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 March 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _________________ to ________________________
Commission file number 0-27378
NuCo2 Inc.
(Exact Name of Registrant as Specified in Its Charter)
Florida 65-0180800
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2800 SE 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 March 31, 2000
----- -----------------------------
Common Stock, $.001 par value 7,274,682 shares
<PAGE>
NuCo2 Inc.
Index Page
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 2000 and 3
June 30, 1999
Consolidated Statements of Operations for the Three Months
Ended March 31, 2000 and March 31, 1999 4
Consolidated Statements of Operations for the Nine Months
Ended March 31, 2000 and March 31, 1999 5
Consolidated Statement of Shareholders' Equity for the Nine
Months Ended March 31, 2000 6
Consolidated Statements of Cash Flows for the Nine Months
Ended March 31, 2000 and March 31, 1999 7
Notes to Consolidated Financial Statements 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 11
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 16
ABOUT MARKET RISK
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
NuCo2 Inc.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, 2000 June 30, 1999
-------------- -------------
(unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 148,994 $ 1,579,191
Trade accounts receivable; net of allowance for doubtful
accounts of $965,162 and $557,592, respectively 7,758,535 6,767,716
Inventories 239,710 213,605
Prepaid expenses and other current assets 1,693,015 593,487
------------- -------------
Total current assets 9,840,254 9,153,999
------------- -------------
Property and equipment, net 106,552,974 99,664,890
------------- -------------
Other assets:
Goodwill, net 20,736,585 21,645,293
Deferred charges, net 2,478,843 2,915,167
Customer lists, net 2,112,922 2,897,638
Restrictive covenants, net 1,657,092 1,928,700
Deferred lease acquisition costs, net 3,512,854 3,236,919
Deposits 308,203 187,595
------------- -------------
30,806,499 32,811,312
------------- -------------
$ 147,199,727 $ 141,630,201
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 32,509 $ 96,748
Accounts payable 10,893,609 6,701,695
Accrued expenses 937,425 747,631
Accrued interest 2,561,161 1,473,704
Accrued payroll 380,087 543,924
Other current liabilities 273,362 45,570
------------- -------------
Total current liabilities 15,078,153 9,609,272
Long-term debt, excluding current maturities 50,089,063 43,615,025
Subordinated debt 38,914,062 38,748,695
Customer deposits 2,174,406 1,924,528
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Total liabilities 106,255,684 93,897,520
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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 7,274,682 and 7,216,664, respectively 7,275 7,217
Additional paid-in capital 64,835,171 64,831,748
Accumulated deficit (23,898,403) (17,106,284)
------------- -------------
Total shareholders' equity 40,944,043 47,732,681
------------- -------------
$ 147,199,727 $ 141,630,201
============= =============
</TABLE>
3
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NuCo2 Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
Net Sales $ 14,812,246 $ 12,008,422
------------ -------------
Costs and expenses:
Cost of products sold 7,409,752 6,459,627
Selling, general and administrative expenses 3,223,242 2,703,649
Depreciation and amortization 3,923,007 3,229,969
------------ -------------
14,556,001 12,393,245
------------ -------------
Operating Income (loss) 256,245 (384,823)
Interest expense, net 2,502,443 1,892,699
------------ -------------
Net (loss) $ (2,246,198) $ (2,277,522)
------------ -------------
Basic and Diluted EPS:
Net (loss) $ (.31) $ (.32)
============ =============
Weighted average number of common and common
equivalent shares outstanding
Basic and Diluted 7,246,104 7,216,664
============ =============
</TABLE>
4
<PAGE>
NuCo2 Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended
-----------------
March 31, 2000 March 31, 1999
-------------- --------------
Net Sales $42,101,179 $34,123,575
----------- -----------
Costs and expenses:
Cost of products sold 21,151,043 18,282,207
Selling, general and administrative expenses 9,011,863 7,602,121
Depreciation and amortization 11,350,698 9,170,979
----------- -----------
41,513,604 35,055,307
----------- -----------
Operating Income (loss) 587,575 (931,732)
Interest expense, net 7,379,694 5,275,820
----------- ------------
Net (loss) $(6,792,119) $(6,207,552)
=========== ============
Basic and Diluted EPS:
Net (loss) $ (.94) $ (.86)
=========== ============
Weighted average number of common and common
equivalent shares outstanding
Basic and Diluted 7,226,411 7,216,664
============ ============
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, 1999 7,216,664 $ 7,217 $ 64,831,748 $(17,106,284) $ 47,732,681
Issuance of 633 shares of Common
Stock - exercise of options 633 1 3,480 -- 3,481
Issuance of 57,385 shares of Common 57,385 57 (57) -- --
Stock - exercise of warrants
Net (loss) -- -- -- (6,792,119) (6,792,119)
------------ ------------ ------------ ------------ ------------
Balance March 31, 2000 7,274,682 $ 7,275 $ 64,835,171 $(23,898,403) $ 40,944,043
============ ============ ============ ============ ============
</TABLE>
6
<PAGE>
NuCo2 Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
Net (loss) $(6,792,119) $ (6,207,552)
Cash flows from operating activities:
Adjustments to reconcile net (loss) to net cash provided
by operating activities:
Depreciation and amortization of property and equipment 7,931,061 6,366,101
Amortization of other assets 3,419,637 2,804,878
Amortization of original issue discount 165,367 32,143
Loss on disposal of property and equipment 663,345 682,037
Changes in operating assets and liabilities:
Decrease (increase) in:
Trade accounts receivable (990,819) (2,211,838)
Inventories (26,105) (17,844)
Prepaid expenses and other current assets (1,099,528) (971,357)
Increase (decrease) in:
Accounts payable 4,191,914 398,241
Accrued expenses 189,794 (146,654)
Accrued payroll (163,837) 29,587
Accrued interest 1,087,457 1,110,886
Other current liabilities 227,792 28,320
Customer deposits 249,878 584,743
------------ ------------
Net cash provided by operating activities 9,053,837 2,481,691
------------ ------------
Cash flows from investing activities:
Proceeds from disposal of property and equipment 63,110 83,980
Purchase of property and equipment (15,469,721) (18,751,286)
Acquisition of businesses -- 45,460
(Increase) in deposits (120,608) (48,409)
Increase in deferred lease acquisition costs (1,137,479) (1,285,969)
------------ ------------
Net cash (used in) investing activities (16,664,698) (19,956,224)
------------ ------------
Cash flows from financing activities:
Repayment of long-term debt (90,201) (102,063)
Proceeds from issuance of long-term debt and subordinated debt 6,500,000 18,500,000
Increase in deferred charges (232,616) (52,852)
Exercise of warrants and options 3,481 --
------------ ------------
Net cash provided by financing activities 6,180,664 18,345,085
------------ ------------
Net increase (decrease) in cash and cash equivalents (1,430,197) 870,552
Cash and cash equivalents at the beginning of period 1,579,191 336,510
------------ ------------
Cash and cash equivalents at the end of period $ 148,994 $ 1,207,062
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 6,130,504 $ 4,153,560
============ ============
Income taxes $ 0 $ 0
============ ============
</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 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
Incremental shares for stock options and warrants calculated
pursuant to the treasury stock method for the three and nine months ended March
31, 2000 were 952,879 and 502,806, 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 for $17.00 per
share and 43,715 shares for $14.64 per share were outstanding during the three
and nine months ended March 31, 2000, 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 nine months ended March
31, 1999 were 39,721 and 32,888, 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, 869,833 shares
and 390,956 shares for $14.64 -$17.00 per share, $11.25-$12.50 per share and
$8.94-$11.00 per share, respectively, were outstanding during all or a portion
of the three and nine months ended March 31, 1999, 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.
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 and gross margin factors. In February 2000,
the agreements governing the Amended SunTrust Facility, were amended to adjust
certain financial covenants for the quarter ending December 31, 1999 and
prospectively.
8
<PAGE>
A total of $49.75 million was outstanding pursuant to the Amended
SunTrust Facility with interest from 9.29% to 9.51% per annum as of March 31,
2000.
As of March 31, 2000, 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% per annum
until such quarter that a certain financial ratio was met. For the quarter ended
December 31, 1999 and prospectively, the ratio was met and the interest rate on
the Notes was 12% per annum. In January 2000, the agreements governing the 12%
Senior Subordinated Promissory Notes were amended to adjust certain financial
covenants for the quarter ending December 31, 1999 and prospectively.
Note 5. Shareholders' Equity
In 1995, the Company adopted the 1995 Stock Option Plan (the "1995
Plan"). Under the 1995 Plan, the Company has reserved 1,550,000 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 March 31, 1999 and 2000,
options for 278,847 shares and 484,344 shares were exercisable, respectively.
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 23,179 $5.50-$11.25 $10.11
Exercised 633 $5.50 $5.50
------------ ------------------ ------------
Outstanding at March 31, 2000 780,414 $5.50-$11.28 $9.30
============ ================== ============
</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
9
<PAGE>
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 March 31, 1999 and 2000,
options to purchase 12,000 shares and 14,000 shares, respectively, were
exercisable and options for 28,000 and 36,000 shares, respectively, were
outstanding.
On February 14, 2000, Citizens Financial Group, Inc., the successor
in interest to State Street Bank and Trust Company, exercised warrants to
purchase 57,385 shares of Common Stock pursuant to the cashless exercise
provision contained in the warrants. In connection with the cashless exercise,
warrants to purchase 27,532 shares of Common Stock were cancelled.
Note 6. Operating Leases
The Company entered into 26 operating leases from July 1, 1999
through March 31, 2000. Two leases were for storage and warehouse facilities
with aggregate annual rentals of approximately $16,000 expiring in 2003. Twenty
four leases were for trucks with aggregate annual rentals of approximately
$274,000 expiring at various dates through 2006.
Note 7. Subsequent Events
In May 2000, the Company sold 5,000 shares of its 8% Cumulative
Convertible Preferred Stock, no par value (the "Convertible Preferred Stock"),
for $1,000 per share (the "Liquidation Preference"). Cumulative dividends are
payable quarterly in arrears at the rate of 8.0% per annum on the Liquidation
Preference, and, to the extent not paid in cash, will be added to the
Liquidation Preference. Shares of the Convertible Preferred Stock may be
converted into shares of Common Stock at any time at a conversion price of $9.47
per share, which represents a 20% premium to average closing price of the Common
Stock on the Nasdaq Stock Market for the 20 trading days prior to May 12, 2000.
Additionally, the Company must redeem the Convertible Preferred Stock upon the
occurrence of a change in control of the Company.
Simultaneously with the sale of the Convertible Preferred Stock, the
agreements governing the Amended SunTrust Facility and the 12% Senior
Subordinated Promissory Notes were amended. The Amended SunTrust Facility was
amended to adjust the borrowing base and to change certain financial covenants
for the quarter ending June 30, 2000 and prospectively. The 12% Senior
Subordinated Promissory Notes were amended to adjust certain financial covenants
for the quarter ended March 31, 2000 and prospectively.
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. 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 89 service locations in 44 states servicing
approximately 70,000 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 third 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 $23.9 million
at March 31, 2000.
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 March 31, 2000, 52% of our stationary service locations were open
over three years, 38% were open two to three years, 9% were open one to two
years and 1% was open under one year. For the three months ended March 31, 2000,
depots open over three years averaged a 57% gross margin; for the three months
ended March 31, 1999, those same depots averaged a 56% gross margin. Depots open
two to three years as of March 31, 2000 averaged a 42% gross margin for the most
recent quarter; for the comparable period of last year, these depots averaged a
38% gross margin. Depots open one to two years averaged a 26% gross margin for
the quarter ended March 31, 2000 as compared to these depots having a 2% gross
margin for the quarter ended March 31, 1999. For the quarter ended March 31,
2000, depots open less than one year had a 3% gross margin.
11
<PAGE>
Additionally, we operate 19 mobile service locations with an average 39% gross
margin for the quarter ended March 31, 2000 compared to 14 mobile service
locations with an average gross margin of 37% for the quarter ended March 31,
1999. 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 generally
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 at our oldest
depots 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 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 March 31, 2000, EBITDA was $4.2 million, or $16.7 million
annualized, the highest for any quarter in 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 Nine Months Ended
March 31, March 31,
--------- ---------
2000 1999 2000 1999
---- ---- ---- ----
Income Statement Data:
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 50.0 53.8 50.2 53.5
Selling, general and administrative expenses 21.8 22.5 21.4 22.3
Depreciation and amortization 26.5 26.9 27.0 26.9
----- ----- ----- -----
Operating income (loss) 1.7 (3.2) 1.4 (2.7)
----- ----- ----- -----
Interest expense, net 16.9 15.8 17.5 15.5
----- ----- ----- -----
Net loss (15.2%) (19.0%) (16.1%) (18.2%)
===== ===== ===== =====
Other Data:
Operating income before depreciation and amortization
(EBITDA) 28.2% 23.7% 28.4% 24.1%
===== ===== ===== =====
</TABLE>
12
<PAGE>
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999
Net Sales
Net sales increased by $2.8 million, or 23.3%, from $12.0 million
in the 1999 period to $14.8 million in the 2000 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 March 31, 2000, there were
approximately 55,000 Company owned and 10,000 customer owned bulk CO2 systems in
service, an increase of 12,000, or 21.8%, over the approximately 44,000 Company
owned and 9,000 customer owned bulk CO2 systems in service at March 31, 1999.
Costs of Products Sold
Cost of products sold increased by $950,000, from $6.5 million in
the 1999 period to $7.4 million in the 2000 period and decreased as a percentage
of net sales from 53.8% to 50.0%. The dollar increase is attributable to our
continued growth. The percentage decrease is attributable to a decrease in fully
loaded route drivers, CO2 purchases and depot expenses. Fully loaded route
drivers increased by $343,000 from $2.0 million in the 1999 period to $2.3
million in the 2000 period and decreased as a percentage of net sales from 16.6%
to 15.7%. CO2 purchases increased by $185,000 from $1.6 million in the 1999
period to $1.8 million in the 2000 period and decreased as a percentage of net
sales from 13.1% to 11.9%. Depot expenses decreased as a percentage of net sales
from 5.2% in the 1999 period to 4.3% in the 2000 period. We operated 89 service
locations at March 31, 2000 compared to 83 service locations at March 31, 1999.
When we open new service locations and expand into new markets, higher costs
expressed as a percentage of net sales are incurred until route density is
achieved. At March 31, 2000, we serviced over 400 bulk CO2 customers per
delivery vehicle from 39% of our service locations.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $520,000
from $2.7 million in the 1999 period to $3.2 million in the 2000 period and
decreased as a percentage of net sales from 22.5% to 21.8%. 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 March 31, 1999, we had operations in
44 states and employed 160 marketing and administrative employees and at March
31, 2000, we had operations in 44 states and employed 191 marketing and
administrative employees.
Depreciation and Amortization
Depreciation and amortization increased by $693,000 from $3.2
million in the 1999 period to $3.9 million in the 2000 period. As a percentage
of net sales, such expenses decreased from 26.9% in the 1999 period to 26.5% in
the 2000 period. Depreciation expense increased by $503,000 from $2.3 million in
the 1999 period to $2.8 million in the 2000 period principally due to the
increase in bulk CO2 systems leased to customers. As a percentage of net sales,
depreciation expense decreased from 18.9% in the 1999 period to 18.7% in the
2000 period. Amortization expense increased by $190,000 from $961,000 in the
1999 period to $1.2 million in the 2000 period primarily due to amortization
related to deferred charges and deferred lease acquisition costs. As a
percentage of net sales, amortization expense decreased from 8.0% to 7.8%.
Operating Income
For the reasons described above, operating income was $256,000, or
1.7% of net sales, in the 2000 period, compared to an operating loss of
$385,000, or (3.2%) of net sales, in the 1999 period.
Interest Expense
Net interest expense increased by $610,000 from $1.9 million in the
1999 period to $2.5 million in the 2000 period and increased as a percentage of
net sales from 15.8% to 16.9%. This increase is primarily attributable to
increased level of long-term debt and subordinated debt in the 2000 period as
compared to the 1999 period.
Net Loss
For the reasons described above, net loss decreased by $31,000, or
1.4%, in the 1999 period compared to the 2000 period. No provision for income
tax expense in either the 1999 period or the 2000 period has been made due to
historical net losses.
13
<PAGE>
EBITDA
For the reasons described above, EBITDA, representing operating
income plus depreciation and amortization, increased by $1.3 million, or 46.9%,
from $2.8 million in the 1999 period to $4.2 million in the 2000 period and
increased as a percentage of net sales from 23.7% to 28.2%, respectively.
Nine Months Ended March 31, 2000 Compared to Nine Months Ended March 31, 1999
Net Sales
Net sales increased by $8.0 million, or 23.4%, from $34.1 million in
the 1999 period to $42.1 million in the 2000 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 March 31, 2000, there were approximately
55,000 Company owned and 10,000 customer owned bulk CO2 systems in service, an
increase of 12,000, or 21.8%, over the approximately 44,000 Company owned and
9,000 customer owned bulk CO2 systems in service at March 31, 1999.
Cost of Products Sold
Cost of products sold increased by $2.9 million, from $18.3 million
in the 1999 period to $21.2 million in the 2000 period and decreased as a
percentage of net sales from 53.5% to 50.2%. The dollar increase is attributable
to our continued growth. The percentage decrease is attributable to a decrease
in fully loaded route drivers, depot expenses and CO2 purchases. Fully loaded
route drivers increased by $884,000 from $6.1 million in the 1999 period to $7.0
million in the 2000 period and decreased as a percentage of net sales from 17.9%
to 16.6%. Depot expenses decreased as a percentage of net sales from 5.2% in the
1999 period to 4.2% in the 2000 period. CO2 purchases increased by $800,000 from
$4.5 million in the 1999 period to $5.3 million in the 2000 period and decreased
as a percentage of net sales from 13.2% to 12.6%. We operated 89 service
locations at March 31, 2000 compared to 83 service locations at March 31, 1999.
When we open new service locations and expand into new markets, higher costs
expressed as a percentage of net sales are incurred until route density is
achieved.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $1.4
million from $7.6 million in the 1999 period to $9.0 million in the 2000 period
and decreased as a percentage of net sales from 22.3% to 21.4%. The dollar
increase is 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 March 31, 1999, we had operations in
44 states and employed 160 marketing and administrative employees and at March
31, 2000, we had operations in 44 states and employed 191 marketing and
administrative employees.
Depreciation and Amortization
Depreciation and amortization increased by $2.2 million from $9.2
million in the 1999 period to $11.4 million in the 2000 period. As a percentage
of net sales, such expenses increased from 26.9% in the 1999 period to 27.0% in
the 2000 period. Depreciation expense increased by $1.6 million from $6.4
million in the 1999 period to $7.9 million in the 2000 period principally due to
the increase in bulk CO2 systems leased to customers. As a percentage of net
sales, depreciation expense increased from 18.7% in the 1999 period to 18.8% in
the 2000 period. Amortization expense increased by $615,000 from $2.8 million in
the 1999 period to $3.4 million in the 2000 period primarily due to amortization
related to deferred charges and deferred lease acquisition costs. As a
percentage of net sales, amortization expense decreased from 8.2% to 8.1%.
Operating Income
For the reasons described above, operating income was $588,000, or
1.4% of net sales, in the 2000 period, compared to an operating loss of
$932,000, or (2.7%) of net sales, in the 1999 period.
14
<PAGE>
Interest Expense
Net interest expense increased by $2.1 million from $5.3 million in
the 1999 period to $7.4 million in the 2000 period and increased as a percentage
of net sales from 15.5% to 17.5%. This increase is attributable to the increased
level of long-term debt and subordinated debt in the 2000 period as compared to
the 1999 period as well as an increase of two percent in interest rates for the
three months ended September 30, 1999 on $30.0 million of subordinated debt.
Net Loss
For the reasons described above, net loss increased by $585,000, or
9.4%, from $6.2 million in the 1999 period to $6.8 million in the 2000 period.
No provision for income tax expense in either the 1999 period or the 2000 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 $3.7 million, or 44.9%,
from $8.2 million in the 1999 period to $11.9 million in the 2000 period and
increased as a percentage of net sales from 24.1% to 28.4%, respectively.
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 March 31, 2000, we
anticipated making cash capital expenditures of at least $5.0 million to $10.0
million during the remaining three 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 and gross margin factors. 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.
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.
In January and February 2000, the agreements governing the 12%
Senior Subordinated Promissory Notes and the Amended SunTrust Facility,
respectively, were amended to adjust certain financial covenants for the quarter
ending December 31, 1999 and prospectively.
15
<PAGE>
In May 2000, we sold 5,000 shares of our 8% Cumulative Convertible
Preferred Stock, no par value (the "Convertible Preferred Stock"), for $1,000
per share (the "Liquidation Preference"). Cumulative dividends are payable
quarterly in arrears at the rate of 8.0% per annum on the Liquidation
Preference, and, to the extent not paid in cash, will be added to the
Liquidation Preference. Shares of the Convertible Preferred Stock may be
converted into shares of Common Stock at any time at a conversion price of $9.47
per share, which represents a 20% premium to average closing price of the Common
Stock on the Nasdaq Stock Market for the 20 trading days prior to May 12, 2000.
Additionally, we must redeem the Convertible Preferred Stock upon the occurrence
of a change in control of the Company.
Simultaneously with the sale of the Convertible Preferred Stock, the
agreements governing the Amended SunTrust Facility and the 12% Senior
Subordinated Promissory Notes were amended. The Amended SunTrust Facility was
amended to adjust the borrowing base and to change certain financial covenants
for the quarter ending June 30, 2000 and prospectively. The 12% Senior
Subordinated Promissory Notes were amended to adjust certain financial covenants
for the quarter ended March 31, 2000 and prospectively.
During the nine months ended March 31, 2000, our capital resources
included cash flows from operations and available borrowing capacity under the
Amended SunTrust Facility. As of March 31, 2000, a total of $49.75 million was
outstanding under the Amended SunTrust Facility with interest at three hundred
fifty basis points above the applicable London InterBank Offering Rate ("LIBOR")
(9.29% to 9.51% at March 31, 2000).
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 March 31, 2000, we had negative working capital of $5.2 million.
Cash Flows from Operating Activities. For the nine months ended
March 31, 1999 and March 31, 2000, net cash provided by operating activities was
$2.5 million and $9.1 million, respectively. The increase from the 1999 period
to the 2000 period of $6.6 million is primarily due to an increase in the net
loss of $585,000 while depreciation and amortization increased by $2.2 million
from the 1999 period to the 2000 period and an increase of $400,000 in accounts
payable in the 1999 period compared to a $4.2 million increase in the 2000
period.
Cash Flows from Investing Activities. For the nine months ended
March 31, 1999 and March 31, 2000, net cash used in investing activities was
$20.0 million and $16.7 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 nine months ended
March 31, 1999 and March 31, 2000, cash flows provided by financing activities
were $18.3 million and $6.2 million, respectively. For the nine months ended
March 31, 1999 and March 31, 2000, net cash provided by financing activities was
primarily from the issuance of long-term debt.
Year 2000
Our computer and other business operating systems were unaffected by
the "Year 2000" problem, having successfully rolled over from 1999 to 2000. We
are also unaware of any Year 2000 issues affecting any of our significant
business partners, suppliers or customers.
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.
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 March 31, 2000, a total of $49.75 million was outstanding under the
Amended SunTrust Facility with interest at three hundred fifty basis points
above the applicable LIBOR rate (9.29% to 9.51% at March 31, 2000). Based upon
$49.75 million outstanding under the Amended SunTrust Facility at March 31,
2000, our annual interest cost under the Amended SunTrust Facility would
increase by $498,000 for each one percent increase in LIBOR (i.e., from 8.0% to
9.0%).
In order to reduce our exposure to increases in LIBOR, and
consequently to increases in interest payments, on June
16
<PAGE>
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) Exhibits.
27 - Financial Data Schedule.
(b) Reports on Form 8-K.
(1) The Company filed a Form 8-K dated March 28, 2000 reporting an
Item 5 event.
17
<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: May 15, 2000 By: /s/ Joann Sabatino
-----------------------------
Joann Sabatino
Chief Financial Officer
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the NuCo2
Inc. Consolidated Financial Statements as of March 31, 2000 and is qualified in
its entirety by reference to such Consolidated Financial Statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> MAR-31-2000
<CASH> 148,994
<SECURITIES> 0
<RECEIVABLES> 8,723,697
<ALLOWANCES> 965,162
<INVENTORY> 239,710
<CURRENT-ASSETS> 9,840,254
<PP&E> 134,732,297
<DEPRECIATION> 28,179,323
<TOTAL-ASSETS> 147,199,727
<CURRENT-LIABILITIES> 15,078,153
<BONDS> 0
<COMMON> 7,275
0
0
<OTHER-SE> 40,944,043
<TOTAL-LIABILITY-AND-EQUITY> 147,199,727
<SALES> 42,101,179
<TOTAL-REVENUES> 42,101,179
<CGS> 21,151,043
<TOTAL-COSTS> 41,513,604
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,382,170
<INCOME-PRETAX> (6,792,119)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,792,119)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,792,119)
<EPS-BASIC> (0.94)
<EPS-DILUTED> (0.94)
</TABLE>
