SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(Mark One)
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended JUNE 30, 1997
OR
/ / TRANSITION REPORT UNDER 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.
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(Name of Small Business Issuer in Its charter)
FLORIDA 65-0180800
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2800 Southeast Market Place, Stuart, Florida 34997
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(Address of Principal Executive Offices) (Zip Code)
(561) 221-1754
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
None.
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
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(Title of Class)
Check whether the issuer: (1) has 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 / /
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(continued next page)
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. /X/
State issuer's revenues for its most recent fiscal year: The
Registrant's revenues for the fiscal year ended June 30, 1997 were $18,943,569.
The aggregate market value at September 18, 1997 of shares of the
Registrant's Common Stock, $.001 par value per share (based upon the closing
price of $16.50 per share of such stock on the Nasdaq National Market on such
date), held by non-affiliates of the Registrant was approximately $99,142,610.
Solely for the purposes of this calculation, shares held by directors and
officers of the Registrant have been excluded. Such exclusion should not be
deemed a determination or an admission by the Registrant that such individuals
are, in fact, affiliates of the Registrant.
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: At September 18, 1997,
there were outstanding 7,197,718 shares of the Registrant's Common Stock, $.001
par value.
Transitional Small Business Disclosure Format (check one):
Yes / / No /X/
DOCUMENTS INCORPORATED BY REFERENCE
The information required by items 9, 10, 11 and 12 of Part III is
incorporated by reference to a definitive proxy statement to be filed by the
Registrant not later than October 28, 1997 pursuant to Regulation 14A.
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PART I
1. DESCRIPTION OF BUSINESS.
GENERAL
NuCo2 Inc., a Florida corporation organized in 1990 (the "Company")
operates in a relatively new industry which supplies liquid carbon dioxide
("bulk CO2") to retail establishments for use in the carbonation and dispensing
of fountain beverages. In most instances, carbon dioxide is presently supplied
in the form of CO2 gas, which is transported and stored in high pressure
cylinders. The Company offers its customers two principal services: a stationary
bulk CO2 system installed on the customer's premises and routine filling of the
system with bulk CO2 according to a defined schedule. The bulk CO2 system
utilizes a cryogenic vessel that preserves CO2 in its liquid form and then
converts the liquid product to gaseous CO2, the necessary ingredient for
beverage carbonation. Typically the bulk CO2 system is owned by the Company and
leased to the customer under a five year noncancelable contract, although some
customers own their own system. The Company believes high pressure cylinders are
being displaced by bulk CO2 systems because, from a customer's perspective, bulk
CO2 systems enjoy several qualitative and economic advantages over high pressure
cylinders.
The Company entered the bulk CO2 business in Florida in 1990 with the
acquisition of a fountain syrup distributor with a base of 19 bulk CO2 systems.
After consolidating its position in Florida through internal growth and the
acquisition of five bulk CO2 distributors, beginning in 1994 the Company,
through acquisitions, expanded into other regional markets as follows:
o In January 1995, the Company completed the acquisition of a
bulk CO2 beverage distributor located in New Orleans.
o In June 1995, the Company acquired substantially all of the
assets of Bevtech, Inc. ("Bevtech") a provider of bulk CO2
service in Georgia, North Carolina, South Carolina and
Alabama, more than doubling the Company's service area.
Previously, in June 1993 the Company had acquired the Florida
operations of Bevtech.
o In January 1996, the Company acquired two bulk CO2 businesses,
one operating in Arkansas, Mississippi, Louisiana and Texas
and the other operating in Florida, Georgia and Alabama.
o In May 1996, the Company acquired the bulk CO2 operations in
New York, New Jersey and Connecticut of The Coca-Cola Bottling
Company of New York, Inc.
o In May 1996, the Company acquired a second bulk CO2 business
operating in Mississippi.
o In August 1996, the Company acquired the bulk CO2 operations
of two affiliated companies operating in Ohio, Kentucky and
Indiana.
o In March 1997, the Company acquired the bulk CO2 operations of
three independent companies operating in Texas.
o In April 1997, the Company acquired a bulk CO2 business
operating in Houston, Texas.
o In May 1997, the Company acquired a bulk CO2 business
operating in Oklahoma, Kansas, Texas and Arkansas.
o In May 1997, the Company acquired the bulk CO2 operations of
BOC Gases in Massachusetts, Pennsylvania and Tennessee.
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o In June 1997, the Company acquired a bulk CO2 business
operating in Georgia.
o In July 1997, the Company acquired two bulk CO2 businesses,
one operating in Colorado and the other operating in Nebraska,
Iowa and South Dakota.
o In September 1997, the Company acquired the bulk CO2
operations of a company operating in Arizona.
In addition, in April 1997, the Company signed an agreement with
MiCell(TM) Technologies Inc. to be the exclusive United States and Canadian
supplier of bulk CO2 systems and liquid carbon dioxide to the MiCell customer
base in the industrial laundry and professional garment care industry (dry
cleaning) that will utilize the MiCare(TM) garment cleaning fluid system
technology developed and patented by MiCell(TM). This system utilizes carbon
dioxide in conjunction with non-toxic cleaning solutions. MiCell(TM) surfactants
allow for a wide range of performance in liquid CO2 systems, that in addition to
garment care, also includes parts cleaning, precision cleaning and textile
processing. MiCell(TM) expects to commence commercialization on a test basis in
the first quarter of calendar 1998.
In July 1997, the Company reached an agreement with Geotechnical
Instruments, Inc. to be the exclusive distributor in the United States of
stationary carbon dioxide detectors. The Company expects to commence the sale
and lease of the detectors in the second quarter of fiscal 1998.
As of August 31, 1997, the Company had operations in 34 states,
operated 43 service and supply depots and serviced over 30,000 bulk CO2
customers, which consist primarily of restaurants, convenience stores, taverns,
theaters, theme parks, resorts and stadiums.
INDUSTRY OVERVIEW
CO2 is universally used for the carbonation and dispensing of fountain
beverages. The Company believes that bulk CO2 technology will eventually
displace most high pressure cylinders in the beverage CO2 market and, therefore,
the bulk CO2 industry presents substantial opportunity for growth. Major
restaurant and convenience store chains continue to adopt this new technology
and search for qualified suppliers to install and service these systems. Unlike
high pressure cylinders, which are typically changed when empty and transported
to the supplier's depot for refilling, bulk CO2 systems are permanently
installed at the customer's site and are kept charged by filling by the supplier
from a specialized bulk CO2 truck on a constant "stay filled" basis. Advantages
to users of bulk CO2 systems include enhanced safety, improved beverage quality
and product yields, reduced employee handling and cylinder storage requirements,
and elimination of system downtime and product waste during cylinder
changeovers.
Many types of businesses compete in the beverage CO2 business, and
market share is fragmented. High pressure cylinders and bulk CO2 service are
most frequently provided by distributors of industrial gases. These companies
generally provide a number of products and services in addition to CO2, and
often view bulk CO2 systems as high-service adjuncts to their core business.
Industrial gas distributors generally have been reluctant to attempt to convert
their cylinder CO2 customers to bulk CO2 systems for several reasons, that
include the capital outlays required to purchase the bulk CO2 systems, the
idling of high pressure cylinders and associated equipment, and the
inefficiencies that would result from splitting their CO2 customer base between
two CO2 technologies. Other competitors in the beverage CO2 market include
fountain supply companies and distributors of restaurant supplies and groceries,
which firms vary greatly in size. There are a number of small companies that
provide bulk CO2 service, that operate on a local or regional geographic scope.
Many of these suppliers lack the capital necessary to offer bulk CO2 systems to
customers on lease, or to purchase additional or replacement specialized bulk
CO2 trucks and stationary depots.
Management believes that demand for bulk CO2 systems will be driven by
the safety, product quality and other operating advantages afforded to users by
such systems, and the increasing availability and acceptance within
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the food and beverage industry of bulk CO2 systems. In addition, the Company
believes that qualified suppliers of bulk CO2 systems do not presently exist in
many regions of the United States.
COMPETITIVE STRATEGY
The central elements of the Company's competitive strategy are the
following:
Focus on Bulk CO2 Market. Unlike many of its competitors for whom bulk
CO2 is a secondary service line, the Company has no material lines of business
at present other than the provision of bulk CO2, and does not anticipate
diversifying into other product or service lines. All aspects of the Company's
operations are guided by its focus on the bulk CO2 business, including its
selection of operating equipment, design of delivery routes, location of depots,
structure of customer contracts, content of employee training programs and
design of management information and accounting systems. By restricting its
scope of activities to the bulk CO2 business, and largely avoiding the dilution
of management time and Company resources that would be required by other service
lines, the Company believes it is able to maximize the level of service it
provides to its bulk CO2 customers. The Company also believes that its focus on
this product line also helps minimize operating costs through the use of
equipment dedicated to bulk CO2 applications and through the high level of
product experience held by its employees.
Company Owned Equipment. The Company generally places a Company owned
bulk CO2 system on the customer's premises under a long-term supply contract.
This arrangement is often appealing to the customer since the Company bears the
initial capital cost of the equipment and installation, with the customer only
facing a predictable and modest monthly usage fee. The Company believes that its
ability to place its equipment on the customers premises helps create customer
loyalty.
Long term Customer Contracts. The Company typically enters into five
year bulk CO2 system lease agreements with its customers. 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 fixed monthly charges for the lease of a Company owned bulk CO2
system installed 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. In exchange for a noncancelable monthly charge, the Company
installs and rents to its customers a Company owned bulk CO2 system and, through
a delivery routing system, services the bulk CO2 system and supplies bulk CO2 to
the customer's site on a regular basis. Even with customers that own their own
bulk CO2 systems, the Company seeks to arrange for multi-year supply contracts.
The Company believes that the use of long-term contracts provides benefits to
both itself and its customers. Customers are able to largely eliminate CO2
supply interruptions and the need to operate CO2 equipment themselves, while the
contract adds stability to the Company's revenue base and may deter potential
competition. After the expiration of the initial term of a contract, the term of
the contract continues in effect until either the Company or the customer
notifies the other of its desire to terminate. Generally, the Company has been
successful contracting with its customers for a new long-term supply contract.
To date, the Company's experience has been that contracts roll-over without a
significant portion of contracts expiring without renewal in any one year. The
largest number (approximately 40%) of the Company's current contracts with
customers expire by their terms in 2002.
Capture Advantages of Scale and Route Density. In most of its current
markets the Company has established itself as the leading or dominant supplier
of bulk CO2, and believes it enjoys cost advantages over its competitors due to
the greater density of the Company's route structure; a lower average time and
distance traveled between stops, and a lower average cost per delivery. Greater
scale may also lead to better vehicle and fixed asset utilization, as well as
the ability to spread fixed marketing and administrative costs over a broader
revenue base.
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Superior Customer Service. The Company seeks to differentiate itself
through its attention to customer service. Each bulk CO2 system serviced by the
Company has a label with a toll-free help line for the customer's use. The
Company has an advanced dispatch and delivery system, including the ability to
communicate by radio with route personnel at all times. The Company responds to
service calls on a 24-hour, seven day a week basis, and the experience level of
its personnel aids in the resolution of equipment failures or other service
interruptions, whether or not caused by the Company's equipment. Recognizing the
public visibility of its customers, the Company carefully maintains the
appearance of its vehicles and the professional image of its employees.
Rapid Installation and Diverse Configurations. The bulk CO2 system
installed at the customer's site consists of a cryogenic vessel for the storage
of liquid CO2 and related valves, regulators and gas lines. The Company operates
a fleet of 43 installation vehicles with dedicated installation personnel. A key
attribute in marketing the Company's services to multi-unit customers is its
ability to rapidly install bulk CO2 systems at customers' locations with minimal
disruption. The Company offers systems ranging from 100 to 600 pounds of CO2
capacity.
Attractive Pricing to Customer. The Company carefully monitors the
prices offered in its markets by providers of high pressure CO2 cylinders.
Despite the customer-level advantages of bulk CO2 systems over high pressure
cylinders, the Company generally prices its services comparably to the price of
high pressure cylinders. This has proved an effective inducement to cause
customers to convert from cylinders to bulk CO2 systems. When appropriate, the
Company will adjust pricing to meet local market conditions in order to build
route density.
GROWTH STRATEGY
The objective of the Company is to become the dominant national
supplier of bulk CO2 systems for beverage applications. The Company intends to
implement its strategy through (i) internal market development by which it
builds route densities necessary to become the lowest cost operator and (ii) a
program of strategic acquisitions, by which it will enter a new market area, or
through tuck-in acquisitions whereby it consolidates an underpenetrated existing
market.
Internal Market Development. The majority of growth is driven by the
conversion of high pressure cylinder CO2 users to bulk CO2 systems. The
Company's ability to drive conversion is illustrated by its success in the
Florida market, where it continues to rapidly add new bulk CO2 system
installations, even after actively marketing in the state since 1990. The
Company's internal growth initiatives consist of marketing multi-system
placements to corporate and franchised operations of large restaurant,
convenience store and theater chains. The Company's relationships with chain
customers in one geographic market frequently help it to establish service with
these same chains when the Company expands to new markets. As the Company enters
a new market, the Company may seek to establish an initial presence through
acquisition. After accessing the chain accounts in a new market, the Company
attempts to rapidly build route density by leasing bulk CO2 systems to
independent restaurants, convenience stores and theaters.
The Company believes that optimal route density is achieved at
approximately 350 accounts per bulk CO2 truck, and the Company typically employs
targeted sales efforts to build density within an existing route. The Company
maintains a "hub and spoke" route structure and establishes additional
stationary bulk CO2 depots as a service area expands through geographic growth.
The Company's route density and market share is highest in Florida, and is less
developed in the other areas where the Company presently has operations. The
Company's entry to these states was accomplished largely by acquisitions of
businesses with more thinly developed route networks than are typical for the
Company. The Company expects to benefit from route efficiencies and other
economies of scale as it builds its customer base in these states through more
intensive internal marketing initiatives.
Strategic Acquisitions. It has been the Company's experience that
acquisition opportunities on satisfactory terms have been regularly available.
The Company estimates that there are more than 100 distributors throughout
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the United States that service between 250 and 750 bulk CO2 accounts and
approximately 10 distributors that each service between 1,000 and 6,000
accounts, many of which may represent attractive acquisition candidates for the
Company. The Company has generally been able to acquire smaller distributors at
prices near their asset value. Since this cost per system is similar to the
Company's internal installation costs, these acquisitions represent an economic
means of acquiring accounts. The Company's strategy is to acquire bulk CO2
operations in strategic markets in new territories, as well as, target tuck-in
operations that can be easily integrated into established routes. These
transactions typically involve the purchase of installed bulk CO2 systems,
equipment and customer lists and require little additional administrative
expense to operate. With these acquisitions, all administrative functions such
as billing, dispatching and accounting are moved to the Company's headquarters
in Stuart, Florida.
As the Company enters a new market, or consolidates an existing market,
incumbent bulk CO2 distributors may be willing to be acquired on satisfactory
terms for the following reasons: (i) distributors realize that successful
competition with the Company will be difficult if the Company has already
achieved greater route density; (ii) a distributor's primary business often is
distribution of other industrial gases and welding supplies, with bulk CO2 not
representing a key service, and a reasonable offer to purchase a non-core
business is often appealing; (iii) because of the operating efficiencies the
Company brings to the accounts serviced, the accounts have more value for the
Company than for the seller; (iv) a distributor may have little opportunity for
growth because of its inability to access capital; and (v) there are few other
credible buyers competing with the Company.
MARKETING AND CUSTOMERS
The Company markets its bulk CO2 systems to large customers such as
restaurant and convenience store chains, movie theater operators and theme
parks. The Company's customers include most of the major national and regional
chains throughout the United States. The Company approaches large chains on a
corporate or regional level for approval to become the exclusive supplier of
bulk CO2 on a national basis or within a designated territory. The Company then
directs its sales efforts to the managers or owners of the individual or
franchised operating units. Whereas the large chains offer immediate penetration
on a national or regional basis, the small operators are important accounts
because they provide geographic density which optimizes delivery efficiency and
reduces cost on a per customer basis. The introduction of smaller bulk CO2
systems (100 pound capacity vessels), which the Company helped develop, allows
the Company to penetrate the market for lower volume users of CO2 such as
mall-based food courts, small restaurants and mass-market retailers.
As of August 31, 1997, the Company distributed bulk CO2 to over 30,000
customers, none of which accounted for more than 5% of the Company's fiscal 1997
net sales. The Company has negotiated multi-system placements or CO2 supply
contracts with numerous customers, including McDonald's, Pizza Hut, Kentucky
Fried Chicken, Burger King, 7-Eleven, Circle K, EZ Serve, Conoco, Carmike
Cinemas, AMC Theaters, Friendly's Restaurant, Universal Studios, Walt Disney
World and Pro Player Stadium. The Company's relationships with chain customers
in one geographic market frequently help it establish service with these same
chains when the Company expands to new markets. After accessing the chain
accounts in a new market, the Company attempts to rapidly build route density by
leasing bulk CO2 systems to independent restaurants, convenience stores and
theaters.
The Company also supplies high pressure gases in cylinder form,
including CO2, helium and nitrogen. The Company estimates that it currently
services approximately 1,000 high pressure CO2 customers, most of whom were
either customers of acquired companies or are low volume users for which it is
not economical to convert to bulk CO2 systems. However, with the introduction of
100 pound capacity bulk CO2 systems, the Company anticipates that many low
volume users will convert from high pressure cylinders. Helium and nitrogen are
mostly supplied to existing bulk customers in connection with filling balloons
and dispensing beer, respectively.
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OPERATIONS
As of August 31, 1997, the Company operated 43 liquid CO2 service and
supply depots located throughout its service area from which it operates 89
specialized bulk CO2 trucks, 43 installation and service vehicles and one high
pressure cylinder delivery truck. Each specialized bulk CO2 truck covers up to
350 accounts, depending on market density, refilling customer systems on a
regular schedule. All delivery quantities are measured by flow meters installed
on the Company's tank trucks. This information is then loaded onto the Company's
centralized billing system, which is maintained on an IBM AS/400 computer.
Service and supply depots are equipped with large storage tanks (up to 40 tons)
which receive liquefied CO2 from large capacity tanker trucks and from which the
Company's bulk CO2 trucks refill for delivery to customers. In most cases, the
tank is accessible from the outside of the establishment.
The Company has a record of timely bill collections, with accounts
receivable historically averaging 37 days of sales. The Company attributes its
successful collection history to several factors: (i) the Company generates
invoices immediately after delivery; (ii) since fountain soda is generally a
highly profitable item, customers are less likely to risk their CO2 supply by
not paying their bills; (iii) the Company performs continuous proprietary
account monitoring and may interrupt service to those customers that are behind
on their accounts; and (iv) the use of a locking device on the fill port
prevents customers from receiving bulk CO2 from other sources while bills to the
Company remain unpaid.
All dispatch and billing functions are conducted from the Company's
corporate headquarters, with route drivers, installers and service personnel
operating from the Company's depots.
BULK CO2 SUPPLY
Bulk CO2 is currently a readily available commodity product which is
processed and sold by various sources. In May 1997, the Company entered into an
exclusive ten year carbon dioxide supply agreement with The BOC Group, Inc.. The
agreement provides readily available, high quality CO2 as well as relatively
stable liquid carbon dioxide prices at competitive levels.
BULK CO2 SYSTEMS
The Company purchases new bulk CO2 systems from Minnesota Valley
Engineering, Inc. and Taylor-Wharton Cryogenics (a division of Harsco
Corporation), the two major manufacturers. The Company believes that it has been
the largest single purchaser of bulk CO2 systems from the two principal
manufacturers combined. The Company purchases vessels in five sizes (100, 250,
300, 400 or 600 lbs.) depending on the CO2 needs of its customers. The Company's
vessels are vacuum insulated containers with extremely high insulation
characteristics allowing the storage of CO2, in its liquid form, at very low
temperatures. The vessels operate under low pressure, are fully automatic and
require no electricity. The service life of the Company's vessels, based upon
manufacturers' estimates, is expected to exceed 20 years with minimal
maintenance.
The Company's in-house service department coordinates all installations
and repairs of equipment. In addition to the normal single unit bulk CO2 system
installation, the Company has performed many complex multi-unit installations in
stadiums (e.g., Pro Players Stadium and Miami Arena) and amusement parks (e.g.
Universal Studios). These installations involve erecting custom-designed piping
systems to link bulk CO2 systems situated in remote locations. The Company's
strong technical capabilities represent an important competitive advantage and
have often resulted in the equipment manufacturers consulting with the Company
on product modifications.
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TRADEMARKS
"NuCo2(R)" is a registered trademark of the Company. The Company
markets its services utilizing the "NuCo2(R)" trademark.
REGULATORY MATTERS
The business of the Company is subject to federal and state laws and
regulations adopted for the protection of the environment, the health and safety
of employees and users of the Company's products. The transportation of bulk CO2
is subject to regulation by various federal, state and local agencies, including
the U.S. Department of Transportation. These regulatory authorities have broad
powers, and the Company is subject to regulatory and legislative changes that
can affect the economics of the industry by requiring changes in operating
practices or by influencing the demand for, and the costs of providing services.
In addition, the Company voluntarily complies with applicable safety standards.
Management believes that the Company is in compliance in all material respects
with all such laws, regulations and standards currently in effect and that the
cost of compliance with such laws, regulations and standards has not and is not
anticipated to have a material adverse effect on the Company.
COMPETITION
The Company competes with other distributors of bulk CO2 and high
pressure CO2, including several regional industrial gas distributors, numerous
small independent operators and distributors of restaurant supplies and
groceries. Bulk CO2 systems typically are serviced by industrial and welding
supply companies, specialty gas distributors and fountain supply companies.
These suppliers range widely in size. Some of the Company's competitors have
significantly greater financial, technical or marketing resources than the
Company. The Company believes that its ability to compete depends on a number of
factors, including price, product quality, availability and reliability, credit
terms, name recognition, delivery time and post-sale service and support.
EMPLOYEES
At June 30, 1997 the Company had 232 full-time employees, of whom 84
were involved in an executive, marketing or administrative capacity, 105 of whom
were route drivers and 43 of whom were in service/installation functions. None
of the Company's employees is covered by a collective bargaining agreement or is
a member of a union. The Company considers its relationship with its employees
to be good.
2. DESCRIPTION OF PROPERTY.
The Company's corporate headquarters are located in a 22,000 square
foot facility in Stuart, Florida. This facility accommodates corporate,
administrative, marketing, sales and warehouse space. The lease expires March
31, 2001 with a fixed annual rent of $167,215. As of August 31, 1997, the
Company also leased liquid CO2 service and supply depots at the following 43
locations: Florida (Stuart, Miami, Ft. Myers, Jacksonville, Tallahassee, Orlando
and Tampa); Georgia (Atlanta, Augusta, Savannah and Macon); Alabama (Birmingham,
Mobile and Opelika); Louisiana (New Orleans, Shreveport and Lake Charles);
Mississippi (Jackson); North Carolina (Charlotte and Raleigh-Durham); South
Carolina (Florence); Arkansas (Little Rock); Tennessee (Chattanooga and
Memphis); New York (Farmingdale and Pelham); Ohio (Boardman, Columbus and
Dayton); West Virginia (Nitro); New Jersey (Newark); Kentucky (Louisville);
Massachusetts (Braintree); Connecticut (Hartford); Texas (Dallas, Houston and
San Antonio); Pennsylvania (Philadelphia); Oklahoma (Oklahoma City); Colorado
(Pueblo); Nebraska (Omaha); Kansas (Kansas City) and Iowa (Des Moines). The
properties on which such facilities are located are leased from third parties
(other than the Stuart and Ft. Myers, Florida service and supply depots) on
terms consistent with market rentals prevailing in the location's area. The
Company believes that its other existing facilities are adequate for its current
needs and that additional facilities in its service area are available to meet
future needs.
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3. LEGAL PROCEEDINGS.
IN CARBONIC DESIGNS, INC. V. MVE, INC., THE TAYLOR-WHARTON GAS
EQUIPMENT DIVISION OF HARSCO CORPORATION, WELDERS SUPPLY CO. AND NUCO2 INC., No.
249-0220-96, 249th Judicial District Court of Johnson County, Texas, filed on or
about December 31, 1996, the plaintiff, Carbonic Designs, Inc. ("CDI"), has
asserted claims against the Company and three other defendants for violation of
the Texas Free Enterprise and Antitrust Act of 1983 (the "Antitrust Act"),
business disparagement, tortious interference with contract, tortious
interference with prospective business relations, and civil conspiracy. CDI
seeks actual damages, treble damages under the Antitrust Act, and exemplary
damages, all in unspecified amounts. No trial date has been set. The Company has
been contesting the case vigorously and intends to continue to do so.
The Company is also involved from time to time in litigation arising in
the ordinary course of business, none of which is expected to have a material
adverse effect on the financial condition or results of operations of the
Company.
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
Not applicable.
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PART II
5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock commenced trading on the Nasdaq National Market under
the symbol "NUCO" on December 19, 1995.
The following table sets forth, for the periods indicated, the highest
and lowest bid quotations for the Common Stock, as reported by the Nasdaq
National Market. The prices reported reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not reflect actual transactions.
CALENDAR 1995 HIGH LOW
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Fourth Quarter (from December 19, 1995)........... 12 3/4 9 1/2
CALENDAR 1996
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First Quarter..................................... 17 1/4 12 1/4
Second Quarter.................................... 34 17
Third Quarter..................................... 31 19 1/2
Fourth Quarter.................................... 22 11 1/4
CALENDAR 1997
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First Quarter..................................... 17 5/8 11
Second Quarter.................................... 18 3/8 11 7/8
At June 30, 1997, there were approximately 206 holders of record of the
Company's Common Stock. This number does not include an indeterminate number of
shareholders whose shares are held by brokers in "street name."
The Company has not paid any cash dividends on the Common Stock since
its inception and the Board of Directors does not anticipate declaring any cash
dividends on the Common Stock in the foreseeable future. The Company currently
intends to utilize any earnings it may achieve for the development of its
business and working capital purposes. In addition, the payment of cash
dividends on the Common Stock is restricted by financial covenants in the
Company's credit facility.
On June 16, 1997, the Company, as partial consideration for the
acquisition of the bulk CO2 business of Metro Carbonation Sales & Service, Inc.,
a Georgia corporation ("Metro"), issued and sold to Metro 33,962 shares of the
Common Stock of the Company in reliance upon the exemption provided by Section
4(2) of the Securities Act of 1933, as amended. No discounts or commissions were
paid.
6. 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
At June 30, 1997 the Company leased 21,919 bulk CO2 systems to its
customers, principally pursuant to five year noncancelable lease contracts.
These customers include restaurants, convenience stores, theaters, taverns
-9-
<PAGE>
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 installed 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 June 30, 1997, the Company provided "fill
only" service to approximately 4,800 customers.
As of June 30, 1997, approximately 9,800 of the Company's 26,934
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 June 30, 1997, approximately 17,100 of the Company's 26,934
customers were billed at a flat monthly rate which generally does not vary
throughout the year.
The Company's installed base of bulk CO2 systems has increased through
internally generated new customers and through acquisitions. As route density
increases, route profitability increases as the fixed costs associated with the
route are spread over a larger revenue base. Since the Company's inception in
February 1990 to June 30, 1997, 14,357 Company owned bulk CO2 systems have been
installed and 11,970 customer accounts have been acquired through 20
acquisitions. Approximately 3,100 of these customer accounts resulted from the
acquisition of Bevtech in June 1995.
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 1996 and
fiscal 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.
GENERAL
Under the budget plan, the Company's net sales consist of charges to
customers for the use of Company owned bulk CO2 systems and a predetermined
quantity of liquid CO2. On customer invoices, the Company does not separate
charges for equipment use from charges for liquid CO2 delivered; customers are
presented with a single amount payable. Customers are invoiced monthly in
advance of services rendered. For customers on rental plus per pound charge
contracts, invoices are broken down into the two respective services, with the
charge for liquid CO2 supply varying with the amount delivered. The Company's
net sales also include revenues received from customers to which it supplies
only CO2 refill services, based on the amount delivered.
Cost of products sold is comprised of purchased CO2 and labor, vehicle
and depot costs associated with the Company's storage and delivery of bulk CO2
to customers. Selling, general and administrative expenses consist of salaries,
dispatch and communications costs, and expenses associated with marketing,
administration, accounting and employee training. Consistent with the capital
intensive character of its business, the Company incurs
-10-
<PAGE>
significant depreciation and amortization expenses. These stem from the
depreciation of Company owned bulk CO2 systems; depreciation and amortization of
bulk system installation costs; amortization of sales commissions, and
amortization of goodwill, deferred financing costs and other intangible assets.
With respect to bulk CO2 systems, the Company only capitalizes costs
that are associated with specific successful placements of such systems with
customers under noncancelable contracts and which would not be incurred by the
Company but for a successful placement. All other service, marketing and
administrative costs are expensed as incurred. Capitalized component parts and
direct costs associated with installation of bulk CO2 equipment leased to
customers was approximately $3.2 million and $6.3 million at the end of fiscal
1996 and fiscal 1997, respectively. Depreciation and amortization expense
related to capitalized component parts and direct costs associated with
installation was approximately $406,000 and $924,000 for fiscal 1996 and fiscal
1997, respectively.
The Company believes EBITDA is useful as a means of measuring the
growth and earning power of its business. In addition, the Company's current
bank credit facility utilizes EBITDA for its formal calculation of financial
leverage, affecting the amount of funds available to the Company for borrowing
under such credit facility. EBITDA represents operating income plus depreciation
and amortization. Information regarding EBITDA is presented because of its use
by certain investors as one measure of a corporation's ability to generate cash
flow. EBITDA should not be considered an alternative to, or more meaningful
than, operating income or cash flows from operating activities as an indicator
of a corporation's operating performance. EBITDA excludes significant costs of
doing business and should not be considered in isolation from GAAP measures.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage relationship which the various items bear to net sales:
Year Ended June 30,
1996 1997
---- ----
Income Statement Data:
Net sales........................................... 100.0% 100.0%
Cost of products sold............................... 43.3 47.5
Selling, general and administrative expenses........ 25.6 30.9
Depreciation and amortization....................... 20.2 22.4
----- -----
Operating income (loss)............................. 10.9 (.8)
Interest (income) expense........................... 10.5 (3.6)
----- ------
Income (loss) before extraordinary item............. .4% 2.8%
Extraordinary item.................................. (7.2) --
------ ------
Net income (loss)................................... (6.8%) 2.8%
===== ======
Other Data:
EBITDA............................................ 31.1% 21.6%
==== =====
-11-
<PAGE>
Net sales increased $7.0 million, or 58.3%, from $12.0 million in
fiscal 1996 to $18.9 million in fiscal 1997. Approximately $938,000 of the
increase represented net sales resulting from the May 1996 acquisition of the
BevServ Division of The Coca-Cola Bottling Company of New York, Inc.
("BevServ"). In addition, approximately $332,000 of the increase represented net
sales from three acquisitions in fiscal 1996 and approximately $1.4 million of
the increase represented net sales from the eight acquisitions in fiscal 1997.
At June 30, 1997, there were 21,919 Company owned systems in service, an
increase of 9,035 over the 12,884 Company owned systems in service at the end of
fiscal 1996. Of such increase, 3,218 resulted from acquisitions of businesses
completed during fiscal 1997 and the remaining 5,817 resulted from internal
marketing efforts. Approximately 31% of the acquired systems were obtained
through the May 1997 acquisition of the bulk CO2 assets of BOC Gases ("BOC").
Increases in net sales due to price increases were insignificant.
Cost of products sold increased by $3.8 million from $5.2 million in
fiscal 1996 to $9.0 million in fiscal 1997, and increased as a percentage of net
sales from 43.3% in fiscal 1996 to 47.5% in fiscal 1997. This increase was
attributable to the expansion of the Company into new territories. Fully loaded
route drivers increased by $1.3 million from $1.8 million in fiscal 1996 to $3.0
million in fiscal 1997, and increased as a percentage of net sales from 14.8% to
16.0%. The number of depots operated by the Company at June 30, 1997 increased
to 38, compared to 24 at June 30, 1996. Rent expense and utilities increased by
$451,000 from $278,000 in fiscal 1996 to $729,000 in fiscal 1997, and increased
as a percentage of net sales from 2.3% to 3.8%. 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 $2.8 million
from $3.1 million in fiscal 1996 to $5.9 million in fiscal 1997, and increased
as a percentage of net sales from 25.6% in fiscal 1996 to 30.9% in fiscal 1997.
The 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. Fully loaded marketing,
administrative and executive personnel increased by $1.6 million from $1.6
million in fiscal 1996 to $3.2 million in fiscal 1997, and increased as a
percentage of net sales from 13.5% in fiscal 1996 to 16.9% in fiscal 1997. At
June 30, 1996 the Company had operations in 18 states and at the end of fiscal
1997, the Company had operations in 30 states.
Depreciation and amortization increased by $1.8 million from $2.4
million in fiscal 1996 to $4.2 million in fiscal 1997. As a percentage of net
sales, such expense increased from 20.2% in fiscal 1996 to 22.4% in fiscal 1997.
Depreciation expense increased by $1.5 million from $1.6 million in fiscal 1996
to $3.1 million in fiscal 1997 principally due to the increase in bulk CO2
systems leased to customers. As a percentage of net sales, depreciation expense
increased from 13.4% in fiscal 1996 to 16.5% in fiscal 1997. Amortization
expense increased by $308,000 from $808,000 in fiscal 1996 to $1.1 million in
fiscal 1997 primarily due to the increase in amortization of deferred lease
acquisition costs, goodwill and customer lists resulting from acquisitions. As a
percentage of net sales, amortization expense decreased from 6.8% in fiscal 1996
to 5.9% in fiscal 1997.
Net interest expense in fiscal 1996 was $1.3 million compared to net
interest income in fiscal 1997 of $681,000. This change is attributable to the
repayment of debt from the proceeds of the Company's initial public offering in
December 1995 (the "IPO") and the increased level of cash and cash equivalents
in the 1997 period from the Company's secondary public offering in June 1996
(the "Secondary Offering").
During fiscal 1996, the Company wrote-off $785,000 of deferred
financing costs and incurred $75,000 in prepayment penalties related to debt
which was repaid with the proceeds of the IPO.
For the reasons described above, the Company's net loss in fiscal 1996
was $813,000 compared to net income of $527,000 in fiscal 1997; however, net
income before extraordinary item in fiscal 1996 was $46,822. The Company has
made no provision for income tax expense in either fiscal 1996 or fiscal 1997
due to its historical
-12-
<PAGE>
net losses. At June 30, 1997 the Company had net operating loss carryforwards
for federal income tax purposes of $12.5 million, which are available to offset
future federal taxable income through 2012.
For the reasons described above, EBITDA increased from $3.7 million in
fiscal 1996 to $4.1 million in fiscal 1997, but decreased as a percentage of net
sales from 31.1% to 21.6%.
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. As of June 30, 1997, the Company anticipated making cash
capital expenditures of approximately $20.0 million to $30.0 million during
fiscal 1998, primarily for purchases of bulk C02 systems that it expects to
place into service during this time. Once bulk CO2 systems are placed into
service, the Company has generally experienced 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.
Prior to the IPO, the Company's primary sources of liquidity were
borrowings under its then existing credit facility with its secured lender which
was repaid and terminated upon consummation of the IPO; equity and debt capital
obtained from various venture capital funds and individuals, including parties
that sold businesses to the Company; and cash flows from operations.
The Company's capital resources include cash flows from operations; the
net proceeds from the Company's Secondary Offering; and available borrowing
capacity under the Company's credit facility with NationsBank of Florida, N.A.
(the "NationsBank Facility"). The Company has available under the NationsBank
Facility an aggregate of $30.0 million, including a $6.0 million term loan that
was used, together with a portion of the net proceeds of the IPO, to refinance
the outstanding balance of existing indebtedness under its prior credit
facility; 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. All portions of the
NationsBank Facility require full repayment of all outstanding principal and
interest on November 30, 1998, the maturity date of the NationsBank Facility.
The NationsBank Facility is secured by substantially all the assets of the
Company. The Company is required to meet certain financial covenants under the
NationsBank Facility, and may not access borrowings which would cause its total
debt to exceed 3.25 times EBITDA on a six month rolling average annualized. 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.
In September 1997, the Company entered into a letter of intent with
SunTrust Bank, South Florida, N.A. ("SunTrust") for Suntrust to provide, subject
to documentation, a $50.0 million Senior Secured Revolving Credit Facility (the
"New Facility") to the Company. SunTrust intends to syndicate the New Facility
and serve as sole agent. The proposed New Facility contains a trigger for an
automatic request by the Company to increase the New Facility to $100.0 million
upon the happening of certain events. The New Facility is expected to close on
or about October 17, 1997. In August 1997, the Company engaged Montgomery
Securities as its exclusive placement agent on a "best efforts" basis in
connection with a proposed private placement of $30.0 million in subordinated
notes. The agent has received term sheets from potential investors and the
transaction is expected to close simultaneously with the New Facility. The
Company believes that cash from operating activities, the net proceeds from the
Secondary Offering, available borrowings under its existing credit facility, the
New Facility which will replace the existing credit facility, and the proposed
private placement, will be sufficient to fund proposed operations for at least
the next 12 months at its current rate of growth.
-13-
<PAGE>
As of June 30, 1997, the Company's total outstanding borrowings
aggregated $9.5 million, as compared to $10.8 million as of June 30, 1996. As of
June 30,1997, under the term portion of the NationsBank Facility interest ranged
from 8.44% to 8.51% per annum, as compared to 8.19% to 8.51% as of June 30,
1996.
Working Capital. At June 30, 1996 the Company had working capital of
$40.7 million. At June 30, 1997, the Company had working capital of $9.5
million.
Cash Flows from Operating Activities. During fiscal 1996 and fiscal
1997, net cash provided by operating activities was $1.8 million and $4.3
million respectively. Cash flows from operating activities increased by $2.5
million for the fiscal year ended June 30, 1997 compared to the same period in
1996 primarily due to the net income and the increase in depreciation and
amortization.
Cash Flows from Investing Activities. During fiscal 1996 and fiscal
1997, the Company made net capital expenditures of $7.0 million and $16.9
million, respectively, for new bulk CO2 systems and associated installation and
direct placement costs. In addition, during the year ended June 30, 1996, the
Company made four acquisitions and expended cash of $1.8 million and during
fiscal 1997 the Company made eight acquisitions and expended cash of $17.7
million.
Cash Flows From Financing Activities. During fiscal 1996, cash flows
from financing activities were $50.0 million. During fiscal 1997 cash flows used
in financing activities were $2.4 million. For the year ended June 30, 1996,
cash flows from financing activities were primarily from the issuance of Common
Stock in connection with the IPO and the Secondary Offering less the repayment
of long-term debt, redemption of Preferred Stock and additional borrowings used
to finance the placement of bulk CO2 systems in service. For the year ended June
30, 1997, cash flows used in financing activities were primarily from repayment
of long-term debt owed and the redemption of a warrant.
The Company believes that cash from operating activities, available
borrowings under the existing facility, the New Facility which will replace the
existing facility, and the proposed private placement, will be sufficient to
fund proposed operations for at least the next 12 months at its current rate of
growth.
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 increases in the consumer price index. The
Company believes that inflation will not have a material adverse effect on its
future results of operations.
7. FINANCIAL STATEMENTS.
[See page F-1.]
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
On July 2, 1996, the Audit Committee of the Board of Directors of the
Company dismissed KPMG Peat Marwick LLP ("KPMG") as independent accountants to
the Company and appointed Cooper, Selvin & Strassberg LLP as the new independent
accountants to the Company. KPMG's accountant's report on the financial
statements of the Registrant for the fiscal year ended June 30, 1995 (the period
for which KPMG was engaged as independent accountants) did not contain any
adverse opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope, or accounting principles.
-14-
<PAGE>
PART III
The information required by Items 9, 10, 11 and 12 of this Part III is
incorporated by reference to the definitive proxy statement to be filed by the
Company no later than October 28, 1997 pursuant to Regulation 14A.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(a) Exhibits:
**3.1 -- Amended and Restated Articles of Incorporation
of the Company.
**3.2 -- Bylaws of the Company.
**10.1 -- 1995 Stock Option Plan.
**10.2 -- Directors' Stock Option Plan.
**10.3 -- Noncompetition Agreement between the Company
and Joseph M. Criscuolo, dated November 30,
1995.
**10.4 -- Noncompetition Agreement between the Company
and Edward M. Sellian, dated November 30, 1995.
**10.5 -- Asset Purchase Agreement among the Company,
Bevtech, Inc., E. Reid Hunter, Edward M.
Sellian and Suzan Sellian, dated November 30,
1995.
**10.6 -- Lease for 2528 North Tamiami Trail, Ft. Myers,
Florida, between the Company and Edward M.
Sellian.
**10.7 -- Lease for storage facility, Ault Road, Stuart,
Florida, between the Company and Edward M.
Sellian.
**10.8 -- Form of Indemnification Agreement between the
Company and directors and officers of the
Registrant.
**10.9 -- Lease for 2800 Southeast Market Place, Stuart,
Florida between the Company and Edward M.
Sellian.
**10.10 -- Asset Purchase Agreement between the Registrant
and The Coca-Cola Bottling Company of New York,
Inc., dated April 18, 1996.
**10.11 -- Amendment No. 1 to Asset Purchase Agreement
between the Registrant and The Coca-Cola
Bottling Company of New York, Inc., dated May
15, 1996.
*10.12 -- Employment agreement between the Company and
Joann Sabatino, dated October 16, 1996.
*11.1 -- Statement re: computation of per share
earnings.
**16 -- Letter of Cooper Selvin & Strassberg dated
December 11, 1995.
****16.2 -- Letter of KPMG Peat Marwick dated July 2, 1996.
-15-
<PAGE>
*23.1 -- Consent of Cooper, Selvin & Strassberg LLP to
the incorporation by reference to the
Registrant's Registration Statement on Form S-8
(No. 333-06705) of the independent auditors'
report included herein.
*27 -- Financial Data Schedule.
- ---------------------------
* Included herein.
** Incorporated by reference to the Company's Registration Statement on
Form SB-2, filed with the Commission on November 7, 1995 (Commission
File No. 33-99078), as amended.
*** Incorporated by reference to the Company's Registration Statement on
Form SB-2, filed with the Commission on June 7, 1996 (Commission File
No. 333-3352).
**** Incorporated by reference to the Company's Form 8-K dated July 2, 1996.
(b) REPORTS ON FORM 8-K
No reports were filed on Form 8-K in the quarter ended June 30, 1997.
-16-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NUCO2 INC.
Dated: September 27, 1997 s/s EDWARD M. SELLIAN
---------------------
Edward M. Sellian,
Chairman of the Board and Chief
Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/S/ EDWARD M. SELLIAN Chairman of the Board and September 27, 1997
- ------------------------------- Chief Executive Officer
Edward M. Sellian
/S/ JOSEPH M. CRISCUOLO President and Director September 27, 1997
- ----------------------------
Joseph M. Criscuolo
/S/ ROBERT L. FROME Director September 27, 1997
- ----------------------------
Robert L. Frome
/S/ JOHN J. O'NEIL Director September 27, 1997
- ----------------------------
John J. O'Neil
/S/ EDWARD F. O'REILLY Director September 27, 1997
- ----------------------------
Edward F. O'Reilly
/S/ JOANN SABATINO Chief Financial Officer September 27, 1997
- ----------------------------
Joann Sabatino
-17-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
NUCO2 INC.
<S> <C>
REPORT OF INDEPENDENT ACCOUNTANTS..................................................................... F-2
FINANCIAL STATEMENTS:
BALANCE SHEETS AS OF JUNE 30, 1996 AND 1997..................................................... F-3
STATEMENTS OF OPERATIONS FOR THE FISCAL YEARS ENDED JUNE 30, 1996 AND 1997...................... F-4
STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE FISCAL YEARS ENDED JUNE 30,
1996 AND 1997................................................................................ F-5
STATEMENTS OF CASH FLOWS FOR THE FISCAL YEARS ENDED JUNE 30, 1996 AND 1997...................... F-6
NOTES TO FINANCIAL STATEMENTS......................................................................... F-8
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
NuCo2 Inc.
Stuart, Florida
We have audited the accompanying balance sheets of NuCo2 Inc. as of June 30,
1996 and 1997, and the related statements of operations, shareholders' equity,
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of NuCo2 Inc. as of June 30, 1996
and 1997, and the results of its operations and its cash flows for the years
then ended in conformity with generally accepted accounting principles.
/S/ COOPER, SELVIN & STRASSBERG LLP
-----------------------------------
COOPER, SELVIN & STRASSBERG LLP
Great Neck, New York August 29, 1997, except as to Note 14, the date of which is
September 18, 1997
F-2
<PAGE>
NuCo2 INC.
BALANCE SHEETS
ASSETS
(NOTE 6)
<TABLE>
<CAPTION>
June 30,
--------
1996 1997
---- ----
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 43,000,676 $ 11,672,506
Trade accounts receivable; net of allowance for doubtful
accounts of $210,629 and $113,054, respectively 1,385,642 2,120,880
Inventories 52,425 85,601
Prepaid expenses and other current assets 384,948 276,858
------------- -------------
Total current assets 44,823,691 14,155,845
------------- -------------
Property and equipment, net (Note 4) 24,392,692 46,803,050
------------- -------------
Other assets:
Goodwill, net 3,064,877 7,580,763
Deferred charges, net 389,343 272,608
Customer lists, net 873,512 1,755,919
Restrictive covenants, net 114,167 1,401,833
Deferred lease acquisition costs, net 714,040 1,274,577
Deposits 260,363 99,863
------------- -------------
5,416,302 12,385,563
------------- -------------
$ 74,632,685 $ 73,344,458
============= =============
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
<S> <C> <C> <C>
Current maturities of long-term debt (Note 6) $ 1,358,447 $ 2,180,601
Accounts payable 2,226,795 1,514,048
Accrued expenses 497,975 961,544
Other current liabilities 73,529 22,699
------------- -------------
Total current liabilities 4,156,746 4,678,892
Long-term debt, excluding current maturities (Note 6) 9,485,994 7,365,740
Customer deposits 305,535 598,177
------------- -------------
Total Liabilities 13,948,275 12,642,809
------------- -------------
Shareholders' equity (Note 7):
Common stock; par value $.001 per share; 30,000,000 shares authorized; issued
and outstanding 7,129,467 shares at June 30, 1996 and 7,197,718
shares at June 30, 1997 7,129 7,198
Additional paid-in capital 63,743,312 63,233,043
Accumulated deficit (3,066,031) (2,538,592)
-------------- --------------
Total shareholders' equity 60,684,410 60,701,649
Commitments and contingencies (Note 12)
$ 74,632,685 $ 73,344,458
============= =============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
NuCo 2 INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------
1996 1997
---- ----
<S> <C> <C>
Net sales $ 11,965,999 $ 18,943,569
------------- -------------
Costs and expenses:
Cost of products sold 5,177,320 8,991,823
Selling, general and administrative expenses 3,066,381 5,858,934
Depreciation and amortization 2,417,492 4,246,035
------------- -------------
10,661,193 19,096,792
------------- -------------
Operating income (loss) 1,304,806 (153,223)
Other expenses (income):
Interest expense (income), net 1,257,984 (680,662)
------------- --------------
Income before extraordinary item 46,822 527,439
------------- -------------
Extraordinary item - loss on extinguishment of debt 859,522 -
------------- -------------
Net income (loss) $ (812,700) $ 527,439
============== =============
Dividends on Preferred Stock $ (110,917) $ -
============== =============
Net income (loss) attributable to common stockholders $ (923,617) $ 527,439
============== =============
Income (loss) per common share (Note 1)
Income (loss) before extraordinary item $ (0.01) $ 0.07
Extraordinary item (Note 6) (0.18) -
-------------- -------------
Net income (loss) $ (0.19) $ 0.07
============== =============
Weighted average number of common and common
equivalent shares outstanding 4,677,900 7,334,131
============== =============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
NuCo2 INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Series A Series B Series C Series D
--------------- ---------------- ----------------- ---------------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1995 485 $485,000 500 $500,000 500 $ 500,000 1,500 $1,500,000
Redemption of Series A (485) (485,000) - - - - - -
Redemption of Series B - - (500) (500,000) - - - -
Conversion of Series C - - - - (500) (500,000) - -
Conversion of Series D - - - - - - (1,500) (1,500,000)
Conversion of subordinated debt
and exercise of warrants and
options - - - - - - -
Issuance of 2,022,576 shares of
common stock - Initial
Public Offering - - - - - - - -
Issuance of 1,761,165 shares of
common stock - secondary
offering - - - - - - - -
Net (loss) - - - - - - - -
Dividends declared on
Preferred Stock - - - - - - - -
------ -------- ------- -------- --------- ----------- ------ ----------
Balance, June 30, 1996 - - - - - - - -
Issuance of 34,289 shares of
common stock - exercise
of options - - - - - - - -
Redemption of warrant - - - - - - - -
Additional expenses - secondary
offering - - - - - - - -
Issuance of 33,962 shares of
common stock - asset
acquisition - - - - - - - -
Net income - - - - - - - -
------- -------- ------- -------- --------- ----------- ------ ----------
Balance, June 30, 1997 - - - - - - - -
======= ======== ======= ======== ========= =========== ====== ==========
</TABLE>
<TABLE>
<CAPTION>
Common Stock Additional
------------------- Paid-in Accumulated Shareholders'
Shares Amount Capital Deficit Equity
------ ------ ----------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1995 1,932,953 $ 1,933 $ 9,317 $(2,253,331) $ 742,919
Redemption of Series A - - - - (485,000)
Redemption of Series B - - 499,500 - (500)
Conversion of Series C 155,164 155 499,845 - 0
Conversion of Series D 300,266 300 1,499,700 - 0
Conversion of subordinated debt
and exercise of warrants and
options 957,343 957 805,400 - 806,357
Issuance of 2,022,576 shares of
common stock - Initial
Public Offering 2,022,576 2,023 16,149,341 - 16,151,364
Issuance of 1,761,165 shares of
common stock - secondary
offering 1,761,165 1,761 44,641,484 - 44,643,245
Net (loss) - - - (812,700) (812,700)
Dividends declared on
Preferred Stock - - (361,275) - (361,275)
---------- ------- ----------- ------------ -----------
Balance, June 30, 1996 7,129,467 7,129 63,743,312 (3,066,031) 60,684,410
Issuance of 34,289 shares of
common stock - exercise
of options 34,289 34 152,319 - 152,353
Redemption of warrant - - (1,143,450) - (1,143,450)
Additional expenses - secondary
offering - - (59,100) - (59,100)
Issuance of 33,962 shares of
common stock - asset
acquisition 33,962 35 539,962 - 539,997
Net income - - - 527,439 527,439
---------- ------- ----------- ------------ -----------
Balance, June 30, 1997 7,197,718 $ 7,198 $63,233,043 $(2,538,592) $60,701,649
========== ======= =========== ============ ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
NuCo 2 INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------
1996 1997
---- ----
<S> <C> <C>
Income before extraordinary item $ 46,822 $ 527,439
Extraordinary item - loss on extinguishment of debt 859,522 -
------------- -------------
Net income (loss) (812,700) 527,439
Cash flows from operating activities:
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization of property and equipment 1,609,063 3,130,022
Amortization of other assets 808,429 1,116,013
Loss on disposal of property and equipment 155,592 294,411
Write-off of deferred financing costs 784,069 -
Changes in operating assets and liabilities:
Decrease (increase) in:
Trade accounts receivable (646,224) (735,238)
Inventories (11,441) (33,176)
Prepaid expenses and other current assets (356,368) 108,090
Increase (decrease) in:
Accounts payable 278,794 (712,747)
Accrued expenses (103,910) 463,569
Other current liabilities 39,064 (50,830)
Customer deposits 100,463 236,392
------------- -------------
Net cash provided by operating activities 1,844,831 4,343,945
------------- -------------
Cash flows from investing activities:
Proceeds from disposal of property and equipment 126,850 2,133,776
Purchase of property and equipment (6,971,472) (16,945,522)
Acquisition of businesses (1,767,460) (17,692,662)
Increase in deferred lease acquisition costs (514,258) (914,999)
(Increase) decrease in deposits (238,364) 160,500
-------------- -------------
Net cash (used in) investing activities $ (9,364,704) $ (33,258,907)
-------------- -------------
</TABLE>
F-6
<PAGE>
NuCo 2 INC.
STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------
1996 1997
---- ----
Cash flows from financing activities:
<S> <C> <C>
Proceeds from issuance of common stock $ 60,794,609 $ (59,100)
Net proceeds from issuance of long-term debt 10,551,728 -
Repayment of long-term debt (19,943,243) (1,309,704)
Increase in loan payable to shareholder 200,000 -
Repayment of loan payable to shareholder (200,000) -
Increase in deferred charges (694,457) (53,307)
Decrease in deferred interest payable (306,535) -
Exercise of warrants and options 403,444 152,353
Preferred stock dividends (361,275) -
Redemption of Series A preferred stock (485,000) -
Redemption of Series B preferred stock (500) -
Redemption of warrant - (1,143,450)
--------------- ---------------
Net cash provided by (used in) financing activities 49,958,771 (2,413,208)
--------------- ---------------
Increase (decrease) in cash and cash equivalents 42,438,898 (31,328,170)
Cash and cash equivalents, beginning of year 561,778 43,000,676
--------------- ---------------
Cash and cash equivalents, end of year $ 43,000,676 $ 11,672,506
=============== ===============
Supplemental disclosure of cash flow information: Cash paid during the year for:
Interest $ 1,661,645 $ 903,729
--============= ===============
Income taxes $ - $ -
=============== ===============
Supplemental schedule of noncash investing and financing activities:
Acquisition of businesses:
Fair value of assets acquired $ 4,269,535 $ 1,098,718
Cost in excess of net assets of businesses acquired 746,910 244,000
Liabilities assumed or incurred (3,248,985) (56,250)
Issuance of common stock - (539,996)
--------------- ---------------
Cash paid $ 1,767,460 $ 746,472
=============== ===============
</TABLE>
In connection with the IPO in December 1995, the Company converted $2.0
million of Series C and Series D Preferred Stock into common stock. In addition,
the Company converted $406,707 of subordinated debt and $499,500 of Series B
Preferred Stock into shares of common stock and additional paid-in capital,
respectively.
In 1996 and 1997 the Company purchased equipment and incurred debt in
the amounts of $89,570 and $11,604, respectively.
See accompanying notes to financial statements.
F-7
<PAGE>
NuCo2 INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1997
NOTE 1 - Description of Business and Summary of Significant Accounting
Policies
(a) Description of business
NuCo2 Inc., (the "Company"), a Florida corporation, is a supplier
of bulk CO2 dispensing systems to customers in the food, beverage, lodging and
recreational industries in the United States.
(b) Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers
all highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
(c) Inventories
Inventories, consisting primarily of carbon dioxide gas, are stated
at the lower of cost or market. Cost is determined by the first-in, first-out
method.
(d) Property and Equipment
Property and equipment are stated at cost. The Company does not
depreciate bulk systems held for installation until the systems are in service
and leased to customers. Upon installation, the systems, component parts and
direct costs associated with the installation are transferred to the leased
equipment account. These costs are associated with successful placements of such
systems with customers under noncancellable contracts and which would not be
incurred by the Company but for a successful placement. Upon early service
termination, the unamortized portion of direct costs associated with the
installation are charged to cost of products sold. Depreciation and amortization
is computed using the straight-line method over the estimated useful lives of
the respective assets or the lease terms for leasehold improvements, whichever
is shorter.
The depreciable lives of property and equipment are as follows:
Estimated Life
--------------
Leased equipment 5-20 years
Equipment and cylinders 3-20 years
Vehicles 3-5 years
Computer equipment 3-7 years
Office furniture and fixtures 5-7 years
Leasehold improvements lease life
(e) Other Assets
Goodwill, Net
Goodwill, net, represents costs in excess of net assets of
businesses acquired and is being amortized on a straight-line basis over twenty
years. Accumulated amortization of goodwill was $174,607 and $390,603 at June
30, 1996 and 1997, respectively. The Company evaluates the recoverability of
goodwill as well as the amortization periods to determine whether an adjustment
of the carrying value is appropriate.
F-8
<PAGE>
NuCo2 INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1997
NOTE 1 - Description of Business and Summary of Significant Accounting
Policies - (Continued)
Deferred Charges, Net
Deferred charges, net, consist of the unamortized portion of
financing costs which are being amortized over the term of the related
indebtedness, ranging from thirty-six to sixty months. Accumulated amortization
of deferred costs was $199,091 and $368,238 at June 30, 1996 and 1997,
respectively. Included in the statement of operations for the year ended June
30, 1996 is an extraordinary write-off of deferred financing fees in connection
with the reduction of certain indebtedness (Note 6).
Customer Lists, Net
Customer lists, net, consist of the unamortized portion of customer
lists acquired in connection with asset acquisitions which are being amortized
over five years, the average life of customer leases. Accumulated amortization
of customer lists was $257,948 and $565,090 at June 30, 1996 and 1997,
respectively. The Company's policy is to value customer lists based on the
estimated value of future cash flows over the life of the customer lease.
Restrictive Covenants, Net
Restrictive covenants, net, consist of covenants not to compete
arising in connection with asset acquisitions which are being amortized over
their contractual lives ranging from thirty to one hundred and twenty months.
Accumulated amortization of restrictive covenants was $60,833 and $173,167 at
June 30, 1996 and 1997, respectively. The Company's policy is to value
restrictive covenants based on the negotiated contractual value of the
restrictive covenant or a third party appraisal.
Deferred Lease Acquisition Costs, Net
Deferred lease acquisition costs, net, consist of commissions
associated with the acquisition of new leases and are being amortized over the
life of the related leases, generally five years. Accumulated amortization of
deferred lease acquisition costs was $428,284 and $709,830 at June 30, 1996 and
1997, respectively. Upon early service termination, the unamortized portion of
deferred lease acquisition costs are charged to selling, general and
administrative expenses.
(f) Revenue Recognition
The Company earns its revenues from the leasing of CO2 systems and
related gas sales. The Company, as lessor, recognizes revenue from leasing of
CO2 systems on a straight-line basis over the life of the related leases. The
majority of CO2 system leases generally include payments for leasing of
equipment and a continuous supply of CO2 until usage reaches a pre-determined
maximum annual level, beyond which the customer pays for CO2 on a per pound
basis. Other CO2 and gas sales are recorded upon delivery to the customer.
(g) Income Taxes
The Company has adopted Financial Accounting Standards Board
Statement No. 109, Accounting for Income Taxes. Statement No. 109 requires
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax bases
of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. Under Statement No. 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. The Company
adopted Statement No. 109 in fiscal 1994. There was no cumulative effect
adjustment on the financial statements as a result of this change in accounting
for income taxes.
F-9
<PAGE>
NuCo2 INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1997
NOTE 1 - Description of Business and Summary of Significant Accounting
Policies - (continued)
(h) Net Income or Loss Per Common Share
The net income or loss per share computations presented are based
on the weighted average number of common shares and dilutive common equivalent
shares outstanding during each year. Fully diluted and primary income or loss
per common share are the same amounts for each period.
In connection with the Initial Public Offering (IPO), 155,164 and
300,266 shares of common stock were issued upon conversion of the Company's
Series C convertible preferred stock and Series D convertible preferred stock,
respectively. An additional 805,209 shares of common stock were issued upon the
conversion of the convertible portion of the Senior Subordinated Notes and
118,167 shares of common stock upon exercise of warrants and options. The above
shares have been treated as outstanding since July 1, 1995. Stock options and
warrants to purchase an additional 152,851 shares of common stock granted during
1995 have also been treated as outstanding since July 1, 1995, using the
treasury stock method.
(i) Use Of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(j) Employee Benefit Plan
On June 1, 1996, the Company adopted a deferred compensation plan
under Section 401(K) of the Internal Revenue Code which covers all eligible
employees. Under the provisions of the plan, eligible employees may defer a
percentage of their compensation subject to the Internal Revenue Service limits.
Contributions to the plan are made only by employees.
NOTE 2 - Public Offerings
(a) Initial Public Offering (IPO)
In connection with the Company's Initial Public Offering, 2,022,576
shares of common stock were sold in December 1995. In addition, representatives
of the Underwriters acquired warrants to purchase up to 110,000 shares of common
stock. Such warrants are exercisable for a period of five years, at an exercise
price of $10.80. In July 1996, the Company redeemed and canceled a warrant to
purchase 77,000 shares of its common stock for $1,143,450. This amount
represented the approximate market value of 77,000 shares of common stock on the
date of redemption.
The gross proceeds the Company received from the sale of the
2,022,576 shares of common stock were $18,203,184. After deducting the
underwriters' discounts and commissions and other offering expenses, the net
proceeds were $16,151,364.
Prior to the IPO, the Company had outstanding approximately $2.9
million in principal amount of Senior Subordinated Notes, a portion of which was
convertible at the option of the holders thereof into Common Stock. The holders
of the Senior Subordinated Notes converted, effective upon the closing of the
IPO, approximately $407,000 of the principal amount of the Senior Subordinated
Notes into an aggregate of 805,209 shares of Common Stock. The Company repaid
the remaining principal of the Senior Subordinated Notes and accrued interest
thereon with a portion of the net proceeds of the IPO. The Company also had
outstanding 485 shares of Series A Preferred Stock, 500 shares of Series B
Preferred Stock, 500 shares of Series C Preferred Stock and 1,500
F-10
<PAGE>
NuCo2 INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1997
NOTE 2 - Public Offerings - (continued)
shares of Series D Preferred Stock. Effective upon closing of the IPO, (i) the
Company redeemed with a portion of the net proceeds of the IPO all of the
outstanding Series A Preferred Stock and Series B Preferred Stock for an
aggregate of $485,500 plus approximately $243,000 of dividends and (ii) all of
the outstanding Series C Preferred Stock and Series D Preferred Stock
automatically converted into an aggregate of 455,430 shares of Common Stock. The
Company used a portion of the net proceeds of the IPO to pay dividends of
approximately $118,000 on the Series C Preferred Stock and Series D Preferred
Stock. In addition, the holders of warrants to purchase an aggregate of 118,167
shares of Common Stock exercised such warrants effective upon the closing of the
IPO.
Prior to the IPO, the board of directors approved, among other
things, an increase in the number of shares authorized of common stock of the
Company to 20,000,000 shares, reduced the par value to $ .001 per share, and
increased the number of authorized shares of preferred stock to 5,000,000
shares.
The Company's board of directors also declared an approximate 3,866
- - for-1 stock split of the Company's common stock. This stock split resulted in
the issuance of an additional 1,932,453 shares of common stock of the Company.
All share, per share and conversion amounts relating to common stock, stock
options and warrants, included in the accompanying financial statements have
been restated to reflect this stock split.
In December 1996, the shareholders voted and approved another
increase in the number of shares authorized of the Company's common stock to
30,000,000 shares.
(b) Secondary Public Offering
In connection with the Company's Secondary Public Offering,
1,425,165 shares of common stock were sold in June 1996. In addition, an
over-allotment option for an additional 336,000 shares of common stock was
exercised.
The net proceeds the Company received from the sale of the 1,761,165
shares of common stock, after deducting the underwriters' discounts and
commissions and other offering expenses was $44,584,145. The Company repaid
$1,963,486 of indebtedness outstanding under its credit facility with the
proceeds. The Company intends to use the remaining proceeds to fund internal
growth, for the acquisition of additional bulk CO2 systems leasing businesses
and for general corporate purposes.
NOTE 3 - Acquisitions
In January 1996, the Company purchased certain assets from two
unrelated companies, one located in Louisiana and the other located in Georgia.
The aggregate combined purchase price was $1,020,550. The Company paid cash for
both of these transactions.
Effective May 15, 1996, the Company acquired substantially all of
the assets associated with the bulk CO2 operating segment of the BevServ
Division of The Coca-Cola Bottling Company of New York, Inc. (BevServ) for
$2,914,374. The Company financed the acquisition through available borrowings
under its $30 million credit facility.
Effective June 1, 1996, the Company acquired certain assets of a
bulk CO2 company having its principal place of business in Mississippi, for an
aggregate purchase price of $248,010. The entire purchase price was financed
through the acquisition facility with the Company's bank.
F-11
<PAGE>
NuCo2 INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1997
NOTE 3 - Acquisitions - (continued)
In August 1996, the Company acquired the bulk CO2 operations of two
affiliated companies operating in Ohio, Kentucky and Indiana for an aggregate
purchase of approximately $1,350,000. The Company paid cash for these
transactions.
In March 1997, the Company acquired certain assets of three
unrelated companies operating in Texas for an aggregate purchase price of
approximately $2,875,000. The Company paid cash for these transactions.
In April 1997, the Company acquired certain assets of Texas Oxygen,
Inc./Texas CO2, Inc. for an aggregate purchase price of approximately
$3,925,000. The Company paid cash for these transactions.
In May 1997, the Company acquired certain assets from two
companies, City Carbonic Company, Inc. and the BOC Group, Inc. City Carbonic
Company, Inc., operating in Oklahoma, Kansas, Texas and Arkansas, sold assets
for an aggregate purchase price of approximately $3,000,000. The BOC Group, Inc.
beverage bulk CO2 operations were located in Massachusetts, Pennsylvania and
Tennessee and were acquired for an aggregate purchase price of approximately
$5,125,000. The Company paid cash for these transactions and as of June 30, 1997
has an additional accrual of approximately $500,000 for post closing adjustments
in connection with these transactions.
In June 1997, the Company acquired certain assets of a business
operating in Georgia for a purchase price of $1,350,000. The Company paid
approximately $750,000 cash, incurred liabilities of $60,000 and issued 33,962
shares of common stock at market for a value of $540,000.
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 $775,000 and $4,732,000
in the years ended June 30, 1996 and 1997, respectively, 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.
The following summarized, unaudited, pro forma results of
operations assume that the acquisitions described above occurred as of the
beginning of the periods presented:
Year Ended June 30,
-------------------
1996 1997
---- ----
Net sales $18,923,657 $22,963,529
Income (loss) before extraordinary item (681,264) 663,940
Net income (loss) (1,540,786) 663,940
Net income (loss) per common share (.33) .09
F-12
<PAGE>
NuCo2 INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1997
NOTE 4 - Property and Equipment, Net
Property and equipment, net consists of the following:
June 30,
--------
1996 1997
---- ----
Leased equipment $22,901,699 $42,207,142
Equipment and cylinders 2,920,456 6,114,340
Systems held for installation 1,195,299 2,028,937
Vehicles 229,641 209,190
Computer equipment 164,039 798,421
Office furniture and fixtures 62,378 766,901
Leasehold improvements 18,482 1,005,173
Construction in progress 368,008 --
----------- ------------
27,860,002 53,130,104
Less accumulated depreciation 3,467,310 6,327,054
----------- ------------
$24,392,692 $46,803,050
=========== ===========
Capitalized component parts and direct costs associated with
installation of equipment leased to others included in leased equipment was
$3,155,424 and $6,335,593 at June 30, 1996 and 1997, respectively. Accumulated
depreciation and amortization of these costs were $1,118,377 and $1,934,704 at
June 30, 1996 and 1997, respectively.
Depreciation and amortization of property and equipment was
$1,609,063 and $3,130,022 for the years ended June 30, 1996 and 1997,
respectively.
NOTE 5 - Leases
The Company leases equipment to its customers generally pursuant to
five-year noncancellable operating leases which expire on varying dates through
June 2003. At June 30, 1997, future minimum rentals due from customers are as
follows:
Year Ending June 30,
- --------------------
1998 $12,203,586
1999 11,082,710
2000 9,323,459
2001 6,473,289
2002 2,376,728
Thereafter 14,375
-----------
$41,474,147
===========
F-13
<PAGE>
NuCo2 INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1997
NOTE 6 - Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------
1996 1997
---- ----
<S> <C> <C>
Note payable issued in connection with a 1995 asset acquisition of $479,000,
principal and interest (at 7%) payments of $9,485 payable monthly,
maturing January, 2000 and collateralized by the purchased assets with
a net book value of $472,456 at June 30, 1997 $ 359,794 $ 268,263
Note payable to bank of $6,000,000 under a $30 million facility, interest
only for 12 months and principal payments of $100,000 plus interest at
a fixed rate of 8.51%, payable monthly for twenty-three months
commencing January 1997. Any accrued interest and one final payment of
all unpaid principal due and payable on November 30, 1998; secured by
substantially all assets of the Company. 6,000,000 5,400,000
Note payable to bank of $10,000,000 under a $30 million facility, interest
only for 12 months at two hundred seventy-five basis points above the
30-day London InterBank Offering Rate ("LIBOR") (8.44% at June 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. The first converted,
acquisition facility, term loan of $3,248,010 is due in monthly
installments of approximately $54,134. Any accrued interest and one
final payment of all unpaid principal due and payable on November 30,
1998; secured by substantially all assets of the Company. 3,248,010 2,977,343
Note payable to bank of $13,000,000 under a $30 million facility, interest
only for 12 months at two hundred seventy-five basis points above the
30-day London InterBank Offering Rate ("LIBOR") (8.44% at June 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. The first converted,
tank facility, term loan of $908,455 is due in monthly installments of
approximately $15,141. Any accrued interest and one final payment of
all unpaid principal due and payable on November 30, 1998; secured by
substantially all assets of the Company. 908,455 832,750
</TABLE>
F-14
<PAGE>
NuCo2 INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1997
NOTE 6 - Long-Term Debt - (continued)
<TABLE>
<CAPTION>
June 30,
--------
1996 1997
---- ----
<S> <C> <C>
Note payable of $290,162 for the financing of equipment, principal and
interest (at 8%) payments of $6,045 payable monthly, maturing August 3,
1997 collateralized by equipment with a net book value of $185,711 at
June 30, 1997 and personally guaranteed by a shareholder of the Company. 75,037 6,005
Note payable of $423,698, principal and interest (at 10%) payments of
$9,002 payable monthly, matured May 1, 1997. 94,248 -
Other note payable issued in connection with a 1995 asset acquisition,
principal payments aggregating $50,000 per annum beginning
July, 1995 through December 31, 1997. 75,000 25,000
Various notes payable of $111,282 for the financing of equipment, principal
payments of $2,959 payable monthly, maturing from September 1997 to
August 2000 collateralized by equipment
with a net book value of $76,537 at June 30, 1997. 83,897 36,980
---------- -----------
10,844,441 9,546,341
Less current maturities of long-term debt 1,358,447 2,180,601
---------- -----------
Long-term debt, excluding current maturities $ 9,485,994 $7,365,740
========== ===========
</TABLE>
In addition, the Company maintains a revolving promissory note
payable to a bank in the amount of $1,000,000 under a $30 million facility,
interest only at two hundred seventy-five basis points above the 30-day London
InterBank Offering Rate ("LIBOR"), payable monthly and maturing November 30,
1998. At June 30, 1997, no borrowings were outstanding under this credit
arrangement.
The Company is required to meet certain financial covenants under
the $30 million facility, and may not access borrowings which would cause its
funded debt ratio to exceed 3.25 times EBITDA on a 6 month rolling average
annualized (see Note 14(c)).
F-15
<PAGE>
NuCo2 INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1997
NOTE 6 - Long-Term Debt - (continued)
The aggregate maturities of long-term debt for the years subsequent
to June 30, 1997 are as follows:
Year Ending
- -----------
1998 $2,180,601
1999 7,293,227
2000 71,542
2001 971
-----------
$9,546,341
===========
Interest expense on long and short-term debt amounted to $1,402,773
and $884,627 for the years ended June 30, 1996 and 1997, respectively.
Extraordinary item - loss on extinguishment of debt
For the year ended June 30, 1996, the Company incurred a one time
extraordinary charge of $859,522 for the write-off of deferred financing costs
and prepayment penalties related to debt which was repaid within the proceeds of
the IPO.
NOTE 7 - Shareholders' Equity
See Note 2 for discussion of conversion and repayment of preferred
stock and dividends declared and paid.
(a) Stock Option Plans
The board of directors adopted the 1995 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, or
both. 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 June 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
========= =========
F-16
<PAGE>
NOTE 7 - Shareholders' Equity - (continued)
The board of directors of the Company adopted the Directors' Stock
Option Plan (the "Directors' Plan"). Under 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. During the year ended June 30, 1996, options
to purchase a total of 24,000 shares of common stock at an exercise price of $9
per share were issued. As of June 30, 1997, options for 8,000 shares are
currently exercisable. No options have been exercised under the Directors' Plan.
(b) Warrants
In August 1994, the Company granted a five year warrant to purchase
73,042 shares of common stock at $3.22 per share to a shareholder of the Company
in connection with the guarantee of certain indebtedness. This warrant was
exercised in 1996.
Proceeds to the Company for the exercise of this warrant aggregated $235,195.
In May 1997, the Company granted a warrant to purchase 1,000,000
shares of common stock to BOC pursuant to the supply agreement (see Note 12b).
The warrant is exercisable from May 1, 1999 to May 1, 2002 at an exercise price
of $17 per share and from May 1, 2002 until April 30, 2007 at an exercise price
of $20 per share. The option may be exercised earlier for a material breach in
the supply contract or a change in control of the Company. As of June 30, 1997,
the warrant was not exercisable.
(c) Non-Qualified Stock Options
During 1995, the Company granted options, outside of the 1995 Plan,
to purchase 67,934 shares of common stock at $4.40 per share to certain officers
and employees. These options vest one year after date of grant and are
exercisable for 10 years. In June and July 1996, these options were exercised.
In 1992, the Company also granted options to purchase 45,125 shares of Common
Stock to a company in connection with the issuance of the senior subordinated
convertible notes. These options were also exercised in 1996. Proceeds to the
Company for the exercise of non-qualified stock options in 1996 and 1997
aggregated $164,455 and $149,455, respectively.
Statement of Financial Standards No. 123, Accounting for
Stock-Based Compensation, defines a fair value based method of accounting for
stock options. It is effective for fiscal years beginning after December 15,
1995. The Statement allows an entity to continue to measure cost using the
accounting method prescribed by APB Opinion No. 25, Accounting for Stock Issued
to Employees, and to make pro forma disclosures of net income and earnings per
share as if the fair value based method of accounting had been applied. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in fiscal 1996 and 1997; expected volatility of 80%,
risk-free interest rate of approximately 6.4%, and expected lives of one to five
years. The Company is adopting SFAS 123 in fiscal year end June 30, 1997 and
presents the following pro forma disclosures rather than change its present
method of accounting for employee stock options:
F-17
<PAGE>
NuCo2 INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1997
NuCo2 INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1997
NOTE 7 - Shareholders' Equity - (continued)
Year Ended June 30,
1996 1997
---- ----
Net loss attributable to common shareholders $(1,043,617) $(972,561)
Net loss per common share $( .22) $( .13)
=========== ============
Weighted average number of common and
common equivalent shares outstanding 4,669,903 7,294,472
============ ============
The pro forma adjustment for stock based compensation costs
under SFAS 123 for the years ended 1996 and 1997 is approximately $120,000 and
$1,500,000, respectively.
NOTE 8 - Income Taxes
The tax effects of temporary differences that give rise to
significant portions of deferred tax assets and deferred tax liabilities are as
follows:
June 30,
--------
1996 1997
---- ----
Deferred tax assets:
Allowance for doubtful accounts $ 79,200 $ 42,500
Amortization expense 42,700 137,800
Other 2,200 3,700
Net operating loss carryforwards 2,978,600 4,696,200
---------- ---------
Total gross deferred tax assets 3,102,700 4,880,200
Less valuation allowance (842,500) (636,400)
----------- -----------
Net deferred tax assets 2,260,200 4,243,800
----------- -----------
Deferred tax liabilities:
Depreciation expense (2,260,200) (4,243,800)
----------- -----------
Total gross deferred tax liabilities (2,260,200) (4,243,800)
----------- -----------
Net deferred taxes $ -- $ --
=========== ===========
At June 30, 1997, the Company had net operating loss carryforwards for
Federal income tax purposes of $12,490,000, which are available to offset future
Federal taxable income, if any, in varying amounts through June 2012. The
valuation allowance for deferred tax assets as of July 1, 1996 was $842,500. The
net change in the total valuation allowance for the year ended June 30, 1997 was
a decrease of $206,100.
F-18
<PAGE>
NuCo2 INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1997
NOTE 9 - Related Party Transactions
The Company entered into leases with the chairman of the board and
chief executive officer for its warehouse/depot and office facilities with
annual rentals of approximately:
Year Ending June 30,
--------------------
1998 $179,000
1999 167,000
2000 167,000
2001 125,000
Rental expense was $87,081 and $166,549 in 1996 and 1997, respectively,
under these leases.
NOTE 10 - Lease Commitments
The Company leases office equipment, trucks and warehouse/depot and
office facilities under operating leases (including related party leases, see
Note 9) that expire at various dates through December 2003. Future minimum lease
payments under noncancellable operating leases (that have initial noncancellable
lease terms in excess of one year) are approximately as follows:
Year Ending June 30,
--------------------
1998 $1,872,000
1999 1,635,000
2000 1,242,000
2001 1,000,000
2002 670,000
Thereafter 372,000
----------
$6,791,000
==========
Total rental expense under noncancellable operating leases was
approximately $763,900 and $1,413,000 in 1996 and 1997, respectively.
NOTE 11 - Concentration of Credit and Business Risks
The Company's business activity is with customers located within the
United States. As of June 30, 1996 and 1997, the Company's sales to customers in
the food and beverage industry were approximately 97% and 98%, respectively.
There were no customers that accounted for greater than 5% of total
sales for the years ended June 30, 1996 or 1997, nor were there any customers
that accounted for greater than 5% of total accounts receivable at June 30, 1996
or 1997.
NOTE 12 - Commitments and Contingencies
(a) Employment Agreements
The Company has an employment agreement with an employee that currently
provides minimum annual compensation of $70,000 per year through December 31,
1997. The contract provides for additional compensation in the form of bonuses
based on performance, medical insurance coverage, and a company vehicle. The
employment agreement also includes a covenant against competition with the
Company which extends for two years after termination for any reason.
F-19
<PAGE>
NuCo2 INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1997
NOTE 12 - Commitments and Contingencies - (continued)
The Company has an employment agreement with an officer of the Company
that currently provides minimum annual compensation of $150,000 per year through
October 1999. The contract provides for additional compensation in the form of
bonuses to be determined by the board of directors and incentive and
non-qualified stock options pursuant to the Company's 1995 Plan to purchase up
to 100,000 shares (see Note 7). The agreement also calls for a covenant against
competition which extends one year beyond termination for any reason.
(b) Supply Agreement
In May 1997, the Company entered into an exclusive, subject to
expirations of existing contracts, ten-year carbon dioxide supply agreement with
The BOC Group, Inc. ("BOC"). The agreement ensures readily available high
quality CO2 as well as relatively stable liquid carbon dioxide prices. Pursuant
to the agreement, the Company must purchase all of its liquid CO2 requirements
from BOC. The agreement contains annual escalations for the lesser of the
Producer Price Index for Chemical and Allied Products or the average annual
percentage increase in the selling price of liquid CO2 to BOC's large
multi-location beverage customers. Increases in each of the first five contract
years shall not exceed 3%.
(c) Other
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.
The Company is a defendant in legal actions which arise in the normal
course of business. In the opinion of management, the outcome of these matters
will not have a material effect on the Company's financial position or results
of operations.
NOTE 13 - Disclosures about Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments.
(a) Cash and cash equivalents
The carrying amount approximates fair value due to the short maturity
of these instruments.
(b) Long-term debt
The fair value of the Company's long-term debt has been estimated based
on the current rates offered to the Company for debt of the same remaining
maturities.
The carrying amounts and fair values of the Company's financial
instruments at June 30, 1997 are as follows:
Carrying Amount Fair Value
--------------- ----------
Cash and cash equivalents $11,672,506 $11,672,506
Long-term debt, including current maturities 9,546,341 9,546,341
F-20
<PAGE>
NuCo2 INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1997
NOTE 14 - Subsequent Events
(a) Acquisitions
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 paid cash for this transaction.
(b) Private Placement
In August 1997, the Company engaged Montgomery Securities as its
exclusive placement agent on a "best efforts" basis in connection with a
proposed offering by private placement of $30 million in Subordinated Notes. The
agent has received term sheets from potential investors and the transaction is
anticipated to close on or about October 17, 1997.
(c) Credit Facility
In September 1997, the Company's existing $30 million facility was
amended to adjust the funded debt ratio to 3.50 times EBITDA on a 3 month
rolling average annualized.
In September 1997, the Company entered into a fully underwritten $50
million Senior Secured Revolving Credit Facility (the "Facility") with a bank.
The bank intends to syndicate the Facility and serve as sole agent. The proposal
contains a trigger for an automatic request by the Company to increase the
Facility to $100,000,000. The proposal also includes usual and customary
covenants.
The Facility is expected to close simultaneously with the private placement (see
Note 14(b)).
(d) Lease Commitments
The Company entered into fourteen operating leases in July and August
1997. Three leases were for warehouse facilities with aggregate annual rentals
of approximately $32,000 expiring at various dates through December 1998. Eleven
leases were for trucks with aggregate annual rentals of approximately $132,000
expiring at various dates through December 2002.
F-21
EMPLOYMENT AGREEMENT
AGREEMENT entered into effective as of the 16th day of
October, 1996, by and between NUCO2 INC., a Florida corporation having its
principal office at 2800 S.E. Market Place, Stuart, Florida 34995 (hereinafter
referred to as the "Corporation"), and JOANN SABATINO, residing at 64 Round Tree
Drive, Melville, New York 11747 (hereinafter referred to as the "Employee").
W I T N E S S E T H:
WHEREAS, the Corporation desires to employ the Employee and
the Employee desires to be employed by the Corporation upon the terms and
subject to the conditions hereinafter set forth,
NOW, THEREFORE, in consideration of the mutual covenants
herein contained and for other good and valuable consideration, it is agreed as
follows:
1. (a) The Corporation hereby employs the Employee
and the Employee agrees to work for the Corporation as its Chief Financial
Officer. The Employee shall serve as and perform the duties of Chief Financial
Officer of the Corporation during the term of this Agreement.
(b) The Employee shall serve as a member or ex-
officio member of such of the Corporation's committees as the Board of Directors
of the Corporation shall designate.
(c) The Employee agrees to devote her full
business time during regular business hours to working for the Corporation and
performing the aforesaid duties and such other duties as shall from time to time
be assigned to her by the Board of Directors of
<PAGE>
the Corporation consistent with her position as Chief Financial Officer. During
the term of her employment hereunder, the Employee shall have no interest in, or
perform any services during regular business hours for any other company,
whether or not such company is competitive with the Corporation, except that (i)
this prohibition shall not be deemed to apply to passive investments in
businesses not competitive with the business of the Corporation or to
investments of 5% or less of the outstanding stock of public companies whose
stock is traded on a national securities exchange or in the over-the-counter
market and (ii) until January 31, 1997, the Employee may provide consulting
services to Cooper, Selvin & Strassberg LLP. For purposes of this Paragraph
l(c), a "passive investment" shall be deemed to mean investment in a business
which does not require or result in the participation of the Employee in the
management or operations of such business except during times other than regular
business hours and which does not interfere with her duties and responsibilities
to the Corporation. Nothing contained herein shall limit the right of the
Employee to make speeches, write articles or participate in public debate and
discussions in and by means of any medium of communication provided that such
activities are not inconsistent with the Employee's obligations hereunder.
(d) Consistent with the Employee's aforesaid
duties the Employee shall, at all times during the term hereof, be subject to
the supervision and direction of the Board of Directors of the
-2-
<PAGE>
Corporation with respect to her duties, responsibilities and the exercise of her
powers.
(e) The services of the Employee hereunder shall
be rendered primarily in Stuart, Florida at the Corporation's principal
executive offices; provided, however, that the Employee shall make such trips
outside of Stuart, Florida as shall be reasonably necessary in connection with
the Employee's duties hereunder.
2. The Corporation shall pay to the Employee during the
term of her employment by the Corporation and the Employee shall accept as her
entire compensation for her services hereunder:
(a) A base salary ("Base Salary") at the rate of
$150,000 per annum or such greater rate as may from time to time be authorized
by the Board of Directors of the Corporation, payable in accordance with the
Corporation's regular payment schedule for its employees.
(b) Bonuses in amounts from time to time
determined by the Board of Directors of the Corporation in its sole and absolute
discretion.
(c) The Corporation shall grant to the Employee
incentive and non-qualified stock options (the "Options") pursuant to the
Corporation's 1995 Stock Option Plan to purchase up to One Hundred Thousand
(100,000) shares of the Corporation's common stock, $.001 par value, such
Options to be evidenced by agreements attached hereto as EXHIBITS A AND B.
-3-
<PAGE>
(d) The Corporation will reimburse the Employee
for her necessary and reasonable out-of-pocket expenses incurred in the course
of her employment and in connection with her duties hereunder.
(e) The Corporation will provide the Employee
with medical insurance coverage under the Corporation's group medical insurance
policy and the Employee shall be entitled to participate in all other health,
welfare, retirement, disability, and other benefit plans, if any, available to
employees and senior executives of the Corporation.
(f) The Employee shall be entitled to paid
vacation and/or sick days during each twelve (12) month period during the term
of this Agreement of the same duration as provided to other executive officers
of the Corporation.
3. The term of the Employee's employment hereunder shall be
deemed to commence effective as of October 16, 1996 and shall continue, except
as otherwise provided herein, through October 15, 1999.
4. (a) Except as otherwise provided herein, the
term of the employment of the Employee shall terminate:
(i) automatically upon the death of the
Employee;
(ii) at the option of the Corporation, upon
written notice thereof to the Employee, in the event that the Employee shall
become permanently incapacitated (as hereinafter defined); and
-4-
<PAGE>
(iii) at the option of the Corporation, upon 30
days' prior written notice thereof to the Employee specifying the basis thereof,
in the event of a material breach by the Employee of any of the provisions of
this Agreement which is not cured by the Employee within thirty (30) days after
the Employee is provided with such written notice, or in the event that the
Employee shall, during the term of this Agreement, engage in any criminal
conduct constituting a felony and criminal charges are brought against the
Employee by a governmental authority or, in the determination of the Board of
Directors of the Corporation, be guilty of willful malfeasance or gross
negligence which materially and adversely affects the business of the
Corporation ("Cause").
(b) For purposes of this Agreement, the Employee
shall be deemed permanently incapacitated in the event that the Employee shall,
by reason of her physical or mental disability, fail to substantially perform
her usual and regular duties for the Corporation for a consecutive period of
twelve (12) months or for twelve (12) months in the aggregate in any eighteen
(18) month period; provided, however, that the Employee shall not be deemed
permanently incapacitated unless and until a physician, duly licensed to
practice medicine and reasonably acceptable to the Corporation and the Employee,
shall certify in writing to the Corporation that the nature of the Employee's
disability is such that it will continue as a substantial impediment to the
Employee's ability to substantially perform her duties hereunder.
-5-
<PAGE>
5. Notwithstanding anything to the contrary contained
herein:
(a) In the event that the Employee shall die
during the term of this Agreement, the Corporation shall, in lieu of any other
compensation payable hereunder, pay to the beneficiaries theretofore designated
in writing by the Employee (or to the Employee's estate if no such beneficiaries
shall have been designated), a sum equal to one hundred percent (100%) of the
compensation payable to the Employee during the twelve (12) month period
immediately preceding the Employee's death, such sum may be paid at the option
of the Corporation in thirty-six (36) equal monthly installments, without
interest, commencing one month following such death. To the extent that the
Corporation receives the proceeds on any life insurance on the life of the
Employee (as provided in Paragraph 5(e)) such proceeds shall be paid to the
beneficiaries theretofore designated in writing by the Employee (or the
Employee's estate if no such beneficiaries shall have been designated) to fund
the obligations under this Section 5(a) and shall reduce such obligations on a
dollar for dollar basis. The balance, if any, due the Employee under this
Section 5(a) shall thereafter be paid in eighteen (18) equal monthly
installments, without interest, commencing one month following the receipt of
such insurance proceeds by the Corporation.
(b) In the event that the Employee shall become
permanently incapacitated, then for the period prior to any termination of her
employment in accordance with Paragraph 4(a)(ii)
-6-
<PAGE>
above, as a result of the Employee becoming permanently incapacitated, the
Employee shall continue to receive one hundred percent (100%) of her regular
annual compensation provided for herein which is attributable to such period.
Such payments shall be in addition to all income disability benefits, if any,
which the Employee may receive from policies provided by or through the
Corporation, including state-required short term disability.
(c) In the event that the employment of the
Employee shall be terminated by reason of the Employee becoming permanently
incapacitated, then, as additional consideration for her past services to the
Corporation, she shall receive one hundred percent (100%) of her then current
annual base salary, in equal monthly installments, without interest, for a
period of twelve (12) months from the date of such termination.
(d) In the event of a termination of the
Employee's employment for Cause, the Employee shall not be entitled to any
payments other than such compensation as shall have been earned by her prior to
the occurrence of the event giving rise to the termination and not paid as of
the date of such termination.
(e) In the event that the Corporation shall
desire to fund the death benefits payable under Paragraph 5(a) above with a
policy or policies of insurance on the life of the Employee or the disability
benefits payable under Paragraphs 5(b) and 5(c) above with a disability policy,
the Employee shall cooperate with the Corporation in obtaining such insurance
policy(ies) and shall
-7-
<PAGE>
submit to such medical examinations and execute such documents as may be
required in connection with the obtaining of such insurance.
6. The Employee acknowledges that, because of her duties and
her position of trust under this Agreement, she will become familiar with trade
secrets and other confidential information (including, but not limited to,
operating methods and procedures, secret lists of actual and potential sources
of supply, customers and employees, costs, profits, markets, sales and plans for
future developments) which are valuable assets and property rights of the
Corporation and not publicly known. Except in connection with the performance of
her duties for the Corporation, the Employee agrees that she will not, during or
at any time after the term of this Agreement, either directly or indirectly,
disclose to any person, firm or corporation such trade secrets or other
confidential information, including, but not limited to, any facts concerning
the systems, methods, procedures or plans developed or used by the Corporation.
The Employee agrees to retain all such trade secrets and other confidential
information in a fiduciary capacity for the sole benefit of the Corporation, its
successors and assigns. Upon termination of her employment by the Corporation or
at any time that the Corporation may so request, the Employee will surrender to
the Corporation all non-public papers, notes, reports and other documents (and
all copies thereof) relating to the business of the Corporation which she may
then possess or have under her control.
-8-
<PAGE>
7. For a period of one (1) year following the expiration or
earlier termination of this Agreement, the Employee shall not, without the prior
written consent of the Corporation, directly or indirectly:
(a) solicit any business for or from, or become
associated with, as principal, agent, employee, consultant, or in any other
capacity, any person who, or entity which, at the time of, or during the twelve
(12) months immediately preceding such expiration or termination was in direct
competition with the Corporation;
(b) become a principal, agent, employee,
consultant, or otherwise become associated with any person who, or entity which,
has taken affirmative action which would permit such entity or person to
actually engage in direct competition with the Corporation during a period of
one (1) year following the expiration or earlier termination of this Agreement.
8. The provisions of Paragraphs 6 and 7 of this Agreement are
of a unique nature and of extraordinary value and of such a character that a
material breach of the provisions of either Paragraphs 6 or 7 of this Agreement
by the Employee will result in irreparable damage and injury to the Corporation
for which the Corporation will not have any adequate remedy at law. Therefore,
in the event that the Employee commits or threatens to commit any such breach,
the Corporation will have (a) the right and remedy to have the provisions of
Paragraphs 6 and 7 of this Agreement specifically enforced by any court having
equity jurisdiction, it
-9-
<PAGE>
being agreed that in any proceeding for an injunction, and upon any motion for a
temporary or permanent injunction, the Employee's ability to answer in damages
shall not be a bar or interposed as a defense to the granting of such injunction
and (b) the right and remedy to require the Employee to account for and to pay
over to the Corporation all compensation, profits, monies, accruals, increments
and other benefits (hereinafter referred to collectively as the "Benefits")
derived or received by her as a result of any transactions constituting a breach
of any of the provisions of Paragraphs 6 and 7 of this Agreement, and the
Employee hereby agrees to account for and pay over such Benefits to the
Corporation. Each of the rights and remedies enumerated in (a) and (b) above
shall be independent of the other, and shall be severally enforceable, and all
of such rights and remedies shall be in addition to, and not in lieu of, any
other rights and remedies available to the Corporation under law or in equity.
9. (a) For purposes of this Paragraph 9, the
following definitions shall have the following meanings:
"Change in Control" shall mean:
(i) on or after the date of execution of this
Agreement, any person (which, for all purposes hereof, shall include, without
limitation, an individual, sole proprietorship, partnership, unincorporated
association, unincorporated syndicate, unincorporated organization, trust, body
corporate and a trustee, executor, administrator or other legal representative)
(a "Person") or any group of two or more Persons acting in concert becoming the
-10-
<PAGE>
beneficial owner, directly or indirectly, of securities of the Corporation
representing, or acquiring the right to control or direct, or to acquiring
through the conversion of securities or the exercise of warrants or other rights
to acquire securities, 25% or more of the combined voting power of the
Corporation's then outstanding securities. Voting power means the right to vote
for the election of directors. Any determination of percentage combined voting
power shall be made on the basis that (x) all securities beneficially owned by
the Person or group or over which control or direction is exercised by the
Person or group which are convertible into securities carrying voting rights
have been converted (whether or not then convertible) and all options, warrants
or other rights which may be exercised to acquire securities beneficially owned
by the Person or group or over which control of direction is exercised by the
Person or group have been exercised (whether or not then exercisable), and (y)
no such convertible securities have been converted by any other Person and no
such option, warrants or other rights have been exercised by any other Person;
or
(ii) at any time subsequent to the date of
execution of this Agreement there shall be elected or appointed to the Board of
Directors of the Corporation any director or directors whose appointment or
election by the Board of Directors or nomination for election by the
Corporation's shareholders was not approved by a vote of at least a majority of
the directors then still in office who were either directors on the date of
execution of this
-11-
<PAGE>
Agreement or whose election or appointment or nomination for election was
previously so approved; or
(iii) a reorganization, merger, consolidation,
combination, corporate restructuring or similar transaction (an "Event"), in
each case, in respect of which the beneficial owners of the outstanding
Corporation voting securities immediately prior to such Event do not, following
such Event, beneficially own, directly or indirectly, more than 51% of the
combined voting power of the then outstanding voting securities entitled to vote
generally in the election of directors of the Corporation and any resulting
Parent in substantially the same proportions as their ownership, immediately
prior to such Event, of the outstanding Corporation voting securities; or
(iv) an Event involving the Company as a result
of which 25% or more of the members of the board of directors of the Parent or
the Company are not persons who were members of the Board of Directors
immediately prior to the earlier of (x) the Event, (y) execution of an agreement
the consummation of which would result in the Event, or (z) announcement by the
Corporation of an intention to effect the Event; or
(v) Edward Sellian shall no longer serve as
Chairman of the Board of the Corporation or shall no longer be actively involved
in the business of the Corporation; or
(vi) the Board of Directors adopts a resolution
to the effect that, for purposes of this Agreement, a Change in Control has
occurred.
-12-
<PAGE>
"Code" shall mean the Internal Revenue Code of 1986,
as amended.
"Change in Control Date" shall be any date during the
term of this Agreement on which a Change in Control occurs. Anything in this
Agreement to the contrary notwithstanding, if the Employee's employment is
terminated within six months prior to the date on which a Change in Control
occurs, and it is reasonably demonstrated that such termination (i) was at the
request of a third party who has taken steps reasonably calculated or intended
to effect a Change in Control or (ii) otherwise arose in connection with or
anticipation of a Change in Control, then for all purposes of this Agreement the
"Change in Control Date" shall mean the date immediately prior to the date of
such termination.
"Parent" means any entity which directly or
indirectly through one or more other entities owns or controls more than 50% of
the voting stock or common stock of the Corporation.
"Protection Period" means the period beginning on the
Change in Control Date and ending twenty-four months following the Change in
Control Date.
(b) The Employee may terminate this Agreement after a
Change of Control Date and during any Protection Period.
(c) If, during a Protection Period, the Employee's
employment shall be terminated by the Corporation other than for Cause or
permanent disability or other than as a result of the Employee's death or if the
Employee shall terminate her employment pursuant to Paragraph 9(b), the
Corporation shall pay to the
-13-
<PAGE>
Employee in a lump sum in cash within 10 days after the date of termination the
aggregate of the following amounts and shall provide the following benefits:
(i) The Employee's full base salary and vacation pay (for
vacation not taken) accrued but unpaid through the date of termination at the
rate in effect at the time of the termination;
(ii) A lump sum severance payment in an amount equal to 300% of the
Employee's "Annual Compensation." For purposes of this Agreement, "Annual
Compensation" shall be an amount equal to the aggregate of the Employee's annual
cash compensation (other than bonus) from the Corporation, whether paid
currently or deferred in effect immediately prior to the date of termination or
Change in Control (whichever is greater) plus the highest bonus payable to the
Employee (whether paid currently or deferred by the Employee) for any of the
Corporation's three fiscal years preceding the date of termination or Change in
Control (whichever is greater).
(iii) Within 30 days of the date of termination, upon
surrender by the Employee of her outstanding options to purchase common shares
of the Corporation ("Common Shares") granted to the Employee pursuant to the
1995 Stock Option Plan of the Corporation (the "Outstanding Options"), an amount
in respect of each Outstanding Option equal to the difference between the
exercise price of such Outstanding Options and the higher of (x) the fair market
value of the Common Shares at the time of such termination, and (y) the highest
price paid for Common Shares or, in the cases of securities convertible into
Common Shares or carrying a right to
-14-
<PAGE>
acquire Common Shares, the highest effective price (based on the prices paid for
such securities) at which such securities are convertible into Common Shares or
at which Common Shares may be acquired, by any person or group whose acquisition
of voting securities has resulted in a Change in Control of the Corporation.
(d) If, during a Protection Period, the Employee's employment
shall be terminated by the Corporation other than for Cause or permanent
disability or other than as a result of the Employee's death or if the Employee
shall terminate her employment pursuant to Paragraph 9(b), the Corporation shall
pay the Employee's medical insurance premiums for one year after the date of
termination.
(e) The Corporation's obligation to make the payments provided
for in this Agreement and otherwise to perform its obligations hereunder shall
not be affected by any set-off, counterclaim, recoupment, defense or other
claim, right or action which the Corporation may have against the Employee or
others. In no event shall the Employee be obligated to seek other employment or
take any other action by way of mitigation of the amounts payable to the
Employee under any of the provisions of this Agreement. The Corporation agrees
to pay, upon written demand therefor by the Employee, all legal fees and
expenses which the Employee may reasonably incur as a result of any dispute or
contest (regardless of the outcome thereof) by or with the Corporation or others
regarding the validity or enforceability of, or liability under, any provision
of this Agreement. In any such action brought
-15-
<PAGE>
by the Employee for damages or to enforce any provisions of this Agreement, she
shall be entitled to seek both legal and equitable relief and remedies,
including, without limitation, specific performance of the Company's obligations
hereunder, his sole discretion.
(f) (i) Anything in this Agreement to the contrary
notwithstanding, in the event it shall be determined that any payment or
distribution made, or benefit provided (including, without limitation, the
acceleration of any payment, distribution or benefit and the acceleration or
exercisability of any stock option), by the Corporation to or for the benefit of
the Employee (whether paid or payable or distributed or distributable pursuant
to the terms of this Agreement or otherwise, but determined without regard to
any additional payments required under this Paragraph 9(f) (a "Payment") would
be subject to the excise tax imposed by Section 4999 of the Code (or any similar
excise tax) or any interest or penalties are incurred by the Employee with
respect to such excise tax (such excise tax, together with any such interest and
penalties, are hereinafter collectively referred to as the "Excise Tax"), then
the Employee shall be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount such that after payment by the Employee of all taxes
(including any Excise Tax, income tax or payroll tax) imposed upon the Gross-Up
Payment and any interest or penalties imposed with respect to such taxes, the
Employee retains from the Gross-Up Payment an amount equal to the Excise Tax
imposed upon the payments.
-16-
<PAGE>
(ii) Subject to the provisions of Paragraph 9(f)(iii), all
determinations required to be made under this Paragraph 9(f)(iii), including
determination of whether a Gross-Up Payment is required and of the amount of any
such Gross-Up Payment, shall be made by the independent certified public
accountants for the Corporation (the "Accounting Firm") which shall provide
detailed supporting calculations both to the Corporation and the Employee within
15 business days of the date of termination, of applicable, or such earlier time
as is requested by the Corporation, provided that any determination that an
Excise Tax is payable by the Employee shall be made on the basis of substantial
authority. The initial Gross-Up Payment, if any, as determined pursuant to this
Paragraph 9(f)(ii), shall be paid to the Employee within five business days of
the receipt of the Accounting Firm's determination. If the Accounting Firm
determines that no Excise Tax is payable by the Employee, it shall furnish the
Employee with a written opinion that she has substantial authority not to report
any Excise Tax on her Federal income tax return. Any determination by the
Accounting Firm meeting the requirements of this Paragraph 9(f)(ii) shall be
binding upon the Corporation and the Employee; subject only to payments pursuant
to the following sentence based on a determination that additional Gross-Up
Payments should have been made, consistent with the calculations required to be
made hereunder (the amount of such additional payments, including any interest
and penalties, are referred to herein as the "Gross-Up Underpayment"). In the
event that the Corporation exhausts its
-17-
<PAGE>
remedies pursuant to Section 9(f)(iii) and the Employee thereafter is required
to make a payment of any Excise tax, the Accounting Firm shall determine the
amount of the Gross-Up Underpayment that has occurred and any such Gross-Up
Underpayment shall be promptly paid by the Corporation to or for the benefit of
the Employee. The fees and disbursements of the Accounting Firm shall be paid by
the Corporation.
(iii) The Employee shall notify the Corporation in writing of any
claim by the Internal Revenue Service that, if successful, would require the
payment by the Corporation of a Gross-Up Payment. Such notification shall be
given as soon as practicable but not later than ten business days after the
Employee receives written notice of such claim and shall apprise the Corporation
of the nature of such claim and the date on which such claim is requested to be
paid. The Employee shall not pay such claim prior to the expiration of the
30-day period following the date on which it gives such notice to the
Corporation (or such shorter period ending on the date that any payment of taxes
with respect to such claim is due). If the Corporation notifies the Employee in
writing prior to the expiration of such period that it desires to contest such
claim and that it will bear the costs and provide the indemnification as
required by this sentence, the Employee shall:
(a) give the Corporation any information reasonably
requested by the Corporation relating to such claim,
(b) take such action in connection with contesting such
claim as the Corporation shall reasonably request in writing from
-18-
<PAGE>
time to time, including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by the Corporation and
reasonably satisfactory to the Employee,
(c) cooperate with the Corporation in good faith in order
effectively to contest such claims, and
(d) permit the Corporation to participate in any
proceedings relating to such claim; PROVIDED HOWEVER, that the Corporation shall
bear and pay directly all costs and expenses (including additional interest and
penalties) incurred in connection with such contest and shall indemnify and hold
the Employee harmless, on an after-tax basis, for any Excise Tax, income tax or
payroll tax, including interest and penalties with respect thereto, imposed as a
result of such representation and payment of costs and expenses. Without
limitation on the foregoing provisions of this Paragraph 9(f)(iii), the
Corporation shall control all proceedings taken in connection with such contest
and, at its sole option, may pursue or forego any and all administrative
appeals, proceedings, hearings and conferences with the taxing authority in
respect of such claim and may, at its sole option, either direct the Employee to
pay the tax claimed and sue for a refund or contest the claim in any permissible
manner, and the Employee agrees to prosecute such contest to a determination
before any administrative tribunal, in a court of initial jurisdiction and in
one or more appellate courts, as the Corporation shall determine; PROVIDED
HOWEVER, that if the Corporation directs the
-19-
<PAGE>
Employee to pay such claim and sue for a refund, the Corporation shall advance
the amount of such payment to the Employee, on an interest-free basis and shall
indemnify and hold the Employee harmless, on an after-tax basis, from any Excise
Tax, income tax or payroll tax, including interest or penalties with respect
thereto, imposed with respect to such advance; AND FURTHER PROVIDED that any
extension of the statute of limitations relating to the payment of taxes for the
taxable year of the Employee with respect to which such contested amount is
claimed to be due is limited solely to such contested amount. Furthermore, the
Corporation's control of the contest shall be limited to issues with respect to
which a Gross-Up Payment would be payable hereunder and the Employee shall be
entitled to settle or contest, as the case may be, any other issue raised by the
Internal Revenue Service or any other taxing authority.
(iv) If, after the receipt by the Employee of an amount
advanced by the Corporation pursuant to Paragraph 9(f), the Employee becomes
entitled to receive any refund with respect to such claim, the Employee shall
(subject to the Corporation's complying with the requirements of Paragraph 9(f)
promptly pay to the Corporation the amount of such refund (together with any
interest paid or credited thereon after taxes applicable thereto). If, after the
receipt by the Employee of an amount advanced by the Corporation pursuant to
Paragraph 9(f), a determination is made that the Employee shall not be entitled
to any refund with respect to such claim and the Corporation does not notify the
Employee in
-20-
<PAGE>
writing of its intent to contest such denial of refund prior to the expiration
of 30 days after such determination, then any obligation of the Employee to
repay such advance shall be forgiven and the amount of such advance shall
offset, to the extent thereof, the amount of Gross-Up Payment required to be
paid.
(g) SUCCESSORS. The Corporation will require any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the Corporation and
any Parent of the Corporation or any successor and without regard to the form of
transaction utilized by the parent to acquire the business or assets of the
Corporation, to assume expressly an agree to perform this Agreement in the same
manner and to the same extent that the Corporation would be required to perform
it if no such succession or Parentage had taken place. As used in this
Agreement, "Corporation" shall mean the Corporation as hereinbefore defined and
any successor) which is required by this clause to assume and agree to perform
this Agreement or which otherwise assumes and agrees to perform this Agreement.
10. In the event that any provision, or any portion of any
provision, of this Agreement shall be held to be void or unenforceable, the
remaining provisions of this Agreement, and the remaining portion of any
provision found void or unenforceable in part only, shall continue in full force
and effect.
11. The Employee represents and warrants that she has made no
commitment of any kind whatsoever inconsistent with the
-21-
<PAGE>
provisions of this Agreement and that she is under no disability of any kind to
enter into this Agreement and to perform all of her obligations hereunder.
12. This Agreement shall inure to the benefit of and shall be
binding upon the parties and their respective successors and permitted assigns.
This Agreement being personal to the Employee, cannot be assigned by her. This
Agreement may be assigned by the Corporation in the event and in connection with
a merger, consolidation or sale of all or substantially all of the assets of the
Corporation provided that the assignee agrees in writing to assume all of the
obligations of the Corporation under this Agreement and such assignment shall
not relieve the Corporation of its obligations hereunder. Prompt written notice
of such assignment shall be provided by the Corporation to the Employee.
13. Any dispute or controversy between the parties relating to
or arising out of this Agreement or any amendment or modification hereof shall
be determined by the [Supreme Court], County of Martin, State of Florida. The
service of any notice, process, motion or other document in connection with an
action under this Agreement, may be effectuated by either personal service upon
a party or by certified mail duly addressed to her at her address set forth on
page 1 hereof.
14. Any notice or communication required or permitted to be
given hereunder shall be deemed duly given if delivered personally or sent by
registered or certified mail, return receipt
-22-
<PAGE>
requested, to the address of the intended recipient as herein set forth or to
such other address as a party may theretofore have specified in writing to the
other. Any notice or communication intended for the Corporation shall be
addressed to the attention of its Board of Directors.
15. A waiver of any breach or violation of any term,
provision, agreement, covenant, or condition herein contained shall not be
deemed to be a continuing waiver or a waiver of any future or past breach or
violation.
16. This Agreement constitutes the entire agreement and
understanding between the Corporation and the Employee relating to the latter's
employment, supersedes any prior agreement between the parties relating to such
matter, shall be governed by and construed in accordance with the laws of the
State of Florida and may not be changed, terminated or discharged orally.
IN WITNESS WHEREOF, the parties hereto have hereunto set their
hands as of the day and year first above written.
NUCO2 INC.
By: /s/ Edward M. Sellian
----------------------------------
Edward M. Sellian, Chairman of
the Board and
Chief Executive Officer
/s/ Joann Sabatino
----------------------------------
JOANN SABATINO
-23-
<PAGE>
EXHIBIT A
NUCO2 INC.
2800 S.E. MARKET PLACE
STUART, FLORIDA 34997
October 16, 1996
To: Joann Sabatino
2800 S.E. Market Place
Stuart, Florida 34997
We are pleased to inform you that on October 16, 1996, the
Stock Option Committee of the Board of Directors of NuCo2 Inc. (the "Company")
granted you an incentive stock option (the "Option") pursuant to the Company's
1995 Stock Option Plan (the "Plan"), to purchase 14,634 shares (the "Shares") of
Common Stock, par value $.001 per share, of the Company, at a price of $20.50
per Share.
The Option may be exercised prior to October 16, 1999 (on
which date the Option will, to the extent not previously exercised, expire) as
follows: (i) as to one-third the number of Shares on or after October 16, 1997,
(ii) as to one-third the number of Shares on or after October 16, 1998 and (iii)
as to the remaining one-third of the number of Shares on or after October 16,
1999, provided, however, that in the event that the Employment Agreement between
you and the Company dated October 16, 1996 (the "Employment Agreement") is not
renewed or otherwise extended prior to September 30, 1999, the Option may be
exercised with respect to the remaining one-third of the number of Shares on or
after October 1, 1999. In addition, in the event of a Change in Control as
defined in the Employment Agreement, all portions of the Option, whether or not
then exercisable, shall immediately become exercisable. You must purchase a
minimum of 100 Shares each time you choose to purchase Shares, except to
purchase the remaining Shares available to you.
The Option is issued in accordance with and is subject to and
conditioned upon all of the terms and conditions of the Plan (a copy of which in
its present form is attached hereto), as from time to time amended, provided,
however, that no future amendment or termination of the Plan shall, without your
consent, alter or impair any of your rights or obligations under the Option.
Reference is made to the terms and conditions of the Plan, all of which are
incorporated by reference in this option agreement as if fully set forth herein.
-24-
<PAGE>
Unless at the time of the exercise of the Option a
registration statement under the Securities Act of 1933, as amended (the "Act"),
is in effect as to such Shares, any Shares purchased by you upon the exercise of
the Option shall be acquired for investment and not for sale or distribution,
and if the Company so requests, upon any exercise of the Option, in whole or in
part, you will execute and deliver to the Company a certificate to such effect.
The Company shall not be obligated to issue any Shares pursuant to the Option
if, in the opinion of counsel to the Company, the Shares to be so issued are
required to be registered or otherwise qualified under the Act or under any
other applicable statute, regulation or ordinance affecting the sale of
securities, unless and until such Shares have been so registered or otherwise
qualified.
You understand and acknowledge that, under existing law,
unless at the time of the exercise of the Option a registration statement under
the Act is in effect as to such Shares (i) any Shares purchased by you upon
exercise of the Option may be required to be held indefinitely unless such
Shares are subsequently registered under the Act or an exemption from such
registration is available; (ii) any sales of such Shares made in reliance upon
Rule 144 promulgated under the Act may be made only in accordance with the terms
and conditions of that Rule (which, under certain circumstances, restrict the
number of shares which may be sold and the manner in which shares may be sold);
(iii) in the case of securities to which Rule 144 is not applicable, compliance
with Regulation A promulgated under the Act or some other disclosure exemption
will be required; (iv) certificates for Shares to be issued to you hereunder
shall bear a legend to the effect that the Shares have not been registered under
the Act and that the Shares may not be sold, hypothecated or otherwise
transferred in the absence of an effective registration statement under the Act
relating thereto or an opinion of counsel satisfactory to the Company that such
registration is not required; (v) the Company will place an appropriate "stop
transfer" order with its transfer agent with respect to such Shares; and (vi)
the Company has undertaken no obligation to register the Shares or to include
the Shares in any registration statement which may be filed by it subsequent to
the issuance of the shares to you. In addition, you understand and acknowledge
that the Company has no obligation to you to furnish information necessary to
enable you to make sales under Rule 144.
The Option (or installment thereof) is to be exercised by
delivering to the Company a written notice of exercise in the form attached
hereto as Exhibit A, specifying the number of Shares to be purchased, together
with payment of the purchase price of the Shares to be purchased. The purchase
price is to be paid in cash or, at the discretion of the Stock Option Committee,
by delivering shares of the Company's stock already owned by you and having a
fair market value on the date of exercise equal to the exercise
-25-
<PAGE>
price of the Option, or a combination of such shares and cash, or otherwise in
accordance with the Plan.
Would you kindly evidence your acceptance of the Option and
your agreement to comply with the provisions hereof and of the Plan by executing
this letter under the words "Agreed To and Accepted."
Very truly yours,
NuCo2 Inc.
By:____________________________
Edward M. Sellian, Chairman
of the Board
AGREED TO AND ACCEPTED:
- -----------------------
Joann Sabatino
-26-
<PAGE>
Exhibit A
NuCo2 Inc.
2800 S.E. Market Place
Stuart, Florida 34997
Ladies and Gentlemen:
Notice is hereby given of my election to purchase _____ shares
of Common Stock, $.001 par value (the "Shares"), of NuCo2 Inc., at a price of
$____ per Share, pursuant to the provisions of the incentive stock option
granted to me on October 16, 1996, under the Company's 1995 Stock Option Plan.
Enclosed in payment for the Shares is:
____
/___/ my check in the amount of $________.
----
*/___/ ___________ Shares having a total value
$________, such value being based on the
closing price(s) of the Shares on the date
hereof.
The following information is supplied for use in issuing and
registering the Shares purchased hereby:
Number of Certificates
and Denominations ___________________
Name ___________________
Address ___________________
___________________
Social Security Number ___________________
Dated: _______________
Very truly yours,
__________________________
Joann Sabatino
*Subject to the approval of the
Stock Option Committee
-27-
<PAGE>
EXHIBIT B
NUCO2 INC.
2800 S.E. MARKET PLACE
STUART, FLORIDA 34997
October 16, 1996
To: Joann Sabatino
2800 S.E. Market Place
Stuart, Florida 34997
We are pleased to inform you that on October 16, 1996, the
Stock Option Committee of the Board of Directors of NuCo2 Inc. (the "Company")
granted you a non-qualified stock option (the "Option") pursuant to the
Company's 1995 Stock Option Plan (the "Plan"), to purchase 85,366 shares (the
"Shares") of Common Stock, par value $.001 per share, of the Company, at a price
of $20.50 per Share.
The Option may be exercised prior to October 16, 1999 (on
which date the Option will, to the extent not previously exercised, expire) as
follows: (i) as to one-third the number of Shares on or after October 16, 1997,
(ii) as to one-third the number of Shares on or after October 16, 1998 and (iii)
as to the remaining one-third of the number of Shares on or after October 16,
1999, provided, however, that in the event that the Employment Agreement between
you and the Company dated October 16, 1996 (the "Employment Agreement") is not
renewed or otherwise extended prior to September 30, 1999, the Option may be
exercised with respect to the remaining one-third of the number of Shares on or
after October 1, 1999. In addition, in the event of a Change in Control as
defined in the Employment Agreement, all portions of the Option, whether or not
then exercisable, shall immediately become exercisable. You must purchase a
minimum of 100 Shares each time you choose to purchase Shares, except to
purchase the remaining Shares available to you.
The Option is issued in accordance with and is subject to and
conditioned upon all of the terms and conditions of the Plan (a copy of which in
its present form is attached hereto), as from time to time amended, provided,
however, that no future amendment or termination of the Plan shall, without your
consent, alter or impair any of your rights or obligations under the Option.
Reference is made to the terms and conditions of the Plan, all of which are
incorporated by reference in this option agreement as if fully set forth herein.
-28-
<PAGE>
Unless at the time of the exercise of the Option a
registration statement under the Securities Act of 1933, as amended (the "Act"),
is in effect as to such Shares, any Shares purchased by you upon the exercise of
the Option shall be acquired for investment and not for sale or distribution,
and if the Company so requests, upon any exercise of the Option, in whole or in
part, you will execute and deliver to the Company a certificate to such effect.
The Company shall not be obligated to issue any Shares pursuant to the Option
if, in the opinion of counsel to the Company, the Shares to be so issued are
required to be registered or otherwise qualified under the Act or under any
other applicable statute, regulation or ordinance affecting the sale of
securities, unless and until such Shares have been so registered or otherwise
qualified.
You understand and acknowledge that, under existing law,
unless at the time of the exercise of the Option a registration statement under
the Act is in effect as to such Shares (i) any Shares purchased by you upon
exercise of the Option may be required to be held indefinitely unless such
Shares are subsequently registered under the Act or an exemption from such
registration is available; (ii) any sales of such Shares made in reliance upon
Rule 144 promulgated under the Act may be made only in accordance with the terms
and conditions of that Rule (which, under certain circumstances, restrict the
number of shares which may be sold and the manner in which shares may be sold);
(iii) in the case of securities to which Rule 144 is not applicable, compliance
with Regulation A promulgated under the Act or some other disclosure exemption
will be required; (iv) certificates for Shares to be issued to you hereunder
shall bear a legend to the effect that the Shares have not been registered under
the Act and that the Shares may not be sold, hypothecated or otherwise
transferred in the absence of an effective registration statement under the Act
relating thereto or an opinion of counsel satisfactory to the Company that such
registration is not required; (v) the Company will place an appropriate "stop
transfer" order with its transfer agent with respect to such Shares; and (vi)
the Company has undertaken no obligation to register the Shares or to include
the Shares in any registration statement which may be filed by it subsequent to
the issuance of the shares to you. In addition, you understand and acknowledge
that the Company has no obligation to you to furnish information necessary to
enable you to make sales under Rule 144.
The Option (or installment thereof) is to be exercised by
delivering to the Company a written notice of exercise in the form attached
hereto as Exhibit A, specifying the number of Shares to be purchased, together
with payment of the purchase price of the Shares to be purchased. The purchase
price is to be paid in cash or, at the discretion of the Stock Option Committee,
by delivering shares of the Company's stock already owned by you and having a
fair market value on the date of exercise equal to the exercise price of the
Option, or a combination of such shares and cash, or otherwise in accordance
with the Plan.
-29-
<PAGE>
Would you kindly evidence your acceptance of the Option and
your agreement to comply with the provisions hereof and of the Plan by executing
this letter under the words "Agreed To and Accepted."
Very truly yours,
NuCo2 Inc.
By:____________________________
Edward M. Sellian, Chairman
of the Board
AGREED TO AND ACCEPTED:
- -----------------------
Joann Sabatino
-30-
<PAGE>
EXHIBIT A
NuCo2 Inc.
2800 S.E. Market Place
Stuart, Florida 34997
Ladies and Gentlemen:
Notice is hereby given of my election to purchase _____ shares
of Common Stock, $.001 par value (the "Shares"), of NuCo2 Inc., at a price of
$____ per Share, pursuant to the provisions of the non-qualified stock option
granted to me on October 16, 1996, under the Company's 1995 Stock Option Plan.
Enclosed in payment for the Shares is:
____
/___/ my check in the amount of $________.
----
*/___/ ___________ Shares having a total value
$________, such value being based on the
closing price(s) of the Shares on the date
hereof.
The following information is supplied for use in issuing and
registering the Shares purchased hereby:
Number of Certificates
and Denominations ___________________
Name ___________________
Address ___________________
___________________
Social Security Number ___________________
Dated: _______________
Very truly yours,
__________________________
Joann Sabatino
*Subject to the approval of the
Stock Option Committee
-31-
Exhibit 11.1 - Statement re Computation of Per Share Earnings
The net income or loss per share computations presented are based on
the weighted average number of common shares and dilutive common equivalent
shares outstanding during each year. Fully diluted and primary income or loss
per common share are the same amounts for each period.
In connection with the Initial Public Offering (IPO), 155,164 and
300,266 shares of common stock were issued upon the conversion of the Company's
Series C convertible preferred stock and Series D convertible preferred stock,
respectively. An additional 805,209 shares of common stock were issued upon the
conversion of the convertible portion of the Senior Subordinated Notes and
118,167 shares of common stock upon exercise of warrants and options. The above
shares have been treated as outstanding since July 1, 1995. Stock options and
warrants to purchase an additional 152,851 shares of common stock granted during
1995 have also been treated as outstanding since July 1, 1995, using the
treasury stock method.
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration
Statement (No.333-06705) on Form S-8 of our report dated August 29, 1997 for the
years ended June 30, 1996 and 1997, and to the reference to our firm under the
caption "Experts" in the Prospectus.
/S/ COOPER, SELVIN & STRASSBERG LLP
-----------------------------------
COOPER, SELVIN & STRASSBERG LLP
New York, New York
September 29, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NUCO2 INC.
FINANCIAL STATEMENTS AS OF JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 11,672,506
<SECURITIES> 0
<RECEIVABLES> 2,120,880
<ALLOWANCES> 113,054
<INVENTORY> 85,601
<CURRENT-ASSETS> 14,155,845
<PP&E> 53,130,104
<DEPRECIATION> 6,327,054
<TOTAL-ASSETS> 73,344,458
<CURRENT-LIABILITIES> 4,678,892
<BONDS> 0
0
0
<COMMON> 7,198
<OTHER-SE> 60,694,451
<TOTAL-LIABILITY-AND-EQUITY> 73,344,458
<SALES> 18,943,569
<TOTAL-REVENUES> 18,943,569
<CGS> 8,991,823
<TOTAL-COSTS> 19,096,792
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 884,627
<INCOME-PRETAX> 527,439
<INCOME-TAX> 0
<INCOME-CONTINUING> 527,439
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 527,439
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
