<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, 1999
SPARKLING SPRING WATER GROUP LIMITED
19 FIELDING AVENUE, DARTMOUTH, NOVA SCOTIA, CANADA B3B 1C9
(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>
PRIMARY STANDARD
INDUSTRIAL
STATE OR OTHER JURISDICTION OF CLASSIFICATION CODE
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER INCORPORATION OF ORGANIZATION NUMBER
<S> <C> <C>
Sparkling Spring Water Limited Nova Scotia 5149
Spring Water, Inc. Delaware 5149
Cullyspring Water Co., Inc. Washington 5149
Crystal Springs Acquisition, Inc. Delaware 5149
Canadian Springs Water Company Limited Nova Scotia 5149
Nature Springs Water Company Limited England 5149
Aquaporte (UK) Limited England 5149
Krystal Fountain Water Co. Limited England 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, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1999
and December 31, 1998..................................................................1
Consolidated Statements of Operations for the three and nine month
periods ended September 30, 1999 and 1998..............................................2
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and 1998......................................................3
Notes to Consolidated Financial Statements............................................ 4
Item 2. Management's Discussion And Analysis Of
Financial Condition And Results Of Operations..........................................8
Part II Other Information
Item 6. Exhibits and Reports on Form 6-K......................................................12
</TABLE>
<PAGE>
Part I Financial Information
Item 1. Financial Statements
SPARKLING SPRING WATER GROUP LIMITED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(in U.S. dollars) SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current
Cash and cash equivalents $ 621,841 $ 9,728,373
Accounts receivable 13,525,889 10,983,492
Inventories [NOTE 3] 1,355,753 1,340,350
Prepaid expenses 1,647,573 1,320,054
------------- -------------
Total current assets 17,151,056 23,372,269
Deferred taxes 615,723 854,240
Fixed assets 33,226,222 31,136,458
Goodwill and deferred charges 50,187,728 51,127,488
Due from parent company 1,142,872 1,142,872
------------- -------------
Total assets $102,323,601 $107,633,327
============= =============
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Current
Accounts payable and accrued liabilities $ 11,616,954 $ 9,107,830
Income tax payable -- 130,000
Customer deposits 5,562,315 5,032,841
Senior bank debt - operating line [NOTE 8] 3,270,565 --
Debt due within one year 989,951 1,399,116
------------- -------------
Total current liabilities 21,439,785 15,669,787
------------- -------------
Obligations under capital leases and other debt 2,471,416 3,252,032
Senior bank debt - term loan [NOTE 8] 8,523,194 7,664,961
Subordinated notes payable [NOTE 4] 90,000,000 100,000,000
Other liabilities [NOTE 4] 58,858 835,998
------------- -------------
Total long-term liabilities 101,053,468 111,752,991
------------- -------------
Shareholder's equity (deficit)
Capital Stock
Issued and outstanding:
Class D common shares - 1,383,328 6,106,000 5,769,132
Class E common shares - 5,860 173,661 164,080
Less: Subscriptions receivable (107,984) (230,003)
------------- -------------
6,171,677 5,703,209
Cumulative translation adjustment (2,181,896) (3,180,597)
Deficit (24,159,433) (22,312,063)
------------- -------------
Total shareholder's equity (deficit) (20,169,652) (19,789,451)
------------- -------------
Total liabilities and
shareholder's equity (deficit) $102,323,601 $107,633,327
============= =============
</TABLE>
SEE ACCOMPANYING NOTES
1
<PAGE>
SPARKLING SPRING WATER GROUP LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
9/30/99 9/30/98 9/30/99 9/30/98
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
(in U.S. dollars)
Revenue:
Water $ 11,752,434 $ 10,645,773 $ 31,457,815 $ 27,126,999
Rental 4,059,051 3,868,235 11,267,955 10,182,050
Other 1,919,542 1,973,796 5,522,271 5,492,216
------------ ------------ ------------ ------------
Total revenue 17,731,027 16,487,804 48,248,041 42,801,265
------------ ------------ ------------ ------------
Cost of sales:
Water 2,679,317 2,143,484 6,815,434 5,892,695
Other 800,248 871,213 2,291,538 2,313,323
------------ ------------ ------------ ------------
Total cost of sales 3,479,565 3,014,697 9,106,972 8,206,018
------------ ------------ ------------ ------------
Gross profit 14,251,462 13,473,107 39,141,069 34,595,247
Expenses:
Selling, delivery and administrative 9,039,622 8,604,543 25,523,069 22,728,941
Depreciation and amortization 2,552,923 1,912,501 7,447,144 5,504,505
Acquisition, integration and related
expenses [NOTE 9] -- 1,825,000 -- 1,825,000
------------ ------------ ------------ ------------
Operating profit 2,658,917 1,131,063 6,170,856 4,536,801
Interest and related expenses [NOTE 4] 3,636,719 1,693,960 8,775,974 5,997,125
------------ ------------ ------------ ------------
Loss before income taxes and extraordinary item (977,802) (562,897) (2,605,118) (1,460,324)
Recovery of income taxes -- 100,000 -- 286,820
------------ ------------ ------------ ------------
Loss before extraordinary item (977,802) (462,897) (2,605,118) (1,173,504)
Extraordinary item [NOTE 5] -- -- 757,748 --
------------ ------------ ------------ ------------
Net loss (977,802) (462,897) (1,847,370) (1,173,504)
Other comprehensive income (loss):
Foreign currency translation adjustment 1,182,123 (625,571) 998,701 (657,379)
------------ ------------ ------------ ------------
Comprehensive income (loss) $ 204,321 $ (1,088,468) $ (848,669) $ (1,830,883)
============ ============ ============ ============
Basic loss per share before extraordinary item $ (0.70) $ (0.33) $ (1.88) $ (0.85)
============ ============ ============ ============
Basic loss per share $ (0.70) $ (0.33) $ (1.33) $ (0.85)
============ ============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES
2
<PAGE>
SPARKLING SPRING WATER GROUP LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------ ------------
<S> <C> <C>
(in U.S. dollars)
OPERATING ACTIVITIES
Net loss $ (1,847,370) $ (1,173,504)
Items not requiring cash
Depreciation and amortization 7,447,144 5,504,505
Deferred taxes 150,623 (161,452)
Amortization of deferred financing costs 403,596 317,465
Extraordinary item (757,748) --
Cross currency swap (721,963) (2,748,614)
------------ ------------
4,674,282 1,738,400
Net change in non-cash working capital balances 61,157 (1,126,435)
------------ ------------
Cash provided by operating activities 4,735,439 611,965
------------ ------------
INVESTING ACTIVITIES
Purchase of fixed assets, net (7,764,272) (7,888,658)
Acquisitions -- (14,853,048)
Increase in other assets -- (1,142,872)
------------ ------------
Cash used in investing activities (7,764,272) (23,884,578)
------------ ------------
FINANCING ACTIVITIES
Increase in long-term debt 4,087,140 4,657,863
Repayment of long-term debt (1,228,795) (1,379,094)
Repurchase of subordinated notes payable (8,500,000) --
Issuance of common shares -- 262,080
Increase in deferred charges (233,602) (840,467)
Decrease in subscription receivable 122,019 --
------------ ------------
Cash provided by (used in) financing activities (5,753,238) 2,700,382
------------ ------------
Effect of foreign currency translation on cash (324,461) (150,447)
Decrease in cash and cash equivalents during the period (9,106,532) (20,722,678)
Cash and cash equivalents, beginning of period 9,728,373 27,507,257
------------ ------------
Cash and cash equivalents, end of period $ 621,841 $ 6,784,579
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid $ 6,668,499 $ 6,130,173
============ ============
Income taxes paid $ 285,288 $ 347,118
============ ============
</TABLE>
SEE ACCOMPANYING NOTES
3
<PAGE>
SPARKLING SPRING WATER GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(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. Balance sheet
accounts of all non-U.S. entities are translated into U.S. dollars at the
exchange rates in effect at the balance sheet date. Income statement accounts
of all non-U.S. entities are translated into U.S. dollars at average exchange
rates prevailing during the period. Gains and losses on translation are
included in a separate component of shareholder's equity titled "cumulative
translation adjustment".
The accompanying unaudited consolidated financial statements have
been prepared on a historical cost basis by management 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 cash flows 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, 1998 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, 1999 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1999 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, 1999 DECEMBER 31, 1998
---------- ----------
(UNAUDITED)
<S> <C> <C>
Packaging materials $ 677,837 $ 598,985
Goods for resale 400,513 482,733
Cooler parts 173,215 142,695
Other 104,188 115,937
---------- ----------
$ 1,355,753 $ 1,340,350
========= =========
</TABLE>
4
<PAGE>
SPARKLING SPRING WATER GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(Unaudited)
4. Derivative 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 which was terminated in October 1998. The semi
annual interest payments on the Pound Sterling swap are approximately 1.1
million pounds. At September 30, 1999 the aggregate fair market value of the
Pound Sterling swap liability was approximately $59,000 in favor of the bank
(at December 31, 1998 it was $836,000 in favor of the bank). For the nine
months ended September 30, 1999, approximately $0.7 million of the $0.8
million decrease in the swap liability was recorded as a decrease in interest
expense. For the nine months ended September 30, 1998, approximately $2.7
million of the increase in the swap asset between December 31, 1997 and
September 30, 1998 was recorded as a decrease in interest expense.
5. Extraordinary Item
In May 1999, the Company paid $8.5 million to repurchase $10 million
face value of its outstanding Subordinated Notes Payable. A gain of $757,748
related to the repurchase of the Subordinated Notes has been recorded, net of
applicable income taxes of $386,000 and costs of $356,252 representing a
write off of a proportionate amount of deferred charges incurred in
connection with the issuance of the Subordinated Notes in November of 1997.
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 as the effect
would be antidilutive.
The weighted average number of shares used to calculate basic loss
per share is 1,389,188 for the three and nine months ended September 30, 1999
and 1,383,328 for the three and nine months ended September 30, 1998.
7. 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. ("Springfield") for
approximately $3.9 million. Springfield operates primarily in the Vancouver,
British Columbia market.
The following unaudited pro forma information presents a summary of
consolidated results of operations as if the acquisitions of Coastal Mountain
Water Corp., Krystal Fountain Water Co. Limited and the Springfield Water
Division of Brio Industries Inc. had occurred at January 1, 1998.
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------
<S> <C> <C>
Total revenue $48,248,041 $45,661,928
Net loss (1,847,370) (1,218,572)
Extraordinary item 757,748 --
Basic loss per share (1.33) (0.88)
</TABLE>
5
<PAGE>
SPARKLING SPRING WATER GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(Unaudited)
8. Senior Credit Facility
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. As at December
31, 1998, the Company was in violation of a financial covenant under the
Senior Credit Facility. On May 17, 1999, the Company finalized an agreement
with its lenders to amend the Senior Credit Facility (the "Amended
Facility"). The Amended Facility restores the Company's compliance with all
financial covenants and includes three separate credit facilities totaling
$30 million.
The Amended Facility is structured as a multi-currency facility and
provides for a $15 million operating line which is renewable annually by
April 30th, a $5 million five year acquisition line and a $10 million short
term credit line expiring October 31, 1999 that provides the Company with
flexibility to repurchase, at its discretion, certain of the Company's
outstanding Subordinated Notes Payable. Any amounts borrowed under this
Facility will be repaid ratably over a five-year period commencing October
31, 2000. The Company has pledged as collateral 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 Amended Facility rank
senior to the payment of the Company's Subordinated Notes Payable.
9. Acquisition, Integration and Related Expenses
In 1998 the Company completed the acquisitions of Coastal Mountain
Water Corp., Krystal Fountain Water Co. Limited and the Springfield Water
Division of Brio Industries Inc. 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 was not completed.
10. Summary of Business Segments
The Company's business segments derive substantially all their
revenues from the sale of bottled water and the rental of water coolers. The
Company has identified three primary business segments: Canada, the United
Kingdom and the United States.
Segment detail is summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
9/30/99 9/30/98 9/30/99 9/30/98
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Revenue:
Canada $ 6,907,664 $ 6,568,072 $19,008,476 $16,960,194
United Kingdom 7,202,401 6,526,727 19,089,867 16,705,675
United States 3,620,962 3,393,005 10,149,698 9,135,396
----------- ----------- ----------- -----------
$17,731,027 $16,487,804 $48,248,041 $42,801,265
=========== =========== =========== ===========
Net income before depreciation,
interest, income taxes and extraordinary item:
Canada $ 1,659,978 $ 1,912,685 $ 4,867,109 $ 4,273,419
United Kingdom 2,589,103 2,480,229 6,721,771 5,800,587
United States 693,599 856,714 2,200,487 2,373,080
Unallocated corporate overhead 269,160 (381,064) (171,367) (580,780)
----------- ----------- ----------- -----------
$ 5,211,840 $ 4,868,564 $13,618,000 $11,866,306
=========== =========== =========== ===========
</TABLE>
11. Comparative Figures
Certain of the comparative figures have been reclassified to
conform with the presentation adopted in the current period.
6
<PAGE>
SPARKLING SPRING WATER GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(Unaudited)
12. Subsequent Events
(a) In October 1999, the Company repurchased $1.9 million face value of its
outstanding Subordinated Notes Payable for $1.46 million plus accrued
interest, completing the repurchase of $10 million of Subordinated Notes
Payable authorized by the Company's Board of Directors. Upon completion
of this repurchase, the Company has fully utilized the $10 million
credit line available under the Amended Facility (see note 8) which has
now been converted to a 5-year term loan.
(b) On November 8, 1999, the Company signed a letter of intent with Baxter
Foods Limited to acquire their Misty Mountain water business that
operates in the Nova Scotia and New Brunswick, Canada markets. Closing
is scheduled for the end of November, 1999.
7
<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 THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
9/30/99 9/30/98 9/30/99 9/30/98
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue 100% 100% 100% 100%
Cost of sales 19.6 18.3 18.9 19.2
------- ------- ------- -------
Gross profit 80.4 81.7 81.1 80.8
Selling, delivery and administrative 51.0 52.2 52.9 53.1
Acquisition, integration and
related expenses -- 11.1 -- 4.2
------- ------- ------- -------
EBITDA 29.4 18.4 28.2 23.5
Depreciation and amortization 14.4 11.6 15.4 12.9
------- ------- ------- -------
Operating profit 15.0 6.8 12.8 10.6
Interest and related expenses 20.5 10.3 18.2 14.0
------- ------- ------- -------
Loss before income taxes and
extraordinary item (5.5) (3.5) (5.4) (3.4)
Recovery of income taxes -- 0.6 -- 0.7
------- ------- ------- -------
Net loss before extraordinary item (5.5) (2.9) (5.4) (2.7)
Extraordinary item -- -- 1.6 --
------- ------- ------- -------
Net loss (5.5) (2.9) (3.8) (2.7)
======= ======= ======= =======
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1998
REVENUE. Revenue increased $1.2 million or 7.5% to $17.7 million in
the three months ended September 30, 1999 compared to $16.5 million in the
three months ended September 30, 1998. Revenues from acquisitions completed
during the 1998 third quarter accounted for approximately $0.4 million or
2.2% of the increase. Revenue growth was reduced by approximately $140,000 or
1% due to a decrease in the Pound Sterling which was only partially offset by
an increase in the Canadian dollar. The balance of the increase was from
growth in sales from the Company's higher customer location base. The
Company's customer locations ended the third quarter at approximately
158,000, up from 153,000 at June 30, 1999.
8
<PAGE>
COST OF SALES. The cost of sales increased by $0.5 million or 15.4%
to $3.5 million in 1999 compared to $3.0 million in 1998 as a result of
acquisitions completed in the 1998 period, growth in the Company's underlying
customer base and line start-up expenses and other charges at the Company's
new facility in Vancouver, British Columbia. The cost of sales as a
percentage of revenue increased by 1.3% from 18.3% in the 1998 period to
19.6% in the 1999 third quarter primarily as a result of an increase in the
plant operating costs in Vancouver as outlined above.
OPERATING EXPENSES. Selling, delivery, and administrative operating
expenses (excluding $1.8 million in acquisition and integration expense)
increased by $0.4 million or 5.1% to $9.0 million in the 1999 third quarter
from $8.6 million in the 1998 period. This increase is primarily due to
approximately $0.3 million from businesses acquired during the 1998 period
plus higher levels of operating activity. As a percentage of revenue,
selling, delivery and administrative expenses decreased from 52.2% in the
1998 period to 51.0% in the 1999 third quarter. Increases in the Company's
semi-fixed operating expenses were more than offset by the growth in the
Company's revenues.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased by 33.5% or $0.6 million to $2.5 million from $1.9 million in the
1998 period. This increase was the result of depreciation of capital
expenditures made in 1999 to support the growth in the Company's water cooler
customer base and due to the significant increase in fixed and intangible
assets acquired as a result of acquisitions consummated during 1998.
OPERATING PROFIT. The Company's operating profit increased by 135.1%
or $1.5 million to $2.6 million from $1.1 million in 1998 as a result of the
changes noted above. As a percentage of revenue, operating profit increased
to 15.0% in the 1999 third quarter from 6.8% in the 1998 period due
principally to the absence in 1999 of integration expenses which were
incurred in the 1998 third quarter to integrate acquisitions into the
Company's existing operations. Excluding the acquisition and integration
charge in 1998, earnings before interest, taxes, depreciation and
amortization expense ("EBITDA") increased by 7.1% or $0.3 million to $5.2
million from $4.9 million in the 1998 period. As a percentage of revenue,
EBITDA decreased to 29.4% in the 1999 quarter from 29.5% in the 1998 period
primarily as a result of the Vancouver plant start up expenses as noted above.
INTEREST EXPENSE. Interest expense increased by $1.9 million from
$1.7 million in the third quarter of 1998 to $3.6 million in the 1999
quarter. Interest expense was increased by $0.6 million in the third quarter
of 1999 and reduced by $1.4 million in the 1998 quarter as a result of
interest accrued due to the fluctuating value of the Company's currency swap
(see Note 4 of the Notes to Consolidated Financial Statements included
elsewhere in this Report). Excluding the impact of accounting for the cross
currency swap, interest expense in the 1999 second quarter decreased by $0.1
million over the 1998 period. This decrease is attributable to a lower
effective interest rate on the Company's outstanding debt due principally to
the repurchase of $10 million face value of the Company's Subordinated Notes
Payable in the second quarter plus lower interest rates on the Company's
Canadian and Sterling debt obligations.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1998
REVENUE. Revenue increased $5.4 million or 12.7% to $48.2 million in
the nine months ended September 30, 1999 compared to $42.8 million in the
nine months ended September 30, 1998. Revenues from acquisitions completed
during the 1998 period accounted for approximately $2.8 million of the
increase. Revenue growth was reduced by approximately $0.8 million or 1.8%
due to declines in both the Canadian Dollar and Pound Sterling. The balance
of the increase was from growth in water sales from the Company's higher
customer location base. The Company's customer locations ended the third
quarter at approximately 158,000, an increase of 3,000 from December 31,
1998. Excluding a customer base adjustment to eliminate accounts that have
not purchased a product in the last 84 days, the Company's actual customer
base grew by approximately 9,000 during the first nine months of 1999.
COST OF SALES. The cost of sales increased by $0.9 million or 11.0%
to $9.1 million in 1999 compared to $8.2 million in 1998 as a result of
acquisitions completed in the 1998 period, growth in the Company's underlying
customer base and plant start-up expenses in Vancouver. The cost of sales as
a percentage of revenue decreased by 0.3% from 19.2% in the 1998 period to
18.9% in 1999. This decrease was primarily due to an increase in the
percentage of revenues derived from higher margin home and office water
sales, increased cooler rental revenues and improved production efficiencies.
Revenues from sales of lower margin small pack cases declined approximately
7.2% during the first nine months of 1999.
OPERATING EXPENSES. Selling, delivery, and administrative operating
expenses (excluding $1.8 million in acquisition and integration expenses)
increased by $2.8 million or 12.3% to $25.5 million for the nine months ended
September 30, 1999 compared to $22.7 million in the 1998 period. This
increase is primarily due to a $0.2 million increase in bad debt reserves and
approximately $1.7 million from businesses acquired during the 1998 period.
The balance of the increase was primarily related to additional expenses
necessary to support the Company's increased customer base that was up over
6% from the adjusted count in the year ago period, including an increase in
general and administrative expenditures to fund increases in corporate
personnel and enhanced computer systems. As a percentage of revenue,
operating expenses decreased from 53.1% to 52.9%. This decrease was a result
of improved operating efficiencies on the increased revenues partially offset
by increased bad debt reserves.
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DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased by 35.3% or $1.9 million to $7.4 million from $5.5 million in the
1998 period. As a percentage of revenue, depreciation and amortization
expense increased by 2.5% from 12.9% to 15.4%. This increase was the result
of depreciation of capital expenditures made in 1999 to support the growth in
the Company's water cooler customer base and due to the significant increase
in fixed and intangible assets acquired as a result of acquisitions
consummated during the 1998 period.
OPERATING PROFIT. The Company's operating profit increased by 36.0%
or $1.6 million to $6.1 million from $4.5 million as a result of the changes
noted above. As a percentage of revenue, operating profit increased from
10.6% in the 1998 period to 12.8% in the nine months ended September 30, 1999
as the decrease in the cost of sales percentage and the absence of
integration and acquisition expenses in 1999 offset the increase in
depreciation and amortization expense as discussed above. Excluding the
acquisition and integration charge in 1998, EBITDA increased by 14.8% or $1.7
million to $13.6 million from $11.9 million in the 1998 period due to
increased revenues and slightly higher operating margins. As a percentage of
revenues, EBITDA increased to 28.2% in the first nine months of 1999 from
27.7% in the 1998 period.
INTEREST EXPENSE. Interest expense increased by $2.8 million from
$6.0 million in the 1998 period to $8.8 million in the 1999 period.
Approximately $2 million of this increase was related to the Company's cross
currency swap. Interest expense was reduced by approximately $0.7 million in
the nine months ended September 30, 1999 and reduced by $2.7 million in the
1998 period due to the fluctuating value of the Company's currency swap (see
Note 4 of the Notes to Consolidated Financial Statements included elsewhere
in this Report). Excluding the impact of accounting for the cross currency
swap, interest expense for the nine months ended September 30, 1999 increased
by approximately $0.8 million as a result of higher borrowing levels (net of
cash) incurred to fund capital expenditures and business acquisitions
completed during the 1998 period. Interest expense on the higher net
borrowing levels was partially offset by a decrease in average interest rates
arising from the repurchase of $10 million of the Company's Senior
Subordinated Notes and lower rates in Canada and the United Kingdom.
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
existing cash balances, cash generated from operations and borrowings under
the Senior Credit Facility (see below).
Net cash provided by operating activities was $4.7 million for the
nine months ended September 30, 1999 and $0.6 million for the 1998 period.
Net cash used in investment activities was $7.8 million in 1999 and $23.9
million in 1998. The 1998 balance includes $14.9 million related to the
acquisitions of Coastal Mountain Water Corp., Krystal Fountain Water Co.
Limited and the Springfield Water Division of Brio Industries Inc. The
Company made net capital expenditures of $7.8 million in the nine months
ended September 30, 1999 and $7.9 million in the nine months ended September
30, 1998. Capital expenditures in the 1999 period include the purchase of
$1.1 million of production equipment for a new plant in Vancouver, Canada and
the addition of water bottles, water coolers, delivery trucks and computer
equipment. Based on the Company's existing operations, management expects
that the Company's capital expenditures will total approximately $9.8 million
in 1999.
In May 1999, the Company paid $8.5 million to repurchase $10 million
face value of its outstanding Subordinated Notes Payable. An extraordinary
gain of $757,748 related to the repurchase of the Subordinated Notes has been
recorded, net of applicable income taxes of $386,000 and costs of $356,252
representing a write off of a proportionate amount of deferred charges
incurred in connection with the issuance of the Subordinated Notes in
November of 1997.
The Company believes that existing cash balances together with cash
generated from operations and available borrowings under the Senior Credit
Facility will be sufficient to finance the Company's working capital and
capital expenditure requirements for the remainder of 1999 as well as some
small acquisitions. However, there can be no assurance that such resources
will be sufficient to meet the Company's anticipated requirements or that
capital will be available to the Company on terms and conditions acceptable
to the Company.
SENIOR CREDIT FACILITY
On May 26, 1998, the Company completed a $40 million Senior Credit
Facility (the "Credit Facility") with the Toronto-Dominion Bank. The Credit
Facility was to be used for purposes of financing future capital investments,
working capital, business acquisitions and general corporate purposes. As at
December 31, 1998, the Company was in violation of a financial covenant under
the Senior Credit Facility. On May 17, 1999, the Company reached agreement
with its lenders to amend the Senior Credit Facility (the "Amended
Facility"). The Amended Facility will provide the Company with increased
operating flexibility and restored the Company's compliance with all
financial covenants.
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The Amended Facility is structured as a multi-currency facility and
provides for a $15 million operating line which is renewable annually by
April 30, a $5 million five year acquisition line and a $10 million short
term credit line expiring October 31, 1999 that provides the Company with
flexibility to repurchase, at its discretion, certain of the Company's
outstanding Subordinated Notes Payable. The Company's payment obligation
under the Amended Facility is secured by a first priority security interest
over substantially all of the assets of the Company; obligations under the
Amended Facility rank senior to the payment of the Subordinated Notes
Payable. Any amounts borrowed under the Amended Facility will be repaid
ratably over a five year period commencing October 31, 2000 based on the
balances outstanding as of that date.
Amounts outstanding under the Amended Facility bear interest at
specified rates based on the Canadian prime, U.S. prime, London inter-bank
market and Bankers' Acceptances rates. As of September 30, 1999, the Company
had approximately $9.0 million of available credit under its $15.0 million
operating line, $1.5 million available under its $10 million Subordinated
Note repurchase facility and $5.0 million available under the acquisition
facility.
YEAR 2000
The Year 2000 issue arises due to computer programs using two digits
rather than four to define an applicable year. Computer programs may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in system failures or miscalculations leading to disruptions in
the Company's operations. If the Company or its significant customers or
suppliers fail to adequately address the Year 2000 issue, such failure could
have an adverse impact on the Company's ability to operate its business.
Sparkling Spring has taken action to address and complete the work
associated with the Year 2000. Each of the Company's business locations has
established a team to identify and correct Year 2000 issues. The Company's
principal financial and operational computer systems utilize software
developed and supported by an outside computer software supplier. It is the
Company's understanding that this supplier has completed an analysis of the
changes required to accommodate the Year 2000 and that these changes are
incorporated in the most recent software upgrades provided to the Company.
The Company has installed and completed its testing of these software
upgrades at all of its locations. 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 estimates that the total cost of addressing and
completing the work associated with the Year 2000 issue will be approximately
$250,000 exclusive of expenditures for software and telephone system upgrades
required to accommodate the Company's growth and anticipated future
requirements. 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. This assumption also excludes any capital costs that
may be required to purchase returnable bottles if the Company's customers
decide to increase inventories as a precaution over the year-end period.
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
its December 31, 1998 Financial Statements and its March 31, 1999 Interim
Financial Statements.
The impact of SFAS No. 130 is to include the change in the
cumulative translation adjustment account in the determination of
Comprehensive Income.
The impact of SFAS No. 131 is 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.
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
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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; (ix) risks
associated with issues surrounding Year 2000 for the Company, its customers
and suppliers; and (x) 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 6-K (incorporated by reference)
Report on Form 6-K dated August 31, 1999 covering the Press
Release dated August 15, 1999 announcing improved second quarter
revenues and earnings.
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