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, 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 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, 2000
----- ---------------------------------
Common Stock, $.001 par value 7,275,015 shares
<PAGE>
NUCO2 INC.
Index
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 2000 and 3
June 30, 2000
Consolidated Statements of Operations for the Three Months
Ended September 30, 2000 and September 30, 1999 4
Consolidated Statement of Shareholders' Equity for the Three
Months Ended September 30, 2000 5
Consolidated Statements of Cash Flows for the Three Months
Ended September 30, 2000 and September 30, 1999 6
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 10
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 14
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 16
2
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
NUCO2 INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
ASSETS
<TABLE>
<CAPTION>
September 30, 2000 June 30, 2000
------------------ -------------
(unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 198 $ 279
Trade accounts receivable; net of allowance for doubtful
accounts of $666 and $622, respectively 8,901 8,862
Inventories 230 222
Prepaid expenses and other current assets 1,052 912
--------- ---------
Total current assets 10,381 10,275
--------- ---------
Property and equipment, net 107,752 107,120
--------- ---------
Other assets:
Goodwill, net 20,131 20,434
Deferred charges, net 3,072 3,425
Customer lists, net 1,654 1,871
Restrictive covenants, net 1,485 1,567
Deferred lease acquisition costs, net 3,728 3,685
Deposits 245 172
--------- ---------
30,315 31,154
--------- ---------
$ 148,448 $ 148,549
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 34 $ 33
Accounts payable 8,010 8,120
Accrued expenses 928 582
Accrued interest 2,226 1,485
Accrued payroll 400 376
Other current liabilities 330 263
--------- ---------
Total current liabilities 11,928 10,859
Long-term debt, excluding current maturities 54,072 53,080
Subordinated debt 39,024 38,969
Customer deposits 2,526 2,351
--------- ---------
Total liabilities 107,550 105,259
--------- ---------
Commitments and contingencies
Redeemable Preferred Stock 5,151 5,050
--------- ---------
Shareholders' equity:
Preferred Stock; no par value; 5,000,000 shares authorized;
5,000 shares issued and outstanding -- --
Common stock; par value $.001 per share; 30,000,000 shares authorized;
issued and outstanding 7,275,015 shares at September 30, 2000
and June 30, 2000 7 7
Additional paid-in capital 64,621 64,722
Accumulated deficit (28,881) (26,489)
--------- ---------
Total shareholders' equity 35,747 38,240
--------- ---------
$ 148,448 $ 148,549
========= =========
</TABLE>
3
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NUCO2 INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
2000 1999
---- ----
<S> <C> <C>
Net Sales $ 16,113 $ 13,595
Costs and expenses:
Cost of products sold 8,077 6,996
Selling, general and administrative expenses 3,492 2,930
Depreciation and amortization 4,244 3,615
-------- --------
15,813 13,541
-------- --------
Operating Income 300 54
Interest expense net 2,692 2,434
-------- --------
Net (loss) $ (2,392) $ (2,380)
======== ========
Basic and Diluted EPS:
Net (loss) $ (0.34) $ (0.33)
======== ========
Weighted average number of common and common
equivalent shares outstanding
Basic and Diluted 7,275 7,217
======== ========
</TABLE>
4
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NUCO2 INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In thousands, except share amounts)
(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, 2000 7,275,015 $ 7 $ 64,722 $ (26,489) $ 38,240
Redeemable Preferred Stock dividend -- -- (101) -- (101)
Net (loss) -- -- -- (2,392) (2,392)
--------- --------- --------- --------- ---------
Balance, September 30, 2000 7,275,015 $ 7 $ 64,621 $ (28,881) $ 35,747
========= ========= ========= ========= =========
</TABLE>
5
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NUCO2 INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
2000 1999*
---- -----
Cash flows from operating activities:
<S> <C> <C>
Net (loss) $(2,392) $(2,380)
Adjustments to reconcile net (loss) to net cash provided
by operating activities:
Depreciation and amortization of property and equipment 2,993 2,497
Amortization of other assets 1,251 1,118
Amortization of original issue discount 55 55
Loss on disposal of property and equipment 47 7
Loss on abandonment 152 198
Changes in operating assets and liabilities:
Decrease (increase) in:
Trade accounts receivable (39) 206
Inventories (8) (10)
Prepaid expenses and other current assets (140) (798)
Increase (decrease) in:
Accounts payable (110) 1,872
Accrued expenses 346 (707)
Accrued payroll 25 86
Accrued interest 741 821
Other current liabilities 68 1
Customer deposits 175 158
------- -------
Net cash provided by operating activities 3,164 3,124
------- -------
Cash flows from investing activities:
Proceeds from disposal of property and equipment -- 2
Purchase of property and equipment (3,803) (4,875)
(Increase) in deposits (73) --
Increase in deferred lease acquisition costs (353) (363)
------- -------
Net cash (used in) investing activities (4,229) (5,236)
------- -------
Cash flows from financing activities:
Repayment of long-term debt (8) (37)
Proceeds from issuance of long-term debt 1,000 1,000
Increase in deferred charges (8) (40)
------- -------
Net cash provided by financing activities 984 923
------- -------
Decrease in cash and cash equivalents (81) (1,189)
Cash and cash equivalents at the beginning of period 279 1,579
------- -------
Cash and cash equivalents at the end of period $ 198 $ 390
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 1,896 $ 1,591
======= =======
Income taxes $ -- $ --
======= =======
</TABLE>
In 2000, the Company increased the carrying amount of the redeemable preferred
stock by $101 for dividends that have not been paid and accordingly reduced
additional paid-in capital by a like amount.
*Restated to conform to current year's classification.
6
<PAGE>
NUCO2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(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, 2000 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, 2000. The consolidated results of
operations for the periods presented are not necessarily indicative of the
results to be expected for the full fiscal year.
NOTE 2. NET (LOSS) PER COMMON SHARE
Incremental shares for stock options and warrants calculated
pursuant to the treasury stock method for the three months ended September 30,
2000 were 202,960. 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, 254,810 shares and 415,224 shares for $14.64 -
$17.00 per share, $11.25 - $12.50 per share and $7.75 - $11.00 per share,
respectively, were outstanding during the three months ended September 30, 2000,
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.
Basic (loss) per common share has been computed by dividing the net
(loss), after giving effect to preferred stock dividends, by the weighted
average number of common shares outstanding during the period. Diluted (loss)
per common share has been computed on the basis of the weighted average number
of common and, if dilutive, common equivalent shares outstanding during the
period. Common equivalent shares for stock options and warrants calculated
pursuant to the treasury stock method were not included in diluted EPS because
they would have been antidilutive. Also, not included in the computation of
diluted EPS was the effect of outstanding shares of Convertible Preferred Stock
(See Note 5) using the "if converted" method, because the effect would be
antidilutive.
Years Ended June 30,
--------------------
2000 1999
---- ----
Net (loss) $ (2,392) $(2,380)
Preferred Stock dividends (101) --
------- -------
Net (loss) available for common shareholders $ (2,493) $(2,380)
======= =======
Weighted average outstanding shares of Common Stock 7,275 7,217
(Loss) per share - Basic and Diluted $ (0.34) $ (0.33)
======= =======
7
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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 ("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, except the
Company may accrue and accumulate, but not pay, cash dividends on the
Convertible Preferred Stock (See Note 5). The Company is also 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 September 2000, the Amended SunTrust Facility was
amended to adjust a certain financial covenant for the quarter ended September
30, 2000 and prospectively.
A total of $53.75 million was outstanding pursuant to the Amended
SunTrust Facility with interest from 10.38% to 10.43% per annum as of September
30, 2000.
As of September 30, 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 1, 2000 and it terminates on September 3, 2002. Pursuant to the Swap,
the Company pays a fixed rate of 7% per annum and receives a LIBOR-based
floating rate.
In June 1998, the FASB issued Statement 133 "Accounting for
Derivative Instruments and Hedging Activities", which was later amended by FASB
137, and is effective for all fiscal periods beginning after June 15, 2000. As
of June 30, 2000, the fair value of the Company's interest rate swap was not
material.
NOTE 4. SUBORDINATED DEBT
In October 1997, the Company issued $30.0 million of its 12% Senior
Subordinated Promissory Notes ("Notes") with interest only payable semi-annually
on April 30 and October 31, due October 31, 2004. The Notes were sold with
detachable seven year warrants to purchase an aggregate of 655,738 shares of
Common Stock at an exercise price of $16.40 per share. The effective interest
rate on the Notes is 12.1% per annum after giving effect to the amortization of
the original issue discount. The Company is required to meet certain affirmative
and negative covenants. 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 12% Senior Subordinated Promissory Notes ("Additional Notes"). Except for
their October 31, 2005 maturity date, the Additional Notes are substantially
identical to the Notes described above. 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 share. 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 share. The effective interest rate on
the Additional Notes is 13.57% per annum after giving effect to the amortization
of the original issue discount. Additionally, from May 4, 1999 to September 30,
1999, the interest rate on the original $30.0 million of Notes increased to 14%
from 12% per annum. Interest will increase from 12% to 14% per annum during any
quarter in which certain financial ratios are not met.
NOTE 5. REDEEMABLE PREFERRED STOCK
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 initial "Liquidation Preference"). Cumulative
dividends are payable quarterly in arrears at the rate of 8% per annum on the
Liquidation Preference, and, to the extent not paid in cash, are added to the
Liquidation Preference. During the fiscal year ended June 30, 2000, and for the
three months ended September 30, 2000, the carrying amount (and Liquidation
Preference) of the Convertible Preferred Stock was increased by $50 and $101,
respectively, for dividends accrued. 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,
8
<PAGE>
which represents a 20% premium to the average closing price of the Common Stock
on the Nasdaq National Market for the 20 trading days prior to May 12, 2000. In
connection with the sale, costs in the amount of $65 were charged to paid-in
capital. The Convertible Preferred Stock shall be mandatorily redeemed by the
Company within 30 days after a Change in Control (as defined) of the Company
(the date of such redemption being the "Mandatory Redemption Date") at an amount
equal to the then effective Liquidation Preference plus accrued and unpaid
dividends thereon from the last dividend payment date to the Mandatory
Redemption Date, plus if the Mandatory Redemption Date is on or prior to the
fourth anniversary of the issuance of the stock, the amount of any dividends
that would have accrued and been payable on the Convertible Preferred Stock from
the Mandatory Redemption Date through the fourth anniversary date.
In addition, outstanding shares of Convertible Preferred Stock vote on
an "as converted basis" with the holders of the Common Stock as a single class
on all matters that the holders of the Common Stock are entitled to vote upon.
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, RELIANCE ON KEY SUPPLIERS AND AVAILABILITY OF MANAGERIAL
PERSONNEL. THE FORWARD-LOOKING STATEMENTS ARE MADE AS OF THE DATE OF THIS FORM
10-Q AND WE ASSUME NO OBLIGATION TO UPDATE THE FORWARD-LOOKING STATEMENTS OR TO
UPDATE THE REASONS WHY ACTUAL RESULTS COULD DIFFER FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS.
OVERVIEW
We are the largest supplier in the United States of bulk CO2 systems
and bulk CO2 for carbonating and dispensing fountain beverages. As of September
30, 2000, we operated a national network of 93 service locations in 45 states
servicing approximately 74,000 bulk and high pressure customers. Currently 99%
of fountain beverage users in the Continental United States are within our
service area.
Growth in our customer base has averaged 50% annually from 1996 to
2000. Our rapid growth has been due to a combination of internal growth and
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 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 $12.0 million in fiscal
1996 to $58.0 million in fiscal 2000, an average increase of 50% 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 1998, 1999
and 2000, 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 (1) the rate of new bulk CO2 system
installations, (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 and (3) price increases.
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 $28.9 million
at September 30, 2000.
We believe that our future revenue growth, gains in gross margin and
profitability will be dependent upon increases in route density, price increases
for our services, improved operating efficiencies resulting from the
implementation of our leading edge delivery system technology and targeted
marketing of customers. Our route density is highest in Florida and is less
developed in the other areas where we presently have operations.
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Our experience has been that as our depots mature their gross
profit margins improve as volume grows and fixed costs remain essentially the
same. At September 30, 2000 and September 30, 1999, gross margins were in excess
of 60% at nine service locations and four service locations, respectively. Since
our new depot openings have slowed drastically over the last 24 months, on a
weighted average basis, we expect that gross margin improvements at our mature
depots will accelerate. We believe that over time many of our service locations
are capable of gross margins in excess of 60%. 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.
We believe that earnings before interest, taxes, depreciation and
amortization ("EBITDA") is the principal financial measure by which we should be
measured. 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 $3.7 million in fiscal 1996 to $16.1 million in fiscal 2000, an
average increase of 46% annually from fiscal 1996 to fiscal 2000. For the three
months ended September 30, 2000, EBITDA was $4.5 million, or $18.0 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:
Three Months Ended
September 30,
-------------
2000 1999
---- ----
Income Statement Data:
Net sales 100.0% 100.0%
Cost of products sold 50.1 51.5
Selling, general and administrative expenses 21.7 21.5
Depreciation and amortization 26.3 26.6
------- -------
Operating income 1.9 .4
Interest expense, net 16.7 17.9
------- -------
Net (loss) (14.8) (17.5)
======= =======
Other Data:
Operating income before depreciation and amortization
(EBITDA) 28.2% 27.0%
======= =======
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
NET SALES
Net sales increased $2.5 million, or 18.5%, from $13.6 million in
1999 to $16.1 million in 2000. 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, 2000, there were approximately 60,000 Company
owned and 10,000 customer owned bulk CO2 systems in service, an increase of
9,000, or 14.8%, over the approximately 51,000 Company owned and 10,000 customer
owned bulk CO2 systems in service at September 30, 1999.
COST OF PRODUCTS SOLD
Cost of products sold increased by $1.1 million, or 15.4%, from $7.0
million in 1999 to $8.1 million in 2000, and decreased as a percentage of net
sales from 51.5% in 1999 to 50.1% in 2000. The dollar increase is attributable
to our continued growth. Purchases increased by $0.2 million from $2.2 million
in 1999 to $2.4 million in 2000 and decreased as a percentage of net
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sales from 16.1% in 1999 to 15.1% in 2000. Fully loaded route drivers increased
by $0.6 million from $2.3 million in 1999 to $2.9 million in 2000 and increased
as a percentage of net sales from 17.2% in 1999 to 17.8% in 2000. Auto and truck
expenses increased $0.2 million from $1.3 million in 1999 to $1.5 million in
2000 and decreased as a percentage of net sales from 9.3% in 1999 to 9.1% in
2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by $0.6
million, or 19.2%, from $2.9 million in 1999 to $3.5 million in 2000, and
increased as a percentage of net sales from 21.5% in 1999 to 21.7% in 2000. The
dollar increase is primarily attributable to (1) an increase in administrative
salaries and related expenses, (2) an increase in telephone expense and (3) an
increase in bad debt expense. Fully loaded administrative and executive
personnel increased by $0.2 million from $1.4 million in 1999 to $1.6 million in
2000 and decreased as a percentage of net sales from 10.3% in 1999 to 10.0 in
2000. Telephone expense increased $0.1 million from $0.2 million in 1999 to $0.3
million in 2000 and is attributable to the introduction of a new mobile
information system for use in our field operations. Bad debt expense increased
$0.2 million from $0.1 million in 1999 to $0.3 million in 2000 and increased as
a percentage of sales from 0.7% in 1999 to 2.0% in 2000 and is primarily
attributable to increased reserves associated with certain high pressure
customers.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased by $0.6 million from $3.6
million in 1999 to $4.2 million in 2000. As a percentage of net sales, such
expense decreased from 26.6% in 1999 to 26.3 % in 2000. Depreciation expense
increased by $0.5 million from $2.5 million in 1999 to $3.0 million in 2000
principally due to the increase in bulk CO2 systems leased to customers. As a
percentage of net sales, depreciation expense increased from 18.4% in 1999 to
18.6% in 2000. Amortization expense increased by $0.1 million from $1.1 million
in 1999 to $1.2 million in 2000 primarily due to the increase in amortization of
deferred lease acquisition costs and deferred charges. As a percentage of net
sales, amortization expense decreased from 8.2% in 1999 to 7.8% in 2000.
OPERATING INCOME
For the reasons described above, operating income was $0.3 million,
or 1.9% of net sales, in 2000 compared to an operating income of $0.1 million,
or 0.4% of net sales, in 1999.
INTEREST EXPENSE
Net interest expense increased by $0.3 million, from $2.4 million in
1999 to $2.7 million in 2000, and decreased as a percentage of net sales from
17.9% in 1999 to 16.7% in 2000. The dollar increase is attributable to increased
levels of long-term debt and increased interest rates in 2000 as compared to
1999.
NET LOSS
For the reasons described above, net (loss) remained unchanged at
$(2.4) million in 1999 and 2000. No provision for income tax expense in either
the 1999 period or 2000 period has been made due to historical net losses.
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EBITDA
For the reasons described above, EBITDA, representing operating
income plus depreciation and amortization, increased by $0.8 million, or 23.8%,
from $3.7 million in 1999 to $4.5 million in 2000 and increased as a percentage
of net sales from 27.0% to 28.2%.
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, 2000, we
anticipated making cash capital expenditures of at least $5.0 million to $10.0
million during the remaining nine months of fiscal 2001, 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.
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 the average closing price of the
Common Stock on the Nasdaq National 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.
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 ("Amended SunTrust Facility"). The Amended SunTrust Facility amended and
restated our 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. We are entitled to select the Base Rate
or the London InterBank Offering Rate ("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, however, it contains a two year renewal option
subject to approval. Additionally, it is collateralized by substantially all of
our assets. We are precluded from declaring or paying any cash dividends, except
that we may accrue and accumulate, but not pay, cash dividends on the
Convertible Preferred Stock. We are also 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. 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. In September
2000, the Amended SunTrust Facility was amended to adjust a certain financial
covenant for the quarter ended September 30, 2000 and prospectively. 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.
During the three months ended September 30, 2000, our capital
resources included cash flows from operations and available borrowing capacity
under the Amended SunTrust Facility. As of September 30, 2000, a total of $53.75
million was outstanding under the Amended SunTrust Facility with interest at
three hundred seventy-five basis points above the applicable LIBOR (10.38% to
10.43% at September 30, 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 September 30, 2000, we had negative working
capital of $1.5 million. At June 30, 2000, we had negative working capital of
$0.6 million.
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Cash Flows from Operating Activities. For the three months ended
September 30, 2000 and September 30, 1999, net cash provided by operating
activities was $3.2 million and $3.1 million, respectively. The increase of $0.1
million in 2000 compared to 1999 is primarily attributable to the following: (1)
depreciation and amortization of property and equipment increased $0.5 million
from $2.5 million in 1999 to $3.0 million in 2000, (2) prepaid expenses and
other current assets increased $0.1 million in 2000 and increased $0.8 in 1999,
(3) accounts payable decreased $0.1 million in 2000 and increased $1.9 million
in 1999 and (4) accrued expenses increased $0.3 million in 2000 and decreased
$0.7 million in 1999.
Cash Flows from Investing Activities. For the three months ended
September 30, 2000 and September 30, 1999, net cash used in investing activities
was $4.2 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, 2000 and September 30, 1999, cash flows provided by financing
activities were $1.0 million and $0.9 million, respectively. For the three
months ended September 30, 2000 and September 30, 1999, 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.
Our bulk CO2 requirements contract with The BOC Group, Inc. ("BOC")
provides for annual adjustments in the purchase price for bulk CO2 based upon
increases or decreases in the Producer Price Index for Chemical and Allied
Products or the average percentage increase in the selling price of bulk
merchant carbon dioxide purchased by BOC's large, multi-location beverage
customers in the United States, however, such increases are limited to 3%
annually until June 2002.
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, 2000, a total of $53.75 million was outstanding under
the Amended SunTrust Facility with interest at three hundred seventy-five basis
points above the 180 day LIBOR rate (10.38% to 10.43% at September 30, 2000).
Based upon $53.75 million outstanding under the Amended SunTrust Facility at
September 30, 2000, our annual interest cost under the Amended SunTrust Facility
would increase by $0.5 million 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 August 31, 2000 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 1, 2000 and it terminates on September 3, 2002. Pursuant
to the Swap, we pay a fixed interest rate of 7% 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 7% 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.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit No. Exhibit
----------- -------
10.1 -- Fourth Amendment to Amended and Restated
Revolving Credit Agreement dated as of
September 28, 2000, by and among the
Company, SunTrust Bank, Bank Austria
Creditanstalt Corporate Finance, Inc.,
The Provident Bank, Bank Leumi Le-Israel
B.M., IBJ Whitehall Business Credit
Corporation and Hamilton Bank, N.A. (the
"Lenders") and SunTrust Bank, as agent
for the Lenders.
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, 2000.
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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 14, 2000 By: /s/ Joann Schirripa
-------------------
Joann Schirripa
Chief Financial Officer
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