United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition to
period from
------------- ---------------
Commission file number 1-13809
AquaPenn Spring Water Company, Inc.
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1541772
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One AquaPenn Drive
P.O. Box 938
Milesburg, PA 16853
(Address of principal executive office and zip code)
(814) 355-5556
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to filing
requirements for the past 90 days.
YES X NO
--- ----
As of August 7, 1998, 7,835,324 shares of the Registrant's common stock were
outstanding.
<PAGE>
AquaPenn Spring Water Company, Inc.
FORM 10-Q For the Quarter Ended June 30, 1998
INDEX
Page
Facing sheet 1
Index 2
Part I. Financial Information
Item 1. Financial Statements (unaudited)
a) Independent Accountants' Review Report 3
b) Consolidated Balance Sheets at June 30, 1998
and September 30, 1997 4
c) Consolidated Statements of Operations for the three
and nine months ended June 30, 1998 and 1997 5
d) Consolidated Statements of Cash Flows for the
nine months ended June 30, 1998 and 1997 6
e) Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Exhibits Exhibit 11 - Computation of Net Income Per Common Share
Exhibit 15 - Letter Regarding Unaudited Interim Financial
Information
Exhibit 27 - Financial Data Schedule
2
<PAGE>
Independent Accountants' Review Report
To the Board of Directors
AquaPenn Spring Water Company, Inc.:
We have reviewed the consolidated balance sheet of AquaPenn Spring Water
Company, Inc. and subsidiaries as of June 30, 1998, and the related consolidated
statements of operations for the three and nine month periods then ended and the
consolidated statements of cash flows for the nine months then ended. These
consolidated financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of AquaPenn Spring Water Company, Inc.
and subsidiaries as of September 30, 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year then
ended (not presented herein); and in our report dated October 21, 1997, except
for note 15 which was as of October 24, 1997, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying consoliated balance sheet as of
September 30, 1997, is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
KPMG PEAT MARWICK LLP
State College, Pennsylvania
August 11, 1998
3
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
AQUAPENN SPRING WATER COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, September 30,
1998 1997
--------- -------------
ASSETS (Unaudited)
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 1,745 $ 687
ACCOUNTS RECEIVABLE, NET 7,144 3,605
INVENTORIES 3,707 1,534
OTHER 1,299 668
-------- --------
TOTAL CURRENT ASSETS 13,895 6,494
-------- --------
PROPERTY, PLANT AND EQUIPMENT, NET 40,516 20,031
GOODWILL, NET 4,115 --
OTHER 339 55
-------- --------
TOTAL ASSETS $ 58,865 $ 26,580
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
CURRENT PORTION OF NOTES PAYABLE $ 114 $ 299
TRADE ACCOUNTS PAYABLE 4,310 140
INCOME TAXES PAYABLE 1,518 822
OTHER ACCRUED LIABILITIES 4,144 2,137
-------- --------
TOTAL CURRENT LIABILITIES 10,086 3,398
-------- --------
DEFERRED INCOME TAXES 600 600
NOTES PAYABLE 1,780 4,518
-------- --------
TOTAL LIABILITIES 12,466 8,516
-------- --------
STOCKHOLDERS' EQUITY:
SERIES A, NON-VOTING CONVERTIBLE PREFERRED
STOCK, $1 PAR VALUE; 0 AND 1,713,750 SHARES
ISSUED, RESPECTIVELY -- 1,714
COMMON STOCK, NO PAR VALUE; 100,000,000 SHARES
AUTHORIZED; 7,838,328 AND 4,423,712 SHARES
ISSUED, RESPECTIVELY 41,108 12,196
RETAINED EARNINGS 5,373 4,242
LESS TREASURY STOCK AND STOCK SUBSCRIPTIONS (82) (88)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 46,399 18,064
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 58,865 $ 26,580
======== ========
See notes to consolidated financial statements.
4
<PAGE>
AQUAPENN SPRING WATER COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ ------------------
1998 1997 1998 1997
------- ------- ------- -------
(Unaudited) (Unaudited)
NET REVENUES $17,356 $12,890 $36,401 $25,311
COST OF GOODS SOLD 12,614 9,210 28,170 18,947
------- ------- ------- -------
GROSS PROFIT 4,742 3,680 8,231 6,364
SALES AND PROMOTION 2,681 1,027 4,665 2,194
GENERAL AND ADMINISTRATIVE 735 478 2,011 1,305
------- ------- ------- -------
3,416 1,505 6,676 3,499
------- ------- ------- -------
INCOME FROM OPERATIONS 1,326 2,175 1,555 2,865
OTHER INCOME, (EXPENSE) 100 19 349 79
------- ------- ------- -------
INCOME BEFORE INCOME TAX
EXPENSE 1,426 2,194 1,904 2,944
INCOME TAX EXPENSE 579 879 773 1,184
------- ------- ------- -------
NET INCOME $ 847 $ 1,315 $ 1,131 $ 1,760
======= ======= ======= =======
INCOME PER COMMON SHARE
BASIC $ 0.11 $ 0.30 $ 0.17 $ 0.41
======= ======= ======= =======
DILUTED $ 0.10 $ 0.22 $ 0.15 $ 0.30
======= ======= ======= =======
SHARES USED IN COMPUTING INCOME PER
COMMON SHARE
BASIC 7,822 4,418 6,842 4,320
======= ======= ======= =======
DILUTED 8,409 5,920 7,445 5,821
======= ======= ======= =======
The income per common share, the number of shares used in the per share
calculations and all share information for the periods presented reflect the
0.6008-for-one reverse stock split that was effective January 28, 1998.
See notes to consolidated financial statements.
5
<PAGE>
AQUAPENN SPRING WATER COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
---------------------
1998 1997
-------- --------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME $ 1,131 $ 1,760
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 2,117 1,718
ISSUANCE OF COMMON STOCK AND OPTIONS FOR
SPRING WATER LEASE 291 --
CHANGE IN ASSETS AND LIABILITIES, EXCLUDING ACQUISITION:
INCREASE IN ACCOUNTS RECEIVABLE, NET (2,993) (3,441)
INCREASE IN INVENTORIES (1,772) (298)
INCREASE IN OTHER CURRENT ASSETS (521) (441)
INCREASE IN OTHER ASSETS (277) (15)
INCREASE IN ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 5,294 1,995
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,270 1,278
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
PURCHASE OF PROPERTY, PLANT AND EQUIPMENT (19,431) (5,851)
ACQUISITION OF CASTLE ROCK (1,437) --
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (20,868) (5,851)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM NOTES PAYABLE 42,726 8,900
REPAYMENTS OF NOTES PAYABLE (48,918) (4,569)
ISSUANCE OF STOCK UNDER EMPLOYEE STOCK PURCHASE
PLAN 428 620
PROCEEDS FROM EXERCISE OF STOCK WARRANTS AND OPTIONS 765 --
PROCEEDS FROM SALE OF COMMON STOCK, NET 23,661 --
INTEREST ACCRUED ON STOCK SUBSCRIPTIONS RECEIVABLE (6) (5)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 18,656 4,946
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,058 373
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 687 186
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,745 $ 559
======== ========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
AQUAPENN SPRING WATER COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(continued)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR INTEREST
INCLUDING $337 OF INTEREST CAPITALIZED IN
FISCAL 1998 $ 407 $ 140
===== =====
CASH PAID DURING THE PERIOD FOR INCOME TAXES $ 290 $ 755
===== =====
ACQUISITION OF CASTLE ROCK
FAIR VALUE OF ASSETS ACQUIRED $ 8,166
LIABILITIES ASSUMED (4,663)
STOCK ISSUED (2,066)
--------
CASH PAID $ 1,437
========
See notes to consolidated financial statements.
7
<PAGE>
AquaPenn Spring Water Company, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
AquaPenn Spring Water Company, Inc. (the "Company") bottles and
distributes non-sparkling natural spring water products to regional and national
customers under retailers' and other customers' private labels and under its
proprietary brand labels.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial data as of June 30, 1998, and for the three
and nine month periods ended June 30, 1998 and June 30, 1997, have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The September 30, 1997 balance sheet was
derived from audited financial statements, but does not include all disclosures
required by generally accepted accounting principles. However, the Company
believes that the disclosures are adequate to make the information presented not
misleading. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company's Registration Statement on Form S-1 (File number
333-38771). The consolidated financial statements presented herein as of June
30, 1998, and for the three and nine month periods ended June 30, 1998, include
the results of Dunsmuir Bottling Company, Inc. acquired by the Company on
October 15, 1997, and the activity of the Company's other subsidiaries, all of
which are wholly owned.
In the opinion of management, all adjustments, which are of a normal and
recurring nature, necessary for a fair statement of the financial position,
results of operations, and cash flows of these interim periods have been
included.
Calculation of Net Income Per Share
During the first quarter of fiscal 1998, the Company adopted Statement of
Financial Accounting Standards No. 128 (SFAS No. 128), "Earnings per Share",
which establishes standards for computing and presenting earnings per share
("EPS") data. SFAS No. 128 replaces the previous standards for presentation of
primary and fully diluted EPS with basic and diluted EPS. Basic EPS excludes the
dilutive impact of common stock equivalents and is computed by dividing income
available to common stockholders by the weighted average number of shares of
common stock outstanding during the period. Diluted EPS includes the effect of
potential dilution from the exercise of common stock equivalents, and is
computed similarly to fully diluted EPS pursuant to Accounting Principles Board
Opinion 15. All prior periods presented have been restated to reflect this
adoption.
8
<PAGE>
AquaPenn Spring Water Company, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Inventories
Inventories consist of the following:
June 30, September 30,
1998 1997
--------- -------------
(Unaudited)
Raw materials $2,281 $1,088
Finished goods 1,426 446
------ ------
$3,707 $1,534
====== ======
4. Acquisition of Dunsmuir Bottling Company, Inc.
On October 15, 1997, the Company acquired California based Dunsmuir
Bottling Company, Inc. (also known as "Castle Rock") for a purchase price, after
post-closing adjustments, of $1,437,000 in cash, the issuance of 158,900 shares
of the Company's common stock, and the granting of options to purchase 27,264
shares of the Company's common stock at $13 per share. The Company also assumed
approximately $4,663,000 of Castle Rock liabilities.
The following pro forma condensed combined balance sheet assumes the
acquisition of Castle Rock occurred at September 30, 1997 and the pro forma
condensed combined statement of operations assumes the acquisition occurred at
the beginning of fiscal 1997. This unaudited pro forma financial information
does not purport to be indicative of what would have occurred had the
acquisition been made at the beginning of fiscal 1997, or of the results which
may occur in the future.
Pro Forma Condensed Combined Balance Sheet
(Unaudited)
September 30, 1997
(In thousands)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
AquaPenn Dunsmuir Adjustments Combined
-------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Assets:
Current assets $ 6,494 $ 1,275 $ $ 7,769
Property, plant and equipment 20,031 3,092 23,123
Other noncurrent assets 55 6 4,115 (a) 4,176
-------- -------- -------- --------
$ 26,580 $ 4,373 $ 4,115 $ 35,068
======== ======== ======== ========
Liabilities and Stockholders' Equity:
Current liabilities $ 3,398 $ 2,275 $ 1,437 (a) $ 7,110
Long-term liabilities 4,518 2,368 6,886
Other noncurrent liabilities 600 -- 600
Stockholders' equity 18,064 (270) (100)(a) 20,472
2,778 (a)
-------- -------- -------- --------
$ 26,580 $ 4,373 $ 4,115 $ 35,068
======== ======== ======== ========
</TABLE>
9
<PAGE>
AquaPenn Spring Water Company, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Acquisition of Dunsmuir Bottling Company, Inc. (continued)
Pro forma Condensed Combined Statement of Operations
(Unaudited)
Three Months Ended
June 30, 1997
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
AquaPenn Dunsmuir Adjustments Combined
-------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenues $12,890 $ 2,620 $ $15,510
Gross profit 3,680 528 4,208
Other costs and expenses 2,365 600 1 (b) 2,966
------- ------- -------- -------
Net income (loss) $ 1,315 $ (72) $ (1) $ 1,242
======= ======= ======== =======
Income (loss) per common share
Basic $ 0.19
Diluted $ 0.15
</TABLE>
Pro forma Condensed Combined Statement of Operations
(Unaudited)
Nine Months Ended
June 30, 1997
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
AquaPenn Dunsmuir Adjustments Combined
-------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenues $25,311 $ 5,153 $ $30,464
Gross profit 6,364 1,020 7,384
Other costs and expenses 4,604 1,456 (100)(b) 5,960
------- ------- ------- -------
Net income (loss) $ 1,760 $ (436) $ 100 $ 1,424
======= ======= ======= =======
Income (loss) per common share
Basic $ 0.22
Diluted $ 0.18
</TABLE>
(a) The aggregate purchase price of $3,503,000 was assumed to be paid through
the issuance of shares of the Company's common stock valued at $2,066,000
(using the initial public offering price of $13 per share), and the
remainder through available credit facilities of $1,437,000. The approximate
excess of purchase price over assets acquired of $4,115,000 (net of
accumulated amortization) is recorded in other noncurrent assets.
(b) The net loss of Dunsmuir has been adjusted for an income tax benefit assumed
to be realized if Dunsmuir's results had been consolidated with AquaPenn's
tax provision and for amortization of goodwill.
5. Reverse Stock Split
The income per common share, the number of common shares used in the
per-share calculations and all share information for the periods presented
reflect a 0.6008-for-one reverse stock split that was effective January 28,
1998.
10
<PAGE>
AquaPenn Spring Water Company, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Conversion of Preferred Stock
During the first quarter of fiscal 1998, all of the Company's outstanding
convertible preferred stock, consisting of 1,702,500 shares, were converted into
shares of common stock of the Company. As a result of this conversion, 1,022,862
(reflecting the reverse stock split) shares of the Company's common stock were
issued. This conversion was a non-cash transaction.
7. Initial Public Offering
On January 29, 1998, the Company completed its initial public offering of
4,071,117 shares of its common stock. The offering was priced at $13 per share.
Of the 4,071,117 shares offered, 2,071,117 were sold by selling shareholders and
2,000,000 shares were sold by the Company. As a result of the offering, the
Company received proceeds of approximately $23.7 million, net of underwriting
discounts, commissions, and expenses of the offering.
8. Earnings Per Share
The following table presents the calculation of basic and diluted
earnings per share as required under SFAS No. 128:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
1998 1997 1998 1997
------ ------ ------ ------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Numerator:
Net Income $ 847 $1,315 $1,131 $1,760
------ ------ ------ ------
Denominator:
Denominator for basic earnings per
share - weighted-average shares 7,822 4,418 6,842 4,320
Effect of dilutive securities:
Options 533 424 546 424
Warrants 54 55 57 54
Preferred Stock -- 1,023 -- 1,023
------ ------ ------ ------
Denominator for diluted earnings per
share 8,409 5,920 7,445 5,821
====== ====== ====== ======
Net income per share - Basic $ 0.11 $ 0.30 $ 0.17 $ 0.41
====== ====== ====== ======
Net income per share - Diluted $ 0.10 $ 0.22 $ 0.15 $ 0.30
====== ====== ====== ======
</TABLE>
11
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Statements set forth below or otherwise made in writing or orally by the
Company with regard to its expectations as to industry conditions, its financial
results and other aspects of its business may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These expectations may differ materially from actual future events or
results. Readers are referred to the Registration Statement on Form S-1 (File
number 333-38771) filed by the Company with the SEC, which identifies important
risk factors that could cause actual results to differ from those contained in
the forward-looking statements, including a highly competitive industry, ability
to achieve and manage growth, potential fluctuations in quarterly operating
results, dependence on key personnel, dependence upon existing natural spring
sources, limited ownership and control of water sources and challenge to use of
Castle Rock Spring Water, dependence on key suppliers, limited ability to raise
prices, potential for product liability, dependence on trademarks, changes in
government regulation, lack of inventory and changes in consumer preferences.
Factors Affecting Operating Results
The Company produces, bottles and sells non-sparkling natural spring
water and commenced operations in fiscal 1987. Because the Company has limited
ability to change the price of its products, the Company's profits are based on
generating sufficient sales volume to exceed its costs, including its relatively
high fixed costs of production. As the Company completes its capital
expenditures in the near term, its profit margins will likely be negatively
impacted until sales volumes increase. The Company's largest variable cost is
packaging, principally PET (polyethylene terephthalate) bottles, caps and
corrugated boxes. Variations in raw materials prices may cause the Company's
results to fluctuate. The Company maintains a relatively low level of raw
material and finished goods inventory averaging $2.5 million in the first nine
months of fiscal 1998. This inventory consists primarily of raw materials, which
the Company finds cost effective to purchase in bulk. The Company maintains a
limited product inventory because the Company tailors much of its production
specifically to customer orders. The Company's principal PET bottle supplier,
Schmalbach-Lubeca, produces PET bottles as needed for the Company on site at the
Milesburg, Pennsylvania facility. Disruptions in supplies of certain raw
materials may negatively impact the Company's ability to deliver finished
products to its customers. Competitive pricing pressures may also negatively
impact the Company's performance. Finally, the mix of products and packaging
sizes sold by the Company may change, particularly as new customers and
distribution channels are obtained or as a different mix of products is sold to
existing customers. Changes in these aspects of the Company's sales profile may
impact profit margins.
Seasonality
The Company's business is highly seasonal, with a concentration of sales
in summer months. In the past, inclement weather has negatively impacted the
Company's net revenues, particularly in summers that are unusually cool or
rainy. In the last three fiscal years, a weighted average of 40.8% of the
Company's net revenues have occurred during June, July and August.
12
<PAGE>
Results of Operations
The following table sets forth for the periods indicated certain
financial data for the Company as a percentage of net revenues.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended Year Ended
June 30, June 30, September 30,
------------------ ----------------- -------------
1998 1997 1998 1997 1997
------ ------ ----- ------ ------
<S> <C> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 72.7 71.5 77.4 74.9 74.5
----- ----- ----- ----- -----
Gross profit 27.3 28.5 22.6 25.1 25.5
Selling, general and administrative 19.7 11.7 18.3 13.8 13.5
----- ----- ----- ----- -----
Income from operations 7.6 16.8 4.3 11.3 12.0
Other income, (expense) .6 0.1 1.0 0.3 0.3
----- ----- ----- ----- -----
Income before provision for income taxes 8.2 16.9 5.3 11.6 12.3
Provision for income taxes 3.3 6.7 2.2 4.6 5.0
----- ----- ----- ----- -----
Net income 4.9% 10.2% 3.1% 7.0% 7.3%
===== ===== ===== ===== =====
</TABLE>
Net Revenues. The Company's net revenues increased from $12.9 million in
the third quarter of fiscal 1997 to $17.4 million in the third quarter of fiscal
1998, an increase of $4.5 million or 34.7%. Net revenues increased from $25.3
million in the first nine months of fiscal 1997 to $36.4 million in the first
nine months of fiscal 1998, an increase of $11.1 million or 43.8%. Approximately
$2.5 million or 55.4% of the increase between the two three month periods and
approximately $5.3 million or 48.0% of the increase from the two nine month
periods is from the revenues resulting from the acquisition of Castle Rock. The
remainder of the increase resulted primarily from the introduction of two (2)
new products and the addition of new customer accounts of the Company.
Gross Profit. Gross profit increased from $3.7 million in the third
quarter of fiscal 1997 to $4.7 million in the third quarter of fiscal 1998.
Gross profit increased from $6.4 million in the first nine months of fiscal 1997
to $8.2 million in the first nine months of fiscal 1998. The gross margin
decreased from 28.5% in the third quarter of fiscal 1997 to 27.3% in the third
quarter of fiscal 1998. Gross margin decreased from 25.1% in the first nine
months of fiscal 1997 to 22.6% in the first nine months of fiscal 1998. The
principal reason gross margins for the third quarter and nine month period of
fiscal 1998 were below those for 1997 was because the new Florida and California
facilities had not yet attained their expected sales volumes relative to their
manufacturing capabilities. In addition, transportation expenses, which
represent outbound delivery costs, increased from 9.5% of net revenues for the
first nine months of fiscal 1997 to 11.7% of net revenues for the first nine
months of fiscal 1998. This increase was due, in part, to an increase in
deliveries from the Company's Milesburg facility to regions other than the
northeast which could not yet be serviced by the Company's other facilities.
Additionally, a shift in product mix occurred as the Company obtained new
customers in different distribution channels, introduced new product sizes and
sold a different mix of products to existing customers, resulting in increased
sales of lower margin products.
Selling, General and Administrative. Selling, general and administrative
expenses increased from $1.5 million in the third quarter of fiscal 1997 to $3.4
million in the third quarter of fiscal 1998 and increased from 11.7% of net
revenues in the third quarter of fiscal 1997 to 19.7% of net revenues in the
third quarter of fiscal 1998. Selling, general and administrative expenses
increased from $3.5 million in the first nine months of fiscal 1997 to $6.7
million in the first nine months of fiscal 1998 and increased from 13.8% of net
revenues in the first nine months of fiscal 1997 to 18.3% of net revenues in the
first nine months of fiscal 1998. This increase is primarily the result of
additional costs associated with the integration of Castle Rock by the Company,
increased selling costs to retain the Company's existing customer base and
increased selling costs to obtain new customers.
13
<PAGE>
Liquidity and Capital Resources
The Company's primary capital needs have been to fund its working capital
requirements and capital expenditures necessitated by its growth. The Company's
net cash provided by operating activities was $3.3 million and $1.3 million for
the first nine months of fiscal 1998 and 1997, respectively.
The Company's capital expenditures totaled $19.4 million for the first
nine months of fiscal 1998, primarily for the expansion of the Milesburg
facility, including the purchase of new equipment, and for the construction of a
new production facility located adjacent to Ginnie Springs, in north central
Florida. The Company's capital expenditures totaled $5.9 million in the first
nine months of fiscal 1997, primarily for the initial expansion of the Milesburg
facility and for the purchase of new equipment.
The Company also paid $1.4 million on October 15, 1997 for the cash
portion of the purchase price for Castle Rock and assumed $4.7 million of Castle
Rock liabilities. A substantial portion of the Castle Rock liabilities were
repaid during the first quarter of fiscal 1998. The Castle Rock purchase price,
together with the Company's capital expenditures, were funded from borrowings
under the Company's credit facilities, cash generated by its operating
activities and proceeds from the initial public offering.
The Company's future capital requirements include $4.6 million to
complete the expansion of the Milesburg facility, to build additional warehouse
space, to install a pipeline from the Big Spring in Bellefonte, Pennsylvania to
its Milesburg facility and to purchase additional equipment. In addition, the
Company's future capital requirements will require the financing and growth of
working capital items such as accounts receivable and inventories. The Company
anticipates that funds available from the initial public offering, together with
cash generated by operating activities, should support the Company's existing
operations at least through fiscal 1998. Long-term capital expenditures are
expected to be funded through additional debt borrowings and operating cash
flow, as available.
The Company has established $38.0 million in available revolving credit
facilities, lines of credit and demand notes which incur interest at annual
rates between LIBOR plus .75% and LIBOR plus 1.0%. The aggregate amount that the
Company may borrow under its credit facilities is limited by financial covenants
contained in one of the credit agreements. These covenants would have limited
the Company's borrowings to approximately $27.4 million at June 30, 1998. At
June 30, 1998 the Company had $223,000 of such borrowings outstanding. One of
the Company's credit agreements contains a direct prohibition on payment of
dividends by the Company. Two credit agreements require the Company to maintain
certain financial ratios which currently restrict and may restrict in the future
the Company's ability to pay dividends. The terms of these credit agreements
require that a ratio of not greater than 2.0 to 1.0 be maintained for the
Company's liabilities to stockholders' equity (excluding all intangible assets)
determined in accordance with generally accepted accounting principles as of the
end of each fiscal year with respect to one agreement, and as of the end of each
quarter of each fiscal year with respect to the other agreement.
To enhance shareholder value, the Board of Directors has authorized a
program to repurchase up to 500,000 shares of the Company's Stock, or about 6%
of its 7.8 million shares outstanding. There is a two year deadline for the
repurchase which expires July 27, 2000.
14
<PAGE>
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. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components including revenues, expenses, gains and
losses in a full set of general-purpose financial statements and requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No. 130
is required to be adopted for the Company's fiscal 1999 year-end financial
statements. SFAS No. 130 will have no impact on the Company's financial position
or results of operations.
SFAS No. 131 establishes standards for the way that public companies
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS No. 131 is required to be adopted
for the Company's fiscal 1999 financial statements. The Company is currently
evaluating the impact, if any, of the adoption of this pronouncement on the
Company's existing disclosures.
In 1998, SFAS No. 132, Employers' Disclosures About Pensions and Other
Postretirement Benefits, and SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, were issued. Each of these standards will be effective
in future fiscal years and will have no impact on the Company's financial
position or results of operations.
AquaPenn Unaudited Pro Forma Combined Financial Data
Unaudited Pro Forma Combined Results of Operations
The following table sets forth for the period indicated certain pro forma
financial data for the Company as a percentage of net revenues, adjusted to give
effect to the Castle Rock acquisition as if it occurred on October 1, 1996. The
pro forma financial data set forth below is not necessarily indicative of
results of operations that would have been achieved had such transaction been
consummated at the beginning of fiscal 1997, or that may be achieved in the
future.
Pro Forma
Three Months Ended Nine Months Ended
June 30, 1997 June 30, 1997
------------------ -----------------
Net revenues 100.0% 100.0%
Cost of goods sold 72.9 75.8
----- -----
Gross profit 27.1 24.2
Selling, general and administrative 13.3 16.0
----- -----
Income from operations 13.8 8.2
Other income, (expense) (0.3) (0.2)
----- -----
Income before provision for income taxes 13.5 8.0
Income tax expense 5.5 3.4
----- -----
Net income 8.0% 4.6%
===== =====
The Company's net revenues increased from $15.5 million on a pro forma
basis for the third quarter of fiscal 1997 to $17.4 million in the third quarter
of fiscal 1998, an increase of $1.9 million or 11.9%. The gross profit for the
Company in the third quarter of fiscal 1997 was $4.2 million on a pro forma
basis as compared to gross profit of $4.7 million for the third quarter of
fiscal 1998, an increase of $500,000 or 12.7%. Net income for the Company on a
pro forma
15
<PAGE>
basis for the third quarter of fiscal 1997, as adjusted for the
income tax benefit due to the net loss of Castle Rock, as if Castle Rock's
results had been consolidated with the Company's income tax provision and for
the amortization of goodwill, was $1.2 million as compared to $847,000 in the
third quarter of fiscal 1998, a decrease of $353,000 or 31.8%.
Future Growth Subject to Risks
In order to achieve continued growth in its bottled water business, the
Company must meet its strategic objectives of expanding its current capacity to
produce high quality spring water products, expanding its customer base,
expanding its product line and adding new distribution channels. The Company's
ability to meet these objectives depends upon (a) the successful development of
a facility adjacent to Ginnie Springs, (b) the successful integration and
operation of the Company's recent acquisition, Castle Rock, (c) the successful
expansion of its Milesburg facility, (d) the securing of new sources of spring
water in strategic locations and identifying and successfully acquiring and
integrating existing water companies, and other factors beyond the Company's
control. The Company has never operated multiple facilities in multiple states
and has never completed and integrated an acquisition of a significant existing
company; the Company may encounter unexpected difficulties operating multiple
facilities or integrating Castle Rock or other acquisitions. No assurance can be
given as to the future growth in the Company's business or as to its
profitability. Further growth of the Company will require capital, employment
and training of new personnel, expansion of facilities and expansion of
management information systems. If the Company is unable to manage its growth
effectively, the Company's profitability and its ability to achieve its
strategic objectives may likely be materially adversely affected.
The Company currently obtains the natural spring water bottled at its
Milesburg facility from a spring located in Graysville, Pennsylvania. A natural
spring located in Dunsmuir, California provides the natural spring water for the
Company's west coast operations based in Dunsmuir, California. The loss of the
Graysville Spring or the Castle Rock Spring would have a material adverse effect
on the business of the Company. The Company commenced bottling water from Ginnie
Springs, the Company's Florida operation, in April 1998. In addition, the
Company has acquired the right to purchase natural spring water from the
Bellefonte Big Spring located in Bellefonte, Pennsylvania, in order to
supplement or replace the Graysville Spring. Subject to completion by the
Borough of Bellefonte of a covering over the spring and the permitting and
approval process, the Company expects to begin bottling Big Spring water in
fiscal 1999. Occurrences beyond the control of the Company, including, but not
limited to, drought, which prevents natural springs from recharging themselves,
and other occurrences, such as contamination of the springs, geological changes
which could interfere with operation of the springs or failure of the water
supply to comply with all applicable governmental requirements for mineral and
chemical concentration, could have a material adverse effect on the business of
the Company. The Company believes that adequate supplemental commercial sources
of spring water exist, but there is no assurance that such commercial sources
will be available in sufficient amounts or if available, obtainable on
commercially reasonable terms.
Year 2000
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any programs
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a major system failure or
miscalculations.
16
<PAGE>
The Company has been informed by the supplier of substantially all of the
Company's software that such supplier's software used by the Company is Year
2000 compliant. The software from this supplier is not used in the Company's
manufacturing process but is used in other areas of the Company's operations,
such as for financial, sales, warehousing and administrative purposes. The
Company is currently taking an inventory and assessing the software and embedded
technology used in its manufacturing process to determine the possibility of a
Year 2000 problem that would materially delay production or result in material
additional expenditures. The Company anticipates this phase will be completed in
November 1998. Based on the results of tests to date, the Company believes that
the software and embedded technology used in its manufacturing process does not
have a Year 2000 problem that would materially delay production or result in
material additional expenditures. Additionally, the Company is currently
assessing whether the Company's information systems may be impacted by other
entities with which the Company currently transacts business by requesting such
entities to provide the Company with information concerning such information
systems and Year 2000-related risk assessments. The Company anticipates this
phase will be completed in October 1998.
At present, the Company is unable to estimate any costs that may be
necessary to remediate the Year 2000 issue. The Company has not hired any
external consultants or incurred any additional costs to address possible
remedial efforts in connection with computer software that could be affected by
the Year 2000 problem other than wage, benefit and related costs for its normal
group of information systems personnel. The use of the Company's own information
system personnel to address the Year 2000 problem has not delayed other
information systems projects.
Based upon its investigation completed to date, the Company has not yet
identified any material Year 2000 issues with respect to the Company's computer
systems; however, there can be no assurance that Year 2000 problems will not
occur with respect to the Company's computer systems. Additionally, the Company
cannot predict the impact that Year 2000 problems of other entities with which
the Company transacts business will have on the Company. To the extent that the
Company is unable to resolve any Year 2000 problems with respect to it's
computer systems or in the event that significant suppliers or customers do not
achieve Year 2000 compliance within a timely period, the Company's business and
operations could be materially adversely affected.
The Company is currently in the process of establishing a contingency
plan to handle any unknown or potential issues that may arise from the Year 2000
issue. This contingency plan will be completed by February 1999.
17
<PAGE>
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds
(d) On January 29, 1998, the Company's Registration Statement on Form S-1
(File number 333-38771), was declared effective by the Securities and
Exchange Commission in connection with the Company's initial public
offering of 4,071,117 shares of the Company's common stock, no par value
(the "Common Stock"), of which 2,000,000 shares of Common Stock were
offered and sold by the Company and 2,071,117 shares of Common Stock were
offered and sold by certain shareholders of the Company. The initial public
offering (the "Offering") commenced on January 29, 1998 and was terminated
after the sale of all of the Common Stock. The managing underwriters for
the Offering were PaineWebber Incorporated, Lazard Freres & Co. LLC and
Parker/Hunter Incorporated. The 4,071,117 shares of Common Stock were
offered at, and sold for, an aggregate offering price of $49,219,805 (less
underwriting discounts and commissions but before deducting offering
expenses), of which $24,180,000 were proceeds to the Company and
$25,039,805 were proceeds to the selling shareholders. The net proceeds to
the Company after deducting all of the expenses described below were
$23,661,000. Expenses incurred for the Company's account in connection with
the Offering are $1,820,000 for underwriting discounts and commissions,
$519,000 for other expenses and $2,339,000 for total expenses. None of the
expenses were direct or indirect payments to directors, officers,
affiliates or persons owning 10% or more of any equity security of the
Company.
From January 29, 1998 to June 30, 1998, the proceeds from the Offering
were used as follows: $11.9 million for purchase and installation of
machinery and equipment; $11.8 million for repayment of indebtedness. None
of the proceeds were used for direct or indirect payments to directors,
officers, affiliates or persons owning 10% or more of any equity security
of the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Computation of net income per common share
15 Letter regarding unaudited interim financial information
27 Financial data schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the third quarter
ended June 30, 1998
18
<PAGE>
SIGNATURES
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.
AquaPenn Spring Water Company, Inc.
Date: August 13, 1998 By /s/ Geoffrey F. Feidelberg
-------------------------------------
Geoffrey F. Feidelberg
Chief Operating Officer and
Chief Financial Officer (Principal
Financial and Accounting Officer)
19
Exhibit 11
Computation of Net Income Per Common Share
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
---------------- ------------------
1998 1997 1998 1997
------ ------ ------- -------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
BASIC:
Weighted average shares outstanding 7,822 4,418 6,842 4,320
------ ------ ------ ------
Total 7,822 4,418 6,842 4,320
====== ====== ====== ======
Net income $ 847 $1,315 $1,131 $1,760
====== ====== ====== ======
Net income per share $ 0.11 $ 0.30 $ 0.17 $ 0.41
====== ====== ====== ======
DILUTED:
Weighted average shares outstanding 7,822 4,418 6,842 4,320
Conversion of 1,703 shares of preferred stock
into 1,023 shares of common stock -- 1,023 -- 1,023
Assuming exercise of options and warrants reduced
by the number of shares which could have been
purchased with the proceeds from such exercise 587 479 603 478
------ ------ ------ ------
Total 8,409 5,920 7,445 5,821
====== ====== ====== ======
Net income $ 847 $1,315 $1,131 $1,760
====== ====== ====== ======
Net income per share $ 0.10 $ 0.22 $ 0.15 $ 0.30
====== ====== ====== ======
</TABLE>
EXHIBIT 15
Letter Regarding Unaudited Interim Financial Information
To the Board of Directors
AquaPenn Spring Water Company, Inc.:
Re: Registration Statement No. 333-49123 and No. 333-51659
With respect to the subject registration statements, we acknowledge our
awareness of the use therein of our report dated August 11, 1998 related to our
review of interim financial information.
Pursuant to Rule 436 (c) under the Securities Act of 1933, such report is not
considered a part of the registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the meaning
of Section 7 and 11 of the Act.
Very truly yours,
KPMG PEAT MARWICK LLP
State College, PA
August 11, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27
Financial Data Schedule
This schedule contains summary financial information extracted from the
financial statements of AquaPenn Spring Water Company, Inc. for the period ended
June 30, 1998, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1.000
<CASH> 1,745
<SECURITIES> 0
<RECEIVABLES> 7,244
<ALLOWANCES> (100)
<INVENTORY> 3,707
<CURRENT-ASSETS> 13,895
<PP&E> 48,638
<DEPRECIATION> (8,122)
<TOTAL-ASSETS> 58,865
<CURRENT-LIABILITIES> 10,086
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 46,399
<TOTAL-LIABILITY-AND-EQUITY> 58,865
<SALES> 35,910
<TOTAL-REVENUES> 36,401
<CGS> 28,170
<TOTAL-COSTS> 34,846
<OTHER-EXPENSES> (464)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 115
<INCOME-PRETAX> 1,904
<INCOME-TAX> 773
<INCOME-CONTINUING> 1,131
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,131
<EPS-PRIMARY> .17
<EPS-DILUTED> .15
</TABLE>
