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, 1999
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 Incorporation (I.R.S. Employer
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 /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, 1999
----- ----------------------------------
Common Stock, $.001 par value 7,216,664 shares
<PAGE>
NUCO2 INC.
INDEX
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 3
1999 and June 30, 1999
Consolidated Statements of Operations for the Three 4
Months Ended September 30, 1999 and September
30, 1998
Consolidated Statement of Shareholders' Equity for 5
the Three Months Ended September 30, 1999
Consolidated Statements of Cash Flows for the Three Months 6
Ended September 30, 1999 and September 30, 1998
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 15
ABOUT MARKET RISK
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 16
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
NUCO2 INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
------
<TABLE>
<CAPTION>
September 30, 1999 June 30, 1999
------------------ -------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 389,733 $ 1,579,191
Trade accounts receivable; net of allowance for doubtful
accounts of $647,077 and $557,592, respectively 6,561,770 6,767,716
Inventories 223,777 213,605
Prepaid expenses and other current assets 1,392,000 593,487
------------- -------------
Total current assets 8,567,280 9,153,999
------------- -------------
Property and equipment, net 101,866,822 99,664,890
------------- -------------
Other assets:
Goodwill, net 21,342,446 21,645,293
Deferred charges, net 2,745,983 2,915,167
Customer lists, net 2,633,783 2,897,638
Restrictive covenants, net 1,841,884 1,928,700
Deferred lease acquisition costs, net 3,313,965 3,236,919
Deposits 187,358 187,595
------------- -------------
32,065,419 32,811,312
------------- -------------
$ 142,499,521 $ 141,630,201
============= =============
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt $ 99,475 $ 96,748
Accounts payable 8,573,753 6,701,695
Accrued expenses 40,325 747,631
Accrued interest 2,294,987 1,473,704
Accrued payroll 630,038 543,924
Other current liabilities 46,950 45,570
------------- -------------
Total current liabilities 11,685,528 9,609,272
Long-term debt, excluding current maturities 44,575,154 43,615,025
Subordinated debt 38,803,817 38,748,695
Customer deposits 2,082,763 1,924,528
------------- -------------
Total liabilities 97,147,262 93,897,520
------------- -------------
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, 1999
and June 30, 1999 7,217 7,217
Additional paid-in capital 64,831,748 64,831,748
Accumulated deficit (19,486,706) (17,106,284)
-------------- --------------
Total shareholders' equity 45,352,259 47,732,681
------------- -------------
$ 142,499,521 $ 141,630,201
============= =============
</TABLE>
3
<PAGE>
NUCO2 INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
------------------
September 30, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
Net Sales $ 13,594,577 $ 10,863,493
Costs and expenses:
Cost of products sold 6,996,345 5,752,090
Selling, general and administrative expenses 2,929,258 2,445,792
Depreciation and amortization 3,614,635 2,845,719
------------- -----------
13,540,238 11,043,601
------------- -----------
Operating Income (Loss) 54,339 (180,108)
Interest expense net 2,434,761 1,560,983
------------- -----------
Net (loss) $ (2,380,422) $ (1,741,091)
============== ============
Basic and Diluted EPS:
Net (loss) $ (0.33) $ (0.24)
============= ============
Weighted average number of common and common
equivalent shares outstanding
Basic and Diluted 7,216,664 7,216,664
============= ===========
</TABLE>
4
<PAGE>
NUCO2 INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-in Accumulated Shareholders'
Shares Amount Capital Deficit Equity
------ ------ ---------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1999 7,216,664 $ 7,217 $ 64,831,748 $ (17,106,284) $ 47,732,681
Net (loss) - - - (2,380,422) (2,380,422)
---------- -------- ------------ -------------- -------------
Balance, September 30, 1999 7,216,664 $ 7,217 $ 64,831,748 $ (19,486,706) $ 45,352,259
========== ======== ============ ============= ============
</TABLE>
5
<PAGE>
NUCO2 INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
------------------
September 30, 1999 September 30, 1998*
------------------ -------------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) $ (2,380,422) $ (1,741,091)
Adjustments to reconcile net (loss) to net cash provided
by operating activities:
Depreciation and amortization of property and equipment 2,496,860 1,937,502
Amortization of other assets 1,117,774 908,217
Loss on disposal of property and equipment 7,134 (3,959)
Loss on abandonment 198,163 157,221
Changes in operating assets and liabilities:
Decrease (increase) in:
Trade accounts receivable 205,946 (1,871,934)
Inventories (10,172) (6,099)
Prepaid expenses and other current assets (798,514) (342,913)
Increase (decrease) in:
Accounts payable 1,872,058 2,200,182
Accrued expenses (707,306) 99,013
Accrued payroll 86,114 15,904
Accrued interest 821,283 880,499
Other current liabilities 1,381 41,138
Customer deposits 158,234 223,504
------------- ------------
Net cash provided by operating activities 3,068,533 2,497,184
------------- ------------
Cash flows from investing activities:
Proceeds from disposal of property and equipment 1,650 26,130
Purchase of property and equipment (4,875,303) (7,069,137)
Acquisition of businesses - 30,500
(Decrease) in deposits 238 (50,392)
Increase in deferred lease acquisition costs (362,175) (345,132)
------------- -------------
Net cash (used in) investing activities (5,235,590) (7,408,031)
------------- -------------
Cash flows from financing activities:
Repayment of long-term debt (37,144) (22,671)
Proceeds from issuance of long-term debt and subordinated debt 1,055,123 5,000,000
Increase in deferred charges (40,380) (1,750)
-------------- -------------
Net cash provided by financing activities 977,599 4,975,579
------------- ------------
Net decrease (increase) in cash and cash equivalents (1,189,458) 64,732
Cash and cash equivalents at the beginning of period 1,579,191 336,510
------------- ------------
Cash and cash equivalents at the end of period $ 389,733 $ 401,242
============= ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 1,590,995 $ 678,103
============ ============
Income taxes $ - $ -
============ ============
* Restated to conform to current year's classifications.
</TABLE>
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. (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, 1999 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, 1999. 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.
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 Stock.
Incremental shares for stock options and warrants calculated pursuant to the
treasury stock method for the three months ended September 30, 1999 were
162,213. 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, 255,310 shares and 385,416 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, 1999, 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 Stock.
7
<PAGE>
NOTE 3. LONG-TERM DEBT
- ------- --------------
The Company has a $75.0 million amended and restated revolving credit
facility with a syndicate of banks led by SunTrust Bank, South Florida, N.A.
("Amended SunTrust Facility"). The Amended SunTrust Facility amended and
restated the Company's existing $50.0 million revolving credit facility which
had been entered into in October 1997. The Amended 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 Amended SunTrust Facility. The applicable LIBOR margin pursuant to the
pricing grid ranges from 1.75% to 3.5%. The applicable unused facility fee
pursuant to the pricing grid ranges from 0.375% to 0.50%. Interest only is
payable periodically until the expiration of the Amended SunTrust Facility on
May 4, 2002; there is, however, a two year renewal option subject to approval.
The Amended SunTrust Facility is collateralized by substantially all of the
assets of the Company. The Company is precluded from declaring or paying any
cash dividends and is required to meet certain affirmative and negative
covenants including, but not limited to, financial covenants. Pursuant to the
Amended SunTrust Facility, drawings are limited to availability under a formula
predicated upon multiples of EBITDA.
A total of $44.25 million was outstanding pursuant to the Amended
SunTrust Facility with interest from 8.74% to 8.88% per annum as of September
30, 1999.
As of September 30, 1999, the Company maintained 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 rate of 6% per annum and receives a LIBOR-based floating rate.
NOTE 4. 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 stock unit. In July 1998, the agreement governing the Notes 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 Common Stock at an exercise price of $14.64 per
share which expires on October 31, 2004.
On May 4, 1999, the Company sold an additional $10.0 million of its
Senior Subordinated Promissory Notes ("Additional Notes"). Except for their
October 31, 2005 maturity date, the Additional Notes are substantially identical
to the Notes. The Additional Notes were sold with detachable 6-1/2 year warrants
to purchase an aggregate of 372,892 shares of Common Stock at an exercise price
of $6.65 per stock unit. In connection with the sale of the Additional Notes,
certain financial covenants governing the Notes and the Additional Notes were
adjusted as of March 31, 1999 and prospectively and the exercise price for
612,023 of the warrants issued in connection with the sale of the Notes was
reduced to $6.65 per stock unit. Additionally, effective May 4, 1999, the
interest rate on the original $30.0 million of Notes increased to 14% and will
continue at 14% during any quarter during which certain financial ratios are not
met.
NOTE 5. 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 must 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 three to five installments over
periods of three to four and one-half years. As of September 30, 1998 and 1999,
options for 105,213 shares and 287,974 shares were exercisable, respectively.
8
<PAGE>
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, 1998 610,926 $9-$11.28 $10.61
Granted 214,500 $5.50-$7 $5.74
Expired or canceled 21,200 $9-$11.25 $10.40
--------- ------------ --------
Outstanding at June 30, 1999 804,226 $5.50-$11.28 $9.32
Granted 0 0 0
Expired or canceled 2,500 $5.50-$11.25 $8.95
--------- ------------- --------
Outstanding at September 30, 1999 801,726 $5.50-$11.28 $9.32
========= ============= ========
</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 receives 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 receives 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. The maximum term for all options is ten years. As of September 30, 1998
and 1999, options to purchase 12,000 shares and 8,000 shares were exercisable
and options for 26,000 and 30,000, respectively, were outstanding.
NOTE 6. OPERATING LEASES
- ------- ----------------
The Company entered into 12 operating leases from July 1 through
September 30, 1999 for trucks with aggregate annual rentals of approximately
$130,000 expiring at various dates through 2005.
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. OUR 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, OUR EXPANSION INTO NEW MARKETS, COMPETITION,
TECHNOLOGICAL ADVANCES, YEAR 2000 ISSUES AND AVAILABILITY OF MANAGERIAL
PERSONNEL.
OVERVIEW
We are the largest supplier in the United States of bulk CO2 systems and
bulk CO2 for carbonating and dispensing fountain beverages. We currently operate
a national network of 88 service locations in 44 states servicing approximately
67,000 bulk and high pressure customers. Over 97% of fountain beverage users in
the Continental United States are within our current service area.
Growth in our customer base has averaged 78% annually. Our rapid growth
has been due to a combination of internal growth and over 30 acquisitions.
Today, the majority of our growth is driven by the conversion of high pressure
CO2 users to bulk CO2 systems. Our success in conversions is demonstrated in the
Florida market where we continue to rapidly add new bulk CO2 system
installations, even after actively marketing in the state since 1990.
Substantially all of our revenues have been derived from the rental of
bulk CO2 systems installed at customers' sites, the sale of CO2 and high
pressure cylinder revenues. Revenues have grown from $812,000 in fiscal 1991 to
$47.1 million in fiscal 1999, an average increase of 68% annually. We believe
that our revenue base is stable due to the existence of long-term contracts with
our customers which generally roll-over without a significant portion expiring
without renewal in any one year. In each of fiscal 1997, 1998 and 1999, less
than 5% of our bulk CO2 systems in service experienced service termination.
Service termination is typically caused by restaurant closure. Affected bulk CO2
systems are either removed and reconditioned, or left in place when prospects
for a new restaurant at the same location appear likely. Revenue growth is
largely dependent on both (1) the rate of new bulk CO2 system installations and
(2) the growth in bulk CO2 sales at (i) customers on rental plus per pound
charge contracts and (ii) customers that own their own bulk CO2 systems. During
the first quarter of fiscal 2000, our customer base increased by approximately
2,000 new accounts.
Cost of products sold is comprised of purchased CO2 and labor, vehicle
and service location costs associated with the storage and delivery of 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 nature of our business, we incur significant depreciation and
amortization expenses. These stem from the depreciation of our 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.
With respect to bulk CO2 systems, we only capitalize costs that are
associated with specific successful placements of such systems with customers
under noncancelable contracts and which would not be incurred but for a
successful placement. All other service, marketing and administrative costs are
expensed as incurred.
Since 1990, we have devoted significant resources to building a sales
and marketing organization, adding administrative personnel and developing a
national infrastructure to support the rapid growth in the number of our
installed base of bulk CO2 systems. The cost of this expansion and the
significant depreciation expense of our installed network have resulted in
significant operating losses to date and accumulated net losses of $19.5 million
at September 30, 1999.
We believe that our future revenue growth, gains in gross margin and
profitability will be dependent upon increases in route density and the
expansion and penetration of bulk CO2 system installations in existing and new
market regions resulting from successful ongoing marketing.
Our experience has been that gross margins at service locations have
generally increased with the length of time that the service location is in
operation. Gross margins in our mature markets are generally in the 55% to 65%
range. As of September 30, 1999, 43% of our stationary service locations were
open over three years, 27% were open two to three years, 28% were open one to
two years and 2% were open under one year. For the three months ended September
30, 1999 and 1998, depots open over three years averaged a 55% gross margin and
a 54% gross margin, respectively,
10
<PAGE>
depots open two to three years averaged a 51% gross margin and a 43% gross
margin, respectively, and depots open one to two years averaged a 35% gross
margin and a 26% gross margin, respectively. For the three months ended
September 30, 1999, the depot open under one year had a 44% gross margin.
Additionally, we operate 20 mobile service locations with an average 39% gross
margin for the quarter ended September 30, 1999 compared to eight mobile service
locations with an average gross margin of 9% for the quarter ended September 30,
1998. Same store sales for depots open one to three years increased by 27%. New
service locations typically operate at low or negative gross margins in the
early stages and detract from our highly profitable service locations in mature
markets. Increases in gross margins at service locations are directly related to
increases in the number of customers serviced. New accounts are being added to
newer depots 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
us in achieving route density. As our customer base increases, we anticipate
that our financial performance on a sequential basis will improve at an
accelerated rate. Our route density is highest in Florida and is less developed
in the other areas where we presently have operations.
We believe that optimal route density is achieved at over 400 accounts
serviced per bulk CO2 truck and we typically employ targeted sales efforts to
build density within an existing delivery route. We maintain a "hub and spoke"
route structure and establish additional stationary bulk CO2 service locations
as a service area expands through geographic growth. Our entry into many states
was accomplished largely through business acquisitions with thinly developed
route networks. We expect to benefit from route efficiencies and other economies
of scale as we build our customer base in these states through intensive
marketing initiatives. Greater scale may also lead to better vehicle and fixed
asset utilization as well as the ability to spread fixed marketing and
administrative costs over a broader revenue base.
We believe that earnings before interest, taxes, depreciation and
amortization ("EBITDA") is the principal financial measure by which we should be
measured as we continue to achieve national market presence and to build route
density. Our revolving credit facility utilizes EBITDA for its calculation of
financial leverage, affecting the amount of funds available to us to borrow.
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 as 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. EBITDA
has grown from $15,000 in fiscal 1991 to $11.3 million in fiscal 1999, an
average increase of 72% annually from fiscal 1994 to fiscal 1999. For the three
months ended September 30, 1999, EBITDA was $3.7 million or $14.7 million
annualized, the highest for any quarter in the our history.
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,
-------------
1999 1998
---- ----
<S> <C> <C>
Income Statement Data:
Net sales................................................ 100.0% 100.0%
Cost of products sold.................................... 51.5 52.9
Selling, general and administrative expenses............. 21.5 22.5
Depreciation and amortization............................ 26.6 26.2
--------- --------
Operating income (loss).................................. .4 (1.6)
Interest expense, net.................................... 17.9 14.4
--------- --------
Net loss................................................. (17.5) (16.0)
========== =========
Other Data:
Operating income before depreciation and amortization
(EBITDA).................................................. 27.0% 24.5%
========== =========
</TABLE>
11
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
NET SALES
Net sales increased $2.7 million, or 25.1%, from $10.9 million in the
1998 period to $13.6 million in the 1999 period. The increase in net sales was
primarily due to internal growth in the number of Company owned and customer
owned bulk CO2 systems serviced. At September 30, 1999, there were approximately
51,000 Company owned and 10,000 customer owned bulk CO2 systems in service, an
increase of 11,000, or 22%, over the approximately 42,000 Company owned and
8,000 customer owned bulk CO2 systems in service at September 30, 1998.
COST OF PRODUCTS SOLD
Cost of products sold increased by $1.2 million, or 21.6%, from $5.8
million in the 1998 period to $7.0 million in the 1999 period and decreased as a
percentage of net sales from 52.9% to 51.5%. The dollar increase is attributable
to our continued growth. The percentage decrease is attributable to a decrease
in fully loaded route drivers. Fully loaded route drivers increased by $335,000
from $2.0 million in the 1998 period to $2.3 million in the 1999 period and
decreased as a percentage of net sales from 18.4% to 17.2%. Overtime expressed
as a percentage of net sales, was 3.2% in the 1998 period and 1.8% in the 1999
period. The overtime percentage decrease was attributable to a proactive
approach to overtime management enabled by new software. Fully loaded auto and
truck expense increased by $364,000 from $881,000 in the 1998 period to $1.2
million in the 1999 period and increased as a percentage of net sales from 8.1%
to 9.2%. Depot expenses decreased as a percentage of net sales from 5.3% to
4.2%. This percentage decrease is attributable to an increase of only one depot
from September 30, 1998 to September 30, 1999 and increased sales at our
existing depots. The number of depots operated by us at September 30, 1999 was
69, compared to 68 at September 30, 1998. When we open new depots and expand
into new markets, higher costs expressed as a percentage of net sales are
incurred until route density is achieved. At September 30, 1999, we serviced
over 400 bulk CO2 customers per delivery vehicle from 71% of our depots.
SELLING, GENERAL AND AdMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by $483,000, or
19.8%, from $2.4 million in the 1998 period to $2.9 million in the 1999 period
and decreased as a percentage of net sales from 22.5% to 21.5%. The dollar
increase is 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. At September 30, 1998, we had operations
in 44 states and employed 161 marketing employees and at September 30, 1999, we
had operations in 44 states and employed 190 marketing employees.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased by $769,000, or 27.0% from $2.8
million in the 1998 period to $3.6 million in the 1999 period. As a percentage
of net sales, such expense increased from 26.2% in the 1998 period to 26.6% in
the 1999 period. Depreciation expense increased by $559,000 from $1.9 million in
the 1998 period to $2.5 million in the 1999 period principally due to the
increase in bulk CO2 systems leased to customers. As a percentage of net sales,
depreciation expense increased from 17.8% in the 1998 period to 18.4% in the
1999 period. Amortization expense increased by $210,000 from $908,000 in the
1998 period to $1.1 million in the 1999 period primarily due to amortization
related to deferred charges, and deferred lease acquisition costs. As a
percentage of net sales, amortization expense decreased from 8.4% to 8.2%.
OPERATING INCOME
For the reasons described above, operating income was $54,000, or 0.4%
of net sales, in the 1999 period, compared to an operating loss of ($180,000),
or (1.6%) of net sales, in the 1998 period.
INTEREST EXPENSE
Net interest expense increased by $874,000 from $1.6 million in the 1998
period to $2.4 million in the 1999 period, and increased as a percentage of net
sales from 14.4% to 17.9%. This increase is primarily attributable to the
increased level of long-term debt and subordinated debt in the 1999 period as
compared to the 1998 period.
12
<PAGE>
NET LOSS
For the reasons described above, net loss increased by $639,000, or
36.7%, from $1.7 million in the 1998 period to $2.4 million in the 1999 period.
No provision for income tax expense in either the 1998 period or 1999 period has
been made due to historical net losses.
EBITDA
For the reasons described above, EBITDA, representing operating income
plus depreciation and amortization, increased by $1.0 million, or 37.6%, from
$2.7 million in the 1998 period to $3.7 million in the 1999 period and increased
as a percentage of net sales from 24.5% to 27.0%.
LIQUIDITY AND CAPITAL RESOURCES
Our cash requirements consist principally of (1) capital expenditures
associated with purchasing and placing new bulk CO2 systems into service at
customers' sites; (2) payments of interest on outstanding indebtedness; and (3)
working capital. Whenever possible, we seek to obtain the use of vehicles, land,
buildings, and other office and service equipment under operating leases as a
means of conserving capital. As of September 30, 1999, we anticipated making
cash capital expenditures of at least $15.0 million to $30.0 million during the
remaining nine months of fiscal 2000, primarily for purchases of bulk CO2
systems that we expect to place into service. Once bulk CO2 systems are placed
into service, we generally experience positive cash flows on a per-unit basis,
as there are minimal additional capital expenditures required for ordinary
operations. In addition to capital expenditures related to internal growth, we
review 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.
During fiscal 1999, our capital resources included cash flows from
operations, available borrowing capacity under our credit facility and proceeds
from the sale of our 12% Senior Subordinated Promissory Notes due 2005 (the
"2005 Notes").
On May 4, 1999, we entered into a $75.0 million amended and restated
revolving credit facility with a syndicate of banks led by SunTrust Bank, South
Florida, National Association ("Amended SunTrust Facility"). The Amended
SunTrust Facility contains interest rates and an unused facility fee based on a
pricing grid calculated quarterly on senior funded debt to annualized EBITDA. We
are entitled to select the Base Rate or LIBOR, plus applicable margin, for
principal drawings under the Amended SunTrust Facility. The applicable LIBOR
margin pursuant to the pricing grid ranges from 1.75% to 3.5%, the applicable
unused facility fee pursuant to the pricing grid ranges from 0.375% to 0.50% and
the applicable Base Rate margin pursuant to the pricing grid ranges from 0.25%
to 2.00%. Interest only is payable periodically until the expiration of the
Amended SunTrust Facility. The Amended SunTrust Facility expires May 4, 2002,
however, it contains a two year renewal option subject to approval.
Additionally, it is collateralized by substantially all of our assets. Drawings
pursuant to the Amended SunTrust Facility are limited to availability under a
formula predicated upon multiples of EBITDA. We are precluded from declaring or
paying any cash dividends and are required to meet certain affirmative and
negative covenants, including but not limited to financial covenants. At various
dates in the past we have been unable to meet certain covenants and have had to
obtain waivers or modifications of terms from our lenders. Although we believe
that we will be able to comply with the current provisions of our borrowing
arrangements, circumstances may result in our having to obtain waivers or
further modifications in the future. We believe that we have an excellent
relationship with our lenders.
Simultaneously with the Amended SunTrust Facility, we sold $10.0 million
of our 2005 Notes. Except for their October 31, 2005 maturity date, the 2005
Notes are substantially identical to our 12% Senior Subordinated Promissory
Notes due 2004 (the "2004 Notes"). The 2005 Notes were sold with detachable
6-1/2 year warrants to purchase an aggregate of 372,892 shares of our Common
Stock at an exercise price of $6.65 per stock unit. In connection with the sale
of the 2005 Notes, certain financial covenants governing the 2004 Notes and the
2005 Notes were adjusted as of March 31, 1999 and prospectively and the exercise
price for 612,023 warrants issued in connection with the sale of the 2004 Notes
was reduced to $6.65 per stock unit. Additionally, effective May 4, 1999, the
interest rate on the original $30.0 million of Notes increased to 14% per annum
and will continue at 14% per annum during any quarter during which certain
financial ratios are not met.
During the three months ended September 30, 1999, our capital resources
included cash flows from operations
13
<PAGE>
and available borrowing capacity under the Amended SunTrust Facility. As of
September 30, 1999, a total of $44.25 million was outstanding under the Amended
SunTrust Facility with interest at three hundred fifty basis points above the
applicable London InterBank Offering Rate ("LIBOR") (8.74% to 8.88% at September
30, 1999).
We believe that cash flows from operations and available borrowings
under the Amended SunTrust Facility will be sufficient to fund proposed
operations for at least the next twelve months.
WORKING CAPITAL. At June 30, 1999, we had negative working capital of
$455,000. At September 30, 1999, we had negative working capital of $3.1
million.
CASH FLOWS FROM OPERATING ACTIVITIES. For the three months ended
September 30, 1998 and September 30, 1999, net cash provided by operating
activities was $2.5 million and $3.1 million, respectively. The increase from
the 1998 period to the 1999 period of $571,000 is primarily due to a decrease in
accounts receivable of $1.9 million in the 1998 period compared to an increase
of $206,000 in the 1999 period.
CASH FLOWS FROM INVESTING ACTIVITIES. For the three months ended
September 30, 1999 and September 30, 1998, net cash used in investing activities
was $7.4 million and $5.2 million, respectively. These investing activities were
primarily attributable to the installation and direct placement costs and
acquisition of bulk CO2 systems.
CASH FLOWS FROM FINANCING ACTIVITIES. For the three months ended
September 30, 1998 and September 30, 1999, cash flows provided by financing
activities were $5.0 million and $978,000, respectively. For the three months
ended September 30, 1998 and September 30, 1999, net cash provided by financing
activities was primarily from the issuance of long-term debt.
YEAR 2000
We have conducted a review to identify which of our computer and other
business operating systems will be affected by the "Year 2000" problem and have
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. We believe 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 our financial position or results of operations.
We are also engaged in communications with its significant business
partners, suppliers and customers to determine the extent to which we are
vulnerable to such third parties' failure to address their own Year 2000 issues.
Our assessment of the impact of Year 2000 issues includes an assessment of our
vulnerability to such third parties. We are seeking assurances from our
significant business partners, suppliers and customers that their computer
applications will not fail due to Year 2000 problems. Nevertheless, we do 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 we believe that
there is a risk that certain of these third parties on whom our finances and
operations depend will experience Year 2000 problems that could affect our
financial position or results of operations. These risks include, but are not
limited to, the potential inability of suppliers to correctly or timely provide
necessary services, materials and components for our operations; the inability
of our customers to timely or correctly process and pay our invoices; and the
inability of lenders, lessors or other sources of our necessary capital and
liquidity to make funds available to us when required.
Because we are unaware of any material Year 2000 compliance issues, we
lack a Year 2000-specific contingency plan. If Year 2000 compliance issues are
discovered, we will evaluate the need for one or more contingency plans relating
to such issues. If we are unable to develop and implement appropriate
contingency plans, as needed, in a timely manner, we may experience delays in,
or increased costs associated with, implementation of changes to address any
such issues, which could have material adverse effect on our business, operating
results or financial condition.
INFLATION
The modest levels of inflation in the general economy have not affected
our results of operations. Additionally, our customer contracts generally
provide for annual increases in the monthly rental rate based on increases in
the consumer price index. We believe that inflation will not have a material
adverse effect on our future results of operations.
14
<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, 1999, a total of $44.25 million was outstanding under the
Amended SunTrust Facility with interest at three hundred fifty basis points
above the 90 day LIBOR rate (8.74% to 8.88% at September 30, 1999). Based upon
$44.25 million outstanding under the Amended SunTrust Facility at September 30,
1999, our annual interest cost under the Amended SunTrust Facility would
increase by $443,000 for each one percent increase in LIBOR (i.e., from 9.0% to
10.0%).
In order to reduce our exposure to increases in LIBOR, and consequently
to increases in interest payments, on June 9, 1998 we 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,
we pay a fixed interest rate of 6% per annum and receive 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 us on the Notional Amount will be greater than if
we had not entered into the Swap, since by exchanging LIBOR for a fixed interest
rate, we would not benefit from falling interest rates on LIBOR, a variable
interest rate. We do not enter into speculative derivative transactions or
leveraged swap transactions.
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, 1999.
15
<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 10, 1999 By: /s/ Joann Sabatino
-------------------------------
Joann Sabatino
Chief Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the NuCo2
Inc. Consolidated Financial Statements as of September 30, 1999 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-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 389,733
<SECURITIES> 0
<RECEIVABLES> 7,208,847
<ALLOWANCES> 647,077
<INVENTORY> 223,777
<CURRENT-ASSETS> 8,567,280
<PP&E> 124,832,817
<DEPRECIATION> 22,965,995
<TOTAL-ASSETS> 142,499,521
<CURRENT-LIABILITIES> 11,685,528
<BONDS> 0
<COMMON> 7,217
0
0
<OTHER-SE> 45,345,042
<TOTAL-LIABILITY-AND-EQUITY> 142,499,521
<SALES> 13,594,577
<TOTAL-REVENUES> 13,594,577
<CGS> 6,996,345
<TOTAL-COSTS> 13,540,238
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,436,685
<INCOME-PRETAX> (2,380,422)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,380,422)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,380,422)
<EPS-BASIC> (.33)
<EPS-DILUTED> (.33)
</TABLE>
