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 December 31, 1997
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 NO X
----- -----
As of March 9, 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 December 31, 1997
INDEX
Page
Facing sheet 1
Index 2
Part I. Financial Information
Item 1. Financial Statements (unaudited)
a) Independent Certified Public Accountants' Review
Report 3
b) Consolidated Balance Sheets at December 31, 1997
and September 30, 1997 4
c) Consolidated Statements of Operations for the three 5
months ended December 31, 1997 and 1996
d) Consolidated Statements of Cash Flows for the
three months ended December 31, 1997 and 1996 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 (Loss) Per
Common Share
Exhibit 27 Financial Data Schedule
2
<PAGE>
Independent Certified Public 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 December 31, 1997, and the related
consolidated statements of operations and cash flows for the three-month period
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 14, 1997, but
we have not performed any auditing procedures since that date.
KPMG Peat Marwick LLP
State College, Pennsylvania
March 5, 1998
3
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
AQUAPENN SPRING WATER COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31, September 30,
1997 1997
---------- -------------
ASSETS (Unaudited)
CURRENT ASSETS:
CASH $ 170 $ 687
ACCOUNTS RECEIVABLE, NET 3,309 3,605
INVENTORIES 1,691 1,534
OTHER 786 668
-------- --------
TOTAL CURRENT ASSETS 5,956 6,494
-------- --------
PROPERTY, PLANT AND EQUIPMENT, NET 29,198 20,031
GOODWILL, NET 4,096 --
DEFERRED OFFERING COSTS 353 --
OTHER 91 55
-------- --------
TOTAL ASSETS $ 39,694 $ 26,580
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
CURRENT PORTION OF NOTES PAYABLE $ 132 $ 98
DEMAND NOTES PAYABLE 1,520 201
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 4,764 3,099
-------- --------
TOTAL CURRENT LIABILITIES 6,416 3,398
-------- --------
DEFERRED INCOME TAXES 600 600
NOTES PAYABLE 12,632 4,518
-------- --------
TOTAL LIABILITIES 19,648 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; 5,608,565 AND 4,423,712 SHARES
ISSUED, RESPECTIVELY 15,995 12,196
RETAINED EARNINGS 4,130 4,242
LESS TREASURY STOCK AND STOCK SUBSCRIPTIONS (79) (88)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 20,046 18,064
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 39,694 $ 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
December 31,
------------------------
1997 1996
------- -------
(Unaudited)
NET REVENUES $ 8,077 $ 5,002
COST OF GOODS SOLD 6,795 4,025
------- -------
GROSS PROFIT 1,282 977
SELLING, GENERAL AND ADMINISTRATIVE 1,563 944
------- -------
INCOME (LOSS) FROM OPERATIONS (281) 33
OTHER INCOME, (EXPENSE) 100 39
------- -------
INCOME (LOSS) BEFORE (PROVISION) BENEFIT FOR
INCOME TAXES (181) 72
(PROVISION) BENEFIT FOR INCOME TAXES 68 (32)
------- -------
NET INCOME (LOSS) $ (113) $ 40
======= =======
INCOME (LOSS) PER COMMON SHARE
BASIC $ (0.02) $ 0.01
======= =======
DILUTED $ (0.02) $ 0.01
======= =======
SHARES USED IN COMPUTING INCOME (LOSS) PER
COMMON SHARE
BASIC 5,756 4,305
======= =======
DILUTED 5,756 5,807
======= =======
The income (loss) 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>
Three Months Ended
December 31,
----------------------------
1997 1996
--------- ---------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME (LOSS) $ (113) $ 40
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 543 418
ISSUANCE OF COMMON STOCK FOR SPRING WATER
LEASE EQUIPMENT 24 --
CHANGE IN ASSETS AND LIABILITIES, EXCLUDING ACQUISITION
DECREASE IN ACCOUNTS RECEIVABLE, NET 842 912
DECREASE IN INVENTORIES 245 257
(INCREASE) DECREASE IN OTHER CURRENT ASSETS 8 (187)
INCREASE IN OTHER ASSETS (30) (7)
INCREASE IN ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES 123 294
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,642 1,727
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
PURCHASE OF PROPERTY, PLANT AND EQUIPMENT (6,592) (2,984)
ACQUISITION OF CASTLE ROCK (1,419) --
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (8,011) (2,984)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
PROCEEDS FROM NOTES PAYABLE 22,603 2,000
REPAYMENTS OF NOTES PAYABLE (16,403) (523)
ISSUANCE OF STOCK UNDER EMPLOYEE STOCK PURCHASE
PLAN 7 --
INCREASE IN DEFERRED OFFERING COSTS (353) --
INTEREST ACCRUED ON STOCK SUBSCRIPTIONS RECEIVABLE (2) (2)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,852 1,475
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (517) 218
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 687 186
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 170 $ 404
======== ========
</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 $ 173 $ 26
CASH PAID DURING THE PERIOD FOR INCOME TAXES $ 16 $ 512
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") was formed
as a Pennsylvania corporation during November 1986. The Company bottles
and distributes non-sparkling natural spring water.
The Company's water products are sold to both 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 December 31, 1997, and
for the three months ended December 31, 1997 and December 31, 1996,
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 December 31,
1997, and for the three months ended December 31, 1997, 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 December 31,
1997, and for the three months ended December 31, 1997. The results of
operations for the period ended December 31, 1997 are not necessarily
indicative of the operating results for the full year.
Calculation of Net Income Per Share
During the quarter, 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 dilution of common stock
equivalents, and is computed similarly to fully diluted EPS
8
<PAGE>
AquaPenn Spring Water Company, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies (continued)
pursuant to Accounting Principles Board Opinion 15. All prior periods
presented have been restated to reflect this adoption.
Common stock issued and stock options granted within
one year prior to the Company's initial public offering have been
included in the calculation of shares used in computing net income per
common share as if they were outstanding for all periods presented.
3. Inventories
Inventories consist of the following:
December 31, September 30,
1997 1997
------------ -------------
(Unaudited)
Raw materials $1,173 $1,088
Finished goods 518 446
------ ------
$1,691 $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 $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 the first quarter of
fiscal 1997, ended December 31, 1996. 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.
9
<PAGE>
AquaPenn Spring Water Company, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Acquisition of Dunsmuir Bottling Company, Inc. (continued)
Pro Forma Condensed Combined Balance Sheet
(Unaudited)
September 30, 1997
(In thousands)
<TABLE>
<CAPTION>
Pro Forma Pro
AquaPenn Dunsmuir Adjustments Forma
-------- -------- ----------- --------
<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 4,096 (a) 4,157
-------- -------- -------- --------
$ 26,580 $ 4,373 $ 4,096 $ 35,049
======== ======== ======== ========
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) 20,471
2,777 (a)
-------- -------- -------- --------
$ 26,580 $ 4,373 $ 4,096 $ 35,049
======== ======== ======== ========
</TABLE>
Pro forma Condensed Combined Statement of Operations
(Unaudited)
Three Months Ended
December 31, 1996
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma Pro
AquaPenn Dunsmuir Adjusments Forma
-------- -------- ---------- -------
<S> <C> <C> <C> <C>
Net revenues $ 5,002 $ 1,048 $ $ 6,050
Gross profit 977 241 1,218
Other costs and expenses 937 399 (55)(b) 1,281
------- ------- ------- -------
Net income (loss) $ 40 $ (158) $ 55 $ (63)
======= ======= ======= =======
Income (loss) per common share
Basic $(.01)
Diluted $(.01)
</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 $4,096,000 (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.
10
<PAGE>
AquaPenn Spring Water Company, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Reverse Stock Split
The income (loss) 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.
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 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 registered, 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.
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 $1.7 million in the first
quarter 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 Year Ended
December 31, September 30,
------------------ -------------
1997 1996 1997
----- ----- ------
<S> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0%
Cost of goods sold 84.1 80.4 74.5
----- ----- -----
Gross profit 15.9 19.6 25.5
Selling, general and administrative 19.3 18.9 13.5
----- ----- -----
Income (loss) from operations (3.4) 0.7 12.0
Other income, (expense) 1.2 0.7 0.3
----- ----- -----
Income (loss) before (provision) benefit for income taxes (2.2) 1.4 12.3
(Provision) benefit for income taxes 0.8 (0.6) (5.0)
----- ----- -----
Net income (loss) (1.4%) 0.8% 7.3%
===== ===== =====
</TABLE>
Three Months Ended December 31, 1997 Compared with
Three Months Ended December 31, 1996
Net Revenues. The Company's net revenues increased from $5.0 million in
the first quarter of fiscal 1997 to $8.1 million in the first quarter of fiscal
1998, an increase of $3.1 million, or 61.5%. Approximately $1.3 million or 41.5%
of this increase is from 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.
Gross Profit. Gross profit increased from $977,000 in the first quarter
of fiscal 1997 to $1.3 million in the first quarter of fiscal 1998. The gross
margin decreased from 19.6% in the first quarter of fiscal 1997 to 15.9% in the
first quarter of fiscal 1998. Cost of goods sold includes direct materials,
direct labor, overhead, depreciation, amortization and transportation. The
percentage decrease resulted primarily from the integration of Castle Rock and a
shift in product mix. In addition, transportation expenses, which represent
outbound delivery costs, increased from 10.5% of net revenues in the first
quarter of fiscal 1997 to 12.0% of net revenues in the first quarter 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. In addition, direct
labor and overhead costs were higher primarily as a result of the costs
associated with the integration of Castle Rock by the Company. Depreciation and
amortization was $418,000 in the first quarter of fiscal 1997, compared to
$543,000 in the first quarter of fiscal 1998, but decreased from 8.4% of net
revenues in the first quarter of fiscal 1997 to 6.7% in the first quarter of
fiscal 1998. This percentage decrease is due to the expenses being spread over a
greater sales volume. 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 $944,000 in the first quarter of fiscal
1997 to $1.6 million in the first quarter of fiscal 1998 and increased from
18.9% of net revenues in the first quarter of fiscal 1997 to 19.3% in the first
quarter 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 $1.7 million and $1.6
million for the first quarters of fiscal 1997 and 1998, respectively.
The Company's capital expenditures totaled $6.6 million for the first
quarter of fiscal 1998, primarily incurred 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
$3.0 million in the first quarter of fiscal 1997, primarily incurred 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 first quarter fiscal 1998 capital expenditures, were
funded from borrowings under the Company's credit facilities and cash generated
by its operating activities.
The Company's future capital requirements include $4.6 million to
complete construction of the Florida facility and $9.8 million to expand 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 of $23.7 million 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.
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
1.0% and LIBOR plus 1.7%. 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 $29.4 million at December 31, 1997. At December 31, 1997 the
Company had $12.5 million of such borrowings outstanding which are expected to
be repaid from the proceeds of the initial public offering. 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 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 October 1, 1996.
The pro forma financial data set forth below are not necessarily indicative of
the financial position or 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
December 31, 1996
------------------
Net revenues 100.0%
Cost of goods sold 79.9
-----
Gross profit 20.1
Selling, general and administrative 21.6
-----
Loss from operations (1.5)
Other income, (expense) 0.1
-----
Loss before benefit for income taxes (1.4)
Benefit for income taxes 0.4
-----
Net loss (1.0)%
=====
The Company's net revenues increased from $6.1 million on a pro forma
basis for the first quarter of fiscal 1997 to $8.1 million in the first quarter
of fiscal 1998, an increase of $2.0 million or 33.5%. The gross profit for the
Company in the first quarter of fiscal 1997 was $1.2 million on a pro forma
basis as compared to gross profit of $1.3 million for the first quarter of
fiscal 1998, an increase of $100,000 or 5.3%. Net loss for the Company on a pro
forma basis for the first 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, was $63,000 as compared to
a loss of $113,000 in the first quarter of fiscal 1998, a decrease of $50,000 or
79.4%.
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 and
construction 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 and Redding, 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 expects to begin
bottling water from Ginnie Springs 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.
Of the 4,071,117 shares of Common Stock registered, all 4,071,117
shares 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.
No proceeds were received during the first fiscal quarter
ended December 31, 1997. From January 29, 1998 to March 1, 1998, the
proceeds from the Offering were used as follows: $2.7 million for
purchase and installation of machinery and equipment; $2.7 million for
repayment of indebtedness; and $18.3 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 share
27 Financial data schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during
the first quarter ended December 31, 1997.
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: March 12, 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 (Loss) Per Common Share
Three Months Ended
December 31,
---------------------
1997 1996
------- -------
(In thousands, except per share amounts)
BASIC:
Weighted average shares outstanding 5,756 4,305
------- -------
Total 5,756 4,305
======= =======
Net income (loss) $ (113) $ 40
======= =======
Net income (loss) per share $ (0.02) $ 0.01
======= =======
DILUTED:
Weighted average shares outstanding 5,756 4,305
Conversion of 1,703 shares of preferred stock
into 1,023 shares of common stock -- 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 -- 479
------- -------
Total 5,756 5,807
======= =======
Net income (loss) $ (113) $ 40
======= =======
Net income (loss) per share $ (0.02) $ 0.01
======= =======
<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
quarter ended December 31, 1997, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
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<FISCAL-YEAR-END> SEP-30-1997
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