SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
---------
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDING JUNE 30, 2003
[_] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
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Commission File No. 000-26991
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ANTHONY & SYLVAN POOLS CORPORATION
(Exact name of registrant as specified in its charter)
Ohio 31-1522456
(State of Incorporation) (I.R.S. Employer
Identification No.)
6690 Beta Drive, Mayfield Village, Ohio 44143
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code:
(440) 720-3301
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Title of Each Class Name of Each Exchange on which Registered
------------------- -----------------------------------------
Common Shares, No Par Value The Company's common stock trades on the
NASDAQ SmallCap Stock Market under the symbol: SWIM
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [_]
Indicate by checkmark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes[_] No [X]
Indicate the number of shares outstanding of each of issuer's classes
of common shares, as of the latest practical date.
Class Outstanding at August 11, 2003
--------------------------- ------------------------------
Common Shares, no par value 5,341,818 Shares
ANTHONY AND SYLVAN POOLS CORPORATION
FORM 10-Q
Index
Begins on
Page
PART I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 2003 (unaudited) and December 31, 2002 3
Unaudited Condensed Consolidated Statements of Operations -
Three months and six months ended June 30, 2003 and 2002 4
Unaudited Condensed Consolidated Statements of Cash Flows -
Six months ended June 30, 2003 and 2002 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Independent Accountants' Review Report 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Item 3. Quantitative and Qualitative Disclosure about Market Risk 13
Item 4. Controls and Procedures 13
PART II - Other Information
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ANTHONY & SYLVAN POOLS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands)
June 30, December 31,
2003 2002
---------- ----------
(unaudited) (audited)
Assets
Current Assets:
Cash and cash equivalents $ 4,972 $ 432
Contract receivables, net 6,207 8,354
Inventories 7,179 5,841
Prepayments and other 3,316 3,655
Deferred income taxes 1,889 1,936
------------ ------------
Total current assets 23,563 20,218
Property, plant and equipment, net 6,841 7,794
Goodwill, net 26,276 26,276
Deferred income taxes 108 373
Other 2,866 2,951
------------ ------------
Total assets $ 59,654 $ 57,612
============ ============
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 9,396 $ 4,310
Accrued expenses 15,669 11,149
Net liabilities of discontinued operations 684 1,169
Accrued income taxes -- 14
------------- ------------
Total current liabilities 25,749 16,642
Long-term debt -- 6,300
Other long-term liabilities 3,317 3,526
Commitments and contingencies -- --
Shareholders' equity 30,588 31,144
------------ ------------
Total liabilities and shareholders' equity $ 59,654 $ 57,612
============ ============
See notes to unaudited condensed consolidated financial statements.
3
ANTHONY & SYLVAN POOLS CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations
For the Three Months and Six Months Ended June 30, 2003 and 2002
(In thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
Net Sales $ 59,195 $ 58,138 $ 77,479 $ 81,271
Cost of Sales 40,131 39,520 55,200 57,257
-------- -------- -------- --------
Gross Profit 19,064 18,618 22,279 24,014
Operating expenses 13,791 12,804 23,057 21,862
-------- -------- -------- --------
Operating income/(loss) from continuing operations 5,273 5,814 (778) 2,152
Interest and other expense 50 21 175 146
-------- -------- -------- --------
Income/(loss) before income taxes from continuing operations 5,223 5,793 (953) 2,006
Income taxes/(benefit) 1,880 2,172 (343) 752
-------- -------- -------- --------
Net Income/(loss) from continuing operations 3,343 3,621 (610) 1,254
Loss from discontinued operations, net of income taxes -- (529) -- (1,121)
-------- -------- -------- --------
Net income/(loss) $ 3,343 $ 3,092 $ (610) $ 133
======== ======== ======== ========
Basic income/(loss)per share:
Basic income/(loss) per share from continuing operations $ 0.64 $ 0.67 $ (0.12) $ 0.23
Basic (loss) per share from discontinued operations -- (0.10) -- (0.21)
-------- -------- -------- --------
Net income/(loss) $ 0.64 $ 0.57 $ (0.12) $ 0.02
======== ======== ======== ========
Diluted income/(loss) per share:
Diluted income/(loss) per share from continuing operations $ 0.63 $ 0.65 $ (0.12) $ 0.22
Diluted (loss) per share from discontinued operations -- (0.09) -- (0.20)
-------- -------- -------- --------
Net income/(loss) $ 0.63 $ 0.56 $ (0.12) $ 0.02
======== ======== ======== ========
Average shares outstanding:
Basic 5,245 5,389 5,245 5,498
Diluted 5,306 5,532 5,245 5,642
See notes to unaudited condensed consolidated financial statements.
4
ANTHONY & SYLVAN POOLS CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2003 and 2002
(Dollars in thousands)
2003 2002
---- ----
Cash Flows from Operating Activities:
Net income/(loss) $ (610) $ 133
Adjustments to reconcile net income/(loss) to
net cash provided by operating activities:
Loss from discontinued operations -- 1,121
Depreciation 1,326 1,316
Deferred income taxes and other 431 401
Changes in operating assets and liabilities:
Contract receivables 2,147 9,813
Inventories (1,338) (1,894)
Prepayments and other 339 532
Accounts payable 5,086 2,634
Accrued expenses and other 4,382 2,672
-------- --------
Net cash provided by operating activities 11,763 16,728
Cash Flows from Investing Activities:
Additions to property, plant and equipment (438) (1,211)
-------- --------
Net cash used in investing activities (438) (1,211)
Cash Flows from Financing Activities:
Repayments of long-term debt (6,300) (7,555)
Proceeds from stock option exercise -- 34
Treasury stock purchases -- (2,513)
-------- --------
Net cash used in financing activities (6,300) (10,034)
-------- --------
Increase in Cash and Cash Equivalents 5,025 5,483
Net cash used in discontinued operations (485) (1,870)
Cash and Cash Equivalents:
Beginning of period 432 351
-------- --------
End of period $ 4,972 $ 3,964
======== ========
See notes to unaudited condensed consolidated financial statements.
5
ANTHONY & SYLVAN POOLS CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
1. Summary of Accounting Policies
Basis of Presentation--Anthony & Sylvan Pools Corporation and
Subsidiaries (the "Company") is among the largest residential in-ground concrete
pool sales and installation businesses in the United States and operates in one
business segment. The accompanying unaudited, condensed consolidated financial
statements of the registrant have been prepared in accordance with the
instructions to Form 10-Q and do not include all of the information and notes
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, the
unaudited financial statements include all adjustments, consisting only of
normal recurring accruals, considered necessary for the fair presentation of the
financial position and the results of operations. Operating results for the
three-month or six-month periods ended June 30, 2003 are not necessarily
indicative of the results that may be expected for the full fiscal year. For
further information, refer to the consolidated financial statements and notes
included in the registrant's Annual Report on Form 10-K for the year ended
December 31, 2002.
Consolidation--The consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
Inventories--Inventories consist of materials and equipment purchased
for installation or use in pools and are stated at the lower of cost or market.
Cost is determined using the first-in, first-out method.
Revenue Recognition--Revenue from swimming pool installation contracts
is recognized on the percentage-of-completion accounting method based on the
proportion of total costs incurred during the various phases of installation as
a percentage of total estimated contract costs. Revisions in cost and revenue
estimates are reflected in the period in which the facts requiring such
revisions become known. Provision is made currently for estimated losses on
uncompleted installations. The majority of the Company's contracts call for
progress payments to be made while completing individual phases of the
installation until the final phases of installation, at which time the remaining
portion is recognized as a contract receivable. Progress payments in excess of
revenue recognized are classified as billings in excess of costs and estimated
earnings on uncompleted contracts, and are included in accrued expenses.
Contract costs include direct material, labor, subcontract costs and overheads.
Selling and administrative expenses are charged to income as incurred.
Warranty--The Company accrues an estimate of warranty claims using
regression analysis formulas and estimates of the aggregate liability for claims
based on the Company's historical experience. The portion of claims the Company
estimates will not be paid within one year is included in other long-term
liabilities.
Use of Estimates--The preparation of the consolidated financial
statements requires management of the Company to make a number of estimates and
assumptions relating to the reported amount of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the unaudited
condensed consolidated financial statements and the reported amounts of revenues
and expenses during the period. Significant items subject to such estimates and
assumptions include the carrying amount of property, plant and equipment;
valuation allowances for receivables, inventories and deferred income tax
assets; goodwill; warranty reserves and obligations related to employee
benefits. Actual results could differ from those estimates.
Stock Option Plans--The Company applies the intrinsic-value-based
method of accounting prescribed by Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations,
including FASB Interpretation No. 44, "Accounting for Certain Transactions
involving Stock Compensation, an Interpretation of APB Opinion No. 25," to
account for its fixed-plan stock options. Under this method, compensation
expense is recorded on the date of grant only if the current market value of the
underlying stock exceeded the exercise price. SFAS No. 123, "Accounting for
Stock-Based Compensation," established accounting and disclosure requirements
using a fair-value-based method of accounting for stock-based employee
compensation plans. As allowed by SFAS No. 123, the Company has elected to
continue to apply the intrinsic-value-based method of accounting described
above, and has adopted only the disclosure requirements of SFAS No. 123 and SFAS
No. 148. The following table illustrates the effect on net income if the
fair-value-based method had been applied to all outstanding and unvested awards
for the three-month and six-month periods ended June 30, 2003 and June 30, 2002.
6
(In Thousands, except per share data): Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
Net income/(loss) from continuing operations, as reported $ 3,343 $ 3,621 $ (610) $ 1,254
Add stock-based employee compensation expense included in reported
net income, net of tax 17 20 32 36
Deduct total stock-based employee compensation expense determined
under fair-value-based method for all rewards, net of tax (83) (83) (166) (139)
------- --------- --------- ---------
Pro forma net income/(loss) from continuing operations $ 3,277 $ 3,558 $ (744) $ 1,151
======= ========= ========= =========
Income/(loss) per share from continuing operations:
Basic - as reported $ 0.64 $ 0.67 $ (0.12) $ 0.23
Basic - pro forma $ 0.62 $ 0.66 $ (0.14) $ 0.21
Diluted - as reported $ 0.63 $ 0.65 $ (0.12) $ 0.22
Diluted - pro forma $ 0.62 $ 0.66 $ (0.14) $ 0.21
Reclassifications--Certain reclassifications have been made to the 2002
condensed consolidated financial statements to make the presentation consistent
with the current period.
2. Discontinued Operations and Restructuring Charge
As more fully disclosed in Note 3 of Notes to Consolidated Financial
Statements included in Item 8 of the registrant's Annual Report on Form 10-K for
the year ended December 31, 2002, the Company, in 2002, closed two swimming pool
installation divisions in the Orlando and Southeastern Florida markets. The
consolidated financial statements have been reclassified to reflect those
operations as discontinued. The Company recorded a reserve in 2002, which
consists of severance costs, future lease obligations and other exit costs. The
following is a summary of activity charged against the reserve during the
six-month period ended June 30, 2003 (dollars in thousands):
Reserves Reserves
At At
12-31-02 Payments 6-30-03
--------- ------------- -----------
Leases $ 625 $ (263) $ 362
Severance payments 25 (20) 5
Other 216 (122) 94
--------- ------------ ----------
$ 866 $ (405) $ 461
========= ============ ==========
3. Long-Term Debt
The Company had no long-term debt at June 30, 2003. The Company has a
revolving credit facility ("Credit Facility"), as more fully disclosed in Note 5
of Notes to Consolidated Financial Statements included in Item 8 of the
registrant's Annual Report on Form 10-K for the year ended December 31, 2002.
The Company is in compliance with all of its debt covenants under the Credit
Facility.
In July 2003, the Credit Facility was amended to reduce the maximum
amount of borrowing from $35 million to $25 million, based on a review of the
Company's historic and future borrowing needs. As a result, the Company will
reduce its annual Credit Facility commitment fees by approximately $40,000.
7
4. Earnings Per Share
Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding. Diluted earnings per share
is based on the combined weighted average number of shares outstanding including
the assumed exercise or conversion of options. The treasury stock method is used
in computing diluted earnings per share. The calculations are as follows (in
thousands except per share data):
(In Thousands, except per share data): Three Months Ended Six Months Ended
March 31, June 30,
2003 2002 2003 2002
--------- --------- ------- ---------
Numerator:
Net income/(loss) from continuing operations $ 3,343 $ 3,621 $ (610) $ 1,254
Net loss from discontinued operations -- (529) -- (1,121)
--------- --------- ------- ---------
Net income/(loss) $ 3,343 $ 3,092 $ (610) $ 133
========= ========= ======= =========
Denominator:
Weighted average common shares outstanding 5,245 5,389 5,245 5,498
Dilutive effect of stock options 61 143 -- 144
--------- --------- ------- ---------
Denominator for net income/(loss) per diluted share 5,306 5,532 5,245 5,642
========= ========= ======= =========
Basic income/(loss) per share:
Continuing operations $ 0.64 $ 0.67 $ (0.12) $ 0.23
Discontinued operations $ -- (0.10) $ -- (0.21)
--------- --------- ------- ---------
$ 0.64 $ 0.57 $ (0.12) $ 0.02
========= ========= ======= =========
Diluted income/(loss) per share:
Continuing operations $ 0.63 $ 0.65 $ (0.12) $ 0.22
Discontinued operations $ -- (0.09) $ -- $ (0.20)
--------- --------- ------- ---------
$ 0.63 $ 0.56 $ (0.12) $ 0.02
========= ========= ======= =========
Outstanding stock options with prices ranging from $2.67 to $9.03 were
not included in the computation of diluted EPS because the options'
exercise prices were greater than the market price of the common
shares.
5. Product Warranties
The Company provides certain warranties with its swimming pools and
accrues for the liability associated with these warranties using
regressing analysis formulas based on historical claims experience. The
changes in the carrying amount of the warranty accrual were as follows
for the six-month periods ended June 30, 3002 and 2002 (dollars in
thousands):
2003 2002
------- -------
Balance at beginning of year $ 3,881 $ 3,549
Warranty expense 1,164 1,301
Warranty payments (1,203) (783)
------- -------
Balance at June 30 $ 3,842 $ 4,067
======= =======
6. Litigation
Certain claims, suits and complaints arising in the ordinary course of
business have been filed or are pending against the Company. In the opinion of
management, the results of all such matters will not have a material adverse
effect on the Company's financial position, results of operations or liquidity.
8
7. New Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51." This Interpretation addresses the consolidation
by business enterprises of variable interest entities as defined in the
Interpretation. The Company does not expect the adoption of this Interpretation
to have a material impact on its results of operations or financial position.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." This statement amends
SFAS No. 133 for decisions made (1) as part of the Derivatives Implementation
Group process that effectively required amendments to SFAS No. 133, (2) in
connection with other FASB projects dealing with financial instruments and (3)
in connection with implementation issues raised in relation to the application
of the definition of a derivative. This statement is effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003, with certain exceptions. The Company does not
expect the adoption of SFAS No. 149 to have a material impact on its results of
operations or financial position.
On May 15, 2003, the FASB issued SAFS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." This
statement requires issuers to classify as liabilities (or assets in some
circumstances) three classes of freestanding financial instruments that embody
obligations for the issuer. Generally, the Statement is effective for financial
instruments entered into or modified after May 31, 2003 and is otherwise
effective at the beginning of the first interim period beginning after June 15,
2003. The Company does not expect the adoption of SFAS No. 150 to have a
material impact on its results of operations or financial position.
9
Independent Accountants' Review Report
To the Board of Directors and Shareholders,
Anthony & Sylvan Pools Corporation and subsidiaries:
We have reviewed the accompanying condensed consolidated balance sheet of
Anthony & Sylvan Pools Corporation and subsidiaries (the Company) as of June
30, 2003, the related condensed consolidated statements of operations for the
three-month and six-month periods ended June 30, 2003 and 2002, and the
related condensed consolidated statements of cash flows for the six-month
periods ended June 30, 2003 and 2002. These condensed consolidated
financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the condensed consolidated financial statements referred to
above for them to be in conformity with accounting principles generally
accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Anthony & Sylvan Pools Corporation and subsidiaries as of December 31, 2002,
and the related consolidated statements of operations, shareholders' equity,
and cash flows for the year then ended (not presented herein); and in our
report dated February 14, 2003, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth
in the accompanying condensed consolidated balance sheet as of December 31,
2002, is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
KPMG LLP
July 23, 2003
Cleveland, Ohio
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information included in this report and
other materials filed with the Securities and Exchange Commission (as well as
information included in oral or other written statements made or to be made by
the Company) contains statements that are forward-looking. All forward looking
statements are based on current expectations regarding important risk factors,
including but not limited to: the costs of integrating acquired businesses;
dependence on existing management; consumer spending and market conditions;
interest rates and weather. Accordingly, actual results may differ from those
expressed in any forward-looking statements, and the making of such statements
should not be regarded as a representation by the Company or any other person
that the results expressed therein will be achieved.
Critical Accounting Policies
Management's discussion and analysis of its financial condition and results of
operations are based upon the Company's unaudited condensed consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The Company
believes the following critical accounting policies affect its more significant
estimates and assumptions used in the preparation of its condensed consolidated
financial statements.
Revenue Recognition - Revenue from swimming pool installation contracts is
recognized on the percentage-of-completion accounting method based on the
proportion of total costs incurred during the various phases of installation as
a percentage of total estimated contract costs. Revisions in cost and revenue
estimates are reflected in the period in which the facts requiring such
revisions become known. Provision is made currently for estimated losses on
uncompleted installations. The majority of the Company's contracts call for
progress payments to be made while completing individual phases of the
installation until the final phases of installation, at which time the remaining
portion is recognized as a contract receivable. Progress payments in excess of
revenue recognized are classified as billings in excess of costs and estimated
earnings on uncompleted contracts, and are included in accrued expenses.
Contract costs include direct material, labor, subcontract costs and overheads.
Selling and administrative expenses are charged to income as incurred.
Warranty - The Company accrues an estimate of warranty claims using regression
analysis formulas and estimates of the aggregate liability for claims based on
the Company's historical experience. The portion of claims the Company estimates
will not be paid within one year is included in other long-term liabilities.
Results of Operations
THREE MONTHS ENDED JUNE 30, 2003 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2002
Net sales from continuing operations of $59.2 million for the three-months ended
June 30, 2003 compared with net sales of $58.1 million reported a year ago. The
increase in sales was primarily attributable to an increase in average selling
prices which helped offset a 4.8% decrease in actual new pool units produced.
Gross profit from continuing operations increased to $19.1 million in the second
quarter ended June 30, 2003 compared with $18.6 million in the second quarter of
2002, primarily as a result of the increase in net sales. As a percentage of
sales, gross profit for the second quarter of 2003 was 32.2%, in line with the
gross profit rate of 32.0% in the second quarter of 2002.
Operating expenses, which include selling and administrative expenses, were
$13.8 million in the second quarter of 2003, or approximately $1.0 million
higher than operating expenses of $12.8 million in the second quarter of 2002.
Higher compensation and general insurance costs were partially offset by lower
advertising expenses compared with a year ago.
The Company's effective tax rate for the second quarter ended June 30, 2003 was
36.0%. This compares with an effective tax rate in the second quarter of 2002 of
37.5%.
Primarily as a result of the above items, the net income from continuing
operations decreased $0.3 million to $3.3 million in the second quarter of 2003.
The net income per diluted share from continuing operations was $0.63 in the
second quarter of 2003 compared with net income per diluted share from
continuing operations of $0.65 per share in the second quarter of 2002.
11
In 2002, the Company closed its swimming pool installation businesses in the
Orlando and Southeastern Florida markets. These operations are shown as
discontinued in the financial statements. The net loss from these operations,
net of taxes, in the second quarter of 2002 was ($0.5) million, or ($0.10) per
diluted share. The net income, including discontinued operations, recorded in
the second quarter of 2002 was $3.1million, or ($0.56) per diluted share.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2002
Net sales from continuing operations of $77.5 million for the six months ended
June 30, 2003 compared with net sales of $81.3 million reported for the same
period a year ago. The decrease in sales was primarily attributable to the
unusual, extended winter and wet spring in the Northeast and mid-Atlantic
states, which had a major impact on the Company's ability to install swimming
pools in those markets.
Gross profit from continuing operations of $22.3 million decreased $1.7 million
in the six months ended June 30, 2003 compared with $24.0 million from the
previous year, primarily as a result of the decrease in net sales. As a
percentage of sales, gross profit for the first six months of 2003 was 28.8%
compared with 29.5% in the first six months of 2002, primarily as the result of
fixed costs and certain seasonal costs being allocated over a smaller revenue
base.
Operating expenses, which include selling and administrative expenses, were
$23.1 million in the first half of 2003 compared with $21.9 million in operating
expenses for the first half of 2002. As with the second quarter of 2003, higher
compensation and general insurance costs were partially offset by lower
advertising expenses in the first six months of 2003 compared with a year ago.
The Company's tax benefit for the six months ended June 30, 2003 was ($0.3)
million, which is an effective tax rate of 36.0%. This compares with a tax
expense in the first half of 2002 of $0.8 million, or an effective tax rate of
37.5%. Recorded tax benefits, which can include current and deferred tax
benefits, are calculated using enacted tax rates expected to apply to taxable
income in the years in which those differences are expected to be recovered or
settled.
Primarily as a result of the above items, the net loss from continuing
operations was ($0.6) million in the first half of 2003. This compares with net
income of $1.3 million from continuing operations for the first six months of
2002. The net loss per diluted share from continuing operations was ($0.12) in
the first half of 2003 compared with net income per diluted share from
continuing operations of $0.22 per share in the first half of 2002.
In 2002, the Company closed its swimming pool installation businesses in the
Orlando and Southeastern Florida markets. These operations are shown as
discontinued in the financial statements. The net loss from these operations,
net of taxes, in the first half of 2002 was ($1.1) million, or ($0.20) per
diluted share. Net income, including discontinued operations, recorded in the
first half of 2002 was $0.1 million, or $0.02 per diluted share.
Liquidity and Capital Resources
For the six-month period ended June 30, 2003, net cash provided by operating
activities was $11.8 million compared with net cash provided by operating
activities of $16.7 million in the first half of 2002. The decrease in
comparative six months' quarterly cash flow amounts was primarily attributable
to less cash generated from the collection of contract receivables as the
Company's capacity to install swimming pools was negatively impacted by poor
weather conditions in the northeast and mid-Atlantic regions of the country.
Offsetting this decrease in cash flow amounts were seasonal increases in
accounts payable and accrued expenses. Capital expenditures in the first half of
2003 were $0.4 million compared with $1.2 million in the first half of 2002, and
were primarily related to computer hardware and software expenditures. $6.3
million of cash provided by operating activities in the first half of 2003 was
used to repay all of the Company's bank borrowings.
The Company does not have any off-balance sheet financing activities.
The Company amended its credit facility ("Credit Facility") in July 2003 to
reduce the maximum amount of borrowing from $35 million to $25 million based on
a review of the Company's historic and future borrowing needs. The credit
facility is secured by the assets of the Company and matures August 10, 2004.
The Company's borrowing capacity and interest rates under the Credit Facility
are based on its profitability and leverage. Interest is charged at increments
over either Prime or Libor rates. In addition, a 37.5 basis points commitment
fee is payable on the total amount of the unused commitment. There were no
borrowings outstanding at June 30, 2003 and the Company is in compliance with
all of its debt covenants under the Credit Facility.
12
The Company believes that existing cash and cash equivalents, internally
generated funds, and funds available under its Credit Facility will be
sufficient to meet its needs.
Cyclicality and Seasonality
The Company believes that the in-ground swimming pool industry is strongly
influenced by general economic conditions and tends to experience periods of
decline during economic downturns. Since it is believed that the majority of the
Company's swimming pool installation purchases are financed, pool sales are
particularly sensitive to interest rate fluctuations and the availability of
credit. A sustained period of high interest rates could result in declining
sales, which could have a material adverse effect on the Company's financial
condition and results of operations. Conversely, a sustained period of low
interest rates could help offset the impact of any economic downturns.
Historically, approximately two-thirds of the Company's revenues have been
generated in the second and third quarters of the year, the peak season for
swimming pool installation and use. Conversely, the Company typically incurs net
losses during the first and fourth quarters of the year. Unseasonably cold
weather or extraordinary amounts of rainfall during the peak sales season can
significantly reduce pool purchases. In addition, unseasonably early or late
warming trends can increase or decrease the length of the swimming pool season,
significantly affecting sales and operating profit.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
The Company is exposed to various market risks, including changes in pricing of
equipment, materials and contract labor, and interest rates. Market risk is the
potential loss arising from adverse changes in market rates and prices, such as
commodity prices and interest rates. The Company does not enter into financial
instruments to manage and reduce the impact of some of these risks. Further, the
Company does not enter into derivatives or other financial instruments for
trading or speculative purposes.
The Company is exposed to cash flow and fair value risk arising out of changes
in interest rates with respect to its long-term debt. Information with respect
to the Company's principal cash flows and weighted average interest rates on
long-term debt at December 31, 2002 is more fully disclosed in Note 5 of Notes
to Consolidated Financial Statements included in Item 8 of the registrant's
Annual Report on Form 10-K for the year ended December 31, 2002.
Item 4. Controls and Procedures
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Chairman and Chief
Executive Officer of the Company and the Chief Financial Officer of the Company,
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures pursuant to Exchange Act Rule 13a-15 as of the end of
the period covered by this report. Based upon that evaluation, the Chairman and
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic SEC filings.
There has been no significant change in our internal control over financial
reporting that occurred during the period covered by this report that has
materially affected, or that is reasonably likely to materially affect, our
internal control over financial reporting.
13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No change
ITEM 2. CHANGES IN SECURITIES
No change
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
None.
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits
10.1 Amendment No. 5 dated as of July 24, 2003 to the Credit Agreement
dated as of July 8, 1999 among Anthony and Sylvan Pools
Corporation and the Lending Institutions - National City Bank, US
Bank, N.A and LaSalle Bank, N.A.
31.1 Certification of Principal Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a)
31.2 Certification of Principal Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a)
32.1 Certification of Principal Executive Officer Pursuant to 18
U.S.C. 1350
32.2 Certification of Principal Financial Officer Pursuant to 18
U.S.C. 1350
(b) Reports on Form 8-K
The following report on Form 8-K was filed with the Securities
and Exchange Commission during the quarter ended June 30, 2003:
On May 2, 2003 the Company furnished a Current Report on Form 8-K
with the Securities and Exchange Commission. That Current Report
on Form 8-K, under Item 9, included an Anthony & Sylvan Pools
Corporation press release, dated May 1, 2003, announcing its
financial results for the first quarter ended March 31, 2003.
14
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Anthony & Sylvan Pools Corporation
By: /s/ Stuart D. Neidus
-------------------------------------
Stuart D. Neidus
Chairman and Chief Executive Officer
(Principal Executive Officer)
By: /s/ William J. Evanson
-------------------------------------
William J. Evanson
Executive Vice President
and Chief Financial Officer
(Principal Accounting Officer)
August 14, 2003
15