SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
--------------------- -------------------
Commission file number 0-27378
NuCo2 Inc.
(Exact Name of Registrant as Specified in Its Charter)
Florida 65-0180800
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2800 Southeast Market Place, Stuart, FL 34997
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (561) 221-1754
N/A
Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report.
Indicate by check /X/ whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Class Outstanding At September 30, 1998
----- ---------------------------------
Common Stock, $.001 par value 7,216,664 shares
<PAGE>
NUCO2 INC.
Index
-----
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 1998 and 3
June 30, 1998
Consolidated Statements of Operations for the Three Months
Ended September 30, 1998 and September 30, 1997 4
Consolidated Statement of Shareholders' Equity for the Three
Months Ended September 30, 1998 5
Consolidated Statements of Cash Flows for the Three Months
Ended September 30, 1998 and September 30, 1997 6
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 10
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 14
ABOUT MARKET RISK
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES 15
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
NUCO2 INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
------
<TABLE>
<CAPTION>
September 30, 1998 June 30, 1998
------------------ -------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 401,242 $ 336,510
Trade accounts receivable; net of allowance for doubtful
accounts of $602,747 and $395,491, respectively 6,329,439 4,457,505
Inventories 217,125 211,027
Prepaid expenses and other current assets 605,351 262,437
------------- -------------
Total current assets 7,553,157 5,267,479
------------- -------------
Property and equipment, net 90,417,204 85,435,933
------------- -------------
Other assets:
Goodwill, net 22,574,720 22,891,846
Deferred charges, net 1,921,171 2,004,259
Customer lists, net 3,676,606 3,963,588
Restrictive covenants, net 2,194,896 2,275,964
Deferred lease acquisition costs, net 2,622,542 2,475,139
Deposits 234,451 184,059
------------- -------------
33,224,386 33,794,855
------------- -------------
$ 131,194,747 $ 124,498,267
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current maturities of long-term debt $ 139,767 $ 139,251
Accounts payable 8,796,904 6,596,722
Accrued expenses 422,266 323,254
Accrued interest 1,724,652 844,153
Accrued payroll 492,363 476,458
Other current liabilities 48,318 7,179
------------- -------------
Total current liabilities 11,624,270 8,387,017
Long-term debt, excluding current maturities 34,426,713 29,460,614
Subordinated debt 29,739,286 29,728,571
Customer deposits 1,502,682 1,279,178
------------- -------------
Total liabilities 77,292,951 68,855,380
Commitments and contingencies
Shareholders' equity:
Preferred Stock; no par value; 5,000,000 shares authorized;
none issued -- --
Common stock; par value $.001 per share; 30,000,000 authorized;
issued and outstanding 7,216,664 shares at September 30, 1998
and 7,216,664 shares at June 30, 1998 7,217 7,217
Additional paid-in capital 63,809,014 63,809,014
Accumulated deficit (9,914,435) (8,173,344)
------------- -------------
Total shareholders' equity 53,901,796 55,642,887
------------- -------------
$ 131,194,747 $ 124,498,267
============= =============
</TABLE>
3
<PAGE>
NUCO2 INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
------------------
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Net Sales $ 10,863,493 $ 7,114,290
Costs and expenses:
Cost of products sold 5,752,090 3,582,867
Selling, general and administrative expenses 2,445,792 2,000,323
Depreciation and amortization 2,845,719 1,632,897
------------ ------------
11,043,601 7,216,087
------------ ------------
Operating (loss) (180,108) (101,797)
Interest expense net 1,560,983 209,112
------------ ------------
Net (loss) $ (1,741,091) $ (310,909)
============ ============
Basic and Diluted EPS:
Net (loss) $ (0.24) $ (0.04)
============ ============
Weighted average number of common and common
equivalent shares outstanding
Basic and Diluted 7,216,664 7,197,718
============ ============
</TABLE>
4
<PAGE>
NUCO2 INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Additional Total
------------ Paid-in Accumulated Shareholders'
Shares Amount Capital Deficit Equity
------ ------ ------- ----------- ------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1998 7,216,664 $ 7,217 $ 63,809,014 $ (8,173,344) $ 55,642,887
Net (loss) -- -- -- (1,741,091) (1,741,091)
------------ ------------ ------------ ------------ ------------
Balance, September 30, 1998 7,216,664 $ 7,217 $ 63,809,014 $ (9,914,435) $ 53,901,796
============ ============ ============ ============ ============
</TABLE>
5
<PAGE>
NUCO2 INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
------------------
September 30, 1998 September 30, 1997*
------------------ -------------------
Cash flows from operating activities:
<S> <C> <C>
Net (loss) $ (1,741,091) $ (310,909)
Adjustments to reconcile net (loss) to net cash provided by operating
activities:
Depreciation and amortization of property and equipment 1,937,502 1,162,138
Amortization of other assets 908,217 470,759
Loss on disposal of property and equipment 153,262 89,413
Changes in operating assets and liabilities:
Decrease (increase) in:
Trade accounts receivable (1,871,934) (326,725)
Inventories (6,099) (34,807)
Prepaid expenses and other current assets (342,913) (505,821)
Increase (decrease) in:
Accounts payable 2,200,182 1,770,708
Accrued expenses 99,013 (74,733)
Accrued payroll 15,904 331,768
Accrued interest 880,499 49,809
Other current liabilities 41,138 26,841
Customer deposits 223,504 114,786
------------ ------------
Net cash provided by operating activities 2,497,184 2,763,227
------------ ------------
Cash flows from investing activities:
Proceeds from disposal of property and equipment 26,130 14,700
Purchase of property and equipment (7,069,137) (4,552,564)
Acquisition of businesses 30,500 (6,089,992)
(Increase) in deposits (50,392) (11,318)
Increase in deferred lease acquisition costs (345,132) (398,904)
------------ ------------
Net cash (used in) investing activities (7,408,031) (11,038,078)
------------ ------------
Cash flows from financing activities:
Repayment of long-term debt (22,671) (551,557)
Proceeds from issuance of long-term debt and subordinated debt 5,000,000 5,500,000
Increase in deferred charges (1,750) (34,181)
------------ ------------
Net cash provided by financing activities 4,975,579 4,914,262
------------ ------------
Net increase (decrease) in cash and cash equivalents 64,732 (3,360,589)
Cash and cash equivalents at the beginning of period 336,510 11,672,506
------------ ------------
Cash and cash equivalents at the end of period $ 401,242 $ 8,311,917
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 678,103 $ 270,219
============ ============
Income taxes $ -- $ --
============ ============
Supplemental schedule of noncash investing and financing activities:
Acquisition of businesses:
Fair value of assets acquired $ -- $ 7,050,600
Cost in excess of net assets of businesses acquired -- 5,724,400
Liabilities assumed or incurred -- (6,750,000)
------------ ------------
Cash paid $ -- $ 6,025,000
============ ============
</TABLE>
In July 1997, the Company wrote-off a restrictive covenant and the related
liability in the amount of $19,231 due to the employee resigning.
* Restated to conform to current year's classifications.
6
<PAGE>
NUCO2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q used for
quarterly reports under Section 13 or 15 (d) of the Securities Exchange Act of
1934, and therefore, do not include all information and footnotes necessary for
a fair presentation of consolidated financial position, results of operations
and cash flows in conformity with generally accepted accounting principles. The
accompanying unaudited consolidated financial statements include the accounts of
NuCo2 Inc. and its wholly-owned subsidiary, NuCo2 Acquisition Corp. which was
formed during the year ended June 30, 1998 to acquire the stock of Koch
Compressed Gases, Inc. in October 1997. All material intercompany accounts and
transactions have been eliminated.
The financial information included in this report has been prepared
in conformity with the accounting principles and methods of applying those
accounting principles, reflected in the consolidated financial statements for
the fiscal year ended June 30, 1998 included in Form 10-K filed with the
Securities and Exchange Commission.
All adjustments necessary for a fair statement of the results for
the interim periods presented have been recorded. This quarterly report on Form
10-Q should be read in conjunction with the Company's audited financial
statements for the fiscal year ended June 30, 1998. The consolidated results of
operations for the periods presented are not necessarily indicative of the
results to be expected for the full fiscal year.
NOTE 2. NET INCOME OR LOSS PER COMMON SHARE
In February 1997, the FASB issued Statement 128, "Earnings Per
Share". Statement 128 supersedes APB Opinion No. 15, "Earnings Per Share" and
specifies the computation, presentation and disclosure requirements for earnings
per share ("EPS") for entities with publicly held Common Stock or potential
common stock. It replaces the presentation of primary EPS with the presentation
of basic EPS and replaces fully diluted EPS with diluted EPS. It also requires
dual presentation of basic and diluted EPS on the face of the statement of
operations for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. Statement 128 is
effective for financial statements for both interim and annual periods ending
after December 15, 1997.
Earnings per share of Common Stock for the three months ended
September 30, 1998 have been calculated according to the guidelines of Statement
128 and earnings per share of common stock for the three months ended September
30, 1997 have been restated to conform with Statement 128.
Incremental shares for stock options and warrants calculated
pursuant to the treasury stock method for the three months ended September 30,
1998 were 32,961. These shares were not included in diluted EPS because they
would have been antidilutive for such period. Additionally, options and warrants
to purchase 1,073,715 shares, 873,433 shares and 408,436 shares for $14.64 -
$17.00 per share, $11.25 - $12.50 per share and $8.938 - $11.00 per share,
respectively, were outstanding during the three months ended September 30, 1998
but were not included in the computation of diluted EPS because the options and
warrants exercise price was greater than the average market price of the common
shares.
Incremental shares for stock options and warrants calculated
pursuant to the treasury stock method for the three months ended September 30,
1997 were 178,065. These shares were not included in diluted EPS because they
would have been antidilutive for such period. Additionally, options and warrants
to purchase 75,000 shares and 1,000,000 shares for $17.50 per share and $17.00
per share, respectively, were outstanding during the three months ended
September 30, 1997 but were not included in the computation of diluted EPS
because the options and warrants exercise price was greater than the average
market price of common shares.
7
<PAGE>
NOTE 3. 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 $11.0
million. Carbo Co. had operations in Nebraska, Kansas, Oklahoma, Iowa, Missouri,
Arkansas and South Dakota. The Company funded $5.0 million through a borrowing
under its 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
$1,084,250. The Company funded $1,075,000 through a borrowing under its credit
facility and paid cash for the balance.
These acquisitions were accounted for by the purchase method of
accounting and, accordingly, the purchase prices and direct costs of the
acquisitions have been allocated to the respective assets and liabilities of the
acquired companies based upon their estimated fair market values at the dates of
acquisition. This resulted in goodwill of approximately $5,770,000 for the three
months ended September 30, 1997, which is being amortized on a straight-line
basis over twenty years. The results of operations of the acquired companies are
included in the Company's financial statements since the effective dates of the
acquisitions.
NOTE 4. LONG-TERM DEBT
The Company has a $50.0 million syndicated bank facility
("SunTrust Facility"). Pursuant to the SunTrust Facility, upon the achievement
of $15.0 million annualized one quarter EBITDA pro-formaed for acquisitions, the
Company shall automatically request that the SunTrust Facility be increased by
an additional $50.0 million to a total of $100.0 million. The SunTrust Facility
contains interest rates and an unused facility fee based on a pricing grid
calculated quarterly on senior funded debt to annualized EBITDA. The applicable
LIBOR margin pursuant to the pricing grid ranges from 1.25% to 2.75%, the
applicable unused facility fee pursuant to the pricing grid ranges from 0.1875%
to 0.50% and the applicable base rate margin pursuant to the pricing grid ranges
from 0.00% to 0.50%.
The Company is entitled to select the Base Rate or LIBOR, plus
applicable margin, for principal drawings under the SunTrust Facility. Base Rate
is defined as the higher of the prime lending rate of SunTrust or the Federal
Funds rate plus one-half of one percent (1/2%) per annum. Interest only is
payable periodically until the expiration of the SunTrust Facility at which time
all outstanding principal and interest is due. The SunTrust Facility expires on
October 31, 2000; however, it contains a two year renewal option subject to
approval. Additionally, it is collateralized by substantially all of the assets
of the Company. The Company is precluded from declaring or paying any dividends
and is required to meet certain affirmative and negative covenants including,
but not limited to financial covenants.
A total of $34.0 million was outstanding pursuant to the SunTrust
Facility with interest from 8.4% to 8.6% per annum as of September 30, 1998.
NOTE 5. SUBORDINATED DEBT
Represents unsecured Senior Subordinated Promissory Notes ("Notes")
with interest only at 12% per annum payable semi-annually on April 30 and
October 31, due October 31, 2004. The Notes were sold with detachable seven year
warrants to purchase an aggregate of 655,738 shares of the Company's Common
Stock at an exercise price of $16.40 per stock unit. In July 1998, the Note
agreement was amended to adjust certain financial covenants as of June 30, 1998
and prospectively. In exchange for the amendment, the exercise price for 612,023
warrants was reduced to $12.40 per stock unit. Additionally, NationsBanc
Montgomery Securities, Inc., the placement agent, received a warrant to purchase
an aggregate of 30,000 shares of the Company's Common Stock at an exercise price
of $14.64 per share which expires on October 31, 2004.
8
<PAGE>
NOTE 6. STOCK OPTION PLAN
In 1995, the Company adopted the 1995 Stock Option Plan (the "1995
Plan"). Under the 1995 Plan, the Company has reserved 850,000 shares of Common
Stock for employees of the Company. Under the terms of the 1995 Plan, options
granted may be either incentive stock options or non-qualified stock options.
The exercise price of incentive options shall be at least equal to 100% of the
fair market value of the Company's Common Stock at the date of the grant, and
the exercise price of non-qualified stock options 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. Options granted to date vest in
three or four installments commencing one year from the date of grant. As of
September 30, 1998, options for 105,213 shares are exercisable.
The following table summarizes the transactions pursuant to the 1995
Plan.
<TABLE>
<CAPTION>
Weighted-Average
Shares Exercise Price Exercise Price
------ -------------- --------------
<S> <C> <C> <C>
Outstanding at June 30, 1997 346,604 $9-$17.50 $12.28
Granted 343,000 $10.25-11.28 $10.43
Expired or canceled 77,067 $9-$17.50 $17.29
Exercised 111 $9 $9
------------ ---------------- ------------
Outstanding at June 30, 1998 612,426 $9-$11.28 $10.61
Granted -0- -0- -0-
Expired or canceled 1,580 $9-$11.25 $10.57
Exercised -0- -0- -0-
------------ ---------------- ------------
Outstanding at September 30, 1998 610,846 $9-$11.28 $10.61
============ ================ ============
</TABLE>
In 1995, the Company adopted the Directors' Stock Option Plan (the
"Directors' Plan"). Under the Directors' Plan, the Company has reserved 60,000
shares of Common Stock. Under the terms of the Directors' Plan each non-employee
director will receive options for 6,000 shares of Common Stock on the date of
his or her first election to the board of directors. In addition, on the third
anniversary of each director's first election to the Board, and on each three
year anniversary thereafter, each non-employee director will receive an
additional option to purchase 6,000 shares of Common Stock. The exercise price
per share for all options granted under the Directors' Plan will be equal to the
fair market value of the Common Stock as of the date of grant. All options vest
in three equal annual installments beginning on the first anniversary of the
date of grant. As of September 30, 1998, options to purchase a total of 14,000
shares of Common Stock at an exercise price of $9.00 per share, a total of 6,000
shares of Common Stock at an exercise price of $12.50 per share and a total of
6,000 shares of Common Stock at an exercise price of $8.938 per share had been
issued. Of these options, 12,000 shares at an exercise price of $9.00 per share
are currently exercisable.
NOTE 7. OPERATING LEASES
The Company entered into 29 operating leases from July 1 through
September 30, 1998. Two leases were for warehouse facilities with aggregate
annual rentals of approximately $47,900 expiring at various dates through 2003.
Twenty-seven leases were for trucks with aggregate annual rentals of
approximately $315,000 expiring at various dates through 2002.
9
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 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, YEAR 2000 ISSUES AND
AVAILABILITY OF MANAGERIAL PERSONNEL.
OVERVIEW
The Company is the largest as well as the sole national supplier of
bulk CO2 systems and bulk CO2 for carbonating and dispensing fountain beverages.
At September 30, 1998, the Company operated 78 service locations in 44 states
servicing approximately 58,000 bulk and high pressure CO2 customers consisting
of restaurants, convenience stores, taverns, theme parks, resorts and stadiums.
Over 96% of potential CO2 beverage users in the Continental United States are
located within the Company's current service area.
CO2 is universally used for the carbonation and dispensing of
fountain beverages. In most instances, CO2 is presently supplied to fountain
beverage users in the form of gas, which is transported and stored in high
pressure cylinders. Bulk CO2 is a relatively new technology that is quickly
replacing high pressure CO2 as the beverage carbonation system of choice. It
reduces flat drinks, is safer to use, eliminates downtime, beverage waste and
employee handling, and is space efficient.
The Company currently services approximately 50,000 of the
approximately 110,000 beverage fountain bulk CO2 users in the Continental United
States. The Company estimates that there are at approximately 800,000 beverage
CO2 users in the Continental United States presenting the Company with
significant long-term growth potential.
In fiscal 1998, the Company achieved its objective of becoming the
sole national supplier of bulk CO2 systems and bulk CO2 to beverage CO2 users.
The Company's objective during fiscal 1999 is to replicate the business model
that it has achieved in its more mature Southeastern markets by building route
density throughout the country. New depots operate at negative EBITDA margins in
the early stages and detract from the Company's highly profitable mature
Southeastern markets. Mature market depots have gross margins in the 55% to 65%
range. New accounts are primarily being added to routes for which there is
substantial excess capacity, and therefore, relatively little additional cost is
incurred to service new customers. New multi-unit placement agreements combined
with single-unit placements will help the Company in achieving route density.
During the three months ended September 30, 1998, the Company reached multi-unit
placement agreements with national and regional chains aggregating approximately
4,500 locations. The Company's success in reaching these multi-placement
agreements is due in part to the Company's national delivery system. As the
Company's installation rate for new customers accelerates, the Company
anticipates that its financial performance on a sequential basis will also
improve at an accelerated rate.
GENERAL
Net sales from bulk CO2 customers are primarily comprised of budget
plan revenues and rental plus per pound revenues. 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. 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 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 delivery and storage 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 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.
10
<PAGE>
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.
The Company believes EBITDA is useful as a means of measuring the
growth and earning power of its business. In addition, the SunTrust Facility
utilizes EBITDA for its formal calculation of financial leverage, affecting the
amount of funds available and rates 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 various items bear to net sales:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------
1998 1997
---- ----
Income Statement Data:
<S> <C> <C>
Net sales....................................................... 100.0% 100.0%
Cost of products sold........................................... 52.9% 50.4%
Selling, general and administrative expenses.................... 22.5% 28.1%
Depreciation and amortization................................... 26.2% 23.0%
------------- ------------
Operating (loss)................................................ (1.6%) (1.5%)
------------- ------------
Interest expense, net........................................... 14.4% 2.9%
Net income (loss)............................................... (16.0%) (4.4%)
============= ============
Other Data:
Operating income before depreciation and amortization
(EBITDA)....................................................... 24.5% 21.5%
============= ============
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
Net sales increased by $3.7 million, or 52.7%, from $7.1 million in
the 1997 period to $10.9 million in the 1998 period. Approximately $2.1 million
of the increase represented net sales resulting from 15 acquisitions completed
during the fiscal year ended June 30, 1998. The remainder of the increase in net
sales was primarily due to internal growth in the number of Company owned and
customer owned bulk CO2 systems serviced. Increases in net sales due to price
increases were insignificant.
Cost of products sold increased by $2.2 million, from $3.6 million
in the 1997 period to $5.8 million in the 1998 period and increased as a
percentage of net sales from 50.4% to 52.9%. The dollar increase was
attributable to the expansion of the Company into new territories. The
percentage increase was primarily attributable to an increase in personnel and
depot expenses. Fully loaded route drivers increased by $795,000 from $1.2
million in the 1997 period to $2.0 million in the 1998 period and increased as a
percentage of net sales from 16.9% to 18.4%. Depot expenses increased by
$280,000 from $279,000 in the 1997 period to $558,000 in the 1998 period and
increased as a percentage of net sales from 3.9% to 5.1%. The number of depots
operated by the Company at September 30, 1998 increased to 68, compared to 45 at
September 30, 1997. 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. At September 30, 1998, the Company serviced over 350
bulk CO2 customers per delivery vehicle from 35% of its depots.
Selling, general and administrative expenses increased by $445,000
from $2.0 million in the 1997 period to $2.4 million in the 1998 period and
decreased as a percentage of net sales from 28.1% to 22.5%. The dollar increase
was primarily attributable to growth in the number of marketing and
administrative personnel and their associated
11
<PAGE>
expenses, as well as the costs of expanding the Company's geographic areas of
service. The percentage decrease is attributable to economies of scale. At
September 30, 1997, the Company had operations in 36 states and employed 75
marketing personnel and at September 30, 1998, the Company had operations in 44
states and employed 106 marketing personnel.
Depreciation and amortization increased by $1.2 million from $1.6
million in the 1997 period to $2.8 million in the 1998 period. As a percentage
of net sales, such expenses increased from 23.0% in the 1997 period to 26.2% in
the 1998 period. Depreciation expense increased by $775,000 from $1.2 million in
the 1997 period to $1.9 million in the 1998 period principally due to the
increase in bulk CO2 systems leased to customers. Expressed as percentage of net
sales, depreciation expense increased from 16.3% in the 1997 period to 17.8% in
the 1998 period. Amortization expense increased by $437,000 from $471,000 in the
1997 period to $908,000 in the 1998 period primarily due to the amortization
related to deferred charges, restrictive covenants, goodwill and customer lists.
As a percentage of net sales, amortization expense increased from 6.6% to 8.4%,
respectively.
Net interest increased by $1.4 million from $209,000 in the 1997
period to 1.6 million in the 1998 period and increased as a percentage of net
sales from 2.9% to 14.4%. This increase was attributable to the decreased level
of cash and cash equivalents and the increased level of long-term debt and
subordinated debt in the 1998 period as compared to the 1997 period.
For the reasons described above, EBITDA, representing operating
income plus depreciation and amortization, increased by $1.1 million, or 74%,
from $1.5 million in the 1997 period to $2.7 million in the 1998 period and
increased as a percentage of net sales from 21.5% to 24.5%, respectively. The
Company believes EBITDA is useful as a means of measuring the growth and earning
power of its business. In addition, the Company uses EBITDA to measure how well
the Company is generating cash flow. EBITDA excludes significant costs and
should not be considered in isolation from GAAP measures.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements consist principally of capital
expenditures associated with placing new bulk CO2 systems into service at
customers' locations; payments of interest on its outstanding indebtedness;
payments for acquired businesses; and working capital. Whenever possible, the
Company seeks to obtain the use of vehicles, land, buildings, and other office
and service equipment under operating leases as a means of conserving capital.
The Company anticipates making cash capital expenditures of approximately $15.0
million to $25.0 million during the remaining nine months of fiscal 1999,
primarily for the purchases of bulk CO2 systems that it expects to place into
service during this time. Once bulk CO2 systems are placed into service, the
Company has generally experienced significant positive cash flows on a per-unit
basis, as there are minimal additional capital expenditures required for
ordinary operations. In addition to the capital expenditures related to internal
growth, the Company 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.
The Company maintains a $50.0 million senior secured revolving
syndicated credit facility with SunTrust Bank, South Florida, National
Association (the "SunTrust Facility"). Pursuant to the SunTrust Facility, upon
the achievement of $15.0 million annualized one quarter EBITDA pro-formaed for
acquisitions, the Company shall automatically request that the SunTrust Facility
be increased by an additional $50.00 million to a total of $100.0 million (the
"Additional SunTrust Facility"). Additionally, the SunTrust Facility contains
interest and an unused facility fee based on a pricing grid calculated quarterly
on senior funded debt to annualized EBITDA. The SunTrust Facility expires on
October 31, 2000; however, it contains a two year renewal option. Additionally,
it is collateralized by substantially all of the assets of the Company.
During the three months ended September 30, 1998, the Company's
capital resources included cash flows from operations and available borrowing
capacity under the SunTrust Facility.
As of September 30, 1998, a total of $34.0 million was outstanding
under the SunTrust Facility with interest at two hundred seventy-five basis
points above the 90-day London InterBank Offering Rate ("LIBOR") (8.4 % to 8.6%
at September 30, 1998).
The Company believes that cash flows from operations and available
borrowings under the SunTrust Facility together with borrowings from the
Additional SunTrust Facility will be sufficient to fund proposed operations for
at least the next twelve months.
12
<PAGE>
Working Capital. At June 30, 1998 the Company had negative working
capital of $3.1 million. At September 30, 1998, the Company had negative working
capital of $4.1 million.
Cash Flows from Operating Activities. For the three months ended
September 30, 1997 and September 30, 1998, net cash provided by operating
activities was $2.8 million and $2.5 million, respectively. The decrease from
the 1997 period to the 1998 period of $266,000 is primarily due to an increase
in the net loss of the Company and an increase in accounts receivable.
Cash Flows from Investing Activities. For the three months ended
September 30, 1997 and September 30, 1998, net cash used in investing activities
was $11.0 million and $7.4 million, respectively. These investing activities
were attributable to the installation and direct placement costs and acquisition
of bulk CO2 systems, and in the 1997 period, the cash expended in connection
with the asset acquisitions.
Cash Flows from Financing Activities. For the three months ended
September 30, 1997 and September 30, 1998, cash flows provided by financing
activities were $4.9 million and $5.0 million, respectively. For the three
months ended September 30, 1997 and September 30, 1998, net cash provided by
financing activities was primarily from the issuance of long-term debt.
YEAR 2000
The Company has conducted a review to identify which of its computer
and other business operating systems will be affected by the "Year 2000" problem
and has developed a project plan and schedule to solve this issue. Among the
functions and systems impacted could be inventory and accounting systems,
dispatch and delivery systems, electronic data interchange, and mechanical
systems operating everything from office building environmental controls to
telephone switches and fax machines. The Company is on schedule to be Year 2000
compliant by June 30, 1999. The Company believes that the costs of
modifications, upgrades, or replacements of software, hardware, or capital
equipment which would not be incurred but for Year 2000 compatibility
requirements have not and will not have a material impact on the Company's
financial position or results of operations.
The Company is also engaged in communications with its significant
business partners, suppliers and customers to determine the extent to which the
Company is vulnerable to such third parties' failure to address their own Year
2000 issues. The Company's assessment of the impact of its Year 2000 issues
includes an assessment of the Company's vulnerability to such third parties. The
Company is seeking assurances from its significant business partners, suppliers
and customers that their computer applications will not fail due to Year 2000
problems. Nevertheless, the Company does not control, and can give no assurances
as to the substance or success of the Year 2000 compliance efforts of such
independent third parties and the Company believes that there is a risk that
certain of these third parties on whom the Company's finances and operations
depend will experience Year 2000 problems that could affect the financial
position or results of operations of the Company. These risks include, but are
not limited to, the potential inability of suppliers to correctly or timely
provide necessary services, materials and components for the Company's
operations; the inability of the Company's customers to timely or correctly
process and pay the Company's invoices; and the inability of lenders, lessors or
other sources of the Company's necessary capital and liquidity to make funds
available to the Company when required.
In case the Company does experience severe Year 2000 financial and
operating problems, notwithstanding its efforts to avoid or mitigate problems
inherent in its own computer systems or the adverse effects of Year 2000
problems experienced by third parties on whom it is substantially reliant, the
Company has begun development of contingency plans.
INFLATION
The modest levels of inflation in the general economy since the
Company began business in 1990 have not affected its results of operations.
Additionally, the Company's contracts with its customers contain an annual lease
rate adjustment clause based on any increase in the consumer price index.
The Company believes that inflation will not have a material adverse effect on
its future results of operations.
13
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As discussed under "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
above, as of September 30, 1998, a total of $34.0 million was outstanding under
the SunTrust Facility with interest at two hundred seventy-five basis points
above the 90 day LIBOR rate (8.4% to 8.6% at September 30, 1998). Based upon
$34.0 million outstanding under the SunTrust Facility at September 30, 1998, the
Company's annual interest cost under the SunTrust Facility would increase by
$340,000 for each one percent increase in LIBOR (i.e., from 8.0% to 9.0%).
In order to reduce the Company's exposure to increases in LIBOR,
and consequently to increases in interest payments, on June 9, 1998 the Company
entered into an interest rate swap transaction (the "Swap") with SunTrust Bank,
Atlanta, in the amount of $10.0 million (the "Notional Amount"). The effective
date of the Swap is September 2, 1998 and it terminates on September 5, 2000.
Pursuant to the Swap, the Company pays a fixed interest rate of 6% per annum and
receives a LIBOR-based floating rate. The effect of the Swap is to neutralize
any changes in LIBOR on the Notional Amount. If LIBOR decreases below 6% during
the period the Swap is in effect, interest payments by the Company on the
Notional Amount will be greater than if the Company had not entered into the
Swap, since by exchanging LIBOR for a fixed interest rate, the Company would not
benefit from falling interest rates on LIBOR, a variable interest rate.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K.
(1) No reports on Form 8-K were filed during the quarter ended
September 30, 1998.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NuCo2 Inc.
Dated: November 13, 1998 By: /s/ Joann Sabatino
------------------
Joann Sabatino
Chief Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE NUCO2
INC. CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 401,242
<SECURITIES> 0
<RECEIVABLES> 6,329,439
<ALLOWANCES> 602,747
<INVENTORY> 217,125
<CURRENT-ASSETS> 7,553,157
<PP&E> 104,648,966
<DEPRECIATION> 14,231,762
<TOTAL-ASSETS> 131,194,747
<CURRENT-LIABILITIES> 11,624,270
<BONDS> 0
<COMMON> 7,217
0
0
<OTHER-SE> 53,894,579
<TOTAL-LIABILITY-AND-EQUITY> 131,194,747
<SALES> 10,863,493
<TOTAL-REVENUES> 10,863,493
<CGS> 5,752,090
<TOTAL-COSTS> 11,043,601
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,569,317
<INCOME-PRETAX> (1,741,091)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,741,091)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,741,091)
<EPS-PRIMARY> (.24)
<EPS-DILUTED> (.24)
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