UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 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 0-27378
NUCO2 INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Florida 65-0180800
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
2800 Southeast Market Place
Stuart, Florida 34997
(Address of Principal Executive Offices)
(561) 221-1754
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
------- --------
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
Class Outstanding at September 30, 1997
----- ---------------------------------
Common Stock, $.001 par value 7,197,718 shares
1
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NUCO2 INC.
Index
-----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Balance Sheets as of 3
September 30, 1997 and June 30, 1997
Statements of Operations 4
for the Three Months Ended September 30,
1997 and September 30, 1996
Statement of Shareholders' 5
Equity for the Three Months Ended
September 30, 1997
Statements of Cash Flows for the 6
Three Months Ended September 30, 1997 and
September 30, 1996
Notes to Financial Statements 7-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN 10-13
OF OPERATION
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES 15
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NUCO2 INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
------
September 30, 1997 June 30, 1997
------------------ -------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,311,917 $ 11,672,506
Trade accounts receivable; net of allowance for doubtful
accounts of $171,322 and $113,054, respectively 2,464,570 2,120,880
Inventories 120,408 85,601
Prepaid expenses and other current assets 782,679 276,858
------------ ------------
Total current assets 11,679,574 14,155,845
------------ ------------
Property and equipment, net 56,928,625 46,803,050
------------ ------------
Other assets:
Goodwill, net 13,224,128 7,580,763
Deferred charges, net 264,840 272,608
Customer lists, net 1,725,452 1,755,919
Restrictive covenants, net 1,444,500 1,401,833
Deferred lease acquisition costs, net 1,553,640 1,274,577
Deposits 111,181 99,863
------------ ------------
18,323,741 12,385,563
------------ ------------
$ 86,931,940 $ 73,344,458
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current maturities of long-term debt $ 2,145,227 $ 2,180,601
Accounts payable 3,284,756 1,514,048
Accrued expenses 1,268,388 961,544
Other current liabilities 49,540 22,699
------------ ------------
Total current liabilities 6,747,911 4,678,892
Long-term debt, excluding current maturities 19,080,326 7,365,740
Customer deposits 712,963 598,177
------------ ------------
Total Liabilities 26,541,200 12,642,809
------------ ------------
Shareholders' equity:
Common stock; par value $.001 per share; 30,000,000 authorized;
issued and outstanding 7,197,718 at each date 7,198 7,198
Additional paid-in capital 63,233,043 63,233,043
Accumulated deficit (2,849,501) (2,538,592)
------------ -------------
Total shareholders' equity 60,390,740 60,701,649
Commitments and contingencies
$ 86,931,940 $ 73,344,458
============ ============
</TABLE>
3
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NUCO2 INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
------------------
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Net sales $ 7,114,290 $ 4,071,657
Costs and expenses:
Cost of products sold 3,582,867 1,969,551
Selling, general and administrative expenses 2,000,323 1,230,425
Depreciation and amortization 1,632,897 821,842
------------ ------------
7,216,087 4,021,818
------------ ------------
Operating (loss) income, net (101,797) 49,839
Interest expense (income), net 209,112 (292,012)
------------ ------------
Net (loss) income $ (310,909) $ 341,851
============ ============
Net (loss) income per common share $ (0.04) $ 0.05
============ ============
Weighted average number of common and common equivalent
shares outstanding 7,375,783 7,333,148
============ ============
</TABLE>
4
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NUCO2 INC.
STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-in Accumulated Shareholders'
Shares Amount Capital Deficit Equity
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1997 7,197,718 $7,198 $63,233,043 $(2,538,592) $60,701,649
Net (loss) (310,909) (310,909)
------------- --------- ------------- ----------- ------------
Balance, September 30, 1997 7,197,718 $7,198 $63,233,043 $(2,849,501) $60,390,740
============= ========= ============= ============ ============
</TABLE>
5
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NUCO2 INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
------------------
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (310,909) $ 341,851
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization of property and equipment 1,162,138 600,000
Amortization of other assets 470,759 221,842
Loss on disposal of property and equipment 89,413 31,271
Changes in operating assets and liabilities:
Decrease (increase) in:
Trade accounts receivable (326,725) (49,594)
Inventories (34,807) (8,933)
Prepaid expenses and other current assets (505,821) 80,248
Increase (decrease) in:
Accounts payable 1,770,708 (947,960)
Accrued expenses 306,844 128,497
Other current liabilities 26,841 (45,907)
Customer deposits 114,786 49,030
------------ ------------
Net cash provided by operating activities $ 2,763,227 $ 400,345
------------ ------------
Cash flows from investing activities:
Proceeds from disposal of property and equipment 14,700 -
Purchase of property and equipment (4,552,564) (5,768,427)
Acquisition of businesses (6,089.992) (1,446,203)
(Increase) decrease in deposits (11,318) 189,945
(Increase) in deferred lease acquisition costs (398,904) (186,676)
------------ ------------
Net cash (used in) investing activities (11,038,078) (7,211,361)
------------ ------------
Cash flows from financing activities:
Redemption of warrants - (1,143,450)
Exercise of options - 149,455
Repayment of long-term debt (551,557) (85,569)
Proceeds from issuance of long-term debt 5,500,000 -
Increase in deferred charges (34,181) (1,442)
Additional expenses - secondary offering - (1,615)
------------ ------------
Net cash provided by (used in) financing activities 4,914,262 (1,082,621)
------------ ------------
Net decrease in cash and cash equivalents (3,360,589) (7,893,637)
Cash and cash equivalents at the beginning of period 11,672,506 43,000,676
------------ ------------
Cash and cash equivalents at the end of period $ 8,311,917 $ 35,107,039
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 270,219 $ 226,136
============ ============
Income taxes $ - $ -
============ ============
Supplemental schedule of noncash investing and financing activities:
Acquisition of businesses:
Fair value of assets acquired $ 7,050,600 $ -
Cost in excess of net assets of businesses acquired 5,724,400 -
Liabilities assumed or incurred (6,750,000) -
------------ -----------
Cash paid $ 6,025,000 $ -
============ ===========
</TABLE>
In July 1997, the Company wrote-off a restrictive covenant and the related
liability in the amuont of $19,231 due to the employee resigning.
6
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NUCO2 INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Basis of Presentation
- ------- ---------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10- QSB used for quarterly
reports under Section 13 or 15 (d) of the Securities Exchange Act of 1934, and
therefore, do not include all information and footnotes necessary for a fair
presentation of financial position, results of operations and cash flows in
conformity with generally accepted accounting principles.
The financial information included in this report has been prepared in
conformity with the accounting principles and methods of applying those
accounting principles, reflected in the financial statements for the fiscal year
ended June 30, 1997 included in Form 10-KSB filed with the Securities and
Exchange Commission.
All adjustments necessary for a fair statement of the results for the
interim periods presented have been recorded. This quarterly report on Form
10-QSB should be read in conjunction with the Company's audited financial
statements for the fiscal year ended June 30, 1997. The results of operations
for the periods presented are not necessarily indicative of the results to be
expected for the full fiscal year.
Note 2. Net Income or Loss Per Common Share
- ------- -----------------------------------
The net income or loss per share computations for the 1997 and 1996
periods presented are based on the weighted average number of common shares and
dilutive common equivalent shares outstanding during each period. Fully diluted
and primary income or loss per common share are the same amounts for each
period.
Note 3. Acquisitions
- ------- ------------
In August 1996, the Company acquired the bulk CO2 operations of two
affiliated companies operating in Ohio, Kentucky and Indiana for an aggregate
purchase price of approximately $1,350,000. The Company paid cash for these
transactions.
Effective July 15, 1997, the Company purchased substantially all of the
assets of a bulk CO2 company operating in Colorado for a purchase price of
$675,000. The purchase price was funded through a borrowing under the Company's
credit facility.
Effective July 31, 1997, the Company purchased certain assets from CC
Acquisition Corp. (Carbo Co.) for an aggregate purchase price of $11,000,000.
Carbo Co. had operations in Nebraska, Kansas, Oklahoma, Iowa, Missouri, Arkansas
and South Dakota. The Company funded $5,000,000 through a borrowing under its
$30 million credit facility and paid cash for the balance.
In September 1997, the Company purchased certain assets of a bulk CO2
company with operations in Arizona for an aggregate purchase price of
$1,100,000. The Company funded $1,075,000 through a borrowing under its credit
facility and paid cash for the balance.
These acquisitions were accounted for by the purchase method of
accounting and, accordingly, the purchase prices and direct costs of the
acquisitions have been allocated to the respective assets and liabilities of the
acquired companies based upon their estimated fair market values at the dates of
acquisition. This resulted in goodwill of approximately $5,772,745 for the three
months ended September 30, 1997, which is being amortized on a straight-line
basis over twenty years. The results of operations of the acquired companies are
included in the Company's financial statements since the effective dates of the
acquisitions.
Note 4. Long-Term Debt
- ------- --------------
As of September 30, 1997, a total of $20,952,270 was outstanding
pursuant to the Company's $30 million credit facility with NationsBank of
Florida, N.A.. The original principal balance was comprised of a $6.0 million
term loan and $16,406,465 of drawings pursuant to the tank and acquisition
revolvers of the credit facility. The term loan was payable interest only for
twelve months. Principal payments of $100,000 plus interest at a fixed rate of
8.51%, are payable monthly for twenty-three months commencing January 1997. The
tank and acquisition revolvers are interest only for 12 months at two hundred
seventy-five basis points above the 30-day London InterBank Offering Rate
("LIBOR") (8.41% at September 30, 1997), with the principal amount outstanding
at the end of 12 months (December 1996) and 24 months (December 1997) converted
to term loans calculated on a 60 month amortization schedule. In January 1997,
drawings
7
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pursuant to the tank and acquisition revolvers in the amount of $4,156,465,
converted to term loans with aggregate monthly principal payments of $69,274.
Any accrued interest and one final payment of all unpaid principal is due and
payable on November 30, 1998.
In September 1997, the Company's existing $30 million facility was
amended to adjust the funded debt ratio to 3.5 times EBITDA on a three month
rolling average annualized. (See Note 8)
Note 5. Stock Option Plan
- ------- -----------------
In 1995, the board of directors approved the 1995 Stock Option Plan
(the "1995 Plan"). Under the 1995 Plan, the Company has reserved 350,000 shares
of Common Stock for employees of the Company. Under the terms of the 1995 Plan,
options granted may be either incentive stock options or non-qualified stock
options. The exercise price of incentive options shall be at least equal to 100%
of the fair market value of the Company's Common Stock at the date of the grant,
and the exercise price of non-qualified stock options issued to employees may
not be less than 75% of the fair market value of the Company's Common Stock at
the date of the grant. The maximum term for all options is 10 years. All options
granted to date vest one-third per annum commencing one year from the date of
grant. As of September 30, 1997, options for 41,437 shares are exercisable.
The following table summarizes the transactions pursuant to the 1995
Plan.
Shares Exercise Price
------ --------------
Outstanding at June 30, 1995 -0- -0-
Granted 130,991 $9-$17.50
Expired or canceled 340 $9
Exercised -0- -0-
---------- ----------
Outstanding at June 30, 1996 130,651 $9-$17.50
Granted 222,500 $11.25
Expired or canceled 6,225 $9-$11.25
Exercised 322 $9
---------- ----------
Outstanding at June 30, 1997 346,604 $9-$17.50
Expired or canceled 300 $11.25
---------- ----------
Outstanding at September 30, 1997 346,304 $9-$17.50
========== ==========
The board of directors of the Company adopted the Directors' Stock
Option Plan (the "Directors' Plan"). Under the Directors' Plan, the Company has
reserved 60,000 shares of Common Stock. Under the terms of the Directors' Plan
each non-employee director will receive options for 6,000 shares of Common Stock
on the date of his or her first election to the board of directors. In addition,
on the third anniversary of each director's first election to the Board, and on
each three year anniversary thereafter, each non-employee director will receive
an additional option to purchase 6,000 shares of Common Stock. The exercise
price per share for all options granted under the Directors' Plan will be equal
to the fair market value of the Common Stock as of the date of grant. All
options vest in three equal annual installments beginning on the first
anniversary of the date of grant. As of September 30, 1997, options to purchase
a total of 20,000 shares of Common Stock at an exercise price of $9 per share
had been issued. Of these options, 8,000 are currently exercisable.
Note 6. Operating Leases
- ------- ----------------
The Company entered into 25 operating leases from July 1 through
September 30, 1997. Seven leases were for warehouse facilities with aggregate
annual rentals of approximately $132,519 expiring at various dates through 2000.
Eighteen leases were for trucks with aggregate annual rentals of approximately
$194,400 expiring at various dates through 2003.
Note 7. Contingencies
- ------- -------------
Carbonic Designs, Inc. ("CDI") v. MVE, Inc., The Taylor-Wharton Gas
Equipment Division of Harsco Corporation, Welders Supply Co. and NuCo2 Inc.,
filed on or about December 31, 1996 asserted claims for violation of the Texas
Free Enterprise and AntiTrust Act of 1983, business disparagement, tortious
interference with contract, tortious interference with prospective business
relations and civil conspiracy. CDI seeks various damages, all in unspecified
amounts. The Company has been contesting the case vigorously and intends to
continue to do so.
8
<PAGE>
Note 8. Subsequent Events
- ------- -----------------
(a) Acquisitions
Effective October 1, 1997, a newly formed wholly-owned subsidiary of
the Company purchased all of the issued and outstanding shares of common stock
of Koch Compressed Gases, Inc., ("Koch") for an aggregate purchase price of
$5,500,000 subject to adjustments. Koch operated a bulk CO2 business as well as
provided carbon dioxide and other gases in high-pressure cylinders throughout
the tri-state New York metropolitan area. The Company paid cash for this
transaction.
Effective November 3, 1997, the Company purchased substantially all of
the assets of a bulk CO2 company operating in Texas for a purchase price of
$1,275,000. The Company paid approximately $1,000,000 cash and issued 18,835
shares of common stock at market for a value of $275,000.
(b) Credit Facility
On October 31, 1997, the Company closed a $50.0 million senior secured
revolving credit facility with SunTrust Bank, South Florida, National
Association (the "Sun Trust Facility"). The facility includes a trigger for an
automatic request by the Company to increase the facility by an additional $50.0
million to a total of $100.0 million upon the happening of certain events. The
facility expires on October 31, 2000 and contains a two year renewal option. No
funds were borrowed at closing.
(c) Senior Subordinated Promissory Notes
On October 31, 1997, the Company closed $25.0 million of its 12% Senior
Subordinated Promissory Notes due 2004. Montgomery Securities acted as placement
agent. The purchasers of the Notes were institutional investors led by Chase
Equity Associates L.P.. The Company expects to close on the sale of an
additional $5.0 million of Notes in the near future. The Notes were sold with
seven year warrants to purchase an aggregate of 546,448 shares of the Company's
Common Stock at an exercise price of $16.40 per share. Approximately $20,800,000
of the proceeds of the Notes was used to repay the Company's existing
indebtedness with its lending institution. The NationsBank of Florida, N.A.
facility was terminated concurrently with the closing of the SunTrust Facility.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION
This Management's Discussion and Analysis or Plan of Operation contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from those anticipated in these
forward-looking statements. Factors that may cause such differences include, but
are not limited to, the Company's expansion into new markets, competition,
technological advances and availability of managerial personnel.
Overview
During the quarter ending September 30, 1997, the Company continued to
take major steps towards becoming the national supplier of bulk CO2 systems and
liquid carbon dioxide to the restaurant and convenience store industries. In
July 1997, the Company finalized two separate acquisitions. One had operations
in Colorado and the other had operations throughout the Midwest. Through these
two acquisitions, the Company continued its expansion by adding four additional
states, Colorado, Nebraska, Iowa and South Dakota to its service area while
adding to its current service area in four others, Arkansas, Kansas, Missouri
and Oklahoma. Additionally, in September 1997, the Company purchased certain
assets of a bulk CO2 distributor and added another state, Arizona, to its
service territory. The acquisitions during the quarter contributed approximately
2,900 bulk CO2 customers.
Additionally, during the quarter, the Company reached multi-unit
placement agreements with Conoco, Inc. and Apple South, Inc. which helped
"back-fill" and add route density to markets in the South and Midwest.
The layering effect of both the acquisitions and multi-unit placement
agreements combined with the Company's largest increase in new internally
generated placements in a quarter (2,026) strengthened the Company's position as
the leader in the industry. The Company's growth plan is to consolidate its
position in existing markets and expand into additional geographic markets
through internal market development facilitated initially by national chain
customers and by strategic acquisitions.
General
At September 30, 1997 the Company leased 26,584 bulk CO2 systems to its
customers, principally pursuant to five year noncancelable lease contracts.
These customers include restaurants, convenience stores, theaters, taverns and
other businesses which dispense carbonated beverages. Generally, these contracts
are classified as one of two types: "budget-plan" service contracts and "rental
plus per pound charge" contracts. Pursuant to budget plan contracts, customers
pay a fixed monthly charge for the lease of a Company owned bulk CO2 system on
the customer's premises and refills of bulk CO2 according to a predetermined
schedule. The bulk CO2 is included in the monthly rental charge up to a
predetermined maximum annual volume. If the maximum annual volume is exceeded,
the customer is charged for additional bulk CO2 delivered. Pursuant to rental
plus per pound charge contracts, the Company also leases a bulk CO2 system to
the customer, but the customer is charged on a per pound basis for all bulk CO2
delivered. The Company's contracts generally provide for price increases based
upon increases in the consumer price index.
The Company provides some services besides those offered under the
above two types of contracts. As of September 30, 1997, the Company provided
"fill only" service to approximately 5,000 customers.
As of September 30, 1997, approximately 11,700 of the Company's 31,741
bulk CO2 customers were billed on a per pound basis which varies with the
quantity of bulk CO2 delivered. These customers will tend to consume less CO2 in
the winter months, and this may cause the Company's revenues and earnings for
its fiscal quarters ending in December and March to be relatively lower than for
its other quarters. As of September 30, 1997, approximately 20,200 of the
Company's 31,741 bulk customers were billed at a flat monthly rate which does
not vary throughout the year.
The Company intends to continue to grow through a combination of
internal growth and acquisitions. The Company requires significant capital to
purchase and install bulk CO2 systems at customers' locations and to grow the
network of service and supply depots and specialized CO2 delivery vehicles
required to service these installations. Once installed, however, there are
minimal additional capital requirements for bulk CO2 systems in service, and the
Company has generally experienced significant positive cash flows on a per-unit
basis. These cash flows stem from per-unit operating income combined with
per-unit non-cash charges for depreciation and amortization. The Company
believes its current installed base of bulk CO2 systems is stable, partly due to
the existence of long-term contracts with its customers. In fiscal 1997 and the
three months ended September 30, 1997, less than 5% of Company owned bulk CO2
systems experienced service termination. Service termination is typically caused
by restaurant closure. Affected bulk CO2 systems are either removed and
reconditioned for use with other customers, or left in place when prospects for
a new restaurant in the same location are deemed favorable.
10
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Results of Operations
The following table sets forth, for the periods indicated, the
percentage relationship which various items bear to net sales:
Three Months Ended
September 30,
1996 1997
---- ----
Income Statement Data:
Net sales ................................................ 100.0% 100.0%
Cost of products sold..................................... 48.4% 50.4%
Selling, general and administrative expenses.............. 30.2% 28.1%
Depreciation and amortization............................. 20.2% 23.0%
----- -----
Operating income (loss)................................... 1.2% (1.5%)
Interest (income) expense, net............................ (7.2%) 2.9%
------ -----
Net income (loss) ........................................ 8.4% (4.4%)
====== ======
Other Data:
Operating income before depreciation and amortization
(EBITDA)................................................. 21.4% 21.5%
===== =====
Three Months Ended September 30, 1997 Compared to Three Months Ended September
30, 1996
Net sales increased by $3.0 million, or 74.7%, from $4.1 million in the
1996 period to $7.1 million in the 1997 period. Approximately $387,000 of the
increase represented net sales resulting from the May 1997 acquisition of
certain assets of the BOC Group, Inc. and $385,000 of the increase represented
net sales resulting from the July 1997 acquisition of CC Acquisition Corp.
(Carbo Co.). In addition, approximately $837,356 and $68,830 represented net
sales from seven acquisitions during year ended June 30, 1997 and two
acquisitions during the first fiscal quarter of 1998, respectively. The
remainder of the increase in net sales was primarily due to internal growth in
the number of Company owned and customer owned bulk CO2 systems in service.
Cost of products sold increased by $1.6 million, from $2.0 million in
the 1996 period to $3.6 million in the 1997 period and increased as a percentage
of net sales from 48.4% to 50.4%. The dollar increase was attributable to the
expansion of the Company into new territories. The percentage increase was
primarily attributable to overtime incurred and tank repairs in connection with
the Carbo Co. acquisition in July 1997. Fully loaded route drivers increased by
$545,000 from $659,000 in the 1996 period to $1.2 million in the 1997 period and
increased as a percentage of net sales from 16.2% to 16.9%. Additionally,
repairs and maintenance on bulk CO2 cylinders increased by $75,000 from $34,000
in the 1996 period to $109,000 in the 1997 period and increased as a percentage
of net sales from .8% to 1.7%. The number of depots operated by the Company at
September 30, 1997, increased to 45, compared to 30 at September 30, 1996. When
the Company opens new depots and expands into new markets, higher costs
expressed as a percentage of net sales are incurred until route density is
achieved. The Company typically services approximately 350 customers per
delivery vehicle in its mature markets. In new territories, a delivery vehicle
can initially service as few as 100 customers.
Selling, general and administrative expenses increased by $770,000 from
$1.2 million in the 1996 period to $2.0 million in the 1997 period and decreased
as a percentage of net sales from 30.2% to 28.1%. The dollar increase was
primarily attributable to growth in the number of marketing and administrative
personnel and their associated expenses, as well as the costs of expanding the
Company's geographic areas of service. The percentage decrease is attributable
to the economies of scale. At September 30, 1996, the Company had operations in
18 states and employed 33 marketing personnel and at September 30, 1997, the
Company had operations in 36 states and employed 75 marketing personnel.
Depreciation and amortization increased by $811,000 from $822,000 in
the 1996 period to $1.6 million in the 1997 period. As a percentage of net
sales, such expenses increased from 20.2% in the 1996 period to 23.0% in the
1997 period. Depreciation expense increased by $562,000 from $600,000 in the
1996 period to $1.2 million in the 1997 period principally due to the increase
in bulk CO2 systems leased to customers. Expressed as percentage of net sales,
depreciation expense increased from 14.7% in the 1996 period to 16.3% in the
1997 period. Amortization expense increased by $249,000 from $222,000 in the
1996 period to $471,000 in the 1997 period primarily due to the amortization
related to restrictive covenants, goodwill and customer lists. As a percentage
of net sales, amortization expense increased from 5.4% to 6.6%, respectively.
Net interest income in the 1996 period was $292,000 compared to net
interest expense in the 1997 period of $209,000. This
11
<PAGE>
change is attributable to the decreased level of cash and cash equivalents and
the increased level of long-term debt in the 1997 period as compared to the 1996
period.
For the reasons described above, EBITDA, representing operating income
plus depreciation and amortization, increased by $659,000, or 75.6%, from
$872,000 in the 1996 period to $1.5 million in the 1997 period and increased as
a percentage of net sales from 21.4% to 21.5%, respectively. The Company
believes EBITDA is useful as a means of measuring the growth and earning power
of its business. In addition, the Company uses EBITDA to measure how well the
Company is generating cash flow. EBITDA excludes significant costs and should
not be considered in isolation from GAAP measures.
Liquidity and Capital Resources
The Company's cash requirements consist principally of capital
expenditures associated with placing new bulk CO2 systems into service at
customers' locations; payments of principal and interest on its outstanding
indebtedness; payments for acquired businesses; and working capital. Whenever
possible, the Company seeks to obtain the use of vehicles, land, buildings, and
other office and service equipment under operating leases as a means of
conserving capital. The Company anticipates making cash capital expenditures of
approximately $15.0 million to $20.0 million during the remaining nine months of
fiscal 1998, primarily for the purchases of bulk CO2 systems that it expects to
place into service during this time. Once bulk CO2 systems are placed into
service, the Company has generally experienced significant positive cash flows
on a per-unit basis, as there are minimal additional capital expenditures
required for ordinary operations. In addition to the capital expenditures
related to internal growth, the Company continually reviews opportunities to
acquire bulk CO2 service businesses, and may require cash in an amount dictated
by the scale and terms of any such transactions successfully concluded. In
August 1996 and July and September of 1997, certain assets, primarily consisting
of bulk CO2 systems, were acquired for $7.4 million in cash and $6.8 million
borrowings under the Company's credit facility.
During the quarter ended September 30, 1997, the Company's capital
resources included cash flows from operations and available borrowing capacity
under the Company's credit facility with NationsBank of Florida, N.A. (the
"NationsBank Facility"). The Company had available under the NationsBank
Facility an aggregate of $30.0 million, including a $6.0 million term loan; a
$13.0 million "tank revolver" to finance the purchase and installation of new
bulk CO2 service systems; a $10.0 million acquisition revolver to finance the
purchase of bulk CO2 service businesses; and a $1.0 million line of credit for
general working capital needs. As of September 30, 1997, a total of $20,952,270
was outstanding pursuant to the credit facility. Principal payments of $100,000
plus interest at a fixed rate of 8.51% were payable monthly for twenty-three
months commencing January 1997 on the $6.0 million term loan. In January 1997
drawings pursuant to the tank and acquisition revolvers converted to term loans
with aggregate monthly principal payments of $ 69,274 plus interest at two
hundred seventy-five basis points above the 30-day London InterBank Offering
Rate ("LIBOR") (8.41% at September 30, 1997). All portions of the NationsBank
Facility required full repayment of all outstanding principal and interest on
November 30, 1998, the maturity date of the NationsBank Facility. The Company
was required to meet certain financial covenants and in September 1997, the
NationsBank Facility was amended to adjust the funded debt ratio to 3.5 times
EBITDA on a three month rolling average annualized.
On October 31, 1997, the Company finalized a $50.0 million senior
secured revolving credit facility with SunTrust Bank, South Florida, National
Association (the "SunTrust Facility"). The facility includes a trigger for an
automatic request by the Company to increase the facility by an additional $50.0
million to a total of $100.0 million upon the achievement of the Company of an
annualized one quarter EBITDA of $15.0 million. Additionally, the facility
contains interest and an unused facility fee based on a pricing grid calculated
quarterly on senior funded debt to annualized EBITDA. The pricing grid is as
follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Senior Funded Debt to Annualized EBITDA Under 1.50 1.50 and 2.25 2.25 and 3.00 Over 3.00
Commitment Fee 0.1875% 0.25% 0.375% 0.50%
Applicable LIBOR Margin 1.25% 1.75% 2.25% 2.75%
Applicable Base Rate Margin 0.00% 0.00% 0.00% 0.50%
</TABLE>
The Company is entitled to select the Base Rate or LIBOR, plus
applicable margin, for principal drawings under the SunTrust Facility. Base Rate
is defined as the higher of the prime lending rate or the Federal Funds rate
plus one-half of one percent (1/2%) per annum. Interest only is payable
periodically until the expiration of the SunTrust Facility at which time all
outstanding principal and interest is due. The SunTrust Facility expires on
October 31, 2000; however, it contains a two year renewal option. Additionally,
it is collateralized by substantially all of the assets of the Company. No funds
were borrowed at closing.
12
<PAGE>
On October 31, 1997, the Company closed $25.0 million of its 12% Senior
Subordinated Promissory Notes due 2004. Montgomery Securities acted as placement
agent. The purchasers of the Notes were institutional investors led by Chase
Equity Associates L.P.. The Company expects to close on the sale of an
additional $5.0 million of Notes in the near future. The Notes were sold with
seven year warrants to purchase an aggregate of 546,448 shares of the Company's
Common Stock at an exercise price of $16.40 per share. Approximately $20,800,000
of the proceeds of the Notes was used to repay the Company's existing
indebtedness under the NationsBank Facility, which facility was terminated
concurrently with the closing of the SunTrust Facility.
The Company believes that cash from operating activities and available
borrowings under the SunTrust Facility will be sufficient to fund proposed
operations for at least the next twelve months at its current rate of growth.
Working Capital. At June 30, 1997 the Company had working capital of
$9.5 million. At September 30, 1997, the Company had working capital of $4.9
million.
Cash Flows from Operating Activities. For the three months ended
September 30, 1996 and September 30, 1997 net cash provided by operating
activities was $400,000 and $2.8 million, respectively. The increase from the
1996 period to the 1997 period of $2.4 million is primarily due to an increase
in depreciation and amortization and an increase in accounts payable.
Cash Flows from Investing Activities. For the three months ended
September 30, 1996 and September 30, 1997 net cash used in investing activities
was $7.2 million and $11.0 million, respectively. These investing activities
were attributable to the installation and direct placement costs and acquisition
of bulk CO2 systems, and the cash expended in connection with the asset
acquisitions.
Cash Flows from Financing Activities. For the three months ended
September 30, 1996 cash flows used in financing activities were $1.1 million.
For the three months ended September 30, 1997, cash flows provided by financing
activities were $4.9 million. For the three months ended September 30, 1996, net
cash used in financing activities are primarily from the redemption and
cancellation of a warrant issued to a representative of the underwriters in the
Company's initial public offering in December 1995. For the three months ended
September 30, 1997 net cash provided by financing activities was primarily from
the issuance of long-term debt..
Inflation
The modest levels of inflation in the general economy since the Company
began business in 1990 have not affected its results of operations.
Additionally, the Company's contracts with its customers contain an annual lease
rate adjustment clause based on any increase in the consumer price index. The
Company believes that inflation will not have a material adverse effect on its
future results of operations.
13
<PAGE>
Part II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial data schedule
(b) No reports on Form 8-K were filed for the quarter
ended September 30, 1997
14
<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.
NuCo2 Inc.
Dated November 14, 1997 By: /s/ Joann Sabatino
-----------------------
Joann Sabatino
Chief Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the NuCo2
Inc. Financial Statements as of September 30, 1997 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 8,311,917
<SECURITIES> 0
<RECEIVABLES> 2,464,570
<ALLOWANCES> 171,322
<INVENTORY> 120,408
<CURRENT-ASSETS> 11,679,574
<PP&E> 64,382,430
<DEPRECIATION> 7,453,805
<TOTAL-ASSETS> 86,931,940
<CURRENT-LIABILITIES> 6,747,911
<BONDS> 0
<COMMON> 7,198
0
0
<OTHER-SE> 60,383,542
<TOTAL-LIABILITY-AND-EQUITY> 86,931,940
<SALES> 7,114,290
<TOTAL-REVENUES> 7,114,290
<CGS> 3,582,867
<TOTAL-COSTS> 7,216,087
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (300,460)
<INCOME-PRETAX> (310,909)
<INCOME-TAX> 0
<INCOME-CONTINUING> (310,909)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (310,909)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
