-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S2DT2EBMK5wmKQJ73ARRoPHOkPVMyEOLtvq7ZYNH3O0eGIASgiT82pzdYuSTXKSr FrXnhyACrLXG0nbZzGHxtQ== 0000950152-98-007665.txt : 19980918 0000950152-98-007665.hdr.sgml : 19980918 ACCESSION NUMBER: 0000950152-98-007665 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 15 FILED AS OF DATE: 19980917 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ANTHONY & SYLVAN POOLS CORP CENTRAL INDEX KEY: 0001067606 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 311522456 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-63573 FILM NUMBER: 98710865 BUSINESS ADDRESS: STREET 1: 3739 EASTON RD RTE 611 CITY: DOYLESTOWN STATE: PA ZIP: 18901 BUSINESS PHONE: 4402862200 MAIL ADDRESS: STREET 1: 220 PARK DRIVE CITY: CHARDON STATE: OH ZIP: 44024 S-1 1 ANTHONY & SYLVAN POOLS CORPORATION S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON , 1998. REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------ ANTHONY & SYLVAN POOLS CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) OHIO 1799 31-1522456 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) NUMBER)
220 PARK DRIVE CHARDON, OHIO 44024 (440) 285-7946 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE) STUART D. NEIDUS CHAIRMAN, CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER ANTHONY & SYLVAN POOLS CORPORATION 220 PARK DRIVE CHARDON, OHIO 44024 (440) 285-7946 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: DYNDA A. THOMAS, ESQ. JAMES R. CARLSON, ESQ. Squire, Sanders & Dempsey L.L.P. Thompson Hine & Flory LLP 4900 Key Tower, 127 Public Square 3900 Key Tower, 127 Public Square Cleveland, Ohio 44114-1304 Cleveland, Ohio 44114-1216 (216) 479-8500 (216) 566-5500 Facsimile: (216) 479-8776 Facsimile: (216) 566-5800
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. ------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [ ] CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------- TITLE OF EACH CLASS PROPOSED MAXIMUM AMOUNT OF OF SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(2) REGISTRATION FEE - -------------------------------------------------------------------------------------------------------------------------------- Common Shares, no par value..................... $22,500,000.00 $6,638.00 - -------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------
(1) Includes shares subject to purchase by the Underwriters to cover over-allotments, if any. (2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457 under the Securities Act. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. 2 [PICTURES OF RESIDENTIAL SWIMMING POOLS AND MAP OF UNITED STATES DEPICTING SALES OFFICES] 3 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS, DATED , 1998 SHARES ANTHONY & SYLVAN POOLS CORPORATION COMMON SHARES ------------------ All of the Common Shares (as hereinafter defined) offered hereby are being sold by Anthony & Sylvan Pools Corporation (the "Company"). The Company currently has outstanding Common Shares, all of which are owned by a wholly owned subsidiary of Essef Corporation ("Essef") (Essef and such subsidiary are sometimes referred to as the "Essef Group"). Upon completion of this offering (the "Offering"), the Essef Group will continue to own approximately % of the outstanding Common Shares ( % if the Underwriters' over-allotment option is exercised in full) and will continue to control the Company. However, Essef has informed the Company that it is currently contemplating a two-stage spin-off of its interest in the Company (the "Double Spin-Off") whereby (i) following the completion of the Offering, Essef would cause its subsidiary to distribute to Essef all of the Common Shares owned by it and (ii) thereafter, Essef would distribute such Common Shares on a pro rata basis to its shareholders. Essef is under no obligation to effect the Double Spin-Off and may pursue other alternatives in the event it is unable to obtain a tax ruling from the Internal Revenue Service recognizing the tax free nature of the Double Spin-Off. See "Principal Shareholder" and "Relationship between the Company and Essef." Prior to the Offering, there has been no public market for the Common Shares of the Company ("Common Shares"). It is currently anticipated that the initial public offering price will be between $ .00 and $ .00 per share. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. Application has been made to have the Common Shares listed on the Nasdaq National Market under the symbol "SWIM." ------------------ SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON SHARES OFFERED HEREBY. ------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS(1) COMPANY(2) - -------------------------------------------------------------------------------------------------------------------- Per Share................................... $ $ $ - -------------------------------------------------------------------------------------------------------------------- Total(3).................................... $ $ $ - -------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). See "Underwriting." (2) Before deducting expenses of the Offering payable by the Company estimated at $ . (3) The Company has granted the Underwriters a 30-day option to purchase up to an aggregate of additional Common Shares on the same terms as set forth above solely to cover over-allotments, if any. If such option is exercised in full, then the total Price to Public, Underwriting Discounts and Commissions, and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ------------------ The Common Shares are being offered by the several Underwriters named herein, subject to prior sale, when, as and if accepted by them and subject to certain conditions. It is expected that certificates for the Common Shares offered hereby will be available for delivery at the offices of McDonald & Company Securities, Inc., Cleveland, Ohio, on or about , 1998. MCDONALD & COMPANY SECURITIES, INC. FRIEDMAN, BILLINGS, RAMSEY & CO., INC. MORGAN KEEGAN & COMPANY, INC. , 1998 4 The Company intends to furnish its shareholders with annual reports containing financial statements audited by the Company's independent accountants and quarterly reports for the first three quarters of each year containing unaudited interim financial information. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON SHARES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 5 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, all information presented in this Prospectus assumes no exercise of the Underwriters' over-allotment option. This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from the results anticipated in these forward-looking statements as a result of certain of the factors set forth under "Risk Factors" and elsewhere in this Prospectus. Unless the context indicates or otherwise requires, references in this Prospectus to "swimming pools" or "pools" shall mean residential, in-ground swimming pools, and references to "swimming pool industry" or "industry" shall mean the swimming pool design, installation and renovation industry. THE COMPANY The Company is the largest installer of concrete swimming pools in the United States. Through its network of 39 sales offices serving 15 states, the Company believes it has achieved the leading market share in 15 of the 24 major metropolitan areas it serves. As the successor to the respective businesses of Sylvan Pools (founded in Pennsylvania in 1946) and Anthony Pools (founded in California in 1947), the Company has a referral base of over 300,000 customers and a depth of experience and expertise that is unmatched in the industry. These factors, together with the Company's national reputation for quality, volume purchasing ability and innovative sales techniques have enabled the Company to establish a significant presence in each of its current geographic markets while positioning itself for continued expansion into new markets through internal growth and selective acquisitions. The majority of the Company's pools range in price from $14,500 to $36,500. Historically, the Company's sales have been seasonally strongest in the second and third quarters and weakest in the first quarter. The Company built approximately 4,100 pools in 1997 and 2,300 pools during the first half of 1998. On a pro forma basis, after giving effect to the January 1998 Tango Acquisition (defined below) for 1997 and the August 1998 Andrews Acquisition (defined below) for 1997 and for the first half of 1998, the number of pools installed by the Company during such periods would have been approximately 6,200 and 2,900, respectively. According to the National Spa & Pool Institute, the total number of swimming pools installed annually in the United States has grown from 121,000 in 1994 to 160,000 in 1997, a 9.8% compound annual growth rate. In each of these years, the percentage of swimming pools installed using formative structures made of concrete, vinyl liners and pre-molded fiberglass has remained relatively constant and in 1997 represented 68.8%, 28.7% and 2.5%, respectively, of total swimming pools installed. While other sectors of the swimming pool business (such as manufacturing, distribution and retailing of pool products and equipment) have undergone significant consolidation in recent years, the industry has remained highly fragmented. The Company estimates that in 1997, the top ten concrete swimming pool installation companies installed approximately 18,600 such pools, accounting for 16.9% of all concrete swimming pool installations and 11.6% of all swimming pool installations in the United States that year. The Company believes that on a nationwide basis, it has the leading share of both the concrete swimming pool market and the total swimming pool market, with an estimated 5.6% share of the concrete pool market and an estimated 3.9% share of the total pool market. COMPETITIVE STRENGTHS The Company attributes its strong competitive position in the swimming pool installation industry to, among other things: Size, National Presence and Leading Market Share. The Company believes its size, national presence and leading market share enable it, among other things, to (i) benefit from operating efficiencies and maximize productivity, (ii) attract, develop and retain the highest quality employees and independent contractors and invest in state-of-the-art equipment, (iii) temper the effects of cyclical and economic downturns and unseasonable 3 6 weather through a diversified geographic presence, (iv) implement national marketing strategies and support a centralized management team and (v) attract desirable acquisition candidates. Industry Expertise. The Company believes its craftsmen are among the most skilled and experienced in the industry. As a result of, among other things, its longevity in the business, significant volume of work and willingness to provide financing for equipment purchases by subcontractors, the Company has forged significant relationships with the craftsmen who perform its pool installation and renovation work. These relationships, which in some cases include several generations from the same family, have enabled the Company to negotiate favorable arrangements with such craftsmen and, together with national recruiting and apprenticeship training, have enabled the Company to maintain a stable supply of skilled labor. In addition to its experienced labor base, the Company has a senior management team that has, on average, 14 years of experience in the swimming pool industry. Reputation and Name Recognition. As a result of the Company's size, history and strong commitment to customer satisfaction, the Company believes "Anthony & Sylvan" has become one of the most recognized names in the industry and a symbol of quality among consumers. The Company's name recognition and reputation should permit the Company to establish relationships with national home builders and other referral sources that wish to be associated with the Company's brand. Innovative Sales and Marketing Approach. The Company's experienced sales designers and substantial investments in training and technology provide it with significant advantages over competitors that have less qualified sales personnel and/or utilize less sophisticated sales methods. All sales designers complete an intensive one-month training program upon joining the Company and receive periodic skills training throughout their careers. The introduction of the laptop computer as a selling tool in recent years has significantly enhanced the quality and professionalism of the Company's in-home sales presentations. This technology enables sales designers to utilize pre-programmed informational displays and pricing worksheets to educate customers and make sales visits more interactive, informative and successful. GROWTH STRATEGY The Company believes that its competitive strengths provide a platform for profitable expansion. The Company's growth strategy includes the following components: Open New Sales Offices. The Company intends to open new sales offices in existing markets where it believes it can enhance its current market share and in new markets where its competitive strengths will permit it to achieve a leading market share position. The Company has currently identified over 30 markets that meet its development or expansion criteria and intends to assess these areas further to pinpoint the most attractive locations for new sales offices and the best strategy for opening such offices. The Company believes the most significant expansion opportunities may be found in certain sunbelt regions and on the eastern seaboard in areas where the Company has little or no current presence. Since January 1, 1997, the Company has opened eight new sales offices. Pursue Acquisitions. The Company believes that it is well positioned to make acquisitions of high quality pool installation companies in the fragmented pool installation industry. As with its internal growth strategy, the Company intends to pursue acquisition candidates in the markets it has targeted for expansion. In keeping with this approach, in January 1998, the Company, which was already the leading pool installer in Las Vegas, acquired substantially all of the assets of Tango Pools, Inc., a leading pool installation company in Las Vegas (the "Tango Acquisition"). In addition, in August 1998, the Company acquired substantially all of the assets of Pools by Andrews, Inc., one of the largest pool installation companies in Florida (the "Andrews Acquisition"). See "-- Recent Developments." Develop Relationships with National and Regional Home Builders. As the largest of the national pool installers, the Company is well positioned to develop relationships with both national and regional home builders. The Company currently has relationships with homebuilders in certain markets that enable it to serve as their exclusive pool installation company. In new housing developments, the cost of the pool is typically included in 4 7 the homeowner's first mortgage, and as such, the Company is paid at closing, after the pool has been completely installed. The Company believes that its ability to forego progress payments on a pool installation and accept a one-time payment at the time of the loan closing provides it with a competitive advantage over smaller companies seeking to provide similar services to large homebuilders. The Company believes that significant opportunities exist to develop and expand upon relationships with national and regional homebuilders in the future. Expand Pool Renovation Business. There are currently over three million swimming pools in the United States. The Company's experience indicates that pool owners seek renovation services when their pools need repair or when they want to upgrade certain features of the pool such as equipment, tile, lighting or plaster. Renovations are typically done in the early spring or late fall which, to some extent, reduces the seasonal nature of the business. Since 1993, the Company has been marketing its renovation services to its past installation customers in selected markets. This strategy has contributed to an increase in revenues from renovations from $0.8 million in 1993 to $7.9 million in 1997. The Company maintains a separate sales and marketing staff of 20 people responsible for its renovation business and intends to expand its marketing efforts to include an even wider base of pool owners in new and existing markets. The Company is an Ohio corporation with its principal executive offices located at 220 Park Drive, Chardon, Ohio 44024, and its telephone number is (440) 285-SWIM, or (440) 285-7946. The Company's internet homepage is located at www.anthony-sylvan.com. RELATIONSHIP WITH ESSEF The Company is an indirect, wholly owned subsidiary of Essef. Upon completion of this Offering, Essef will beneficially own Common Shares, representing % of the Common Shares then outstanding ( % if the Underwriters' over-allotment option is exercised in full). Unless and until the Double Spin-Off is completed, Essef will retain control of the Company. Such control will include the ability to determine any corporate action requiring approval of holders of the Common Shares (including the election of the entire Board of Directors of the Company) without the approval of the other shareholders of the Company. Currently, all three of the Company's current directors are executive officers and/or directors of Essef. In connection with this Offering, the Company intends to execute and deliver a revolving credit promissory note to, and enter into a series of agreements with, Essef that will govern certain aspects of their relationship subsequent to this Offering. It is anticipated that the Company will utilize the proceeds of the Offering to reduce the intercompany debt the Company owes Essef in connection with, among other things, the May 1997 acquisition of the assets and business of Anthony and Sylvan Pools, Inc. ("Original Anthony and Sylvan"). As of June 30, 1998, the Company's obligations to Essef totaled approximately $26.7 million. See "Risk Factors -- Relationship with Essef; Absence of History as a Stand-Alone Company," "Relationship between the Company and Essef" and "Principal Shareholder." RECENT DEVELOPMENTS On August 26, 1998, the Company completed the Andrews Acquisition. Pools by Andrews, Inc., with annual sales of approximately $27.0 million for the year ended December 31, 1997, is one of the largest installers of concrete swimming pools in Florida and installed approximately 1,500 pools in 1997. The Company believes that the Andrews Acquisition will facilitate its entry into six new Florida markets (Fort Myers, Fort Lauderdale, Jacksonville, Miami, Palm Beach and Tampa), and augment its presence in the Orlando market. In addition, Edward Andrews, the founder and President of Pools by Andrews, Inc. has joined the Company as a Vice President with primary responsibility for the Company's Florida operations. 5 8 THE OFFERING Common Shares offered...................................... shares Common Shares to be outstanding after the Offering......... shares(1) Use of proceeds............................................ To repay certain existing indebtedness. See "Use of Proceeds." Proposed Nasdaq National Market Symbol..................... SWIM
- --------------- (1) Excludes 1,000,000 Common Shares reserved for issuance under the Company's 1998 Long-Term Incentive Plan and additional Common Shares which may be issued to Stuart D. Neidus, the Company's Chairman, Chief Executive Officer and Chief Financial Officer, and Thomas B. Waldin, a Director of the Company, in substitution for certain of their respective Essef stock options. See "Management -- Stock Options" and "Management -- 1998 Long-Term Incentive Plan." If the Underwriters' over-allotment option is exercised in full, then the Company will have Common Shares outstanding upon consummation of the Offering. See "Shares Eligible for Future Sale." RISK FACTORS The Common Shares offered hereby involve a high degree of risk. See "Risk Factors." 6 9 SUMMARY OF HISTORICAL AND PRO FORMA FINANCIAL DATA The following table sets forth summary historical and pro forma operating results, balance sheet and operating data of the Company. The summary historical financial data for the years ended December 31, 1995 and 1996 were derived from the Audited Financial Statements of Original Anthony and Sylvan prior to the Company's May 1997 acquisition of substantially all of the assets of Original Anthony and Sylvan ("Original A&S Acquisition"). The summary pro forma data for the year ended December 31, 1997 and the six months ended June 30, 1997 give effect to the Original A&S Acquisition and the Offering as if they had occurred on January 1, 1997. The summary financial data as of and for the six months ended June 30, 1998 have been derived from the Unaudited Financial Statements of the Company and include, in the opinion of management, all adjustments necessary to present fairly the data for such periods. The results for the six months ended June 30, 1998 are not necessarily indicative of the results to be expected for the year ending December 31, 1998 or for any future period. The summary pro forma data as of and for the six months ended June 30, 1998 and latest 52-week period ("LTM") ended June 30, 1998 give effect to the Offering as if it occurred on January 1, 1998 and July 1, 1997, respectively. The summary pro forma balance sheet data give effect to the Offering as if it had occurred as of June 30, 1998. The data presented below should be read in conjunction with the Financial Statements and the related notes thereto included elsewhere herein, the other financial information included elsewhere herein, the "Unaudited Pro Forma Financial Data," "Capitalization" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
ORIGINAL A&S THE COMPANY ------------------ ----------------------------------------------------------------- PRO FORMA PRO FORMA YEAR ENDED PRO FORMA SIX MONTHS SIX MONTHS SIX MONTHS PRO FORMA DECEMBER 31, YEAR ENDED ENDED ENDED ENDED LTM ENDED ------------------ DECEMBER 31, JUNE 30, JUNE 30, JUNE 30, JUNE 30, 1995 1996(1) 1997(2)(3) 1997(2)(3) 1998 1998(3) 1998(3) ------- -------- ------------ ---------- ---------- ------------ --------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) OPERATING RESULTS: Net sales.................. $58,569 $112,167 $127,712 $58,257 $70,455 $70,455 $139,910 Cost of sales.............. 42,454 82,018 93,105 42,788 50,597 50,597 100,914 ------- -------- -------- ------- ------- ------- -------- Gross profit............... 16,115 30,149 34,607 15,469 19,858 19,858 38,996 Selling expenses........... 9,373 18,875 19,651 9,669 11,439 11,439 21,421 Administrative expenses.... 5,695 9,049 10,378 5,800 5,632 6,032 10,610 ------- -------- -------- ------- ------- ------- -------- Total operating expenses... 15,068 27,924 30,029 15,469 17,071 17,471 32,031 ------- -------- -------- ------- ------- ------- -------- Income/(loss) from operations............... 1,047 2,225 4,578 -- 2,787 2,387 6,965 Interest and other expense.................. 101 354 217 99 1,026 245 363 ------- -------- -------- ------- ------- ------- -------- Income/(loss) before taxes.................... 946 1,871 4,361 (99) 1,761 2,142 6,602 Income taxes expense/(benefit)........ 342 704 1,631 (36) 675 812 2,479 ------- -------- -------- ------- ------- ------- -------- Net income/(loss).......... $ 604 $ 1,167 $ 2,730 $ (63) $ 1,086 $ 1,330 $ 4,123 ======= ======== ======== ======= ======= ======= ======== Pro forma weighted average shares outstanding basic and diluted(4)........... Pro forma net income per share basic and diluted(4)(5)............ BALANCE SHEET DATA: Working capital............ $ 879 $(5,871) $ (5,871) Total assets............... 51,402 51,402 51,402 Total debt................. 27,416 7,416 7,416 Equity..................... 5,639 25,639 25,639 OPERATING DATA: Number of pools installed................ 2,209 3,803 4,112 1,812 2,262 2,262 4,562
- --------------- (1) In March 1996, Original Anthony and Sylvan acquired the assets of Anthony Pools. This acquisition was accounted for as a purchase, and, accordingly, the results of operations of Anthony Pools are included in Original Anthony and Sylvan's financial statements from the date of acquisition. As a result, period to period comparisons are not necessarily meaningful. (2) The acquisition of the assets of Original Anthony and Sylvan by the Company in May 1997 was accounted for as a purchase, with the purchase price being allocated to the assets and liabilities based on the estimated fair value thereof as of the date of the Original A&S Acquisition. The pro forma financial data for 1997 gives effect to the Original A&S Acquisition as if it had occurred as of January 1, 1997. (3) Pro forma for the reduction of indebtedness with the proceeds of the Offering and the addition of estimated stand-alone public company administrative expenses to be incurred by the Company following the Offering. (4) Does not include options to purchase Essef Shares held by officers and directors of the Company which may be substituted by stock options relating to the Company's Common Shares at the date of the Double Spin-Off. See "Management -- Stock Options" for a description of the stock option substitution methodology. (5) Historical net income per share has not been presented as it would not be meaningful because on , 1998, the Company declared a for stock split of its Common Shares. 7 10 RISK FACTORS This Prospectus contains forward-looking statements which involve a number of risks and uncertainties. Actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause actual results to differ materially include, without limitation, the risk factors discussed below as well as the risks discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere in this Prospectus. In addition to the other information contained in this Prospectus, the following risk factors should be considered carefully in evaluating the Company and its business before purchasing the Common Shares offered hereby. GENERAL ECONOMIC CONDITIONS The Company believes that the swimming pool industry is strongly influenced by general economic conditions and tends to experience periods of decline during economic downturns. Because the majority of the Company's pool installations are financed, pool sales are particularly sensitive to interest rate fluctuations and the availability of credit. The industry may experience sustained periods of declining sales in the future, and such a decline could have a material adverse effect on the Company's business, financial condition and results of operations. RISKS RELATED TO THE COMPANY'S GROWTH STRATEGY The Company's business has experienced substantial growth in recent years, resulting in significant changes in the size, scope and geographic distribution of the Company's operations. The Company's business model contemplates a continued process of aggressive and rapid growth through acquisitions and internal expansion. There can be no assurance that the Company will be successful in identifying, attracting or acquiring acquisition candidates or in identifying opportunities for internal growth. On the other hand, if the Company experiences a rapid pace of acquisitions, there can be no assurance that the Company will be able to integrate its acquisitions and manage future growth without substantial costs, delays or other problems. The Company may not be able to anticipate all of the changing demands that future growth will impose on its management personnel, operational and management information systems and financial systems. Internal expansion into new markets and the integration of the operations of newly acquired companies may lead to diversion of management attention from other ongoing business concerns. The Company may seek to recruit additional managers to oversee internal expansion and supplement the management of the acquired companies but may have difficulty recruiting additional managers with the skills necessary to operate successfully in new markets or enhance the management of the acquired companies. In addition, the Company may be unable to retain sales people and other key employees of acquired companies. There can be no assurance that new operations or acquired companies will achieve targeted sales and profitability levels or that the Company will recognize the efficiencies or synergies expected from such growth. The cost of expansion and the integration of new operations could have an adverse effect on short-term operating results. With regard to acquisitions, such costs could include, among other things, severance payments to employees of acquired companies, restructuring charges, expenses associated with a change of control and non-recurring acquisition costs such as accounting and legal fees, investment banking fees and recognition of transaction-related obligations. Any or all of the factors described in this section could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Growth Strategy." AVAILABILITY OF ACQUISITION FINANCING; FUTURE CAPITAL NEEDS The Company may choose to finance future acquisitions by using shares of its capital stock for all or a portion of the consideration to be paid. Unless and until the completion of the Double Spin-Off, the number of Common Shares available for this purpose may be limited by the federal tax requirement that the Essef Group retain at least 80% of the total voting power and value of the Company in order to include the Company in its consolidated federal income tax group. The issuance of additional equity securities for use as acquisition currency or otherwise will result in a reduction of the percentage ownership of the then current shareholders of the 8 11 Company and such equity securities may have rights, preferences or privileges senior to those of the holders of the Common Shares offered hereby. In the event the Common Shares do not maintain a sufficient market value, or potential acquisition candidates are otherwise unwilling to accept Common Shares as part of the consideration for the sale of their businesses, the Company would be required to use more of its cash resources, if available, in order to initiate and maintain its acquisition program. In such instance, if the Company is unable to generate or otherwise obtain sufficient cash resources on acceptable terms, its growth could be limited. The Company intends to apply the proceeds of this Offering to reduce its debt to Essef and, as such, is not relying upon such proceeds to provide cash for its acquisition program and other liquidity requirements. Cash generated during the last three quarters of the year is expected to be sufficient to meet the Company's short-term working capital requirements. As an additional source of short-term liquidity and acquisition financing, the Company expects to be able to borrow funds from Essef pursuant to a revolving credit promissory note ("Revolving Note") to be executed by the Company and delivered to Essef following the completion of the Offering. However, Essef is not legally obligated to provide financing to the Company pursuant to such Revolving Note and may, for reasons not relating to the Company, be unwilling or otherwise unable, under the terms of its bank credit facility (of which the Company is a guarantor), to extend new loans to the Company in the future. Terms of Essef's credit facility that could limit Essef's willingness or ability to make loans to the Company include limits on aggregate borrowings and affirmative and negative covenants. In addition, Essef has other subsidiaries to which it may extend loans thereby reducing the funds it has available to loan to the Company. Because the Revolving Note will become immediately due and payable and all new borrowing thereunder will cease upon the consummation of the Double Spin-Off, the Company may need to rely upon other sources, such as public and private debt and equity financing, to meet its long-term liquidity requirements. The inability of the Company to obtain financing from Essef could materially adversely affect the Company's growth strategy in the short-term. The inability of the Company to secure alternate sources of financing on acceptable terms following the Double Spin-Off could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that necessary financing will be available on terms favorable to the Company, or at all. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." RELATIONSHIP WITH ESSEF; ABSENCE OF HISTORY AS A STAND-ALONE COMPANY Following the Offering, unless and until the Double Spin-Off is effected, the Essef Group will own % of the outstanding Common Shares of the Company ( % if the Underwriters' over-allotment option is exercised in full). As a result, Essef will be able to elect the entire Board of Directors of the Company and control the business and affairs of the Company, including any determinations with respect to mergers or other combinations involving the Company, the acquisition or disposition of assets by the Company, the incurrence of indebtedness by the Company, the issuance of additional Common Shares or other equity securities by the Company and the payment of dividends with respect to the Common Shares. Similarly, Essef will have the power to determine matters submitted to a vote of the Company's shareholders, will have the power to delay, defer or prevent a change in control of the Company and could take other actions that might be favorable to Essef but not to the shareholders of the Company generally. In addition, as of the date of this Prospectus, all three of the Company's current directors, including its Chairman and Chief Executive Officer, are executive officers or directors of Essef. The performance by these persons of their duties to the Essef Group companies may give rise to conflicts of interest and conflicting demands on the amount of time these individuals will have available for the Company's affairs. There can be no assurance that any such conflicts will be resolved in the Company's favor. See "Management -- Directors, Executive Officers and Key Employees" and "Relationship between the Company and Essef." The Essef Group could decide to sell or otherwise dispose of all or a portion of its Common Shares at some future date, and there can be no assurance that, in any transfer by the Essef Group of its controlling interest in the Company, any other holders of Common Shares will be allowed to participate in such transaction or will realize any premium with respect to their Common Shares. Sales or distributions by the Essef Group of substantial amounts of Common Shares in the public market could adversely affect prevailing market prices for the Common Shares. 9 12 This Offering is expected to provide several significant benefits to Essef and its shareholders, including the establishment of a public market for the Common Shares retained by Essef and the creation of an opportunity to accomplish the Double Spin-Off. Although the Double Spin-Off is expected to increase the liquidity of the Common Shares, there can be no assurance that it will result in any benefit to shareholders of the Company or will have a positive impact on the market for the Common Shares. Essef is under no obligation to effect the Double Spin-Off and has informed the Company that there is a possibility that it will pursue other alternatives in the event it is unable to obtain a favorable tax ruling from the Internal Revenue Service regarding the tax free nature of the Double Spin-Off. See "Relationship between the Company and Essef" and "Shares Eligible for Future Sale." Essef currently provides certain financial, risk management, tax, employee benefits, legal and management services to the Company, for which all specifically identifiable charges for such services are reflected in the Company's financial statements. The Company's short-term business, operating results and financial condition could be adversely affected by a sudden reduction or discontinuation of such services from Essef. The Company intends to execute and deliver the Revolving Note to, and enter into a series of agreements with, Essef for the purpose of facilitating the Company's transition to an independent public company. However, there can be no assurance that the Company will be able to manage this transition or to develop these independent resources without interruption to its business. Except as otherwise described in this Prospectus, Essef has no obligation to provide these services to the Company. See "Relationship between the Company and Essef." The Company's financial results as a subsidiary of Essef may not be representative of what the Company's results of operations and financial condition would have been had the Company been a separate, stand-alone public company during the periods presented and may not be indicative of the future results of operations or financial condition of the Company. See "-- Availability of Acquisition Financing; Future Capital Needs." SEASONALITY AND WEATHER Although the Company expects to reduce the seasonality of its sales over time by expanding both its presence in the sunbelt regions and its renovation business, at present the Company's business remains highly seasonal. Historically, approximately 70% of the Company's net sales have been generated in the second and third quarters of the year, the peak season for swimming pool installation and use. Moreover, the Company typically incurs net losses during the first quarter of the year. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Quarterly Results of Operations." Unseasonably cold weather or extraordinary amounts of rainfall during the peak sales season can significantly reduce pool purchases and disrupt installation schedules, thereby adversely affecting sales and operating profit. ABSENCE OF PRIOR TRADING MARKET; POTENTIAL VOLATILITY OF STOCK PRICE Prior to the Offering, there has been no public market for the Common Shares. Although the Company has applied to have the Common Shares approved for quotation on the Nasdaq National Market, there can be no assurance that an active trading market will develop for the Common Shares or, if one does develop, that it will be maintained. The initial public offering price of the Common Shares will be negotiated between the Company and the representatives of the Underwriters and may not be indicative of the market price of the Common Shares after the Offering. See "Underwriting." The market price of the Common Shares could be highly volatile, fluctuating in response to factors such as changes in the economy or the financial markets, variations in the Company's operating results, failure to achieve earnings consistent with analysts' estimates, announcements of new services or market expansions by the Company or its competitors, and developments relating to regulatory or other issues affecting the swimming pool industry. In addition, the domestic stock exchanges and systems generally have experienced and are likely in the future to experience significant price and volume fluctuations which could adversely affect the market price of the Common Shares without regard to the Company's operating performance. SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial amounts of the Common Shares in the public market following the Offering could have an adverse effect on prevailing market prices of the Common Shares. After the Offering, the shares ( shares if the Underwriters' over-allotment option is exercised in full) 10 13 offered hereby will be freely tradable without restriction, while approximately additional shares, ( shares if the Underwriters' over-allotment option is exercised in full) will be eligible for sale pursuant to Rule 144 promulgated under the Securities Act ("Rule 144"), subject to certain volume and other limitations. However, Essef and other affiliates of the Company, which upon the completion of the Offering will beneficially own an aggregate of approximately Common Shares, have agreed with the Underwriters not to sell any of their shares for a period of 90 days from the date of this Prospectus without the prior consent of the Representatives; provided, however, that, within that 90-day period, the Essef Group may effect the Double Spin-Off. If the Double Spin-Off is completed, all Common Shares will be freely tradable except for any Common Shares that are held by affiliates of the Company or that are otherwise subject to the restrictions of Rule 144. See "Shares Eligible for Future Sale." COMPETITION AND NEW MARKET ENTRANTS The swimming pool design, installation and renovation business is highly fragmented. The Company estimates that in 1997, the top ten concrete swimming pool installation companies' combined share of the concrete swimming pool market was 16.9%. Like others in its industry, the Company competes generally with sellers of luxury items such as boats and other leisure products for a share of consumers' disposable income. The Company faces competition within its industry from many regional and independent pool builders. While the Company believes that its size, national presence and leading market share have enabled it to achieve certain operating, marketing and administrative efficiencies which may discourage new competitors from entering into its markets, there can be no assurance that the Company will not encounter substantial competition from new market entrants. Within a particular market, some of the Company's competitors may be significantly larger and may have greater name recognition and greater financial, marketing and other resources than the Company. There can be no assurance that the Company will be able to compete effectively against such competitors in the future. See "Business -- Competition." DEPENDENCE UPON KEY PERSONNEL The Company is dependent to a substantial extent upon the continuing efforts and abilities of its executive officers. Furthermore, the Company may be dependent upon the senior management of any business acquired in the future. If any of the Company's key personnel become unable to continue in their present roles, or if the Company is unable to attract and retain other qualified employees, the Company's business and prospects could be adversely affected. Although the Company has entered into employment agreements with three of its executive officers and key employees, there can be no assurance that any individual will continue in his present capacity with the Company for any particular period of time. The Company does not intend to obtain key man life insurance covering any of its executive officers or other members of senior management. For an interim period (not expected to exceed 18 months), Mr. Neidus will continue to be employed by Essef and may spend up to 40% of his time on Essef matters. There can be no assurance that Mr. Neidus' responsibilities to Essef will not result in a conflict of interest or otherwise detract from his ability to perform adequately all of his duties to the Company. See "Management -- Executive Compensation" and "Relationship between the Company and Essef." ANTI-TAKEOVER EFFECT Certain Ohio legislation applicable to the Company may delay, deter or prevent a tender offer or takeover attempt for the Company. In addition, certain provisions of the Amended and Restated Articles of Incorporation and Amended and Restated Regulations which the Company will cause to become effective prior to the sale of the Common Shares offered hereby may be deemed to have anti-takeover effects which could delay, deter or prevent a tender offer or takeover attempt. While the Board of Directors of the Company (the "Board of Directors") believes that these provisions will have a positive effect on long-term shareholder value, there can be no assurance that such provisions would not at some point in time, depending on market and other conditions, adversely affect the market price for the Common Shares. In addition, the Company will be authorized to issue 1,000,000 preferred shares in one or more series, having terms fixed by the Board of Directors without shareholder vote, including dividend or liquidation rights that could be greater than or senior to the rights of 11 14 holders of Common Shares. Issuance of these shares could also be used as an anti-takeover device. The Company has no current intentions or plans to issue any such preferred shares. For a description of the Common Shares and a discussion of possible effects of certain provisions of the Company's organizational documents, see "Description of Capital Stock." SUBSTANTIAL DILUTION Purchasers of the Common Shares offered hereby will experience immediate and substantial dilution in the net tangible book value of their shares. See "Dilution." EFFECT OF YEAR 2000 Many existing computer programs use only two digits to identify a year in the date field. These programs were designed and developed without considering the impact of the upcoming century change in the year 2000. Moreover, these programs often are highly dependent upon historical or dynamic financial and other data that, based on the programs' inability to distinguish between the year 2000 and other century-end years, could be misreported or misinterpreted and cause significant resulting errors. If not corrected, many computer applications could fail when processing year 2000 data. The Company's own operations are not highly dependent on computerized recordkeeping, financial reporting or other systems. However, some of the Company's vendors and other third parties with which the Company conducts business may use computer systems that may be adversely affected by year 2000-related programming errors. Although the Company is evaluating its computer systems and is endeavoring to identify and correct any year 2000-related problems, there can be no assurance that all such problems will, in fact, be identified and corrected by the Company or third parties. In addition, the Company's business may be adversely affected if the Company or other organizations with which the Company does business are unsuccessful in completing in a timely manner the conversion to applications that can process year 2000 dates. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations -- Year 2000 Matters". FORWARD-LOOKING STATEMENTS This Prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such forward-looking statements include statements regarding the Company's growth strategy, marketing plans, expectations concerning relevant markets, financial projections and planned use of proceeds. Actual results could differ from those projected in any forward-looking statements. The forward-looking statements are made as of the date of this Prospectus and the Company assumes no obligation to update such forward-looking statements, or to update the reasons actual results may differ from those projected in the forward-looking statements. Numerous factors, including without limitation factors mentioned in this "Risk Factors" section, many of which are beyond the control of management of the Company, could cause future results to differ substantially from those contemplated in such forward-looking statements. 12 15 USE OF PROCEEDS The net proceeds to the Company from the sale of the Common Shares offered hereby (assuming an offering price of $ per share, and after deducting estimated underwriting discounts and commissions and offering expenses) are estimated to be approximately $20.0 million ($ million if the Underwriters' over-allotment option is exercised in full). It is anticipated that the Company will utilize the proceeds of the Offering to reduce the intercompany debt the Company owes Essef in connection with, among other things, the Company's May 1997 acquisition of the assets and business of Original Anthony and Sylvan. As of June 30, 1998, the Company's obligations to Essef totaled approximately $26.7 million. The Company's indebtedness to Essef bears interest at a rate of 7.5% per annum and is payable on demand. The balance of the indebtedness to Essef remaining after the Offering and the application of the net proceeds therefrom will be evidenced by the Revolving Note. DIVIDEND POLICY The Company has never paid any cash dividends to holders of its Common Shares and does not anticipate paying any cash dividends in the foreseeable future, but intends instead to retain any future earnings for reinvestment in its business. Any future determination as to the payment of dividends will be made at the discretion of the Board of Directors and will depend upon the Company's operating results, financial condition, capital requirements, general business conditions, the terms of its credit facility and such other factors as the Board of Directors deems relevant. 13 16 CAPITALIZATION The following table sets forth the capitalization of the Company at June 30, 1998 on an actual and adjusted basis after giving effect to (i) the for stock split of the Common Shares, (ii) the sale of the Common Shares offered hereby at an assumed initial public offering price of $ per share, (iii) the application of the estimated net proceeds of $20.0 million as described under "Use of Proceeds" and (iv) the effectiveness of the Revolving Note between the Company and Essef. This table should be read in conjunction with the Company's Financial Statements and the related notes thereto included elsewhere in this Prospectus.
JUNE 30, 1998 ---------------------- AS ACTUAL ADJUSTED ------- ----------- (DOLLARS IN THOUSANDS) Current maturities of long-term debt........................ $ 286 $ 286 Current portion of the Revolving Note....................... 0 6,750 ------- ------- Total current debt................................ 286 7,036 Long-term debt.............................................. 380 380 Intercompany advance from Essef............................. 26,750 0 Shareholders' equity: Preferred shares (1,000,000 shares authorized; no shares outstanding)........................................... 0 0 Common Shares, no par value (49,000,000 shares authorized, 100 shares outstanding actual, as adjusted)(a).... 0 20,000 Retained earnings......................................... 5,639 5,639 ------- ------- Total shareholders' equity........................ 5,639 25,639 ------- ------- Total capitalization.............................. $33,055 $33,055 ======= =======
- --------------- (a) Excludes 1,000,000 Common Shares reserved for issuance under the 1998 Long-Term Incentive Plan. See "Management -- 1998 Long-Term Incentive Plan" and additional Common Shares which may be issued to Messrs. Neidus and Waldin in substitution for certain of their respective Essef stock options. See "Management -- Stock Options." 14 17 DILUTION At June 30, 1998, the net book value of the Common Shares was $5,639,000, or $56,390 per share. Net book value per share is determined by dividing net book value (assets less liabilities and redeemable preferred shares) by the number of outstanding Common Shares. At such date, the net tangible book value of the Common Shares was negative $18,518,000, or negative $185,180 per share. Net tangible book value per share is determined by dividing net tangible book value (tangible assets less liabilities and redeemable preferred shares) by the number of outstanding Common Shares. After giving effect to the sale of the Common Shares offered hereby at an assumed public offering price of $ per share and after deducting assumed underwriting discounts and commissions and estimated offering expenses, the pro forma net book value per Common Share and pro forma net tangible book value per Common Share would have been $ and $ , respectively. This represents an immediate increase to the existing shareholder in net book value of $ per Common Share and in tangible net book value of $ per Common Share, and an immediate dilution to new investors in net book value of $ per Common Share and in tangible net book value of $ per Common Share. The following table illustrates the dilution in net tangible book value per share: Assumed initial public offering price per share............. $ Net tangible book value per share before the Offering....... Increase in net tangible book value per share attributable to new investors.......................................... Pro forma net tangible book value per share after the Offering.................................................. Dilution per share to new investors......................... $ ====
If the Underwriters' over-allotment option is exercised in full, the increase in net tangible book value per share to the existing shareholder will be $ per share and the dilution per share to new investors will be $ . Based on the same assumptions utilized in the foregoing table, the following table summarizes, on a pro forma basis as of June 30, 1998, the difference between the number of Common Shares purchased from the Company, the aggregate consideration paid and the average price per Common Share paid by the existing shareholder and by new investors (based upon an assumed initial offering price of $ per share for new investors):
SHARES PURCHASED TOTAL CONSIDERATION -------------------- ------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE --------- ------- -------- ------- ------------- Existing Shareholder(1)(2)............ % $ % $ New Investors(1)...................... $ --------- ----- -------- ----- Total....................... % $ % ========= ===== ======== =====
- --------------- (1) If the Underwriters' over-allotment option is exercised in full, then the percentage of shares held by the existing shareholder will be reduced to % of the total number of Common Shares to be outstanding after the Offering, and the percentage of shares held by new investors will increase to % of the total number of Common Shares to be outstanding after the Offering. See "Principal Shareholder." (2) Excludes 1,000,000 Common Shares reserved for issuance under the 1998 Long-Term Incentive Plan. See "Capitalization" and "Management -- 1998 Long-Term Incentive Plan" and additional Common Shares which may be issued to Messrs. Neidus and Waldin in substitution for certain of their respective Essef stock options. See "Management -- Stock Options." It is not possible to specify how many Common Shares will be subject to such Company Options at the time of the Double Spin-Off because, among other things, it is not known how many unexercised and outstanding Essef Options will be held by Messrs. Waldin and Neidus immediately prior to the completion of the Double Spin-Off. If Company Options are exercised, further dilution to new investors will occur. 15 18 SELECTED HISTORICAL FINANCIAL DATA The following table sets forth selected historical operating results and balance sheet data of the Company. The selected historical financial data as of and for the years ended December 31, 1993 and 1994 were derived from the Unaudited Financial Statements of Original Anthony and Sylvan prior to the Original A&S Acquisition. The selected historical financial data as of and for the years ended December 31, 1995 and 1996 and the four months ended April 30, 1997 were derived from the Audited Financial Statements of Original Anthony and Sylvan prior to the Original A&S Acquisition. The selected historical financial data as of and for the eight months ended December 31, 1997 have been derived from the Audited Financial Statements of the Company. The selected financial data for the two months ended June 30, 1997 and as of and for the six months ended June 30, 1998 have been derived from the Unaudited Financial Statements of the Company and include, in the opinion of management, all adjustments necessary to present fairly the data for such periods. The results for the six months ended June 30, 1998 are not necessarily indicative of the results to be expected for the year ending December 31, 1998 or for any future period. The data presented below should be read in conjunction with the Financial Statements and the related notes thereto included elsewhere herein, the other financial information included elsewhere herein and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
ORIGINAL A&S THE COMPANY ------------------------------------------------------- ---------------------------------------- FOR THE PERIOD FOR THE PERIOD JANUARY 1, MAY 1, TWO MONTHS SIX MONTHS YEARS ENDED DECEMBER 31, 1997 TO 1997 TO ENDED ENDED -------------------------------------- APRIL 30, DECEMBER 31, JUNE 30, JUNE 30, 1993 1994 1995 1996(1) 1997 1997(2) 1997(2) 1998 ------- ------- ------- -------- -------------- -------------- ---------- ---------- (DOLLARS IN THOUSANDS) OPERATING RESULTS: Net sales.................. $43,639 $56,418 $58,569 $112,167 $ 28,883 $98,829 $29,374 $70,455 Cost of sales.............. 30,621 40,899 42,454 82,018 22,291 70,814 20,497 50,597 ------- ------- ------- -------- -------- ------- ------- ------- Gross profit............... 13,018 15,519 16,115 30,149 6,592 28,015 8,877 19,858 Selling expenses........... 7,288 8,662 9,373 18,875 6,073 13,578 3,596 11,439 Administrative expenses.... 4,404 4,876 5,695 9,049 3,980 5,598 1,420 5,632 ------- ------- ------- -------- -------- ------- ------- ------- Total operating expenses... 11,692 13,538 15,068 27,924 10,053 19,176 5,016 17,071 ------- ------- ------- -------- -------- ------- ------- ------- Income/(loss) from operations............... 1,326 1,981 1,047 2,225 (3,461) 8,839 3,861 2,787 Interest and other expense/(income)......... 15 (15) 101 354 303 1,637 387 1,026 ------- ------- ------- -------- -------- ------- ------- ------- Income/(loss) before taxes.................... 1,311 1,996 946 1,871 (3,764) 7,202 3,474 1,761 Income taxes expense/(benefit)........ 470 725 342 704 (1,350) 2,649 1,251 675 ------- ------- ------- -------- -------- ------- ------- ------- Net income/(loss)(3)....... $ 841 $ 1,271 $ 604 $ 1,167 $ (2,414) $ 4,553 $ 2,223 $ 1,086 ======= ======= ======= ======== ======== ======= ======= ======= JUNE 30, BALANCE SHEET DATA: 1993 1994 1995 1996 1997 1998 ------- ------- ------- -------- ------- ------- Working capital............ $ 105 $ 99 $ (156) $ (3,636) $ 8 $ 879 Total assets............... 5,746 8,722 8,721 20,658 42,620 51,402 Total debt................. -- 881 949 9,790 24,638 27,416 Equity..................... 2,002 2,360 1,943 (3,402) 4,553 5,639
- --------------- (1) In March 1996, Original Anthony and Sylvan acquired the assets of Anthony Pools. This acquisition was accounted for as a purchase, and, accordingly, the results of operations of Anthony Pools are included in Original Anthony and Sylvan's financial statements from the date of acquisition. As a result, period to period comparisons are not necessarily meaningful. (2) The acquisition of the assets of Original Anthony and Sylvan by the Company in May 1997 was accounted for as a purchase, with the purchase price being allocated to the assets and liabilities based on the estimated fair value thereof as of the date of the Original A&S Acquisition. (3) Historical net income per share has not been presented as it would not be meaningful because on , 1998, the Company declared a for stock split of its Common Shares. 16 19 UNAUDITED PRO FORMA FINANCIAL DATA The following Unaudited Pro Forma Financial Data have been derived by the application of pro forma adjustments to the Company's historical financial data included elsewhere herein. The Unaudited Pro Forma Statements of Income for the periods presented give effect to the Offering as if it were consummated as of the beginning of the earliest period presented. The adjustments are described in the accompanying notes. The Unaudited Pro Forma Financial Data do not purport to represent what the Company's results of operations actually would have been if the Offering had been consummated on the date indicated, or what results will be for any future period. The Unaudited Pro Forma Financial Data should be read in conjunction with the financial statements and the related notes thereto included elsewhere herein and "Use of Proceeds." UNAUDITED PRO FORMA STATEMENTS OF INCOME SIX MONTHS ENDED JUNE 30, 1998
PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA ---------- ----------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales................................................ $70,455 $70,455 Cost of sales............................................ 50,597 50,597 ------- ------- Gross profit........................................... 19,858 19,858 Selling and administrative expenses...................... 17,071 $ 400(a) 17,471 ------- ----- ------- Income from operations................................. 2,787 (400) 2,387 Interest and other expense/(income)...................... 1,026 (781)(b) 245 ------- ----- ------- Income before income taxes............................. 1,761 381 2,142 Provision for income taxes............................... 675 137(c) 812 ------- ----- ------- Net income............................................. $ 1,086 $ 244 $ 1,330 ======= ===== ======= Pro forma weighted average shares outstanding basic and diluted(d)............................................. Pro forma net income per share basic and diluted(d)......
The accompanying notes are an integral part of this statement. 17 20 YEAR ENDED DECEMBER 31, 1997
FOR THE PERIOD FOR THE PERIOD JANUARY 1, 1997 MAY 1, 1997 TO COMBINED PRO FORMA TO APRIL 30, 1997 DECEMBER 31, 1997 HISTORICAL ADJUSTMENTS PRO FORMA ----------------- ----------------- ---------- ----------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales.................. $28,883 $98,829 $127,712 $127,712 Cost of sales.............. 22,291 70,814 93,105 93,105 ------- ------- -------- -------- Gross profit............. 6,592 28,015 34,607 34,607 Selling and administrative expenses................. 10,053 19,176 29,229 $ 800(a) 30,029 ------- ------- -------- ------- -------- (Loss)/income from operations............ (3,461) 8,839 5,378 (800) 4,578 Interest and other expense/(income)......... 303 1,637 1,940 (1,723)(b) 217 ------- ------- -------- ------- -------- (Loss)/income before income taxes.......... (3,764) 7,202 3,438 923 4,361 (Benefit)/provision for income taxes............. (1,350) 2,649 1,299 332(c) 1,631 ------- ------- -------- ------- -------- Net (loss)/income........ $(2,414) $ 4,553 $ 2,139 $ 591 $ 2,730 ======= ======= ======== ======= ======== Pro forma weighted average shares outstanding basic and diluted(d)........... Pro forma net income per share basic and diluted(d)...............
The accompanying notes are an integral part of this statement. NOTES TO UNAUDITED PRO FORMA FINANCIAL DATA (a) The Company is an indirect, wholly owned subsidiary of Essef and, as such, expects to incur additional costs as a stand-alone public company. The pro forma financial statements have been adjusted to include these costs, which are estimated to be $800,000 annually. These costs include incremental managerial, legal, risk management and investor relations costs and the costs associated with an independent Board of Directors. Upon completion of the Offering and up to the date of the Double Spin-Off, the Company expects to receive a portion of these additional services from Essef pursuant to an Administrative Services Agreement it will have with Essef prior to the Offering. The $800,000 pro forma adjustment includes the charges expected by the Company under the Administrative Services Agreement. (b) Estimated net proceeds from the Offering of $20.0 million will be used to repay intercompany debt owing to Essef. Following completion of the Offering the Company will enter into a Revolving Note with Essef as its primary source of financing. The Revolving Note will provide for interest charges at the costs incurred by Essef under its external financing agreement plus 0.25% (assumed rate of 7.50%). The pro forma adjustment recognizes interest based on costs applicable under the Revolving Note and eliminates historical interest expense charged on intercompany debt that will be repaid from the proceeds of the Offering. (c) Recognition of income taxes, at the Company's effective rate of 36.0%, on the pro forma adjustments described in (a) and (b). (d) Does not include options to purchase Essef Shares held by officers and directors of the Company which may be substituted by stock options relating to the Company's Common Shares at the date of the Double Spin-Off. See "Management -- Stock Options" for a description of the stock option substitution methodology. 18 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Company's Consolidated Financial Statements and related Notes contained elsewhere in this Prospectus. OVERVIEW From May 1, 1997 through the Offering, the Company has operated as an indirect wholly owned subsidiary of Essef. Prior to May 1, 1997, for the periods presented, the Company's predecessor, Original Anthony and Sylvan, operated as a wholly owned subsidiary of General Aquatics, Inc. Following the Offering, pending the completion of the Double Spin-Off, the Company will continue to be controlled directly or indirectly by Essef, but will operate on a stand-alone basis. Accordingly, the Company expects that after this Offering it will incur incremental recurring legal, audit, risk management and administrative costs relating to operating as a stand-alone public company that it did not experience as an indirect subsidiary of Essef. After this Offering, the Essef Group will provide services to the Company pursuant to an Administrative Services Agreement and a Tax Allocation Agreement to be entered into following the consummation of this Offering. These agreements will provide the basis for the allocation of shared expenses, and the reimbursement of direct expenses which are currently reflected in the Company's financial statements. In addition, upon completion of this Offering, the Company intends to execute and deliver the Revolving Note to Essef pursuant to which Essef may loan funds to the Company for working capital and to fund acquisitions. See "Relationship between the Company and Essef" and "Unaudited Pro Forma Financial Data." The financial information included in this Prospectus is not necessarily indicative of the Company's future results of operations, financial position and cash flows. The principal components of the Company's expenses include the cost of installation, the cost of products purchased from manufacturers and used in installation, and operating expenses, which are primarily related to administrative costs, occupancy, sales commissions and marketing. RESULTS OF OPERATIONS The following table shows, for the periods indicated, information derived from the consolidated statements of operations of the Company, expressed as a percentage of net sales for the periods presented.
AS A PERCENT OF NET SALES ----------------------------------------------- SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, -------------------------- ----------------- COMBINED COMBINED 1995 1996 1997 1997 1998 ----- ----- -------- -------- ----- Net sales..................................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales................................. 72.5 73.1 72.9 73.4 71.8 ----- ----- ----- ----- ----- Gross profit.................................. 27.5 26.9 27.1 26.6 28.2 Operating expenses: Selling expenses............................ 16.0 16.8 15.4 16.6 16.2 Administrative expenses..................... 9.7 8.1 7.5 9.3 8.0 ----- ----- ----- ----- ----- Total operating expenses............ 25.7 24.9 22.9 25.9 24.2 Income from operations........................ 1.8 2.0 4.2 0.7 4.0 Interest and other expense.................... 0.2 0.3 1.5 1.2 1.4 Income taxes.................................. 0.6 0.6 1.0 (0.2) 1.0 ----- ----- ----- ----- ----- Net income.................................... 1.0% 1.1% 1.7% (0.3%) 1.6% ===== ===== ===== ===== =====
19 22 SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO COMBINED SIX MONTHS ENDED JUNE 30, 1997 The following discussion compares the results of operations for the six months ended June 30, 1998 with the combined results of operations for the six months ended June 30, 1997. The combined results of operations have been prepared without giving effect to pro forma adjustments. Original Anthony and Sylvan was a wholly owned subsidiary of General Aquatics, Inc. during the four months ended April 30, 1997. Net Sales. Net sales increased by $12.2 million, or 20.9%, from $58.3 million for the six months ended June 30, 1997 to $70.5 million for the six months ended June 30, 1998. The increase was attributable to the combination of (i) increased sales at existing offices due generally to a stronger pool season arising from favorable economic factors and weather conditions in certain regions of the country; (ii) the opening of new sales offices; and (iii) the Tango Acquisition which was completed in January, 1998. Gross Profit. Gross profit increased by $4.4 million to $19.9 million, or 28.2% of net sales for the six months ended June 30, 1998, from $15.5 million or 26.6% of net sales for the six months ended June 30, 1997. The increase in gross profit and gross profit margin was attributable to an increase in the number of pools installed combined with an increase in the average selling price of the Company's pools in certain markets. The gross profit margin improved also due to tighter spending controls introduced after the acquisition of the Company by Essef. Operating Expenses. Operating expenses, consisting of sales, marketing and administrative expenses increased by $2.0 million to $17.1 million or 24.2% of net sales for the six months ended June 30, 1998, from $15.1 million or 25.9% of net sales for the six months ended June 30, 1997. This improvement in operating expenses as a percentage of net sales was primarily due to the leveraging of certain fixed costs. Interest and Other Expense. Interest expense increased by $336,000 to $1.0 million, or 1.5% of net sales, for the six months ended June 30, 1998 from $690,000, or 1.2% of net sales, for the six months ended June 30, 1997. Interest expense was charged on the intercompany payable between Essef and the Company based on the average payable balance for the six months at a fixed rate of 7.5% per annum. Interest expense for the same period in fiscal 1997 includes amounts charged by Essef on the intercompany payable and interest on borrowings that existed between Original Anthony and Sylvan and its parent, General Aquatics, Inc. Provision for Income Taxes. The Company's effective tax rate increased from 34.1% for the six months ended June 30, 1997 to 38.3% for the six months ended June 30, 1998, due to permanent differences in the basis of goodwill which is being amortized for financial reporting and income tax purposes. Net Income. As a result of the above items, combined net income increased from a loss of $191,000 for the six months ended June 30, 1997 to income of $1.1 million for the six months ended June 30, 1998. COMBINED YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 The following discussion compares the results of operations for the year ended December 31, 1997 prepared on a combined basis without giving effect to pro forma adjustments, with the results of operations for the year ended December 31, 1996, when Original Anthony and Sylvan was a wholly owned subsidiary of General Aquatics, Inc. Net Sales. Net sales increased by $15.5 million, or 13.8%, from $112.2 million for the fiscal year ended December 31, 1996 to $127.7 million for the fiscal year ended December 31, 1997. The increase was attributable to the combination of (i) the inclusion of a full year's results from the operations of Anthony Pools which was acquired on March 6, 1996; (ii) the opening of new sales offices; and (iii) increased sales at existing offices. The combination of Anthony Pools with Sylvan Pools created the largest installer of concrete swimming pools in the United States, and provided the Company with an entrance into the California and Florida swimming pool markets. Gross Profit. Gross profit increased by $4.5 million to $34.6 million, or 27.1% of net sales, for the fiscal year ended December 31, 1997 from $30.1 million or 26.9% of net sales for the fiscal year ended December 31, 1996. 20 23 Operating Expenses. Operating expenses, consisting of sales, marketing and administrative expenses increased by $1.3 million to $29.2 million, or 22.9% of net sales, for the fiscal year ended December 31, 1997 from $27.9 million, or 24.9% of net sales, for the fiscal year ended December 31, 1996. The decrease in operating expenses as a percentage of net sales was primarily attributable to the inclusion of a full year of cost savings arising from the consolidation activities undertaken following the acquisition of Anthony Pools. Interest and Other Expense. Interest and other expense increased to $1.9 million, or 1.5% of net sales for the fiscal year ended December 31, 1997 from $354,000, or 0.3% of net sales for the fiscal year ended December 31, 1996. For the eight months ended December 31, 1997, the Company was charged $1.6 million of interest on the intercompany payable owed by the Company to Essef based on the average payable balance for the eight months at the rate of 10.25% per annum. Interest expense for calendar 1996 and the first four months of 1997 relates primarily to borrowings that existed between Original Anthony and Sylvan and General Aquatics, Inc. Provision For Income Taxes. The Company's effective tax rate on a combined basis increased from 37.6% in 1996 to 37.8% in 1997 due to permanent differences in the basis of goodwill which is being amortized for financial reporting and income tax purposes. Net Income. As a result of the above items, combined net income increased $972,000 from $1.2 million for the fiscal year ended December 31, 1996 to $2.1 million for the fiscal year ended December 31, 1997. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Original Anthony and Sylvan was a wholly owned subsidiary of General Aquatics, Inc. for the years ended December 31, 1996 and 1995. As such, the results of operations presented herein have been prepared on a consistent basis of accounting. Net Sales. Net sales increased by $53.6 million, or 91.5%, from $58.6 million in 1995 to $112.2 million in 1996. The increase in sales was primarily attributable to the acquisition of Anthony Pools which was completed on March 6, 1996. Gross Profit. Gross profit increased by $14.0 million to $30.1 million, or 26.9% of net sales, for the fiscal year ended December 31, 1996 from $16.1 million, or 27.5% of net sales, for the fiscal year ended December 31, 1995, due to higher net sales. Gross profit margin decreased due to the acquisition of Anthony Pools which operated with a higher cost structure than Sylvan Pools. Operating Expenses. Operating expenses, consisting of sales, marketing and administrative expenses increased by $12.8 million to $27.9 million, or 24.9% of net sales for the fiscal year ended December 31, 1996 from $15.1 million, or 25.7% of net sales for the fiscal year ended December 31, 1995. The decrease in operating expenses as a percentage of net sales was attributable to cost savings resulting from consolidation activities undertaken following the acquisition of Anthony Pools. These activities included the closure of several offices where duplicate facilities existed, reductions in personnel and consolidation of sales and marketing efforts. Provision for Income Taxes. The Company's effective tax rate increased to 37.6% for the fiscal year ended 1996 from 36.1% for the fiscal year ended December 31, 1995. Net Income. As a result of the above items, net income increased $563,000, from $604,000 for the fiscal year ended December 31, 1995 to $1.2 million for the fiscal year ended December 31, 1996. 21 24 QUARTERLY RESULTS OF OPERATIONS The following table presents certain unaudited quarterly financial information for the ten consecutive quarters ended June 30, 1998. In the opinion of the Company's management, this information has been prepared on the same basis as the audited financial statements appearing elsewhere in this Prospectus and includes all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the unaudited quarterly results set forth herein. The Company expects that it will continue to experience significant fluctuations in its quarterly operating results. In the past, these fluctuations have been caused by a variety of factors, including the seasonality of the swimming pool industry and sensitivity to fluctuations in the overall economy, which cannot be predicted with any degree of certainty. The Company's quarterly results have in the past been subject to fluctuations and, therefore, the operating results for any quarter or quarters are not necessarily indicative of results for any future period. See "Risk Factors -- General Economic Conditions" and " -- Seasonality and Weather."
1996 1997 1998 ------------------------------------- ------------------------------------- ----------------- Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS) Net sales..................... $ 7,988 $40,444 $38,061 $25,674 $14,166 $44,091 $44,831 $24,624 $18,040 $52,415 % of total year............... 7.1% 36.1% 33.9% 22.9% 11.1% 34.5% 35.1% 19.3% -- -- Gross Profit.................. 911 11,657 10,549 7,032 2,484 12,985 13,005 6,133 4,371 15,487 Income/(loss) from operations.................. $(2,643) $ 2,724 $ 2,169 $ (25) $(3,199) $ 3,599 $ 4,306 $ 672 $(2,006) $ 4,793
The reported income from operations does not reflect all general and administrative expenses which the Company expects to incur as a stand-alone public company. See "Unaudited Pro Forma Financial Data" and related notes thereto. LIQUIDITY AND CAPITAL RESOURCES Since its acquisition by Essef on May 1, 1997, the Company has relied upon internal cash flow from operations and interest bearing advances from Essef to provide the necessary financing for its operating and investing activities. The Company's advances from Essef also include an allocation of the debt incurred by Essef in connection with the acquisition of the Company. At June 30, 1998, these advances aggregated $26.7 million. The Company intends to reduce the intercompany advance from Essef with the proceeds from the Offering. Pursuant to the terms of the Revolving Note to be executed by the Company and delivered to Essef following the completion of this Offering, such advances will be repayable to Essef on demand and bear interest at the Essef borrowing rate plus 0.25%. In addition, the Company will also be required to reimburse Essef for its portion of the costs that Essef incurs under Essef's bank revolving credit facility, including but not limited to, commitment fees, letter of credit fees and agent fees. At the time of the Double Spin-Off the Company intends to establish a revolving credit facility with a syndicate of banks to replace the Revolving Note. For the six month period ended June 30, 1998, the Company generated $866,000 of cash from operating activities as that period represented a seasonally lower period of net income and higher working capital requirements. Offsetting the cash flow from operating activities was $3.2 million of uses of cash in investing activities to fund capital expenditures and acquisitions. Such amounts were funded through an increase in the Company's intercompany debt with Essef. Due to the changes in ownership and the capital structure of the Company's business, cash flow data for previous periods are not presented as period to period comparisons are not necessarily meaningful. The Company believes that existing cash, cash equivalents, internally generated funds and funds that will be advanced from Essef until the time of the Double Spin-Off will be sufficient to meet the Company's presently anticipated short-term working capital, capital expenditure and acquisition financing requirements. To the extent that the Company needs additional capital resources, the Company believes that it will have access to bank or other forms of debt financing; however, there can be no assurance that additional financing will be available on terms favorable to the Company or at all. See "Risk Factors -- Availability of Acquisition Financing; Future Capital Needs." 22 25 CYCLICALITY AND SEASONALITY The Company believes that the swimming pool industry is strongly influenced by general economic conditions and tends to experience periods of decline during economic downturns. Because the majority of the Company's pool installations are financed, pool sales are particularly sensitive to interest rate fluctuations and the availability of credit. The industry may experience sustained periods of declining sales in the future, and such a decline could have a material adverse effect on the Company's condition and results of operations. Although the Company expects to reduce the seasonality of its sales over time by expanding both its presence in the sunbelt regions and its renovation business, at present the Company's business remains highly seasonal. Historically, approximately 70% of the Company's net sales have been generated in the second and third quarters of the year, the peak season for swimming pool installation and use. Moreover, the Company typically incurs net losses during the first quarter 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 pool season, significantly affecting sales and operating profit. INFLATION Generally, price increases are passed through to customers as they are received by the Company and therefore reduce the negative effect of inflation. The Company does not believe that inflation has had a significant impact on its results of operations or financial condition for the periods presented. YEAR 2000 MATTERS In 1997, as part of an overall modernization and upgrade of its information systems, the Company began preparing its computer systems and applications for the date change in the year 2000. To date, this process has involved modifying or replacing certain hardware and upgrading certain software and has not involved material costs to the Company. Management believes that substantially all of the necessary systems and applications changes will be completed by mid-1999, that the Company's level of preparedness is appropriate and that the amount of additional costs, if any, needed to address the year 2000 issue will be immaterial. The Company has initiated communications with certain of its largest suppliers regarding year 2000 preparedness. However, management does not believe that the Company would have any difficulty securing alternate sources of supply in the event any of its current suppliers experience year 2000 difficulties. In addition, because of the seasonal nature of the Company's business (which is slowest in the first and fourth quarters of the calendar year), management believes that any problems arising on January 1, 2000, either with the Company's systems or the systems of its major suppliers, can be substantially remedied before the start of the peak installation season. The costs of the project and the date on which the Company believes it will complete the year 2000 modifications are based on management's best estimates, including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates can be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes and similar uncertainties. 23 26 BUSINESS OVERVIEW The Company was formed in 1997 to acquire the assets and business of Original Anthony and Sylvan, the successor to the respective pool installation businesses of Pennsylvania-based Sylvan Pools and California-based Anthony Pools. Sylvan Pools was founded by Herman Silverman in 1946 and quickly grew to become the leading pool installer in the Northeast, with operations stretching out to the Southeast, Texas and Nevada. Anthony Pools was founded by Phil Anthony in 1947 and eventually established itself as the largest pool company in the United States and the first national company in its industry. In 1996, the parent company of Sylvan Pools purchased Anthony Pools and combined the two businesses under the name "Anthony & Sylvan." The combined entity, Original Anthony and Sylvan, maintained the high standards of its predecessors and established a reputation for quality, reliability and affordability that has carried over to the Company. The Company is the largest installer of concrete swimming pools in the United States. Through its network of 39 sales offices serving 15 states, the Company believes it has achieved the leading market share in 15 of the 24 major metropolitan areas it serves. As a result of its longevity in the pool installation business, the Company has a referral base of over 300,000 customers and a depth of experience and expertise that is unmatched in the industry. These factors, together with the Company's national reputation for quality, volume purchasing ability and innovative sales techniques have enabled the Company to establish a significant presence in each of its current geographic markets while positioning itself for continued expansion into new markets through internal growth and selective acquisitions. The majority of the Company's pools range in price from $14,500 to $36,500. Historically, the Company's sales have been seasonally strongest in the second and third quarters and weakest in the first quarter. The Company built approximately 4,100 pools in 1997 and 2,300 pools during the first half of 1998. On a pro forma basis, after giving effect to the January 1998 Tango Acquisition for 1997 and the August 1998 Andrews Acquisition for 1997 and the first half of 1998, the number of pools installed by the Company during such periods would have been approximately 6,200 and 2,900, respectively. Since 1993, the Company has been marketing renovation services to its past installation customers in selected markets. The Company maintains a separate sales and marketing staff of 20 people responsible for its renovation business and intends to expand its marketing efforts to include an even wider base of pool owners in new and existing markets. In 1997, revenues from renovations totaled approximately $7.9 million, or 6.2%, of the Company's sales. In addition to installing and renovating residential pools, the Company operates (i) a commercial pool installation business in the Northeast focused primarily on smaller hotel chains and country clubs, (ii) 16 retail locations that sell chemicals, replacement parts, accessories, equipment and inflatables and (iii) four field service operations that offer post-installation services such as pool openings, closings and weekly maintenance. Sales from these businesses accounted for $9.4 million, or 7.3%, of the Company's 1997 sales. INDUSTRY The Company estimates that the installation of swimming pools is a $3.5 billion per year industry in the United States. According to the National Spa & Pool Institute, the total number of swimming pools installed annually in the United States has grown from 121,000 in 1994 to 160,000 in 1997, a 9.8% compound annual growth rate. In each of these years, the percentage of swimming pools installed using formative structures made of concrete, vinyl liners and pre-molded fiberglass has remained fairly consistent and in 1997 represented 68.8%, 28.7% and 2.5%, respectively, of total swimming pools installed. While other sectors of the swimming pool business (such as manufacturing, distribution and retailing of pool products and equipment) have undergone significant consolidation in recent years, the installation industry has remained highly fragmented. The Company estimates that in 1997, the top ten concrete swimming pool installation companies installed approximately 18,600 such pools, accounting for 16.9% of all concrete swimming pool installations and 11.6% of all swimming pool installations in the United States that year. The Company believes that, on a nationwide basis, it has the leading 24 27 share of both the concrete swimming pool market and the total swimming pool market, with an estimated 5.6% share of the concrete pool market and an estimated 3.9% of the total pool market. MARKETS The Company operates in 24 metropolitan markets serving 15 states. In general, the Company groups markets by geographic region. Differences between regions are influenced most strongly by climate and demographics. The Company believes it is well-positioned to take advantage of opportunities throughout the United States. In the sunbelt regions, where much of the Company's recent growth has occurred, the season for pool installation, renovation and use extends throughout all or most of the year. In addition, in the sunbelt regions, both peak and average temperatures tend to be significantly higher than in other areas of the country. As a result, swimming pools compete favorably with other luxury items for consumers' disposable income and appeal to a broad socio-economic customer base in these regions. In contrast to comparably sized markets in other areas of the country, certain markets in the sunbelt regions tend to have a higher number of pools (both per capita and overall) and less variation in terms of pool size, cost and complexity. According to the U.S. Census Bureau, many markets in the sunbelt regions have experienced high levels of new housing construction and population growth in recent years and are expected to continue to grow at a higher rate than most other areas of the country. In non-sunbelt regions, including areas of the northeast where the Company traditionally has maintained a strong presence, the season for pool installation, renovation and use is shorter, and both peak and average temperatures are lower, than in the sunbelt regions. Although these regions tend to have fewer pools (both per capita and overall) than the sunbelt regions, the average non-sunbelt pool is larger, more elaborate and more expensive than the average sunbelt pool. COMPETITIVE STRENGTHS The Company attributes its strong competitive position in the swimming pool installation industry to, among other things: Size, National Presence and Leading Market Share. The Company believes its size, national presence and leading market share enable it, among other things, to (i) benefit from operating efficiencies and maximize productivity, (ii) attract, develop and retain the highest quality employees and independent contractors and invest in state-of-the-art equipment, (iii) temper the effects of cyclical and economic downturns and unseasonable weather through a diversified geographic presence, (iv) implement national marketing strategies and support a centralized management team and (v) attract desirable acquisition candidates. Industry Expertise. The Company believes its craftsmen are among the most skilled and experienced in the industry. As a result of, among other things, its longevity in the business, significant volume of work and willingness to provide financing for equipment purchases by subcontractors, the Company has forged significant relationships with the craftsmen who perform its pool installation and renovation work. These relationships, which in some cases include several generations from the same family, have enabled the Company to negotiate favorable arrangements with such craftsmen and, together with national recruiting and apprenticeship training, have enabled the Company to maintain a stable supply of skilled labor. In addition to its experienced labor base, the Company has a senior management team that has, on average, 14 years of experience in the swimming pool industry. Reputation and Name Recognition. As a result of the Company's size, history and strong commitment to customer satisfaction, the Company believes "Anthony & Sylvan" has become one of the most recognized names in the industry and a symbol of quality among consumers. The Company's name recognition and reputation should permit the Company to establish relationships with national home builders and other referral sources that wish to be associated with the Company's brand. Innovative Sales and Marketing Approach. The Company's experienced sales designers and substantial investments in training and technology provide it with significant advantages over competitors that have less qualified sales personnel and/or utilize less sophisticated sales methods. All sales designers complete an intensive 25 28 one-month training program upon joining the Company and receive periodic skills training throughout their careers. The introduction of the laptop computer as a selling tool in recent years has significantly enhanced the quality and professionalism of the Company's in-home sales presentations. This technology enables sales designers to utilize pre-programmed informational displays and pricing worksheets to educate customers and make sales visits more interactive, informative and successful. GROWTH STRATEGY The Company believes that its competitive strengths provide a platform for profitable expansion. The Company's growth strategy includes the following components: Open New Sales Offices. The Company intends to open new sales offices in existing markets where it believes it can enhance its current market share and in new markets where its competitive strengths will permit it to achieve a leading market share position. The Company has currently identified over 30 markets that meet its development or expansion criteria and intends to assess these areas further to pinpoint the most attractive locations for new sales offices and the best strategy for opening such offices. The Company believes the most significant expansion opportunities may be found in certain sunbelt regions and on the southeastern seaboard where the Company has little or no current presence. Since January 1, 1997, the Company has opened eight new sales offices. Pursue Acquisitions. The Company believes that it is well positioned to make acquisitions of high quality pool installation companies in the fragmented pool installation industry. As with its internal growth strategy, the Company intends to pursue acquisition candidates in the markets it has targeted for expansion. In keeping with this approach, in January 1998, the Company, which was already the leading pool installer in Las Vegas, completed the Tango Acquisition. In addition, in August 1998, the Company added new markets when it acquired the assets of Pools by Andrews, Inc., one of the largest installers of swimming pools in Florida with offices serving Miami, Ft. Lauderdale, Palm Beach, Orlando, Jacksonville, Tampa and Fort Myers. Develop Relationships with National and Regional Home Builders. As the largest of the national pool installers, the Company is well positioned to develop relationships with both national and regional home builders. The Company currently has relationships with homebuilders in certain areas that enable it to serve as their exclusive pool installation company. In new housing developments, the cost of the pool is typically included in the homeowner's first mortgage, and as such, the Company is paid at closing, after the pool has been completely installed. The Company believes that its ability to forego progress payments on a pool installation and accept a one-time payment at the time of the loan closing provides it with a competitive advantage over smaller companies seeking to provide similar services to large homebuilders. The Company believes that significant opportunities exist to develop and expand upon relationships with national and regional homebuilders in the future. Expand Pool Renovation Business. There are currently over three million swimming pools in the United States. The Company's experience indicates that pool owners seek renovation services when their pools need repair or when they want to upgrade certain features of the pool such as equipment, tile, lighting or plaster. Renovations are typically done in the early spring or late fall which, to some extent, reduces the seasonal nature of the business. Since 1993, the Company has been marketing its renovation services to its past installation customers in selected markets. This strategy has contributed to an increase in revenues from renovations from $0.8 million in 1993 to $7.9 million in 1997. The Company maintains a separate sales and marketing staff of 20 people responsible for its renovation business and intends to expand its marketing efforts to include an even wider base of pool owners in new and existing markets. MARKETING AND SALES The Company sells its products to a large number of customers, primarily residential homeowners. The Company's principal sales activities are conducted by a dedicated sales force of approximately 200 employees who have responsibility for developing and maintaining customer relationships. The Company's representative sales designer is 42 years old, college educated and professionally trained, with more than five years of sales experience in the industry. The Company requires all new sales designers to complete an intensive one-month 26 29 training program consisting of one week of national classroom instruction and three weeks of ride-along training. Commissions and bonuses are paid based on sales volume to encourage entrepreneurial spirit and reward individual achievement. Sales visits are conducted in the customer's home or at the Company office nearest the customer's home. The introduction of the laptop computer as a selling tool in recent years has significantly enhanced the quality and professionalism of the Company's sales presentations and reinforced the Company's image as an expert installer. This technology enables sales designers to utilize pre-programmed informational segments and pricing worksheets to educate customers and make sales visits more interactive, informative and successful. During the sales presentation the sales designer discusses all aspects of pool installation and provides the customer with information about financing options. As a service to its customers, the Company maintains relationships with a number of different lenders that provide financing for its customers. The Company's pricing policies are controlled at the corporate level and are monitored versus the actual sales contracts written. Prices quoted to customers by sales designers must fall into a specified range set at the corporate office. The Company does most of its advertising in local newspapers and Yellow Pages. The Company has advertised, to a lesser extent, using radio, television, billboards and direct mail and has also attracted buyers as a result of referrals from previous customers and realtors, among others. The Company has an internet home page located at www.anthony-sylvan.com which also provides a source of high quality leads for the Company's sales designers. INSTALLATION The Company's field supervisors oversee all aspects of the installation process. While the installation time for a pool varies by the level of complexity, the Company's installation schedules generally range in duration from 30 to 45 days. Company personnel act as schedulers, coordinating the activities of the craftsmen and communicating this information to the customer. During the installation process, the Company utilizes both Company employees as well as subcontractors; however, the majority of the Company's labor base consists of subcontractors. The use of subcontractors enables the Company to minimize its investment in direct employee labor, capital, equipment and inventory, thereby reducing its exposure to cyclical, seasonal or geographic demand fluctuations for pool installation. The field supervisor routinely visits the installation site to supervise the performance of the crews and performs mandatory inspections during the following four phases of the installation process, (i) excavation, (ii) concrete, (iii) deck installation and (iv) plaster. When the installation is complete, a "start-up crew" provides the customer with operating instructions for the equipment as well as instructions regarding the on-going maintenance of the pool. This team performs a quality check which ensures that everything is working properly. The Company generally warrants the structural integrity of the pool for as long as the customer owns the home. Equipment installed by the Company is subject to the terms and conditions of the manufacturer's warranty. The Company's local offices have primary responsibility for managing all aspects of the installation process, including all related inventory management, sales, field service, accounting and administrative functions. Purchasing is generally done at the national level based on input from the local offices. COMPETITION The Company primarily faces competition from regional and local installers. The Company believes that there are a small number of swimming pool companies that compete with the Company on a national basis. Barriers to entry in the swimming pool installation industry are relatively low. The Company believes that the principal competitive factors in the pool installation business are the quality and level of customer service, product pricing, breadth and quality of products offered, ability to procure labor and materials on a market-by-market basis from local and regional sources, financial integrity and stability, and consistency of business relationships with customers. The Company believes it competes favorably with respect to each of these factors. Some geographic areas serviced by the Company, particularly the sunbelt regions, tend to 27 30 be more competitive than others. The Company regularly evaluates competitive pressures on a market-by-market basis and from time-to-time may adjust selling prices in a particular region in response to changing conditions. PURCHASING AND PRINCIPAL SUPPLIERS The Company regularly evaluates supplier relationships and considers alternate sourcing as appropriate to assure competitive costs and quality standards. The Company currently does not have long-term contracts with any of its suppliers. However, the Company believes it has a good relationship with its suppliers and, as a result, is offered volume discounts, rebates, favorable return policies and promotional allowances. Decisions relating to pricing, suppliers and product selection are centralized at the Company's headquarters, with significant input from each of the Company's locations. Decisions relating to inventory management are made independently by each location using the data provided by the Company's information systems. FACILITIES The Company currently operates 39 sales offices and 16 installation offices in 13 states. The proximity of its sales offices to its installation offices varies from market to market, based on the historical growth of the business and various other considerations such as geography and demographics. The Company's executive offices are located in Chardon, Ohio. The Company believes that no single property is material to its operations and that alternate sites are presently available at market rates. LEGAL PROCEEDINGS From time to time, the Company is involved in litigation and proceedings arising in the ordinary course of its business. Although the outcome of litigation and claims is uncertain, the Company does not believe that there are any pending proceedings which could be expected to have a material adverse effect on its financial condition or results of operations. EMPLOYEES At June 30, 1998, the Company employed (i) 609 persons on a full-time basis, of whom 50 were salaried employees, 265 were hourly installation and manufacturing employees, 119 were hourly administrative employees, and 175 were commissioned sales personnel and (ii) 49 persons on a part-time basis, all of whom were employed at the Company's retail stores. No employees are covered by collective bargaining agreements. The Company believes it has satisfactory relations with its employees. 28 31 MANAGEMENT DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES The directors and executive officers of the Company are as follows:
NAME AGE POSITION ---- --- -------- Stuart D. Neidus.......................... 47 Chairman of the Board, Chief Executive Officer and Chief Financial Officer Howard P. Wertman......................... 53 President Richard M. Kelso.......................... 49 Executive Vice President Edward W. Andrews III..................... 39 Vice President Thomas J. Casey........................... 37 Vice President Lawrence M. Mazzenga...................... 45 Vice President Phillip A. Pascucci....................... 51 Vice President Richard S. Wolff.......................... 33 Vice President Mary Ann Jorgenson........................ 57 Director Thomas B. Waldin.......................... 56 Director
Mr. Neidus has served as Chairman of the Board of Directors, Chief Executive Officer and Chief Financial Officer of the Company since September 1998 and as a Director since May 1997. In addition, Mr. Neidus has served as Executive Vice President and Chief Financial Officer of Essef since September 1996. Prior to that, from 1992-1996 Mr. Neidus served with Premier Farnell plc (successor to Premier Industrial Corporation), most recently as Executive Vice President. Prior to joining Premier Farnell plc, Mr. Neidus spent 19 years as an independent public accountant with KPMG Peat Marwick, including eight years as a partner. Mr. Wertman has served as President of the Company since October 1995. He previously served as Divisional Vice President of Sylvan Pools from 1990 to 1995. Mr. Wertman's career in the swimming pool industry began in 1973, and since then he has served in various management positions with both Anthony Pools and Sylvan Pools. Mr. Kelso has served as Executive Vice President of the Company since 1996. His experience in the pool industry includes service as Vice President of Anthony Pools from 1989 to 1996. Prior to that, from 1979 to 1988 Mr. Kelso was the General Manager of the Washington, D.C. division of Anthony Pools. His career includes 23 years of pool service, all in management positions with Anthony Pools. Mr. Andrews has served as Vice President of the Company since August 1998, following the Andrews Acquisition. Mr. Andrews was the founder of Pools by Andrews, Inc., established in 1983, and served as its President for 15 years. His more than 20 years of experience in the swimming pool industry includes service as a General Manager of Andrews Gunite Company, a New England based swimming pool builder. Mr. Casey has served as Vice President of the Company since 1998 and as the National Sales Manager since 1995. Prior to that, he served as Sales Manager and a sales designer with Sylvan Pools from 1986 to 1995. Mr. Mazzenga has served as Vice President of the Company since 1996. He served as Vice President of Sylvan Pools from 1994 to 1996. Prior to that, from 1979 to 1994 he served in various operational and management positions with Anthony Pools. Mr. Pascucci has served as Vice President of the Company since 1997. Prior to that, from 1992 to 1997 he served as General Manager of the Las Vegas Division of Sylvan Pools. Mr. Pascucci has served in various operational and management positions with Sylvan Pools during the period 1986-1992. Mr. Wolff has served as Vice President of the Company since 1997. Prior to that, Mr. Wolff served as Director of Finance of General Aquatics, Inc. He has served as controller for various public and private companies and as an independent public accountant with Kenneth Leventhal prior to his position with General Aquatics, Inc. 29 32 Ms. Jorgenson has served as a director of the Company since September 1998. Ms. Jorgenson is a partner and head of the corporate practice in the law firm of Squire, Sanders & Dempsey L.L.P., and has been associated with that firm since 1975. She is a director of the general partner of Cedar Fair, L.P., the owner of five regional amusement parks. She is also a director of S2 Golf Inc., a manufacturer and distributor of golf clubs and bags, and a director of Continental Business Enterprises, Inc., an Ohio-based metal stamping company. Mr. Waldin has served as a director of the Company since May 1997. Mr. Waldin has served as Chief Executive Officer and President of Essef since 1990 and a Director since 1991. COMMITTEES OF THE BOARD OF DIRECTORS General. The Company's Amended and Restated Regulations will provide for a minimum of three and a maximum of nine directors and divide the Board of Directors into two classes, with regular three-year staggered terms. The number of directors will be set at six. and will be elected as Class I directors and will hold office until the 2000 annual shareholders' meeting. will be elected as a Class II director and will hold office until the 2001 annual shareholders' meeting and have agreed to serve as Class II directors and will be elected as such by the current directors upon the completion of this Offering. The vacancy on the Board of Directors will remain until the Company identifies a qualified candidate for such position. All officers of the Company serve at the pleasure of the Board of Directors. Committees. Immediately following the completion of this Offering, the Company's Board of Directors will establish a Compensation Committee, an Audit Committee, and an Executive Committee. The Executive Committee will be chaired by Mr. Waldin, and the other members will be Mr. Neidus and Ms. Jorgenson. The functions of the Compensation Committee include considering and recommending to the Board of Directors and Company management the overall compensation programs of the Company, reviewing and approving the compensation payable to the senior management personnel of the Company, and reviewing and monitoring the executive development efforts of the Company to assure development of a core of management and executive personnel adequate for orderly management succession. The Committee will also review significant changes in employee benefits plans and stock related plans and serve as the "Committee" under the Company's 1998 Long-Term Incentive Plan. The Compensation Committee will consist of two independent members of the Board of Directors to be named following the Offering, each of whom will be a "non-employee director" within the meaning of Rule 16b-3 under the Exchange Act, and an "outside director" within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). The Audit Committee will review the scope and results of the annual audit of the Company's consolidated financial statements conducted by the Company's independent accountants, the scope of other services provided by the Company's independent accountants, proposed changes in the Company's financial and accounting standards and principles, and the Company's policies and procedures with respect to its internal accounting, auditing and financial controls. The Audit Committee will also examine and consider other matters relating to the financial affairs and accounting methods of the Company, including selection and retention of the Company's independent accountants. The Audit Committee is also responsible for reviewing all related party transactions and for monitoring corporate policies and procedures with respect to the Company's ethics and compliance program. The Audit Committee will consist of two independent members of the Board of Directors to be named following the Offering, each of whom will be an "independent director" within the meaning of the rules of the Nasdaq National Market. The Board of Directors may, from time to time, establish certain other committees to facilitate its work. Compensation. Non-employee directors of the Company will receive reimbursement of reasonable expenses incurred in serving as a director. In addition, pursuant to the Company's 1998 Long-Term Incentive Plan, each director of the Company who is not an employee of the Company automatically receives on the date such person first becomes a director a grant of nonqualified options to purchase Common Shares, which will vest one-fifth on each anniversary of the date of grant. In addition, following each annual meeting of the Company's shareholders, each such outside director will receive an annual grant of options to purchase an additional Common Shares, all of which vest one-fifth on each anniversary of the date of grant. 30 33 The exercise price of all such options is the fair market value at the time the options are granted. In addition, outside directors will receive annual compensation under the Company's deferred compensation plan in the form of a number of Common Shares equivalent in value to $20,000. Directors who are employees of the Company or Essef receive no compensation for their services as directors. The Company will enter into Indemnification Agreements with each of its directors and executive officers that provide the maximum indemnification allowed to directors and executive officers under the Ohio Revised Code, subject to certain exceptions. In addition, as authorized by the Company's Amended and Restated Regulations and the Ohio Revised Code, the Indemnification Agreements will provide generally that the Company will advance expenses incurred by directors and executive officers in any action or proceeding as to which they may be entitled to indemnification, subject to certain exceptions. EXECUTIVE COMPENSATION The following table sets forth the total compensation paid by Essef to the Chief Executive Officer and by the Company to the other four most highly compensated executive officers of the Company who received an annual salary and bonus in excess of $100,000 (hereafter collectively referred to as the "Named Executive Officers") for services rendered during 1997. SUMMARY COMPENSATION TABLE(1)
ANNUAL COMPENSATION -------------------- OTHER YEAR SALARY BONUS COMPENSATION(3) ---- -------- -------- --------------- Stuart D. Neidus, Chairman of the Board, Chief Executive Officer and Chief Financial Officer(2)................................... 1997 $200,000 $146,061 $9,000 Howard P. Wertman, President(4)................ 1997 170,000 132,997 8,142(5) Richard M. Kelso, Executive Vice President(4)................................. 1997 129,038 81,244 7,833 Thomas J. Casey, Vice President(4)............. 1997 100,000 33,950 6,026 Lawrence M. Mazzenga, Vice President(4)........ 1997 91,000 25,000 7,543
- --------------- (1) Since the Company was not a reporting company during the three immediately preceding fiscal years, only the information with respect to the most recent completed fiscal year is noted in the Summary Compensation Table. (2) Represents amounts earned by Mr. Neidus in his capacity as Executive Vice President and Chief Financial Officer of Essef. Such amounts were paid by Essef. (3) Includes for each named officer matching contributions under either Essef's or the Company's 401(k) Profit Sharing Plan. (4) All compensation shown for these officers was paid by Original Anthony and Sylvan for the period January 1, 1997 through May 1, 1997, and by the Company starting on May 2, 1997 through December 31, 1997. (5) Such amount does not include compensation earned in connection with the sale of Original Anthony and Sylvan. STOCK OPTIONS Grants and Exercises. There were no grants of stock options by the Company or Essef to any of the Named Executive Officers, and no exercises of Essef Options (defined below) or Company Options (defined below) by any of the Named Executive Officers, during the Company's last completed fiscal year. Replacement of Outstanding Essef Options. As of August 11, 1998, Mr. Waldin had 2,372,074 options to purchase Essef Common Stock ("Essef Options") at a weighted average exercise price of $0.87 per share. As of the same date, Mr. Neidus had 302,500 Essef Options at a weighted average exercise price of $7.23 per share. Subject to the substitution of the Essef Options described below, if the Double Spin-Off is completed, the number of Essef Options held by Messrs. Waldin and Neidus and the exercise price of such Essef Options will be adjusted 31 34 in accordance with the following formulas to reflect the portion of the value of their existing Essef Options allocable to the Company. It is not possible to specify how many Common Shares will be subject to such Company Options at the time of the Double Spin-Off because it is not known (i) how many unexercised and outstanding Essef Options will be held by Messrs. Waldin and Neidus immediately prior to the completion of the Double Spin-Off (ii) what the Essef Trading Price and the Company Trading Price will be, and (iii) how many Essef Options Mr. Neidus will elect for substitution. If Company Options are exercised further dilution to new investors will occur. REPRICING OF ESSEF OPTIONS: Essef Trading Price New Essef Option Old Essef Option After Double Spin-Off Exercise Price = Exercise Price X --------------------------- Essef Trading Price Before Double Spin-Off Essef Trading Price Old Essef Before Double Spin-Off New Essef Options* = Number Of Options X --------------------------- Essef Trading Price After Double Spin-Off
* Subject to reduction for issuance of Company Options described below. Notwithstanding the foregoing, the Company, Essef and Messrs. Waldin and Neidus have agreed that any additional Essef Options which would have been issued as a result of the aforementioned adjustment will be automatically substituted with stock options to purchase Common Shares ("Company Options") in accordance with the following formula: COMPANY OPTIONS TO BE ISSUED: Company Trading Price Company Option New Essef Option Before Double Spin-Off Exercise Price = Exercise Price X --------------------------- Essef Trading Price After Double Spin-Off Essef Trading Price New Essef Options After Double Spin-Off Substituted Company Options = -Old Essef Options X --------------------------- Company Trading Price Before Double Spin-Off
For purposes of the above calculations, "Trading Price" of Essef Shares or the Company's Common Shares, as the case may be, means the average closing price of such shares on the Nasdaq National Market for the 20 consecutive business days preceding or following the Double Spin-Off, as applicable. In addition, Mr. Neidus may elect at any time prior to the issuance of the substituted Company Options, to have a portion of his remaining old Essef Options substituted with Company Options. EMPLOYMENT AGREEMENTS The Company currently has employment agreements with three of its executive officers, Messrs. Neidus, Wertman and Kelso. Each such agreement expires on December 31, 2000, unless terminated or extended according to its terms. As compensation for his service as Chief Executive Officer and Chief Financial Officer of the Company, Mr. Neidus will receive an annual base salary of at least $220,000 and performance-based bonuses targeted at 60% of his annual salary. In addition, at the time of the Offering, Mr. Neidus will be granted options to purchase 100,000 Common Shares at an exercise price equal to the public offering price exercisable 20% per year following the Offering Date. As compensation for their service as President and Executive Vice President, respectively, Messrs. Wertman and Kelso will receive annual base salaries of $175,000 and $137,500, respectively, and performance-based bonuses targeted at 50% of their respective annual salaries. 32 35 If any of Messrs. Neidus, Wertman or Kelso is terminated by the Company without "cause," he will be entitled to receive salary for a period of one year (or, in the case of Mr. Neidus, until the later of one year or December 31, 2000), along with the pro rata portion of any bonus payable for such fiscal year. Messrs. Wertman and Kelso also would receive the right to exercise, for three months, any Company Options granted to them that are exercisable. Mr. Neidus will be entitled to exercise, for one year, any Company Options granted to him whether or not exercisable. Mr. Neidus will be deemed to have been terminated without "cause" if, among other things, the Company at any time materially changes his duties and responsibilities without his consent. Upon a "change in control" of the Company, Mr. Neidus shall have the right to terminate his employment with the Company and receive the same rights and benefits to which he would be entitled upon his termination without "cause". The Double Spin-Off is not included as a "change in control" under Mr. Neidus' employment agreement. 1998 LONG-TERM INCENTIVE PLAN All key employees and directors of the Company and its direct and indirect subsidiaries and other persons whose selection the Compensation Committee determines to be in the best interests of the Company would be eligible to receive awards under the 1998 Long-Term Incentive Plan ("the 1998 Plan"), including the executives named in the Summary Compensation Table. The 1998 Plan will be administered by the Compensation Committee, which will have authority to interpret the 1998 Plan, to grant waivers of 1998 Plan restrictions and to adopt such rules, regulations and policies for carrying out the 1998 Plan as it may deem necessary or proper in order to further the purposes of the 1998 Plan. In particular, the Compensation Committee will have the authority to (i) select participants, (ii) determine the number and type of awards to be granted, (iii) determine the terms and conditions, not inconsistent with the terms of the 1998 Plan, to any award granted, (iv) interpret the terms and provisions of the 1998 Plan and any award granted, (v) prescribe the form of any agreement or instrument executed in connection with any award and (vi) establish, amend and rescind such rules, regulations and policies for the administration of the 1998 Plan as it may deem advisable from time to time. Awards under the 1998 Plan may be in the form of stock options (either "incentive stock options" within the meaning of Section 422 of the Code or nonstatutory stock options), stock appreciation rights, restricted shares, performance shares or stock awards. Stock options will be exercisable in whole or in such installments and at such times and upon such terms as may be determined by the Compensation Committee, provided that no stock options will be exercisable more than ten years after the date of grant. The exercise price of any option may not be less than the fair market value of a Common Share on the date of the grant. Participants may pay the exercise price of a stock option in cash, Common Shares, or a combination of cash and Common Shares. Stock appreciation rights ("SARs") entitle the recipient to receive a payment, in cash or Common Shares, equal to the appreciation in market value of a stated number of Common Shares from the exercise price to the fair market value on the date of exercise or surrender. SARs may be granted either separately or in conjunction with other awards granted under the 1998 Plan. Any SAR related to a nonstatutory stock option may be granted at the same time such option is granted or at any time thereafter before exercise or expiration of such option. Any SAR related to an incentive stock option must be granted at the same time such option is granted. Any SAR related to an option will be exercisable only to the extent the related option is exercisable and such SAR (or the applicable portion thereof) will terminate and will no longer be exercisable upon the termination or exercise of the related option. Similarly, upon the exercise of a SAR as to some or all of the Common Shares covered by a related option, the related option shall be canceled automatically to the extent of the SARs exercised, and such Common Shares will not thereafter be eligible for grant. Restricted shares may be awarded in such numbers and at such times as the Compensation Committee determines. Restricted shares will be subject to such terms, conditions or restrictions as the Compensation Committee deems appropriate including, but not limited to, restrictions on transferability, requirements of continued employment, individual performance or financial performance of the Company. The period of vesting 33 36 and forfeiture restrictions will be established by the Compensation Committee at the time of grant, except that no restriction period may be less than 12 months. During the period in which any restricted shares are subject to forfeiture restrictions, the Compensation Committee may, in its discretion, grant to the participant to whom such shares have been awarded all or any of the rights of a shareholder with respect to such restricted shares, including the right to vote such shares and to receive dividends with respect to such shares. Performance shares may be awarded in the form of Common Shares that are earned only after the attainment of predetermined performance targets as established by the Compensation Committee at the time an award is made. A performance target shall be based upon one or any combination of the following: (i) revenues of the Company; (ii) operating income of the Company; (iii) net income of the Company; (iv) earnings per Share; (v) the Company's return on equity; (vi) cash flow of the Company; (vii) Company shareholder total return; (viii) return on assets; (ix) return on investment; (x) asset turnover; (xi) liquidity; (xii) capitalization; (xiii) stock price; (xiv) expenses; (xv) operating profit and margin; (xvi) retained earnings; (xvii) market share; (xviii) sales to targeted customers; (xix) customer satisfaction; (xx) quality measures; (xxi) productivity; (xxii) safety measures; or (xxiii) educational and technical skills of employees. The Compensation Committee shall be permitted to make adjustments when determining the attainment of a performance target to reflect extraordinary or nonrecurring items or events, or unusual nonrecurring gains or losses identified in the Company's financial statements, as long as any such adjustments are made in a manner consistent with Section 162(m) of the Code to the extent applicable. Awards of performance shares made to participants subject to Section 162(m) of the Code are intended to qualify under Section 162(m) and provisions of such awards will be interpreted in a manner consistent with that intent to the extent appropriate. The foregoing provisions of this paragraph are also applicable to awards of restricted shares to the extent such awards of restricted shares are subject to the financial performance of the Company. At the end of the applicable performance period, performance shares will be converted into Common Shares (or cash or a combination of shares and cash) and distributed to participants based upon the applicable performance entitlement. Award payments made in cash rather than the issuance of shares will not, by reason of such payment in cash, result in additional shares being available under the 1998 Plan. Stock awards may be made in Common Shares or on a basis valued in whole or in part by reference to, or otherwise based upon, Common Shares. Stock awards will be subject to conditions established by the Compensation Committee. Subject to adjustment in the event of any change in the number of outstanding shares by reason of a reorganization, recapitalization, stock split, stock dividend, combination or exchange of shares, merger, consolidation or any change in the corporate structure or capital stock of the Company, the aggregate number of Common Shares which may be awarded under the 1998 Plan shall be 1,000,000 shares. No more than 1,000,000 shares shall be cumulatively available for the grant of incentive stock options under the 1998 Plan and no more than 200,000 shares shall be the subject of awards to any individual participant in any one calendar year. Shares issuable under the 1998 Plan may consist of authorized and unissued Common Shares or Common Shares held in treasury. In the event of a Change in Control (as defined in the 1998 Plan) of the Company, and except as the Board may expressly provide otherwise, (i) all stock options or SARs then outstanding will become fully exercisable as of the date of the Change in Control, whether or not then otherwise exercisable, (ii) all restrictions and conditions of all awards of restricted shares then outstanding shall be deemed satisfied as of the date of the Change in Control, and (iii) all awards of performance shares will be deemed to have been fully earned as of the date of the Change in Control. The Board may amend, suspend or terminate the 1998 Plan at any time, provided that no such action shall be taken that would impair the rights under an outstanding award without the participant's consent. Similarly, the Board may amend the terms of any outstanding award, prospectively or retroactively, but no such amendment shall impair the rights of any participant without the participant's consent and no such amendment shall have the effect, with respect to any employee subject to Section 162(m) of the Code, of increasing the amount of any award from the amount that would otherwise be payable pursuant to the formula and/or goals previously established for such participant. 34 37 Except as may be otherwise provided in the relevant award agreement, no award or any benefit under the 1998 Plan will be assignable or transferable, or payable to or exercisable by, anyone other than the participant to whom it was granted. CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE 1998 PLAN The following summary generally describes the principal federal income tax consequences under current tax laws of certain events under the 1998 Plan. The summary is general in nature and is not intended to cover all tax consequences that may apply to a particular participant or to the Company, nor does it describe foreign, state or local tax consequences. No income will result to a participant upon the grant or exercise of an incentive stock option ("ISO") provided that (i) there is no disposition of stock received upon exercise of an ISO within two years from the date the ISO is granted or within one year from the date the ISO is exercised (the "ISO holding periods"); and (ii) the participant is an employee of the Company or a subsidiary of the Company at all times during the period commencing on the date of grant and ending on the date three months (or one year in the case of a participant who is totally and permanently disabled) prior to the date of exercise. In the event of a disposition of stock received upon exercise of an ISO after the ISO holding periods have been satisfied, any gain or loss, equal to the difference between the amount realized upon such disposition and the option price, generally will be taxable as capital gain or loss. In the event of a disposition of stock received upon exercise of an ISO prior to the expiration of the ISO holding periods, the participant will recognize ordinary income equal to the excess of the fair market value of such stock at the time of exercise (or the amount realized upon such disposition, if less) over the option price. If the amount realized upon such disqualifying disposition exceeds the fair market value of such stock at the time of exercise, the excess will be taxable as capital gain. No deduction is allowable to the Company upon the grant or exercise of an ISO. In the event that a participant recognizes ordinary income as a result of a disposition of stock received upon exercise of an ISO prior to the expiration of the ISO holding periods, the company generally will be entitled to a deduction in an amount equal to the ordinary income recognized by the participant. No income is recognized upon the grant of a nonstatutory stock option to a participant. The participant recognizes ordinary income upon exercise of the nonstatutory stock option equal to the excess of the fair market value of the stock received upon exercise of the stock option on the date of exercise over the option price. Such ordinary income is subject to withholding if the participant is an employee. The participant's tax basis in these shares will be their fair market value when purchased. On subsequent sale of such shares, gain or loss will be recognized in an amount equal to the difference between the tax basis thereof and the amount realized on such sale. A participant will not be taxed upon the award of an SAR. Upon exercise of the SAR, the participant will recognize ordinary income equal to the amount of cash received and the Company will be entitled to a corresponding deduction. In the event a participant receives shares upon the exercise of an SAR, the participant will recognize ordinary income equal to the value of the shares at such time. If the participant is an employee, any ordinary income recognized upon the exercise of an SAR is treated as wages subject to withholding. A participant generally will not recognize taxable income upon the grant of restricted shares, and the recognition of any income will be postponed until the time that the restrictions on the shares lapse, at which time the participant will recognize ordinary income (subject to withholding if the participant is an employee) equal to the fair market value of the restricted shares at the time that such restrictions lapse. A participant may elect to be taxed at the time of the grant of restricted stock and, if this election is made, the participant will recognize ordinary income equal to the fair market value of the restricted shares at the time of grant determined without regard to any of the restrictions thereon. When performance shares are earned and stock is issued therefor, a participant will realize ordinary income (subject to withholding if the participant is an employee) equal to the fair market value of the performance shares. 35 38 A participant will recognize ordinary income upon the receipt of a stock award (other than an award of performance shares or restricted shares) equal to the fair market value of such stock on the date of such award. If the participant is an employee, any ordinary income recognized as a result of a stock award is treated as wages subject to withholding. The Company generally will be entitled to a deduction equal to the ordinary income recognized by the participant in the same taxable year in which the participant recognizes ordinary income with respect to nonstatutory stock options, restricted stock, performance shares, stock appreciation rights and stock awards. 36 39 RELATIONSHIP BETWEEN THE COMPANY AND ESSEF RELATIONSHIP AND TRANSACTIONS PRIOR TO THE OFFERING The Company is an indirect wholly owned subsidiary of Essef. Essef provides certain financial, management, and other services to its direct and indirect subsidiaries, including the Company. Until the consummation of this Offering, Essef will continue to provide those services and others to the Company on an informal basis. See "Risk Factors -- Relationship with Essef; Absence of History as a Stand-Alone Company." The Company purchases certain pool equipment and other supplies from the Essef Group on an arm's length basis. During the period from January 1, 1997 to June 30, 1998, such purchases totaled approximately $10.6 million. Although the Company expects to continue to purchase equipment and other supplies from the Essef Group following the Offering, the Company is not bound by any formal supply agreement and may discontinue this relationship with the Essef Group at any time. Management believes that there are currently a number of other suppliers from which the Company could procure such equipment and supplies upon comparable terms. See "Business -- Purchasing and Principal Suppliers." RELATIONSHIP AND TRANSACTIONS FOLLOWING THE OFFERING Certain aspects of the Company's relationship with Essef following the completion of the Offering will be defined by a Revolving Note, a Company Indemnification Agreement, a Tax Allocation Agreement and an Administrative Services Agreement. These documents have been negotiated in the context of a parent-subsidiary relationship and therefore are not the result of negotiations between independent parties. It is the intention of the Company and Essef that such documents and the transactions provided for therein, taken as a whole, should accommodate the parties' interests in a manner that is fair to both parties. The parties intend that such documents and transactions provide fair market value to them on terms no less favorable to the Company than would otherwise be available from unaffiliated parties. The documents summarized in this section have been filed as exhibits to the Registration Statement of which this Prospectus forms a part, and the following summaries are qualified in their entirety by reference to the agreements as filed. Revolving Note. The Company intends to execute and deliver a Revolving Note to Essef upon the completion of this Offering. Essef is not legally obligated to provide financing to the Company pursuant to such Revolving Note and may, for reasons not relating to the Company, be unwilling or otherwise unable, under the terms of its bank credit facility (of which the Company is a guarantor), to extend new loans to the Company in the future. Terms of Essef's credit facility that could limit Essef's willingness or ability to make loans to the Company include limits on aggregate borrowing and affirmative and negative covenants. In addition, Essef has other subsidiaries to which it may extend loans, thereby reducing the funds it has available to loan to the Company. Pursuant to the terms of the Revolving Note, any advances made by Essef to the Company thereunder will be repayable to Essef on demand and bear interest at the Essef borrowing rate plus 0.25%. In addition, the Company will also be required to reimburse Essef for its portion of the costs that Essef incurs under Essef's bank revolving credit facility, including but not limited to, commitment fees, letter of credit fees and agent fees. At the time of the Double Spin-Off the Company intends to establish a revolving credit facility with a syndicate of banks to replace the Revolving Note. Company Indemnification Agreement. The Company and Essef intend to enter into an indemnification agreement (the "Company Indemnification Agreement") upon the completion of this Offering in which each party will agree to indemnify and hold harmless the other from and against certain obligations and contingent liabilities. Tax Allocation Agreement. The Company will be included in Essef's consolidated group (the "Group"), and thus in Essef's consolidated tax returns, for federal income tax purposes so long as Essef beneficially owns at least 80% of the total voting power and value of the outstanding stock of the Company. For periods during which the Company is included in Essef's consolidated federal income tax returns or state consolidated or combined returns, the Company will be required, pursuant to a tax allocation agreement ("Tax Allocation Agreement") that the Company and Essef intend to execute, to make a payment to Essef in an amount generally equal to the amount of federal and state taxes that the Company would have incurred if it had filed separate federal and state 37 40 tax returns. The Company will be responsible for its own separate tax liabilities that are not determined on a consolidated or combined basis. The Company will also be responsible in the future for any increases to the consolidated tax liability of the Group that are attributable to the Company for prior periods during which the Tax Allocation Agreement is in effect. Each corporation that is a member of the Group during any portion of the Group's taxable year is jointly and severally liable to the Internal Revenue Service (the "Service") for the federal income tax liability of the entire Group for that year. Accordingly, if the Group's federal income tax liability for a taxable year in which the Company is a member of the Group is not paid in full to the Service, the Company would be potentially liable to the Service for an amount up to and including the Group's entire unpaid federal income tax liability, regardless of the amount of that liability that is allocable to the Company and regardless of any provisions of the Tax Allocation Agreement to the contrary. In such event, the Company would be entitled to seek indemnification from Essef for the amount that the Company was not required to pay pursuant to the Tax Allocation Agreement. Administrative Services Agreement. The Company and Essef intend to enter into an administrative services agreement (the "Services Agreement") upon the completion of this Offering pursuant to which Essef will continue to provide limited services to the Company, including financial, risk management, tax, employee benefits, legal and management services. The Company estimates its basic costs under the Services Agreement will be approximately $600,000 annually. Such amount is intended to reimburse Essef for those incremental costs that will be incurred by Essef, on behalf of the Company, as a result of Company's becoming a stand-alone public company. In addition, Essef will also charge the Company on an hourly basis for certain non-recurring work performed for the Company by Essef management. The actual expenditures will depend on numerous factors, some of which are beyond the Company's control. There can be no assurance that the actual expenses will not be significantly greater than anticipated. See "Risk Factors -- Relationship with Essef; Absence of History as a Stand-Alone Company." 38 41 PRINCIPAL SHAREHOLDER Prior to the Offering, all of the outstanding Common Shares will be owned by the Essef Group. Upon the completion of the Offering, the Essef Group will own approximately % of the Common Shares then outstanding ( % if the Underwriters' over-allotment option is exercised in full). Accordingly, Essef will be able to elect the entire Board of Directors of the Company and to control the vote on matters submitted to a vote of the Company's shareholders, including extraordinary corporate transactions. See "Risk Factors -- Relationship with Essef; Absence of History as a Stand-Alone Company." The following table sets forth certain information with respect to the beneficial ownership of Common Shares and/or Essef's common shares ("Essef Shares") by: (i) each of the Named Executive Officers and directors, (ii) each other person (or group of persons) who is known by the Company to own beneficially 5% or more of the Common Shares or the Essef Shares, and (iii) all directors and executive officers of the Company as a group.
COMMON SHARES COMMON SHARES BENEFICIALLY OWNED BENEFICIALLY OWNED ESSEF SHARES IMMEDIATELY PRIOR IMMEDIATELY AFTER BENEFICIALLY TO OFFERING OFFERING OWNED* NAME AND ADDRESS OF ------------------ ------------------- ------------ BENEFICIAL OWNER(1)(2) NUMBER PERCENT NUMBER PERCENT(3) NUMBER PERCENT ---------------------- ------- -------- ------ ---------- ---------- ------- Essef Group(4)................... 100% % NA Mary Ann Jorgenson(5)............ -- -- 3,390,893 28.76% Thomas B. Waldin(6)(7)........... -- -- 2,493,371 16.68 Stuart D. Neidus(6).............. -- -- 62,700 ** Howard P. Wertman................ 5,600 ** Thomas J. Casey.................. 700 ** All directors and executive officers of the Company as a group (10 persons)(4).......... -- -- 5,964,192 39.91%
- --------------- * Based on 11,788,197 Essef Shares outstanding as of August 27, 1998. ** Less than 1.0% (1) The address of each of the executive officers and directors is c/o Anthony & Sylvan Pools Corporation, 220 Park Drive, Chardon, Ohio 44024. (2) Unless otherwise indicated, the Company believes that the beneficial owner has sole voting and dispositive power over these shares. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission which generally attribute beneficial ownership of securities to persons who possess sole or shared voting power and/or investment power with respect to those shares. (3) Assumes no exercise of the Underwriters' over-allotment option. (4) If the Underwriters' over-allotment option is exercised in full, the Essef Group will be the beneficial owner of % of the Common Shares outstanding after the Offering, and all directors and executive officers as a group will be the beneficial owners of % of the Common Shares outstanding after the Offering. (5) Mary Ann Jorgenson shares voting and dispositive power as co-trustee and is also beneficial owner of: (a) 83,732 Essef Shares held by six trusts of which she is the sole trustee with sole voting and dispositive power; (b) 828,984 Essef Shares held by two trusts of which she is one of three trustees with shared voting and dispositive power; (c) 80,828 Essef Shares held by a trust of which she is a co-trustee with shared voting and dispositive power; (d) 2,215,849 Essef Shares held by two trusts over which she has shared dispositive power as one of three trust advisors; and (e) 181,500 Essef Shares held by trusts of which she is one of three trustees with shared voting and dispositive power. Ms. Jorgenson disclaims the benefits of ownership of any of the aforementioned Essef Shares. Ms. Jorgenson is a partner in the law firm of Squire, Sanders & Dempsey L.L.P., which the Company retains as its outside general counsel. (6) Includes shares underlying options which are exercisable within 60 days of August 27, 1998 as follows: Thomas B. Waldin 2,372,074 Stuart D. Neidus 48,400
(7) Thomas B. Waldin is the beneficial owner of 2,493,371 Essef Shares owned by or benefiting him, his wife or child directly, including the Essef Options noted above. 39 42 DESCRIPTION OF CAPITAL STOCK Set forth below is a brief description of the Company capital stock that will be authorized for issuance upon the effectiveness of the Company's Amended and Restated Articles, including the Common Shares offered hereby. The Company will cause such Amended and Restated Articles of Incorporation and its Amended and Restated Regulations (each in substantially the form filed as an exhibit to the Registration Statement of which this Prospectus is a part) to become effective prior to the sale of the Common Shares offered hereby. The Company will be authorized to issue 49,000,000 Common Shares, without par value, and 1,000,000 Preferred Shares, without par value ("Serial Preferred Shares"). No Serial Preferred Shares have been issued as of the date of this Prospectus, nor will any Serial Preferred Shares be outstanding immediately following the Offering. The Company's Amended and Restated Articles will permit the Company's Board of Directors to fix the rights and designations of the Serial Preferred Shares, to the extent allowed by Ohio law. Holders of outstanding Common Shares will be entitled to one vote per share on all matters submitted to a vote of shareholders, and will not have the right to vote cumulatively in the election of directors. Holders of Common Shares will have equal rights to receive dividends ratably, as and when declared by its Board out of funds legally available therefor, subject to the dividend rights of holders of Serial Preferred Shares that may be issued in the future. In the event of any liquidation, dissolution or winding up of the Company, holders of Common Shares will receive the assets of the Company available for distribution on a pro rata basis. No holder of Common Shares will have any preemptive or preferential rights to purchase or subscribe to any shares of any class of the Company, except to the extent provided by the Board of Directors. The transfer agent and registrar for the Common Shares is National City Bank, Cleveland, Ohio. POSSIBLE EFFECTS OF CERTAIN PROVISIONS OF THE COMPANY'S ORGANIZATIONAL DOCUMENTS AND OHIO LAW The Company's strategic plan is focused on the primary goal of building value for the benefit of long-term shareholders. The Board of Directors believes that, in the event the Double Spin-Off is effected, this goal can best be attained by the Company's operation as an independent entity. Under Ohio law, the directors have the responsibility for selecting the time frame for achieving corporate goals. In order to assure that the directors can carry out that responsibility, the Company's Amended and Restated Articles of Incorporation and Amended and Restated Regulations will contain certain provisions which may have the effect of discouraging unilateral tender offers or other attempts to take over and acquire the business of the Company. If they discourage potential takeover bids, such provisions could limit the opportunity for the Company's shareholders to sell their shares at a premium over then prevailing market prices. Such provisions are intended to help preserve for the public shareholders of the Company the long-term value inherent in their investment in the Common Shares and guard against offers which are not, or are otherwise made at a time or in a manner which is not, in the best interests of the Company and its shareholders. The Board of Directors believes that it is in the best position to consider all of the factors which may be relevant to a determination of whether a control bid is in the best interests of the Company and its shareholders. A transaction which is negotiated and approved by the Board of Directors can be carefully planned and undertaken at an opportune time in order to obtain maximum value for the Company and its shareholders, with due consideration given to matters such as the management and business of the acquiror, the interests of other constituencies of the Company and maximum strategic development of the assets of the Company. By contrast, the Board of Directors believes that non-negotiated takeover attempts present to shareholders the risk of a sale on terms which may be less favorable than might otherwise be available. Such offers may be timed to exploit fluctuations in the stock market to capture for the acquiror, at the expense of the target company's public shareholders, the intrinsic value of the target company's capital stock. Moreover, although a tender offer or other takeover attempt may be made at a price substantially above the prevailing market price for the target company's shares, such offers are sometimes made for less than all of the outstanding target company shares, presenting shareholders with the alternative of partially liquidating their investment at a time that may be disadvantageous, or retaining their investment in an enterprise which is under different management and whose 40 43 objectives may not be similar to, or as attractive as, those of the remaining shareholders. Such offers may also be made for illegitimate or improper purposes (such as "greenmail") which seek to enrich the bidder at the expense of the target company and its shareholders and may cause significant disruption of the target company's business and management. Accordingly, the Board of Directors believes that the provisions described below, which encourage potential acquirors to negotiate with the Board of Directors and discourage the use of improper and coercive tactics, are in the best interests of the Company and its shareholders. In addition to such provisions, the Board of Directors may, in the future, adopt other measures designed to discourage non-negotiated takeover attempts, including a shareholder rights plan. The Board of Directors currently is not aware of any plan by any third party to effect a change of control in the Company. Authorized But Unissued Shares. The Company's Amended and Restated Articles of Incorporation will authorize the issuance of up to 1,000,000 Serial Preferred Shares. In addition, after giving effect to this Offering, approximately, Common Shares will be authorized but unissued and not reserved for issuance. An effect of the existence of authorized but unissued Common Shares and Serial Preferred Shares may be to enable the Board of Directors to render more difficult or discourage a transaction to obtain control of the Company by issuing such shares without shareholder approval in transactions which dilute voting or other rights of the proposed acquiror. The Company has no present plans or intentions to issue any of such shares and has no current plans to adopt other such measures. Classified Board; No Cumulative Voting. The Company's organizational documents will provide for a classified Board of Directors, consisting of two (2) classes with three (3) year terms, and no cumulative voting in the election of directors. Such provisions may discourage purchases of a significant minority position because they tend to delay and render more difficult a purchaser's ability to obtain control of the Board of Directors. Although directors of the Company may be removed without cause, the Company's Amended and Restated Regulations will require the affirmative vote of at least 80% of the then-outstanding shares entitled to vote in an election of directors, taken as a single class, to remove any director. Special Vote Required to Approve Certain Control Share Acquisitions. Article SIXTH of the Company's Amended and Restated Articles of Incorporation ("Article SIXTH") will be substantially identical to the Ohio Control Share Acquisition Statute, Section 1701.831 of the Ohio Revised Code, as currently in effect, although Article SIXTH will provide for remedies and a level of director discretion with regard to calling a meeting of shareholders not otherwise found in Section 1701.831. The Company's Amended and Restated Articles of Incorporation will provide that the Ohio Control Share Acquisition Statute, as in effect on September , 1998, shall not apply to acquisitions of its shares. Article SIXTH will provide that no person (or entity or group) shall make a Control Share Acquisition (as defined below) without first obtaining the authorization of the Company's shareholders in accordance with certain procedural requirements. A "Control Share Acquisition" is generally any acquisition, directly or indirectly, of shares of the Company which, when added to all other shares of the Company owned or controlled by the acquiror, would entitle the acquiror, alone or with others, to exercise or direct the exercise of the voting power of the Company in the election of directors within any of the following ranges of voting power: (i) one-fifth or more but less than one-third of such voting power; (ii) one-third or more but less than a majority of such voting power; or (iii) a majority or more of such voting power. Article SIXTH will provide that any shareholder whose ownership of Common Shares as of the date of the Double Spin-Off would be in one of the ranges of voting power shall not be required to obtain any shareholder approval for ownership within such range but would be required to obtain shareholder approval for acquisitions of Common Shares that would cause such shareholder's holdings to move to a greater range. Article SIXTH will require that the person proposing to make a Control Share Acquisition deliver a notice to the Company containing, among other things, a description of the terms of the proposed acquisition and reasonable evidence that the proposed Control Share Acquisition, if consummated, would not be contrary to law and that the person who is giving the Notice has the financial capacity to make such acquisition. Within 50 days of its receipt of such notice, the Board of Directors must call and hold a special meeting of shareholders to vote on the proposed Control Share Acquisition unless it has determined that (i) the notice was not given in good faith, 41 44 (ii) the proposed Control Share Acquisition would not be in the best interests of the Company or (iii) the proposed Control Share Acquisition could not be consummated for financial or legal reasons. Article SIXTH will provide that in determining whether the proposed Control Share Acquisition would be in the best interests of the Company, a director must consider the interests of the Company's shareholders and has the discretion to consider any of the following: the interests of the Company's employees, suppliers, creditors and customers; the economy of the state and nation; community and societal considerations; and the long term as well as short term interests of the Company and its shareholders, including the possibility that these interests may be best served by the continued independence of the corporation. Article SIXTH will also provide that a determination by the Board of Directors that such a special meeting of shareholders should not be called shall not be deemed void or voidable merely because one or more of its directors or officers who participated in making such determination may be deemed to be other than disinterested, if in any such case the material facts of the relationship giving rise to a basis for self-interest are known to the directors and the directors, in good faith reasonably justified by the facts, make such determination by the affirmative vote of a majority of the disinterested directors, even though the disinterested directors constitute less than a quorum. For these purposes, a "disinterested director" means a director whose material contacts with the Company are limited principally to activities as a director or shareholder. A director would not be deemed to be other than a "disinterested director" merely because he would no longer be a director if the proposed Control Share Acquisition were approved and consummated. If a special meeting is to be held, the Company's notice to shareholders must include or be accompanied by both the notice submitted to the Company by the person proposing to make a Control Share Acquisition and a statement by the Company of its position or recommendation with respect to such acquisition or a statement that it has not taken a position or made a recommendation. For purposes of Article SIXTH, the person who delivered the notice may make the proposed Control Share Acquisition if both of the following occur: (i) the shareholders of the Company authorize such acquisition by an affirmative vote of a majority of (A) all voting shares represented at such meeting and (B) all voting shares represented at such meeting which are not "Interested Shares" (as defined below); and (ii) such acquisition is consummated, in accordance with the terms so authorized, not later than 360 days following shareholder authorization of the Control Share Acquisition. Subject to certain exclusions, the term "Interested Shares" generally refers to voting shares held or controlled by: (i) the person whose notice prompted the calling of the special meeting of shareholders; (ii) any officer of the Company elected or appointed by the directors of the Company; (iii) any employee of the Company who is also a director of the Company; (iv) any person who acquired his shares, directly or indirectly, for valuable consideration during the period beginning with the date of the first public disclosure of a proposed Control Share Acquisition and ending on the record date of the special meeting if (A) the aggregate consideration paid by such acquiring person for such shares exceeds $250,000 or (B) the number of shares acquired by such acquiring person exceeds one-half of one percent of the outstanding voting shares of the Company; and (v) any person who transfers voting shares for valuable consideration after the record date of the special meeting as to shares so transferred, if accompanied by the voting power in the form of a blank proxy, an agreement to vote as instructed by the transferee, or otherwise. Article SIXTH will provide that the issuance or transfer of any shares in violation of Article SIXTH ("Excess Shares") will be null and void. In the event the Company is not permitted to treat an issuance or transfer of Excess Shares as null and void, Article SIXTH will further provide that the holders of Excess Shares will be deemed to hold such shares as agents of the Company. During the time when such shares are considered Excess Shares, they will not be entitled to any voting rights, will not be considered to be outstanding for quorum or voting purposes, and will not be entitled to receive dividends, interest or any other distribution with respect to the Excess Shares. Following a transfer of such shares to a person in whose hands such shares do not constitute Excess Shares, the Company will distribute to such transferee any dividends or other distributions which accrued on such shares and were not previously paid or distributed. Special Vote Required for Certain Amendments to Organizational Documents. Certain provisions of the Company's Amended and Restated Articles of Incorpoartion, such as those set forth in Article SIXTH (control 42 45 share acquisitions), will not be subject to amendment, alteration or repeal except by the affirmative vote of at least 80% of the outstanding voting shares of the Company. Such 80% vote will also required to amend, alter or repeal any of the provisions of Section 7 (number of directors), Section 9 (classification, election and term of office of directors) or Section 10 (removal of directors) of the Company's Amended and Restated Regulations, unless such amendment has been recommended by at least two-thirds of the Continuing Directors. As used in the Company's Amended and Restated Regulations, the term "Continuing Directors" generally will mean, as of any date of determination, members of the Board of Directors who were either elected as initial directors of the Company (the three current directors) or were nominated for election or elected to the Board of Directors with the approval of a majority of the Continuing Directors in office at the time of such nomination or election. Other Provisions. Certain other provisions of the Company's Amended and Restated Articles of Incorporation and Amended and Restated Regulations may also tend to discourage attempts to acquire control of the Company. These include advance notice requirements for director nominations and shareholder proposals, provisions which require the unanimous written consent of the holders of all voting shares in order for the shareholders to take action without a meeting, provisions which permit a special meeting to be called by shareholders only with the approval of the holders of 50% or more of outstanding voting shares, provisions which permit shareholders to set the number of directors only upon the recommendation of the Board of Directors, and provisions which permit the Company to repurchase outstanding shares of its capital stock as permitted by law. TRANSACTIONS AND RELATIONSHIPS WITH INTERESTED PARTIES The Amended and Restated Articles of Incorporation will contain certain provisions intended to clarify the duties and obligations of directors and officers of the Company with respect to related party transactions. The Amended and Restated Articles of Incorporation will provide that no contract or arrangement between the Company and Essef, or between the Company and any director or officer of the Company or Essef, will be void or voidable solely because: (i) Essef or such officer or director is a party; or (ii) such officer or director participated in, or voted with respect to, the authorization of such contract or arrangement. Further, the Amended and Restated Articles of Incorporation will provide that neither Essef nor any of its officers or directors are liable to the Company or its shareholders for breach of any fiduciary duty or duty of loyalty, failure to act in the best interests of the Company, or the derivation of any improper personal benefit, if they in good faith take any action or exercise any right in connection with a contract or arrangement between the Company and Essef. CERTAIN LAWS The Company is subject to Chapter 1704 of the Ohio Revised Code ("Chapter 1704"). Under Chapter 1704, the Company may not engage in a Chapter 1704 transaction (a term that broadly includes mergers, assets and stock sales and other financing transactions) with an interested shareholder (a person or entity that controls 10% or more of the Company's voting power) for three years after the interested shareholder became such unless the directors of the Company approved the transaction or the purchase of shares by the interested shareholder in advance. Chapter 1704 transactions between an interested shareholder who has held such shares for three years and the Company that were not approved by the directors in advance are subject to additional shareholder approval requirements or fairness criteria. The provisions of Chapter 1704 may deter or prevent takeover bids that have not been approved in advance by the directors and may decrease the chances of shareholders realizing a premium over market price for their Common Shares as a result of such a takeover bid. SHARES ELIGIBLE FOR FUTURE SALE GENERAL Prior to the Offering there has been no market for the Common Shares of the Company. The Company can make no predictions as to the effect, if any, that sales of shares or the availability of shares for sale will have on the market price prevailing from time to time. Nevertheless, sales of significant amounts of the Common Shares in the public market, or the perception that such sales may occur, could adversely affect prevailing market prices. See "Risk Factors -- Shares Eligible for Future Sale." 43 46 Upon consummation of the Offering, the Company will have Common Shares outstanding ( Common Shares if the Underwriters' over-allotment option is exercised in full), of which will be freely tradable without restriction or further registration under the Securities Act, except for any shares purchased by an "affiliate" of the Company (in general, a person who has a control relationship with the Company), which shares will be subject to the resale limitations, described below, of Rule 144. The remaining shares ( shares if the Underwriters' over-allotment option is exercised in full) are deemed to be "restricted securities," as that term is defined under Rule 144, in that such shares were issued and sold by the Company in private transactions not involving a public offering and, as such, may only be sold pursuant to an effective registration under the Securities Act, in compliance with the exemption provisions of Rule 144 or pursuant to another exemption under the Securities Act. An aggregate of Common Shares held by existing Shareholders of the Company upon completion of the Offering will be "restricted securities" (as that phrase is defined in Rule 144) and may not be resold in the absence of registration under the Securities Act or pursuant to an exemption from such registration, including among others, the exemption provided by Rule 144 under the Securities Act. An aggregate of ( shares if the Underwriters' over-allotment option is exercised in full) of such restricted shares will be eligible for sale under Rule 144 (subject to certain recurring three-month volume limitations prescribed by Rule 144 and the lock-up arrangements with the Underwriters described in the following paragraph) commencing 90 days after the Offering, and the balance will become so eligible at various times commencing thereafter. See "Risk Factors -- Shares Eligible for Future Sale." Essef Corporation and all of the directors and executive officers of the Company, beneficially holding in the aggregate Common Shares upon consummation of the Offering, have agreed with the Underwriters not to sell or otherwise dispose of any of those Common Shares for a period of 90 days after the date of this Prospectus without the written consent of the Representatives; provided, however, that within such 90-day period, the Essef Group may consummate the Double Spin-Off. If the Double Spin-Off is completed, all Common Shares will be freely tradable except for any Common Shares that are held by affiliates of the Company or that are otherwise subject to the restrictions of Rule 144. In general, under Rule 144 as currently in effect, beginning 90 days after the date of this Prospectus, if a period of at least one year has elapsed since the later of the date the "restricted securities" were acquired from the Company or the date they were acquired from an Affiliate, then the holder of such restricted securities (including an Affiliate) is entitled to sell in the public market a number of shares within any three-month period that does not exceed the greater of 1% of the then outstanding shares of the Common Shares (approximately shares immediately after the Offering) or the average weekly reported volume of trading of the Common Shares on the Nasdaq National Market during the four calendar weeks preceding such sale. Under Rule 144, the holder may only sell such shares through "brokers' transactions" or in transactions directly with a "market maker" (as such terms are defined in Rule 144). Sales under Rule 144 are also subject to certain requirements regarding providing notice of such sales and the availability of currently public information concerning the Company. Affiliates may sell shares not constituting restricted shares in accordance with the foregoing volume limitations and other requirements but without regard to the one-year holding period. Under Rule 144(k), if a period of at least two years has elapsed between the later of the date restricted securities were acquired from the Company or the date they were acquired from an Affiliate, as applicable, a holder of such restricted securities who is not an Affiliate at the time of the sale and has not been an Affiliate for at least three months prior to the sale would be entitled to sell the shares in the public market without regard to the volume limitations and other restrictions described above. Beginning 90 days after the date of this Prospectus, approximately Common Shares will be eligible for sale in the public market pursuant to Rule 144, subject to the volume limitations and other restrictions described above. The Company intends to file a registration statement under the Securities Act to register Common Shares reserved for issuance under the 1998 Plan, thereby permitting the resale of such shares by non-affiliates in the public market without restriction under the Securities Act. The Company has reserved up to 1,000,000 Common Shares for issuance under the 1998 Plan. See "Management -- Long-Term Incentive Plan." 44 47 UNDERWRITING Subject to the terms and conditions contained in the Underwriting Agreement, each of the underwriters named below (the "Underwriters") has severally agreed to purchase, and the Company has agreed to sell to such Underwriter, the respective number of Common Shares set forth opposite the name of such Underwriter at the public offering price less the underwriting discount set forth on the cover page of this Prospectus.
NUMBER OF UNDERWRITERS SHARES ------------ --------- McDonald & Company Securities, Inc.......................... Friedman, Billings, Ramsey & Co., Inc....................... Morgan Keegan & Company, Inc................................ --------- Total............................................. =========
The Underwriting Agreement provides that the obligations of the several Underwriters to pay for and accept delivery of the Common Shares offered hereby are subject to approval of certain legal matters by their counsel and to certain other conditions. The Underwriters are obligated to take and pay for all Common Shares offered hereby (other than those covered by the over-allotment option described below) if any such shares are purchased. The Underwriters, for whom McDonald & Company Securities, Inc., Friedman, Billings, Ramsey & Co., Inc. and Morgan Keegan & Company, Inc. are acting as Representatives (the "Representatives"), propose to offer part of the Common Shares directly to the public at the public offering price set forth on the cover page of this Prospectus and part of the shares to certain dealers at a price which represents a concession not in excess of $ per share under the public offering price. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other dealers. After the Offering, the offering price and other selling terms may be changed. The Representatives of the Underwriters have advised the Company that the Underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. The Company has granted to the Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase up to an aggregate of additional Common Shares at the public offering price set forth on the cover page of this Prospectus minus the underwriting discounts and commissions. The Underwriters may exercise such option solely for the purpose of covering over-allotments, if any, in connection with the sale of the shares offered hereby. To the extent such option is exercised, each Underwriter will be obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares as the number of shares set forth opposite such Underwriter's name in the preceding table bears to the total number of shares in such table. The Company, Essef and other affiliates of the Company, who beneficially hold an aggregate of Common Shares, have agreed that, for a period of 90 days following the date of this Prospectus, they will not, without the prior written consent of the Representatives, offer, sell, contract to sell, or otherwise dispose of any Common Shares of the Company (other than shares offered pursuant to this Prospectus) or any securities convertible into, or exercisable or exchangeable for Common Shares of the Company without the prior written consent of the Underwriters, other than, in the case of the Company, in certain limited circumstances and, in the case of the Essef Group companies, in the Double Spin-Off. If the Double Spin-Off is completed, all Common Shares will be freely tradable except for any Common Shares that are held by affiliates of the Company or that are otherwise subject to Rule 144. Prior to the Offering, there has not been any public market for the Common Shares of the Company. Consequently, the initial public offering price for the Common Shares included in the Offering will be determined by negotiations between the Company and the Representatives. Among the factors to be considered in determining such price are the history of and prospects for the Company's business and the industry in which it competes, an assessment of the Company's management and the present state of the Company's development, the past and present revenues and earnings of the Company, the prospects for the growth of the Company's revenues and earnings, the current state of the economy in the United States and the current level of economic activity in 45 48 the industry in which the Company competes and in related or comparable industries, and currently prevailing conditions in the securities markets, including current market valuations of publicly traded companies that are comparable to the Company. The Company has agreed to indemnify the Underwriters against certain liabilities, including certain liabilities under the Securities Act, or to contribute to payments that the Underwriters may be required to make in respect thereof. LEGAL MATTERS Squire, Sanders & Dempsey L.L.P. has rendered an opinion as to the validity of the Common Shares offered hereby. Certain legal matters relating to the Offering will be passed upon for the Underwriters by Thompson Hine & Flory LLP. EXPERTS The financial statements of Anthony & Sylvan Pools Corporation as of December 31, 1997 and for the eight months then ended, and the financial statements of Anthony & Sylvan Pools, Inc. as of December 31, 1996 and for the four month period ended April 30, 1997 and the years ended December 31, 1996 and 1995, included in this Registration Statement and the related financial statement schedule included elsewhere in the Registration Statement have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein and elsewhere in the registration statement, and are included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission in Washington, D.C. a Registration Statement on Form S-1 under the Securities Act with respect to the Common Shares offered in the Offering. This Prospectus does not contain all of the information set forth in the Registration Statement and the Exhibits and schedules thereto, certain items of which are omitted in accordance with the rules and regulations of the Commission. Statements contained in this Prospectus concerning the provisions or contents of any contract or other document referred to herein are not necessarily complete. With respect to each such contract, agreement, or document filed as an exhibit to the Registration Statement, reference is made to such exhibit for a more complete description, and each such statement is deemed to be qualified in all respects by such reference. The Registration Statement and the exhibits and schedules thereto filed with the Commission may be inspected, without charge, at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices located at Seven World Trade Center, 13th Floor, New York, New York 10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material may also be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Such materials may also be accessed electronically by means of the Commission's home page on the Internet at http:www.sec.gov. Upon completion of the Offering, the Company will be subject to the information requirements of the Exchange Act, and, in accordance therewith, will file reports, proxy and information statements and other information with the Commission. Such reports, proxy and information statements and other information can be inspected and copied at the addresses, and may be accessed electronically at the Uniform Resource Locator, set forth above. Statements contained in this Prospectus as to the contents of any agreement, contract or other document are not necessarily complete, and in each instance reference is made to the copy of such agreement, contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. 46 49 INDEX TO HISTORICAL FINANCIAL STATEMENTS
PAGE ---- ANTHONY & SYLVAN POOLS CORPORATION Condensed Financial Statements for the Four Months Ended April 30, 1997, the Two Months Ended June 30, 1997, and the Six Months Ended June 30, 1998..................... F-2 Financial Statements for the Eight Months Ended December 31, 1997............................................... F-8 ANTHONY & SYLVAN POOLS, INC. Financial Statements for the Years Ended December 31, 1995 and 1996 and the Four Months Ended April 30, 1997...... F-18
F-1 50 ANTHONY & SYLVAN POOLS CORPORATION CONDENSED FINANCIAL STATEMENTS FOR THE FOUR MONTHS ENDED APRIL 30, 1997, THE TWO MONTHS ENDED JUNE 30, 1997 AND THE SIX MONTHS ENDED JUNE 30, 1998 F-2 51 ANTHONY & SYLVAN POOLS CORPORATION UNAUDITED CONDENSED BALANCE SHEET JUNE 30, 1998 (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Current Assets: Cash and cash equivalents................................. $ 411 Contract receivables, net of allowance for doubtful accounts of $767....................................... 9,730 Inventories............................................... 6,648 Prepayments and other..................................... 225 Deferred income taxes..................................... 1,415 ------- Total current assets.............................. 18,429 Property, Plant and Equipment, at cost: Land...................................................... 1,160 Buildings................................................. 3,184 Machinery and equipment................................... 5,076 ------- Total............................................. 9,420 Less accumulated depreciation............................. 1,268 ------- Net property, plant and equipment................. 8,152 Other Assets: Goodwill, net of accumulated amortization................. 24,157 Other..................................................... 664 ------- Total other assets................................ 24,821 ------- TOTAL ASSETS...................................... $51,402 ======= LIABILITIES AND SHAREHOLDER'S EQUITY Current Liabilities: Current maturities of long-term debt...................... $ 286 Accounts payable.......................................... 6,453 Accrued expenses.......................................... 10,811 ------- Total current liabilities......................... 17,550 Long-Term Debt.............................................. 380 Other Long-Term Liabilities................................. 1,083 Commitments and Contingencies............................... -- Payable to Essef Corporation................................ 26,750 Shareholder's Equity: Common Shares, no par value; 1,000 shares authorized, 100 shares issued and outstanding.......................... -- Retained Earnings......................................... 5,639 ------- Total Shareholder's Equity........................ 5,639 ------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY........ $51,402 =======
See notes to condensed financial statements. F-3 52 ANTHONY & SYLVAN POOLS CORPORATION CONDENSED STATEMENTS OF OPERATIONS FOR THE FOUR MONTHS ENDED APRIL 30, 1997, THE TWO MONTHS ENDED JUNE 30, 1997 AND THE SIX MONTHS ENDED JUNE 30, 1998 (DOLLARS IN THOUSANDS)
FOUR MONTHS ENDED TWO MONTHS ENDED SIX MONTHS ENDED APRIL 30, 1997 JUNE 30, 1997 JUNE 30, 1998 (AUDITED) (UNAUDITED) (UNAUDITED) ----------------- ---------------- ---------------- Net sales................................ $28,883 $29,374 $70,455 Cost of sales............................ 22,291 20,497 50,597 ------- ------- ------- Gross profit............................. 6,592 8,877 19,858 Operating expenses: Selling................................ 6,073 3,596 11,439 Administrative......................... 3,980 1,420 5,632 ------- ------- ------- Total operating expenses....... 10,053 5,016 17,071 ------- ------- ------- (Loss)/income from operations............ (3,461) 3,861 2,787 Interest and other expense............... 303 387 1,026 ------- ------- ------- (Loss)/income before income taxes........ (3,764) 3,474 1,761 (Benefit)/provision for income taxes..... (1,350) 1,251 675 ------- ------- ------- Net (loss)/income........................ $(2,414) $ 2,223 $ 1,086 ======= ======= =======
See notes to condensed financial statements. F-4 53 ANTHONY & SYLVAN POOLS CORPORATION CONDENSED STATEMENTS OF CASH FLOWS FOR THE FOUR MONTHS ENDED APRIL 30, 1997, THE TWO MONTHS ENDED JUNE 30, 1997 AND THE SIX MONTHS ENDED JUNE 30, 1998 (DOLLARS IN THOUSANDS)
FOUR MONTHS ENDED TWO MONTHS ENDED SIX MONTHS ENDED APRIL 30, 1997 JUNE 30, 1997 JUNE 30, 1998 (AUDITED) (UNAUDITED) (UNAUDITED) ----------------- ---------------- ---------------- Cash Flows For Operating Activities: Net (loss)/income...................... $(2,414) $ 2,223 $ 1,086 Adjustments to reconcile net (loss)/income to net cash provided by operating activities: Depreciation and amortization.......... 470 267 1,010 Non-cash interest...................... 116 -- -- Deferred income taxes.................. (914) -- 47 Changes in operating assets and liabilities net of assets acquired: Contract receivables................... 491 (823) (2,558) Inventories............................ (1,031) 210 (2,212) Prepayments and other.................. 218 110 313 Accounts payable....................... 3,251 75 915 Accrued expenses....................... 1,834 (1,703) 2,265 ------- ------- ------- Cash provided by operating activities........................ 2,021 359 866 ------- ------- ------- Cash Flows For Investing Activities: Additions to property, plant and equipment........................... (259) (118) (1,379) Business Acquisition................... -- -- (1,813) ------- ------- ------- Cash used in investing activities... (259) (118) (3,192) ------- ------- ------- Cash Flows From Financing Activities: Net transactions with GAI/Essef Corporation......................... (7,224) 1,871 2,226 Proceeds from/(repayment of) long-term debt................................ 3,675 (97) (192) ------- ------- ------- Cash (used in)/provided by financing activities........................ (3,549) 1,774 2,034 ------- ------- ------- Net (decrease)/increase in cash and cash equivalents............................ (1,787) 2,015 (292) Cash and cash equivalents: Beginning of period.................... 1,832 45 703 ------- ------- ------- End of period.......................... $ 45 $ 2,060 $ 411 ======= ======= ======= Supplemental cash flow information: Interest paid.......................... $ 272 395 $ 1,002 Income taxes paid, net................. $ -- $ 1,251 $ 675 Non-cash financing and investing activities: Business acquisition with Parent stock charged through inter-company payable............................. $ -- $ -- $ 744
See notes to condensed financial statements. F-5 54 ANTHONY & SYLVAN POOLS CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS FOR THE FOUR MONTHS ENDED APRIL 30, 1997, THE TWO MONTHS ENDED JUNE 30, 1997 AND THE SIX MONTHS ENDED JUNE 30, 1998 1. BASIS OF PRESENTATION Anthony & Sylvan Pools Corporation (the "Company") is the largest residential in-ground concrete swimming pool sales and installation business in the United States and operates in the swimming pool installation segment. On May 1, 1997, substantially all of Anthony & Sylvan, Inc.'s operating assets were acquired and certain of its liabilities assumed by Essef Corporation and subsidiaries (the "Parent") through Anthony & Sylvan Pools Corporation as part of an acquisition transaction with General Aquatics, Inc. ("GAI") of which Anthony & Sylvan, Inc. was a subsidiary. The accompanying financial statements for the four months ended April 30, 1997 are presented under the Company's historical basis of accounting and do not reflect any adjustments which would be required as a result of the acquisition by Essef Corporation. The financial statements for the two months ended June 30, 1997 and the six months ended June 30, 1998 are for the period subsequent to the acquisition and contemplate the adjustments required under the purchase method of accounting. Company management believes that the financial statements reflect all material expenses of the Company assuming the Company were organized as a stand-alone legal entity including specifically identifiable costs incurred by the Parent on behalf of, and charged to, the Company. 2. INTERIM UNAUDITED FINANCIAL STATEMENTS The accompanying balance sheet as of June 30, 1998, and the statements of operations and cash flows for the six months ended June 30, 1998, and the two months ended June 30, 1997 are unaudited. In the opinion of management, these interim unaudited financial statements have been prepared on the same basis as the audited financial statements for the eight months ended December 31, 1997 and include all adjustments, consisting of only normal and recurring adjustments, necessary for fair presentation of the interim period. The disclosures in the notes related to these unaudited interim financial statements are also unaudited. The unaudited condensed statement of income for the six months ended June 30, 1998 is not necessarily indicative of the results to be expected for the full year. 3. INITIAL PUBLIC OFFERING AND SPIN-OFF In May 1998, the Parent announced its intention to separate from the Parent its swimming pool sales and installation business and the associated assets and liabilities of such business which comprise the Company. To accomplish the separation the Parent plans to commence an initial public offering for 15 to 20 percent of the Company's shares. The Parent also plans to distribute the remaining shares of the Company to the Parent's shareholders. Such distribution is contingent on, among other things, the distribution qualifying as a tax-free distribution for federal income tax purposes under Section 355 of the Internal Revenue Code of 1986. The Company and Parent have entered, or will enter, into on or prior to the consummation of the initial public offering certain arrangements governing various interim and ongoing relationships between the companies, including agreements that will provide for administrative services, tax allocations, inter-company borrowings and indemnification. Immediately prior to the initial public offering, the Company will amend its articles of incorporation to provide for the issuance of up to 49,000,000 shares of common stock. Additionally, prior to the offering the Company will establish a long-term incentive plan under which certain employees and directors will be issued options to purchase common shares of the Company (the "Long-Term Incentive Plan"). The number of options issued under the Long-Term Incentive Plan will not exceed 1,000,000. As the number of shares that will be outstanding after the initial public offering is uncertain at this time, pro forma earnings per share has not been presented. F-6 55 ANTHONY & SYLVAN POOLS CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED) FOR THE FOUR MONTHS ENDED APRIL 30, 1997, THE TWO MONTHS ENDED JUNE 30, 1997 AND THE SIX MONTHS ENDED JUNE 30, 1998 4. RELATED PARTY TRANSACTIONS With the exception of certain capitalized lease obligations, the Company does not have external sources of borrowings and, as such, relies upon the Parent as its primary source of funding. The Parent provides funding through an inter-company debt arrangement under which borrowings available to the Company are subject to the terms, conditions and covenants of the Parent's credit agreement and limited to the availability thereunder. This inter-company account is used to provide working capital funding and to account for the centralized cash management program. Interest was charged on the average outstanding payable at a fixed rate of 7.5% for the six months ended June 30, 1998. Total interest charges on the inter-company account for the six months ended June 30, 1998 and for the two months ended June 30, 1997 were $972,000 and $395,000, respectively. 5. ACQUISITION OF TANGO POOLS On January 21, 1998, the Company acquired the net operating assets of Tango Pools. Tango Pools, with sales of approximately $18,000,000 for the year ended December 31, 1997, is a leading installer of residential in-ground concrete swimming pools in Las Vegas, Nevada. The acquisition was accounted for as a purchase, and thus, the purchase price has been allocated to the assets and liabilities based on their estimated fair value as of the date of acquisition. The results of operations shown in these statements reflect Tango Pools' results since the date of acquisition. The cost in excess of the fair value of the net assets acquired is being amortized on a straight line basis over forty years. 6. SHAREHOLDER'S EQUITY Shareholder's equity consisted of the following for the six months ended June 30, 1998 (dollars in thousands):
COMMON SHARES RETAINED EARNINGS TOTAL ------------- ----------------- ------ Balance, January 1, 1998.................. $ -- $4,553 $4,553 Net income.............................. -- 1,086 1,086 ------- ------ ------ Balance, June 30, 1998.................... $ -- $5,639 $5,639 ======= ====== ======
7. 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 cash flows. 8. SUBSEQUENT EVENT On August 26, 1998, the Company acquired the net operating assets of Pools by Andrews, Inc. Pools by Andrews, with sales of approximately $27,000,000 for the year ended December 31, 1997, is one of the largest installers of residential in-ground concrete swimming pools in Florida with offices serving Miami, Ft. Lauderdale, Palm Beach, Orlando, Jacksonville, Tampa and Fort Myers. The acquisition, accounted for as a purchase, was funded through a charge to the Company's payable to Parent. F-7 56 ANTHONY & SYLVAN POOLS CORPORATION FINANCIAL STATEMENTS FOR THE EIGHT MONTHS ENDED DECEMBER 31, 1997 F-8 57 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders, Anthony & Sylvan Pools Corporation We have audited the accompanying balance sheet of Anthony & Sylvan Pools Corporation (the "Company") as of December 31, 1997 and the related statements of income, and cash flows for the eight months ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above, present fairly, in all material respects, the financial position of the Company as of December 31, 1997 and the results of its operations and its cash flows for the eight months ended December 31, 1997 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Cleveland, Ohio September 15, 1998 F-9 58 ANTHONY & SYLVAN POOLS CORPORATION BALANCE SHEET DECEMBER 31, 1997 (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Current Assets: Cash and cash equivalents................................. $ 703 Contract receivables, net of allowance for doubtful accounts of $708....................................... 5,912 Inventories............................................... 4,144 Prepayments and other..................................... 506 Deferred taxes............................................ 1,445 ------- Total current assets.............................. 12,710 Property, Plant and Equipment, at cost: Land...................................................... 1,160 Buildings................................................. 2,893 Machinery and equipment................................... 3,759 ------- Total............................................. 7,812 Less accumulated depreciation............................. 578 ------- Net property, plant and equipment................. 7,234 Other Assets: Goodwill, net of accumulated amortization................. 22,084 Other..................................................... 592 ------- Total other assets................................ 22,676 ------- TOTAL ASSETS...................................... $42,620 ======= LIABILITIES AND SHAREHOLDER'S EQUITY Current Liabilities: Current maturities of long-term debt...................... $ 403 Accounts payable.......................................... 4,329 Accrued expenses.......................................... 7,970 ------- Total current liabilities......................... 12,702 Long-Term Debt.............................................. 455 Other Long-Term Liabilities................................. 1,130 Commitments and Contingencies............................... -- Payable to Essef Corporation................................ 23,780 Shareholder's Equity: Common shares, no par value; 1,000 shares authorized, 100 shares issued and outstanding.......................... -- Retained earnings......................................... 4,553 ------- Total Shareholder's Equity........................ 4,553 ------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY........ $42,620 =======
See notes to financial statements. F-10 59 ANTHONY & SYLVAN POOLS CORPORATION STATEMENT OF INCOME FOR THE EIGHT MONTHS ENDED DECEMBER 31, 1997 (DOLLARS IN THOUSANDS) Net sales................................................... $98,829 Cost of sales............................................... 70,814 ------- Gross profit................................................ 28,015 Operating expenses: Selling................................................... 13,578 Administrative............................................ 5,598 ------- Total operating expenses.......................... 19,176 ------- Income from operations...................................... 8,839 Interest and other expense.................................. 1,637 ------- Income before income taxes.................................. 7,202 Provision for income taxes.................................. 2,649 ------- Net income.................................................. $ 4,553 =======
See notes to financial statements. F-11 60 ANTHONY & SYLVAN POOLS CORPORATION STATEMENT OF CASH FLOWS FOR THE EIGHT MONTHS ENDED DECEMBER 31, 1997 (DOLLARS IN THOUSANDS) Cash Flows For Operating Activities: Net income................................................ $ 4,553 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization.......................... 1,070 Deferred income taxes.................................. 32 Changes in operating assets and liabilities net of assets acquired: Contract receivables................................... (1,931) Inventories............................................ 1,671 Prepayments and other.................................. (158) Accounts payable....................................... (2,079) Accrued expenses....................................... (3,845) -------- Cash used in operating activities...................... (687) -------- Cash Flows For Investing Activities: Additions to property, plant and equipment............. (1,019) -------- Acquisition of the Company............................. (21,065) Cash used in investing activities...................... (22,084) Cash Flows From Financing Activities: Net transactions with Essef Corporation................ 23,780 Repayments of long-term debt........................... (351) -------- Cash provided by financing activities.................. 23,429 -------- Increase in cash and cash equivalents....................... 658 Cash and cash equivalents: Beginning of period....................................... 45 -------- End of period............................................. $ 703 ======== Supplemental Cash Flow Information: Interest paid............................................. $ 1,615 Income taxes paid......................................... $ 2,617
See notes to financial statements. F-12 61 ANTHONY & SYLVAN POOLS CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION -- Anthony & Sylvan Pools Corporation (the "Company") is the largest residential in-ground concrete pool sales and installation business in the United States and operates in the pool installation segment. On May 1, 1997, substantially all of Anthony & Sylvan, Inc.'s operating assets were acquired and certain of its liabilities were assumed by Essef Corporation and subsidiaries (the "Parent") through Anthony & Sylvan Pools Corporation as part of an acquisition transaction with General Aquatics, Inc. of which Anthony & Sylvan, Inc. was a subsidiary. The accompanying financial statements include the results of operations for the Company from the date of acquisition. Company management believes that the financial statements reflect all material expenses of the Company assuming the Company were organized as a stand-alone legal entity including specifically identifiable costs incurred by the Parent on behalf of, and charged to, the Company. CASH AND CASH EQUIVALENTS -- The Company considers all highly liquid short-term investments with initial maturities of three months or less to be cash equivalents. FINANCIAL INSTRUMENTS -- The Company has financial instruments which consist primarily of cash and cash equivalents, receivables, payables and debt instruments. The Company has determined that the estimated fair value of its financial instruments approximates carrying value. The Company is subject to concentrations of credit risk with respect to contract receivables which is limited due to the large number of customers comprising the Company's customer base and their geographical dispersion. INVENTORIES -- Inventories consist primarily of goods purchased for installation in pools and are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. At December 31, 1997, the Company has a $485,000 reserve on these inventories. FIXED ASSETS -- Depreciation is computed using the straight-line method for financial reporting purposes. Accelerated methods are used for tax reporting purposes. Assets, valued at cost, are generally being depreciated over their useful lives as follows: buildings, 30 years; and machinery and equipment, 3 to 15 years. GOODWILL -- Goodwill arising from the acquisition of the Company by the Parent is being amortized using the straight-line method over forty years. Accumulated amortization at December 31, 1997 was $373,000. The Company periodically evaluates the recoverability of goodwill by comparing the book value of such assets to expected future cash flows, on an undiscounted basis, over the remaining amortization period of the asset. At December 31, 1997, no such impairment has been recorded. WARRANTY -- Losses associated with warranty claims are accrued based on the Company's estimate of the aggregate liability for claims based on the Company's experience and the expected timing of payments. The portion of claims the Company estimates will not be paid within one year is included in other long-term liabilities. INCOME TAXES -- The Company is included in the consolidated federal income tax return of the Parent. All tax amounts have been recorded as if the Company filed separate federal and state tax returns. The provision for income taxes included in the statement of income includes federal, state and local taxes currently payable and those deferred because of temporary differences between the financial statement and tax bases of assets and has been computed as if the Company was a stand-alone entity. The accompanying balance sheet includes deferred tax amounts applicable to the Company. REVENUE RECOGNITION -- Revenue from pool installation contracts is recognized on the percentage-of-completion accounting method based on the proportion of total costs incurred on the contract as a percentage of F-13 62 ANTHONY & SYLVAN POOLS CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1997 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 in advance of 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. Unbilled contract receivables are not material at any point in time. Contract costs include direct material, labor, subcontract costs and overheads. Selling and administrative expenses are charged to income as incurred. USE OF ESTIMATES -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. 2. INITIAL PUBLIC OFFERING AND SPIN-OFF In May 1998, the Parent announced its intention to separate from the Parent its swimming pool sales and installation business and the associated assets and liabilities of such business which comprise the Company. To accomplish the separation, the Parent plans to commence an initial public offering for 15 to 20 percent of the Company's shares. The Parent also plans to distribute the remaining shares of the Company to the Parent's shareholders. Such distribution is contingent, on, among other things, the distribution qualifying as a tax-free distribution for federal income tax purposes under Section 355 of the Internal Revenue Code of 1986. The Company and Parent have entered, or will enter, into on or prior to the consummation of the initial public offering certain arrangements governing various interim and ongoing relationships between the companies, including agreements that will provide for administrative services, tax allocations, intercompany borrowings and indemnification. Immediately prior to the initial public offering, the Company will amend its articles of incorporation to provide for the issuance of up to 49,000,000 common shares. Additionally, prior to the offering the Company will establish a long-term incentive plan under which certain employees and directors will be issued options to purchase common shares of the Company (the "Long-Term Incentive Plan"). The number of options issued under the Long-Term Incentive Plan will not exceed 1,000,000. As the number of shares that will be outstanding after the initial public offering is uncertain at this time, pro forma earnings per share has not been presented. 3. RELATED PARTY TRANSACTIONS With the exception of certain capitalized lease obligations, the Company does not have external sources of borrowings and, as such, relies upon the Parent as its primary source of funding. The Parent provides funding through an inter-company debt arrangement under which borrowings available to the Company are subject to the terms, conditions and covenants of the Parent's credit agreement, and limited to the availability thereunder. This inter-company account is used to provide working capital funding and to account for the centralized cash management program. Interest was charged on the average outstanding payable at a fixed rate of 10.25% for the eight month period. Total interest charges on the inter-company account for the eight months ended December 31, 1997 were $1,601,000. The Parent manages consolidated domestic cash flows. Pursuant to this cash management program the Company transfers any accumulated cash surplus to the Parent's accounts and the Parent funds cash disbursements, as needed, to maintain minimum account balances. Such cash flow activities serve to increase or decrease the Company's debt with the Parent. F-14 63 ANTHONY & SYLVAN POOLS CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1997 The Company also purchases swimming pool and spa equipment used in its swimming pool installations from other companies who are also wholly owned subsidiaries of the Parent. These purchases are made on an arms length basis, on terms similar to those to which those Companies sell to their other customers and are not subject to any long term supply agreements. Total purchases from related Companies for the eight months ended December 31, 1997, were approximately $2,030,000. Amounts payable by the Company to related companies of $287,000 are included in accounts payable at December 31, 1997. 4. BUSINESS ACQUISITION On May 1, 1997, substantially all of the Company's assets were acquired and certain of its liabilities were assumed by the Parent as part of an acquisition transaction with the Company's former parent, General Aquatics, Inc. The acquisition was accounted for as a purchase, and thus, the purchase price has been allocated to the assets and liabilities based on their estimated fair value as of the date of acquisition. The results of operations shown in these statements reflect the Company's results since the date of acquisition. The cost in excess of the fair value of the net assets acquired is being amortized on a straight line basis over forty years. The following table is a summary of the allocation of purchase price to the Company (dollars in thousands): Fair value of identifiable assets acquired.................. $19,077 Costs in excess of net assets acquired...................... 22,457 Less liabilities assumed.................................... (20,469) ------- Net cash paid for acquisition............................... $21,065 =======
5. SHAREHOLDER'S EQUITY Shareholder's equity consisted of the following for the eight months ended December 31, 1997 (dollars in thousands):
COMMON RETAINED SHARES EARNINGS TOTAL ------ -------- ------ Balance, May 1, 1997............................. $ -- $ -- $ -- Net income..................................... -- 4,553 4,553 ------ ------ ------ Balance, December 31, 1997....................... $ -- $4,553 $4,553 ====== ====== ======
6. ACCRUED EXPENSES Accrued expenses consisted of the following at December 31, 1997 (dollars in thousands): Billings in excess of costs and estimated earnings on uncompleted contracts..................................... $2,802 Warranty.................................................... 1,867 Accrued compensation........................................ 1,787 Other....................................................... 1,514 ------ Total............................................. $7,970 ======
F-15 64 ANTHONY & SYLVAN POOLS CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1997 7. LONG-TERM DEBT Long-term debt consists of the following at December 31, 1997 (dollars in thousands): Capital lease obligations................................... $ 858 Less current maturities..................................... (403) ----- Total............................................. $ 455 =====
The Company has capital leases for the purchase of automobiles and other equipment with a net book value of $560,000 at December 31, 1997. The leases are collateralized by the automobiles and the equipment purchased. At December 31, 1997, the total future minimum payments under these leases were $1,080,000, with $222,000 representing payments for future interest at an average interest rate of approximately 10%. Aggregate maturities of long-term debt are the following: 1998, $403,000; 1999, $231,000; 2000, $152,000; and 2001, $72,000. 8. INCOME TAXES The significant components of the provision for income taxes are as follows for the eight months ended December 31, 1997 (dollars in thousands): Current: Federal................................................... $2,397 State.................................................. 220 ------ Total current..................................... 2,617 ------ Deferred: Federal................................................... 30 State..................................................... 2 ------ Total deferred......................................... 32 ------ Total............................................. $2,649 ======
The Company's deferred tax assets at December 31, 1997 are comprised primarily of non-deductible accruals for doubtful accounts and warranty expenses and reserves for inventory obsolescence. The consolidated tax provision differs from the tax provision computed at the statutory United States tax rate of 34% for 1997 as follows (dollars in thousands): Tax provision at statutory Federal rate..................... $2,449 State income taxes.......................................... 147 Other items, net............................................ 53 ------ Provision for income taxes.................................. $2,649 ======
F-16 65 ANTHONY & SYLVAN POOLS CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1997 9. OPERATING LEASES The Company leases certain of its facilities and equipment. Total rental expenses under operating leases were approximately $1,046,000 for the eight months ended December 31, 1997. Minimum annual rental commitments for the next five years under non-cancelable operating leases are the following: 1998, $1,774,000; 1999, $1,627,000; 2000, $1,272,000; 2001 $847,000; 2002 $547,000; and $247,000 thereafter. 10. RETIREMENT PLANS The Company and certain other subsidiaries of the Parent maintain a defined contribution plan covering substantially all of its employees. Participants are permitted to make pretax contributions to the plan as a percentage of compensation. The Company matches participant contributions, up to specified limits. Total Company contributions were approximately $422,000 for the eight months ended December 31, 1997. 11. 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 cash flows. 12. SUBSEQUENT EVENTS On January 21, 1998, the Company acquired the net operating assets of Tango Pools. Tango Pools, with sales of approximately $18,000,000 for the year ended December 31, 1997, is a leading installer of residential in-ground concrete swimming pools in Las Vegas, Nevada. On August 26, 1998, the Company acquired the net operating assets of Pools by Andrews, Inc. Pools by Andrews, with sales of approximately $27,000,000 for the year ended December 31, 1997, is one of the largest installers of residential in-ground concrete swimming pools in Florida with offices serving Miami, Ft. Lauderdale, Palm Beach, Orlando, Jacksonville, Tampa and Fort Myers. The acquisitions, accounted for as purchases, were funded through charges to the Company's payable to Parent. F-17 66 ANTHONY & SYLVAN POOLS, INC. FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996 AND THE FOUR MONTHS ENDED APRIL 30, 1997 F-18 67 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors & Shareholders, Anthony & Sylvan Pools, Inc. We have audited the accompanying balance sheet of Anthony & Sylvan Pools, Inc. (the "Company") as of December 31, 1996, and the related statements of operations, and cash flows for the years ended December 31, 1995 and 1996 and for the four months ended April 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 1996, and the results of its operations and its cash flows for the years ended December 31, 1995 and 1996 and for the four months ended April 30, 1997. DELOITTE & TOUCHE LLP Cleveland, Ohio September 15, 1998 F-19 68 ANTHONY & SYLVAN POOLS, INC. BALANCE SHEET DECEMBER 31, 1996 (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Current Assets: Cash and cash equivalents................................. $ 1,832 Contract receivables, net of allowance for doubtful accounts of $460....................................... 4,472 Inventories............................................... 4,783 Prepayments and other..................................... 492 Deferred income taxes..................................... 1,788 ------- Total current assets.............................. 13,367 Property, Plant and Equipment, at cost: Land...................................................... 325 Buildings................................................. 2,353 Machinery and equipment................................... 5,935 ------- Total............................................. 8,613 Less accumulated depreciation............................... 5,041 ------- Net property, plant and equipment................. 3,572 Other Assets: Goodwill, net of accumulated amortization................. 3,070 Other..................................................... 649 ------- Total other assets................................ 3,719 ------- TOTAL ASSETS...................................... $20,658 ======= LIABILITIES AND SHAREHOLDER'S DEFICIT Current Liabilities: Current maturities of long-term debt...................... $ 531 Notes payable............................................. 3,379 Accounts payable.......................................... 3,157 Accrued expenses.......................................... 9,936 ------- Total current liabilities......................... 17,003 Long-Term Debt.............................................. 5,880 Other Long-Term Liabilities................................. 1,177 Commitments and Contingencies............................... -- Shareholder's Deficit: Common Shares, $1.00 par value; 20,000 shares authorized, 20,000 shares issued and outstanding................... 20 Retained Earnings......................................... 1,771 Payable to Shareholder.................................... (5,193) ------- Total Shareholder's Deficit....................... (3,402) ------- TOTAL LIABILITIES AND SHAREHOLDER'S DEFICIT....... $20,658 =======
See notes to financial statements. F-20 69 ANTHONY & SYLVAN POOLS, INC. STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996 AND THE FOUR MONTHS ENDED APRIL 30, 1997 (DOLLARS IN THOUSANDS)
FOUR MONTHS ENDED DECEMBER 31, DECEMBER 31 APRIL 30, 1995 1996 1997 ------------ ------------ ----------- Net sales............................................ $58,569 $112,167 $28,883 Cost of sales........................................ 42,454 82,018 22,291 ------- -------- ------- Gross profit......................................... 16,115 30,149 6,592 Operating expenses: Selling............................................ 9,373 18,875 6,073 Administrative..................................... 5,695 9,049 3,980 ------- -------- ------- Total operating expenses................... 15,068 27,924 10,053 ------- -------- ------- Income/(loss) from operations........................ 1,047 2,225 (3,461) Interest and other expense........................... 101 354 303 ------- -------- ------- Income/(loss) before income taxes.................... 946 1,871 (3,764) Provision/(benefit) for income taxes................. 342 704 (1,350) ------- -------- ------- Net income/(loss).................................... $ 604 $ 1,167 $(2,414) ======= ======== =======
See notes to financial statements. F-21 70 ANTHONY & SYLVAN POOLS, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996 AND THE FOUR MONTHS ENDED APRIL 30, 1997 (DOLLARS IN THOUSANDS)
FOUR MONTHS ENDED DECEMBER 31, DECEMBER 31, APRIL 30, 1995 1996 1997 ------------ ------------ ----------- Cash Flows For Operating Activities: Net income/(loss).................................. $ 604 $1,167 $(2,414) Adjustments to reconcile net income/(loss) to net cash provided by operating activities: Depreciation and amortization................... 462 1,066 470 Non-cash interest............................... -- 426 116 Deferred income taxes........................... (165) (207) (631) Changes in operating assets and liabilities net of assets acquired: Contract receivables............................ 748 (574) 491 Inventories..................................... (50) (13) (1,031) Prepayments and other........................... (33) (462) 218 Accounts payable................................ (208) 1,559 3,251 Accrued expenses................................ 480 2,499 1,551 ------- ------ ------- Cash provided by operating activities......... 1,838 5,461 2,021 ------- ------ ------- Cash Flows For Investing Activities: Additions to property, plant and equipment......... (169) (329) (259) Acquisition costs.................................. -- (223) -- ------- ------ ------- Cash used in investing activities............. (169) (552) (259) ------- ------ ------- Cash Flows From Financing Activities: Net transactions with General Aquatics, Inc........ (1,021) (7,052) (7,224) Proceeds from long-term debt....................... -- 3,379 3,825 Payments on capital lease obligations.............. (370) (496) (150) ------- ------ ------- Cash used in financing activities............. (1,391) (4,169) (3,549) ------- ------ ------- Net increase/(decrease) in cash and cash equivalents........................................ 278 740 (1,787) Cash and cash equivalents: Beginning of period................................ 814 1,092 1,832 ------- ------ ------- End of period...................................... $ 1,092 $1,832 $ 45 ======= ====== ======= Supplemental Cash Flow Information: Interest paid...................................... $ 97 $ 47 $ 272 Income taxes paid, net............................. $ 583 $ 745 $ -- Purchases of equipment under capital leases........ $ 437 $ 179 $ 493 Note payable issued for business acquisition....... $ -- $5,355 $ --
See notes to financial statements. F-22 71 ANTHONY & SYLVAN POOLS, INC. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996 AND THE FOUR MONTHS ENDED APRIL 30, 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION -- Anthony & Sylvan Pools, Inc. (the "Company") is the largest residential in-ground concrete pool sales and installation business in the United States. On May 1, 1997, substantially all of the Company's operating assets were acquired and certain of its liabilities assumed by Essef Corporation and subsidiaries as part of an acquisition transaction with General Aquatics, Inc. (the "Parent"), of which Anthony & Sylvan, Inc. was a subsidiary. The accompanying financial statements are presented under the Company's historical basis of accounting and do not reflect any adjustments which would be required as a result of the acquisition by Essef Corporation. Separate financial statements have been issued for the period subsequent to the acquisition which contemplate the adjustments required under the purchase method of accounting. Company management believes that the financial statements reflect all material expenses of the Company assuming the Company were organized as a stand-alone legal entity, including specifically identifiable costs incurred by the Parent on behalf of, and charged to, the Company. In March, 1996, the Company purchased certain assets and assumed certain liabilities of Anthony Pools, a division of Anthony Industries, Inc., a residential in-ground concrete swimming pool installation business. Subsequent to the acquisition the Company changed its name to Anthony & Sylvan Pools, Inc. CASH AND CASH EQUIVALENTS -- The Company considers all highly liquid short-term investments with initial maturities of three months or less to be cash equivalents. FINANCIAL INSTRUMENTS -- The Company has financial instruments which consist primarily of cash and cash equivalents, receivables, payables and debt instruments. The Company has determined that the estimated fair value of its financial instruments approximates carrying value. Financial instruments which subject the Company to concentrations of credit risk consist primarily of contract receivables. Concentration with respect to contract receivables is limited due to the large number of customers comprising the Company's customer base and their geographical dispersion. INVENTORIES -- Inventories consist primarily of goods purchased for installation in pools and are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. At December 31, 1996, the Company has a $100,000 reserve on these inventories. FIXED ASSETS -- Depreciation is computed using the straight-line method for financial reporting purposes. Accelerated methods are used for tax reporting purposes. Assets, valued at cost, are generally being depreciated over their useful lives as follows: buildings 10 to 40 years; and machinery and equipment, 3 to 10 years. GOODWILL -- Goodwill arising from the acquisition of Anthony Pools is being amortized using the straight-line method over fifteen years. Accumulated amortization at December 31, 1996 was $222,000. The Company periodically evaluates the recoverability of goodwill by comparing the book value of such assets to expected future cash flows, on an undiscounted basis, over the remaining amortization period of the asset. At December 31, 1996, no such impairment has been recorded. WARRANTY -- Losses associated with warranty claims are accrued based on the Company's estimate of the aggregate liability for claims based on the Company's experience and the expected timing of payments. The portion of claims the Company estimates will not be paid within one year is included in other long-term liabilities. INCOME TAXES -- The Company is included in the consolidated federal income tax return of the Parent. All tax amounts have been recorded as if the Company filed separate federal and state tax returns. The provision for income taxes included in the statement of operations includes federal, state and local taxes currently payable and F-23 72 ANTHONY & SYLVAN POOLS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996 AND THE FOUR MONTHS ENDED APRIL 30, 1997 those deferred because of temporary differences between the financial statement and tax bases of assets and has been computed as if the Company was a stand-alone entity. The accompanying balance sheet includes deferred tax amounts applicable to the Company. REVENUE RECOGNITION -- Revenue from pool installation contracts is recognized on the percentage-of-completion accounting method based on the proportion of total costs incurred on the contract 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 in advance of 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. Unbilled contract receivables are not material at any point in time. Contract costs include direct material, labor, subcontract costs and overheads. Selling and administrative expenses are charged to income as incurred. USE OF ESTIMATES -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. 2. RELATED PARTY TRANSACTIONS The Parent manages consolidated domestic cash flows. Pursuant to this cash management program the Company transfers any accumulated cash surplus to the Parent's accounts and the Parent funds cash disbursements, as needed, to maintain minimum account balances. Such cash flow activities serve to increase or decrease the Company's debt with the Parent. The Company purchases swimming pool and spa equipment used in its swimming pool installations from other companies who are also wholly owned subsidiaries of the Parent. These purchases are made on an arms length basis, on terms similar to those to which those Companies sell to their other customers and are not subject to any long term supply agreements. Total purchases from related Companies for the years ended December 31, 1995 and 1996 and the four months ended April 30, 1997 were $2,141,000, $3,985,000 and $1,558,000. Amounts payable by the Company to related companies totaling $278,000 are included as accounts payable at December 31, 1996. 3. ACQUISITION OF ANTHONY POOLS In March, 1996, the Company purchased certain assets and assumed certain liabilities of Anthony Pools, a division of Anthony Industries, Inc. for $6,253,000. Anthony Pools was primarily involved in the installation of residential pools. Subsequent to the acquisition the Company changed its name to Anthony & Sylvan Pools, Inc. The purchase price was paid by issuance of subordinated debt of $6,178,000 (discounted to $5,355,000), warrants to purchase 455,556 shares of the Parent's common stock (at $13.56 per share), and 100,000 shares of the Parent's common stock. The acquisition has been accounted for as a purchase, and thus, the purchase price has been allocated to the assets and liabilities acquired, based on their estimated fair value as of the date of acquisition. The results of operations have been included in the Company's results since the date of acquisition. The cost in excess of the fair value of the net assets acquired is being amortized on a straight-line basis over fifteen years. F-24 73 ANTHONY & SYLVAN POOLS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996 AND THE FOUR MONTHS ENDED APRIL 30, 1997 The following table is a summary of the transaction (dollars in thousands): Fair value of identifiable assets acquired.................. $7,510 Costs in excess of net assets acquired...................... 3,292 Less liabilities assumed.................................... (4,549) ------ Net consideration paid for acquisition...................... $6,253 ======
The following unaudited pro-forma combined results of operations give effect to the acquisition as though it was completed at the beginning of each period shown. The pro-forma information has been presented for comparative purposes only and does not purport to be indicative of what would have occurred had the acquisition been made at the beginning of the earliest period presented, or of results which may occur in the future (dollars in thousands) (unaudited):
YEARS ENDED DECEMBER 31, ------------------------ 1995 1996 --------- --------- Net sales............................................ $123,918 $119,480 Net income........................................... $ 94 $ (50)
4. SHAREHOLDER'S DEFICIT Shareholder's deficit consisted of the following for the year ended December 31, 1996 (dollars in thousands):
COMMON RETAINED PAYABLE TO SHARES EARNINGS SHAREHOLDER TOTAL ------ -------- ----------- ----- Balance, January 1, 1996............... $20 $ 604 $ 859 $ 1,483 Net income........................... 1,167 1,167 Net transactions with shareholder.... (6,052) (6,052) --- ------ ------- ------- Balance, December 31, 1996............. $20 $1,771 $(5,193) $(3,402) === ====== ======= =======
5. ACCRUED EXPENSES Accrued expenses consisted of the following at December 31, 1996 (dollars in thousands): Billings in excess of costs and estimated earnings on uncompleted contracts..................................... $ 3,592 Warranty.................................................... 2,304 Accrued compensation........................................ 2,256 Other....................................................... 1,784 ------- Total............................................. $ 9,936 =======
6. NOTES PAYABLE At December 31, 1996, the Company had $3,379,000 outstanding under a bank line of credit. These facilities were made available under the Parent's revolving line of credit agreement which allows for borrowings of up to $20 million, subject to sub-limits based on secured accounts receivable, inventory and equipment levels of the Parent and its subsidiaries. Interest was payable at the bank's prime rate (8.25 percent at December 31, F-25 74 ANTHONY & SYLVAN POOLS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996 AND THE FOUR MONTHS ENDED APRIL 30, 1997 1996) plus .75 percent or the Eurodollar rate plus 2 percent. The line of credit had an expiration date of November 30, 1999. On May 1, 1997, the line of credit was repaid in conjunction with the acquisition of General Aquatics, Inc. by Essef Corporation (see Note 1). 7. LONG-TERM DEBT Long-term debt consists of the following at December 31, 1996 (dollars in thousands): Acquisition note............................................ $5,781 Capital lease obligations................................... 630 ------ 6,411 Less current maturities..................................... (531) ------ Total............................................. $5,880 ======
The acquisition note represents a subordinated note payable to Anthony Industries, Inc. in the amount of $6,178,000 due March 1, 2001. Interest accrues at 5.61 percent commencing September 1, 1996. Interest charged through March 1, 1997 is to be converted semiannually to notes with similar terms to the original acquisition note. This note has been discounted to $5,355,000 which represents its fair market value at a 9 percent interest rate. At December 31, 1996 $426,000 of additional notes had been issued for interest charges. The Company has capital leases for the purchase of automobiles and other equipment with a net book value of approximately $830,000 at December 31, 1996. The leases are collateralized by the automobiles and the equipment purchased. At December 31, 1996, the total future minimum payments under these leases was $755,000, with $125,000 representing payments for future interest at an average interest rate of approximately 10%. Aggregate maturities of long-term debt are the following: 1997, $531,000; 1998, $99,000; and 2001, $5,781,000. 8. INCOME TAXES The significant components of the provision/(benefit) for income taxes are as follows (dollars in thousands):
YEAR ENDED DECEMBER 31, FOUR MONTHS ------------- ENDED 1995 1996 APRIL 30, 1997 ----- ---- -------------- Current: Federal................................................... $ 464 $836 $ (658) State..................................................... 43 75 (61) ----- ---- ------- Total current..................................... 507 911 (719) ----- ---- ------- Deferred: Federal................................................... (151) (190) (578) State..................................................... (14) (17) (53) ----- ---- ------- Total deferred.................................... (165) (207) (631) ----- ---- ------- Total............................................. $ 342 $704 $(1,350) ===== ==== =======
F-26 75 ANTHONY & SYLVAN POOLS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996 AND THE FOUR MONTHS ENDED APRIL 30, 1997 The Company's deferred tax assets at December 31, 1996 are comprised primarily of non-deductible accruals for doubtful accounts, warranty expenses and reserves for inventory obsolescence. The consolidated tax provision/(benefit) differs from the tax provision/(benefit) computed at the statutory United States tax rate of 34% for following reasons (dollars in thousands):
YEAR ENDED DECEMBER 31, FOUR MONTHS ------------ ENDED 1995 1996 APRIL 30, 1997 ---- ---- -------------- Tax provision/(benefit) at statutory Federal rate........... $322 $636 $(1,280) State income taxes.......................................... 19 38 (75) Other items, net............................................ 1 30 5 ---- ---- ------- Provision/(benefit) for income taxes........................ $342 $704 $(1,350) ==== ==== =======
9. OPERATING LEASES The Company leases certain of its facilities and equipment. Total rental expenses under operating leases for the years ended December 31, 1995 and 1996 and the four months ended April 30, 1997 were approximately $1,025,000, $1,819,000 and $536,000, respectively. Minimum annual rental commitments for the next five years under non-cancelable operating leases are the following: 1998, $1,628,000; 1999, $1,150,000; 2000, $876,000; 2001, $582,000; 2002, $297,000; and $664,000 thereafter. 10. RETIREMENT PLANS The Company and certain other subsidiaries of the Parent maintain a defined contribution plan covering substantially all of its employees. Participants are permitted to make pretax contributions to the plans as a percentage of compensation. The Company matches participant contributions, up to specified limits. Total Company contributions for the years ended December 31, 1995 and 1996 and for the four months ended April 30, 1997 were approximately $250,000, $283,000 and $177,000, respectively. Until April 30, 1997, the Company maintained noncontributory defined benefit pension plans covering substantially all of its full-time employees. The plans provided pension benefits that were based on years of service and the employee's total compensation. It was the Company's policy to make annual contributions required by applicable regulations. The assets and liabilities of the plans were not acquired by Essef Corporation in conjunction with its acquisition of General Aquatics, Inc. (See Note 1). Significant assumptions used in the plans' actuarial valuations were:
YEAR ENDED DECEMBER 31, FOUR MONTHS ------------ ENDED 1995 1996 APRIL 30, 1997 ---- ---- -------------- Discount rate............................................... 7.25% 7.25% 7.25% Long-term rate of investment return......................... 9.00% 9.00% 9.00%
F-27 76 ANTHONY & SYLVAN POOLS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996 AND THE FOUR MONTHS ENDED APRIL 30, 1997 Net periodic pension cost consists of the following (dollars in thousands):
YEAR ENDED DECEMBER 31, FOUR MONTHS ----------------------- ENDED 1995 1996 APRIL 30, 1997 ------------ ------------ -------------- Service cost-benefits earned during the period................................... $ 17 $ 18 $ 5 Interest cost on projected benefit obligation............................... 62 63 23 Return on plan assets...................... (35) (35) (11) Net amortization and deferral.............. 42 42 3 ---- ---- ---- Net periodic pension cost.................. $ 86 $ 88 $ 20 ==== ==== ====
The funded status of the defined benefit plans and the amounts recognized in the balance sheet at December 31, 1996 are as follows (dollars in thousands): Projected benefit obligation................................ $ 930 Fair value of plan assets................................... 395 ----- Plan assets less than projected benefit obligation.......... 535 Unrecognized net (gain) loss................................ 496 Unrecognized prior service cost............................. 120 Minimum liability adjustment................................ (616) ----- Accrued pension liability................................... $ 535 ===== Vested actuarial present value of benefit obligation........ $ 899 ===== Accumulated benefit obligation.............................. $ 930 =====
11. 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 cash flows. F-28 77 - ------------------------------------------------------------ - ------------------------------------------------------------ NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE COMMON SHARES OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE COMMON SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary......................... 3 Risk Factors............................... 8 Use of Proceeds............................ 13 Dividend Policy............................ 13 Capitalization............................. 14 Dilution................................... 15 Selected Historical Financial Data......... 16 Unaudited Pro Forma Financial Data......... 17 Management's Discussion and Analysis of Financial Condition and Results of Operations............................... 19 Business................................... 24 Management................................. 29 Relationship Between the Company and Essef.................................... 37 Principal Shareholder...................... 39 Description of Capital Stock............... 40 Shares Eligible for Future Sale............ 43 Underwriting............................... 45 Legal Matters.............................. 46 Experts.................................... 46 Available Information...................... 46 Index to Consolidated Financial Statements............................... F-1
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON SHARES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - ------------------------------------------------------------ - ------------------------------------------------------------ - ------------------------------------------------------------ - ------------------------------------------------------------ SHARES COMMON SHARES --------------------- PROSPECTUS --------------------- MCDONALD & COMPANY SECURITIES, INC. FRIEDMAN, BILLINGS, RAMSEY & CO., INC. MORGAN KEEGAN & COMPANY, INC. , 1998 - ------------------------------------------------------------ - ------------------------------------------------------------ 78 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth an estimate of the expenses expected to be incurred in connection with the issuance and distribution of the securities being registered, other than underwriting compensation:
NOTICE OF EXPENSE AMOUNT ----------------- -------- Registration Fee -- Securities and Exchange Commission*..... $ 6,638 Filing Fee -- National Association of Securities Dealers*... 2,750 Nasdaq National Market Listing and Entry Fee*............... 80,000 Transfer Agent and Registrar Fees and Expenses*............. 10,000 Legal Fees and Expenses*.................................... 200,000 Accounting Fees and Expenses*............................... 200,000 Printing and Engraving Expenses*............................ 200,000 Miscellaneous*.............................................. 75,000 -------- Total*............................................ $774,388 ========
- --------------- * Estimate ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 33 of the Company's Amended and Restated Regulations provides that the Company will indemnify any director or officer or any former director or officer of the Company or any person who is or has served at the request of the Company as a director, officer or trustee of another corporation, joint venture, trust or other enterprise (and his heirs, executors and administrators) against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement, actually and reasonably incurred by him by reason of the fact that he is or was such director, officer or trustee in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative to the full extent and according to the procedures and requirements set forth in the Ohio General Corporation Law as the same may be in effect from time to time. Section 33 further provides that the indemnification provided for therein shall not be deemed to restrict the right of the Company to indemnify employees, agents and others as permitted by such law, and shall be in addition to any other rights granted to those seeking indemnification under the Company's Amended and Restated Articles or Incorporation or Amended and Restated Regulations or any Indemnification Agreement (as hereinafter defined), vote of shareholders or disinterested directors, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. In addition, Section 33 provides that the Company is expressly authorized to enter into agreements which grant rights of indemnification to any person or entity. The Company has entered into indemnification agreements ("Indemnification Agreements") with its directors and executive officers ("Indemnitees") Pursuant to each Indemnification Agreement, the Company must indemnify the Indemnitee with respect to his activities as a director or officer of the Company and/or as a person who is serving or has served on behalf of the Company ("Representative") as a director, officer or trustee of another corporation, joint venture, trust or other enterprise, domestic or foreign, in which the Company has a direct or indirect ownership interest against expenses (including, without limitation, attorneys' fees, judgments, fines and amounts paid in settlement) actually and reasonably incurred by him ("Expenses") in connection with any claim against the Indemnitee which is the subject of any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, investigative or otherwise and whether formal or informal (a "Proceeding"), to which the Indemnitee was, is II-1 79 or is threatened to be made a party by reason of facts which include the Indemnitee's being or having been such a director, officer or Representative, to the extent of the highest and most advantageous to the Indemnitee, as determined by the Indemnitee, of one or any combination of the following: (a) The benefits provided by the Company's Amended and Restated Regulations as of the date of the Indemnification Agreement; (b) The benefits provided by the Company's Amended and Restated Articles of Incorporation, Amended and Restated Regulations or By-laws or their equivalent of the Company in effect at the time Expenses are incurred by the Indemnitee; (c) The benefits allowable under Ohio law in effect as of the date of the Indemnification Agreement; (d) The benefits allowable under the law of the jurisdiction under which the Company exists at the time Expenses are incurred by the Indemnitee; (e) The benefits available under liability insurance obtained by the Company; (f) The benefits which would have been available to the Indemnitee under his Executive Liability Insurance Policy; and (g) Such other benefits as are or may be otherwise available to the Indemnitee. The Indemnification Agreements provide for the advancement of Expenses to the Indemnitee if the Indemnitee provides the Company with a written undertaking that (i) the Indemnitee has notified the Company of any Proceeding; (ii) the Indemnitee believes he should prevail in the Proceeding and (iii) that the Indemnitee will reimburse the Company for all Expenses if it is determined that the Indemnitee is not entitled to indemnification. Section 33 also authorizes the Company to purchase and maintain insurance or furnish similar protection, including but not limited to trust funds, letters of credit or self-insurance, on behalf of or for any person who is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, trustee, officer, employee or agent of another corporation, joint venture, trust or other enterprise (and his heirs, executors and administrators), against any liability asserted against him and incurred by him in such capacity, or arising out of his status as such, regardless of whether the Company would have indemnified him against such liability under any other provision of Section 34. It further provides that insurance may be purchased from or maintained with a person in which the Company has a financial interest. The Underwriting Agreement provides that the Underwriters are obligated, under certain circumstances, to indemnify directors, officers, and controlling persons of the Company against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Act"). Reference is made to the form of Underwriting Agreement filed as Exhibit 1.1 hereto. The Company has obtained, through Essef, director and officer liability insurance covering its current executive officers and directors. II-2 80 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (A) EXHIBITS. The following Exhibits are filed as a part of this Registration Statement:
EXHIBIT NO. DESCRIPTION ------- ----------- *1.1 Underwriting Agreement 3.1 Form of Amended and Restated Articles of Incorporation of the Registrant 3.2 Form of Amended and Restated Regulations of the Registrant 4.1 Specimen certificate for Common Shares of the Registrant 4.2 See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated Articles of Incorporation and Amended and Restated Regulations of the Registrant defining rights of holders of Common Shares 5.1 Opinion of Squire, Sanders & Dempsey L.L.P. as to the legality of the Common Shares being registered (including consents) 10.1 Form of 1998 Long-Term Incentive Plan 10.2 Form of Executive Employment Agreement between Stuart D. Neidus and the Registrant 10.3 Form of Executive Employment Agreement between Howard A. Wertman and the Registrant 10.4 Form of Executive Employment Agreement between Richard M. Kelso and the Registrant 10.5 Form of Indemnification Agreement 10.6 Form of Revolving Credit Promissory Note 10.7 Form of Company Indemnification Agreement 10.8 Form of Tax Allocation Agreement 10.9 Form of Administrative Services Agreement 23.1 Consent of Deloitte & Touche LLP 23.2 Consent of Squire, Sanders & Dempsey L.L.P. (see Exhibit 5.1) 24.1 Power of Attorney (included elsewhere in Part II of this Registration Statement)
- --------------- * To be filed by amendment. (B) FINANCIAL STATEMENT SCHEDULES. The following financial statement schedules of the Company are attached hereto and are filed as part of this Registration Statement: Report of Independent Auditors Schedule II -- Valuation and qualifying accounts All other schedules are omitted because the required information is either presented in the financial statements or notes thereto, or is not applicable, required or material. ITEM 17. UNDERTAKINGS. (f) The undersigned Registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. (h) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions described in Item 14 above, or otherwise, the Registrant has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, II-3 81 unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (i) The undersigned Registrant hereby undertakes that: (1) for purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 82 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Chardon, State of Ohio, on , 1998. ANTHONY & SYLVAN POOLS CORPORATION By: /s/ STUART D. NEIDUS ------------------------------------ Stuart D. Neidus Chairman of the Board, Chief Executive Officer and Chief Financial Officer POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Mary Ann Jorgenson, Stuart D. Neidus and Thomas B. Waldin, or any one of them, as his true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution for him and in his name, place and stead in any and all capacities to execute in the name of each such person who is then an officer or director of the Registrant any and all amendments (including post-effective amendments) to this Registration Statement, and any registration statement relating to the Offering hereunder pursuant to Rule 462 under the Securities Act of 1933, as amended, and to file the same with all exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents and each of them full power and authority to do and perform each and every act and thing required to necessary to be done in and about the premises as fully as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their substitute or substitutes, may lawfully do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed effective as of , 1998 by the following persons in the capacities indicated below.
SIGNATURE TITLE - --------- ----- /s/ STUART D. NEIDUS Chairman of the Board, Chief Executive Officer and - --------------------------------------------- Chief Financial Officer (Principal Executive Officer Stuart D. Neidus and Principal Financial and Accounting Officer) /s/ HOWARD P. WERTMAN President - --------------------------------------------- Howard P. Wertman /s/ RICHARD M. KELSO Executive Vice President - --------------------------------------------- Richard M. Kelso /s/ THOMAS B. WALDIN Director - --------------------------------------------- Thomas B. Waldin /s/ MARY ANN JORGENSON Director - --------------------------------------------- Mary Ann Jorgenson
II-5 83 INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULES To the Board of Directors and Shareholders of Anthony & Sylvan Pools Corporation Chardon, Ohio We consent to the use in this Registration Statement of Anthony & Sylvan Pools Corporation on Form S-1 of our reports on the financial statements of Anthony & Sylvan Pools Corporation dated September 15, 1998, and Anthony & Sylvan Pools, Inc. dated September 15, 1998, appearing in the Prospectus, which is a part of this Registration Statement, and to the references to us under the heading "Experts" in such Prospectus. Our audits of the financial statements referred to in our aforementioned reports also included the financial statement schedules of Anthony & Sylvan Pools Corporation and Anthony & Sylvan Pools, Inc. listed in Item 16(b). These financial statement schedules are the responsibility of the Corporation's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. Deloitte & Touche LLP Cleveland, Ohio September 15, 1998 II-6 84 SCHEDULE II ANTHONY & SYLVAN POOLS CORPORATION VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT BALANCE BEGINNING OF CHARGED TO AT END DESCRIPTION PERIOD EXPENSE WRITE-OFFS OF PERIOD ----------- ------------ ---------- ---------- --------- ALLOWANCE FOR DOUBTFUL ACCOUNTS For the year ended December 31, 1995 $ 93 $ 260 $ 171 $ 182 For the year ended December 31, 1996 $ 182 $ 412 $ 134 $ 460 For the four months ended April 30, 1997 $ 460 $ 157 $ 101 $ 516 For the year ended December 31, 1997 $ 516 $ 265 $ 73 $ 708 - -------------------------------------------- RESERVE FOR INVENTORY OBSOLESCENCE For the year ended December 31, 1995 $ 100 $ -- $ -- $ 100 For the year ended December 31, 1996 $ 100 $ -- $ -- $ 100 For the four months ended April 30, 1997 $ 100 $ 119 $ -- $ 219 For the year ended December 31, 1997 $ 219 $ 266 $ -- $ 485
II-7 85 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ------- ----------- *1.1 Underwriting Agreement 3.1 Form of Amended and Restated Articles of Incorporation of the Registrant 3.2 Form of Amended and Restated Regulations of the Registrant 4.1 Specimen certificate for Common Shares of the Registrant 4.2 See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated Articles of Incorporation and Amended and Restated Regulations of the Registrant defining rights of holders of Common Shares 5 Opinion of Squire, Sanders & Dempsey L.L.P. as to the legality of the Common Shares being registered (including consents) 10.1 Form of 1998 Long-Term Incentive Plan 10.2 Form of Executive Employment Agreement between Stuart D. Neidus and the Registrant 10.3 Form of Executive Employment Agreement between Howard A. Wertman and the Registrant 10.4 Form of Executive Employment Agreement between Richard M. Kelso and the Registrant 10.5 Form of Indemnification Agreement 10.6 Form of Revolving Credit Promissory Note 10.7 Form of Company Indemnification Agreement 10.8 Form of Tax Allocation Agreement 10.9 Form of Administrative Services Agreement 23.1 Consent of Deloitte & Touche LLP 23.2 Consent of Squire, Sanders & Dempsey L.L.P. (see Exhibit 5.1) 24.1 Power of Attorney (included elsewhere in Part II of this Registration Statement)
- --------------- * To be filed by amendment EX-3.1 2 EXHIBIT 3.1 1 EXHIBIT 3.1 CERTIFICATE OF AMENDED AND RESTATED ARTICLES OF INCORPORATION OF ANTHONY & SYLVAN POOLS CORPORATION Stuart D. Neidus, who is Chairman of the Board of Directors, Chief Executive Officer and Chief Financial Officer, and Kevan Langner, who is Secretary, of the above-named Ohio corporation for profit with its principal location at Chardon, Ohio (the "Corporation") do hereby certify that the following Amended and Restated Articles of Incorporation were adopted by the Board of Directors of the Corporation to supersede and take the place of the existing Articles of Incorporation at a meeting duly called on September __, 1998, and further that such Amended and Restated Articles of Incorporation were approved by the sole shareholder of the Corporation in a writing signed by such shareholder and dated September __, 1998, all in accordance with the applicable provisions of the Ohio Revised Code, including Section 1701.69 thereof. AMENDED AND RESTATED ARTICLES OF INCORPORATION OF ANTHONY & SYLVAN POOLS CORPORATION The undersigned, desiring to form a corporation for profit under Chapter 1701 of the Ohio Revised Code, does hereby certify: FIRST: The name of the Corporation shall be "Anthony & Sylvan Pools Corporation." SECOND: The place in the State of Ohio where the principal office of the Corporation will be located is Chardon, Ohio, in Geauga County, or such other location as the Board of Directors may from time to time determine. THIRD: The purposes for which the Corporation is formed are (i) to engage in any lawful act or activity for which corporations may be formed under Chapter 1701 of the Ohio Revised Code, as now in effect or hereinafter amended, in furtherance of such long-term plans and strategies as the Board of Directors may from time to time establish for the Corporation and (ii) to preserve for the Corporation, its shareholders and such other constituencies as the Board of Directors may from time to time identify, the benefits expected to be derived from such long-term plans and strategies. 2 FOURTH: The total number of shares of all classes of stock which the Corporation shall have authority to issue is Fifty Million (50,000,000), all without par value, divided into two classes as follows: 1,000,000 serial preferred shares (hereinafter called the "Serial Shares"); and 49,000,000 common shares (hereinafter called the "Common Shares"). The voting powers and such designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions of each class of shares which are fixed by these Articles of Incorporation, and the express grant of authority to the Board of Directors to fix by resolutions the voting powers, designations, preferences and relative, participating, optional or other rights, if any, or the qualifications, limitations or restrictions, if any, of the Serial Shares which are not fixed by these Articles of Incorporation, are as follows: SECTION 1. PROVISIONS APPLICABLE ONLY TO THE SERIAL SHARES A. The Serial Shares may be issued from time to time in any amount, not exceeding in the aggregate (including all shares of any and all series thereof theretofore issued and not theretofore retired) the total number of Serial Shares hereinabove authorized, as Serial Shares of one or more series, as hereinafter provided. All shares of any one series of the Serial Shares shall be identical in all respects, each series thereof shall be distinctively designated by letter or descriptive words, and, except as permitted by the provisions of this Article FOURTH, all series of the Serial Shares shall rank equally and be identical in all respects. B. Authority is hereby expressly granted to the Board of Directors from time to time to issue the Serial Shares in any series and in connection with the creation of such series to fix by the resolution or resolutions providing for the issue of shares thereof the voting powers and designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions of such series, to the fullest extent now or hereafter permitted by the laws of the State of Ohio, in respect of the matters set forth in the following subdivisions (1) to (7), inclusive: (1) The designation of such series; (2) The voting powers, if any, of the holders of such series; (3) The rate and the times and conditions upon which the holders of such series shall be entitled to receive dividends, and whether such dividends shall be cumulative or non-cumulative; (4) The price or prices and the time or times and the manner in which such series shall be redeemable, if such Serial Shares are made redeemable; (5) Whether the shares of such series shall be entitled to the benefit of a sinking fund or purchase fund to be applied to the redemption or purchase of such series and, if so entitled, the amount of such fund and the manner of its application; 2 3 (6) Whether the shares of such series shall be convertible into, or exchangeable for, shares of any other class or classes or of any other series of the same or any other class of the Corporation or any other security, and, if so convertible or exchangeable, the conversion price or prices or rate or rates, or the rate or rates of exchange, and the adjustments, if any, in the price or prices or rate or rates at which such conversion or exchange may be made; and (7) Any other designations, preferences and relative participating, or other special rights, and qualifications, limitations or restrictions thereof, so far as they are not inconsistent with the provisions of these Articles of Incorporation, as from time to time amended. C. Shares of any such series which have been issued and reacquired in any manner by the Corporation (excluding, until the Corporation elects to retire them, shares which are held as treasury shares but including shares redeemed, shares purchased and retired, whether through the operation of a retirement or purchase fund or otherwise, and shares which, if convertible or exchangeable, have been converted into or exchanged for shares of any other class or classes) shall have the status of authorized and unissued shares and may be reissued as a part of the series of which they were originally a part or may be reissued as part of a new series to be created by resolution or resolutions of the Board of Directors or as part of any other series, all subject to the conditions or restrictions on issuance set forth herein or in any resolution or resolutions adopted by the Board of Directors providing for the issue of any series of Serial Shares. SECTION 2. PROVISIONS APPLICABLE TO ALL CLASSES OF SHARES A. Except to the extent that the resolution or resolutions providing for the issuance of a series of Serial Shares may otherwise provide with respect to such series, the preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions of the Serial Shares of all series are as follows: (1) Out of the unreserved and unrestricted surplus of the Corporation legally available for dividends, the holders of Serial Shares shall be entitled to receive, when and as declared by the Board of Directors, dividends at the rate per annum determined as in this Article FOURTH, provided therefor, and no more, payable quarterly in each year on such dates as may be fixed as in this Article FOURTH provided therefor to holders of record on the respective dates not exceeding forty days preceding such dividend payment dates as may be determined by the Board of Directors in advance of the payment of each such dividend (each such payment day being hereinafter called a dividend date and each quarterly period ending with a dividend date being hereinafter called a dividend period), before any dividends (other than dividends payable in shares ranking junior to Serial Shares) on any class or classes of shares of the Corporation ranking junior to Serial Shares as to dividends or on liquidation shall be declared or paid or set apart for payment. With respect to each issue on which dividends are cumulative, such dividends shall accrue and be cumulative from the "Date of Cumulation." The term "Date of Cumulation" as used in this Section 2A.(1) with reference to the Serial Shares shall be deemed to mean the date on which shares of such series are first issued. In the event of the issue of additional shares of any then existing series, all dividends paid on the shares of such series prior to the issue of such additional shares, and all dividends declared and payable to holders of record of shares of such series on any date prior to the 3 4 issue of such additional shares, shall be deemed to have been paid on such additional shares. No dividends shall be declared in respect of any dividend period unless there shall likewise be or have been declared on all shares of each other issue at the time outstanding like dividends for all dividend periods coinciding with or ending before such dividend period, ratably in proportion to the respective annual dividend rates per annum fixed therefor as hereinbefore provided. Accruals of dividends shall not bear interest. (2) The Serial Shares of all issues shall be preferred over the Common Shares as to assets in the event of any liquidation or dissolution or winding up of the Corporation, and in that event the holders of each series shall be entitled to receive, out of the assets of the Corporation available for distribution to its shareholders the amount payable upon such liquidation or dissolution or winding up as fixed by the Board of Directors, plus an amount equal to all dividends accrued and unpaid thereon to the date of final distribution to such holders, before any distribution of the assets shall be made to the holders of the Common Shares; and, if in the event of any such liquidation or dissolution or winding up of the Corporation, the holders of all issues of the Serial Shares shall have received all the amounts to which they shall be entitled as aforesaid, the holders of the Common Shares shall be entitled, to the exclusion of the holders of the Serial Shares, to share ratably in all the assets of the Corporation available for distribution to the shareholders then remaining according to the number of shares of the Common Shares held by them respectively. If, upon any liquidation or dissolution or winding up of the Corporation, the amounts payable on or with respect to the Serial Shares are not paid in full, the holders of shares of the Serial Shares of all issues shall share ratably in any distribution of assets according to the respective amounts which would be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to the Serial Shares of all series were paid in full. For the purposes of this Section 2A.(2), the voluntary sale, lease, exchange or transfer (for cash, shares, securities, or other consideration) of all or substantially all of its property or assets to, or a consolidation or merger of the Corporation with, one or more corporations shall not be deemed to be a liquidation, dissolution or winding up, voluntary or involuntary. (3) The Serial Shares, or any series or issue thereof, or any part of any series or issue thereof, which are outstanding and which are by resolution or resolutions of the Board of Directors creating any such series, then redeemable, may be redeemed by the Corporation at its election expressed by resolution of the Board of Directors, upon not less than thirty (30) nor more than sixty (60) days' previous notice to the holders of record of the Serial Shares to be redeemed, given by mail or by publication in such manner as may be prescribed by resolution of the Board of Directors, at the applicable redemption price, determined as provided in this Article FOURTH, of the Serial Shares to be redeemed. If less than all the outstanding Serial Shares of any issue or series is to be redeemed, the redemption may be made either by lot or pro rata as may be prescribed by resolution of the Board of Directors. From and after the date fixed in any such notice as the date of redemption (unless default shall be made by the Corporation in providing moneys for the payment of the redemption price pursuant to such notice), or, if the Corporation shall so elect, from and after a date, prior to the date fixed as the date of redemption, on which the Corporation shall provide moneys for the payment of the redemption price by depositing the amount thereof for the account of the holders of the Serial Shares entitled thereto with a bank or trust company and having a capital and surplus of at least fifty million dollars ($50,000,000), pursuant to notice of such election included in the notice of redemption specifying the date on which such deposit will be 4 5 made, all dividends on the Serial Shares called for redemption shall cease to accrue and all rights of the holders thereof as shareholders of the Corporation, except the right to receive the redemption price as hereinafter provided and, in the case of such deposit, any conversion rights not theretofore expired, shall cease and terminate. After the deposit of such amount with such bank or trust company, the respective holders of record of the Serial Shares to be redeemed shall be entitled to receive the redemption price at any time upon actual delivery to such bank or trust company of certificates for the number of shares to be redeemed, duly endorsed in blank or accompanied by proper instruments of assignment and transfer thereof duly endorsed in blank. Any moneys so deposited which shall remain unclaimed by the holders of such Serial Shares at the end of six (6) years after the redemption date, together with any interest thereon which shall be allowed by the bank or trust company with which the deposit shall have been made, shall be repaid by such bank or trust company to the Corporation upon its request expressed in a resolution of its Board of Directors, free of any trust theretofore impressed upon them by the Corporation. (4) If at the time of any annual meeting of shareholders of the Corporation for the election of directors a default in preference dividends, as the term "default in preference dividends" is hereinafter defined, shall exist, the holders of the Serial Shares voting separately as a class and without regard to series, shall have the right to elect two members of the Board of Directors; and the holders of the Common Shares shall not be entitled to vote in the election of the directors of the Corporation to be elected by the holders of Serial Shares, as provided above. Whenever a default in preference dividends shall commence to exist, the Corporation, upon the written request of the holders of five percent (5%) or more of the outstanding Serial Shares, shall call a special meeting of the holders of the Serial Shares, such special meeting or meetings to be held within one hundred twenty (120) days after the date on which such request is received by the Corporation, for the purpose of enabling such holders to elect members of the Board of Directors as provided above; provided, however, that such special meeting or meetings need not be called if an annual meeting of shareholders of the Corporation for the election of directors shall be scheduled to be held within such 120 days. Prior to any such special or annual meeting or meetings, the number of directors of the Corporation shall be increased to the extent necessary to provide as additional places on the Board of Directors the directorships to be filled by the directors to be elected thereat. Any director elected as aforesaid by the holders of Serial Shares shall cease to serve as such director whenever a default in preference dividends shall cease to exist. If, prior to the end of the term of any director elected as aforesaid by the holders of Serial Shares, or elected by the holders of Serial Shares and Common Shares, a vacancy in the office of such director shall occur by reason of death, resignation, removal or disability, or for any other cause, such vacancy shall be filled for the unexpired term in the manner provided in these Articles of Incorporation and the Regulations of the Corporation; provided, however, that if such vacancy shall be filled by election by the shareholders at a meeting thereof, the right to fill such vacancy shall be vested in the holders of that class of shares or series thereof which elected the director the vacancy in the office of whom is so to be filled, unless, in any such case, no default in preference dividends shall exist at the time of such meeting. For the purposes of this Section 2A.(4), a "default in preference dividends" shall be deemed to have occurred whenever the amount of cumulative dividends accrued and unpaid upon any series of the Serial Shares and the amount of non-cumulative dividends unpaid upon any series of the Serial Shares shall be equivalent to six (6) full quarter-yearly dividends or more, and, having so occurred, such default in preference dividends shall be deemed to exist thereafter until, but only until, all cumulative dividends accrued and unpaid 5 6 on all Serial Shares then outstanding, of each and every class and series, shall have been paid in full, or declared and funds set aside for their payment, and until non-cumulative dividends on all Serial Shares then outstanding, of each and every series, shall have been paid regularly for at least one year. Nothing herein contained shall be deemed to prevent an increase in the number of directors of the Corporation pursuant to its Regulations so as to provide as additional places on the Board of Directors the directorships to be filled by the directors so to be elected by the holders of the Serial Shares or of any class or series thereof, or to prevent any other change in the number of directors of the Corporation. At any meeting held for the purpose of electing directors at which the holders of the Serial Shares shall have the special right, voting separately as a group, to elect directors as provided in this Section 2A.(4), the presence, in person or by proxy, of the holders of one-third of the aggregate number of Serial Shares of all series at the time outstanding shall be required to constitute a quorum of such group for the election of any director by the holders of the Serial Shares as a group. At any such meeting or adjournment thereof, (a) the absence of a quorum of the holders of the Serial Shares shall not prevent the election of directors other than those to be elected by the holders of the Serial Shares voting as a group and the absence of a quorum for the election of such other directors shall not prevent the election of the directors to be elected by the holders of the Serial Shares voting as a group, and (b) in the absence of either or both such quorums, a majority of the holders present in person or by proxy of the shares which lack a quorum shall have power to adjourn the meeting for the election of directors which they are entitled to elect from time to time without notice other than announcement at the meeting until a quorum shall be present. (5) So long as any shares of any series shall be outstanding, (a) the Corporation shall not, without the affirmative vote or written consent of the holders of at least two-thirds of the aggregate number of shares of all series at the time outstanding, considered as a single class without regard to series, (i) alter or change the voting powers, designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions of the Serial Shares as provided in these Articles of Incorporation or by the resolution or resolutions so fixing the same, so as to affect the Serial Shares adversely, or (ii) authorize or create any class of shares ranking, either as to dividends or upon liquidation, prior to the Serial Shares; or (b) the Corporation shall not, without the affirmative vote or written consent of the holders of a majority of the aggregate number of shares of all series at the time outstanding, considered as a single class, increase the authorized amount of Serial Shares or authorize or create any class ranking, either as to dividends or upon liquidation, on a parity with Serial Shares; or (c) the Corporation shall not, without the affirmative vote or written consent of the holders of at least two-thirds of the aggregate number of shares of any series at the time outstanding, the holders of such series consenting or voting separately as a series, alter or change the voting powers, designations, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions specifically applicable to such series, as provided in these Articles of Incorporation or in the resolution or resolutions adopted by the Board of Directors providing for the issue of such series, so as to affect such series adversely; or (d) the 6 7 Corporation shall not (i) declare, or pay, or set apart for payment, any dividends (other than dividends payable in shares ranking junior to the Serial Shares) or make any distribution, on any class or classes of shares of the Corporation ranking junior to the Serial Shares in any respect, or (ii) redeem, purchase or otherwise acquire, or permit any subsidiary to purchase or otherwise acquire, any shares of any such junior class, if at the time of making such declaration, payment, distribution, redemption, purchase or acquisition, the Corporation shall be in default with respect to any dividend payable on, or any obligation to retire, shares of Serial Shares, provided that, notwithstanding the foregoing, the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior class in exchange for, or out of the net cash proceeds from the sale of, other shares of any junior class; provided, however, that any vote or consent required by Section 2A.(5)(a)(i) above may be given and made effective by the filing of an appropriate amendment of these Articles of Incorporation without obtaining the vote or consent of the holders of the Common Shares, the right to give such vote or consent being expressly waived by all holders of such Common Shares unless the action to be taken would substantially adversely affect the rights or powers of the Common Shares; and provided, further, that any vote or consent required by Section 2A.(5)(c) above may be given and made effective by the filing of an appropriate amendment of these Articles of Incorporation without obtaining the vote or consent of the holders of any other series of the Serial Shares or of the holders of the Common Shares, the right to give such vote or consent being expressly waived by all holders of such other series of Serial Shares and Common Shares, unless the action to be taken would substantially adversely affect the rights or powers of such other series of Serial Shares or Common Shares, as the case may be. (6) If at any time the Corporation shall have failed to pay dividends in full on the Serial Shares, thereafter and until dividends in full, including all accrued and unpaid dividends on the Serial Shares outstanding, shall have been declared and set apart for payment or paid (a) the Corporation shall not, without the affirmative vote or written consent of the holders of at least two-thirds of the aggregate number of shares of all series at the time outstanding, redeem less than all of the Serial Shares at such time outstanding other than in accordance with Section 2A.(7), and (b) neither the Corporation nor any subsidiary shall purchase any Serial Shares except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of Serial Shares of all series upon such terms as the Board of Directors, in its sole discretion after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series, shall determine (which determination shall be final and conclusive) will result in fair and equitable treatment among the respective series; provided, that (i) unless prohibited by the provisions applicable to any series, the Corporation, to meet the requirements of any retirement or sinking fund provisions with respect to any series, may use shares of such series acquired by it prior to such failure and then held by it as treasury shares and (ii) nothing shall prevent the Corporation from completing the purchase or redemption of Serial Shares for which a purchase contract was entered into for any retirement or sinking fund purposes, or the notice of redemption of which was initially published, prior to such failure. (7) If in any case the amounts payable with respect to any obligations to retire shares of the Serial Shares are not paid in full in the case of all series as to which such obligations exist, the number of shares of the various series to be retired shall be in proportion to the respective amounts which would be payable on account of such obligations if all amounts which would be payable on account of such obligations were discharged in full. 7 8 B. For the purposes of this Article FOURTH and of any resolution or resolutions of the Board of Directors adopted pursuant to this Article FOURTH or of any certificate filed with the Secretary of State of Ohio (unless otherwise provided in any such resolution or certificate): (1) The term "outstanding," when used in reference to shares, shall mean issued shares, excluding shares held by the Corporation or a subsidiary and shares called for redemption, funds for the redemption of which shall have been deposited in trust; (2) The amount of dividends "accrued and unpaid" on any Serial Shares of any series as at any quarterly dividend date shall be deemed (whether or not in any dividend period in respect of which such term is used there shall have been unreserved and unrestricted surplus legally available for the payment of dividends) to be the amount of any unpaid dividends accumulated thereon to and including such quarterly dividend date, whether or not earned or declared, and the amount of dividends "accrued and unpaid" on any shares of any series as at any date other than a quarterly dividend date shall be calculated as the amount of any unpaid dividends accumulated thereon to and including the last preceding quarterly dividend date, whether or not earned or declared, plus an amount calculated on the basis of the annual dividend rate fixed for the shares of such series for the period after such last preceding quarterly dividend date to, and including, the date as of which the calculation is made, based on a 360-day year of twelve 30-day months; (3) Any class or classes of shares of the Corporation shall be deemed to rank: (a) prior to the Serial Shares either as to dividends or upon liquidation, if the holders of such class or classes shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of any Serial Shares; (b) on a parity with the Serial Shares either as to dividends or upon liquidation, whether or not the dividend rates, dividend payment dates, or redemption or liquidation prices per share thereof be different from those of any Serial Shares, if the holders of such class or classes shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority one over the other as between the holders of such class or classes of shares and the holders of any Serial Shares; and (c) junior to the Serial Shares if the rights of the holders of such class or classes shall be subject or subordinate to the rights of the holders of the Serial Shares in respect of either the receipt of dividends or the amounts distributable upon liquidation, dissolution or winding up. C. Except as otherwise provided by law or by these Articles of Incorporation and except to the extent that the resolution or resolutions of the Board of Directors providing for the 8 9 issuance of a series of Serial Shares may otherwise provide with respect to such series, the holder (or holders) of each outstanding share of the Corporation, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders or submitted to shareholders for their consent without a meeting. D. No shareholder of the Corporation shall by reason of his holding shares of any class have any preemptive or preferential right to purchase or subscribe to any shares of any class of the Corporation now or hereafter to be authorized, or any notes, debentures, bonds, or other securities convertible into or carrying options or warrants to purchase shares of any class, now or hereafter to be authorized, whether or not the issuance of any such shares, or such notes, debentures, bonds or other securities, would adversely affect the dividend or voting rights of such shareholder, other than such rights, if any, as the Board of Directors, in its discretion from time to time may grant and at such price as the Board of Directors in its discretion may fix; and the Board of Directors may issue shares of any class of the Corporation, or any notes, debentures, bonds, or other securities convertible into or carrying options or warrants to purchase shares of any class, without offering any such shares of any class, either in whole or in part, to the existing shareholders of any class. FIFTH: The provisions of Section 1701.831 of the Ohio Revised Code, as in effect on August 31, 1998, shall not apply to this Corporation. SIXTH: No Person shall make a Control Share Acquisition without the prior authorization of the Corporation's shareholders. SECTION 1. PROCEDURE. In order to obtain authorization of a Control Share Acquisition by the Corporation's shareholders, a Person shall deliver a notice (the "Notice") to the Corporation at its principal place of business that sets forth all of the following information: A. The identity of the Person who is giving the Notice; B. A statement that the Notice is given pursuant to this Article SIXTH; C. The number and class of shares of the Corporation owned, directly or indirectly, by the Person who gives the Notice; D. The range of voting power under which the proposed Control Share Acquisition would, if consummated, fall; E. A description in reasonable detail of the terms of the proposed Control Share Acquisition; and F. Reasonable evidence that the proposed Control Share Acquisition, if consummated, would not be contrary to law and that the Person who is giving the Notice has the financial capacity to make the proposed Control Share Acquisition. 9 10 SECTION 2. CALL OF SPECIAL MEETING OF SHAREHOLDERS. The Board of Directors of the Corporation shall, within ten days after receipt of such Notice by the Corporation, call a special meeting of shareholders to be held not later than fifty (50) days after receipt of the Notice by the Corporation, unless the Person who delivered the Notice agrees to a later date, to consider the proposed Control Share Acquisition; provided that the Board of Directors shall have no obligation to call such meeting if they make a determination within ten days after receipt of the Notice (i) that the Notice was not given in good faith, (ii) that the proposed Control Share Acquisition would not be in the best interests of the Corporation or (iii) that the proposed Control Share Acquisition could not be consummated for financial or legal reasons. The Board of Directors may adjourn such meeting if, prior to such meeting, the Corporation has received a Notice from any other Person and the Board of Directors has determined that the Control Share Acquisition proposed by such other Person or a merger, consolidation or sale of assets of the Corporation should be presented to shareholders at an adjourned meeting or at a special meeting held at a later date. For purposes of this Section 2, a director, in determining whether the proposed Control Share Acquisition would be in the best interests of the Corporation, shall consider the interests of the Corporation's shareholders and, in his discretion, may consider any of the following: the interests of the Corporation's employees, suppliers, creditors and customers; the economy of the state and nation; community and societal considerations; and the long term as well as short term interests of the Corporation and its shareholders, including the possibility that these interests may be best served by the continued independence of the Corporation. For purposes of making a determination that a special meeting of shareholders should not be called pursuant to this Section 2, no such determination shall be deemed void or voidable with respect to the Corporation merely because one or more of its directors or officers who participated in making such determination may be deemed to be other than disinterested, if in any such case the material facts of the relationship giving rise to a basis for self-interest are known to the directors and the directors, in good faith reasonably justified by the facts, make such determination by the affirmative vote of a majority of the disinterested directors, even though the disinterested directors constitute less than a quorum. For purposes of this paragraph, "disinterested directors" shall mean directors whose material contacts with the Corporation are limited principally to activities as a director or shareholder. Persons who have substantial, recurring business or professional contacts with the Corporation shall not be deemed to be "disinterested directors" for purposes of this provision. A director shall not be deemed to be other than a "disinterested director" merely because he or she would no longer be a director if the proposed Control Share Acquisition were approved and consummated. SECTION 3. NOTICE OF SPECIAL MEETING. The Corporation shall give notice of such special meeting to all shareholders of record as of the record date set for such meeting as promptly as practicable. Such notice shall include or be accompanied by a copy of the Notice and by a statement of the Corporation, authorized by the Board of Directors, of its position or recommendation, or that it is taking no position or making no recommendation, with respect to the proposed Control Share Acquisition. 10 11 SECTION 4. REQUIREMENTS FOR APPROVAL. The Person who delivered the Notice may make the proposed Control Share Acquisition if both of the following occur: (i) the shareholders of the Corporation authorize such acquisition at the special meeting called by the Board of Directors at which a quorum is present and held for that purpose by an affirmative vote of a majority of the Voting Shares represented at such meeting in person or by proxy and by a majority of the portion of such Voting Shares represented at such meeting in person or by proxy excluding the votes of Interested Shares; and (ii) such acquisition is consummated, in accordance with the terms so authorized, not later than 360 days following shareholder authorization of the Control Share Acquisition. For purposes of these Articles of Incorporation, "Voting Shares" shall mean all outstanding shares of the Corporation entitled, at the time of the meeting, to vote in the election of directors. SECTION 5. VIOLATIONS OF RESTRICTION. Shares issued or transferred to any Person in violation of this Article SIXTH shall be valid only with respect to such number of shares as does not result in a violation of this Article SIXTH, and such issuance or transfer shall be null and void with respect to the remainder of such shares, any such remainder of shares being hereinafter called "Excess Shares." If the last clause of the foregoing sentence is determined to be invalid by virtue of any legal decision, statute, rule or regulation, the Person who holds Excess Shares shall be conclusively deemed to have acted as an agent on behalf of the Corporation in acquiring the Excess Shares and to hold such Excess Shares on behalf of the Corporation. As the equivalent of treasury securities for such purposes, the Excess Shares shall not be entitled to any voting rights, shall not be considered to be outstanding for quorum or voting purposes, and shall not be entitled to receive dividends, interest or any other distribution with respect to the Excess Shares. Any person who receives dividends, interest or any other distribution in respect to Excess Shares shall hold the same as agent for the Corporation and, following a permitted transfer, for the transferee thereof. Notwithstanding the foregoing, any holder of Excess Shares may transfer the same (together with any distributions thereon) to any person who, following such transfer, would not own shares in violation of this Article SIXTH. Upon such permitted transfer, the Corporation shall pay or distribute to the transferee any distributions on the Excess Shares not previously paid or distributed. SECTION 6. DEFINITIONS. As used in this Article SIXTH: A. "Person" includes, without limitation, an individual, a corporation (whether nonprofit or for profit), a partnership, a limited liability company, an unincorporated society or association, and two or more persons having a joint or common interest. B. (1) "Control Share Acquisition" means the acquisition, directly or indirectly, by any Person, of shares of the Corporation that, when added to all other shares of the Corporation in respect of which such Person may exercise or direct the exercise of voting power as provided in this Section 6B.(1), would entitle such Person, immediately after such acquisition, directly or 11 12 indirectly, to exercise or direct the exercise of the voting power of the Corporation in the election of directors within any of the following ranges of such voting power: (a) One-fifth or more but less than one-third of Voting Shares; (b) One-third or more but less than a majority of Voting Shares; (c) A majority or more of Voting Shares. A bank, broker, nominee, trustee, or other person who acquires shares in the ordinary course of business for the benefit of others in good faith and not for the purpose of circumventing this Article SIXTH shall, however, be deemed to have voting power only of shares in respect of which such person would be able to exercise or direct the exercise of votes without further instruction from others at a meeting of shareholders called under this Article SIXTH. For purposes of this Article SIXTH, the acquisition of securities immediately convertible into shares of the Corporation with voting power in the election of directors shall be treated as an acquisition of such shares. (2) The acquisition by any Person of any shares of the Corporation does not constitute a Control Share Acquisition for the purpose of this Article SIXTH if the acquisition is consummated in any of the following circumstances: (a) Pursuant to a spin-off or other distribution of all or any portion of Essef Corporation's ownership interest in the Corporation or pursuant to the exercise of options obtained pursuant to agreements in place prior to spin-off or distribution; (b) By underwriters in good faith and not for the purpose of circumventing this Article SIXTH in connection with an offering of the securities of the Corporation to the public; (c) By bequest or inheritance, by operation of law upon the death of any individual, or by any other transfer without valuable consideration, including a gift, that is made in good faith and not for the purpose of circumventing this Article SIXTH; (d) Pursuant to the satisfaction of a pledge or other security interest created in good faith and not for the purpose of circumventing this Article SIXTH; (e) Pursuant to a merger or consolidation adopted, or a combination or majority share acquisition authorized by shareholder vote in compliance with Sections 1701.78 or 1701.83 or Chapter 1704 of the Ohio Revised Code if the Corporation is the surviving or new corporation in the merger or consolidation or is the acquiring corporation in the combination or majority share acquisition and if the vote of shareholders of the surviving, new, or acquiring corporation is required by the provisions of Sections 1701.78 or 1701.83 or Chapter 1704 of the Ohio Revised Code; or (f) The Person's being entitled, immediately thereafter, to exercise or direct the exercise of voting power of the Corporation in the election of directors within 12 13 the same range theretofore attained by that person either in compliance with the provisions of this Article SIXTH or as a result solely of the Corporation's purchase of shares issued by it. Any shareholder whose ownership of shares of the Corporation as of the date of any spin-off of Essef Corporation's interest in the Corporation would be in one of the ranges of voting power described under Section 6B(1)(a), (b) or (c) shall not be required to obtain any shareholder approval for ownership within such range but would be required to obtain shareholder approval for acquisitions of shares that would cause such shareholder's holdings to move to a greater range. The acquisition by any Person of shares of the Corporation in a manner described under this Section 6B.(2) shall be deemed to be a Control Share Acquisition authorized pursuant to this Article SIXTH within the range of voting power under Section 6B.(1)(a), (b) or (c) of this Article SIXTH that such Person is entitled to exercise after such acquisition, provided that, in the case of an acquisition in a manner described under Section 6B.(2)(c) or (d), the transferor of shares to such Person had previously obtained any authorization of shareholders required under this Article SIXTH in connection with such transferor's acquisition of shares of the Corporation. (3) The acquisition of shares of the Corporation in good faith and not for the purpose of circumventing this Article SIXTH the acquisition of which (a) had previously been authorized by shareholders in compliance with this Article SIXTH or (b) would have constituted a Control Share Acquisition but for Section 6B.(2), does not constitute a Control Share Acquisition for the purpose of this Article SIXTH unless such acquisition entitles any Person, directly or indirectly, to exercise or direct the exercise of voting power of the Corporation in the election of directors in excess of the range of such voting power authorized pursuant to this Article SIXTH, or deemed to be so authorized under Section 6B.(2). C. "Interested Shares" means Voting Shares with respect to which any of the following persons may exercise or direct the exercise of the voting power: (1) any Person whose Notice prompted the calling of the meeting of shareholders; (2) any officer of the Corporation elected or appointed by the directors of the Corporation; provided, however, that Voting Shares which, as of the record date of any special meeting held pursuant to this Article SIXTH, have been beneficially owned by such person for three or more years (including, for this purpose, the holding period of shares of Essef Corporation to the extent Voting Shares were obtained by such officer in a spin-off by Essef of shares of the Corporation) shall not be deemed to be "Interested Shares" for purposes of any vote at such meeting; and (3) any employee of the Corporation who is also a director of the Corporation; provided, however, that Voting Shares which, as of the record date of any special meeting held pursuant to this Article SIXTH, have been beneficially owned by such person for three or more years (including, for this purpose, the holding period of shares of Essef Corporation to the extent Voting Shares were obtained by such officer in a spin-off by Essef of shares of the Corporation) shall not be deemed to be "Interested Shares" for purposes of any vote at such meeting; (4) any Person that acquires such Voting Shares for a valuable consideration during the period beginning with the date of the first public disclosure of a proposed Control Share Acquisition or any proposed merger, consolidation or other transaction which would result in a change of control of the Corporation or all or substantially all of its assets, and ending on 13 14 the record date of any special meeting held thereafter pursuant to this Article SIXTH for the purpose of voting on a Control Share Acquisition proposed by any Person who has delivered a Notice pursuant to Section 1 of this Article SIXTH if either of the following applies: (a) the aggregate consideration paid or given by the Person who acquired the Voting Shares, and other persons acting in concert with such Person, for all such Voting Shares exceeds Two Hundred Fifty Thousand Dollars ($250,000.00); or (b) the number of Voting Shares acquired by the Person who acquired the Voting Shares, and other persons acting in concert with such Person, for all such Voting Shares exceeds one half of one percent of all Voting Shares; and (5) any Person that transfers such Voting Shares for valuable consideration after the record date of any special meeting described in Section 6(C)(4) of this Article SIXTH as to shares so transferred, if accompanied by the voting power in the form of a blank proxy, an agreement to vote as instructed by the transferee, or otherwise. SECTION 7. PROXIES. No proxy appointed for or in connection with the shareholder authorization of a Control Share Acquisition pursuant to this Article SIXTH is valid if it provides that it is irrevocable. No such proxy is valid unless it is sought, appointed, and received both: A. In accordance with all applicable requirements of law; and B. Separate and apart from the sale or purchase, contract or tender for sale or purchase, or request or invitation for tender for sale or purchase, of shares of the Corporation. SECTION 8. REVOCABILITY OF PROXIES. Proxies appointed for or in connection with the shareholder authorization of a Control Share Acquisition pursuant to this Article SIXTH shall be revocable at all times prior to the obtaining of such shareholder authorization, whether or not coupled with an interest. SECTION 9. AMENDMENTS. Notwithstanding any other provisions of these Articles of Incorporation or the Regulations of the Corporation, as the same may be in effect from time to time, or any provision of law that might otherwise permit a lesser vote of the directors or shareholders, but in addition to any affirmative vote of the directors or the holders of any particular class or series of shares required by law, the Articles of Incorporation or the Regulations of the Corporation, as the same may be in effect from time to time, the affirmative vote of at least eighty percent (80%) of the Voting Shares shall be required to alter, amend or repeal this Article SIXTH or adopt any provisions in the Articles of Incorporation or Regulations of the Corporation, as the same may be in effect from time to time, which are inconsistent with the provisions of this Article SIXTH. 14 15 SECTION 10. LEGEND ON SHARE CERTIFICATES. Each certificate representing shares of the Corporation shall contain the following legend: "Transfer of the shares represented by this Certificate is subject to the provisions of Article SIXTH of the Corporation's Articles of Incorporation as the same may be in effect from time to time. Upon written request delivered to the Secretary of the Corporation at its principal place of business, the Corporation will mail to the holder of this Certificate a copy of such provisions without charge within five (5) days after receipt of written request therefor. By accepting this Certificate the holder hereof acknowledges that it is accepting same subject to the provisions of said Article SIXTH as the same may be in effect from time to time and covenants with the Corporation and each shareholder thereof from time to time to comply with the provisions of said Article SIXTH as the same may be in effect from time to time." SEVENTH: Except as otherwise provided in these Articles of Incorporation or in the Regulations of the Corporation, the holders of a majority of the outstanding Voting Shares of the Corporation present in person or by proxy at any meeting of the shareholders of the Corporation are authorized to act on any matter which may properly come before such meeting. EIGHTH: Except to the extent that Articles FOURTH and SIXTH otherwise provide with respect to certain matters therein set forth, the Corporation reserves the right to amend, alter, change or repeal any provision contained in these Articles of Incorporation and to add new provisions, in the manner now or hereafter prescribed by statute, upon the affirmative vote of a majority of the outstanding shares of the Corporation, voting as a Class; and all rights, privileges and preferences of whatsoever nature conferred upon shareholders, directors and officers pursuant to these Articles of Incorporation in their present form or as hereafter amended are granted subject to this reservation. Notwithstanding the foregoing, the adoption of any amendment, alteration, change or repeal to these Articles of Incorporation as the same may be in effect from time to time which is inconsistent with or would have the effect of amending, altering, changing or repealing the provisions of Sections 7, 9 or 10 of the Regulations of the Corporation as the same may be in effect from time to time shall require the same affirmative vote of shareholders as would be required under such Regulations to adopt any amendment, alteration, change or repeal of said Sections 7, 9 or 10 or to adopt any provisions inconsistent therewith. NINTH: Without derogation from any other power to purchase shares of the Corporation, the Corporation may, by action of its Board of Directors and to the extent not prohibited by law, purchase outstanding shares of any class. TENTH: No holder of shares of any class shall have the right to cumulate his voting power in the election of the Board of Directors, and the right to cumulative voting described in Ohio Revised Code Section 1701.55 is hereby specifically denied to the holders of any class of shares of the Corporation. ELEVENTH: Except where the law or the Articles of Incorporation or Regulations of the Corporation require action to be authorized or taken by shareholders, all of the authority of the Corporation shall be exercised by or under the direction of the Board of Directors. No contract or arrangement between the Corporation and Essef Corporation or its successor ("Essef"), or between the Corporation and any director or officer of the Corporation or Essef, will be void or voidable by the Corporation solely because: (a) Essef or such officer or director is a party; or (b) such officer or director participated in, or voted with respect to, the authorization of such contract or arrangement. The Corporation and its shareholders shall have no right to recover any amounts or seek any judgment against Essef or any director or officer of Essef for breach of fiduciary duty or duty of loyalty, failure to act in the best interests of the Corporation, or the derivation of any improper personal benefit; provided, that such officer or director of Essef acts in good faith in taking action or exercising rights in connection with any contract or arrangement between the Corporation and Essef. 16 IN WITNESS WHEREOF, the above-named officers, acting for and on behalf of the Corporation, have subscribed their names this ___ day of _________, 1998. -------------------------------------- Chairman of the Board, Chief Executive Officer and Chief Financial Officer -------------------------------------- Secretary 16 EX-3.2 3 EXHIBIT 3.2 1 EXHIBIT 3.2 AMENDED AND RESTATED REGULATIONS OF ANTHONY & SYLVAN POOLS CORPORATION MEETINGS OF SHAREHOLDERS SECTION 1. ANNUAL MEETING. The annual meeting of shareholders of the Corporation shall be held at such time and on such business day as the directors may determine each year. The annual meeting shall be held at the principal office of the Corporation or at such other place within or without the State of Ohio as the directors may determine. SECTION 2. SPECIAL MEETINGS. Special meetings of the shareholders may be called at any time by (i) the Chairman of the Board, (ii) the President, (iii) the directors, by action at a meeting or a majority of the directors acting without a meeting, or (iv) the holders of 50% or more of the outstanding shares entitled to vote thereat. Such meetings may be held within or without the State of Ohio at such time and place as may be specified in the notice thereof. SECTION 3. NOTICE OF MEETINGS. Written notice of every annual or special meeting of the shareholders stating the time, place and purposes thereof shall be given to each shareholder entitled to notice as provided by law, not less than seven nor more than ninety days before the date of the meeting. Such notice may be given by or at the direction of the Chairman of the Board, the President or the Secretary by personal delivery or by mail addressed to the shareholder at his last address as it appears on the records of the Corporation. Any shareholder may waive in writing notice of any meeting, either before or after the holding of such meeting, and, by attending any meeting without protesting the lack of proper notice, shall be deemed to have waived notice thereof. SECTION 4. PERSONS BECOMING ENTITLED BY OPERATION OF LAW OR TRANSFER. Every person who, by operation of law, transfer or any other means whatsoever, shall become entitled to any shares, shall be bound by every notice in respect of such share or shares which previously to the entering of his name and address on the records of the Corporation shall have been duly given to the person from whom he derives his title to such shares. 2 SECTION 5. QUORUM AND ADJOURNMENTS. Except as may be otherwise required by law or by the Articles of Incorporation or these Regulations, the holders of a majority of the then-outstanding shares entitled to vote in an election of directors, taken together as a single class ("Voting Shares"), present in person or by proxy, shall constitute a quorum; provided that any meeting duly called, whether a quorum is present or otherwise may, by order of the chair of such meeting or by vote of the holders of the majority of the Voting Shares represented thereat, adjourn from time to time, in which case no further notice of any such adjourned meeting need be given. SECTION 6. BUSINESS TO BE CONDUCTED AT MEETINGS. No business shall be conducted at a meeting of shareholders except in accordance with the procedures set forth in this Section 6. To be properly brought before a meeting of shareholders, business must be specified in the notice of meeting (or any supplement thereto) given by or at the direction of the directors, otherwise properly brought before the meeting by or at the direction of the directors or otherwise properly brought before the meeting by a shareholder. For business to be properly brought before a meeting of shareholders by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than sixty (60) days nor more than ninety (90) days prior to the meeting; provided, however, that in the event that less than seventy-five (75) days' notice or prior public disclosure of the date of the meeting is given or made to the shareholders, notice by the shareholder to be timely must be so received not later than the close of business on the fifteenth (15th) day following the earlier of the day on which such notice of the date of the meeting was mailed or such public disclosure was made. A shareholder's notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the meeting: (i) a brief description of the proposal desired to be brought before the meeting and a statement of the reasons for making such proposal at the meeting; (iii) the name and record address of, and the class and number of shares of the Corporation beneficially owned by (A) the shareholder offering such proposal, (B) any other beneficial owner of the shares registered in such shareholder's name and (C) any other shareholder (or beneficial owner of shares) known by such shareholder to be supporting such proposal on the date of such shareholder's notice; and (iv) any financial or other material interest of the shareholder (or any such beneficial owner) in such proposal. If the Board of Directors, or a designated committee thereof, determines that any shareholder proposal was not timely made in accordance with the provisions of this Section 6, or that any proposal conflicts with or violates a provision of the Articles of Incorporation or Regulations of the Corporation, then such proposal shall not be presented for action at the meeting in question. If the Board of Directors, or a designated committee thereof, determines that the information provided in the shareholder's notice does not satisfy the informational requirements of this Section 6 in any material respect, the Secretary of the Corporation shall promptly notify such shareholder of the deficiency in the notice. Such shareholder shall have the opportunity to cure such deficiency by providing additional information to the Secretary within the period of time, not to exceed five (5) days from the date such deficiency notice is given such shareholder, determined by the Board of Directors or such committee. If the deficiency is not cured within such period, or if the Board of Directors or such committee determines that the additional information provided by the shareholder, together with the information 2 3 previously provided, does not satisfy the requirements of this Section 6 in any material respect, then such proposal shall not be presented for action at the meeting in question. If neither the Board of Directors nor such committee makes a determination as to the compliance of any shareholder proposal with the provisions of this Section 6, as set forth above, the chair of the meeting of shareholders shall determine and declare to the meeting, if the facts warrant, that such proposal was not made in accordance with the provisions of this Section 6, and if so determined, the defective proposal shall be disregarded. DIRECTORS SECTION 7. NUMBER. The number of directors of the Corporation shall be not fewer than three (3) nor more than nine (9), as may be determined from time to time upon the recommendation of a majority of the Continuing Directors (as hereinafter defined) by the holders of a majority of the outstanding Voting Shares represented at any annual meeting or special meeting called for the purpose of electing directors, and when so fixed such number shall continue to be the authorized number of directors until changed by the shareholders by vote as aforesaid or by the directors as hereinafter provided. In addition to the authority of the shareholders to fix or change the number of directors as described above, the directors, by majority vote of the Continuing Directors, may change the number of directors and may fill any vacancy that is created by an increase in the number of directors. In exercising the foregoing authority, the directors may not change the number of directors by more than two (2) from the number authorized by the shareholders at the last annual or special meeting of the shareholders at which the number of directors was fixed and in no event may the directors fix the number of directors at fewer than three (3) nor more than nine (9). As used herein, the term "Continuing Director" shall mean, as of any date of determination, any member of the Board of Directors of the Corporation who (i) was a member of such Board of Directors on the date of the initial adoption of these Regulations by the shareholder(s) of the Corporation or (ii) was nominated for election or elected to such Board of Directors with the approval of a majority of the Continuing Directors who were members of such Board of Directors at the time of such nomination or election. SECTION 8. NOMINATIONS. Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors. Nominations of persons for election as directors of the Corporation may be made at a meeting of shareholders by or at the direction of the directors by any nominating committee or person appointed by the directors or by any shareholder of the Corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 8. Such nominations, other than those made by or at the direction of the directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a shareholder's notice shall be delivered to or mailed and received at the principal executive offices of the Corporation not less than sixty (60) days nor more than ninety (90) days prior to the meeting; provided, however, that in the event that less than seventy-five (75) days' notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be 3 4 timely must be so received not later than the close of business on the fifteenth (15th) day following the earlier of the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such shareholder's notice shall set forth as to each nomination: (i) the name, age and business address or residence address of any proposed nominee, the nominee's principal employment or occupation and the other information which is required to be disclosed in solicitations for proxies for election of directors pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended; (ii) the name and record address of, and the class and number of shares of the Corporation beneficially owned by (A) the shareholder offering such nomination, (B) any other beneficial owner of the shares registered in such shareholder's name and (C) any other shareholder (or beneficial owner of shares) known by such shareholder to be supporting such nomination on the date of such shareholder's notice; and (iii) any financial or other material interest of the shareholder (or any such beneficial owner) in such nomination. Such notice shall be accompanied by the written consent of each proposed nominee to serve as a director of the Corporation, if elected. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 8. If the Board of Directors, or a designated committee thereof, determines that any shareholder nomination was not timely made in accordance with the provisions of this Section 8, or that any nomination conflicts with or violates a provision of the Articles of Incorporation or Regulations of the Corporation, then such nomination shall not be presented for action at the meeting in question. If the Board of Directors, or a designated committee thereof, determines that the information provided in the shareholder's notice does not satisfy the informational requirements of this Section 8 in any material respect, the Secretary of the Corporation shall promptly notify such shareholder of the deficiency in the notice. Such shareholder shall have the opportunity to cure such deficiency by providing additional information to the Secretary within the period of time, not to exceed five (5) days from the date such deficiency notice is given such shareholder, determined by the Board of Directors or such committee. If the deficiency is not cured within such period, or if the Board of Directors or such committee determines that the additional information provided by the shareholder, together with the information previously provided, does not satisfy the requirements of this Section 8 in any material respect, then such nomination shall not be presented for action at the meeting in question. If neither the Board of Directors nor such committee makes a determination as to the compliance of any shareholder nomination with the provisions of this Section 8, as set forth above, the chair of the meeting of shareholders shall determine and declare to the meeting, if the facts warrant, that such nomination was not properly brought before the meeting in accordance with the provisions of this Section 8, and if so determined, the defective nomination shall be disregarded. 4 5 SECTION 9. CLASSIFICATION, ELECTION AND TERM OF OFFICE OF DIRECTORS. Subject to the remaining provisions of this Section 9, the directors shall be divided into two (2) classes, designated Class I and Class II. The classes shall be as nearly equal in number as possible, and the directors as initially classified shall hold office for terms as follows: the Class I directors shall hold office until the 2001 annual meeting of shareholders and until their respective successors are elected and qualified; and the Class II directors shall hold office until the 2002 annual meeting of shareholders and until their respective successors are elected and qualified, in all cases, subject to prior death, resignation or removal from office. Thereafter, at each annual meeting of shareholders in which the terms of any directors are due to expire, the successors of the directors whose terms are expiring at such annual meeting shall be elected to hold office until the third succeeding annual meeting of shareholders and until their respective successors are elected and qualified, subject to prior death, resignation or removal from office. If the number of directors is changed, any increase or decrease shall be apportioned between the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional director of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of such class, but in no case will a decrease in the number of directors shorten the term of any incumbent director. Election of directors shall be by ballot whenever requested by any person entitled to vote at the meeting; but unless so requested such election may be conducted in any way approved at such meeting. SECTION 10. REMOVAL. Except as otherwise provided by law, all the directors or all the directors of a particular class, or any individual director, may be removed from office without assigning any cause, by the affirmative vote of at least eighty percent (80%) of the Voting Shares at an annual meeting or at any special meeting duly called. SECTION 11. VACANCIES. Whenever any vacancy shall occur among the directors, the remaining directors shall constitute the directors of the Corporation until such vacancy is filled or until the number of directors is changed pursuant to Section 7 hereof. Except in cases where a director is removed as provided by law and these Regulations and his successor is elected by the shareholders, the remaining directors may, by a vote of a majority of their number, fill any vacancy for the unexpired term. A majority of the directors then in office may also fill any vacancy that results from an increase in the number of directors. SECTION 12. QUORUM AND ADJOURNMENTS. A majority of the directors in office at the time shall constitute a quorum, provided that any meeting duly called, whether a quorum is present or otherwise, may, by vote of a majority of the directors present, adjourn from time to time and place to place within or without the State of Ohio, in which case no further notice of the adjourned meeting need be given. At any meeting at which a quorum is present, all questions and business shall be determined by the affirmative vote of not less 5 6 than a majority of the directors present, except as is otherwise provided in the Articles of Incorporation or these Regulations or is otherwise authorized by Section 1701.60(A)(1) of the Ohio Revised Code. SECTION 13. ORGANIZATION MEETING. Immediately after each annual meeting of the shareholders at which directors are elected, or each special meeting held in lieu thereof, the directors, including those newly elected, if a quorum of all such directors is present, shall hold an organization meeting at the same place or at such other time and place as may be fixed by the shareholders at such meeting, for the purpose of electing officers and transacting any other business. Notice of such meeting need not be given. If for any reason such organization meeting is not held at such time, a special meeting for such purpose shall be held as soon thereafter as practicable. SECTION 14. REGULAR MEETINGS. Regular meetings of the directors may be held at such times and places within or without the State of Ohio as may be provided for in by-laws or resolutions adopted by the directors and upon such notice, if any, as shall be so provided for. SECTION 15. SPECIAL MEETINGS. Special meetings of the directors may be held at any time within or without the State of Ohio upon call by the Chairman of the Board or a majority of the directors. Written notice of each such meeting shall be given to each director by personal delivery or by mail, cablegram or telegram not less than two days prior to such meeting or such shorter notice as the directors shall deem necessary and warranted under the circumstances. Any directors may waive in writing notice of any meeting, and, by attending any meeting without protesting the lack of proper notice, shall be deemed to have waived notice thereof. Unless otherwise limited in the notice thereof, any business may be transacted at any organization, regular or special meeting. SECTION 16. COMPENSATION. The directors are authorized to fix reasonable compensation, which may include pension, disability, and death benefits for services to the Corporation by directors or a reasonable fee for attendance at any meeting of the directors, the Executive Committee, or other committees elected under Section 20 hereof, or any combination of general and attendance fee, and may be paid in cash, shares or rights to shares of the Corporation or other property. In addition to such compensation provided for directors, they shall be reimbursed for any expenses incurred by them in traveling to and from such meetings. 6 7 EXECUTIVE COMMITTEE AND OTHER COMMITTEES SECTION 17. MEMBERSHIP AND ORGANIZATION. (a) The directors, at any time, may elect from their number an Executive Committee which shall consist of three or more directors of the Corporation, each of whom shall hold office during the pleasure of the directors and may be removed at any time, with or without cause, by vote thereof. (b) Vacancies occurring in the Committee may be filled by the directors. (c) In the event the directors have not designated a Chairman, the Committee shall appoint one of its own number as chair who shall preside at all meetings and may also appoint a secretary (who need not be a member of the Committee) who shall keep its records and who shall hold office during the pleasure of the Committee. SECTION 18. MEETINGS. (a) Regular meetings of the Committee may be held without notice of the time, place or purposes thereof and shall be held at such times and places within or without the State of Ohio as the Committee may from time to time determine. (b) Special meetings may be held upon notice of the time, place and purposes thereof at any place within or without the State of Ohio and until otherwise ordered by the Committee shall be held at any time and place at the call of the chair or any two members of the Committee. (c) At any regular or special meeting the Committee may exercise any or all of its powers, and any business which shall come before any regular or special meeting may be transacted thereat, provided a majority of the Committee is present, but in every case the affirmative vote of a majority of all of the members of the Committee present shall be necessary to take any action. (d) Any authorized action by the Committee may be taken without a meeting by a writing signed by all the members of the Committee. SECTION 19. POWERS. Except as its powers, duties and functions may be limited or prescribed by the directors, during the intervals between the meetings of the directors, the Committee shall possess and may exercise all the powers of the directors provided that the Committee shall not be empowered to declare dividends, elect or remove officers, fill vacancies among the directors or Executive Committee, adopt an agreement of merger or consolidation, recommend to the shareholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, nor recommend to the shareholders a dissolution of the Corporation or revocation of a dissolution. All actions of the Committee shall be reported to the directors at their meeting next succeeding such action and shall be subject to revision or alteration by the directors, provided that no rights of any third person shall be affected thereby. 7 8 SECTION 20. OTHER COMMITTEES. The directors may elect other committees from among the directors in addition to or in lieu of an Executive Committee and give to them any of the powers which under the foregoing provisions could be vested in an Executive Committee. Sections 17 and 18 shall be applicable to such other committees. OFFICERS SECTION 21. OFFICES DESIGNATED. The offices of the Corporation shall be a Chairman of the Board, a President, a Secretary, a Treasurer and such other officers as the Board of Directors may from time to time deem appropriate. The Chairman of the Board shall be, and the other officers may, but need not be, chosen from among the directors. Any two or more of such offices other than that of President or Chief Executive Officer and Vice President, Secretary and Assistant Secretary and Chief Financial Officer and other financial officer, may be held by the same person, but no officer shall execute, acknowledge or verify any instrument in more than one capacity if such instrument is required by law, the Articles of Incorporation, these Regulations or any by-laws to be executed, acknowledged, or verified by two or more officers. SECTION 22. ELECTION OF OFFICERS; TENURE OF OFFICE. All officers shall be elected by the Board of Directors. The Board of Directors may remove any officer at any time with or without cause by a majority vote of the directors in office at the time. A vacancy, however created, in any office may be filled by election by the directors. SECTION 23. CHAIRMAN OF THE BOARD. The Chairman of the Board shall preside at meetings of the shareholders and directors and shall have such other powers and duties as may be prescribed by the directors. Except where the signature of the President or Chief Executive Officer is required by law, the Chairman of the Board shall possess the same power as the President or Chief Executive Officer to execute all authorized deeds, mortgages, bonds, contracts and other instruments and obligations in the name of the Corporation. 8 9 SECTION 24. PRESIDENT. The President or Chief Executive Officer may be the chief operating officer of the Corporation and shall have general supervision over its property, business and affairs, subject to the directions of the Chairman of the Board and/or the directors. Unless otherwise determined by the directors, the President or Chief Executive Officer shall have authority to execute all authorized deeds, mortgages, bonds, contracts and other instruments and obligations in the name of the Corporation, and, in the absence of the Chairman of the Board, shall preside at meetings of the shareholders and the directors and shall have such other powers and duties as may be prescribed by the directors. SECTION 25. VICE PRESIDENTS. The Vice Presidents shall have such powers and duties as may be prescribed by the directors or as may be delegated by the Chairman of the Board or the President. SECTION 26. SECRETARY. The Secretary shall attend and keep the minutes of all meetings of the shareholders and of the directors, shall keep such books as may be required by the directors, shall have charge of the seal of the Corporation and shall give all notices of meetings of shareholders and directors, and shall have such other powers and duties as may be prescribed by the directors. SECTION 27. TREASURER OR CHIEF FINANCIAL OFFICER. The Treasurer or Financial Officer shall receive and have in charge all money, bills, notes, bonds, stocks in other corporations and similar property belonging to the Corporation and shall do with the same as shall be ordered by the directors, shall keep accurate financial accounts and hold the same open for inspection and examination of the directors, and shall have such other powers and duties as may be prescribed by the directors. SECTION 28. OTHER OFFICERS. The Assistant Secretaries, Assistant Treasurers, if any, and the other officers, if any, shall have such powers and duties as the directors may prescribe. SECTION 29. DELEGATION OF DUTIES. The directors are authorized to delegate the duties of any officers to any other officer and generally to control the action of the officers and to require the performance of duties in addition to those mentioned herein. SECTION 30. COMPENSATION. The directors are authorized to determine or to provide the method of determining the compensation of all officers. 9 10 SECTION 31. BOND. Any officer or employee, if required by the directors, shall give bond in such sum and with such security as the directors may require for the faithful performance of his or her duties. SECTION 32. SIGNING CHECKS AND OTHER INSTRUMENTS. The directors are authorized to determine or provide the method of determining how checks, notes, bills of exchange and similar instruments shall be signed, countersigned or endorsed. INDEMNIFICATION OF DIRECTORS AND OFFICERS SECTION 33. INDEMNIFICATION. The Corporation shall indemnify any director or officer or any former director or officer of the Corporation or any person who is or has served at the request of the Corporation as a director, officer or trustee of another corporation, joint venture, trust or other enterprise (and his heirs, executors and administrators) against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement, actually and reasonably incurred by him or her by reason of the fact that he or she is or was such director, officer or trustee in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative to the full extent and according to the procedures and requirements set forth in the Ohio General Corporation Law as the same may be in effect from time to time. The indemnification provided for herein shall not be deemed to restrict the right of the Corporation to indemnify employees, agents and others as permitted by such Law. The indemnification authorized by the foregoing paragraph shall not be exclusive of, and shall be in addition to any other rights granted to those seeking indemnification under the Articles of Incorporation or these Regulations or any Indemnification Agreement (as hereinafter defined), vote of shareholders or disinterested directors, or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office. Without derogation to the power of the Corporation from time to time to enter into, or assume the obligations of any affiliate of the Corporation under, any agreement granting rights of indemnification to any person or entity ("Indemnification Agreement"), the Corporation is hereby expressly authorized to assume the obligations of Essef Corporation under any Indemnification Agreement existing on the date of the adoption of these Regulations by the Board of Directors and Shareholders of the Corporation, and any obligations so assumed shall be binding upon the Corporation with the same force and effect as if the Corporation had been an original party to such Indemnification Agreement. The Corporation is further authorized to enter into Indemnification Agreements in substantially the same form as the Indemnification Agreements of Essef Corporation existing on the effective date of these Regulations. The Corporation may purchase and maintain insurance or furnish similar protection, including but not limited to trust funds, letters of credit or self-insurance, on behalf of or for any person 10 11 who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, trustee, officer, employee or agent of another corporation, joint venture, trust or other enterprise (and his or her heirs, executors and administrators), against any liability asserted against and incurred by him or her in such capacity, or arising out of his or her status as such, regardless of whether the Corporation would have provided indemnity against such liability under the foregoing provisions of this Section 33. Insurance may be purchased from or maintained with a person in which the Corporation has a financial interest. CORPORATE SEAL SECTION 34. CORPORATE SEAL. The corporate seal of the Corporation shall be circular in form and shall contain the name of the Corporation. PROVISIONS IN ARTICLES OF INCORPORATION SECTION 35. PROVISIONS IN ARTICLES OF INCORPORATION. These Regulations are at all times subject to the provisions of the Articles of Incorporation of the Corporation as the same may be in effect from time to time, including without limitation, the provisions of Article FOURTH thereof authorizing the Board of Directors to fix by resolution or resolutions providing for the issuance of Serial Shares, the voting powers and designation, preferences and relative rights, qualifications, limitations or restrictions of such Serial Shares to the fullest extent permitted by the laws of the State of Ohio. LOST CERTIFICATES SECTION 36. LOST CERTIFICATES. The directors may direct a new certificate to be issued in place of any certificate theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon such terms and conditions as they may deem advisable upon satisfactory proof of loss or destruction thereof. When authorizing such issue of a new certificate, the directors may, as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate, or such owner's legal representative, to advertise the same in such manner as the directors shall require and/or to give the Corporation a suitable bond or indemnity against loss by reason of the issuance of a new certificate. RECORD DATES SECTION 37. RECORD DATES. 11 12 For any lawful purpose, including, without limitation, the determination of the shareholders who are entitled to: (i) receive notice of or to vote at a meeting of shareholders; (ii) receive payment of any dividend or distribution; (iii) receive or exercise rights of purchase of or subscription for, or exchange or conversion of, shares or other securities, subject to contract rights with respect thereto; or (iv) participate in the execution of written consents, waivers, or releases, the directors may fix a record date which shall not be a date earlier than the date on which the record date is fixed and, in the cases provided for in clauses (i), (ii) and (iii) above, shall not be more than sixty (60) nor fewer than ten (10) days, unless the Articles of Incorporation specify a shorter or a longer period for such purpose, preceding the date of the meeting of the shareholders, or the date fixed for the payment of any dividend or distribution, or the date fixed for the receipt or the exercise of rights, as the case may be. AMENDMENTS SECTION 38. AMENDMENTS. (a) These Regulations may be altered, changed or amended in any respect or superseded by new Regulations in whole or in part, by the affirmative vote of the holders of two-thirds of the outstanding Voting Shares, unless such alteration, change, amendment or adoption has been recommended by at least two-thirds of the Board of Directors of the Corporation then in office, in which event such alteration, change, amendment or adoption may be approved by the affirmative vote of the holders of a majority of the outstanding Voting Shares. No alteration, change or amendment of these Regulations or adoption of new Regulations in whole or part may be adopted by the shareholders other than pursuant to a vote of shareholders at an annual or special meeting or pursuant to a writing or writings signed by the holders of all of the Voting Shares entitled to notice of a meeting of the shareholders held for such purpose. (b) Notwithstanding the provisions of Section 38(a) hereof and notwithstanding the fact that a lesser percentage may be specified by law or in any agreement with any national securities exchange or any other provision of these Regulations, the amendment, alteration, change or repeal of, or adoption of any provisions inconsistent with, Sections 7, 9 or 10 of these Regulations shall require the affirmative vote of at least eighty percent (80%) of the outstanding Voting Shares, unless such amendment, alteration, change, repeal or adoption has been recommended by at least two-thirds of the Continuing Directors (as defined in Section 7 of these Regulations), in which event the provisions of Section 38(a) hereof shall apply. EX-4.1 4 EXHIBIT 4.1 1 EXHIBIT 4.1
COMMON STOCK COMMON STOCK NUMBER SHARES ANTHONY & SYLVAN INCORPORATED UNDER THE LAWS POOLS CORPORATION SEE REVERSE FOR CERTAIN OF THE STATE OF OHIO DEFINITIONS AND TRANSFER PROVISIONS CUSIP This Certifies that SPECIMEN is the owner of FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, NO PAR VALUE ANTHONY & SYLVAN POOLS CORPORATION an Ohio corporation, transferable on the books of the Corporation in person or by duly authorized attorney upon surrender of this certificate properly endorsed. This certificate is not valid until countersigned by the Transfer Agent and registered by the Registrar. Witness the facsimile seal of the Corporation and the facsimile signature of its duly authorized officers. Dated /s/ Kevan K. Langner ANTHONY & SYLVAN POOLS CORPORATION /s/ Stuart D. Neidus CORPORATE SECRETARY SEAL CHAIRMAN OHIO COUNTERSIGNED AND REGISTERED: BY NATIONAL CITY BANK TRANSFER AGENT AND REGISTRAR AUTHORIZED OFFICER
ANTHONY & SYLVAN POOLS CORPORATION THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH SHAREHOLDER WHO SO REQUEST THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS. SUCH REQUEST MAY BE MADE TO THE CORPORATION OR TO A TRANSFER AGENT. Transfer of the shares represented by this Certificate is subject to the provisions of Article SIXTH of the Corporation's Articles of Incorporation as the same may be in effect from time to time. Upon written request delivered to the Secretary of the Corporation at its principal place of business, the Corporation will mail to the holder of this Certificate a copy of such provisions without charge within five (5) days after receipt of written request therefor. By accepting this Certificate the holder hereof acknowledges that it is accepting same subject to the provisions of said Article SIXTH as the same may be in effect from time to time and covenants with the Corporation and each shareholder thereof from time to time to comply with the provisions of said Article SIXTH as the same may be in effect from time to time. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM-as tenants in common UNIF GIFT MIN ACT-_____Custodian_____ TEN ENT-as tenants by the entireties (Cust) (Minor) JT TEN -as joint tenants with right of under Uniform Gifts to survivorship and not as tenants Minors in common Act _______ (State) Additional abbreviations may also be used though not in the above list. For value received, ________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY CODE OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - ----------------------------------------------------------------------------- (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OR ASSIGNEE) - ----------------------------------------------------------------------------- - ---------------------------------------------------------------------------- shares - ------------------------------------------------------------------------ of the capital stock represented by the within Certificate and do hereby irrevocably constitute and appoint ________________ Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Date ___________ -------------------------------------------------- NOTICE: The signature to this assignment must correspond with the name as written upon the face of the certificate in every particular, without alteration enlargement or any change whatsoever. EX-5 5 EXHIBIT 5 1 EXHIBIT 5 [SQUIRE, SANDERS & DEMPSEY L.L.P. LETTERHEAD] September , 1998 Anthony & Sylvan Pools Corporation 220 Park Drive Chardon, Ohio 44024 Ladies and Gentlemen: Reference is made to the Registration Statement on Form S-1 ("Registration Statement") to be filed by Anthony & Sylvan Pools Corporation (the "Company") in connection with the initial public offering of its common shares, without par value ("Common Shares"), upon the terms and conditions set forth in the Underwriting Agreement dated September , 1998 by and among the Company, McDonald & Company Securities, Inc., Friedman, Billings, Ramsey & Co., Inc. and Morgan Keegan & Company, Inc ("Underwriting Agreement"). We have examined such documents and matters of law as we have deemed necessary or appropriate for the purpose of rendering this opinion. Based upon the foregoing, we are of the opinion that the Common Shares, when issued by the Company as contemplated in the Registration Statement and the Underwriting Agreement, will be legally issued, fully paid and non-assessable. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference of our firm under the caption "Legal Matters" in the prospectus contained therein. Respectfully submitted, SQUIRE, SANDERS & DEMPSEY L.L.P. EX-10.1 6 EXHIBIT 10.1 1 Exhibit 10.1 ANTHONY & SYLVAN POOLS CORPORATION 1998 LONG-TERM INCENTIVE PLAN 1. PURPOSES The purpose of the Anthony & Sylvan Pools Corporation 1998 Long-Term Incentive Plan (the "Plan") is to promote the long-term growth and performance of Anthony & Sylvan Pools Corporation (the "Company"). The Plan provides an opportunity for employees of the Company to participate through share ownership in the long-term growth and success of the Company, enhances the Company's ability to attract and retain persons with desired abilities, provides additional incentives for such persons and identifies interests of employees and shareholders of the Company. 2. DEFINITIONS (a) "Award" means any form of stock option, stock appreciation right, restricted shares, share or share-based award or performance share granted to a Participant under the Plan. (b) "Award Agreement" means a written agreement between the Company and a Participant setting forth the terms, conditions and limitations applicable to an Award. (c) "Board" means the Board of Directors of the Company. (d) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (e) "Committee" means the Compensation Committee of the Company's Board, or such other committee of the Board that is designated by the Board to administer the Plan, provided that the Committee shall be constituted so as to satisfy any applicable legal requirements, including the requirements of Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Section 162(m) of the Code or any respective successor rule. (f) "Fair Market Value" means the closing price of Shares as reported on the Nasdaq Stock Market for the date in question, provided that if no sales of Shares were made on the Nasdaq Stock Market on that date, the closing price of Shares as reported on the Nasdaq Stock Market for the preceding day on which sales of Shares were made on the Nasdaq Stock Market shall be used. (g) "Participant" means (i) any employee of the Company, (ii) any employee of any direct or indirect subsidiary of the Company or (iii) any other person whose selection the Committee determines to be in the best interests of the Company, to whom an Award is made under the Plan. (h) "Shares" means the common stock, without par value, of the Company. 3. SHARES AVAILABLE FOR AWARDS Subject to adjustment as provided in Section 11 below, the aggregate number of Shares which may be awarded under the Plan shall be One Million (1,000,000) Shares. No more than 2 Two Hundred Thousand (200,000) Shares shall be the subject of Awards to any individual Participant in any one calendar year. Shares issuable under the Plan may consist of authorized and unissued Shares or treasury Shares. Any Shares issued by the Company through the assumption or substitution of outstanding grants previously made by an acquired corporation or entity shall not reduce the number of Shares available for Awards under the Plan. Any Shares issued by the Company through the conversion or substitution of outstanding grants previously made by Essef Corporation shall not reduce the number of Shares available for Awards under the Plan. If any Shares subject to any Award granted under the Plan are forfeited or if such Award otherwise terminates without the issuance of such Shares or payment of other consideration in lieu of such Shares, the Shares subject to such Award, to the extent of any such forfeiture or termination, shall again be available for grant under the Plan as if such Shares had not been subject to an Award. 4. ADMINISTRATION The Plan shall be administered by the Committee, which shall have full power and authority to interpret the Plan, to grant waivers of Plan restrictions and to adopt such rules, regulations and policies for carrying out the Plan as it may deem necessary or proper in order to further the purposes of the Plan. In particular, the Committee shall have the authority to (i) select Participants to receive Awards, (ii) determine the number and type of Awards to be granted, (iii) determine the terms and conditions, not inconsistent with the terms hereof, of any Award granted, (iv) interpret the terms and provisions of the Plan and any Award granted, (v) prescribe the form of any agreement or instrument executed in connection with any Award, and (vi) establish, amend and rescind such rules, regulations and policies for the administration of the Plan as it may deem advisable from time to time. 5. AWARDS The Committee shall determine the type(s) of Award(s) to be made to each Participant and shall set forth in the related Award Agreement the terms, conditions and limitations applicable to each Award. Awards may include but are not limited to those listed in this Section 5. Awards may be made singly, in combination, in tandem or in exchange for a previously granted Award, and also may be made in combination or in tandem with, in replacement of, or as alternatives to, grants or rights under any other employee plan of the Company, including the plan of any acquired entity. (a) STOCK OPTIONS. Awards may be made in the form of stock options, which may be incentive stock options within the meaning of Section 422 of the Code or nonstatutory stock options not intended to qualify under Section 422 of the Code. Incentive stock options may be granted only to employees. The aggregate Fair Market Value (determined at the time the option is granted) of Shares as to which incentive stock options are exercisable for the first time by a Participant during any calendar year (under the Plan and any other plan of the Company) shall not exceed $100,000 (or such other limit as may be required by the Code from time to time). The exercise price of stock options granted under the Plan shall be not less than 100% of Fair Market Value on the date of the grant. A stock option granted under the Plan shall be exercisable in whole or in such installments and at such times and upon such terms as may be determined by the Committee, provided that no 2 3 stock option shall be exercisable more than ten years after the date of grant. A participant may pay the exercise price of a stock option in cash, Shares or a combination of cash and Shares. The Committee shall establish appropriate procedures for accepting Shares in payment of the exercise price of a stock option and may impose such conditions as it deems appropriate on such use of Shares. (b) STOCK APPRECIATION RIGHTS. Awards may be granted in the form of stock appreciation rights ("SARs"). SARs shall entitle the recipient to receive a payment, in cash or Shares, equal to the appreciation in market value of a stated number of Shares from the price stated in the Award Agreement to the Fair Market Value on the date of exercise or surrender. SARs may be granted either separately or in conjunction with other Awards granted under the Plan. Any SAR related to a nonstatutory stock option may be granted at the same time such option is granted or any time thereafter before exercise or expiration of such option. Any SAR related to an incentive stock option must be granted at the same time such option is granted. Any SAR related to an option shall be exercisable only to the extent the related option is exercisable. In the case of any SAR related to any option, the SAR or applicable portion thereof shall terminate and no longer be exercisable upon the termination or exercise of the related option. Similarly, upon exercise of an SAR as to some or all of the Shares covered by a related option, the related option shall be canceled automatically to the extent of the SARs exercised, and such Shares shall not thereafter be eligible for grant. The Committee may impose such conditions or restrictions upon the exercise of any SAR as it shall deem appropriate. (c) RESTRICTED SHARES. Awards may be granted in the form of restricted Shares in such numbers and at such times as the Committee shall determine. Awards of restricted Shares shall be subject to such terms, conditions or restrictions as the Committee deems appropriate including, but not limited to, restrictions on transferability, requirements of continued employment, individual performance or financial performance of the Company. The period of vesting and forfeiture restrictions shall be established by the Committee at the time of grant, except that no restriction period shall be less than 12 months. During the period in which any restricted Shares are subject to forfeiture restrictions, the Committee may, in its discretion, grant to the Participant to whom such restricted Shares have been awarded, all or any of the rights of a shareholder with respect to such restricted Shares, including the right to vote such Shares and to receive dividends with respect to such Shares. (d) PERFORMANCE SHARES. Awards may be made in the form of Shares that are earned only after the attainment of predetermined performance targets as established by the Committee at the time an Award is made ("Performance Shares"). A performance target shall be based upon one or any combination of the following: (i) revenues of the Company; (ii) operating income of the Company; (iii) net income of the Company; (iv) earnings per Share; (v) the Company's return on equity; (vi) cash flow of the Company; (vii) Company shareholder total return; (viii) return on assets; (ix) return on investment; (x) asset turnover; (xi) liquidity; (xii) capitalization; (xiii) stock price; (xiv) expenses; (xv) operating profit and margin; (xvi) retained earnings; (xvii) market share; (xviii) sales to targeted customers; (xix) customer satisfaction; (xx) quality measures; (xxi) productivity; (xxii) safety measures; or (xxiii) educational and technical skills of employees. Performance targets may also be based on the attainment of levels of performance of the Company and/or any of its affiliates or divisions under one or more of the measures described above relative 3 4 to the performance of other businesses. The Committee shall be permitted to make adjustments when determining the attainment of a performance target to reflect extraordinary or nonrecurring items or events, or unusual nonrecurring gains or losses identified in the Company's financial statements, as long as any such adjustments are made in a manner consistent with Section 162(m) of the Code to the extent applicable. Awards of Performance Shares made to Participants subject to Section 162(m) of the Code are intended to qualify under Section 162(m) and provisions of such Awards shall be interpreted in a manner consistent with that intent to the extent appropriate. The foregoing provisions of this Section 5(d) also shall be applicable to Awards of restricted Shares made under Section 5(c) to the extent such Awards of restricted Shares are subject to the financial performance of the Company. At the end of the applicable performance period, Performance Shares shall be converted into Shares (or cash or a combination of Shares and cash, as set forth in the Award Agreement) and distributed to Participants based upon the applicable performance entitlement. Award payments made in cash rather than the issuance of Shares shall not, by reason of such payment in cash, result in additional Shares being available under the Plan. (e) STOCK AWARDS. Awards may be made in Shares or on a basis valued in whole or in part by reference to, or otherwise based upon, Shares. Share awards shall be subject to conditions established by the Committee and set forth in the Award Agreement. 6. PAYMENT OF AWARDS; DEFERRALS Payment of Awards may be made in the form of Shares, cash or a combination of Shares and cash and may include such restrictions as the Committee shall determine, including restrictions on transfer and forfeiture provisions. With Committee approval, payments may be deferred, either in the form of installments or a future lump sum payment. The Committee may permit Participants to elect to defer payments of some or all types of Awards in accordance with procedures established by the Committee to assure that such deferrals comply with applicable requirements of the Code including the capability to make further deferrals for payment after retirement. The Committee may also establish rules and procedures for the crediting of interest on deferred cash payments and dividend equivalents for deferred payments denominated in Shares. 7. TAX WITHHOLDING The Company shall have the authority to withhold, or to require a Participant to remit to the Company, prior to issuance or delivery of any Shares or cash relating to an Award made under the Plan, an amount sufficient to satisfy federal, state and local tax withholding requirements associated with any Award. In addition, the Company may, in its sole discretion, permit a Participant to satisfy any tax withholding requirements, in whole or in part, by (i) delivering to the Company Shares held by such Participant having a Fair Market Value equal to the amount of the tax or (ii) directing the Company to retain Shares having such Fair Market Value and otherwise issuable to the Participant under the Plan. 8. TERMINATION OF EMPLOYMENT If the employment of a Participant terminates for any reason, all unexercised, deferred and unpaid Awards shall be exercisable or paid in accordance with the applicable Award Agreement, 4 5 which may provide that the Committee may authorize, as it deems appropriate, the acceleration and/or continuation of all or any part of Awards granted prior to such termination. 9. NONASSIGNABILITY Except as may be otherwise provided in the relevant Award Agreement, no Award or any benefit under the Plan shall be assignable or transferable, or payable to or exercisable by, anyone other than the Participant to whom it was granted. 10. CHANGE IN CONTROL (a) In the event of a Change in Control (as defined below) of the Company, and except as the Board may expressly provide otherwise, (i) all stock options or SARs then outstanding shall become fully exercisable as of the date of the Change in Control, whether or not then otherwise exercisable, (ii) all restrictions and conditions of all Awards of restricted Shares then outstanding shall be deemed satisfied as of the date of the Change in Control, and (iii) all Awards of Performance Shares shall be deemed to have been fully earned as of the date of the Change in Control. (b) A "Change in Control" of the Company shall have occurred when any of the following events shall occur: (i) The Company is merged, consolidated or reorganized into or with another corporation or other legal person, and immediately after such merger, consolidation or reorganization less than a majority of the combined voting power of the then-outstanding securities of such corporation or person immediately after such transaction are held in the aggregate by the holders of Voting Stock (as that term is hereafter defined) of the Company immediately prior to such transaction; (ii) The Company sells all or substantially all of its assets to any other corporation or other legal person, less than a majority of the combined voting power of the then-outstanding securities of such corporation or person immediately after such sale are held in the aggregate by the holders of Voting Stock of the Company immediately prior to such sale; (iii) There is a report filed or required to be filed on Schedule 13D on Schedule 14D-1 (or any successor schedule, form or report), each as promulgated pursuant to the Exchange Act, disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the beneficial owner (as the term "beneficial owner, is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of securities representing 20% or more of the combined voting power of the then-outstanding securities entitled to vote generally in the election of directors of the Company ("Voting Stock"); (iv) The Company files a report or proxy statement with the Securities and Exchange Commission pursuant to the Exchange Act disclosing in response to Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) that a change in control of 5 6 the Company has or may have occurred or will or may occur in the future pursuant to any then-existing contract or transaction; or (v) If during any period of two consecutive years, individuals who at the beginning of any such period constitute the Directors of the Company cease for any reason to constitute at least a majority thereof, provided, however, that for purposes of this clause (v), each Director who is first elected, or first nominated for election by the Company's shareholders by a vote of at least two-thirds of the Directors of the Company (or a committee thereof) then still in office who were Directors of the Company at the beginning of any such period will be deemed to have been a Director of the Company at the beginning of such period. Notwithstanding the foregoing provisions of Section 10 (b)(iii) or (iv) hereof, unless otherwise determined in a specific case by majority vote of the Board, a "Change in Control" shall not be deemed to have occurred for purposes of the Plan solely because (i) the Company, (ii) an entity in which the Company directly or indirectly beneficially owns 50% or more of the voting securities or interest, or (iii) any Company-sponsored employee stock ownership plan or any other employee benefit plan of the Company, either files or becomes obligated to file a report or a proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) under the Exchange Act, disclosing beneficial ownership by it of shares of Voting Stock, whether in excess of 20% or otherwise, or because the Company reports that a change in control of the Company has or may have occurred or will or may occur in the future by reason of such beneficial ownership. 11. ADJUSTMENTS UPON CHANGES OF CAPITALIZATION In the event of any change in the outstanding Shares by reason of a reorganization, recapitalization, stock split, stock dividend, combination or exchange of shares, merger, consolidation or any change in the corporate structure or Shares of the Company, the number of Shares as to which Awards may be granted under the Plan, including limitations relating to incentive stock option Awards and maximum Awards to individual Participants, the number of Shares issuable pursuant to then outstanding Awards, and/or, if appropriate, the prices of Shares related to outstanding Awards, shall be appropriately and proportionately adjusted. 12. RIGHTS OF EMPLOYEES Nothing in the Plan shall interfere with or limit in any way the right of the Company or any subsidiary of the Company to terminate any Participant's employment at any time, nor confer upon any Participant any right to continued employment with the Company or any subsidiary of the Company. 13. AMENDMENT, SUSPENSION OR TERMINATION OF PLAN AND AWARDS The Board may amend, suspend or terminate the Plan at any time, provided that no such action shall be taken that would impair the rights under an outstanding Award without the Participant's consent. 6 7 The Board may amend the terms of any outstanding Award, prospectively or retroactively, but no such amendment shall impair the rights of any Participant without the Participant's consent and no such amendment shall have the effect, with respect to any employee subject to Section 162(m) of the Code, of increasing the amount of any Award from the amount that would otherwise be payable pursuant to the formula and/or goals previously established for such Participant. 14. GOVERNING LAW The Plan, together with all determinations and actions made or taken in connection therewith, to the extent not otherwise governed by the Code or other laws of the United States, shall be governed by the laws of the State of Ohio. 15. EFFECTIVE AND TERMINATION DATES The Plan shall become effective on the date it is approved by the shareholders of the Company. The Plan shall continue in effect until terminated by the Board, at which time all outstanding Awards shall remain outstanding in accordance with their applicable terms and conditions. 7 EX-10.2 7 EXHIBIT 10.2 1 Exhibit 10.2 EMPLOYMENT AGREEMENT Anthony & Sylvan Pools Corporation, an Ohio corporation (the "Company") and Stuart D. Neidus (the "Executive") agree as follows: 1. Employment and Duties. (a) The Company agrees to employ the Executive, and the Executive agrees to serve the Company, as the Company's Chief Executive Officer and Chief Financial Officer. The Executive shall report to the Company's Board of Directors and shall have such powers and duties as are customarily performed by Chief Executive and Chief Financial Officers of companies similar in size to the Company, together with such other duties, consistent with his positions as set forth above, as may be reasonably requested by the Board of Directors. (b) On a day-to-day basis, the Executive shall (i) devote substantially all of his working time to the business and affairs of the Company, acknowledging that the Executive is also employed as an executive officer of Essef Corporation ("Essef"). So long as it does not unreasonably interfere with his employment obligations to the Company hereunder, the Executive shall be entitled to attend to outside investments, and subject to prior approval of the Board of Directors, serve as a director of a corporation which does not compete with the Company (as provided in Section 10 hereof) or as a director, trustee or officer of or otherwise participate in educational, welfare, social, religious, charitable and civic organizations, and (ii) use his good faith efforts to advance the interests of the Company and to improve the value of the Company to its shareholders. 2. Term. The Company's employment of the Executive shall commence on September __, 1998 and expire on December 31, 2000. Unless 2 terminated as provided in Section 7 hereof, this Agreement shall be extended automatically as of each December 31 thereafter for one (1) additional year period with such modified terms as mutually agreed. 3. Compensation. (a) The Executive's annual base salary ("base salary") during the term of this Agreement shall be at least Two Hundred Twenty Thousand Dollars (USD $220,000), such base salary to be reviewed annually by the Compensation Committee of the Board of Directors or an authorized subcommittee thereof (the "Committee"). (b) In addition to the base salary, the Company shall pay the Executive a bonus targeted at sixty (60%) of his base salary for each year ("Target Bonus"), and the Committee shall determine the appropriate target earnings per share ("Targeted Earnings Per Share") or other performance measure for bonus purposes. There shall be no cap on bonus potential. Such bonus shall be determined and paid within thirty (30) days after the Company's audited financial statements become available. (c) Initial Options. (i) concurrent with the sale of shares of the Company to the public in an initial public offering and subject to the limitation in (iii) below, the Company hereby agrees to grant to the Executive options (the "Initial Options") to purchase One Hundred Thousand (100,000) shares of the Company's common stock (the "Shares") at the price and subject to the following terms and conditions. The Initial Options shall vest as of the date of sale of shares in the Company's initial public offering (the "Commencement Date"). (ii) The exercise price per Share for the Initial Options shall be the offering price to the public in the initial public offering. 2 3 (iii) Regardless of the fact that the Initial Options are deemed to vest on the Commencement Date, the Executive may exercise Initial Options only in the percentages and at the times set forth below: 0% prior to the first anniversary of the Commencement Date; 20% at any time after the first anniversary of the Commencement Date; 40% at any time after the second anniversary of the Commencement Date; 60% at any time after the third anniversary of the Commencement Date; 80% at any time after the fourth anniversary of the Commencement Date; 100% at any time after the fifth anniversary of the Commencement Date; (d) Taxes. If all or any of the amounts payable to the Executive under this Agreement (together with all other payments of cash or property, whether pursuant to this Agreement or otherwise, including, without limitation, the issuance of shares or options) constitutes "excess parachute payments" within the meaning of Section 280G of the Code that are subject to the excise tax imposed by Section 4999 of the Code (or any similar tax or assessment), the amounts payable hereunder shall be increased to the extent necessary to place the Executive in the same after-tax position as he would have been in had no such tax assessment been imposed on any such payment paid or payable to the Executive under this Agreement or any other payment that the Executive may receive in connection therewith. The determination of the amount of any such tax or assessment and the incremental payment required hereby in connection therewith shall be made by the accounting firm employed by the Executive within thirty (30) calendar days after such payment and said incremental payment shall be made within five (5) calendar days after determination has been made. If, after the date upon which the payment required by this Section 3(d) has been made, it is determined (pursuant to final 3 4 regulations or published rulings of the Internal Revenue Service, final judgment of a court of competent jurisdiction, Internal Revenue Service audit assessment, or otherwise) that the amount of excise or other similar taxes or assessments payable by the Executive is greater than the amount initially so determined, then the Company shall pay the Executive an amount equal to the sum of: (i) such additional excise or other taxes, plus (ii) any interest, fines and penalties resulting from such underpayment, plus (iii) an amount necessary to reimburse the Executive for any income, excise or other tax assessment payable by the Executive with respect to the amounts specified in (i) and (ii) above, and the reimbursement provided by this clause (iii), in the manner described above in this Section 3(c). Payment thereof shall be made within five (5) calendar days after the date of such subsequent determination. If, after the date upon which the payment required by this Section 3(c) has been made to the Executive, it is determined that the Executive is entitled to receive a refund of all or part of such payment, then the Executive shall pay to the Company all amounts received by the Executive as a refund of any such overpayment of excise or other taxes. 4. Benefits. During the term of this Agreement, the Executive and his eligible dependents shall be entitled to participate in and receive benefits under any stock option or profit-sharing plan, health, disability, medical insurance or other employee welfare or benefit plan or arrangement made generally available by the Company during the term of this Agreement to its executives and key management employees. 5. Car. During the term of this Agreement, the Company shall provide the Executive with an automobile and shall pay for operating expenses incurred in connection with the use of the automobile, including the costs of insurance, gas, maintenance and car phone. The costs associated with such automobile may be allocated between the Company and Essef. 4 5 6. Vacation. The Executive shall be entitled to the number of paid vacation days in each calendar year determined by the Board from time to time. 7. Disability or Death; Resignation; Termination for Cause; Other Terminations. (a) Disability or Death. If the Executive is incapacitated for a period of six (6) consecutive months so that he cannot perform his duties hereunder on a full-time basis, then either the Company or the Executive may give written notice to the other terminating the Executive's employment effective thirty (30) days thereafter (the "Disability Termination Date"). The Company shall continue to provide salary, medical coverage, disability and group life insurance to the Executive for one (1) year after the earlier of the Disability Termination Date or death. In the event of the Executive's disability or death any stock options that are not yet exercisable shall immediately become exercisable. The Executive or his estate may exercise any options held at the date of death or the Disability Termination Date for one (1) year after such date. In the event of death or disability, the Company shall pay to the Executive the prorated portion (through the applicable termination date) of the Executive's Target Bonus that would have been paid had the Executive been employed by the Company at the end of the fiscal year in which the applicable termination date occurred. Such Target Bonus shall be calculated according to actual Company results for the respective fiscal year and paid at the same time other Company bonuses are paid. Except as set forth below, if the Executive dies prior to the termination of his employment or if notice of termination for disability is given as provided above, the Company's obligations hereunder shall terminate as of the earlier of the Executive's death or the Disability Termination Date. (b) Resignation. If the Executive's employment is terminated by reason of his voluntary resignation, all of the Company's obligations hereunder shall terminate as of the termination date. All unexercised options for shares, if any, then outstanding, both vested and unvested, shall be automatically forfeited and canceled by the Company. (c) Termination for Cause. If the Company terminates the Executive's employment for cause (as defined below), all of the Company's obligations hereunder shall 5 6 immediately terminate as of the termination date. All unexercised stock options, both vested and unvested, shall be automatically forfeited and canceled by the Company. As used herein, "for cause" shall mean (i) gross misconduct by the Executive that is materially inconsistent with the terms hereof, or (ii) material failure by the Executive to perform his duties, either of which continues after written notice thereof and a fifteen (15) day chance to cure or (iii) the Executive's conviction for committing a felony. (d) Other Terminations. If the Company terminates the Executive's employment other than for cause (including failing to extend the term at the end of any year), both the Company's and the Executive's obligations hereunder shall immediately terminate as of the termination date; provided, however, that (i) any stock options that are not yet exercisable shall immediately become exercisable and the Executive may exercise within one (1) year from the date the Company delivers notice of termination (the "Termination Date") any options held by him on the Termination Date and (ii) the Company shall continue to provide salary and medical, group life and disability insurance (collectively, "insurance benefits") to the Executive until the later of December 31, 2000 or one (1) year after the Termination Date. In addition the Company shall pay the prorated portion (through the Termination Date) of the Executive's Target Bonus that would have been paid had the Executive been employed by the Company at the end of the year in which the Termination Date occurred. Such Target Bonus will be calculated according to actual Company results for the year and paid at the same time other Company bonuses are paid. 6 7 If (i) the Company materially changes the Executive's duties and responsibilities as set forth in Section 1 without his consent; or (ii) there occurs a "change in control" (as hereinafter defined) of the Company, then in any such event the Executive shall have the right to terminate his employment with the Company, but such termination shall not be considered a voluntary resignation or termination of such employment or of this Agreement by the Executive but rather a discharge of the Executive by the Company without "cause" under this Section 7(d). The term "change in control" means the first to occur of the following events: (i) when any "person" as defined in Section 3(a)(9) of the Exchange Act and as used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d) of the Exchange Act, but excluding the Company and any employee benefit plan sponsored or maintained by the Company (including any trustee of such plan acting as trustee), directly or indirectly, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act, as amended from time to time), of securities of the Company representing more than fifty percent (50%) of the combined voting power of the Company's then outstanding securities; or (ii) The completion of a transaction requiring shareholder approval for the acquisition of substantially all of the stock or assets of the Company by an entity other than the Company or any merger of the Company into another company and the Company is not the surviving company. Notwithstanding anything to the contrary contained in this Agreement, upon the occurrence of a "change of control" of the Company any stock options granted to the Executive shall immediately become exercisable by the Executive at any time. 7 8 8. Trade Secrets: Confidential and Proprietary Information. The Executive shall not at any time or in any manner, either directly or indirectly, divulge, disclose or communicate to any person, firm, company, corporation or business in any manner whatsoever any confidential information relating to the business of the Company, including without limitation, the Company's customer list, pricing policies, trade secrets, know-how, product designs, strategic plans and similar types of information. This Section 8 shall be interpreted with the Executive's role as Chief Executive and Chief Financial Officer and liaison with the securities markets and the investing public in general in mind. The foregoing restrictions shall not apply to the extent that such information (a) is obtainable in the public domain, (b) becomes obtainable in the public domain, except by reason of the breach by the Executive of the terms hereof, or (c) is required to be disclosed by rule of law or by order of a court or governmental body or agency. This Section 8 shall remain in full force and effect for a period of ten (10) years after expiration or termination of this Agreement for any reason. 9. Covenant Not to Compete. During the term of this Agreement and for a period of five (5) years thereafter the Executive will not, without the Company's prior written consent, directly or indirectly engage in, make any investment in or have any interest in any business in competition with the business of the Company; and the Executive will not advise, assist or render services either directly or indirectly to any person, firm, company, corporation or business other than the Company with reference to any business in competition with the business engaged in by the Company during the Executive's employment by the Company. Notwithstanding the foregoing, the ownership of securities of any business competing with the Company, if such securities are publicly traded on a national securities market and constitute less than five percent (5%) of the outstanding stock thereof, shall not constitute a violation of this provision. For 8 9 purposes of this Section 9, a business in competition with the Company shall mean any business engaged in the manufacture, design, installation processing, sale or distribution of products that are the same as or similar to those of the Company at any time during the term of this Agreement. 10. Notices. All notices, requests, demands and other communications made or given in connection with this Agreement shall be in writing and shall be deemed to have been duly given (a) if delivered, at the time delivered or (b) if mailed, at the time mailed at any general or branch United States Post Office enclosed in a registered or certified postage paid envelope addressed to the address of the respective parties as follows: To the Company: Anthony & Sylvan Pools Corporation 220 Park Drive Chardon, OH 44024 To the Executive: Stuart D. Neidus 7860 Sugarbush Lane Gates Mills, OH 44040 or to such other addresses as the party to whom notice is to be given may have previously furnished to the other party in writing in the manner set forth above, provided that notices of changes of address shall only be effective upon receipt. 11. Modification and Waivers. No provisions of this Agreement may be modified or discharged unless such modification or discharge is authorized by the Board of Directors and is agreed to in writing, signed by the Executive and by another executive officer of the Company. No waiver by either party hereto of any breach by the other party hereto or any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 9 10 12. Entire Agreement. This Agreement constitutes the entire agreement of the parties hereto relating to the subject matter hereof, and there are no written or oral terms or representations made by either party other than those contained herein. 13. Governing Law. The validity, interpretation, construction, performance and enforcement of this Agreement shall be governed by the laws of the State of Ohio. 14. Invalidity. The unenforceability or invalidity of any provision of this Agreement shall not affect the enforceability or validity of the balance of the Agreement. In the event that any such provision should be or becomes invalid for any reason, such provision shall remain effective to the maximum extent permissible, and the parties shall consult and agree on a legally acceptable modification giving effect to the commercial objectives of the unenforceable or invalid provision, and every other provision of this Agreement shall remain in full force and effect. 15. Successors. This Agreement shall inure to the benefit of, and be enforceable by, the parties' successors, representatives, executors, administrators or assignees. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on September ___, 1998. ANTHONY & SYLVAN POOLS CORPORATION By: - ----------------------------------- -------------------------------- Stuart D. Neidus 10 EX-10.3 8 EXHIBIT 10.3 1 Exhibit 10.3 EMPLOYMENT AGREEMENT -------------------- AGREEMENT effective as of September ___, 1998, between ANTHONY & SYLVAN POOLS CORPORATION (the "Company"), its successors and assigns, and HOWARD P. WERTMAN (the "Employee"). The Company agrees to employ the Employee as President of the Company, and the Employee agrees to serve the Company in such position, all in accordance with the terms and conditions set forth below. 1. EMPLOYMENT The term of this Agreement (the "Term") shall commence on the date hereof and terminate on December 31, 2000. Unless, at least thirty days prior to the end of the Term (whether the initial Term or as theretofore extended), the Company shall have given written notice to the Employee of its intention not to renew this Agreement, or the Employee shall have given written notice to the Company of his unwillingness to renew this Agreement or the employment of the Employee has otherwise been terminated during the Term, the Term shall automatically be extended for an additional year. 2. COMPENSATION The Employee will receive a base salary of $175,000.00, with annual review for so long as this Agreement is continued, at which times increases will be considered in good faith. In addition to the base salary, the Company shall pay the Employee a bonus targeted at fifty percent (50%) of his base salary each year ("Target Bonus"), and the Compensation Committee of the Company's Board of Directors shall determine the appropriate target measures or goals in connection with bonus compensation. There shall be no cap on bonus potential. Such bonus shall be determined and paid within thirty (30) days after the Company's audited financial statements become available. 3. BENEFITS During the term of this Agreement, the Employee and his eligible dependents shall be entitled to participate in and receive benefits under any profit-sharing plan, health, disability, medical insurance or other employee welfare or benefit plan or arrangement made generally available by the Company during the term of this Agreement to its executives and key management employees. 4. CAR During the term of this Agreement, the Company shall provide the Employee with an automobile of a type customary for executives in similar positions and shall pay for operating expenses incurred in connection with the use of the automobile, including the costs of insurance, gas, maintenance and car phone. 2 5. TRADE SECRETS: CONFIDENTIAL AND PROPRIETARY INFORMATION The Employee shall not at any time or in any manner, either directly or indirectly, divulge, disclose or communicate to any person, firm, company, corporation or business in any manner whatsoever any confidential information relating to the business of the Company, including without limitation, the Company's customer list, pricing policies, trade secrets, know-how, product designs, strategic plans and similar types of information. The foregoing restrictions shall not apply to the extent that such information (a) is obtainable in the public domain, (b) becomes obtainable in the public domain, except by reason of the breach by the Employee of the terms hereof, or (c) is required to be disclosed by rule of law or by order of a court or governmental body or agency. This Section 5 shall remain in full force and effect for a period of ten (10) years after expiration or termination of this Agreement for any reason. 6. COVENANT NOT TO COMPETE During the term of this Agreement and for a period of two (2) years thereafter, the Employee will not, without the Company's prior written consent, directly or indirectly engage in, make any investment in or have any interest in any business in competition with the business of the Company; and the Employee will not advise, assist or render services either directly or indirectly to any person, firm, company, corporation or business other than the Company with reference to any business in competition with the business engaged in by the Company during the Employee's employment by the Company. Notwithstanding the foregoing, the ownership of securities of any business competing with the Company, if such securities are publicly traded on a national securities market and constitute less than five percent (5%) of the outstanding stock thereof, shall not constitute a violation of this provision. For purposes of this Section 6, a business in competition with the Company shall mean any business engaged in the manufacture, design, installation, processing, sale or distribution of products that are the same as or similar to those of the Company at any time during the term of this Agreement. 7. TERMINATION OF CONTRACT It is agreed that subject to the provisions of Section 8 below, the Company may terminate the employment of the Employee at any time with or without cause by prior written notice to the Employee. 8. SEVERANCE AND ENTITLEMENT In the event the Company decides to terminate the employment of the Employee under the section entitled "TERMINATION OF CONTRACT" for any reason and/or at any time, for reasons other than "Good Cause" (as hereinafter defined), or determines not to renew this Agreement at the end of the Term (whether the initial Term or as theretofore extended), the Employee will be entitled to, in lieu of any and all other payments that may otherwise be due under this Agreement, (i) a termination allowance in an amount equal to (a) twelve months' salary at the then current rate of the Employee's pay paid by the Company consistent with the method used to pay salary prior to the termination and (b) the annual Target Bonus to which the Employee would be entitled if his targeted goals were attained for the fiscal year during which such termination occurs and the Employee were employed during such entire year, -2- 3 multiplied by a fraction the numerator of which is the number of days elapsed during the year through such date of termination and the denominator of which is 365, such Target Bonus paid at the same time other Company bonuses are paid, and (ii) a continuation of all medical and other employee benefits for the shorter of (a) twelve months following the effective date of the termination and (b) the effective date of coverage by similar plans of another employer. The termination allowance shall be paid by the Company as long as the Employee continues to be in compliance with Sections 5 and 6 above. Any stock options vested as of the date of such termination may be exercised by the Employee for up to three (3) months after the date that the Company delivers notice of such termination. In the event the Company terminates this Agreement for "Good Cause," which will be defined as the failure or refusal by the Employee to perform his assigned duties, failure to adhere to Company policy and/or the engaging by the Employee in misconduct injurious to the Company, the Employee will not be entitled to receive any termination allowance, continuation of benefits, or any other payments provided for in this Agreement, and any and all unexercised stock options held by the Employee, both vested and unvested, shall be automatically forfeited and cancelled by the Company. 9. NOTICE OF TERMINATION Any intended termination of the employment of the Employee by the Company or by the Employee shall be communicated by written notice of termination ("Notice of Termination") to the other party hereto in accordance with the section entitled "NOTICES" and shall state the grounds for termination. Any purported termination of the Employee's employment which is not effected pursuant to a Notice of Termination shall not be effective in discharging the Employee. 10. DEATH OR DISABILITY; RESIGNATION (a) DISABILITY OR DEATH. If the Employee is incapacitated for a period of three (3) consecutive months so that he cannot perform his duties hereunder on a full-time basis, then either the Company or the Employee may give written notice to the other terminating the Employee's employment effective thirty (30) days thereafter (the "Disability Termination Date"). The Company shall continue to provide salary, medical coverage, disability and group life insurance to the Employee for six (6) months after the earlier of the Disability Termination Date or date of death. In the event of the Employee's death, his estate may exercise any options vested and exercisable at the date of death for one (1) year after such death. In the event of disability, the Employee may exercise any options vested and exercisable at the Disability Termination Date for a period of one (1) year after the Disability Termination Date. Except as set forth herein, if the Employee dies prior to the termination of his employment or if notice of termination for disability is given as provided above, the Company's obligations hereunder shall terminate as of the earlier of the Employee's death or the Disability Termination Date. (b) RESIGNATION. If the Employee's employment is terminated by reason of his voluntary resignation, all of the Company's obligations hereunder shall terminate as of the termination date. All unexercised options, both vested and unvested, shall be automatically forfeited and cancelled by the Company. -3- 4 11. CHANGE IN CONTROL If there occurs a "change in control" (as hereinafter defined) of the Company, then in any such event the Employee shall have the right to exercise any options that are vested as of the date of such "change in control" for a period of three (3) months thereafter. The term "change in control" means the first to occur of the following events: (i) when any "person" as defined in Section 3(a)(9) of the Exchange Act and as used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d) of the Exchange Act, but excluding the Company and any employee benefit plan sponsored or maintained by the Company (including any trustee of such plan acting as trustee), directly or indirectly, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act, as amended from time to time), of securities of the Company representing more than fifty percent (50%) of the combined voting power of the Company's then outstanding securities; or (ii) The completion of a transaction requiring shareholder approval for the acquisition of substantially all of the stock or assets of the Company by an entity other than the Company or any merger of the Company into another company and the Company is not the surviving company. 12. AMENDMENT This Agreement may be amended at any time by a written agreement signed by the Company and the Employee. 13. WAIVERS The voluntary waiver by the Company or the Employee of any provision of this Agreement or any breach thereof does not entail a waiver of any other portion of this Agreement or this Agreement as a whole, or any subsequent breach of the same provision, and does not affect the validity of this Agreement. 14. GOVERNING LAW This Agreement, and all rights, duties and remedies hereunder shall be governed by and construed and interpreted in accordance with the procedural and substantive laws of the State of Ohio. 15. SEVERABILITY Should any portion of this Agreement be declared by a court of law having competent jurisdiction over the persons and subject matter of this Agreement to be invalid or unenforceable, the remainder of this Agreement shall remain enforceable and in full effect. In the event that any provision of this Agreement should be or becomes invalid for any reason, such provision shall remain effective to the maximum extent permissible, and the parties shall consult and agree on a legally acceptable modification giving effect to the commercial objectives of the unenforceable or invalid provision, and every other provision of this Agreement shall remain in full force and effect. -4- 5 16. NOTICES All notices or other communications hereunder shall be in writing and shall be made by hand delivery, facsimile or registered or certified mail, postage prepaid, return receipt requested, addressed as follows: IF TO THE COMPANY, TO: Anthony & Sylvan Pools Corporation 220 Park Drive Chardon, OH 44024 Attention: Chief Executive Officer IF TO THE EMPLOYEE, TO: Howard P. Wertman Anthony & Sylvan Pools Corporation 3739 Easton Road, Route 611 Doylestown, PA 18901 or at such other addresses as shall be furnished by the parties by like notice, and such notice or communication shall be deemed to have been given or made as of the date so delivered, if delivered personally; when receipt is acknowledged, if sent by facsimile; and five calendar days after so mailed, if sent by registered or certified mail. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first above written. ANTHONY & SYLVAN POOLS CORPORATION By: -------------------------------------- Stuart D. Neidus Its: Chief Executive Officer ------------------------------------------ Howard P. Wertman -5- EX-10.4 9 EXHIBIT 10.4 1 Exhibit 10.4 EMPLOYMENT AGREEMENT -------------------- AGREEMENT effective as of September ___, 1998, between ANTHONY & SYLVAN POOLS CORPORATION (the "Company"), its successors and assigns, and RICHARD M. KELSO (the "Employee"). The Company agrees to employ the Employee as Executive Vice President of the Company, and the Employee agrees to serve the Company in such position, all in accordance with the terms and conditions set forth below. 1. EMPLOYMENT The term of this Agreement (the "Term") shall commence on the date hereof and terminate on December 31, 2000. Unless, at least thirty days prior to the end of the Term (whether the initial Term or as theretofore extended), the Company shall have given written notice to the Employee of its intention not to renew this Agreement, or the Employee shall have given written notice to the Company of his unwillingness to renew this Agreement or the employment of the Employee has otherwise been terminated during the Term, the Term shall automatically be extended for an additional year. 2. COMPENSATION The Employee will receive a base salary of $137,500.00, with annual review for so long as this Agreement is continued, at which times increases will be considered in good faith. In addition to the base salary, the Company shall pay the Employee a bonus targeted at fifty percent (50%) of his base salary each year ("Target Bonus"), and the Compensation Committee of the Company's Board of Directors shall determine the appropriate target measures or goals in connection with bonus compensation. There shall be no cap on bonus potential. Such bonus shall be determined and paid within thirty (30) days after the Company's audited financial statements become available. 3. BENEFITS During the term of this Agreement, the Employee and his eligible dependents shall be entitled to participate in and receive benefits under any profit-sharing plan, health, disability, medical insurance or other employee welfare or benefit plan or arrangement made generally available by the Company during the term of this Agreement to its executives and key management employees. 4. CAR During the term of this Agreement, the Company shall provide the Employee with an automobile of a type customary for executives in similar positions and shall pay for operating expenses incurred in connection with the use of the automobile, including the costs of insurance, gas, maintenance and car phone. 2 5. TRADE SECRETS: CONFIDENTIAL AND PROPRIETARY INFORMATION The Employee shall not at any time or in any manner, either directly or indirectly, divulge, disclose or communicate to any person, firm, company, corporation or business in any manner whatsoever any confidential information relating to the business of the Company, including without limitation, the Company's customer list, pricing policies, trade secrets, know-how, product designs, strategic plans and similar types of information. The foregoing restrictions shall not apply to the extent that such information (a) is obtainable in the public domain, (b) becomes obtainable in the public domain, except by reason of the breach by the Employee of the terms hereof, or (c) is required to be disclosed by rule of law or by order of a court or governmental body or agency. This Section 5 shall remain in full force and effect for a period of ten (10) years after expiration or termination of this Agreement for any reason. 6. COVENANT NOT TO COMPETE During the term of this Agreement and for a period of two (2) years thereafter, the Employee will not, without the Company's prior written consent, directly or indirectly engage in, make any investment in or have any interest in any business in competition with the business of the Company; and the Employee will not advise, assist or render services either directly or indirectly to any person, firm, company, corporation or business other than the Company with reference to any business in competition with the business engaged in by the Company during the Employee's employment by the Company. Notwithstanding the foregoing, the ownership of securities of any business competing with the Company, if such securities are publicly traded on a national securities market and constitute less than five percent (5%) of the outstanding stock thereof, shall not constitute a violation of this provision. For purposes of this Section 6, a business in competition with the Company shall mean any business engaged in the manufacture, design, installation, processing, sale or distribution of products that are the same as or similar to those of the Company at any time during the term of this Agreement. 7. TERMINATION OF CONTRACT It is agreed that subject to the provisions of Section 8 below, the Company may terminate the employment of the Employee at any time with or without cause by prior written notice to the Employee. 8. SEVERANCE AND ENTITLEMENT In the event the Company decides to terminate the employment of the Employee under the section entitled "TERMINATION OF CONTRACT" for any reason and/or at any time, for reasons other than "Good Cause" (as hereinafter defined), or determines not to renew this Agreement at the end of the Term (whether the initial Term or as theretofore extended), the Employee will be entitled to, in lieu of any and all other payments that may otherwise be due under this Agreement, (i) a termination allowance in an amount equal to (a) twelve months' salary at the then current rate of the Employee's pay paid by the Company consistent with the method used to pay salary prior to the termination and (b) the annual Target Bonus to which the Employee would be entitled if his targeted goals were attained for the fiscal year during which such termination occurs and the Employee were employed during such entire year, multiplied by a fraction the numerator of which is the number of days elapsed during the year through such date of termination and the denominator of which is 365, such Target Bonus paid at the same time other Company bonuses are paid, and (ii) a continuation of all medical and other employee benefits for the shorter of (a) twelve months following the effective date of the termination and (b) the effective date of coverage by similar plans of another employer. The termination allowance shall be paid by the Company as long as the Employee continues to be in compliance with Sections 5 and 6 above. Any stock options vested as of the date of such termination may be exercised by the Employee for up to three (3) months after the date that the Company delivers notice of such termination. In the event the Company terminates this Agreement for "Good Cause," which will be defined as the failure or refusal by the Employee to perform his assigned duties, failure to adhere to Company policy and/or the engaging by the Employee in misconduct injurious to the Company, the Employee will not be entitled to receive any termination allowance, continuation of benefits, or any other payments provided for in this Agreement, and any and all unexercised stock options held by the Employee, both vested and unvested, shall be automatically forfeited and cancelled by the Company. -2- 3 9. NOTICE OF TERMINATION Any intended termination of the employment of the Employee by the Company or by the Employee shall be communicated by written notice of termination ("Notice of Termination") to the other party hereto in accordance with the section entitled "NOTICES" and shall state the grounds for termination. Any purported termination of the Employee's employment which is not effected pursuant to a Notice of Termination shall not be effective in discharging the Employee. 10. DEATH OR DISABILITY; RESIGNATION (a) DISABILITY OR DEATH. If the Employee is incapacitated for a period of three (3) consecutive months so that he cannot perform his duties hereunder on a full-time basis, then either the Company or the Employee may give written notice to the other terminating the Employee's employment effective thirty (30) days thereafter (the "Disability Termination Date"). The Company shall continue to provide salary, medical coverage, disability and group life insurance to the Employee for six (6) months after the earlier of the Disability Termination Date or date of death. In the event of the Employee's death, his estate may exercise any options vested and exercisable at the date of death for one (1) year after such death. In the event of disability, the Employee may exercise any options vested and exercisable at the Disability Termination Date for a period of one (1) year after the Disability Termination Date. Except as set forth herein, if the Employee dies prior to the termination of his employment or if notice of termination for disability is given as provided above, the Company's obligations hereunder shall terminate as of the earlier of the Employee's death or the Disability Termination Date. (b) RESIGNATION. If the Employee's employment is terminated by reason of his voluntary resignation, all of the Company's obligations hereunder shall terminate as of the termination date. All unexercised options, both vested and unvested, shall be automatically forfeited and cancelled by the Company. 11. CHANGE IN CONTROL If there occurs a "change in control" (as hereinafter defined) of the Company, then in any such event the Employee shall have the right to exercise any options that are vested as of the date of such "change in control" for a period of three (3) months thereafter. The term "change in control" means the first to occur of the following events: (i) when any "person" as defined in Section 3(a)(9) of the Exchange Act and as used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d) of the Exchange Act, but excluding the Company and any employee benefit plan sponsored or maintained by the Company (including any trustee of such plan acting as trustee), directly or indirectly, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act, as amended from time to time), of securities of the Company representing more than fifty percent (50%) of the combined voting power of the Company's then outstanding securities; or (ii) The completion of a transaction requiring shareholder approval for the acquisition of substantially all of the stock or assets of the Company by an entity other than the Company or any merger of the Company into another company and the Company is not the surviving company. 12. AMENDMENT This Agreement may be amended at any time by a written agreement signed by the Company and the Employee. 13. WAIVERS The voluntary waiver by the Company or the Employee of any provision of this Agreement or any breach thereof does not entail a waiver of any other portion of this Agreement or this Agreement as a whole, or any subsequent breach of the same provision, and does not affect the validity of this Agreement. 14. GOVERNING LAW This Agreement, and all rights, duties and remedies hereunder shall be governed by and construed and interpreted in accordance with the procedural and substantive laws of the State of Ohio. 15. SEVERABILITY Should any portion of this Agreement be declared by a court of law having competent jurisdiction over the persons and subject matter of this Agreement to be invalid or unenforceable, the remainder of this Agreement shall remain enforceable and in full effect. In the event that any provision of this Agreement should be or becomes invalid for any reason, such provision shall remain effective to the maximum extent permissible, and the parties shall consult and agree on a legally acceptable modification giving effect to the commercial objectives of the unenforceable or invalid provision, and every other provision of this Agreement shall remain in full force and effect. -3- 4 16. NOTICES All notices or other communications hereunder shall be in writing and shall be made by hand delivery, facsimile or registered or certified mail, postage prepaid, return receipt requested, addressed as follows: IF TO THE COMPANY, TO: Anthony & Sylvan Pools Corporation 220 Park Drive Chardon, OH 44024 Attention: Chief Executive Officer IF TO THE EMPLOYEE, TO: Richard M. Kelso Anthony & Sylvan Pools Corporation 3739 Easton Road, Route 611 Doylestown, PA 18901 or at such other addresses as shall be furnished by the parties by like notice, and such notice or communication shall be deemed to have been given or made as of the date so delivered, if delivered personally; when receipt is acknowledged, if sent by facsimile; and five calendar days after so mailed, if sent by registered or certified mail. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first above written. ANTHONY & SYLVAN POOLS CORPORATION By: -------------------------------------- Stuart D. Neidus Its: Chief Executive Officer ------------------------------------------ Richard M. Kelso -4- EX-10.5 10 EXHIBIT 10.5 1 Exhibit 10.5 INDEMNIFICATION AGREEMENT ------------------------- This Agreement, made as of this _____ day of __________, 1998, between Anthony & Sylvan Pools Corporation, an Ohio corporation, (the "Company") and [____________________], a director, officer or representative (as hereinafter defined) of the Company (the "Indemnitee"); The Company and the Indemnitee are each aware of the exposure to litigation of officers, directors and representatives of the Company as such persons exercise their duties to the Company; The Company and the Indemnitee are also aware of conditions in the insurance industry that have affected and may continue to affect the Company's ability to obtain appropriate directors' and officers' liability insurance on an economically acceptable basis; The Company desires to continue to benefit from the services of highly qualified, experienced and otherwise competent persons such as the Indemnitee; and The Indemnitee desires to serve or to continue to serve the Company as a director or an officer, or as a director, officer or trustee of another corporation, joint venture, trust or other enterprise in which the Company has a direct or indirect ownership interest, for so long as the Company continues to provide on an acceptable basis adequate and reliable indemnification against certain liabilities and expenses that may be incurred by the Indemnitee. In consideration of the foregoing premises and the mutual covenants herein contained, the parties hereto agree as follows: 1. INDEMNIFICATION Subject to the terms of this Agreement, the Company shall indemnify the Indemnitee with respect to his activities as a director or officer of the Company and/or as a person who is serving or has served on behalf of the Company ("representative") as a director, officer, or trustee of another corporation, joint venture, trust or other enterprise, domestic or foreign, in which the Company has a direct or indirect ownership interest (an "affiliated entity") against expenses (including, without limitation, attorneys' fees, judgments, fines, and amounts paid in settlement) actually and reasonably incurred by him or her ("Expenses") in connection with any claim against Indemnitee which is the subject of any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, investigative or otherwise and whether formal or informal (a "Proceeding"), to which Indemnitee was, is, or is threatened to be made a party by reason of facts which include Indemnitee's being or having been such a director, officer or representative, to the extent of the highest and most advantageous to the Indemnitee, as determined by the Indemnitee, of one or any combination of the following: (a) The benefits provided by the Company's Regulations in effect on the date hereof, a copy of the relevant portions of which are attached hereto as Exhibit I; 2 (b) The benefits provided by the Articles of Incorporation, Regulations, or Bylaws or their equivalent of the Company in effect at the time Expenses are incurred by Indemnitee; (c) The benefits allowable under Ohio law in effect at the date hereof; (d) The benefits allowable under the law of the jurisdiction under which the Company exists at the time Expenses are incurred by the Indemnitee; (e) The benefits available under liability insurance obtained by the Company; (f) The benefits which would have been available to the Indemnitee under the [policy name] issued by [name of insurance company] on __________________, 1998, which is designated as policy number [___________], a copy of which is attached as Exhibit II hereto; had such policy continued in effect and unamended at the time Expenses are incurred by the Indemnitee; and (g) Such other benefits as are or may be otherwise available to Indemnitee. Combination of two or more of the benefits provided by (a) through (g) shall be available to the extent that the Applicable Document, as hereafter defined, does not require that the benefits provided therein be exclusive of other benefits. The document or law providing for the benefits listed in items (a) through (g) above is called the "Applicable Document" in this Agreement. Company hereby undertakes to use its best efforts to assist Indemnitee, in all proper and legal ways, to obtain the benefits selected by Indemnitee under items (a) through (g) above. For purposes of this Agreement, references to "other enterprises" shall include employee benefit plans for employees of the Company or of any affiliated entity without regard to ownership of such plans; references to "fines" shall include any excise taxes assessed on the Indemnitee with respect to any employee benefit plan. References to "serving on behalf of the Company" shall include any service as a director, officer, employee or agent of the Company which imposes duties on, or involves services by, the Indemnitee with respect to an employee benefit plan, its participants or beneficiaries. References to the masculine shall include the feminine; references to the singular shall include the plural and vice versa. If the Indemnitee acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, he shall be deemed to have acted in a manner consistent with the standards required for indemnification by the Company under the Applicable Documents. 2. INSURANCE The Company shall maintain directors' and officers' liability insurance for so long as Indemnitee's services are covered hereunder, provided and only to the extent that such insurance is available in amounts and on terms and conditions determined by the Company to be acceptable. However, the Company agrees that the provisions of this agreement shall remain in 2 3 effect regardless of whether liability or other insurance coverage is at any time obtained or retained by the Company, except that any payments in fact made to Indemnitee under an insurance policy obtained or retained by the Company shall reduce the obligation of the Company to make payments hereunder by the amount of the payments made under any such insurance policy. 3. PAYMENT OF EXPENSES At Indemnitee's request, the Company shall pay the Expenses as and when incurred by Indemnitee, but only after receipt of written notice pursuant to Section 5 of this agreement and an undertaking in the form of Exhibit III attached hereto by or on behalf of Indemnitee to repay such amounts so paid on Indemnitee's behalf if it shall ultimately be determined under the Applicable Document that Indemnitee is not entitled to be indemnified by the Company for such Expenses. The portion of Expenses that represents attorneys' fees and other costs incurred in defending any Proceeding shall be paid by the Company within thirty (30) days of the Company's receipt of such request, together with reasonable documentation (consistent, in the case of attorneys' fees, with Company practice in payment of legal fees for outside counsel generally) evidencing the amount and nature of such Expenses, subject to its having received such a notice and undertaking. 4. ADDITIONAL RIGHTS The indemnification provided in this Agreement shall not be exclusive of any other indemnification or right to which Indemnitee may be entitled and shall continue after Indemnitee has ceased to occupy a position as an officer, director or representative as described in Paragraph 1 above with respect to Proceedings relating to or arising out of Indemnitee's acts or omissions during his service in such position. 5. NOTICE TO COMPANY Indemnitee shall provide to the Company prompt written notice of any Proceeding brought, threatened, asserted or commenced against Indemnitee with respect to which Indemnitee may assert a right to indemnification hereunder, provided that failure to provide such notice shall not in any way limit Indemnitee's rights under this Agreement. 6. COOPERATION IN DEFENSE AND SETTLEMENT Indemnitee shall not make any admission or effect any settlement of any Proceeding without the Company's written consent unless Indemnitee shall have determined to undertake his own defense in such matter and has waived the benefits of this Agreement. The Company shall not settle any Proceeding to which Indemnitee is a party in any manner which would impose any Expense on Indemnitee without his written consent. Neither Indemnitee nor the Company will unreasonably withhold consent to any proposed settlement. Indemnitee and the Company shall cooperate to the extent reasonably possible with each other and with the Company's insurers, in attempts to defend and/or settle such Proceeding. 3 4 7. ASSUMPTION OF DEFENSE Except as otherwise provided below, to the extent that it may wish, the Company jointly with any other indemnifying party similarly notified will be entitled to assume Indemnitee's defense in any Proceeding, with counsel mutually satisfactory to Indemnitee and the Company. After notice from the Company to Indemnitee of the Company's election to assume such defense, the Company will not be liable to Indemnitee under this Agreement for Expenses subsequently incurred by Indemnitee in connection with the defense thereof other than reasonable costs of investigation or as otherwise provided below. Indemnitee shall have the right to employ counsel in such Proceeding, but the fees and expenses of such counsel incurred after notice from the Company of its assumption of the defense thereof shall be at Indemnitee's expense unless: (a) The employment of counsel by Indemnitee has been authorized by the Company; (b) Counsel employed by the Company initially is unacceptable or later becomes unacceptable to Indemnitee and such unacceptability is reasonable under then existing circumstances; (c) Indemnitee shall have reasonably concluded that there may be a conflict of interest between Indemnitee and the Company in the conduct of the defense of such Proceeding; or (d) The Company shall not have employed counsel promptly to assume the defense of such Proceeding. In each of these cases the fees and expenses of counsel shall be at the expense of the Company and subject to payment pursuant to this Agreement. The Company shall not be entitled to assume the defense of Indemnitee in any Proceeding brought by or on behalf of the Company or as to which Indemnitee shall have made either of the conclusions provided for in clauses (b) or (c) above. 8. ENFORCEMENT In the event that any dispute or controversy shall arise under this Agreement between Indemnitee and the Company with respect to whether the Indemnitee is entitled to indemnification in connection with any Proceeding or with respect to the amount of Expenses incurred, then with respect to each such dispute or controversy Indemnitee may seek to enforce the Agreement through legal action or, at Indemnitee's sole option and written request, through arbitration. If arbitration is requested, such dispute or controversy shall be submitted by the parties to binding arbitration in the City of Cleveland, State of Ohio, before a single arbitrator agreeable to both parties. If the parties cannot agree on a designated arbitrator within 15 days after arbitration is requested in writing by Indemnitee, the arbitration shall proceed in the City of Cleveland, State of Ohio, before an arbitrator appointed by the American Arbitration Association. In either case, the arbitration proceeding shall commence promptly under the rules then in effect of that Association. The arbitrator agreed to by the parties or appointed by that 4 5 Association shall be an attorney other than an attorney who has been or is associated with a firm having associated with it an attorney who has been retained by or performed services for the Company or Indemnitee at any time during the five years preceding the commencement of arbitration. The award shall be rendered in such form that judgment may be entered thereon in any court having jurisdiction thereof. The prevailing party shall be entitled to prompt reimbursement of any costs and expenses (including, without limitation, reasonable attorneys' fees) incurred in connection with such legal action or arbitration; provided that Indemnitee shall not be obligated to reimburse the Company unless the arbitrator or court which resolves the dispute determines that Indemnitee acted in bad faith in bringing such action or arbitration. 9. EXCLUSIONS Notwithstanding the scope of indemnification which may be available to Indemnitee from time to time under any Applicable Document, no indemnification, reimbursement or payment shall be required of the Company hereunder with respect to: (a) Any claim or any part thereof as to which Indemnitee shall have been adjudged by a court of competent jurisdiction from which no appeal is or can be taken to have acted in willful misfeasance, or willful disregard of his duties, except to the extent that such court shall determine upon application that, despite the adjudication of liability, but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such expenses as the court shall deem proper; (b) Any claim or any part thereof arising under Section 16(b) of the Securities Exchange Act of 1934 pursuant to which Indemnitee shall be obligated to pay any penalty, fine, settlement or judgment; (c) Any obligation of Indemnitee based upon or attributable to the Indemnitee gaining in fact any personal gain, profit or advantage to which he was not entitled; or (d) Any Proceeding initiated by Indemnitee without the consent or authorization of the Board of Directors of the Company, provided that this exclusion shall not apply with respect to any claims brought by Indemnitee to enforce his rights under this Agreement or in any Proceeding initiated by another person or entity whether or not such claims were brought by Indemnitee against a person or entity who was otherwise a party to such Proceeding. Nothing in this Section 9 shall eliminate or diminish the Company's obligations to advance that portion of Indemnitee's Expenses which represent attorneys' fees and other costs incurred in defending any Proceeding pursuant to Section 3 of this Agreement. 10. EXTRAORDINARY TRANSACTIONS The Company covenants and agrees that, in the event of any merger, consolidation or reorganization in which the Company is not the surviving entity, any sale of all or substantially 5 6 all of the assets of the Company or any liquidation of the Company (each such event is hereinafter referred to as an "extraordinary transaction"), the Company shall: (a) Have the obligations of the Company under this Agreement expressly assumed by the survivor, purchaser or successor, as the case may be, in such extraordinary transaction; or (b) Otherwise adequately provide for the satisfaction of the Company's obligations under this Agreement, in a manner acceptable to Indemnitee. 11. NO PERSONAL LIABILITY Indemnitee agrees that neither the directors nor any officer, employee, representative or agent of the Company shall be personally liable for the satisfaction of the Company's obligations under this Agreement, and Indemnitee shall look solely to the assets of the Company for satisfaction of any claims hereunder. 12. SEVERABILITY If any provision, phrase, or other portion of this Agreement should be determined by any court of competent jurisdiction to be invalid, illegal or unenforceable, in whole or in part, and such determination should become final, such provision, phrase or other portion shall be deemed to be severed or limited, but only to the extent required to render the remaining provisions and portions of the Agreement enforceable, and the Agreement as thus amended shall be enforced to give effect to the intention of the parties insofar as that is possible. 13. SUBROGATION In the event of any payment under this Agreement, the Company shall be subrogated to the extent thereof to all rights to indemnification or reimbursement against any insurer or other entity or person vested in the Indemnitee, who shall execute all instruments and take all other actions as shall be reasonably necessary for the Company to enforce such rights. 14. GOVERNING LAW The parties hereto agree that this Agreement shall be construed and enforced in accordance with and governed by the laws of the State of Ohio. 15. NOTICES All notices, requests, demands and other communications hereunder shall be in writing and shall be considered to have been duly given if delivered by hand and receipted for by the party to whom the notice, request, demand or other communication shall have been directed, or mailed by certified mail, return receipt requested, with postage prepaid: 6 7 (a) If to Company, to: Anthony & Sylvan Pools Corporation c/o Essef Corporation 220 Park Drive Chardon, Ohio 44024 Attention: Chief Executive Officer (b) If to Indemnitee, to: [ ] ---------------------------------- [ ] ---------------------------------- [ ] ---------------------------------- or to such other or further address as shall be designated from time to time by the Indemnitee or the Company to the other. 16. TERMINATION This Agreement may be terminated by either party upon not less than sixty (60) days prior written notice delivered to the other party, but termination shall not in any way diminish the obligations of Company hereunder with respect to Indemnitee's activities prior to the effective date of termination, provided that this Agreement shall terminate automatically and be void ab initio if the shareholders of the Company have not by _____________________ voted to grant the Company the authority to enter into and perform its obligations hereunder. 17. AMENDMENTS AND BINDING EFFECT This Agreement and the rights and duties of Indemnitee and the Company hereunder may not be amended, modified or terminated except by written instrument signed and delivered by the parties hereto. This Agreement is and shall be binding upon and shall inure to the benefits of the parties thereto and their respective heirs, executors, administrators, successors and assigns. IN WITNESS WHEREOF, the undersigned have executed this Agreement in triplicate as of the date first above written. INDEMNITEE Anthony & Sylvan Pools Corporation By: - -------------------------------------- ----------------------------- [ ] Name: -------------------------- ---------------------------- Title: Director, [ ] Title: -------------------- --------------------------- 7 8 EXHIBIT I FROM THE CODE OF REGULATIONS FOR ANTHONY & SYLVAN POOLS CORPORATION: Section 33. Indemnification The Corporation shall indemnify any director or officer or any former director or officer of the Corporation or any person who is or has served at the request of the Corporation as a director, officer or trustee of another corporation, joint venture, trust or other enterprise (and his or her heirs, executors and administrators) against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement, actually and reasonably incurred by him or her by reason of the fact that he or she is or was such director, officer or trustee in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative to the full extent and according to the procedures and requirements set forth in the Ohio General Corporation Law as the same may be in effect from time to time. The indemnification provided for herein shall not be deemed to restrict the right of the Corporation to indemnify employees, agents and others as permitted by such Law. 8 9 EXHIBIT II [ATTACH COPY OF DIRECTOR AND OFFICER INSURANCE POLICY] 9 10 EXHIBIT III [UNDERTAKING] ___[date]___ Anthony & Sylvan Pools Corporation C/o Essef Corporation 220 Park Drive Chardon, Ohio 44024 Re: Indemnification Agreement Undertaking ------------------------------------- - ---------------------: As required by Section 3 of the Indemnification Agreement dated __________, 1998 that I entered into with Anthony & Sylvan Pools Corporation (the "Company"), I hereby agree to repay to the Company any and all amounts paid by it on my behalf if it shall ultimately be determined under the Applicable Documents (as defined in the Indemnification Agreement) that I am not entitled to be indemnified by the Company for such amounts. ---------------------- [Name of Director] 10 EX-10.6 11 EXHIBIT 10.6 1 EXHIBIT 10.6 REVOLVING CREDIT PROMISSORY NOTE _____________________, 1998 FOR VALUE RECEIVED, ANTHONY & SYLVAN POOLS CORPORATION, an Ohio Corporation (the "Maker"), unconditionally promises to pay to the order of ESSEF CORPORATION, an Ohio corporation ("Lender"), at 220 Park Drive, Chardon, Ohio 44022, or at such other place as the holder hereof may direct in writing, the principal then outstanding as shown on the Schedule of Advances and Payments of Principal attached hereto and made a part hereof, with interest on the balance of principal outstanding from time to time from the date hereof at a variable rate per annum equal to the "Incremental Borrowing Rate" of the Lender, as in effect from time to time, until the entire principal balance is paid in full. For purposes hereof, the term "Incremental Borrowing Rate" shall mean the sum of (a) the per annum rate then in effect for advances to the Lender under its Credit Agreement dated as of April 28, 1997, as amended, among the Lender, National City Bank, in its individual capacity and as Administrative Agent, as such Credit Agreement is amended and in effect from time to time, or if such Credit Agreement shall no longer be in effect then the rate of interest then charged for advances under any replacement revolving credit agreement of the Lender; plus (b) one-quarter of one percent (.25%). For purposes hereof, the term "Spinoff" shall mean the distribution by Lender to its shareholders, pursuant to a two-step tax free spinoff under Internal Revenue Code Section 355, of all of the common shares of Maker which Lender owns. All amounts payable under this Note shall be payable without relief from valuation and appraisement laws, and with all collection costs and attorneys' fees. Interest accruing during each calendar month shall be due and payable monthly, on or before the fifth (5th) day of the next succeeding calendar month, commencing on ______________ 5, 199_, and continuing thereafter until the entire unpaid principal balance of this Note is paid in full. All payments, as received, shall be applied first to the payment of interest accrued to the date of receipt of payment and the balance, if any, shall be applied to principal. The principal of this Note, and accrued, unpaid interest thereon, shall be due and payable on demand, which shall occur no later than the date of the consummation of the Spinoff. The principal of this Note may be prepaid in whole or in part without premium or penalty. All payments of principal and interest shall be made in lawful money of the United States of America and in immediately available funds. Interest shall be calculated on the basis that an entire year's interest is earned in 360 days. If any payment falls due on a day on which the holder is not generally open for the conduct of its business, the due date thereof shall be extended 2 to the next succeeding day on which the holder is so open for business and interest will be payable at the rate stated herein in respect of such extension. Maker and endorser(s), jointly and severally, waive demand and presentment for payment, protest, notice of protest and notice of nonpayment or dishonor of this Note and each of them consents to all extensions of the time of payment thereof. This Note evidences the obligation of Maker to repay any loan advances made by Lender from time to time pursuant to the terms of a credit facility between Lender and Maker. At Lender's sole discretion, amounts may be borrowed, repaid, and reborrowed under this Note from time to time prior to the Maturity Date. Maker's principal indebtedness on this Note at any particular time shall be represented by the total of all loan advances made to such time, less all principal payments made to such time. Maker and all endorsers hereby authorize Lender and any holder of this Note to make notations on the attached Schedule of Advances and Payments of Principal of all advances made to Maker hereunder and all payments of principal. Upon default in the payment of any installment of interest due under this Note, which default shall remain uncured for a period of ten (10) days from the date such installment is due, or at any time thereafter during the continuance of such default, Lender shall be entitled by written notice to Maker to declare the entire unpaid balance of principal and interest on this Note to be immediately due and payable, whereupon the same shall become and be immediately due and payable. Signed and delivered as of the _____ day of __________________, 19__. ANTHONY & SYLVAN POOLS CORPORATION By: ____________________________ Name: __________________________ Title:__________________________ 2 3 SCHEDULE OF ADVANCES AND PAYMENTS OF PRINCIPAL
Unpaid Amount of Principal Amount of Principal Balance Notation Date Advance Paid of Note Made By: ______ _________ _________ _________ ________ ______ _________ _________ _________ ________ ______ _________ _________ _________ ________ ______ _________ _________ _________ ________ ______ _________ _________ _________ ________ ______ _________ _________ _________ ________ ______ _________ _________ _________ ________ ______ _________ _________ _________ ________ ______ _________ _________ _________ ________ ______ _________ _________ _________ ________ ______ _________ _________ _________ ________ ______ _________ _________ _________ ________ ______ _________ _________ _________ ________ ______ _________ _________ _________ ________ ______ _________ _________ _________ ________
This is the attached Schedule of Advances and Payments of Principal referred to in the Revolving Credit Promissory Note dated ____________________, made by Anthony & Sylvan Pools Corporation to the order of Essef Corporation. Anthony & Sylvan Pools Corporation By: _______________________________ Name: _____________________________ Title: ____________________________ EX-10.7 12 EXHIBIT 10.7 1 Exhibit 10.7 COMPANY INDEMNIFICATION AGREEMENT This Company Indemnification Agreement ("Agreement") is dated as of the _____ day of _______________, 1998, by and between ESSEF CORPORATION, an Ohio corporation ("Essef") and ANTHONY & SYLVAN POOLS CORPORATION, an Ohio corporation ("A&S"). RECITALS WHEREAS, Essef has numerous direct and indirect subsidiaries, and it provides or causes others to provide certain financial, management and other services to those subsidiaries; WHEREAS, as of the date of this Agreement, A&S is an indirect, wholly-owned subsidiary of Essef; WHEREAS, A&S intends to issue 20% or less of its outstanding shares in an initial public offering and subsequently Essef intends to distribute to its shareholders the A&S common stock that Essef owns in a tax-free spinoff under Internal Revenue Code Section 355; WHEREAS, Essef has entered into asset purchase agreements pursuant to which Essef agreed to certain indemnification and other obligations relating to the assets and operations of swimming pool businesses it or its subsidiaries purchased ("Purchase Agreements"); WHEREAS, the corporate structure of Essef and the relationship of A&S to its ultimate parent may have led to situations in which either Essef or A&S may incur costs, expenses or liabilities that are attributable to the other ("General Costs"); WHEREAS, each of Essef and A&S desire to indemnify and hold the other party harmless from and against certain of such obligations and/or liabilities; NOW THEREFORE, in consideration of the premises and the mutual covenants contained herein, the parties to this Agreement hereby agree as follows: Section 1. INDEMNIFICATION BY A&S. A&S, for itself, its successors and its assigns, does hereby agree to indemnify and hold harmless Essef and its direct and indirect subsidiaries other than A&S from and against any and all claims, losses, liabilities, costs, damages, demands, charges and expenses (including without limitation legal and other professional fees) which they might incur or which may be charged against them in any way: (a) based upon, connected with or arising out of the Purchase Agreements or General Costs attributable to A&S; (b) as a result of any act or omission on the part of the A&S after the date hereof to the extent that such act or omission results in the distribution by Essef to its shareholders of A&S common stock being treated as a taxable distribution under the Internal Revenue Code; or (c) as a result of any act or omission on the part of A&S or any of its officers, directors, employees, representatives or agents after the date hereof to the extent that such act or omission results in any claims, losses, liabilities, costs, damages, demands, charges and expenses (including without limitation legal 2 and other professional fees) which Essef or any of its direct or indirect subsidiaries other than A&S might incur or which may be charged against them in any way. Section 2. INDEMNIFICATION BY ESSEF. Essef, for itself, its successors and its assigns, does hereby agree to indemnify and hold harmless A&S and all of its subsidiaries from and against any and all claims, losses, liabilities, costs, damages, demands, charges and expenses (including without limitation legal and other professional fees) which they might incur or which may be charged against them in any way based upon, connected with or arising out of: (a) General Costs attributable to Essef or any subsidiary of Essef other than A&S (b) any agreements or instruments other than the Purchase Agreements; or (c) any act or omission on the part of Essef or any of its direct or indirect subsidiaries other than A&S or any of their officers, directors, employees, representatives or agents after the date hereof to the extent that such act or omission results in any claims, losses, liabilities, costs, damages, demands, charges and expenses (including without limitation legal and other professional fees) which A&S might incur or which may be charged against it in any way. Section 3. NOTICE OF CLAIMS. The party seeking indemnification under any provision of this Agreement (the "Indemnified Party") shall notify the party against whom indemnification is sought (the "Indemnifying Party") in writing of any claim for indemnification, specifying in detail the basis of such claim, the facts pertaining thereto and, if known, the amount, or an estimate of the amount, of the liability arising therefrom; provided however, that failure to give such notice shall not affect the indemnification provided hereunder so long as the Indemnifying Party as promptly as practicable thereafter receives all information and documentation necessary to support and verify the claim asserted and the Indemnifying Party shall be given reasonable access to all books and records in the possession or control of the Indemnified Party or any of its affiliates which the Indemnifying Party reasonably determines to be related to such claim. Section 4. DEFENSE. If the facts giving rise to a right to indemnification arise out of the claim of any third party, or if there is any claim against a third party, the Indemnifying Party may assume the defense or the prosecution thereof, including the employment of counsel, at its cost and expense. The Indemnified Party shall have the right to employ counsel separate from counsel employed by the Indemnifying Party in any such action and to participate therein, but the fees and expenses of such counsel employed by the Indemnified Party shall be at its expense. The Indemnifying Party shall not be liable for any settlement of any such claim effected without its prior written consent which consent shall not be unreasonably withheld. Section 5. APPLICABLE LAW. This Agreement shall be construed under the laws of the State of Ohio and the rights and obligations of the parties shall be determined under the substantive law of Ohio, without giving effect to Ohio's conflict of law rules or principles. Section 6. NOTICES. Any notice and other communication hereunder shall be in writing and shall be effective and deemed to have been properly given (i) on the third day after it is mailed postage prepaid, by certified first class mail, return receipt requested, addressed to a party; (ii) when it is hand or courier delivered; or (iii) when it is sent by telecopy with receipt confirmed, as follows: -2- 3 (a) If to Essef to: Essef Corporation 220 Park Drive Chardon, OH 44024 Telecopy: 440-286-2206 Attention: Chief Executive Officer (b) If to A&S to: Anthony & Sylvan Pools Corporation c/o Essef Corporation 220 Park Drive Chardon, OH 44024 Telecopy: 440-285-7946 Attention: Chief Executive Officer Any party may from time to time designate another address to which notice or other communication shall be addressed or delivered to such party and such new designation shall be effective on the later of (i) the date specified in the notice or (ii) receipt of such notice by the intended recipient. Section 7. ASSIGNABILITY. Neither party hereto shall assign this Agreement in whole or in part without the prior written consent of the other party hereto, which consent shall not be unreasonably withheld. Section 8. SEVERABILITY. If any term or condition of this Agreement shall be held invalid in any respect, such invalidity shall not affect the validity of any other term or condition hereof. Section 9. AMENDMENT OR MODIFICATION. This Agreement may be amended, modified, superseded, canceled, renewed or extended, and the terms and conditions hereof may be waived, only by a written instrument signed by the parties, or in the case of a waiver, by the party waiving compliance. Section 10. CONSTRUCTION. Descriptive headings to sections are for convenience only and shall not control or affect the meaning or construction of any provisions of this Agreement. -3- 4 IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the duly authorized officers of the parties as of the date first written above. ESSEF CORPORATION By: ---------------------------------------- Name: -------------------------------------- Title: ------------------------------------- ANTHONY & SYLVAN POOLS CORPORATION By: ---------------------------------------- Name: -------------------------------------- Title: ------------------------------------- -4- EX-10.8 13 EXHIBIT 10.8 1 Exhibit 10.8 TAX ALLOCATION AGREEMENT THIS TAX ALLOCATION AGREEMENT is dated as of the _____ day of _______________, 1998, by and between Essef Corporation, an Ohio corporation ("Essef"), and Anthony & Sylvan Pools Corporation, an Ohio corporation ("A&S"). R E C I T A L S --------------- WHEREAS, Essef owns eighty percent (80%) or more of the total voting power and value of the issued and outstanding stock of A&S and is the common parent of an "affiliated group," as defined in Section 1504(a) of the Internal Revenue Code of 1986, as amended ("Code"); and WHEREAS, Essef and A&S presently intend to join in the filing of consolidated federal income tax returns and, where applicable, consolidated or combined state income or franchise tax returns ("Consolidated Tax Returns") for all taxable years in which they are eligible to do so and during which Essef is the common parent of a consolidated or combined group that includes A&S (the "Essef Group"); and WHEREAS, in connection with such Consolidated Tax Returns for the Essef Group's taxable year that ended September 30, 1977, and subsequent years, Essef and A&S consider it in their mutual best interests to provide herein for the allocation of a portion of the federal income tax and state income or franchise tax liabilities (collectively, "Tax Liabilities") of the Essef Group to A&S generally in accordance with such liability as A&S would have incurred if it filed separate federal income and state income or franchise tax returns; NOW, THEREFORE, in consideration of the premises, it is agreed as follows: 1. DEFINITIONS. For purposes of this Agreement, "consolidated return," "consolidated group," "common parent," "member," "taxable year," "carryover," "carryback," and similar terms used herein and bearing on federal income tax liability shall have the respective meanings ascribed to them in the Code and the Treasury Regulations thereunder, and, where applicable, specifically the provisions thereof relating to consolidated federal income tax returns. For state tax purposes, such terms shall be interpreted and applied in a manner so as to achieve as nearly as possible the intention reflected herein with respect to the federal income tax. 2. COOPERATION. As long as A&S and Essef are members of the Essef Group and are eligible to file Consolidated Tax Returns, A&S will join in the filing by Essef of such Consolidated Tax Returns and will execute such documents and take such actions as Essef may request in connection therewith. 3. CONSOLIDATED TAX RETURN LIABILITY. For each taxable year to which this Agreement applies (as set forth in Section 11 below) and for which A&S is included in one or more of Essef's Consolidated Tax Returns, A&S shall pay to Essef, at such time before the date on which each such Consolidated Tax Return is required to be filed (including any extensions -1- 2 granted by the Internal Revenue Service) as will permit Essef timely to pay the Tax Liability shown thereon, an amount equal to the separate federal income and, as applicable, state income or franchise tax ("Separate Tax") liability, including liability for any minimum tax imposed by the Code or by the state taxing authority, that A&S would have incurred if it had filed Separate Tax returns for the taxable year and for all taxable years during which A&S was included in that Consolidated Tax Return of the Essef Group. Any amounts paid by A&S pursuant to Section 6 hereof shall be credited against such Separate Tax liability. If pursuant to the Separate Tax computation for A&S it would be entitled to a refund of tax, then Essef shall make a payment in the amount of such refund to A&S on the date that the Consolidated Tax Return of the Essef Group is required to be filed or, if the Essef Group is entitled to receive a refund as a result of its filing of the Consolidated Tax Return, within 10 days after Essef receives such refund. 4. SEPARATE TAX LIABILITY OF A&S. The Separate Tax liability of A&S shall be computed in the following manner (and, in the case of state income or franchise tax, consistently with the following principles): (a) All items of income, deduction, loss, and credit properly attributable to A&S for the taxable year shall be taken into account; provided, however, that gain or loss from the sale of property, recapture of depreciation deductions, and other items that are otherwise deferred in accordance with Section 1.1502-13 or other provisions of the Treasury Regulations relating to the transfer of property to another member of the Essef Group shall be taken into account in the Separate Tax calculation only in the taxable year and to the extent that such item is taken into account in the computation of the Consolidated Tax Liability of the Essef Group for such taxable year. (b) Carryover and carryback items (including, without limitation, net operating losses, capital losses, general business credits, and foreign tax credits) shall be taken into account as though A&S had filed Separate Tax Returns throughout the period of consolidation. (c) The Separate Tax computation for A&S for any taxable year to which this Agreement applies shall reflect the income, loss, deduction, and credit items of all corporations that are (1) members of the Essef Group, (2) join in the Consolidated Tax Return of the Essef Group for such year, and (3) would be entitled to be included in a Consolidated Tax Return of a group of which A&S were the common parent. Under such circumstances, A&S shall compute its Separate Tax liability as though it filed a Consolidated Tax Return with the other corporations that would be members of the consolidated group of which A&S would be the common parent. (d) All items of income, loss, deduction, or credit shall be taken into account on a basis consistent with the treatment accorded such items in the Consolidated Tax Return of the Essef Group, except to the extent that the filing of a Separate Tax return would have required different treatment of an item. (e) A&S shall be deemed to have made all applicable elections consistently with Essef's elections with respect to the Consolidated Tax Return. -2- 3 (f) A portion of the amounts in each taxable income bracket in the tax table in Section 11(b)(1) of the Code shall be allocated to A&S for a taxable year based on the percentage that A&S's separate taxable income determined as set forth herein for that year bears to the Essef Group's taxable income for that year. 5. OTHER TAXES OF A&S. A&S shall be responsible for the payment of all of its taxes that are not shown on a Consolidated Tax Return. 6. ESTIMATED TAXES. A&S shall pay to Essef such amounts of estimated tax payments as Essef deems appropriate taking into account the portion of the Tax Liabilities that A&S is required under this Agreement to pay to Essef. Such payments will be made at such times as will permit Essef to timely make estimated tax payments to the Internal Revenue Service. 7. ADJUSTMENTS. It is recognized that subsequent adjustments may be made, on audit or otherwise, in the Tax Liabilities of the Essef Group for a year to which this Agreement applies, and that such adjustments may affect the treatment of items included in the computation of the Separate Tax of A&S and thus require correlative adjustments in the payments by A&S required hereunder. To the extent such a subsequent adjustment, if reflected in the original Separate Tax computation of A&S, would have decreased the amount of tax shown to be due or increased the amount of refund, Essef will make a payment to A&S in an amount equal to such decrease or increase, together with interest and penalties, if any. To the extent such a subsequent adjustment would have increased the amount of such Separate Tax or decreased the amount of refund, A&S shall make a supplemental payment to Essef in an amount equal to such increase or decrease, together with interest and penalties, if any. Each payment required by this paragraph shall be made not later than ten days after final determination of the amount thereof, or, if the payment is due to an adjustment in the Consolidated Tax Return of the Essef Group that entitles Essef to a refund from the Internal Revenue Service, not later than ten days after Essef's receipt of such refund. 8. LATE PAYMENT. If any payment required by this Agreement is not timely made, interest shall accrue on the unpaid amount at the percentage rate then applicable to underpayments under Section 6621(a)(2) of the Code. 9. COMPUTATIONS. All computations of the Separate Tax liability of A&S shall be made by Essef in consultation with A&S. Final determinations of the appropriateness of Separate Tax computations shall be the sole prerogative of Essef, provided that such determination is not found to be inappropriate by the Public Accounting Firm responsible for the audit of the Essef Group's published financial statements. 10. INDEMNIFICATION OF A&S FOR PAYMENT OF OTHER ESSEF GROUP TAXES. In the event that A&S pays any Tax Liabilities of the Essef Group in excess of the payments by A&S required hereunder, Essef shall indemnify A&S for such excess payments. 11. APPLICABLE PERIOD. This Agreement shall apply to the taxable year ended September 30, 1997, and to subsequent taxable years in which A&S is included in any -3- 4 Consolidated Tax Returns of the Essef Group. This Agreement shall continue to apply to such taxable years after A&S is no longer so included, for example, for purposes of computing any adjustments under Section 7 hereof. 12. FURTHER AGREEMENTS. A&S may enter into such arrangements with its subsidiaries, if any, as may be consistent herewith and appropriate to fulfilling the purposes of this Agreement. 13. INDEMNIFICATION. For each taxable year to which this Agreement applies, Essef and A&S shall indemnify and hold each other harmless against any interest or penalties incurred under the Code by reason of any act or omission on the part of the indemnifying party. IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by their duly authorized representatives as of the day and year first above written. ESSEF CORPORATION By ---------------------------------------- ANTHONY & SYLVAN POOLS CORPORATION By ---------------------------------------- -4- EX-10.9 14 EXHIBIT 10.9 1 Exhibit 10.9 ADMINISTRATIVE SERVICES AGREEMENT THIS ADMINISTRATIVE SERVICES AGREEMENT is dated the ____ day of _______, 1998, by and between ESSEF CORPORATION, an Ohio corporation ("Essef"), and Essef's indirect, wholly-owned subsidiary, ANTHONY & SYLVAN POOLS CORPORATION, an Ohio corporation ("A&S"). WITNESSETH: WHEREAS, A&S anticipates that it will issue additional shares of its authorized but unissued shares of common stock ("Common Stock") in a registered and underwritten initial public offering of 20% or less of its outstanding shares and subsequently, Essef intends to distribute to its shareholders, pursuant to a two-step tax free spinoff under Internal Revenue Code Section 355, all of the Common Stock of A&S which it owns ("Spinoff"); and WHEREAS, Essef has the resources, staff, and expertise to support A&S in the business of A&S until such time as A&S has the internal staff and expertise necessary to operate independently; and WHEREAS, on the terms and subject to the conditions set forth herein, A&S desires to retain Essef as an independent contractor to provide, directly or indirectly, certain administrative, financial, management, and other services to A&S; and WHEREAS, on the terms and subject to the conditions set forth herein, Essef desires to provide, directly or indirectly, such services to A&S. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Essef and A&S, for themselves, and their respective successors and assigns, hereby agree as follows: ARTICLE I DEFINITIONS Section 1.01. DEFINITIONS. As used in this Agreement, the following terms will have the following meanings: (a) "Closing Date" means the date of the closing of the initial sale of Common Stock in the Initial Public Offering. (b) "Common Stock" means the issued and outstanding shares of Common Stock, having no par value, of A&S, and any other class of A&S capital stock representing the right to vote generally for the election of directors. (c) "Employee Welfare Plans" has the meaning ascribed thereto in Section 4.03. 2 (d) "ERISA" means the Employee Retirement Income Security Act of 1974 and the regulations promulgated and rulings issued thereunder, as amended from time to time. (e) "Essef Entities" means Essef and its subsidiaries (excluding A&S, unless otherwise required by the context), and an "Essef Entity" shall mean any of the Essef Entities. (f) "Hourly Billing" has the meaning ascribed thereto in Section 3.01. (g) "Initial Public Offering" means the issue of shares of Common Stock to the public in an offering registered under the Securities Act of 1933, as amended. (h) "Pass-Through Billing" has the meaning ascribed thereto in Section 3.01. (i) "Payment Date" has the meaning ascribed thereto in Section 3.05. (j) "Person" means any individual, partnership, limited liability company, joint venture, corporation, trust, unincorporated organization, government (and any department or agency thereof), or other entity. (k) "Service Costs" has the meaning ascribed thereto in Section 3.01. (l) "Services" has the meaning ascribed thereto in Section 2.01. (n) "subsidiary" means, as to any Person, any corporation, association, partnership, limited liability company, joint venture, or other business entity of which more than 50% of the voting capital stock or other voting ownership interests is owned or controlled directly or indirectly by such Person or by one or more of the subsidiaries of such Person or by a combination thereof. Subsidiary, when used with respect to Essef or A&S, shall also include any other entity affiliated with Essef and A&S, as the case may be, that Essef and A&S may hereafter agree in writing shall be treated as a "subsidiary" for the purposes of this Agreement. Section 1.02. INTERNAL REFERENCES. Unless the context indicates otherwise, references to Articles, Sections, and paragraphs shall refer to the corresponding articles, sections, and paragraphs in this Agreement, and references to the parties shall mean the parties to this Agreement. 2 3 ARTICLE II PURCHASE AND SALE OF SERVICES Section 2.01. PURCHASE AND SALE OF SERVICES. (a) On the terms and subject to the conditions of this Agreement and in consideration of the Service Costs, Essef agrees to provide to A&S, or to procure for the provision to A&S, and A&S agrees to purchase from Essef, the services described in Section 2.01(c) (the "Services"). Unless specifically provided otherwise, the Services to be provided or procured by Essef hereunder shall be substantially similar in scope, quality, and nature to those provided to, or procured on behalf of, A&S prior to the Closing Date. (b) It is understood that (i) the Services to be provided to A&S under this Agreement will, at A&S's request, be provided to subsidiaries of A&S, and (ii) Essef may satisfy its obligation to provide or procure Services hereunder by causing one or more of its subsidiaries to provide or procure such Services. With respect to Services provided to, or procured on behalf of, any subsidiary of A&S, A&S agrees to pay on behalf of such subsidiary all amounts payable for such Services. (c) Essef will provide the following Services to A&S pursuant to this Agreement and A&S will pay for such Services as described below. SERVICES PAYMENT METHOD - -------------------------------------------------------------------------------- 1. Day-to-day, recurring management, oversight, Flat Fee Billing cash management, risk management, legal, tax preparation and filing, accounting, administration of the A&S 401(k) plan and other employee benefit programs, Securities and Exchange Commission filings, public relations, investor relations - -------------------------------------------------------------------------------- 2. Corporate development, acquisitions and dispositions Hourly Billing - -------------------------------------------------------------------------------- 3. Extraordinary legal and accounting Hourly Billing - -------------------------------------------------------------------------------- 4. Insurance Policies Allocable Share - -------------------------------------------------------------------------------- 5. Employee Benefits Payments Pass-Through Billing - -------------------------------------------------------------------------------- Section 2.02. ADDITIONAL SERVICES. In addition to the Services to be provided or procured by Essef pursuant to Section 2.01, Essef from time to time may provide additional services (including services not provided by Essef to A&S prior to the Closing Date) to A&S; provided that the scope of any such services, as well as the term, costs, and other terms and conditions applicable to such services, shall be as mutually agreed in writing by Essef and A&S. 3 4 Upon such agreement, all such services shall be included in the term "Services" for purposes of this Agreement. ARTICLE III SERVICE COSTS; OTHER CHARGES Section 3.01. SERVICE COSTS GENERALLY. (a) The Hourly Billing, Pass-Through Billing, and Flat Fee Billing methods applicable to the Services provided to A&S are collectively referred to herein as the "Service Costs." A&S agrees to pay to Essef in the manner set forth in Section 3.05 the Service Costs applicable to each of the Services provided by Essef. (b) It is the express intent of the parties that Service Costs relating to the administration of the employee plans and the performance of related Services will not exceed reasonable compensation for such Services as defined in 29 CFR section 2550.408c-2. Section 3.02. HOURLY BILLING. The costs of Services determined by the Hourly Billing method shall be equal to an Essef Entity employee's annual compensation, including bonuses, divided by 2080, multiplied by the aggregate number of hours the Essef Entity employee is engaged in providing Services to A&S, plus an additional 30% of such amount. All Essef Entities shall cause each of their employees who provides any of the Services to keep written records of the hours engaged in providing Services to A&S. Section 3.03. PASS-THROUGH BILLING. The costs of Services determined by the Pass-Through Billing method shall be equal to the third-party costs and expenses incurred by any Essef Entity on behalf of A&S. If an Essef Entity incurs costs or expenses on behalf of A&S as well as other businesses operated by such Essef Entity, the Essef Entity will allocate any such costs or expenses in good faith between the various businesses on behalf of which such costs or expenses were incurred as such Essef Entity shall determine in the exercise of its reasonable judgment. Essef shall apply usual and customary accounting conventions in making such allocations, and Essef or its agents shall keep and maintain such books and records as may be reasonably necessary to make such allocations. Essef shall make copies of such books and records available to A&S upon request and with reasonable notice. Section 3.04. FLAT FEE BILLING. Essef shall charge A&S Fifty Thousand Dollars ($50,000) per month for the Services determined by the Flat Fee Billing arrangement. The costs of Services determined by the Flat Fee Billing have been determined by Essef and A&S and are expected to be commensurate with the estimated amount of Services. If an Essef Entity incurs costs or expenses on behalf of A&S as well as other businesses operated by A&S, the Essef Entity will allocate any such costs or expenses in good faith between the various businesses on behalf of which such costs or expenses were incurred as the Essef Entity shall determine in the exercise of its reasonable judgment. Essef shall apply usual and customary accounting conventions in making such allocations, and Essef or its agents shall keep and maintain such books and records as may be reasonably necessary to make such allocations. Essef shall make copies of all books and records relating to such Services available to A&S upon request and with 4 5 reasonable notice. Benefit claims processing activities performed by Essef or Essef's subcontractors shall be coordinated to facilitate payments. Section 3.05. INVOICING AND SETTLEMENT OF COSTS. (a) Essef will invoice A&S for the Service Costs on a monthly basis, in arrears, either directly or through an intracompany billing system, in a manner substantially consistent with the billing practices used in connection with services provided to A&S prior to the Closing Date. In connection with the invoicing described in this Section 3.05(a), Essef will provide to A&S the same billing data and level of detail as it customarily provides to other businesses and subsidiaries operated by Essef and such other data as may be reasonably requested by A&S. Such invoices shall specify, if applicable, the number of hours engaged in providing Services to A&S reported by each Essef Entity employee in the case of Services whose cost is determined by the Hourly Billing method. (b) A&S agrees to pay Essef on the date on which Essef invoices A&S for the Service Costs (each, a "Payment Date"), at Essef's option upon reasonable notice to A&S, through Essef's intracompany billing system, cash management systems, or, if requested by Essef, by wire transfer of immediately available funds payable to the order of Essef, all amounts invoiced by Essef pursuant to paragraph (a) above during the preceding calendar month (or since the Closing Date, in the case of the first Payment Date). However, in the event that A&S, in good faith, questions any invoiced item, payment of that item shall be made only after the satisfactory resolution of those questions. If A&S fails to pay any monthly payment within five (5) days of the Payment Date, A&S shall be obligated to pay, in addition to the amount due on such Payment Date, simple interest on such amount at a rate of one percent (1%) per month. Section 3.06. AMENDED BILLING. Essef may, from time to time, prepare and deliver to A&S any proposed changes in billing methodology and, to the extent available, the Service Costs estimated to be payable for such Services. Except as otherwise provided in Section 4.04, and except as specifically described in this Agreement (including the Schedules), Essef may not change the method of allocating and charging the Service Cost of any Service provided to A&S unless A&S is notified in writing not less than thirty (30) days in advance of implementing such revised method. ARTICLE IV THE SERVICES Section 4.01. STANDARD OF CARE. (a) Except as otherwise described in this Agreement, and provided that Essef is not restricted by contract with third parties or by applicable law, Essef agrees that the nature, quality, and standard of care applicable to the delivery of the Services hereunder will be substantially the same as that of the Services which Essef provides from time to time throughout its businesses. Essef shall use its reasonable efforts to ensure that the nature and quality of Services provided to A&S employees, either by Essef directly or through administrators under contract, shall be undifferentiated as compared with the same services provided to or on behalf of Essef employees under Employee Welfare Plans. 5 6 (b) A&S recognizes that Essef now renders and may continue to render management and other services to other companies that may or may not have policies and conduct activities similar to those of A&S. Essef shall be free to render such advice and other services, and A&S hereby consent thereto. Essef shall not be required to devote full time and attention to the performance of its duties under this Agreement, but shall devote only so much of its time and attention as it deems reasonably necessary to perform the Services required hereunder. Section 4.02. PERSONNEL. In consultation with A&S, Essef shall determine both the staffing required and particular personnel assigned to perform the Services, including but not limited to clerical staff, technicians, professionals, management persons, or otherwise. Section 4.03. DELEGATION. Subject to Section 4.01 above, A&S hereby delegates to Essef final, binding, and exclusive authority, responsibility, and discretion to interpret and construe the provisions of employee welfare benefit plans in which A&S has elected to participate and which are administered by Essef under this Agreement (collectively, the "Employee Welfare Plans"). Essef may further delegate such authority to plan administrators to: (i) provide administrative and other services; (ii) reach factually supported conclusions consistent with the terms of the Employee Welfare Plans; (iii) make a full and fair review of each claim, denial, and decision related to the provisions of benefits provided or arranged for under the Employee Welfare Plans, pursuant to the requirements of ERISA, if within sixty (60) days after receipt of the notice of denial, a claimant requests in writing a review for reconsideration of such decisions. The administrator shall notify the claimant in writing of its decision on review. Such notice shall satisfy all ERISA requirements relating thereto; and (iv) notify the claimant in writing of its decision on review. Section 4.04. NOTICE. Unless otherwise agreed in writing, A&S agrees to provide Essef with at least thirty (30) days prior written notice of any material change in the eligible A&S employees and retirees covered by Employee Welfare Plans, and any change in the scope of Services to be provided by Essef with respect thereto. Notwithstanding the preceding sentence, if A&S provides Essef with less than thirty (30) days notice of any such change and Essef is nonetheless able, with reasonable efforts, to effectuate such change with such shorter notice, then Essef shall implement the requested change. Section 4.05. REPORTS. Essef shall provide or shall cause to be provided to A&S data or reports requested by A&S relating to (i) benefits paid to or on behalf of A&S employees under Employee Welfare Plans, including but not limited to financial statements, claims history, and census information, and (ii) other information relating to the Services that is required to satisfy any reporting or disclosure requirement of ERISA or the Code. Essef will provide such information within a reasonable period of time after it is requested. The costs for reports which are substantially similar to reports prepared by Essef or on behalf of Essef generally for its 6 7 businesses shall be billed as part of the Flat Fee Billing. The cost for additional reports shall be billed as incremental costs in accordance with Section 3.07. Section 4.06. LIMITATION OF LIABILITY. A&S agrees that none of the Essef Entities and their respective directors, officers, agents, and employees (each, an "Essef Indemnified Person") shall have any liability, whether direct or indirect, in contract or tort or otherwise, to A&S for or in connection with the Services rendered or to be rendered by any Essef Indemnified Person pursuant to this Agreement, the transactions contemplated hereby, or any Essef Indemnified Person's actions or inactions in connection with any such Services or transactions, except for damages which have resulted from such Essef Indemnified Person's gross negligence or willful misconduct in connection with any such Services, actions, or inactions. The sole remedy of A&S for any claim relating to the performance or nonperformance of the Services shall be a refund by Essef to A&S of any charges or fees paid for the applicable Services. In addition, in no event shall either party be liable to the other for special, punitive, incidental, or consequential damages arising out of this Agreement. ESSEF MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, AND ESSEF SPECIFICALLY DISCLAIMS ANY IMPLIED WARRANTIES WITH RESPECT TO THE SERVICES TO BE PROVIDED HEREUNDER. Section 4.07. INDEMNIFICATION OF ESSEF INDEMNIFIED PERSONS BY A&S. A&S agrees to indemnify and hold harmless each Essef Indemnified Person from and against any damages arising out of any of the Services, actions, or inactions in connection with this Agreement; provided that A&S will not be responsible for any damages of any Essef Indemnified Person that have resulted from such Essef Indemnified Person's gross negligence or willful misconduct in connection with any of the Services, actions, or inactions referred to above. Section 4.08. INDEMNIFICATION OF A&S INDEMNIFIED PERSONS BY ESSEF. Essef agrees to indemnify and hold harmless A&S and its directors, officers, agents, and employees (each, an "A&S Indemnified Person") from and against any damages arising out of any of the Services, actions or inactions in connection with this Agreement, provided that Essef will not be responsible for any damages of any A&S Indemnified Person that have resulted from such A&S Indemnified Person's gross negligence, or willful misconduct in connection with any of the Services, actions or inactions referred to above. Section 4.09. FURTHER INDEMNIFICATION. To the extent that any other Person has agreed to indemnify any Essef Indemnified Person or to hold an Essef Indemnified Person harmless and such Person provides services to Essef or any affiliate of Essef relating directly or indirectly to his employee plan or benefit arrangement to (i) make such agreement applicable to A&S Indemnified Person so that each A&S Indemnified Person is held harmless or indemnified to the same extent as any Essef Indemnified Person, or (ii) otherwise make available to each A&S Indemnified Person the benefits of such agreement. ARTICLE V TERM AND TERMINATION Section 5.01. TERM. Except as otherwise provided in this Article V or as otherwise agreed in writing by the parties, this Agreement shall have an initial term lasting through the earlier of three years from the date hereof or (18) months following the consummation of the Spinoff, and will be renewed automatically thereafter for successive one-year terms unless either A&S or Essef elects not to renew this Agreement upon not less than sixty (60) days' written notice. Essef shall not have any obligation to provide the Services described in this Agreement for any period after the Spinoff except as specifically provided herein. 7 8 Section 5.02. TERMINATION. (a) Either A&S or Essef may from time to time terminate this Agreement with respect to one or more of the Services upon giving at least sixty (60) days' written notice to the other; provided, however that if Essef amends the billing methodology as described in Section 3.06 above, A&S may terminate this Agreement upon thirty (30) days notice following such amendment. (b) This Agreement will be subject to termination by either A&S or Essef upon sixty (60) days' written notice if Essef ceases to own shares of Common Stock representing more than fifty percent (50%) of the voting power of the Common Stock of A&S. (c) Notwithstanding anything to the contrary in this Section 5.02, Essef may, at its option, immediately terminate this Agreement as it relates to any given Service if Essef would otherwise not be required to provide such service with respect to any employee benefit plan or program that is substantially similar to a corresponding plan or program of Essef (as such plans and programs of Essef exist from time to time) or if the method of delivering such Service would no longer be substantially similar to the manner in which such Service was delivered to A&S, as such delivery may change from time to time. Essef shall give A&S as much advance notice as is reasonably possible in connection with any planned early termination of a Service with respect to any employee benefit plan or program. (d) Notwithstanding anything to the contrary in this Section 5.02, Essef may terminate any affected Service at any time if A&S shall have failed to perform any of its material obligations under this Agreement relating to any such Service, Essef has notified A&S in writing of such failure, and such failure shall have continued for a period of sixty (60) days after receipt by A&S of notice of such failure. (e) Notwithstanding anything to the contrary in this Section 5.02, A&S may terminate any affected Service at any time if Essef shall have failed to perform any of its material obligations under this Agreement relating to any such Service, A&S has notified Essef in writing of such failure, and such failure shall have continued for a period of thirty (30) days after receipt by Essef of notice of such failure. (f) Notwithstanding anything to the contrary in this Section 5.02, either Essef or A&S may terminate coverage of A&S under Essef's umbrella liability, property, casualty or fiduciary insurance policies at any time on ninety (90) days' written notice prior; provided that a replacement policy, acceptable to Essef, is entered into by A&S. A&S shall reimburse Essef for any out-of-pocket costs or expenses Essef incurs as a result of any such termination of coverage. Section 5.03. EFFECT OF TERMINATION. (a) Other than as required by law, upon termination of any Service pursuant to Section 5.02, and upon expiration of the term of this Agreement, without renewal, in accordance with Section 5.01, Essef will have no further obligation to provide the terminated service (or any Service, in the case of termination of this Agreement), and A&S will have no obligation to pay any fees relating to such Services or make any other payments hereunder; provided that 8 9 notwithstanding such termination, (i) A&S shall remain liable to Essef for fees owed and payable in respect of Services provided prior to the effective date of the termination, including any applicable interest payments as specified in Section 3.05(b), (ii) Essef shall continue to charge A&S for administrative and program costs relating to benefits paid after but incurred prior to the termination of any Service and other services required to be provided after the termination of such Service and A&S shall be obligated to pay such expenses in accordance with the terms of this Agreement, and (iii) the provisions of Articles IV, V, and VI shall survive any such termination. All program and administrative costs attributable to A&S' employees for Essef Plans that relate to any period after the effective date of any such termination shall be for the account of and payable by A&S. (b) Following termination of this Agreement with respect to any Service, Essef and A&S agree to cooperate in providing for an orderly transition of such Service to A&S or to a successor service provider. Without limiting the foregoing, Essef agrees to (i) provide, within thirty (30) days of the termination, copies in a format designated by Essef of all records relating directly or indirectly to benefit determinations of A&S employees, including but not limited to plan interpretive policies, plan procedures, administration guidelines, minutes, or any data or records required to be maintained by law, and (ii) work with A&S in developing a transition schedule. Section 5.04. PURPOSE OF AGREEMENT. The parties acknowledge that the purpose of this Agreement is to provide the services on an interim basis following the initial public offering of Common Stock and prior to the spinoff of A&S Common Shares to Essef's shareholders to permit A&S to obtain alternative sources for the Services. A&S shall use its best efforts to obtain alternative sources for the Services as soon as practicable. ARTICLE VI MISCELLANEOUS Section 6.01. OTHER AGREEMENTS. In addition to the services described herein, Essef is providing A&S with certain additional services pursuant to a Tax Allocation Agreement. Section 6.02. FUTURE LITIGATION AND OTHER PROCEEDINGS. In the event that A&S (or any of its officers or directors) or an Essef Entity (or any of its officers or directors) at any time after the date hereof initiates or becomes subject to any litigation or other proceedings before any governmental authority or arbitration panel with respect to which the parties have no prior agreements (as to indemnification or otherwise), the party (and its officers and directors) that has not initiated and is not subject to such litigation or other proceedings shall comply, at the other party's expense, with any reasonable requests by the other party for assistance in connection with such litigation or other proceedings (including by way of provision of information and making available of employees as witnesses). In the event that A&S (or any of its officers or directors) and an Essef Entity (or any of its officers and directors) at any time after the date hereof initiate or become subject to any litigation or other proceedings before any governmental authority or arbitration panel with respect to which the parties have no prior agreements (as to indemnification or otherwise), each party (and its officers and directors) shall, at its own expense, coordinate its strategies and actions with respect to such litigation or other proceedings 9 10 to the extent such coordination would not be detrimental to its respective interests and shall comply, at the expense of the requesting party, with any reasonable requests of the other party for assistance in connection therewith (including providing information and making available employees as witnesses). Section 6.03. RELATIONSHIP BETWEEN THE PARTIES; INDEPENDENT CONTRACTOR; USE OF ESSEF PERSONNEL. With respect to the relationship between A&S and Essef, it is hereby acknowledged and understood that each of A&S and Essef is (i) a separate legal entity, with a separate governing body, officers and shareholders, (ii) conducting a separate business, (iii) responsible for establishing its own policies, its capital budget and operating budgets, and making its own investments in its business, and (iv) responsible for selecting, determining the compensation of and termination of its personnel; and neither the existence of this Agreement, nor the providing of Services hereunder is intended to or shall be deemed to constitute control of A&S by Essef or any of its affiliates. It is further understood and agreed that Essef shall be rendering the Services to A&S as an independent contractor and that none of its officers or employees (other than those who are also employed by or are officers of A&S) shall be deemed or construed to be an employee of A&S. Each party shall be responsible for any injury or death to its own employees, including all workers' compensation claims or liabilities resulting therefrom. This Agreement does not constitute or involve a partnership, joint venture (except to the extent provided in Section 4.03), or a profit-sharing arrangement among the parties hereto. All personnel used in rendering the Services shall be employed by and compensated by Essef. Section 6.04. SUBCONTRACTORS. Essef may hire or engage one or more subcontractors to perform all or any of its obligations under this Agreement, provided that, subject to Section 4.06, Essef will in all cases remain primarily responsible for all obligations undertaken by it in this Agreement with respect to the scope, quality and nature of the Services provided to A&S. Section 6.05. FORCE MAJEURE. Neither party shall be liable for delay or failure of performance because of "force majeure," defined as an event beyond the control of either party, which by its nature could not have been foreseen by such party, or, if it could have been foreseen, was unavoidable, and includes without limitation, acts of God, storms, floods, riots, fires, sabotage, civil commotion or civil unrest, interference by civil or military authorities, acts of war (declared or undeclared), failure of energy sources, and systems failures because of the Year 2000 problem. The party claiming excuse will exercise all due diligence to minimize to the greatest extent possible the effect of force majeure on its obligations hereunder. Promptly on becoming aware of force majeure causing a delay or failure of performance of any obligations imposed by this Agreement (and termination of such delay), the party affected shall give written notice to the other party giving details of the same, including particulars of the actual and, if applicable, any estimated continuing effects of such force majeure on the obligations of the party whose performance fails or is delayed. Section 6.06. NOTICES. Any notice, request, designation, direction, demand, election, acceptance or other communication shall be in writing and shall be effective and deemed to have been given (i) three days after mailed postage prepaid, by certified first class mail, return receipt requested, addressed to a party and received by such party, (ii) when hand or courier delivered, or (iii) when sent by telecopy with receipt confirmed, to the following addresses: 10 11 (a) If to A&S, to: Anthony & Sylvan Pools Corporation 220 Park Drive Chardon, OH 44024 Attention: Stuart D. Neidus Fax: (440) 286-2206 (b) If to Essef, to: Essef Corporation 220 Park Drive Chardon, OH 44024 Attention: Mark E. Brody Fax: (440) 286-2206 Section 6.07. GOVERNING LAW. This Agreement shall be construed in accordance with and governed by the laws of the State of Ohio, without giving effect to Ohio's conflict of law rules or principles. Section 6.08. SEVERABILITY. If any provision of this Agreement shall be invalid or unenforceable, such invalidity or unenforceability shall not render the entire Agreement invalid. Rather, the Agreement shall be construed as if not containing the particular invalid or unenforceable provision, and the rights and obligations of each party shall be construed and enforced accordingly. Section 6.09. AMENDMENT. This Agreement may only be amended by a written agreement executed by both parties hereto. This Agreement shall be amended as mutually agreed by Essef and A&S in order to comply with any requirements imposed by the Internal Revenue Service in order to issue a ruling pursuant to Section 355 of the Internal Revenue Service Code of 1986, as amended. Section 6.10. COUNTERPARTS. This Agreement may be executed in separate counterparts, each of which shall be deemed an original and all of which, when taken together, shall constitute one agreement. Section 6.11. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. The foregoing notwithstanding, and except as provided in Section 6.04, neither party may assign its rights or obligations under this Agreement without the prior written consent of the other party. Section 6.12. DISPUTE RESOLUTION. (a) In the event that any dispute arises between A&S and Essef in connection with this Agreement, the representatives of each party responsible for the subject matter of such 11 12 dispute shall use good faith efforts to resolve such dispute promptly. In the event that such dispute cannot be resolved by the parties' representatives, the matter shall be submitted to the parties' respective Chief Executive Officers ("CEOs") for resolution. (b) In the event that the CEOs cannot reach resolution of an issue involving the values or amounts of Services to be provided under this Agreement, then the unresolved dispute shall be settled at the election of either party, by final and binding independent arbitration. All arbitrations pursuant to this Agreement shall be conducted before the American Arbitration Association ("AAA") in Cleveland, Ohio, U.S.A., and shall be carried out in accordance with the Commercial Arbitration Rules of the AAA then in effect (the "Rules") and the provisions of this Agreement. A&S and Essef shall each select one arbitrator and a third arbitrator will be selected unanimously by the arbitrators selected by A&S and Essef. If the two arbitrators selected by A&S and Essef are unable to select the third arbitrator within ten (10) days of the appointment of the two arbitrators, the parties consent to the selection of the third arbitrator by the AAA administrator. The award of the arbitrators may be enforced by any court having jurisdiction over the parties. (c) Nothing in this section shall be interpreted or construed to permit independent arbitration regarding disputes that do not involve only amounts or values of the Services provided. All other issues, including but not limited to the interpretation of this Agreement, are not subject to arbitration by either party. Section 6.13. WAIVERS. The failure of a party to exercise any of its rights under this agreement on one occasion shall not waive such party's right to exercise its rights on another occasion. Section 6.14. A&S' DIRECTORS AND OFFICERS. Nothing contained herein will be construed to relieve the directors or officers of A&S from the performance of their respective duties or to limit the exercise of their powers in accordance with the Articles or Regulations of A&S or in accordance with any applicable statute or regulation. Section 6.15. ARTICLE AND SECTION TITLES. The article and section titles used in this Agreement are for convenience of reference only and will not be considered in the interpretation or construction of any of the provisions thereof. 12 13 IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by their duly authorized representatives as of the date and year first above written. ESSEF CORPORATION NAME: ---------------------------------------- BY: ----------------------------------------- TITLE: --------------------------------------- ANTHONY & SYLVAN POOLS CORPORATION BY: ---------------------------------------- NAME: ----------------------------------------- TITLE: --------------------------------------- EX-23.1 15 EXHIBIT 23.1 1 Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULES To the Board of Directors and Shareholders of Anthony & Sylvan Pools Corporation Chardon, Ohio We consent to the use in this Registration Statement of Anthony & Sylvan Pools Corporation on Form S-1 of our reports on the financial statements of Anthony & Sylvan Pools Corporation dated September 15, 1998, and Anthony & Sylvan Pools, Inc. dated September 15, 1998, appearing in the Prospectus, which is a part of this Registration Statement, and to the references to us under the heading "Experts" in such Prospectus. Our audits of the financial statements referred to in our aforementioned reports also included the financial statement schedules of Anthony & Sylvan Pools Corporation and Anthony & Sylvan Pools, Inc. listed in Item 16(b). These financial statement schedules are the responsibility of the Corporation's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. Deloitte & Touche LLP Cleveland, Ohio September 15, 1998 -----END PRIVACY-ENHANCED MESSAGE-----