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 March 31, 1998
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
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 May 8, 1998, 7,815,039 shares of the Registrant's common stock were
outstanding.
<PAGE>
AquaPenn Spring Water Company, Inc.
FORM 10-Q For the Quarter Ended March 31, 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 March 31, 1998 and
September 30, 1997 4
c) Consolidated Statements of Operations for the three
and six months ended March 31, 1998 and 1997 5
d) Consolidated Statements of Cash Flows for the
six months ended March 31, 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 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
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 accompanying consolidated balance sheet of AquaPenn Spring
Water Company, Inc. and subsidiaries as of March 31, 1998, and the related
consolidated statements of operations and cash flows for the three and six month
periods 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 consolidated 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 accompanying consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
The consolidated financial statements for the year ended September 30, 1997,
were audited by us and we expressed an unqualified opinion on them in our report
dated October 21, 1997, except for note 15 which is as of October 24, 1997, but
we have not performed any auditing procedures since that date.
KPMG Peat Marwick LLP
State College, Pennsylvania
May 8, 1998
3
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
AQUAPENN SPRING WATER COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, September 30,
1998 1997
--------- -------------
(Unaudited)
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 9,149 $ 687
ACCOUNTS RECEIVABLE, NET 4,822 3,605
INVENTORIES 2,836 1,534
OTHER 1,098 668
-------- --------
TOTAL CURRENT ASSETS 17,905 6,494
-------- --------
PROPERTY, PLANT AND EQUIPMENT, NET 36,765 20,031
GOODWILL, NET 4,114 --
OTHER 356 55
-------- --------
TOTAL ASSETS $ 59,140 $ 26,580
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
CURRENT PORTION OF NOTES PAYABLE $ 132 $ 98
DEMAND NOTES PAYABLE 1,000 201
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 10,296 3,099
-------- --------
TOTAL CURRENT LIABILITIES 11,428 3,398
-------- --------
DEFERRED INCOME TAXES 600 600
NOTES PAYABLE 2,098 4,518
-------- --------
TOTAL LIABILITIES 14,126 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; 7,818,043 AND 4,423,712 SHARES
ISSUED, RESPECTIVELY 40,568 12,196
RETAINED EARNINGS 4,526 4,242
LESS TREASURY STOCK AND STOCK SUBSCRIPTIONS (80) (88)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 45,014 18,064
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 59,140 $ 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)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
-------------------- --------------------
1998 1997 1998 1997
------- ------- ------- -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NET REVENUES $10,968 $ 7,420 $19,045 $12,422
COST OF GOODS SOLD 8,761 5,713 15,556 9,738
------- ------- ------- -------
GROSS PROFIT 2,207 1,707 3,489 2,684
SELLING, GENERAL AND ADMINISTRATIVE 1,697 1,051 3,260 1,995
------- ------- ------- -------
INCOME FROM OPERATIONS 510 656 229 689
OTHER INCOME, (EXPENSE) 149 21 249 60
------- ------- ------- -------
INCOME BEFORE INCOME TAX EXPENSE 659 677 478 749
INCOME TAX EXPENSE 262 272 194 304
------- ------- ------- -------
NET INCOME $ 397 $ 405 $ 284 $ 445
======= ======= ======= =======
INCOME PER COMMON SHARE
BASIC $ 0.06 $ 0.09 $ 0.04 $ 0.10
======= ======= ======= =======
DILUTED $ 0.05 $ 0.07 $ 0.04 $ 0.08
======= ======= ======= =======
SHARES USED IN COMPUTING INCOME PER
COMMON SHARE
BASIC 7,114 4,309 6,349 4,305
======= ======= ======= =======
DILUTED 7,643 5,811 6,879 5,807
======= ======= ======= =======
</TABLE>
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>
Six Months Ended
March 31,
----------------------
1998 1997
-------- -------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME $ 284 $ 445
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 1,137 1,010
ISSUANCE OF COMMON STOCK AND OPTIONS FOR
SPRING WATER LEASE 291 --
CHANGE IN ASSETS AND LIABILITIES, EXCLUDING ACQUISITION
INCREASE IN ACCOUNTS RECEIVABLE, NET (671) (318)
INCREASE IN INVENTORIES (901) (638)
INCREASE IN OTHER CURRENT ASSETS (319) (282)
INCREASE IN OTHER ASSETS (295) (6)
INCREASE IN ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 5,627 500
-------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,153 711
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
PURCHASE OF PROPERTY, PLANT AND EQUIPMENT (14,726) (3,996)
ACQUISITION OF CASTLE ROCK (1,419) --
-------- -------
NET CASH USED BY INVESTING ACTIVITIES (16,145) (3,996)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
PROCEEDS FROM NOTES PAYABLE 36,426 3,800
REPAYMENTS OF NOTES PAYABLE (41,280) (546)
ISSUANCE OF STOCK UNDER EMPLOYEE STOCK PURCHASE PLAN 408 19
PROCEEDS FROM EXERCISE OF STOCK WARRANTS 675 --
PROCEEDS FROM SALE OF COMMON STOCK, NET 23,229 --
INTEREST ACCRUED ON STOCK SUBSCRIPTIONS RECEIVABLE (4) (3)
-------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 19,454 3,270
-------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 8,462 (15)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 687 186
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,149 $ 171
======== =======
</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
$287 OF INTEREST CAPITALIZED IN FISCAL 1998 $382 $ 81
==== ====
CASH PAID DURING THE PERIOD FOR INCOME TAXES $ 33 $661
==== ====
ACQUISITION OF CASTLE ROCK
FAIR VALUE OF ASSETS ACQUIRED $8,135
LIABILITIES ASSUMED (4,650)
STOCK ISSUED (2,066)
------
CASH PAID $1,419
======
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 March 31, 1998, and for the three and
six month periods ended March 31, 1998 and March 31, 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 March
31, 1998, and for the three and six month periods ended March 31, 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, the unaudited consolidated financial
statements include all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position, results of
operations, and cash flows as of March 31, 1998, and for the three and six month
periods ended March 31, 1998. The results of operations for the period ended
March 31, 1998 are not necessarily indicative of the operating results for the
full year.
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:
March 31, September 30,
1998 1997
--------- -------------
(Unaudited)
Raw materials $1,887 $1,088
Finished goods 949 446
------ ------
$2,836 $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 $1,419,000 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 $4,650,000 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 4,114 (a) 4,175
------- ------ ------ -------
$26,580 $4,373 $4,114 $35,067
======= ====== ====== =======
Liabilities and Stockholders' Equity:
Current liabilities................ $ 3,398 $2,275 $1,419 (a) $ 7,092
Long-term liabilities.............. 4,518 2,368 6,886
Other noncurrent liabilities....... 600 600
Stockholders' equity............... 18,064 (270) (100)(a) 20,489
2,795 (a)
------- ------ ------ -------
$26,580 $4,373 $4,114 $35,067
======= ====== ====== =======
</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
March 31, 1997
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
AquaPenn Dunsmuir Adjustments Combined
-------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenues....................... $7,420 $1,484 $ $ 8,904
Gross profit....................... 1,707 251 1,958
Other costs and expenses........... 1,302 457 (46) (b) 1,713
------ ------- -------- -------
Net income (loss).................. $ 405 $ (206) $ 46 $ 245
====== ======= ======== =======
Income (loss) per common share
Basic $ 0.04
Diluted $ 0.03
</TABLE>
Pro forma Condensed Combined Statement of Operations
(Unaudited)
Six Months Ended
March 31, 1997
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
AquaPenn Dunsmuir Adjustments Combined
-------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenues....................... $12,422 $2,532 $ $14,954
Gross profit....................... 2,684 492 3,176
Other costs and expenses........... 2,239 856 (101)(b) 2,994
------- ------ ----- -------
Net income (loss).................. $ 445 $ (364) $ 101 $ 182
======= ====== ===== =======
Income (loss) per common share
Basic $ 0.03
Diluted $ 0.02
</TABLE>
(a) The aggregate purchase price of $3,485,000 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 $1,419,000. The
approximate excess of purchase price over assets acquired of $4,114,000
(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 wasi 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 Six Months Ended
March 31, March 31,
------------------ ------------------
1998 1997 1998 1997
------ ------ ------ ------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Numerator:
Net Income $ 397 $ 405 $ 284 $ 445
------ ------ ------ ------
Denominator:
Denominator for basic earnings per share -
weighted-average shares 7,114 4,309 6,349 4,305
Effect of dilutive securities:
Options 470 424 470 424
Warrants 59 55 60 55
Preferred Stock -- 1,023 -- 1,023
------ ------ ------ ------
Denominator for diluted earnings per share 7,643 5,811 6,879 5,807
====== ====== ====== ======
Net income per share - Basic $ 0.06 $ 0.09 $ 0.04 $ 0.10
====== ====== ====== ======
Net income per share - Diluted $ 0.05 $ 0.07 $ 0.04 $ 0.08
====== ====== ====== ======
</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 $2.0 million in the first half
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 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 Six Months Ended Year Ended
March 31, March 31, 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 ........................ 79.9 77.0 81.7 78.4 74.5
----- ----- ----- ----- -----
Gross profit .............................. 20.1 23.0 18.3 21.6 25.5
Selling, general and administrative ....... 15.5 14.2 17.1 16.1 13.5
----- ----- ----- ----- -----
Income from operations .................... 4.6 8.8 1.2 5.5 12.0
Other income, (expense) ................... 1.4 0.3 1.3 0.5 0.3
----- ----- ----- ----- -----
Income before provision for income taxes... 6.0 9.1 2.5 6.0 12.3
Provision for income taxes ................ 2.4 3.7 1.0 2.4 5.0
----- ----- ----- ----- -----
Net income ................................ 3.6% 5.4% 1.5% 3.6% 7.3%
===== ===== ===== ===== =====
</TABLE>
Net Revenues. The Company's net revenues increased from $7.4 million in the
second quarter of fiscal 1997 to $11.0 million in the second quarter of fiscal
1998, an increase of $3.6 million or 47.8%. Net revenues increased from $12.4
million in the first half of fiscal 1997 to $19.0 million in the first half of
fiscal 1998, an increase of $6.6 million, or 53.3%. Approximately $1.5 million
or 42.5% of the increase between the two three month periods and approximately
$2.8 million or 43.0% of the increase from the two six 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 product sizes
and the addition of new customer accounts of the Company. The Company's fiscal
1998 second quarter net revenues were negatively impacted by the rainy weather
experienced in California and the southeastern section of the United States.
Gross Profit. Gross profit increased from $1.7 million in the second
quarter of fiscal 1997 to $2.2 million in the second quarter of fiscal 1998.
Gross profit increased from $2.7 million in the first half of fiscal 1997 to
$3.5 million in the first half of fiscal 1998. The gross margin decreased from
23.0% in the second quarter of fiscal 1997 to 20.1% in the second quarter of
fiscal 1998. Gross margin decreased from 21.6% in the first six months of fiscal
1997 to 18.3% in the first six months of fiscal 1998. The gross margin decrease
resulted primarily from costs associated with the continued integration of
Castle Rock and a shift in product mix. In addition, transportation expenses,
which represent outbound delivery costs, increased from 10.0% of net revenues
for the first six months of fiscal 1997 to 11.6% of net revenues for the first
six months of fiscal 1998. This increase was due, in part, to an increase in
deliveries to the West and Southwest from the Company's Milesburg facility which
could not yet be serviced by the Castle Rock facility in northern California.
Product shifts 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 to customers with
lower margins.
Selling, General and Administrative. Selling, general and administrative
expenses increased from $1.1 million in the second quarter of fiscal 1997 to
$1.7 million in the second quarter of fiscal 1998 and increased from 14.2% of
net revenues in the second quarter of fiscal 1997 to 15.5% of net revenues in
the second quarter of fiscal 1998. Selling, general and administrative expenses
increased from $2.0 million in the first six months of fiscal 1997 to $3.3
million in the first six months of fiscal 1998 and increased from 16.1% of net
revenues in the first six months of fiscal 1997 to 17.1% of net revenues in the
first six months of fiscal 1998. This increase is primarily the result of
additional costs associated with the integration of Castle Rock by the Company.
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 $5.2 million and $711,000 for the
first half of fiscal 1998 and 1997, respectively.
The Company's capital expenditures totaled $14.7 million for the first half
of fiscal 1998, primarily for the expansion of the Milesburg facility, including
the purchase of and progress payments on 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 $4.0 million in the
first half 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 $650,000 to complete
construction of the Florida facility and $7.1 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 $38.0 million in 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 $29.8 million at March 31, 1998. At March 31, 1998 the Company
had $1.5 million 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.
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.
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.
<TABLE>
<CAPTION>
Pro Forma
Three Months Ended Six Months Ended
March 31, 1997 March 31, 1997
------------------ ----------------
<S> <C> <C>
Net revenues..................................... 100.0% 100.0%
Cost of goods sold............................... 78.0 78.8
----- -----
Gross profit..................................... 22.0 21.2
Selling, general and administrative.............. 16.8 18.7
----- -----
Income from operations........................... 5.2 2.5
Other income, (expense).......................... (0.1) (0.1)
----- -----
Income before provision for income taxes......... 5.1 2.4
Provision for income taxes....................... 2.3 1.2
----- -----
Net income....................................... 2.8% 1.2%
===== =====
</TABLE>
The Company's net revenues increased from $8.9 million on a pro forma basis
for the second quarter of fiscal 1997 to $11.0 million in the second quarter of
fiscal 1998, an increase of $2.1 million or 23.2%. The gross profit for the
Company in the second quarter of fiscal 1997 was $2.0 million on a pro forma
basis as compared to gross profit of $2.2 million for the second quarter of
fiscal 1998, an increase of $200,000 or 12.7%. Net income for the Company on a
pro forma basis for the second 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 $245,000 as compared to $397,000 in the second
quarter of fiscal 1998, an increase of $152,000 or 61.7%.
15
<PAGE>
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 the 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.
16
<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
$23,700,000. To date, the expenses incurred for the Company's account in
connection with the Offering are $1,820,000 for underwriting discounts and
commissions, $480,000 for other expenses and $2,300,000 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 March 31, 1998, the proceeds from the Offering
were used as follows: $8.7 million for purchase and installation of machinery
and equipment; $8.7 million for repayment of indebtedness; and $6.3 million for
temporary investments. 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
second quarter ended March 31, 1998.
17
<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: May 11, 1998 By /s/ Geoffrey F. Feidelberg
--------------------------------
Geoffrey F. Feidelberg
Chief Operating Officer and
Chief Financial Officer (Principal Financial
and Accounting Officer)
18
Exhibit 11
Computation of Net Income Per Common Share
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
------------------ ------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
(In thousands, except per share amounts)
BASIC:
Weighted average shares outstanding 7,114 4,309 6,349 4,305
------ ------ ------ ------
Total 7,114 4,309 6,349 4,305
====== ====== ====== ======
Net income $ 397 $ 405 $ 284 $ 445
====== ====== ====== ======
Net income per share $ 0.06 $ 0.09 $ 0.04 $ 0.10
====== ====== ====== ======
DILUTED:
Weighted average shares outstanding 7,114 4,309 6,349 4,305
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 529 479 530 479
------ ------ ------ ------
Total 7,643 5,811 6,879 5,807
====== ====== ====== ======
Net income $ 397 $ 405 $ 284 $ 445
====== ====== ====== ======
Net income per share $ 0.05 $ 0.07 $ 0.04 $ 0.08
====== ====== ====== ======
</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 May 8, 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
May 8, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of AquaPenn Spring Water Company, Inc. for the period
ended March 31, 1997, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S.$
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1.000
<CASH> 9,149
<SECURITIES> 0
<RECEIVABLES> 4,922
<ALLOWANCES> (100)
<INVENTORY> 2,836
<CURRENT-ASSETS> 17,905
<PP&E> 44,088
<DEPRECIATION> (7,323)
<TOTAL-ASSETS> 59,140
<CURRENT-LIABILITIES> 11,428
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 45,014
<TOTAL-LIABILITY-AND-EQUITY> 59,140
<SALES> 18,823
<TOTAL-REVENUES> 19,045
<CGS> 15,556
<TOTAL-COSTS> 18,816
<OTHER-EXPENSES> (349)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 100
<INCOME-PRETAX> 478
<INCOME-TAX> 194
<INCOME-CONTINUING> 284
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 284
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
