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 December 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _____________________ to ______________________
Commission file number 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
Incorporation or Organization) Identification No.)
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 / / 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 December 31, 1998
Common Stock, $.001 par value 7,216,664 shares
<PAGE>
NuCo2 Inc.
Index Page
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1998 and
June 30, 1998 3
Consolidated Statements of Operations for the Three Months
Ended December 31, 1998 and December 31, 1997 4
Consolidated Statements of Operations for the Six Months
Ended December 31, 1998 and December 31, 1997 5
Consolidated Statement of Shareholders' Equity for the Six
Months Ended December 31, 1998 6
Consolidated Statements of Cash Flows for the Six Months
Ended December 31, and December 31, 1997 7
Notes to Consolidated Financial Statements 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 16
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 17
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
NuCo2 Inc.
CONSOLIDATED BALANCE SHEETS
ASSETS
------
<TABLE>
<CAPTION>
December 31, 1998 June 30, 1998
----------------- -------------
(unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 170,935 $ 336,510
Trade accounts receivable; net of allowance for doubtful
accounts of $758,860 and $395,491, respectively 6,628,266 4,457,505
Inventories 223,777 211,027
Prepaid expenses and other current assets 1,040,181 262,437
------------- ------------
Total current assets 8,063,159 5,267,479
------------- ------------
Property and equipment, net 94,074,153 85,435,933
------------- ------------
Other assets:
Goodwill, net 22,277,687 22,891,846
Deferred charges, net 1,881,752 2,004,259
Customer lists, net 3,400,329 3,963,588
Restrictive covenants, net 2,113,828 2,275,964
Deferred lease acquisition costs, net 2,898,585 2,475,139
Deposits 234,672 184,059
------------- ------------
32,806,853 33,794,855
------------- ------------
$ 134,944,165 $124,498,267
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current maturities of long-term debt $ 141,652 $ 139,251
Accounts payable 9,988,979 6,596,722
Accrued expenses 488,945 323,254
Accrued interest 954,675 844,153
Accrued payroll 277,816 476,458
Other current liabilities 33,366 7,179
------------- ------------
Total current liabilities 11,885,433 8,387,017
Long-term debt, excluding current maturities 39,890,812 29,460,614
Subordinated debt 29,750,000 29,728,571
Customer deposits 1,705,063 1,279,178
------------- ------------
Total liabilities 83,231,308 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 each date 7,217 7,217
Additional paid-in capital 63,809,014 63,809,014
Accumulated deficit (12,103,374) (8,173,344)
------------- ------------
Total shareholders' equity 51,712,857 55,642,887
------------- ------------
$ 134,944,165 $124,498,267
============= ============
</TABLE>
3
<PAGE>
NuCo2 Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
------------------
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Net Sales $ 11,251,659 $ 8,077,798
Costs and expenses:
Cost of products sold 6,070,491 4,309,627
Selling, general and administrative expenses 2,452,679 2,399,037
Depreciation and amortization 3,095,290 2,051,101
------------ -----------
11,618,460 8,759,765
------------ -----------
Operating (loss) (366,801) (681,967)
Interest expense, net 1,822,138 806,721
------------ -----------
Net (loss) before extraordinary item (2,188,939) (1,488,688)
------------ -----------
Extraordinary item - loss on extinguishment of debt - 184,861
------------ -----------
Net (loss) $ (2,188,939) $(1,673,549)
============ ===========
Basic and Diluted EPS:
Income (loss) before extraordinary item $ (.30) $ (.20)
------------ -----------
Extraordinary item - (.03)
------------ -----------
Net (loss) $ (.30) $ (.23)
============ ===========
Weighted average number of common and common
equivalent shares outstanding
Basic and Diluted 7,216,664 7,210,616
============ ===========
</TABLE>
4
<PAGE>
NuCo2 Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
----------------
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Net Sales $ 22,115,152 $ 15,192,088
Costs and expenses:
Cost of products sold 11,822,581 7,892,494
Selling, general and administrative expenses 4,898,471 4,399,360
Depreciation and amortization 5,941,009 3,683,998
------------ ------------
22,662,061 15,975,852
------------ ------------
Operating (loss) (546,909) (783,764)
Interest expense, net 3,383,121 1,015,834
------------ ------------
Net (loss) before extraordinary item (3,930,030) (1,799,598)
------------ ------------
Extraordinary item - loss on extinguishment of debt - 184,861
------------ ------------
Net (loss) $ (3,930,030) $ (1,984,459)
============ ============
Basic and Diluted EPS:
Net (loss) before extraordinary item $ (.54) $ (.25)
------------ ------------
Extraordinary item - (.03)
------------ ------------
Net (loss) $ (.54) $ (.28)
============ ============
Weighted average number of common and common
equivalent shares outstanding
Basic and Diluted 7,216,664 7,204,167
============ ============
</TABLE>
5
<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) - - - (3,930,030) (3,930,030)
--------- ------- ----------- ----------- -----------
Balance, December 31, 1998 7,216,664 $ 7,217 $63,809,014 $(12,103,374) $51,712,857
========= ======= =========== =========== ===========
</TABLE>
6
<PAGE>
NuCo2 Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
----------------
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Net (loss) before extraordinary item $ (3,930,030) $ (1,799,598)
Extraordinary item - loss on extinguishment of debt - 184,861
------------- ------------
Net (loss) (3,930,030) (1,984,459)
Cash flows from operating activities:
Adjustments to reconcile net (loss) to net cash
provided by operating activities:
Depreciation and amortization of property and equipment 4,097,039 2,550,038
Amortization of other assets 1,865,399 1,133,960
Loss on disposal of property and equipment 343,037 238,659
Write-off of deferred financing costs - 184,861
Changes in operating assets and liabilities:
Decrease (increase) in:
Trade accounts receivable (2,170,761) (1,364,506)
Inventories (12,750) (103,012)
Prepaid expenses and other current assets (777,744) (518,601)
Increase (decrease) in:
Accounts payable 3,392,257 3,631,849
Accrued expenses 165,691 49,303
Accrued payroll (198,643) 311,731
Accrued interest 110,523 623,024
Other current liabilities 26,187 9,696
Customer deposits 425,887 340,398
------------- ------------
Net cash provided by operating activities 3,336,092 5,102,941
-------------- -------------
Cash flows from investing activities:
Proceeds from disposal of property and equipment 65,880 75,714
Purchase of property and equipment (13,086,381) 9,626,455)
Acquisition of businesses 30,500 (12,132,122)
(Increase) in deposits (50,613) (62,275)
Increase in deferred lease acquisition costs (840,799) (789,336)
------------- ------------
Net cash (used in) investing activities (13,881,413) (22,534,474)
------------- ------------
Cash flows from financing activities:
Repayment of long-term debt (67,402) 757,964)
Proceeds from issuance of long-term debt and subordinated debt 10,500,000 9,689,190
Increase in deferred charges (52,852) (2,081,302)
------------- ------------
Net cash provided by financing activities 10,379,746 6,849,924
------------- ------------
Net increase (decrease) in cash and cash equivalents (165,575) (10,581,609)
Cash and cash equivalents at the beginning of period 336,510 11,672,506
------------- ------------
Cash and cash equivalents at the end of period $ 170,935 $ 1,090,897
============= ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 3,283,464 $ 408,926
============= ============
Income taxes $ 0 $ 0
============= ============
Supplemental schedule of noncash investing and
financing activities:
Acquisition of businesses:
Fair value of assets acquired $ - $19,759,698
Cost in excess of net assets of businesses acquired - 12,136,387
Liabilities assumed or incurred - (19,729,345)
Issuance of common stock - (274,991)
------------- ------------
Cash paid $ - $11,891,749
============= ============
</TABLE>
7
<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. (the "Company") 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 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 and six months ended
December 31, 1998 and 1997 have been calculated according to the guidelines of
Statement 128.
Incremental shares for stock options and warrants calculated pursuant
to the treasury stock method for the three and six months ended December 31,
1998 were 31,517 and 27,269, respectively. These shares were not included in
diluted EPS because they would have been antidilutive for such periods.
Additionally, options and warrants to purchase 1,073,715 shares, 872,333 shares
and 443,166 shares for $14.64 - $17.00 per share, $11.25 - $12.50 per share and
$7.00 - $11.00 per share, respectively, were outstanding during all or a portion
of the three and six months ended December 31, 1998 but were not included in the
computation of diluted EPS because the exercise price of the options and
warrants was greater than the average market price of the Common Stock.
Incremental shares for stock options and warrants calculated pursuant
to the treasury stock method for the three and six months ended December 31,
1997 were 128,115 and 153,090, respectively. These shares were not included in
diluted EPS because they would have been antidilutive for such periods.
Additionally, options and warrants to purchase 1,000,000 shares, 655,738 shares
(see Note 5) and 30,000 shares (see Note 5) for $17.00 per share, $16.40 per
share and $14.64 per share, respectively, were outstanding during all or a
portion of the three and six months ended December 31, 1997 but were not
included in the computation of diluted EPS because the exercise price of the
options and warrants was greater than the average market price of Common Stock.
8
<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.
Effective October 1, 1997, a newly formed wholly-owned subsidiary of
the Company purchased all of the issued and outstanding shares of common stock
of Koch Compressed Gases, Inc., ("Koch") for an aggregate purchase price of $5.0
million. Koch operated a bulk CO2 business as well as provided carbon dioxide
and other gases in high pressure cylinders throughout the tri-state New York
metropolitan area. The purchase price was funded through a borrowing under the
Company's credit facility.
In November 1997, the Company purchased substantially all of the assets
of a bulk CO2 company operating in Texas for a purchase price of $949,240. The
Company paid $674,249 cash and issued 18,835 shares of Common Stock at market,
for a value of $274,991.
Effective December 2, 1997, the Company purchased certain assets from
four related carbonic gas distributors, Miller Carbonic Systems Co. Inc., Miller
Carbonic, Inc., Carbonic National Systems, Inc., and Carbonic Gas Service, Inc.,
operating primarily in Illinois, Indiana, Wisconsin and Michigan for an
aggregate purchase price of $11,150,000. The Company paid approximately
$4,650,000 cash and funded $6,500,000 through a borrowing under the Company's
credit facility.
Effective December 2, 1997, the Company purchased certain assets of a
bulk CO2 company with operations in Kansas for a purchase price of approximately
$990,000. The purchase price was funded through a borrowing under the Company's
credit facility.
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 $12,640,000 for the six
months ended December 31, 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") lead managed by SunTrust Bank, South Florida, National Association
("SunTrust"). 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 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. 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%. 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.
9
<PAGE>
A total of $39.5 million was outstanding pursuant to the SunTrust
Facility with interest from 7.84% to 8.57% per annum as of December 31, 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 Common Stock at an
exercise price of $16.40 per share. 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 share. Additionally, NationsBanc Montgomery Securities, Inc., the
placement agent, received a warrant to purchase an aggregate of 30,000 shares of
Common Stock at an exercise price of $14.64 per share which expires on October
31, 2004.
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 stock options shall be at least equal to 100% of
the fair market value of the 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 Common Stock at the date of the grant. The maximum term
for all options is 10 years. Options granted to date vest in two, three or four
installments commencing one year from the date of grant. As of December 31,
1998, options for 307,360 shares were 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 341,500 $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 610,926 $9-$11.28 $10.61
Granted 74,500 $5.50-$7.00 $6.20
Expired or canceled 2,950 $9-$11.25 $10.68
Exercised -0- -0- -0-
------- ------------- ------
Outstanding at December 31, 1998 682,476 $5.50-$11.28 $10.13
------- ------------- ------
</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 at the date of grant. All options vest in
three equal annual installments beginning on the first anniversary of the date
of grant. As of December 31, 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, a total of 6,000
shares of Common Stock at an exercise price of $8.938 per share and a total of
6,000 shares of Common Stock at an exercise price of $6.625 per share had been
issued. Of these options, as of December 31, 1998 options to purchase 14,000
shares of Common Stock at an exercise price of $9.00 per share were exercisable.
Note 7. OPERATING LEASES
The Company entered into fifty-one operating leases from July 1, 1998
through December 31, 1998. Three leases were for warehouse facilities with
aggregate annual rentals of approximately $79,100 expiring at various dates
through 2003. Forty-eight leases were for trucks with aggregate annual rentals
of approximately $487,000 expiring at various dates through 2005.
10
<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 December 31, 1998, the Company operated 78 service locations in 44 states
servicing over 60,000 bulk and high pressure CO2 fountain beverage customers
consisting primarily of restaurants, convenience stores, taverns, theme parks,
resorts and stadiums. Over 96% of potential fountain beverage CO2 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 55,000 of the
approximately 110,000 fountain beverage bulk CO2 users in the Continental United
States. The Company estimates that there are approximately 800,000 fountain
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 in fiscal 1999 is to replicate the business model that it
has achieved in its more mature 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 depots in mature markets. Depots in
mature markets have gross margins generally in the 55% to 65% range. For the six
months ended December 31, 1998, 24% of the Company's depots were open over three
years and averaged a 57% gross margin, 27% of depots were open between two and
three years and averaged a 47% gross margin, 29% of depots were open between one
and two years and averaged a 37% gross margin, and 20% of depots were open under
one year and averaged a 15% gross margin. New accounts are primarily being added
to newer depots for which there is substantial excess capacity, and therefore,
relatively little additional cost is incurred to service new customers.
Increases in gross margins are directly related to increases in the number of
accounts serviced. New multi-unit placement agreements combined with single-unit
placements will help the Company in achieving route density. During the six
months ended December 31, 1998, the Company reached multi-unit placement
agreements with national and regional chains aggregating approximately 6,100
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 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 bulk CO2. For customers on rental plus
per pound, invoices are broken down into the two respective services, with the
charge for bulk 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 CO2 system installation
costs; amortization of sales commissions, and amortization of goodwill, deferred
financing costs and other intangible assets.
11
<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 Six Months Ended
December 31, December 31,
------------ ------------
1998 1997 1998 1997
---- ---- ---- ----
Income Statement Data:
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 54.0% 53.3% 53.5% 52.0%
Selling, general and administrative expenses 21.8% 29.7% 22.1% 29.0%
Depreciation and amortization 27.5% 25.4% 26.9% 24.2%
----- ----- ----- -----
Operating (loss) (3.3%) (8.4%) (2.5%) (5.2%)
----- ----- ----- -----
Interest expense, net 16.2% 10.0% 15.3% 6.7%
Extraordinary item - loss on extinguishment of debt - 2.3% - 1.2%
----- ----- ----- -----
Net income (loss) (19.5%) (20.7%) (17.8%) (13.1%)
===== ===== ===== =====
Other Data:
Operating income before depreciation and amortization
(EBITDA) 24.2% 16.9% 24.4% 19.1%
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1997
Net sales increased by $3.2 million, or 39.3%, from $8.1 million in the
1997 period to $11.3 million in the 1998 period. Approximately $2.3 million of
the increase represented net sales resulting from 14 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 $1.8 million, from $4.3 million in
the 1997 period to $6.1 million in the 1998 period and increased as a percentage
of net sales from 53.3% to 54.0%. The increase was attributable to the expansion
of the Company into new territories. Fully loaded route drivers increased by
$647,000 from $1.5 million in the 1997 period to $2.1 million in the 1998 period
and increased as a percentage of net sales from 18.1% to 18.7%. Fully loaded
truck expense increased by $331,000 from $664,000 in the 1997 period to $994,000
in the 1998 period and increased as a percentage of net sales from 8.2% to 8.8%.
Purchases of bulk CO2 increased by $483,000 from $984,000 in the 1997 period to
$1.5 million in the 1998 period and increased as a percentage of net sales from
12.2% to 13.0%. Depot expenses increased by $128,000 from $410,000 in the 1997
period to $538,000 in the 1998 period and decreased as a percentage of net sales
from 5.1% to 4.8%. The number of service locations operated by the Company at
December 31, 1998 increased to 78, compared to 53 at December 31, 1997. When the
Company opens new service locations and expands into new markets, higher costs
expressed as a percentage of net sales are incurred until route density is
achieved. At December 31, 1998, the Company serviced over 400 bulk CO2 customers
per delivery vehicle from 31% of its depots.
12
<PAGE>
Selling, general and administrative expenses increased by $54,000 from
$2.4 million in the 1997 period to $2.5 million in the 1998 period and decreased
as a percentage of net sales from 29.7% to 21.8%. The dollar increase was
primarily attributable to growth in the number of marketing and administrative
personnel and their associated expenses. The percentage decrease is attributable
to economies of scale. This quarter represented the fourth sequential decrease
in selling, general and administrative expenses expressed as a percentage of net
sales. At December 31, 1997, the Company had operations in 39 states and
employed 117 marketing and administrative employees and at December 31, 1998,
the Company had operations in 44 states and employed 157 marketing and
administrative employees.
Depreciation and amortization increased by $1.0 million from $2.1
million in the 1997 period to $3.1 million in the 1998 period. As a percentage
of net sales, such expenses increased from 25.4% in the 1997 period to 27.5% in
the 1998 period. Depreciation expense increased by $772,000 from $1.4 million in
the 1997 period to $2.2 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 17.2% in the 1997 period to 19.2% in
the 1998 period. Amortization expense increased by $273,000 from $663,000 in the
1997 period to $936,000 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 8.2% to 8.3%.
Net interest increased by $1.0 million from $807,000 in the 1997 period
to $1.8 million in the 1998 period and increased as a percentage of net sales
from 10.0% to 16.2%. 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 $1.4 million, or 99.3%, from
$1.4 million in the 1997 period to $2.7 million in the 1998 period and increased
as a percentage of net sales from 16.9% to 24.2%, 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.
SIX MONTHS ENDED DECEMBER 31, 1998 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1997
Net sales increased by $6.9 million, or 45.6%, from $15.2 million in
the 1997 period to $22.1 million in the 1998 period. Approximately $4.4 million
of the increase represented net sales resulting from 14 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 in service. Increases in net sales due to price
increases were insignificant.
Cost of products sold increased by $3.9 million, from $7.9 million in
the 1997 period to $11.8 million in the 1998 period and increased as a
percentage of net sales from 52.0% to 53.5%. The increase was attributable to
the continued expansion of the Company, an increase in fully loaded route
drivers and an increase in high pressure cylinder rental expense. Fully loaded
route drivers increased by $1.4 million from $2.7 million in the 1997 period to
$4.1 million in the 1998 period and increased as a percentage of net sales from
17.7% to 18.6%. As of December 31, 1997, the Company employed 176 route drivers
and at December 31, 1998, the Company employed 255 route drivers. High pressure
cylinder rent expense increased by $157,000 from $148,000 in the 1997 period to
$305,000 in the 1998 period and increased as a percentage of net sales from 1.0%
in the 1997 period to 1.4% in the 1998 period. The increase in high pressure
cylinder rent was attributable to the acquisitions during the 1997 period. The
number of service locations operated by the Company at December 31, 1998,
increased to 78, compared to 53 at December 31, 1997. When the Company opens new
service locations and expands into new markets, higher costs expressed as a
percentage of net sales are incurred until route density is achieved. At
December 31, 1998, the Company serviced over 400 bulk CO2 customers per delivery
vehicle from 31% of its depots.
Selling, general and administrative expenses increased by $499,000 from
$4.4 million in the 1997 period to $4.9 million in the 1998 period and decreased
as a percentage of net sales from 29.0% to 22.1%. The dollar increase was
primarily attributable to growth in the number of marketing and administrative
employees and their associated expenses. The percentage decrease is attributable
to economies of scale. At December 31, 1997, the Company had operations in 39
states and employed 117 marketing and administrative employees and at December
31, 1998, the Company had operations in 44 states and employed 157 marketing and
administrative employees.
-13-
<PAGE>
Depreciation and amortization increased by $2.3 million from $3.7
million in the 1997 period to $5.9 million in the 1998 period. As a percentage
of net sales, such expenses increased from 24.2% in the 1997 period to 26.9% in
the 1998 period. Depreciation expense increased by $1.5 million from $2.6
million in the 1997 period to $4.1 million in the 1998 period principally due to
the increase in bulk CO2 systems leased to customers. Expressed as a percentage
of net sales, depreciation expense increased from 16.8% in the 1997 period to
18.5% in the 1998 period. Amortization expense increased by $731,000 from $1.1
million in the 1997 period to $1.9 million in the 1998 period primarily due to
the amortization related to restrictive covenants, goodwill and customer lists.
As a percentage of net sales, amortization expense increased from 7.5% to 8.4%.
Net interest income in the 1997 period was $1.0 million compared to net
interest expense in the 1998 period of $3.4 million. This change is 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.
During the 1998 period, the Company wrote-off $185,000 of deferred
financing costs related to its NationsBank Facility which was replaced by a new
syndicated bank group facility led by SunTrust Bank.
For the reasons described above, EBITDA, representing operating income
plus depreciation and amortization, increased by $2.5 million, or 86%, from $2.9
million in the 1997 period to $5.4 million in the 1998 period and increased as a
percentage of net sales from 19.1% to 24.4%, 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 $13.0
million to $20.0 million during the remaining six 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 $50.0 million to a total of $100.0 million (the
"Additional SunTrust Facility"). 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. It is collateralized by
substantially all of the assets of the Company.
During the six months ended December 31, 1998, the Company's capital
resources included cash flows from operations and available borrowing capacity
under the SunTrust Facility.
As of December 31, 1998, a total of $39.5 million was outstanding under
the SunTrust Facility with interest at two hundred seventy-five basis points
above the applicable London InterBank Offering Rate ("LIBOR") (7.84% to 8.57% at
December 31, 1998).
Although the Company has not achieved $15.0 million annualized EDITDA,
the Company has requested the Additional SunTrust Facility. The SunTrust
Facility lenders have proposed, subject to various conditions, to increase the
SunTrust Facility by an additional $25.0 million. The Company anticipates that
the closing of the increase in the SunTrust Facility will occur simultaneously
with the sale by the Company of an additional $15.0 million principal amount of
12% senior subordinated promissory notes (the "Additional Notes"). The Company
anticipates that the closings will occur prior to March 31, 1999. The Company
has received an indication from one holder of its outstnding 12% Senior
Subordinated Promissory Notes due 2004 (the "12% Notes") that it is willing to
purchase the Additional Notes on substantially the same terms and conditions as
the 12% Notes.
-14-
<PAGE>
The Company believes that cash flows from operations and available
borrowings under the increased SunTrust Facility together with the proceeds from
the sale of the Additional Notes will be sufficient to fund proposed operations
for at least the next twelve months.
Working Capital. At June 30, 1998 the Company had negative working
capital of $3.1 million. At December 31, 1998, the Company had negative working
capital of $3.8 million.
Cash Flows from Operating Activities. For the six months ended December
31, 1997 and December 31, 1998, net cash provided by operating activities was
$5.1 million and $3.3 million, respectively. The decrease from the 1997 period
to the 1998 period of $1.8 million 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 six months ended December
31, 1997 and December 31, 1998, net cash used in investing activities was $22.5
million and $13.9 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, cash expended in connection with the
asset acquisitions.
Cash Flows from Financing Activities. For the six months ended December
31, 1997 and December 31, 1998, cash flows provided by financing activities were
$6.8 million and $10.4 million, respectively. For the six months ended December
31, 1997 and December 31, 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 generally 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.
15
<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 December 31, 1998, a total of $39.5 million was outstanding under the
SunTrust Facility with interest at two hundred seventy-five basis points above
the applicable LIBOR rate (7.84% to 8.57% at December 31, 1998). Based upon
$39.5 million outstanding under the SunTrust Facility at December 31, 1998, the
Company's annual interest cost under the SunTrust Facility would increase by
$395,000 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Company's Annual meeting of Shareholders was held on December
15, 1998 (the "Annual Meeting").
(b) Edward M. Sellian, Robert Ranieri, Robert L. Frome, John A. Kerney
and Daniel Raynor were elected as directors of the Company to serve until the
next annual meeting of the shareholders or until their successors are elected
and qualified. No other director's term of office continued after the Annual
Meeting.
(c) (1) Election of Directors:
Number of Number of
Votes For Votes Against
--------- -------------
Edward M. Sellian 6,875,400 30,494
Robert Ranieri 6,877,140 28,814
Robert L. Frome 6,875,769 30,185
John A. Kerney 6,875,569 30,385
Daniel Raynor 6,874,069 31,885
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 December 31, 1998.
16
<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: February 12, 1999 By: /s/ Joann Sabatino
----------------------
Joann Sabatino
Chief Financial Officer
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the NuCo2
Inc. Consolidated Financial Statements as of December 31, 1998 and is qualified
in its entirety by reference to such Consolidated Financial Statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1998
<CASH> 170,935
<SECURITIES> 0
<RECEIVABLES> 6,628,266
<ALLOWANCES> 758,860
<INVENTORY> 223,777
<CURRENT-ASSETS> 8,063,159
<PP&E> 110,380,747
<DEPRECIATION> 16,306,594
<TOTAL-ASSETS> 134,944,165
<CURRENT-LIABILITIES> 11,885,433
<BONDS> 0
<COMMON> 7,217
0
0
<OTHER-SE> 51,705,640
<TOTAL-LIABILITY-AND-EQUITY> 134,944,165
<SALES> 22,115,152
<TOTAL-REVENUES> 22,115,152
<CGS> 11,822,581
<TOTAL-COSTS> 22,662,061
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,394,015
<INCOME-PRETAX> (3,930,030)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,930,030)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,930,030)
<EPS-PRIMARY> (.54)
<EPS-DILUTED> (.54)
</TABLE>
