<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1998
Sparkling Spring Water Group Limited
------------------------------------
One Landmark Square, Stamford CT, USA 06901
-------------------------------------------
(Address of principal executive offices)
[Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F]
Form 20-F X Form 40-F
---- ----
[Indicate by check mark whether the registrant by furnishing the
information contained in this Form is also thereby furnishing the
information to the Commission pursuant to Rule 12g3 - 2(b) under the
Securities Exchange Act of 1934.]
Yes No X
---- ----
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Sparkling Spring Water Group Limited
By:
--------------------------------------
Name: David M. Arnold
Title: Vice President Finance, Treasurer
Date:
-----------------
<PAGE>
TABLE OF ADDITIONAL REGISTRANTS
<TABLE>
<CAPTION>
STATE OR OTHER PRIMARY STANDARD
JURISDICTION OF INDUSTRIAL
INCORPORATION OF CLASSIFICATION
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER ORGANIZATION CODE NUMBER
<S> <C> <C>
Sparkling Spring Water Limited Nova Scotia 5149
Spring Water, Inc. Delaware 5149
Cullyspring Water Co., Inc. Washington 5149
Crystal Springs of Seattle, Inc. Delaware 5149
Crystal Springs Drinking Water, Inc. Washington 5149
Crystal Springs Acquisition, Inc. Delaware 5149
Mountain Fresh Acquisition Corp. Delaware 5149
Water Jug Enterprises Limited Nova Scotia 5149
Withey's Water Softening & Purification Ltd. Nova Scotia 5149
Aqua Care Water Softening & Purification Inc. Nova Scotia 5149
High Valley Water Limited Nova Scotia 5149
3003969 Nova Scotia Limited Nova Scotia 5149
Coastal Mountain Water Corp. British Columbia 5149
Canadian Springs Water Company Limited Nova Scotia 5149
Sparkling Spring Water UK Limited UK 5149
Aquaporte (UK) Limited UK 5149
Krystal Fountain Water Co. Limited UK 5149
Marlborough Employment Limited Scotland 5149
Water at Work Limited Scotland 5149
Natural Water Limited Scotland 5149
</TABLE>
The address of the principal executive offices of each of the Additional
Registrants is the same as for Sparkling Spring Water Group Limited, as set
forth on the cover page of this Report.
<PAGE>
Sparkling Spring Water Group Limited
Quarterly Report On Form 6 - K
For The Quarter Ended September 30, 1998
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997. . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Operations for the three and nine
month periods ended September 30, 1998 and 1997. . . . . . . . . 2
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1998 and 1997. . . . . . . . . . . . . . . . 3
Notes to Consolidated Financial Statements . . . . . . . . . . . 4
Item 2. Management's Discussion And Analysis Of
Financial Condition And Results Of Operations. . . . . . . . . . 7
Part II Other Information
Item 6. Exhibits and Reports on Form 6-K . . . . . . . . . . . . . . . . 11
</TABLE>
<PAGE>
Part I Financial Information
Item 1. Financial Statements
SPARKLING SPRING WATER GROUP LIMITED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS (Unaudited)
Current
Cash and cash equivalents $ 6,784,579 $ 27,507,257
Accounts receivable 16,370,763 8,267,315
Inventories 1,730,144 1,751,562
Prepaid expenses 2,293,543 1,536,755
------------ ------------
Total current assets 27,179,029 39,062,889
Deferred taxes 1,541,188 1,379,736
Fixed assets 31,586,649 23,307,315
Goodwill and deferred charges 52,886,421 43,248,972
Other assets 1,108,000 --
------------ ------------
Total assets $114,301,287 $106,998,912
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current
Accounts payable and accrued liabilities $ 11,175,464 $ 6,645,552
Income tax payable 811,751 1,042,567
Unearned revenue 304,535 75,488
Customer deposits 4,620,082 3,396,466
Debt due within one year 1,173,251 1,189,868
------------ ------------
Total current liabilities 18,085,083 12,349,941
------------ ------------
Obligations under capital leases 2,627,846 2,485,204
Senior bank loan 3,811,416 --
Other loans 814,235 1,123,617
Subordinated notes payable 100,000,000 100,000,000
------------ ------------
Total long-term liabilities 107,253,497 103,608,821
------------ ------------
Temporary equity (note 7) 262,080 --
------------ ------------
Shareholders' equity (deficit)
Capital Stock
Issued and outstanding:
Class D common shares 1,383,328
(1997-1,383,328) 5,760,564 6,269,204
Less: Subscriptions receivable (230,003) (230,003)
------------ ------------
5,530,561 6,039,201
Cumulative translation adjustment (1,428,108) (770,729)
Deficit (15,401,826) (14,228,322)
------------ ------------
Total shareholders' equity (deficit) (11,299,373) (8,959,850)
------------ ------------
Total liabilities and
shareholders' equity (deficit) $114,301,287 $106,998,912
============ ============
</TABLE>
SEE ACCOMPANYING NOTES
1
<PAGE>
SPARKLING SPRING WATER GROUP LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Twelve Weeks Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue:
Water $10,645,773 $ 7,211,302 $27,126,999 $19,536,818
Rental 3,868,235 2,790,050 10,182,050 7,776,599
Other 1,973,796 1,496,208 5,492,216 4,484,361
----------- ----------- ----------- -----------
Total revenue 16,487,804 11,497,560 42,801,265 31,797,778
----------- ----------- ----------- -----------
Cost of sales:
Water 1,964,701 1,476,184 5,422,273 3,881,307
Other 871,213 745,035 2,313,323 1,982,330
----------- ----------- ----------- -----------
Total cost of sales 2,835,914 2,221,219 7,735,596 5,863,637
----------- ----------- ----------- -----------
Gross profit 13,651,890 9,276,341 35,065,669 25,934,141
Expenses:
Selling, delivery and administrative 8,783,326 5,657,137 23,199,363 16,817,876
Depreciation and amortization 1,912,501 1,147,774 5,504,505 3,918,398
Acquisition, integration and related
expenses (note 9) 1,825,000 -- 1,825,000 --
----------- ----------- ----------- -----------
Operating profit 1,131,063 2,471,430 4,536,801 5,197,867
Interest expense 1,693,960 1,172,146 5,997,125 2,900,528
----------- ----------- ----------- -----------
Income (loss) before income taxes (562,897) 1,299,284 (1,460,324) 2,297,339
Provision for (recovery of) income taxes (100,000) 547,314 (286,820) 1,063,640
----------- ----------- ----------- -----------
Net income (loss) $ (462,897) $ 751,970 $(1,173,504) $ 1,233,699
=========== =========== =========== ===========
Basic earnings (loss) per share $(0.33) $0.44 $(0.85) $0.71
=========== =========== =========== ===========
Diluted earnings per share $ N/A $0.40 N/A $0.64
=========== =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES
2
<PAGE>
SPARKLING SPRING WATER GROUP LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Nine Months
Months Ended Ended
September 30, September 30,
1998 1997
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (1,173,504) $ 1,233,699
Items not requiring cash
Depreciation and amortization 5,504,505 3,918,398
Deferred taxes (161,452) 301,794
Unrealized gain on cross currency swap (2,748,614) --
------------ ------------
1,420,935 5,453,891
Net change in non-cash working capital balances (1,126,435) (1,913,872)
------------ ------------
Cash provided by operating activities 294,500 3,540,019
------------ ------------
INVESTING ACTIVITIES
Purchase of fixed assets, net (7,888,658) (5,749,761)
Acquisitions (14,853,048) (19,835,497)
Increase in other assets (1,108,000) --
------------ ------------
Cash used in investing activities (23,849,706) (25,585,258)
------------ ------------
FINANCING ACTIVITIES
Increase in long-term debt 4,657,863 24,048,786
Repayment of long-term debt (1,379,094) (1,998,069)
Issuance of common shares 262,080 19,153
Increase in deferred charges (875,339) (1,174,907)
------------ ------------
Cash provided by financing activities 2,665,510 20,894,963
------------ ------------
Effect of foreign currency translation on cash 167,018 (182,590)
------------ ------------
Decrease in cash and cash equivalents during the period (20,722,678) (1,332,866)
Cash and cash equivalents, beginning of period 27,507,257 2,230,735
------------ ------------
Cash and cash equivalents, end of period $ 6,784,579 $ 897,869
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid $ 6,130,173 $ 2,552,109
============ ============
Income taxes paid $ 347,118 $ 207,890
============ ============
</TABLE>
SEE ACCOMPANYING NOTES
3
<PAGE>
SPARKLING SPRING WATER GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(Unaudited)
1. Basis of Presentation
Sparkling Spring Water Group Limited ("Sparkling Spring") is incorporated
under the laws of the Province of Nova Scotia, Canada and provides containered
water to home and office markets in British Columbia and the Maritime provinces
of Canada, England, Scotland and the Pacific Northwestern United States. The
Company uses the US$ as its reporting currency and the Canadian dollar as its
functional currency.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with United States generally accepted accounting
principles for interim financial information. Accordingly, they do not include
all information and notes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, the unaudited
interim consolidated financial statements of the Company reflect all adjustments
necessary to present fairly the financial position of the Company, the results
of its operations and the changes in its financial position for the interim
periods presented. All such adjustments are of a normal recurring nature.
The accompanying consolidated financial statements should be read in
conjunction with the Audited Financial Statements for the year ended December
31, 1997 and the notes thereto contained in the Company's Annual Report on Form
20-F filed with the Securities and Exchange Commission.
2. Seasonal Nature of Business
Operating results for the three and nine month periods ended September 30,
1998 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1998 due to the seasonal nature of the business. This
seasonality results from a combination of higher unit sales of the Company's
products in the second and third quarters and the accounting for such
administrative and other overhead costs including but not limited to
depreciation, amortization and interest expense which are not significantly
impacted by business seasonality.
3. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(unaudited)
<S> <C> <C>
Packaging materials $ 893,327 $ 973,583
Goods for resale 540,783 502,608
Cooler parts 152,218 151,208
Other 143,816 124,163
---------- ----------
$1,730,144 $1,751,562
========== ==========
</TABLE>
4. Reorganization
The Board of Directors approved a reorganization of Sparkling Spring Water
Group Limited ("Group") which became effective August 31, 1998. In this
reorganization shareholders and option holders of Group exchanged their shares
and options to acquire common stock of Group for shares and options to acquire
common stock of a new holding company, Sparkling Spring Water Holdings Limited
("Holdings"). Holdings was formed to increase corporate flexibility and provide
additional access to capital markets. Group has advanced $1.1 million to
Holdings for administrative expenses and to provide partial payment to purchase
stock options previously issued by Group to an executive officer who resigned in
March 1998. This advance is in the form of a loan with interest at 15% per
annum.
4
<PAGE>
SPARKLING SPRING WATER GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(Unaudited)
5. Financial Instruments
In December 1997, the Company entered into two cross currency interest rate
swaps with a US bank to more closely match the interest requirements of its
subordinated notes with the cash flows earned by the Company's Canadian and UK
subsidiaries. The Company entered into a $30 million US six year swap in
British pounds sterling and a $28 million US five year swap in Canadian dollars.
The semi annual interest payments are approximately 1.1 million pounds on the
pounds sterling swap and $2.2 million Canadian dollars on the Canadian swap. At
September 30, 1998 and December 31, 1997, the aggregate fair market value of the
two swaps was approximately $3,111,000 and $423,000 in favor of the Company
respectively. Of these amounts approximately $2,749,000 and $115,000 were
recorded as a reduction in interest expense for the nine months ended September
30, 1998 and the year ended December 31, 1997 respectively.
In October 1998 the Company closed out its Canadian dollar swap, realizing
cash proceeds of $3.4 million.
6. Earnings per Share
The Company has adopted Statement of Financial Accounting Standard No. 128
(SFAS No. 128), Earnings per Share. SFAS No. 128 replaces the previous standards
for presentation of primary and fully diluted earnings per share (EPS) with
basic and diluted EPS. Basic EPS excludes the dilutive effect of the exercise of
all outstanding options and warrants. Diluted EPS includes the dilutive effect
of the exercise of all outstanding options and warrants. The effect of the
exercise of outstanding options and warrants has not been included in the
computation of earnings per share for the three and nine months ended September
30, 1998 as the effect would be antidilutive.
The weighted average number of shares used to calculate basic and
diluted earnings (loss) per share is 1,383,328 and 1,635,525 respectively
for the three and nine month periods ended September 30, 1998 and 1,728,246
and 1,980,443 respectively for the three and nine month periods ended
September 30, 1997.
7. Common Stock
In January 1998, certain key managers of the Company subscribed for an
aggregate of 9,360 shares of Common Stock of the Company. The shares were
recorded at $28 per share, representing the estimated fair value as determined
by an agreed upon formula. These managers have granted an option to Sparkling
Spring enabling Sparkling Spring to repurchase these shares of Common Stock at
any time at their estimated fair market value determined in accordance with the
same agreed upon formula price. Sparkling Spring is obligated to repurchase
these shares at the option of the key managers for the same formula price during
a one-month period each year, subject to any financial covenants and financing
requirements affecting the Company. The shares are shown as "Temporary Equity"
in the Company's financial statements.
8. Acquisitions
On February 24, 1998, the Company purchased all of the outstanding capital
stock of Coastal Mountain Water Corp. (Coastal) for approximately $4.3 million.
Coastal is based in Vancouver, British Columbia and focuses on the direct
delivery of eighteen litre containers of water to residential and commercial
customers and the rental of water coolers.
On May 15, 1998, the Company purchased all of the outstanding shares of
Krystal Fountain Water Co. Limited (Krystal Fountain) for approximately $6.7
million. Krystal Fountain operates in the M25 area in London, England.
On August 31, 1998, the Company purchased the assets of the Springfield
Water Division of Brio Industries Inc. for approximately $3.9 million.
Springfield operates primarily in the Vancouver, British Columbia market.
5
<PAGE>
SPARKLING SPRING WATER GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(Unaudited)
8. Acquisitions (cont'd)
The following unaudited pro forma information presents a summary of
consolidated results of operations as if the acquisitions of D&D and Company,
Inc., High Valley Water Limited, Withey's Water Softening and Purification
Limited, Marlborough Employment Limited, Soja Enterprises Inc., Crystal Spring
Bottled Water Co., Inc., Cullyspring Water Co., Inc., Crystal Springs Drinking
Water Inc., Coastal Mountain Water Corp., Krystal Fountain Water Co. Limited and
Springfield Water Company had occurred at January 1, 1998 and January 1, 1997.
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, September 30,
1998 1997
------------- -------------
<S> <C> <C>
Total revenue $45,661,928 $41,794,307
Net income (loss) (1,218,572) 502,484
Extraordinary item --- ---
Basic income (loss) per share $ (0.88) $ 0.29
</TABLE>
9. Acquisition, Integration and Related Expenses
In 1998 the Company completed the acquisitions of Coastal Mountain Water
Corp., Krystal Fountain Water Co. Limited and Springfield Water Company. In
integrating these acquisitions into the Company's existing business, non -
recurring costs were incurred to reduce and relocate staff, convert the acquired
business' computer systems, close acquired facilities and blend acquired
customers into the Company's existing routes. Further, costs were incurred in
connection with a potential acquisition which will not be completed. The
components of the acquisition, integration and related charges are as follows:
<TABLE>
<S> <C>
Write-off of costs associated with an
acquisition which did not close $ 125,000
Severance, relocation and related costs 350,000
Conversion of computer systems 375,000
Route blending 550,000
Facility closure and other integration costs 425,000
----------
$1,825,000
==========
</TABLE>
10. Financing Arrangements
On May 26, 1998, the Company completed a $40 million senior credit facility
for purposes of financing future capital investments, working capital, business
acquisitions and general corporate purposes. The loan facility matures in 2007.
The Company's payment obligations under the credit facility are secured by a
first priority security interest granted in favor of the lenders over
substantially all of the assets of the Company. The Company's obligations under
the credit facility rank senior to the payment of the Company's subordinated
notes payable.
6
<PAGE>
ITEM 2. Management's Discussion And Analysis Of
Financial Condition And Results Of Operations
The following is management's discussion and analysis of certain
significant factors which have affected the Company's financial position and
operating results during the periods included in the accompanying consolidated
financial statements.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated certain statement
of operations and other data of the Company.
<TABLE>
<CAPTION>
Three Months Twelve Weeks Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September30, September 30,
1998 1997 1998 1997
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Revenue 100 % 100 % 100 % 100 %
Cost of sales 17.2 19.3 18.1 18.4
----- ----- ----- -----
Gross profit 82.8 80.7 81.9 81.6
Selling, delivery and administrative 53.3 49.2 54.2 52.9
Acquisition, integration and
related expenses 11.1 -- 4.2 --
----- ----- ----- -----
EBITDA 18.4 31.5 23.5 28.7
Depreciation and amortization 11.6 10.0 12.9 12.3
----- ----- ----- -----
Operating profit 6.8 21.5 10.6 16.4
Interest expense 10.3 10.2 14.0 9.1
----- ----- ----- -----
Income (loss) before income taxes (3.5) 11.3 (3.4) 7.3
Provision for (recovery of) income taxes (0.6) 4.8 (0.7) 3.3
----- ----- ----- -----
Net income (2.9) 6.5 (2.7) 4.0
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE TWELVE WEEKS ENDED
SEPTEMBER 30, 1997
REVENUE. Revenue increased $5.0 million or 43.4% to $16.5 million in the
three months ended September 30, 1998 compared to $11.5 million in the twelve
weeks ended September 30, 1997. Approximately $1.7 million of this increase
was due to additional delivery days in the longer 1998 quarter. In addition,
revenue growth was reduced by approximately $0.3 million or 2.6% due to the
decline in the Canadian Dollar less benefits from a slight increase in the
exchange rate for the Pound. Revenues from acquisitions completed during and
after the 1997 third quarter accounted for approximately $2.8 million of the
increase. The balance of the increase was from growth in sales from the
Company's increasing customer base. The Company's water cooler customer
locations ended the third quarter at approximately 154,000 up from 137,000 at
June 30, 1998. Approximately 9,000 of this increase came from the acquisition
of Springfield.
COST OF SALES. The cost of sales increased by $0.6 million or 27.7% to $2.8
million in 1998 compared to $2.2 million in 1997. Approximately $0.3 of the
increase was due to the greater number of delivery days in the 1998 quarter.
The balance of the increase was due to acquisitions completed since the 1997
period, an increase of $100,000 in the provision for obsolete inventory and
growth in the Company's base operations. The cost of sales as a percentage of
revenue decreased 2.1% from 19.3% in the 1997 period to 17.2% in the 1998 third
quarter as a result of a lower percentage mix of lower margin small pack sales
and other lower margin products including cups and coffee.
7
<PAGE>
OPERATING EXPENSES. Selling, delivery and administrative operating expenses
increased by $3.1 million or 55.3% to $8.8 million in the 1998 third quarter
from $5.7 million in the 1997 period. Approximately $0.8 million of this
increase was due to the greater number of delivery days in the 1998 third
quarter. An increase in the allowance for doubtful accounts accounted for a
further $0.5 million of the increase. The balance of the increase was the result
of increased business operations from businesses acquired during and after the
1997 period and from the underlying growth in the Company's water cooler
location base. At the end of the third quarter of 1998 the Company's actual
water cooler rental account base was up over 34% over the period ending count in
1997. The acquisition adjusted water cooler account base was up by approximately
18%.
As a percentage of revenue, selling, delivery and administrative expenses
increased from 49.2% in the 1997 period to 53.3% in the 1998 third quarter.
This increase was due to additional reserves for uncollectible accounts
receivable, increased corporate personnel and systems expenditures and increased
expenditures to fund customer growth.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased by 66.6% or $0.8 million to $1.9 million from $1.1 million in the
1997 period. Approximately $0.2 million of this increase was due to the
greater number of delivery days in the 1998 third quarter. This increase
reflects the significant increase in fixed and intangible assets acquired as a
result of acquisitions consummated during and after the 1997 period. In
addition, this increase is a result of depreciation of capital expenditures
required to support the increase in the Company's water cooler customer base
and capital expenditures required to maintain existing operations.
OPERATING PROFIT. After including a charge of $1.8 million for costs
incurred to integrate the 1998 acquisitions into the Company's operations (see
Note 9 to the Notes to Consolidated Financial Statements included elsewhere in
this Report), operating income decreased by $1.4 million from $2.5 million in
the 1997 period to $1.1 million in the 1998 quarter. Excluding this charge,
operating income increased 19.6% or $0.5 million to $3.0 million from $2.5
million in the 1997 period.
As a percentage of revenue, operating profit decreased from 21.5% in the
1997 period to 6.8% in the 1998 quarter due principally to the acquisition and
integration expenses and the increase in the allowance for doubtful accounts
discussed above. Earnings before interest, taxes, depreciation and amortization
expense decreased $0.6 million from $3.6 million in the 1997 period to $3.0
million in the third quarter. Excluding the integration charge EBITDA increased
by $1.3 million or 34.5% to $4.9 million from $3.6 million in the 1997 period.
INTEREST EXPENSE. Interest expense increased by $0.5 million from $1.2
million in the 1997 period to $1.7 million in the 1998 quarter. Interest expense
was reduced by $1.4 million as a result of a reduction in interest expense
accrued due to the fluctuating value of the Company's currency swaps (see Note 5
of the Notes to Consolidated Financial Statements included elsewhere in this
Report). Interest expense for the 1998 third quarter was higher than the third
quarter 1997 by $0.2 million as a result of more delivery days in the quarter.
Excluding these two items, interest expense in the 1998 third quarter increased
by $1.7 million over the 1997 period. This increase is the result of higher
borrowing levels and interest rates as a result of the issuance of $100 million
of 11.5% Senior Subordinated Notes in November of 1997. The proceeds from the
Notes were used to refinance existing debt and complete a reorganization of the
Company as well as to provide funding for future acquisitions, capital
expenditures and working capital for the Company.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1997
REVENUE. Revenue increased $11.0 million or 34.6% to $42.8 million in the
nine months ended September 30, 1998 compared to $31.8 million in the nine
months ended September 30, 1997. This increase was reduced by approximately $0.9
million or 2.7% due to the decline in the Canadian Dollar less benefits from a
slight increase in the exchange rate for the Pound. Revenues from acquisitions
completed during and after the 1997 third quarter accounted for approximately
$8.9 million of the increase. The balance of the increase was from growth in
sales from the Company's increasing customer base. The Company's water cooler
customer locations ended the third quarter at approximately 154,000 up from
115,000 at December 31, 1997. Approximately 21,000 of this increase came from
the acquisitions of Coastal , Krystal Fountain and Springfield.
COST OF SALES. The cost of sales increased by $1.8 million or 31.9% to $7.7
million in 1998 compared to $5.9 million in 1997 largely as a result of
acquisitions completed since the 1997 period. The cost of sales as a percentage
of revenue decreased by 0.3% from 18.4% in 1997 to 18.1% in 1998 as a result of
a lower percentage mix of lower margin small pack sales and other products
including cups and coffee.
8
<PAGE>
OPERATING EXPENSES. Selling, delivery, and administrative operating
expenses increased by $6.4 million or 37.9% to $23.2 million for the nine
months ended September 30, 1998 compared to $16.8 million in the 1997 period.
This increase is due to increased business operations from businesses acquired
during and after the 1997 period and from the underlying growth in the Company's
water cooler location base. At the end of the third quarter of 1998 the
Company's actual water cooler rental account base was up over 34% over the
period ending count in 1997. The acquisition adjusted water cooler account base
was up by approximately 18%.
As a percentage of revenue, selling, delivery and administrative expenses
increased from 52.9% for the nine months ended September 30, 1997 to 54.2% for
the nine months ended September 30, 1998. This increase is due in part to an
increase in the Company's allowance for doubtful accounts of $475,000, increased
marketing expenditures to fund customer growth and increased administrative
charges in corporate personnel and computer systems.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased by 40.5% or $1.6 million to $5.5 million from $3.9 million in the 1997
period. This increase was due to the significant increase in fixed and
intangible assets acquired as a result of acquisitions consummated during and
after the 1997 period. In addition, this increase is a result of depreciation of
capital expenditures required to support the increase in the Company's water
cooler customer base and capital expenditures required to maintain existing
operations.
OPERATING PROFIT. After including a charge of $1.8 million for costs
incurred to integrate the 1998 acquisitions into the Company's operations,
operating profit decreased $0.7 million to $4.5 million in 1998 from $5.2
million in 1997. Excluding this charge, operating profit increased 22.3% or $1.2
million from $5.2 million in 1997. As a percentage of revenue, operating profit
decreased from 16.4% in the 1997 period to 10.6% in the nine months ended
September 30, 1998 due principally to the acquisition charge as discussed above.
Earnings before interest, taxes, depreciation and amortization expense increased
by 10.2% or $0.9 million to $10.0 million from $9.1 million in the 1997 period
as a result of the changes noted above. Excluding the acquisition and
integration charge, EBITDA increased by $2.8 million or 30.2% to $11.9 million
from $9.1 million in 1997.
INTEREST EXPENSE. Interest expense increased by $3.1 million from $2.9
million in the 1997 period to $6.0 million in the 1998 period. Interest expense
was reduced by approximately $2.7 million as a result of interest accrued due to
the fluctuating value of the Company's currency swaps (see Note 5 of the Notes
to Consolidated Financial Statements included elsewhere in this Report).
Interest expense increased over 1997 as a result of higher borrowing levels and
interest rates as a result of the issuance of $100 million of 11.5% Senior
Subordinated Notes in November of 1997. The proceeds from the Notes were used to
refinance existing debt and complete a reorganization of the Company as well as
to provide funding for future acquisitions, capital expenditures and working
capital for the Company.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has funded its capital and operating requirements
with a combination of cash flow from operations, borrowings under bank credit
facilities and equity investments from shareholders. The Company has utilized
these sources of funds to make acquisitions, to fund significant capital
expenditures at its properties, to fund operations and to service debt. The
Company presently expects to fund its future capital and operating requirements
at its existing operations through a combination of cash generated from
operations, excess cash proceeds from the issuance of the Subordinated Notes and
borrowings under the Senior Credit Facility (see below).
Net cash provided by operating activities was $0.3 million for the nine
months ended September 30, 1998 and $3.5 million for the nine months ended
September 30, 1997. Net cash used in investment activities was $23.8 million in
1998 and $25.6 million in 1997. These amounts include $14.9 million related to
three acquisitions completed in the nine months ended September 30, 1998 and six
acquisitions completed in 1997 for $19.8 million. The Company made net capital
expenditures of $7.9 million in the nine months ended September 30, 1998 and
$5.7 million in 1997. Capital expenditures include expenditures related to the
addition of bottling lines at existing facilities, construction of new bottling
facilities, and the purchase of water bottles, water coolers and delivery
trucks. Based on the Company's existing operations, management expects that the
Company's capital expenditures will total approximately $8.5 to $9.0 million in
1998.
The Company believes that the net proceeds from the sale of the
Subordinated Notes together with available cash, cash generated from operations
and available borrowings under the Senior Credit Facility will be sufficient to
finance the Company's
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working capital and capital expenditure requirements for 1998 as well as some
acquisitions. However, there can be no assurance that such resources will be
sufficient to meet the Company's anticipated requirements or that the Company
will not require additional financing within this time frame.
SENIOR CREDIT FACILITY
On May 26, 1998, the Company closed a $40 million Senior Credit Facility
(the "Credit Facility") with Toronto-Dominion. The Credit Facility will be used
for general corporate purposes including working capital, acquisitions and
capital expenditure financing.
The Credit Facility is structured as a multi-currency revolving facility
having a term of approximately six and one half years. Availability under the
Credit Facility requires compliance with certain loan covenants. The Company's
payment obligation under the Credit Facility is secured by a first priority
security interest over substantially all of the assets of the Company;
obligations under the Credit Facility rank senior to the payment of the
Subordinated Notes.
Amounts outstanding under the Credit Facility bear interest at
specified rates based on the Canadian Banker's Acceptance or prime rates in the
case of advances made in Canadian dollars, at specified rates based on the
London inter-bank market in the case of advances made in British pounds sterling
or U.S. dollars, and at specified rates based on the U.S. prime rate in the
event of advances made in U.S. dollars. As of September 30, 1998, the Company
had borrowings outstanding under the Credit Facility of $5.8 million Canadian.
Based on current exchange rates and loan balances outstanding as of September
30, 1998, the Company has available $36.2 million US under the Credit Facility.
YEAR 2000
The Company uses software and other technologies throughout its operations
that will be affected by the Year 2000 issue. Each of the Company's business
locations has established a team to identify and correct Year 2000 issues and in
general have completed the assessment phase and are progressing with required
modifications. The Company's principal financial and operational computer
systems utilize software developed and supported by an outside computer software
supplier. The supplier has upgraded its software for Year 2000 compliance. The
software will be installed and tested at the Company's sites commencing in
December 1998 and continuing in early 1999. In addition, the impact of Year 2000
on manufacturing plants and building facilities is also being addressed. The
Company is also investigating the Year 2000 capabilities of suppliers, customers
and other external entities, and developing contingency plans where necessary.
The Company does not expect the costs associated with Year 2000 to be
material to the Company's consolidated financial position, results of operations
or cash flows. This expectation is based on the assumption that the Company has
contemplated all significant actions required and that significant costs related
to Year 2000 will not be incurred on behalf of the Company's customers or
suppliers.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, SFAS No. 130, Reporting Comprehensive Income, and SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information were
issued. These standards are applicable to the Company commencing with the
December 31, 1998 Financial Statements and its March 31, 1999 Interim Financial
Statements.
The impact of SFAS No. 130 will be to include the change in the cumulative
translation adjustment account in the determination of Comprehensive Income.
The impact of SFAS No. 131 will be to disclose certain information about
the revenues the Company derives from each of its major products in addition to
segmented information for the countries in which it earns revenues and holds
assets.
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SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Statements included in this Report that do not relate to present or
historical conditions are "forward looking statements" within the meaning of the
Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995
(the "1995 Reform Act"). Additional oral or written forward-looking statements
may be made by the Company from time to time, and such statements may be
included in documents other than this Report that are filed with the SEC. Such
forward-looking statements involve risks and uncertainties that could cause
results or outcomes to differ materially from those expressed in such
forward-looking statements. Forward-looking statements in this Report and
elsewhere may include without limitation, statements relating to the Company's
plans, strategies, objectives, expectations, intentions and adequacy of
resources and are intended to be made pursuant to the safe harbor provisions of
the 1995 Reform Act. Words such as "believes," "forecasts," "intends,"
"possible," "expects," "estimates," "anticipates," or "plans" and similar
expressions are intended to identify forward-looking statements. Investors are
cautioned that such forward-looking statements involve risks and uncertainties
including without limitation the following: (i) the Company's plans,
strategies, objectives, expectations and intentions are subject to change at any
time at the discretion of the Company; (ii) the Company's ability to expand by
acquisitions is dependent upon, and may be limited by, the availability of
suitable acquisition candidates and the availability of financing therefor on
suitable terms; (iii) the Company's ability to obtain financing will be affected
by restrictions contained in the Indenture and the Company's other existing and
future financing arrangements; (iv) the Company's proposed expansion strategy
will be substantially dependent upon the Company's ability to hire and retain
skilled management, financial, marketing and other personnel; (v) the Company's
plans and results of operations will be affected by the Company's ability to
successfully manage growth (including monitoring operations, controlling costs
and maintaining effective quality and inventory controls; (vi) the market for
attractive acquisitions in the bottled water industry is becoming increasingly
competitive, which could make the Company's acquisition strategy more difficult
to achieve; (vii) the Company's operations are subject to the jurisdiction of
various governmental and regulatory agencies which regulate the quality of
drinking water and other products and any failure by the Company to comply with
existing and future laws and regulations could subject the Company to
significant penalties or impose additional costs on the Company or otherwise
have a material adverse affect on its financial position or results of
operations; (viii) any interruption in the availability of water to the Company
from municipal sources and local natural springs could have a material adverse
affect on the Company's operations until suitable replacement sources are
located; and (ix) other risks and uncertainties indicated from time to time in
the Company's filings with the SEC.
Part II Other Information
Item 6. Exhibits and Reports on Form 6-K
(a) Exhibits
None
(b) Reports on Form 6-K (incorporated by reference)
Report on Form 6-K dated June 3, 1998 which covers:
Press Release Dated May 19, 1998 Announcing the Acquisition of Krystal
Fountain Water Co. Limited
Press Release Dated May 27, 1998 Announcing the Completion of a $US 40
Million Senior Credit Facility with the Toronto Dominion Bank
Report on Form 6-K dated July 13, 1998 covering the Press Release
dated July 6, 1998 announcing 1st Quarter 1998 Financial Results
Report on Form 6-K dated August 24, 1998 covering the Press Release
dated August 18, 1998 announcing 2nd Quarter 1998 Financial Results
Report on Form 6-K dated September 8, 1998 covering the Press Release
dated August 31, 1998 announcing the acquisition of the assets of the
Springfield Water Division of Brio Industries Inc.
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