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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction period from ___________ to ___________
Commission file number: 0-27378
NUCO2 INC.
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(Exact Name of Registrant as Specified in Its Charter)
Florida 65-0180800
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2800 S.E Market Place, Stuart, Florida 34997
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (561) 221-1754
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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(Title of Class)
Indicate by check mark 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 by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. / /
(continued next page)
The aggregate market value at September 19, 2000 of shares of the
Registrant's common stock, $.001 par value per share (based upon the closing
price of $7.125 per share of such stock on the Nasdaq National Market on such
date), held by non-affiliates of the Registrant was approximately $36,346,000.
Solely for the purposes of this calculation, shares held by directors and
executive officers of the Registrant have been excluded. Such exclusion should
not be deemed a determination or an admission by the Registrant that such
individuals are, in fact, affiliates of the Registrant.
At September 19, 2000, there were outstanding 7,275,015 shares of
the Registrant's common stock, $.001 par value.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Items 10, 11, 12 and 13 of Part III is
incorporated by reference to the Registrant's definitive proxy statement to be
filed not later than October 30, 2000 pursuant to Regulation 14A.
NUCO2 INC.
Index
Page
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PART I.
Item 1. Business. 1
Item 2. Properties. 9
Item 3. Legal Proceedings. 9
Item 4. Submission of Matters to a Vote of Security Holders. 9
PART II.
Item 5. Market For Registrant's Common Equity and
Related Stockholder Matters. 9
Item 6. Selected Financial Data. 11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations. 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 18
Item 8 Financial Statements and Supplementary Data. 18
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure. 18
PART III.
Item 10. Directors and Executive Officers of the Registrant. 18
Item 11. Executive Compensation. 18
Item 12. Security Ownership of Certain Beneficial Owners and Management. 18
Item 13. Certain Relationships and Related Transactions. 19
PART IV.
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K. 19
Signatures 22
Index to Financial Statements F-1
1. Business.
General
NuCo2 Inc. is the largest supplier in the United States of bulk CO2
systems and bulk CO2 for carbonating and dispensing fountain beverages. In most
instances, CO2 is presently supplied to fountain beverage users in the form of
gas, which is transported and stored in high pressure cylinders. Bulk CO2 is a
relatively new technology that is replacing high pressure CO2 as the beverage
carbonation system of choice. We are the first and only company to operate a
national network of service locations with over 99% of fountain beverage users
in the Continental United States within our current service area.
Our customers are many of the major national and regional restaurant
and convenience store chains, movie theater operators, theme parks, resorts and
sports venues, including:
Quick Serve Restaurants Casual/Dinner Houses
Burger King Captain D's Applebee's Landry's
Pizza Hut Sonic Drive-In Outback Steakhouse Red Lobster/Olive Garden
Taco Bell White Castle Chili's Shoney's
KFC Roy Rogers Ryan's Family Steak House Longhorn Steakhouse
McDonald's Dunkin' Donuts Pizzeria Uno Ponderosa Steak House
Wendy's Pizza Inn Hard Rock Cafe Friendly's Restaurant
Krystal Bumpers Drive-In Official All Star Cafe Ruby Tuesday
Hardee's Checker's Spaghetti Warehouse Roadhouse Grill
Churchs Chicken Steak'n Shake Don Pablo's Bahama Breeze
Arby's Carl's Jr. Chevy's Cooker Bar & Grill
Schlotzsky's Deli D'Angelo's Sandwich Shop Rio Bravo Cantina Bertucci's
Chick-Fil-A Sbarro Perkins Family Restaurants
Quizno's Classic Subs Panera Bread Company Cheesecake Factory
Papa Gino's
Contract Feeders Wholesale Clubs Convenience/Petroleum
Sodexho Operations BJ's Wholesale 7-Eleven Exxon
Host Marriott Costco Circle K Shell ETD
Daka International Sam's Club Coastal Mart E-Z Serve
ARAmark Total Petroleum Racetrac Petroleum
Fine Host Golden Pantry Spectrum Stores
Sport Services Handy Way Sunshine Jr.
Christy's Market Star Enterprises
Phillips 66 BP/Amoco
Conoco Farm Stores
Sports Venues Pantry Stores Tom Thumb
Pro Player Stadium
Madison Square Garden Movie Theatres
Georgia Dome Regal Cinemas General Cinema
Derby Lane American Multi Cinema United Artist Cinemas
AMF Bowling Centers Sony/Loew's Cinemas Wallace Theatres
Brunswick Recreation Centers Litchfield Cinemas
Raymond James Stadium
We are a Florida corporation, incorporated in 1990. Through a
combination of internal growth and over 30 acquisitions, we have expanded our
service area from one service location and 19 customers in Florida to 92 service
locations and approximately 73,000 bulk and high pressure CO2 customers in 45
states. Our customer base has increased by an average of 50% annually from 1996
to 2000. Today, the majority of our growth is driven by the conversion of high
pressure CO2 users to bulk CO2 systems.
1
Service Locations
[OBJECT OMITTED]
Customer Base
[OBJECT OMITTED]
2
Our bulk CO2 customer base is highest in Florida, Texas, Georgia,
California and New York.
Five States With Largest Bulk CO2 Customer Base
[OBJECT OMITTED]
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
$58.0 million in fiscal 2000, with an average increase of 50% annually from
fiscal 1996 to fiscal 2000. 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 share and
build route density. EBITDA has grown from $15,000 in fiscal 1991 to $16.1
million in fiscal 2000, with an average increase of 46% annually from fiscal
1996 to fiscal 2000.
Net Sales
[OBJECT OMITTED]
EBITDA
[OBJECT OMITTED]
3
Opportunity for Growth
CO2 is universally used for the carbonation and dispensing of
fountain beverages. Unlike high pressure cylinders, which are typically changed
out when empty and transported to the supplier's depot for refilling, bulk CO2
systems are permanently installed at the customer's site and are filled by the
supplier from a specialized bulk CO2 truck on a constant "stay fill" basis.
Advantages to users of bulk CO2 systems over high pressure cylinders include
enhanced safety, improved beverage quality and product yields, reduced employee
handling and cylinder storage requirements, and elimination of downtime and
product waste during high pressure cylinder changeovers. Consequently, we
believe that bulk CO2 systems will eventually displace most high pressure
cylinders in the fountain beverage market.
There are currently approximately 140,000 bulk CO2 beverage users in
the United States. Of these, approximately 68,000 are already our customers. We
also currently service approximately 5,000 high pressure CO2 customers and
estimate that there are approximately 800,000 fountain beverage users in the
Continental United States and therefore the bulk CO2 industry presents
substantial opportunity for growth.
Total Beverage CO2 Users (800,000)
[OBJECT OMITTED]
4
Products and Services
We offer our customers two principal services: (1) a stationary bulk
CO2 system installed on the customer's site and (2) routine filling of the bulk
CO2 system with bulk CO2 on a four week cycle. The bulk CO2 system installed at
a customer's site consists of a cryogenic vessel for the storage of bulk CO2 and
related valves, regulators and gas lines. The cryogenic vessel preserves CO2 in
its liquid form and then converts the liquid product to gaseous CO2, the
necessary ingredient for beverage carbonation. We offer bulk CO2 systems ranging
from 50 to 600 lbs. of CO2 capacity. This range of bulk CO2 system sizes permits
us to market our services to a broad range of potential customers.
Presently, we typically enter into a six year bulk CO2 system lease
and CO2 supply agreement with our customers. Generally, these agreements are
classified as one of two types: (1) "budget plan" service contracts or (2)
"rental plus per pound charge" contracts. Under budget plan contracts, customers
pay a fixed monthly charge for the lease of a bulk CO2 system installed on the
customer's site and refills of bulk CO2. The bulk CO2 is included in the monthly
rental charge up to a predetermined maximum annual volume. This arrangement is
appealing to the customer since we bear the initial cost of the equipment and
installation, with the customer only facing a predictable and modest monthly
usage fee. If the maximum annual volume of CO2 is exceeded, the customer is
charged on a per pound basis for additional bulk CO2 delivered. Under rental
plus per pound charge contracts, we also lease a bulk CO2 system to the
customer, but the customer is charged on a per pound basis for all bulk CO2
delivered. Although the bulk CO2 system is typically owned by us and leased to
the customer, some customers own their own bulk CO2 systems. Even with customers
that own their own their own bulk CO2 systems, we seek to arrange for long-term
bulk CO2 supply contracts.
We believe that the use of long-term contracts provides benefits to
both us and our customers. Customers are able to largely eliminate CO2 supply
interruptions and the need to operate CO2 equipment themselves, while the
contract adds stability to our revenue base. 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.
After the expiration of the initial term of a contract, the contract generally
renews unless we or the customer notifies the other of intent to cancel. To
date, our experience has been that contracts generally "roll-over" without a
significant portion terminating in any one year. The largest number
(approximately 26%) of our current contracts expire in 2003.
We also supply high pressure gases in cylinder form, including CO2,
helium and nitrogen. We estimate that we currently service approximately 5,000
high pressure CO2 customers, most of whom are very low volume users. Helium and
nitrogen are supplied mostly to existing customers in connection with filling
balloons and dispensing beer, respectively.
We have an agreement with The Coca-Cola Company that establishes a
framework to develop a strategic alliance between us for providing Coke's
fountain customers in the United States with quality CO2, CO2 dispensing
systems, technology and service that are superior to systems available today. If
we successfully develop a strategic alliance, the agreement ultimately
contemplates, among other things, that we will be the sole preferred provider of
bulk CO2 to Coke's customers, that we and Coke will develop differentiated CO2
sales and marketing programs to be used solely by Coke's and our sales
associates exclusively for Coke's customers, and that Coke will not proactively
market CO2 programs of other CO2 suppliers to customers that meet an agreed upon
customer profile.
We have an agreement with MiCell Technologies Inc. ("MiCell") to be
the exclusive supplier in the United States and Canada of bulk CO2 systems and
bulk CO2 to MiCell's customers in the dry cleaning industry that use the MICO2
garment cleaning fluid system technology developed and patented by MiCell. While
perchloroethylele ("perc") has been used effectively in the dry cleaning
industry for years, there are growing concerns that perc may be a health hazard
and tighter controls have been placed on its use. Dry cleaners and other
businesses that use perc must dispose of it as hazardous waste. The MICO2 system
is an alternative to perc and uses a combination of CO2 and specialty detergents
as a cleaning solvent. MiCell believes that the MICO2 system is environmentally
benign, non-carcinogenic, safe for garments and does a better job of cleaning
than any of the alternatives. MiCell completed field testing of the MICO2 system
and began its sale in November 1998. We currently service 13 MiCell customers
and expect that number to
5
increase if MiCell is successful in commercializing the MICO2 system. Tests of
the MICO2 system have indicated that the average dry cleaner customer will use
approximately 10 times the volume of bulk CO2 that an average fountain beverage
customer uses.
We also have an agreement with Geotechnical Instruments, Inc. to be
the exclusive distributor in the United States of stationary carbon dioxide
detectors. Escaped CO2 in an enclosed area displaces oxygen and can lead to
asphyxiation. Our bulk CO2 systems are typically installed in store rooms or
basements at a customer's site. Municipalities have increasingly been requiring
the use of carbon dioxide detectors as a preventive measure.
Marketing and Customers
At June 30, 2000, we serviced approximately 73,000 bulk and high
pressure CO2 customers, none of which accounted for more than 5% of our fiscal
2000 net sales. We market our bulk CO2 products and services to large customers
such as restaurant and convenience store chains, movie theater operators, theme
parks, resorts and sports venues. Our customers include most of the major
national and regional chains throughout the United States. We approach large
chains on a corporate or regional level for approval to become the exclusive
supplier of bulk CO2 products and services on a national basis or within a
designated territory. We then direct our sales efforts to the managers or owners
of the individual or franchised operating units. Our relationships with chain
customers in one geographic market frequently help us to establish service with
these same chains when we expand into new markets. After accessing the chain
accounts in a new market, we attempt to rapidly build route density by leasing
bulk CO2 systems to independent restaurants, convenience stores and theaters.
While the large chains offer immediate penetration on a national or regional
basis, the small operators are important accounts because they provide
geographic density which optimizes delivery efficiency and reduces costs on a
per customer basis. The introduction of smaller bulk CO2 systems (50 and 100 lb.
capacity vessels), which we helped develop, allows us to penetrate the market
for lower volume users of CO2 such as mall-based food courts, small restaurants
and mass-market retailers. Our products and services are sold by a sales force
of 63 commission only independent sales representatives and 27 salaried sales
personnel.
Competition
We are the largest as well as the sole national supplier of bulk CO2
systems and bulk CO2 for carbonating and dispensing fountain beverages. In many
of our markets, we are a leading or the dominant supplier of bulk CO2 services.
Major restaurant and convenience store chains continue to adopt bulk
CO2 technology and search for qualified suppliers to install and service bulk
CO2 systems. With the exception of us, we believe that qualified suppliers of
bulk CO2 services do not presently exist in many regions of the United States.
Unlike many of our competitors for whom bulk CO2 is a secondary service line, we
have no material lines of business at present other than the provision of bulk
CO2 services. All aspects of our operations are guided by our focus on the bulk
CO2 business, including our selection of operating equipment, design of delivery
routes, location of service locations, structure of customer contracts, content
of employee training programs and design of management information and
accounting systems. By restricting the scope of our activities to the bulk CO2
business, and largely avoiding the dilution of management time and resources
that would be required by other service lines, we believe that we are able to
maximize the level of service we provide to our bulk CO2 customers.
We offer a wide range of innovative sales, marketing and billing
programs. We believe that our ability to compete depends on a number of factors,
including price, product quality, availability and reliability, name
recognition, delivery time and post-sale service and support. Despite the
customer-level advantages of bulk CO2 systems over high pressure cylinders, we
generally price our services comparably to the price of high pressure cylinders.
This has proved an effective inducement to cause customers to convert from high
pressure cylinders to bulk CO2 systems. We believe that we enjoy cost advantages
over our competitors due to the density of our route structure, a lower average
time and distance traveled between stops and a lower average cost per delivery.
Each bulk CO2 system serviced by us has a label with a toll-free help line for
the customer's use. We respond to service calls on a 24-hour, 7-day-a-week
basis, and the
6
experience level of our personnel aids in the resolution of equipment failures
or other service interruptions, whether or not caused by our equipment.
Recognizing the public visibility of our customers, we carefully maintain the
appearance of our vehicles and the professional image of our employees.
Many types of businesses compete in the fountain beverage CO2
business and market share is fragmented. High pressure cylinders and bulk CO2
services are most frequently provided by distributors of industrial gases. These
companies generally provide a number of products and services in addition to CO2
and often view bulk CO2 systems as high-service adjuncts to their core business.
Industrial gas distributors generally have been reluctant to attempt to convert
their high pressure cylinder customers to bulk CO2 systems for several reasons
including the capital outlays required to purchase bulk CO2 systems and the
idling of existing high pressure cylinders and associated equipment. Other
competitors in the fountain beverage CO2 business include fountain supply
companies and distributors of restaurant supplies and groceries which vary
greatly in size. There are also a number of small companies that provide bulk
CO2 services that operate on a local or regional geographic scope. While many of
these suppliers lack the capital necessary to offer bulk CO2 systems to
customers on lease, or to purchase additional or replacement specialized bulk
CO2 trucks and equipment, suppliers vary widely in size and some of our
competitors have significantly greater financial, technical or marketing
resources than we do.
Operations
At June 30, 2000, we operated 91 service locations (70 stationary
depots and 21 mobile depots) located throughout our 44 state service area and
operated 158 specialized bulk CO2 trucks, 95 installation vehicles and seven
high pressure cylinder delivery trucks. Each specialized bulk CO2 truck refills
bulk CO2 systems at customers' sites on a regular cycle and CO2 delivery
quantities are measured by flow meters installed on the bulk CO2 trucks. Each
stationary depot is equipped with a storage tank (up to 40 tons) which receives
bulk CO2 from large capacity tanker trucks and from which our specialized bulk
CO2 trucks are filled with bulk CO2 for delivery to customers. In most
instances, the bulk CO2 system at a customer's site is accessible from the
outside of the establishment and delivery of bulk CO2 does not cause any
interference with the operations of the customer. All dispatch and billing
functions are conducted from our corporate headquarters in Stuart, Florida, with
route drivers, installers and service personnel operating from our service
locations.
We have substantially rolled out a new mobile information system for
use in our field operations. The system utilizes a hand held device to provide
field personnel with up to date delivery route and customer account information
and also serves as an input source to record all delivery transaction
information. At the end of the driver's shift, all delivery transaction
information is transmitted electronically to our headquarters in Stuart, Florida
and downloaded into our computer systems. We believe that this new system will
revolutionize our route management system and lead to improved efficiencies in
virtually all aspects of our operations. Anticipated benefits include improved
route efficiencies and monitoring of driver performance, a reduction in courier
charges for overnight shipment of delivery tickets and in employee hours to
manually input delivery tickets since delivery information will be transmitted
electronically, virtual elimination of illegible delivery tickets and
consequently a reduction in billing errors and customer disputes and a reduction
in paperwork as well as telephone calls to and from the field.
The new mobile information system is the first phase of our planned
RouteSmart(TM) leading edge delivery system. We anticipate that the next two
phases of the RouteSmart(TM) delivery system, software-based forecasting and
route design will be operational by March 31, 2001. The forecasting application
will analyze customer CO2 usage and predict when a customer will run out of CO2
enabling us to schedule a delivery to prevent such an occurrence. The route
design software will produce efficient delivery routes to minimize time and
distance traveled between deliveries.
The fourth phase of the RouteSmart(TM) delivery system will be the
development of a monitoring system installed at the customer's location to
remotely inspect bulk CO2 tanks. It is anticipated that the system will provide
readings of CO2 pressure, volume and purity either by automated telephone call
to the tank or triggered by preset emergency readings. We anticipate that this
phase of the RouteSmart(TM) delivery system will be operational in the next
couple of years.
7
The final phase of the fully integrated RouteSmart(TM) delivery
system is expected to be Internet-based customer support. It is anticipated that
when this final phase of the RouteSmart(TM) delivery system is in place,
customers will be able to log onto the Internet, and among other things, bring
up their accounts, check payment balances as well as scheduled deliveries.
Bulk CO2 Supply
Bulk CO2 is currently a readily available commodity product which is
processed and sold by various sources. In May 1997, we entered into a ten year
bulk CO2 exclusive requirements contract with The BOC Group, Inc. that provides
high quality CO2 as well as relatively stable prices at competitive levels. In
addition, the agreement provides that if sufficient quantities of bulk CO2
become unavailable for any reason, we will receive treatment as a preferred
customer.
Bulk CO2 Systems
We purchase new bulk CO2 systems from their two major manufacturers
pursuant to purchase agreements and we believe that we are the largest purchaser
of bulk CO2 systems from these manufacturers combined. We purchase bulk CO2
systems in six sizes (50, 100, 250, 300, 400 or 600 lbs. bulk CO2 capacity)
depending on the needs of our customers. Bulk CO2 systems are vacuum insulated
containers with extremely high insulation characteristics allowing the storage
of CO2, in its liquid form, at very low temperatures. Bulk CO2 systems operate
under low pressure, are fully automatic, and require no electricity. Based upon
manufacturers' estimates, the service life of a bulk CO2 system is expected to
exceed 20 years with minimal maintenance. We maintain an adequate inventory of
bulk CO2 systems to meet expected customer demand.
Employees
At June 30, 2000, we employed 545 full-time employees, 174 of whom
were involved in management, sales or customer support, 241 of whom were route
drivers and 130 of whom were in installation functions. We consider our
relationship with our employees to be good.
Trademarks
We market our services using the NuCo2(R) trademark which has been
registered by us with the United States Patent and Trademark Office. The current
registration expires in 2007.
Seasonality
At June 30, 2000, approximately 5,000 of our bulk CO2 customers were
billed under rental plus per pound charge contracts and approximately 10,000 of
our bulk CO2 customers own their own bulk CO2 systems and are billed by the
pound for all bulk CO2 delivered. Customers who purchase bulk CO2 by the pound
tend to consume less CO2 in the winter months and our revenues to such customers
will be correspondingly lower in times of cold or inclement weather.
Regulatory Matters
Our business is subject to various federal, state and local laws and
regulations adopted for the protection of the environment, the health and safety
of employees and users of our products. For example, the transportation of bulk
CO2 is subject to regulation by various federal, state and local agencies,
including the U.S. Department of Transportation. Regulatory authorities have
broad powers and we are subject to regulatory and legislative changes that can
affect the economics of the industry by requiring changes in operating practices
or by influencing the demand for, and the costs of, providing services. We
believe that we are in compliance in all material respects with all such laws,
regulations and standards currently in effect and that the cost of compliance
with such laws, regulations and standards has not and is not anticipated to
materially adversely effect us.
8
2. Properties.
Our corporate headquarters are located in a 32,000 square foot
rented facility in Stuart, Florida that accommodates corporate, administrative,
marketing, sales and warehouse space. At June 30, 2000, we also rented 70
stationary service locations throughout 44 states. These facilities are rented
on terms consistent with market conditions prevailing in the area. We believe
that our existing facilities are suitable for our current needs and that
additional or replacement facilities, if needed, are available to meet future
needs.
3. Legal Proceedings.
We are involved from time to time in litigation arising in the
ordinary course of business, none of which is expected to have a material
adverse effect on our financial condition or results of operations.
4. Submission of Matters to a Vote of Security Holders.
Not applicable.
5. Market For Registrant's Common Equity and Related Stockholder
Matters.
Our Common Stock trades on the Nasdaq National Market under the
symbol "NUCO". The following table indicates the high and low sale prices for
our Common Stock for each quarterly period during fiscal 1999 and 2000, as
reported by the Nasdaq National Market.
Calendar 1998 High Low
- ------------- ---- ---
Third Quarter $ 10.500 $ 5.625
Fourth Quarter 8.500 5.000
Calendar 1999
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First Quarter $ 10.000 $ 6.250
Second Quarter 9.875 5.375
Third Quarter 9.375 5.000
Fourth Quarter 17.000 5.500
Calendar 2000
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First Quarter $ 17.750 $10.500
Second Quarter 13.750 5.500
At August 29, 2000, there were approximately 200 holders of record
of our Common Stock, although there is a much larger number of beneficial
owners.
We have never paid cash dividends on our Common Stock and we do not
anticipate declaring any cash dividends on our Common Stock in the foreseeable
future. We intend to retain all future earnings for use in the development of
our business. In addition, the payment of cash dividends is restricted by
financial covenants in our loan agreements.
On May 4, 1999, in connection with and in consideration for the
purchase of $10.0 million of our 12% Senior Subordinated Promissory Notes due
2005 by an existing holder of our 12% Senior Subordinated Promissory Notes due
2004 and an affiliate of SunTrust Bank, South Florida, National Association, we
issued warrants to purchase 372,892 shares of our Common Stock at an exercise
price of $6.65 per share in reliance upon the
9
exemption provided by Section 4(2) of the Securities Act of 1933, as amended. No
underwriting discounts or commissions were paid.
On May 15, 2000, we sold 5,000 shares of our 8% Cumulative
Convertible Preferred Stock to Chase Capital Investments, L.P., a Delaware
limited partnership, for an aggregate consideration of $5.0 million in reliance
upon the exemption provided by Section 4(2) of the Securities Act of 1933, as
amended. Shares of the 8% Cumulative Convertible Preferred Stock may be
converted into shares of our 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. No underwriting discounts or commissions were paid.
10
6. Selected Financial Data.
The Selected Financial Data set forth below reflect our historical
results of operations, financial condition and operating data for the periods
indicated and should be read in conjunction with the consolidated financial
statements and notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations included elsewhere in this Form
10-K.
Fiscal Year Ended June 30,
--------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(in thousands, except per share amounts and Operating Data)
Income Statement Data:
Net sales $ 57,951 $ 47,098 $ 35,077 $ 18,944 $ 11,966
Cost of products sold 28,931 25,225 18,578 8,992 5,177
Selling, general and administrative expenses 12,887 10,554 9,396 5,859 3,067
Depreciation and amortization 15,501 12,763 8,912 4,246 2,417
--------- --------- --------- --------- ---------
Operating income (loss) 632 (1,444) (1,809) (153) 1,305
Interest expense, net 10,015 7,489 3,639 (680) 1,258
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item (9,383) (8,933) (5,448) 527 47
Extraordinary item -- -- 187 -- 860
--------- --------- --------- --------- ---------
Net income (loss) $ (9,383) $ (8,933) $ (5,635) $ 527 $ (813)
========= ========= ========= ========= =========
Income (loss) per common share before
extraordinary item $ (1.30) $ (1.24) $ (0.75) $ .07 $ (.02)
Extraordinary item -- -- (0.03) -- (.19)
--------- --------- --------- --------- ---------
Net income (loss) per common share $ (1.30) $ (1.24) $ (0.78) $ .07 $ (.21)
Weighted average shares outstanding 7,238 7,217 7,210 7,318 4,500
Other Data:
EBITDA (1) $ 16,133 $ 11,319 $ 7,103 $ 4,093 $ 3,722
Operating Data:
Company owned bulk CO2 systems serviced
Beginning of period 50,395 39,295 21,919 12,884 7,967
New installations, net 7,605 11,100 9,446 5,817 3,337
Acquisitions -- -- 7,930 3,218 1,580
--------- --------- --------- --------- ---------
Total Company owned bulk CO2 systems serviced: 58,000 50,395 39,295 21,919 12,884
Customer owned bulk CO2 systems serviced 10,000 8,605 6,800 4,800 2,900
--------- --------- --------- --------- ---------
Total bulk CO2 systems serviced 68,000 59,000 46,095 26,719 15,784
Total high pressure CO2 customers 5,000 6,000 9,000 2,000 400
--------- --------- --------- --------- ---------
Total customers 73,000 65,000 55,095 28,719 16,184
Stationary depots 70 69 63 38 24
Mobile depots 21 15 2 0 0
Bulk CO2 trucks 158 166 150 83 49
Installation vehicles 95 86 76 36 19
High pressure cylinder delivery trucks 7 7 17 1 1
Balance Sheet Data:
Cash and cash equivalents $ 279 $ 1,579 $ 337 $ 11,673 $ 43,001
Total assets 148,549 141,630 124,498 73,344 74,633
Total debt (including short-term debt) 92,082 82,461 59,328 9,546 10,844
Redeemable Preferred Stock 5,050 -- -- -- --
Total shareholders' equity 38,240 47,733 55,643 60,702 60,684
- --------------------
(1) EBITDA represents operating income (loss) plus depreciation and
amortization. Information regarding EBITDA is presented because of its
use by certain investors as one measure of an issuer's ability to
generate
11
cash flow. EBITDA should not be considered an alternative to, or more
meaningful than, operating income or cash flows from operating
activities as an indicator of an issuer's operating performance.
7. 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-K 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 June 30,
2000, we operated a national network of 91 service locations in 44 states
servicing approximately 73,000 bulk and high pressure customers. Currently, 99%
of fountain beverage users in the Continental United States are within our
current 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 both (1) the rate of new bulk CO2 system
installations, (2) the growth in bulk CO2 sales at (i) customers on the rental
plus per pound charge contracts and (ii) customers that own their own bulk CO2
systems and (3) price increases. During fiscal 2000, we installed a net of
approximately 700 bulk CO2 systems monthly.
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
expended 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 $26.5 million
at June 30, 2000.
12
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 route density is
highest in Florida and is less developed in the other areas where we presently
have operations. New multi-unit placement agreements combined with single-unit
placements will help us in achieving route density. Our success in reaching
multi-placement agreements is due in part to our national delivery system.
Our experience has been that as our depots mature their gross
profit margins improve as volume grows and fixed costs remain essentially the
same. For example, at the end of fiscal 2000, depots open greater than three
years averaged a 56.8% gross margin. Many of these depots have gross margins
greater than 60% and continue to improve. These same depots averaged a 54.0%
gross margin at the end of fiscal 1999. Since our new depot openings have slowed
drastically over the last 24 months, on a weighted average basis, we expect that
gross margins at our mature depots will accelerate. Additionally, new
technologies continue to enhance improvements in gross margins and we continue
to investigate non-techological improvements in gross margins as well. 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 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 $3.7 million in fiscal 1996 to $16.1 million in fiscal 2000, an
average of 46% annually from fiscal 1996 to fiscal 2000.
Results of Operations
The following table sets forth, for the periods indicated, the
percentage relationship which the various items bear to net sales:
Fiscal Year Ended June 30,
2000 1999 1998
---- ---- ----
Income Statement Data:
Net sales............................................ 100.0% 100.0% 100.0%
Cost of products sold................................ 49.9 53.6 53.0
Selling, general and administrative expenses......... 22.2 22.4 26.8
Depreciation and amortization........................ 26.8 27.1 25.4
------- ------- ---------
Operating income (loss).............................. 1.1 (3.1) (5.2)
Interest expense, net................................ 17.3 15.9 10.4
------- ------- ---------
Loss before extraordinary item....................... (16.2) (19.0) (15.6)
Extraordinary item................................... - - .5
------- ------- ---------
Net income (loss).................................... (16.2)% (19.0)% (16.1)%
========= ========= ===========
Other Data:
EBITDA............................................ 27.8% 24.0% 20.3%
========= ========= ===========
13
Fiscal Year Ended June 30, 2000 Compared to Fiscal Year Ended June 30, 1999
Net Sales
Net sales increased $10.9 million, or 23.0%, from $47.1 million in
1999 to $58.0 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 June 30, 2000, there were approximately 58,000 Company
owned and 10,000 customer owned bulk CO2 systems in service, an increase of
9,000, or 15%, over the approximately 50,000 Company owned and 9,000 customer
owned bulk CO2 systems in service at the end of 1999. Increases in net sales due
to price increases were immaterial.
Cost of Products Sold
Cost of products sold increased by $3.7 million, or 14.7%, from
$25.2 million in 1999 to $28.9 million in 2000, and decreased as a percentage of
net sales from 53.6% in 1999 to 49.9% in 2000. The dollar increase is
attributable to our continued growth and the percentage decrease is primarily
attributable to our increased route densities. Bulk CO2 purchases increased by
$0.8 million from $6.3 million in 1999 to $7.1 million in 2000 and decreased as
a percentage of net sales from 13.4% to 12.2%. Fully loaded route drivers
increased by $1.5 million from $8.2 million in 1999 to $9.7 million in 2000 and
decreased as a percentage of net sales from 17.5% to 16.8%. Auto and truck
expense increased by $1.1 million from $4.2 million in 1999 to $5.3 million in
2000 and increased as a percentage of net sales from 9.0% to 9.1%. Depot expense
increased by $0.1 from $2.2 million in 1999 to $2.3 million in 2000 and
decreased as a percentage of net sales from 4.7% to 3.9%.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $2.3
million, or 22.1%, from $10.6 million in 1999 to $12.9 million in 2000, and
decreased as a percentage of net sales from 22.4% in 1999 to 22.2% in 2000. The
dollar increase is primarily attributable to (1) growth in the number of
marketing and administrative personnel and their related expenses and (2) an
increase in telephone expense. Fully loaded marketing, administrative and
executive personnel increased by $1.0 million from $6.7 million in 1999 to $7.7
million in 2000, and decreased as a percentage of net sales from 14.2% in 1999
to 13.2% in 2000. The percentage decrease is attributable to increased
efficiencies. Telephone expense increased $0.4 million from $0.8 million in 1999
to $1.2 million in 2000 and is attributable to the introduction of a new mobile
information system for use in our field operations.
Depreciation and Amortization
Depreciation and amortization increased by $2.7 million from $12.8
million in 1999 to $15.5 million in 2000. As a percentage of net sales, such
expense decreased from 27.1% in 1999 to 26.8 % in 2000. Depreciation expense
increased by $2.1 million from $8.7 million in 1999 to $10.8 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 18.6% in 1999 to
18.7% in 2000. Amortization expense increased by $0.6 million from $4.1 million
in 1999 to $4.7 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 8.5% in 1999 to 8.0% in 2000.
Operating Income (Loss)
For the reasons described above, operating income was $0.6 million,
or 1.1% of net sales, in 2000 compared to an operating (loss) of $1.4 million,
or 3.1% of net sales, in 1999.
Interest Expense
Net interest expense increased by $2.5 million from $7.5 million in
1999 to $10.0 million in 2000, and increased as a percentage of net sales from
15.9% in 1999 to 17.3% in 2000. This increase is attributable to both increased
levels of long-term and subordinated debt and increased interest rates in 2000
as compared to 1999.
14
Net Loss
For the reasons described above, net loss increased by $0.5 million,
or 5.0%, from $8.9 million in 1999 to $9.4 million in 2000. No provision for
income tax expense in either 1999 or 2000 has been made due to historical net
losses. At June 30, 2000, we had net operating loss carryforwards for federal
income tax purposes of $64.8 million, which are available to offset future
federal taxable income through 2020.
EBITDA
For the reasons described above, EBITDA increased from $11.3 million
in 1999 to $16.1 million in 2000, or 42.5%, and increased as a percentage of net
sales from 24.0% to 27.8%.
Fiscal Year Ended June 30, 1999 Compared to Fiscal Year Ended June 30, 1998
Net Sales
Net sales increased $12.0 million, or 34.3%, from $35.1 million in
1998 to $47.1 million in 1999. Approximately $3.6 million, or 30.2%, of the
increase represented net sales from fifteen acquisitions during 1998 which are
included for the full year in 1999 as compared to from their dates of
acquisition in 1998. The remainder of the increase in net sales was primarily
due to internal growth in the number of Company owned and customer owned bulk
CO2 systems serviced. At June 30, 1999, there were approximately 50,000 Company
owned and 9,000 customer owned bulk CO2 systems in service, an increase of
13,000, or 28%, over the approximately 39,000 Company owned and 7,000 customer
owned bulk CO2 systems in service at the end of 1998. Increases in net sales due
to price increase were immaterial.
Cost of Products Sold
Cost of products sold increased by $6.6 million, or 35.8%, from
$18.6 million in 1998 to $25.2 million in 1999, and increased as a percentage of
net sales from 53.0% in 1998 to 53.6% in 1999. The dollar increase is
attributable to our continued growth. The percentage increase is largely
attributable to an increase in bulk CO2 purchases as a percentage of net sales.
Bulk CO2 purchases increased by $2.1 million from $4.2 million in 1998 to $6.3
million in 1999 and increased as a percentage of net sales from 12.1% to 13.4%.
Fully loaded route drivers increased by $2.0 million from $6.2 million in 1998
to $8.2 million in 1999 and decreased as a percentage of net sales from 17.7% to
17.5%. Auto and truck expense increased by $1.0 million from $3.2 million in
1998 to $4.2 million in 1999 and decreased as a percentage of net sales from
9.2% to 9.0%. Depot expense increased by $0.5 million from $1.7 million in 1998
to $2.2 million in 1999 and decreased as a percentage of net sales from 4.9% to
4.7%.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $1.2
million, or 12.3%, from $9.4 million in 1998 to $10.6 million in 1999, and
decreased as a percentage of net sales from 26.8% in 1998 to 22.4% in 1999. 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. Fully loaded marketing,
administrative and executive personnel increased by $1.1 million from $5.6
million in 1998 to $6.7 million in 1999, and decreased as a percentage of net
sales from 16.1% in 1998 to 14.2% in 1999.
Depreciation and Amortization
Depreciation and amortization increased by $3.9 million from $8.9
million in 1998 to $12.8 million in 1999. As a percentage of net sales, such
expense increased from 25.4% in 1998 to 27.1% in 1999. Depreciation expense
increased by $2.7 million from $6.0 million in 1998 to $8.7 million in 1999
principally due to the increase in bulk CO2 systems leased to customers. As a
percentage of net sales, depreciation expense increased from 17.2% in 1998 to
18.6% in 1999. Amortization expense increased by $1.2 million from $2.9 million
in 1998 to $4.0 million in 1999 primarily due to the increase in amortization of
deferred lease acquisition costs, deferred charges
15
and goodwill and customer lists resulting from acquisitions. As a percentage of
net sales, amortization expense increased from 8.2% in 1998 to 8.5% in 1999.
Operating Loss
For the reasons described above, operating loss decreased by $0.4
million, or 20.2%, from $1.8 million in 1998 to $1.4 million in 1999, and
decreased as a percentage of net sales from 5.2% in 1998 to 3.1% in 1999.
Interest Expense
Net interest expense increased by $3.9 million from $3.6 million in
1998 to $7.5 million in 1999, and increased as a percentage of net sales from
10.4% in 1998 to 15.9% in 1999. This increase is attributable to the increased
level of long-term and subordinated debt in 1999 as compared to 1998.
During 1998, $0.2 million of deferred financing costs relating to
our prior credit facility was written off.
Net Loss
For the reasons described above, net loss increased by $3.3 million,
or 58.5%, from $5.6 million in 1998 to $8.9 million in 1999. No provision for
income tax expense in either 1998 or 1999 has been made due to historical net
losses. At June 30, 1999, we had net operating loss carryforwards for federal
income tax purposes of $45.6 million, which are available to offset future
federal taxable income through 2019.
EBITDA
For the reasons described above, EBITDA increased from $7.1 million
in 1998 to $11.3 million in 1999, or 59.3%, and increased as a percentage of net
sales from 20.3% to 24.0%.
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 June 30, 2000, we
anticipated making cash capital expenditures of at least $10.0 million to $30.0
million during each of 2001 and 2002, 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.
During fiscal 2000, our capital resources included cash flows from
operations, available borrowing capacity under our credit facility and proceeds
from the issuance of our Convertible Preferred Stock.
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
16
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 .375% to .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 from $12.40 per share to $6.65 per stock unit.
As of June 30, 2000, a total of $52.8 million was outstanding under
the Amended SunTrust Facility with interest at three hundred seventy-five basis
points above the 180-day London InterBank Offering Rate ("LIBOR") (10.02% to
10.61% at June 30, 2000).
Working Capital. At June 30, 2000, we had negative working capital
of $0.6 million. At June 30, 1999, we had negative working capital of $0.5
million.
Cash Flows from Operating Activities. During 2000 and 1999, net cash
provided by operating activities was $6.6 million and $4.2 million,
respectively. Cash flows from operating activities increased by $2.4 million
during 2000 compared to 1999 primarily due to an increase in the change in
accounts payable and an increase in depreciation. The increase in accounts
payable in 2000 was $1.4 million and in 1999 was $0.1 million. Depreciation and
amortization of property and equipment increased $2.1 million from $8.7 million
in 1999 to $10.8 million in 2000.
Cash Flows from Investing Activities. During 2000 and 1999, we made
net capital expenditures of $19.2 million and $24.0 million, respectively,
primarily for purchases of new bulk CO2 systems and associated installation and
direct placement costs.
Cash Flows from Financing Activities. During 2000 and 1999, net cash
provided by financing activities was $12.8 million and $22.6 million,
respectively. For 2000 and 1999, cash flows provided by financing activities
were primarily from the issuance of subordinated debt, borrowings under our
revolving credit facility and the issuance of the Convertible Preferred Stock.
We believe that cash from operating activities and available
borrowings under the Amended SunTrust Facility will be sufficient to fund
proposed operations for at least the next 12 months at our anticipated rate of
growth.
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.
17
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. 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.
7A. 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 June 30, 2000, a total of $52.8 million was outstanding under the
Amended SunTrust Facility with interest at three hundred seventy-five basis
points above the 180 day LIBOR rate (10.02% to 10.61% at June 30, 2000). Based
upon $52.8 million outstanding under the Amended SunTrust Facility at June 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 8.0%
to 9.0%).
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.
8. Financial Statements and Supplementary Data.
See page F-1.
9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not applicable.
10. Directors and Executive Officers of the Registrant.
The information required by Item 10 is incorporated by reference to
our definitive proxy statement to be filed with the Securities and Exchange
Commission no later than October 30, 2000 pursuant to Regulation 14A.
11. Executive Compensation.
The information required by Item 11 is incorporated by reference to
our definitive proxy statement to be filed with the Securities and Exchange
Commission no later than October 30, 2000 pursuant to Regulation 14A.
12. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item 12 is incorporated by reference to
our definitive proxy statement to be filed with the Securities and Exchange
Commission no later than October 30, 2000 pursuant to Regulation 14A.
18
13. Certain Relationships and Related Transactions.
The information required by Item 13 is incorporated by reference to
our definitive proxy statement to be filed with the Securities and Exchange
Commission no later than October 30, 2000 pursuant to Regulation 14A.
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as part of this
report:
(1) Financial statements.
See Index to Financial Statements which appears on page
F-1 herein.
(2) Financial Statement Schedules
II - Valuation and Qualifying Accounts.
(3) Exhibits:
Exhibit No. Exhibit
3.1 -- Amended and Restated Articles of Incorporation of the
Company. (2)
3.2 -- Articles of Amendment to the Articles of Incorporation
of the Company, dated December 18, 1995. (5)
3.3 -- Articles of Amendment to the Articles of Incorporation
of the Company, dated December 17, 1996. (5)
3.4 -- Articles of Amendment to the Articles of Incorporation
of the Company, dated May 10, 2000. (1)
3.5 -- Bylaws of the Company. (2)
10.1 -- 1995 Stock Option Plan. (1)
10.2 -- Directors' Stock Option Plan. (2)
10.3 -- Noncompetition Agreement between the Company and
Edward M. Sellian, dated November 30, 1995. (2)
10.4 -- Lease for 2528 North Tamiami Trail, Ft. Myers,
Florida, between the Company and Edward M. Sellian.
(2)
10.5 -- Lease for 2800 Southeast Market Place, Stuart, Florida
between the Company and Edward M. Sellian. (3)
10.6 -- Lease for 2820 Southeast Market Place, Stuart, Florida
between the Company and Edward M. Sellian dated as of
February 1, 1998. (5)
10.7 -- Amended and Restated Revolving Credit Agreement
("Amended and Restated Revolving Credit Agreement"),
dated as of May 4, 1999 by and among the Company,
SunTrust Bank, South Florida, National Association,
Bank Austria Creditanstalt Corporate Finance, Inc.,
The Provident Bank and Bank Leumi Le-Israel B.M. (the
"Lenders") and SunTrust Bank, South Florida, National
Association, as agent for the Lenders (the "Agent").
(6)
19
10.8 -- First Amendment to Amended and Restated Revolving
Credit Agreement dated as of June 16, 1999. (6)
10.9 -- Second Amendment and Waiver to Amended and Restated
Revolving Credit Agreement dated as of February 7,
2000.(1)
10.10 -- Third Amendment to Amended and Restated Revolving
Credit Agreement dated as of May 12, 2000. (1)
10.11 -- Senior Subordinated Note Purchase Agreement ("Senior
Subordinated Note Purchase Agreement"), dated as of
October 31, 1997 between the Company, the Subsidiary
Guarantors and the Investors. (5)
10.12 -- Amendment No. 1 to Senior Subordinated Note Purchase
Agreement dated as of November 14, 1997. (5)
10.13 -- Amendment No. 2 to Senior Subordinated Note Purchase
Agreement dated as of June 30, 1998. (5)
10.14 -- Amendment No. 3 to Senior Subordinated Note Purchase
Agreement dated as of May 4, 1999. (6)
10.15 -- Amendment No. 4 to Senior Subordinated Note Purchase
Agreement dated as of January __, 2000. (1)
10.16 -- Amendment No. 5 to Senior Subordinated Note Purchase
Agreement dated as of May 12, 2000. (1)
10.17 -- Preferred Stock Purchase Agreement, dated as of May
15, 2000 by and between the Company and Chase Capital
Investments, L.P. (1)
10.18 -- Warrant Agreement ("Warrant Agreement") dated as of
October 31, 1997 among the Company and the Initial
Holders. (5)
10.19 -- Amendment No. 1 to Warrant Agreement dated as of
November 14, 1997. (5)
10.20 -- Amendment No. 2 to Warrant Agreement dated as of May
4, 1999. (6)
10.21 -- Employment Agreement between the Company and Michael
DeDomenico, dated as of June 2, 2000. (1)
21 -- Subsidiaries (5)
23 -- Consent of Margolin, Winer & Evens LLP to the
incorporation by reference to the Company's
Registration Statement on Form S-8 (No. 333-06705) and
(No. 333- 30042) of the independent auditors' report
included herein. (1)
27 -- Financial Data Schedule. (1)
(b) Reports on Form 8-K
None.
- ---------------------------
(1) Included herein.
(2) Incorporated by reference to the Company's Registration Statement on
Form SB-2, filed with the Commission on November 7, 1995 (Commission
File No. 33-99078), as amended.
(3) Incorporated by reference to the Company's Registration Statement on
Form SB-2, filed with the Commission on June 7, 1996 (Commission
File No. 333-3352).
20
(4) Incorporated by reference to the Company's Form 10-KSB for the year
ended June 30, 1997.
(5) Incorporated by reference to the Company's Form 10-K for the year
ended June 30, 1998.
(6) Incorporated by reference to the Company's Form 10-K for the year
ended June 30, 1999.
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: September 28, 2000 /s/ Edward M. Sellian
----------------------------------
Edward M. Sellian,
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ Craig L. Burr Director September 28, 2000
- ---------------------------
Craig L. Burr
/s/ Michael E. DeDomenico Director, September 28, 2000
- --------------------------- Chief Executive Officer
Michael E. DeDomenico
/s/ Robert L. Frome Director September 28, 2000
- ---------------------------
Robert L. Frome
/s/ Robert Ranieri Director September 28, 2000
- ---------------------------
Robert Ranieri
Director
- ---------------------------
Daniel Raynor
/s/ Edward M. Sellian
- --------------------------- Director September 28, 2000
Edward M. Sellian
/s/ Richard D. Waters, Jr. Director September 28, 2000
- ---------------------------
Richard D. Waters, Jr.
Director
- ---------------------------
John E. Wilson
/s/ Joann Schirripa Chief Financial Officer September 28, 2000
- ---------------------------
Joann Schirripa
22
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
--------
NUCO2 INC.
Report of Independent Auditors ..................................................................................F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 2000 and 1999.......................................................F-3
Consolidated Statements of Operations for the Fiscal Years Ended June 30, 2000, 1999 and
1998.......................................................................................................F-4
Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended June 30, 2000,
1999, 1998 and 1997.......................................................................................F-5
Consolidated Statements of Cash Flows for the Fiscal Years Ended June 30, 2000, 1999 and
1998.......................................................................................................F-6
Notes to Consolidated Financial Statements.......................................................................F-8
Schedule II - Valuation and Qualifying Accounts for the Fiscal Years Ended June 30, 2000,
1999 and 1998............................................................................................F-19
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
NuCo2 Inc.
Stuart, Florida
We have audited the accompanying consolidated balance sheets of NuCo2 Inc. as of
June 30, 2000 and 1999, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended June 30, 2000. We have also audited the financial statement schedule
listed in the accompanying index. These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of NuCo2
Inc. as of June 30, 2000 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
June 30, 2000 in conformity with generally accepted accounting principles. Also,
in our opinion, the related financial statement schedule when considered in
relation to the basic financial statement taken as a whole, presents fairly, in
all material respects, the information set forth herein.
/s/ MARGOLIN, WINER & EVENS LLP
--------------------------------
MARGOLIN, WINER & EVENS LLP
Garden City, New York
August 18, 2000
F-2
NUCO2 INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
ASSETS
(NOTE 5)
June 30,
--------
2000 1999
---------- --------
Current assets:
Cash and cash equivalents $ 279 $ 1,579
Trade accounts receivable; net of allowance for doubtful
accounts of $622 and $558, respectively 8,862 6,768
Inventories 222 214
Prepaid expenses and other current assets 912 593
--------- ---------
Total current assets 10,275 9,154
--------- ---------
Property and equipment, net (Note 3) 107,120 99,665
--------- ---------
Other assets:
Goodwill, net 20,434 21,645
Deferred charges, net 3,425 2,915
Customer lists, net 1,871 2,898
Restrictive covenants, net 1,567 1,929
Deferred lease acquisition costs, net 3,685 3,237
Deposits 172 187
--------- ---------
31,154 32,811
--------- ---------
$ 148,549 $ 141,630
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt (Note 5) $ 33 $ 97
Accounts payable 8,120 6,702
Accrued expenses 582 747
Accrued interest 1,485 1,474
Accrued payroll 376 544
Other current liabilities 263 45
--------- ---------
Total current liabilities 10,859 9,609
Long-term debt, excluding current maturities (Note 5) 53,080 43,615
Subordinated debt (Note 6) 38,969 38,749
Customer deposits 2,351 1,924
--------- ---------
Total Liabilities 105,259 93,897
--------- ---------
Commitments and contingencies (Note 14)
Redeemable Preferred Stock (Note 7) 5,050 --
--------- ---------
Shareholders' equity (Note 8):
Preferred Stock; no par value; 5,000,000 shares authorized;
5,000 issued and outstanding (Note 7) -- --
Common Stock; par value $.001 per share; 30,000,000 shares authorized;
issued and outstanding 7,275,015 shares at June 30, 2000 and 7,216,664
at June 30, 1999 7 7
Additional paid-in capital 64,722 64,832
Accumulated deficit (26,489) (17,106)
--------- ---------
Total shareholders' equity 38,240 47,733
--------- ---------
$ 148,549 $ 141,630
========= =========
See accompanying notes to consolidated financial statements.
F-3
NUCO2 INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Years Ended June 30,
2000 1999 1998
-------- ---------- -------
Net sales $ 57,951 $ 47,098 $ 35,077
-------- -------- --------
Costs and expenses:
Cost of products sold 28,931 25,225 18,578
Selling, general and administrative expenses 12,887 10,554 9,396
Depreciation and amortization 15,501 12,763 8,912
-------- -------- --------
57,319 48,542 36,886
-------- -------- --------
Operating Income (loss) 632 (1,444) (1,809)
Other expenses (income):
Interest expense 10,019 7,525 3,809
Interest (income) (4) (36) (170)
-------- -------- --------
(Loss) before extraordinary item (9,383) (8,933) (5,448)
-------- -------- --------
Extraordinary item - loss on extinguishment of debt (Note 5) -- -- 187
-------- -------- --------
Net (loss) $ (9,383) $ (8,933) $ (5,635)
======== ======== ========
Basic and Diluted EPS
(Loss) before extraordinary item $ (1.30) $ (1.24) $ (0.75)
Extraordinary item -- -- (0.03)
-------- -------- --------
Net (loss) $ (1.30) $ (1.24) $ (0.78)
======== ======== ========
Weighted average number of common and common
equivalent shares outstanding
Basic and Diluted 7,238 7,217 7,210
======== ======== ========
See accompanying notes to consolidated financial statements.
F-4
NUCO2 INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share amounts)
Common Stock Total
------------ Additional Accumulated Shareholders'
Shares Amount Paid-In Capital Deficit Equity
------ ------ --------------- ------- ------
Balance, June 30, 1997 7,197,718 $ 7 $ 63,233 $ (2,538) $ 60,702
Issuance of 18,835 shares of common
stock - asset acquisition 18,835 -- 275 -- 275
Issuance of 111 shares of common
stock - exercise of options 111 -- 1 -- 1
Issuance of warrants -- -- 300 -- 300
Net (loss) -- -- -- (5,635) (5,635)
--------- --------- --------- --------- ---------
Balance, June 30, 1998 7,216,664 7 63,809 (8,173) 55,643
Issuance and repricing of warrants -- -- 1,023 -- 1,023
Net (loss) -- -- -- (8,933) (8,933)
--------- --------- --------- --------- ---------
Balance, June 30, 1999 7,216,664 7 64,832 (17,106) 47,733
Issuance of 5,000 shares of
redeemable preferred stock (Note 7) -- -- (65) -- (65)
Redeemable preferred stock dividend (Note 7) -- -- (50) -- (50)
Issuance of 966 shares of common
stock - exercise of options 966 -- 5 -- 5
Issuance of 57,385 shares of common stock -
exercise of warrants 57,385 -- -- -- --
Net (loss) -- -- -- (9,383) (9,383)
--------- --------- --------- --------- ---------
Balance, June 30, 2000 7,275,015 $ 7 $ 64,722 $ (26,489) $ 38,240
========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
F-5
NUCO2 INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except per share amounts)
Years Ended June 30,
--------------------
2000 1999 1998
--------- -------- --------
(Loss) before extraordinary item $ (9,383) $ (8,933) $ (5,448)
Extraordinary item - loss on extinguishment of debt -- -- (187)
-------- -------- --------
Net (loss) (9,383) (8,933) (5,635)
Cash flows from operating activities:
Adjustments to reconcile net (loss) to net cash
provided by operating activities:
Depreciation and amortization of property and equipment 10,841 8,743 6,046
Amortization of other assets 4,660 4,020 2,866
Amortization of original issue discount 220 43 --
Loss on disposal of property and equipment 909 1,110 500
Write-off of deferred financing costs -- -- 187
Changes in operating assets and liabilities:
Decrease (increase) in:
Trade accounts receivable (2,094) (2,482) (2,017)
Inventories (8) (2) (116)
Prepaid expenses and other current assets (319) (159) (158)
Increase (decrease) in:
Accounts payable 1,418 105 4,543
Accrued expenses (165) 424 (396)
Accrued payroll (168) 67 244
Accrued interest 11 630 825
Other current liabilities 218 38 (41)
Customer deposits 427 645 590
-------- -------- --------
Net cash provided by operating activities 6,567 4,249 7,438
-------- -------- --------
Cash flows from investing activities:
Proceeds from disposal of property and equipment 55 104 411
Purchase of property and equipment (19,162) (24,048) (23,456)
Acquisition of businesses -- 45 (12,407)
Increase in deferred lease acquisition costs (1,610) (1,718) (1,806)
(Increase) decrease in deposits 15 (3) (80)
-------- -------- --------
Net cash used in investing activities $(20,702) $(25,620) $(37,338)
-------- -------- --------
See accompanying notes to consolidated financial statements.
F-6
NUCO2 INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
Years Ended June 30,
--------------------
2000 1999 1998
-------- ---------- -------
Cash flows from financing activities:
Proceeds from issuance of redeemable preferred stock $ 4,935 $ -- $ --
Net proceeds from issuance of long-term debt
and subordinated debt 9,500 24,250 21,611
Repayment of long-term debt (99) (138) (831)
Increase in deferred charges (1,506) (1,498) (2,217)
Exercise of warrants and options 5 -- 1
------------ ------------ ------------
Net cash provided by financing activities 12,835 22,614 18,564
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents (1,300) 1,243 (11,336)
Cash and cash equivalents, beginning of year 1,579 336 11,672
------------ ------------ ------------
Cash and cash equivalents, end of year $ 279 $ 1,579 $ 336
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 9,788 $ 6,871 $ 2,967
============ ============ ============
Income taxes $ -- $ -- $ --
============ ============ ============
Supplemental schedule of noncash investing and
financing activities: Acquisition of businesses:
Fair value of assets acquired $ -- $ -- $ 26,426
Cost in excess of net assets of businesses acquired -- -- 16,257
Liabilities assumed or incurred -- -- (30,001)
Issuance of common stock -- -- (275)
------------ ------------ ------------
Cash paid $ -- $ -- $ 12,407
============ ============ ============
In 1998, the Company wrote-off a restrictive covenant and the related
liability in the amount of $19 due to the employee resigning.
In 1998, the Company repaid long-term debt in the amount of $20,783 with
the proceeds of the issuance of subordinated debt. In connection therewith,
detachable warrants were issued and original issue discount in the amount of
$300 was recorded.
In 1999, the Company repaid long-term debt in the amount of $5,000 with
the proceeds of the issuance of subordinated debt. In connection therewith,
detachable warrants were issued and original issue discount in the amount of
$549 was recorded. Additionally, in connection with the repricing of the
Company's 2004 warrants, original issue discount in the amount of $473 was
recorded.
In 2000, the Company increased the carrying amount of the redeemable
preferred stock by $50 for dividends that have not been paid and accordingly
reduced additional paid-in capital by a like amount.
See accompanying notes to consolidated financial statements.
F-7
NUCO2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
Note 1 - Description of Business and Summary of Significant Accounting
Policies
(a) Basis of Presentation
The consolidated financial statements include the accounts of NuCo2
Inc. and its wholly-owned subsidiary, NuCo2 Acquisition Corp. which was formed
during the year ended June 30, 1998 to acquire the stock of Koch Compressed
Gases, Inc. (see Note 2). All material intercompany accounts and transactions
have been eliminated.
(b) Description of Business
The Company is a supplier of bulk CO2 dispensing systems to customers
in the food, beverage, lodging and recreational industries in the United States.
(c) Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased
with an original maturity of three months or less to be cash equivalents.
(d) Inventories
Inventories, consisting primarily of carbon dioxide gas, are stated
at the lower of cost or market. Cost is determined by the first-in, first-out
method.
(e) Property and Equipment
Property and equipment are stated at cost. The Company does not
depreciate bulk systems held for installation until the systems are in service
and leased to customers. Upon installation, the systems, component parts and
direct costs associated with the installation are transferred to the leased
equipment account. These costs are associated with successful placements of such
systems with customers under noncancelable contracts and which would not be
incurred by the Company but for a successful placement. Upon early service
termination, the unamortized portion of direct costs associated with the
installation are charged to cost of products sold. Depreciation and amortization
is computed using the straight-line method over the estimated useful lives of
the respective assets or the lease terms for leasehold improvements, whichever
is shorter.
The depreciable lives of property and equipment are as follows:
Estimated Life
--------------
Leased equipment 5-20 years
Equipment and cylinders 3-20 years
Vehicles 3-5 years
Computer equipment 3-7 years
Office furniture and fixtures 5-7 years
Leasehold improvements lease term
F-8
NUCO2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
Note 1 - Description of Business and Summary of Significant Accounting
Policies - (continued)
(f) Other Assets
Goodwill, Net
Goodwill, net, represents costs in excess of net assets of businesses
acquired and is being amortized on a straight-line basis over twenty years.
Accumulated amortization of goodwill was $3,794 and $2,582 at June 30, 2000 and
1999, respectively. The Company periodically assesses the recoverability of the
cost of its goodwill, as well as of its other intangible assets, based on a
review of projected undiscounted cash flows of the related operating assets.
These cash flows are prepared and reviewed by management in connection with the
Company's annual long range planning process.
Deferred Charges, Net
Deferred charges, net, consist of the unamortized portion of
financing costs which are being amortized over the term of the related
indebtedness, ranging from thirty-six to eighty-four months. Accumulated
amortization of deferred charges was $1,679 and $1,005 at June 30, 2000 and
1999, respectively. Included in the consolidated statements of operations for
the year ended June 30, 1998 are extraordinary write-offs of deferred financing
fees in connection with the reduction of certain indebtedness.
Customer Lists, Net
Customer lists, net, consist of the unamortized portion of customer
lists acquired in connection with asset acquisitions which are being amortized
over five years, the average life of customer leases. Accumulated amortization
of customer lists was $3,464 and $2,436 at June 30, 2000 and 1999, respectively.
The Company's policy is to value customer lists based on the estimated value of
future cash flows over the life of the customer lease.
Restrictive Covenants, Net
Restrictive covenants, net, consist of covenants not to compete
arising in connection with asset acquisitions which are being amortized over
their contractual lives ranging from thirty to one hundred and twenty months.
Accumulated amortization of restrictive covenants was $1,063 and $701 at June
30, 2000 and 1999, respectively. The Company's policy is to value restrictive
covenants based on the negotiated contractual value of the restrictive covenant
or a third party appraisal.
Deferred Lease Acquisition Costs, Net
Deferred lease acquisition costs, net, consist of commissions
associated with the acquisition of new leases and are being amortized over the
life of the related leases, generally five to six years. Accumulated
amortization of deferred lease acquisition costs was $2,898 and $1,932 at June
30, 2000 and 1999, respectively. Upon early service termination, the unamortized
portion of deferred lease acquisition costs are charged to selling, general and
administrative expenses.
(g) Revenue Recognition
The Company earns its revenues from the leasing of CO2 systems and
related gas sales. The Company, as lessor, recognizes revenue from leasing of
CO2 systems on a straight-line basis over the life of the related leases. The
majority of CO2 system leases generally include payments for leasing of
equipment and a continuous supply of CO2 until usage reaches a pre-determined
maximum annual level, beyond which the customer pays for CO2 on a per pound
basis. Other CO2 and gas sales are recorded upon delivery to the customer.
F-9
NUCO2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
Note 1 - Description of Business and Summary of Significant Accounting
Policies - (continued)
(h) Income Taxes
Income taxes are accounted for under Financial Accounting Standards
Board Statement No. 109, Accounting for Income Taxes. Statement No. 109 requires
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax bases
of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. Under Statement No. 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(i) Net Loss Per Common Share
Net loss per common share is presented in accordance with SFAS No.
128, "Earnings per Share." Basic earnings per common share are computed using
the weighted average number of common shares outstanding during the period.
Diluted earnings per common share incorporate the incremental shares issuable
upon the assumed exercise of stock options and warrants to the extent they are
not anti-dilutive.
(j) Use Of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(k) Employee Benefit Plan
On June 1, 1996, the Company adopted a deferred compensation plan
under Section 401(K) of the Internal Revenue Code which covers all eligible
employees. Under the provisions of the plan, eligible employees may defer a
percentage of their compensation subject to the Internal Revenue Service limits.
Contributions to the plan are made only by employees.
Note 2 - Acquisitions
Effective July 15, 1997, the Company purchased substantially all of
the assets of a bulk CO2 company operating in Colorado for a purchase price of
$675. The purchase price was funded through a borrowing under the Company's
credit facility.
Effective July 31, 1997, the Company purchased certain assets from CC
Acquisition Corp. (Carbo Co.) for an aggregate purchase price of $11,000. Carbo
Co. had operations in Nebraska, Kansas, Oklahoma, Iowa, Missouri, Arkansas and
South Dakota. The Company funded $5,000 through a borrowing under its credit
facility and paid cash for the balance.
In September 1997, the Company purchased certain assets of a bulk CO2
company with operations in Arizona for an aggregate purchase price of $1,084.
The Company funded $1,075 through a borrowing under its credit facility and paid
cash for the balance.
Effective October 1, 1997, a newly formed wholly-owned subsidiary of
the Company purchased all of the issued and outstanding shares of Common Stock
of Koch Compressed Gases, Inc. ("Koch") for an aggregate purchase price of
approximately $5,000. Koch operated a bulk CO2 business as well as provided
carbon dioxide and other gases in high-pressure cylinders throughout the
tri-state New York metropolitan area. The purchase price was funded through a
borrowing under the Company's credit facility.
F-10
NUCO2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
In November 1997, the Company purchased substantially all of the
assets of a bulk CO2 company operating in Texas for a purchase price of $949.
The Company paid $674 cash and issued 18,835 shares of Common Stock at market,
for a value of $275.
Effective December 2, 1997, the Company purchased certain assets from
four related carbonic gas distributors, Miller Carbonic Systems Co. Inc., Miller
Carbonic, Inc., Carbonic National Systems, Inc., and Carbonic Gas Service, Inc.,
operating primarily in Illinois, Indiana, Wisconsin and Michigan for an
aggregate purchase price of $11,150. The Company paid approximately $4,650 cash
and funded $6,500 through a borrowing under the Company's SunTrust Facility (see
Note 5).
Effective December 2, 1997, the Company purchased certain assets of a
bulk CO2 company with operations in Kansas for a purchase price of approximately
$990. The purchase price was funded through a borrowing under the Company's
SunTrust Facility (see Note 5).
Effective January 23, 1998, the Company purchased substantially all
of the assets of a bulk CO2 company operating in California for a purchase price
of $4,500. The purchase price was funded through a borrowing under the Company's
SunTrust Facility (see Note 5).
Effective March 2, 1998, the Company purchased certain assets from
Florida Carbonic Distributor, Inc., a carbonic gas distributor operating in
Florida for a purchase price of $6,300. The purchase price was funded through a
borrowing under the Company's SunTrust Facility (see Note 5).
In March, 1998, the Company purchased certain assets from three
unrelated carbonic gas distributors with operations in Texas, Maine and Alabama
for an aggregate purchase price of $406. The Company paid cash for these
transactions.
The Company did not consumate any acquisitions during the fiscal
years ended June 30, 2000 and 1999.
These acquisitions were accounted for by the purchase method of
accounting and, accordingly, the purchase prices and direct costs of the
acquisitions have been allocated to the respective assets and liabilities of the
acquired companies based upon their estimated fair market values at the date of
acquisition. This resulted in goodwill of approximately $16,257 in the year
ended June 30, 1998, which is being amortized on a straight-line basis over
twenty years. The results of operations of the acquired companies are included
in the Company's consolidated financial statements since the effective date of
the acquisitions.
The following summarized, unaudited, pro forma results of operations
for the year ended June 30, 1998 assumes that the acquisitions described above
occurred as of the beginning of the year:
Net sales $ 39,079
(Loss) before extraordinary item (6,134)
Net (loss) (6,321)
Net (loss) per common share (0.88)
F-11
NUCO2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
Note 3 - Property and Equipment, Net
Property and equipment, net consists of the following:
June 30,
--------
2000 1999
-------- --------
Leased equipment $112,427 $ 95,925
Equipment and cylinders 15,061 13,940
Systems held for installation 4,757 5,151
Vehicles 412 448
Computer equipment 2,454 2,063
Office furniture and fixtures 1,382 1,216
Leasehold improvements 1,613 1,485
-------- --------
138,106 120,228
Less accumulated depreciation and amortization 30,986 20,563
-------- --------
$107,120 $ 99,665
======== ========
Capitalized component parts and direct costs associated with
installation of equipment leased to others included in leased equipment was
$26,265 and $19,418 at June 30, 2000 and 1999, respectively. Accumulated
depreciation and amortization of these costs were $10,324 and $6,332 at June 30,
2000 and 1999, respectively.
Depreciation and amortization of property and equipment was $10,841,
$8,743 and $6,046 for the years ended June 30, 2000, 1999, and 1998,
respectively.
Note 4 - Leases
The Company leases equipment to its customers generally pursuant to
five-year or six year noncancelable operating leases which expire on varying
dates through June 2006. At June 30, 2000, future minimum rentals due from
customers which includes, where applicable, a continuous supply of CO2 (see Note
1(g)), are approximately as follows:
Year Ending June 30,
--------------------
2001 $ 38,179
2002 34,531
2003 27,140
2004 18,895
2005 14,834
Thereafter 5,520
--------
$139,099
========
F-12
NUCO2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
Note 5 - Long-Term Debt
Long-term debt consists of the following:
June 30,
--------
2000 1999
---- ----
Note payable to bank under credit facility. Drawings at June 30, 2000 are at LIBOR rates
plus 3.75% (10.0213% to 10.6125%). Drawings at June 30, 1999 are at LIBOR
rates plus 3.5% (8.8831%). (a) $ 52,750 $ 43,250
Various notes payable 363 462
--------- --------
53,113 43,712
Less current maturities of long-term debt 33 97
--------- --------
Long-term debt, excluding current maturities $ 53,080 $ 43,615
========= ========
(a) On May 4, 1999, the Company entered into 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 syndicated
facility which had been entered into in October 1997. As of June 30, 2000,
$22.25 million is available under the 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 (as
defined). 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 .375% to .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 cumulate, but not pay, cash dividends on the 8% convertible preferred
stock. 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.
On June 9, 1998, the Company entered into an interest rate swap
transaction (the "Swap") with SunTrust Bank, Atlanta, in the amount of $10.0
million (the "Notional Amount"). The effective date of the Swap is September 2,
1998 and terminates on September 5, 2000. Pursuant to the Swap, the Company pays
a fixed interest rate of 6% per annum and receives a LIBOR-based floating rate.
The aggregate maturities of long-term debt for each of the five years
subsequent to June 30, 2000 are as follows:
Year Ending June 30,
--------------------
2001 $ 33
2002 52,787
2003 40
2004 44
2005 48
Thereafter 161
-------
$ 53,113
=======
Extraordinary item - loss on extinguishment of debt
During the year ended June 30, 1998, the Company incurred an
extraordinary charge of $187, for the write-off of deferred financing costs in
connection with the early repayment of debt.
F-13
NUCO2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
Note 6 - 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 the
Company's Common Stock at an exercise price of $16.40 per share. The effective
rate of 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 the Company's 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 of 612,023 of the warrants issued in connection with the sale of
the Notes was reduced to $6.65 per share. The effective rate of 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 7 - 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 year ended June 30, 2000, the carrying amount
(and Liquidation Preference) of the Convertible Preferred Stock was increased by
$50 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, 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.
Note 8 - Shareholders' Equity
(a) Non-Qualified Stock Options and Warrants
In June 1995, the Company granted a ten year warrant to purchase
84,917 shares of Common Stock at $5.00 per share to the Company's then current
lending institution in connection with a refinancing. On February 14, 2000, the
lending institution exercised warrants to purchase 57,385 shares of Common Stock
pursuant to the cashless exercise contained in the warrants. In connection with
the cashless exercise, warrants to purchase 27,532 shares of Common Stock were
cancelled.
In connection with the Company's Initial Public Offering in
December 1995, representatives of the Underwriter received warrants to purchase
up to an aggregate of 33,000 shares of Common Stock. Such warrants are
exercisable for a period of five years, at an exercise price of $10.80 per
share. As of June 30, 2000 the warrants are outstanding.
In May 1997, the Company granted a warrant to purchase 1,000,000
shares of Common Stock to BOC pursuant to the supply agreement (see Note 14).
The warrant is exercisable from May 1, 1999 to May 1, 2002 at an exercise price
of $17 per share and from May 1, 2002 until April 30, 2007 at an exercise price
of $20 per share. As of June 30, 2000 the warrant is outstanding.
F-14
NUCO2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(b) Stock Option Plans
The board of directors adopted the 1995 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, or both.
The exercise price of incentive options shall be at least equal to 100% of the
fair market value of the Company's Common Stock at the date of the grant, and
the exercise price of non-qualified stock options issued to employees may not be
less than 75% of the fair market value of the Company's Common Stock at the date
of the grant. The maximum term for all options is 10 years. Options granted to
date vest in three to five installments over periods of three to four and
one-half years. As of June 30, 1998, 1999 and 2000, options for 105,900 shares,
277,307 shares and 481,808 shares were exercisable, respectively. The
weighted-average fair value per share of options granted during the years ended
June 30, 1998, 1999 and 2000 were $2.81, $2.20 and $3.06, respectively. As of
June 30, 2000, the weighted-average remaining life of the options was 6.98
years.
The following table summarizes the transactions pursuant to the 1995
Plan.
Weighted-Average
Shares Exercise Price Exercise Price
------ -------------- --------------
Outstanding at June 30, 1997 346,604 $9-$17.50 $12.28
Granted 341,500 $10.25-$11.28 $10.43
Expired or canceled 77,067 $9-$17.50 $17.29
Exercised 111 $9 $9
--------- ------------- --------
Outstanding at June 30, 1998 610,926 $9-$11.28 $10.61
Granted 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 315,000 $6.75-$7.50 $6.79
Expired or canceled 26,526 $5.50-$11.25 $9.85
Exercised 966 $5.50 $5.50
--------- ------------- --------
Outstanding at June 30, 2000 1,091,734 $5.50-$11.28 $8.58
========= ============= ========
The board of directors of the Company adopted the Directors' Stock
Option Plan (the "Directors' Plan"). Under the Directors' Plan, each
non-employee director will receive options for 6,000 shares of Common Stock on
the date of his or her first election to the board of directors. In addition, on
the third anniversary of each director's first election to the Board, and on
each three year anniversary thereafter, each non-employee director will receive
an additional option to purchase 6,000 shares of Common Stock. The exercise
price per share for all options granted under the Directors' Plan will be equal
to the fair market value of the Common Stock as of the date of grant. All
options vest in three equal annual installments beginning on the first
anniversary of the date of grant. The maximum term for all options is ten years.
As of June 30, 1998, 1999 and 2000 options for 14,000 shares, 8,000 shares and
16,000 shares were exercisable, respectively. No options have been exercised
under the Directors' Plan. The weighted-average fair value per share of options
granted during the years ended June 30, 1998, 1999 and 2000 were $4.11, $2.58
and $2.37 respectively. As of June 30, 2000, the weighted-average remaining life
of the options was 7.51 years.
Weighted-Average
Shares Exercise Price Exercise Price
------ -------------- --------------
Outstanding at June 30, 1997 24,000 $9.00 $9.00
Granted 6,000 $12.50 $12.50
Expired or canceled 8,000 $9.00 $9.00
------ ------------- ------
Outstanding at June 30, 1998 22,000 $9.00-$12.50 $9.95
Granted 18,000 $6.06-$8.94 $7.21
Expired or canceled 10,000 $9.00 $9.00
------ ------------- ------
Outstanding at June 30, 1999 30,000 $6.06-$12.50 $8.63
Granted 6,000 $7.00 $7.00
Expired or canceled 4,000 $8.94 $8.94
------ ------------- ------
Outstanding at June 30, 2000 32,000 $6.06-$12.50 $8.28
====== ============= ======
F-15
NUCO2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, defines a fair value based method of accounting for stock options.
The Statement allows an entity to continue to measure cost using the accounting
method prescribed by APB Opinion No. 25, Accounting for Stock Issued to
Employees, and to make pro forma disclosures of net income and earnings per
share as if the fair value based method of accounting had been applied. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in fiscal 1998, 1999 and 2000; expected volatility
of 39% to 40%, risk-free interest rate of 4.3% to 6.6%, expected dividend yield
of 0% and expected lives of one to five years. The Company presents the
following pro forma disclosures for employee stock options:
Years Ended June 30,
--------------------
2000 1999 1998
---- ---- ----
Net (loss) available to common shareholders $ (9,766) $ (9,463) $ (5,975)
Net (loss) per common share $ (1.35) $ (1.31) $ (0.83)
========== ========== ==========
Weighted average number of common and
common equivalent shares outstanding 7.238 7.217 7.210
========== ========== ==========
The pro forma adjustment for stock based compensation costs under
SFAS 123 for the years ending 1998, 1999 and 2000 is approximately $340, $530
and $333, respectively. No stock based compensation was recognized in the
financial statements pursuant to APB Opinion No. 25.
Note 9 - Earnings per Share
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 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 for the years ended June 30, 2000, 1999 and 1998 were
438,131 shares, 52,668 shares and 136,972 shares, respectively. These shares
were not included in diluted EPS because they would have been antidilutive.
Additionally, options and warrants to purchase 1,000,000 shares and 43,715
shares for $17.00 per share and $16.40 per share, respectively, were outstanding
during the year ended June 30, 2000 and options and warrants to purchase
1,075,000 shares, 655,738 shares and 36,000 shares for $17.00-$17.50 per share,
$16.40 per share and $12.50-$14.64 per share, respectively, and options and
warrants to purchase 1,043,715 shares, 321,810 shares and 350,416 shares for
$16.40-$17.00 per share, $11.00-$14.64 per share and $8.94-$10.80 per share,
respectively, were outstanding during all or a portion of the years ended June
30, 1998 and 1999, respectively, but were not included in the computation of
diluted EPS because the options and warrants exercise price was greater than the
average market price of the common shares. Also, not included in the computation
of diluted EPS for the year ended June 30, 2000, were 533,262 shares of Common
Stock issuable upon conversion of 5,000 shares of Convertible Preferred Stock
issued during the year ended June 30, 2000, because the effect would be
antidilutive.
Years Ended June 30,
--------------------
2000 1999 1998
---- ---- ----
(Loss) before extraordinary item $(9,383) $(8,933) $(5,448)
Extraordinary item - loss on extinguishments of debt (Note 5) -- -- 187
------- ------- -------
Net Loss (9,383) (8,933) (5,635)
Preferred Stock dividends (50) -- --
------- ------- -------
Net (loss) available for common shareholders $(9,433) $(8,933) $(5,635)
======= ======= =======
Weighted Average outstanding shares of Common Stock 7,238 7,217 7,210
Loss per share - Basic and Diluted
Loss before extraordinary item $ (1.30) $ (1.24) $ (0.75)
Extraordinary item -- -- (0.03)
------- ------- -------
Net loss $ (1.30) $ (1.24) $ (0.78)
======= ======= =======
F-16
NUCO2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
Note 10 - Income Taxes
The tax effects of temporary differences that give rise to
significant portions of deferred tax assets and deferred tax liabilities are as
follows:
June 30,
--------
2000 1999
---- ----
Deferred tax assets:
Allowance for doubtful accounts $ 234 $ 210
Amortization expense 730 512
Other 10 11
Net operating loss carryforwards 24,368 17,143
-------- --------
Total gross deferred tax assets 25,342 17,876
Less valuation allowance (9,796) (6,236)
-------- --------
Net deferred tax assets 15,546 11,640
-------- --------
Deferred tax liabilities:
Depreciation expense (15,546) (11,640)
-------- --------
Total gross deferred tax liabilities (15,546) (11,640)
-------- --------
Net deferred taxes $ -- $ --
======== ========
At June 30, 2000, the Company had net operating loss carryforwards for
Federal income tax purposes of approximately $64,800, which are available to
offset future Federal taxable income, if any, in varying amounts through June
2020. The net change in the total valuation allowance for the years ended June
30, 2000 and 1999 was an increase of $3,560 and $3,470 respectively.
Note 11 - Related Party Transactions
The Company entered into leases with the chairman of the board and
chief executive officer for certain warehouse/depots and office facilities with
future annual rentals of approximately:
Year Ending June 30,
--------------------
2001 $ 235
2002 109
2003 60
----
$ 404
====
Rental expense was $305, $275 and $247 in 2000, 1999 and 1998,
respectively, under these leases.
Note 12 - Lease Commitments
The Company leases office equipment, trucks and warehouse/depot and
office facilities under operating leases (including related party leases, see
Note 11) that expire at various dates through June 2006. Primarily all of the
leases contain renewal options and escalations for real estate taxes, common
charges, etc. Future minimum lease payments under noncancelable operating leases
(that have initial noncancelable lease terms in excess of one year) are as
follows:
Year Ending June 30,
--------------------
2001 $ 4,466
2002 4,094
2003 2,846
2004 1,416
2005 409
Thereafter 63
------
$13,294
======
Total rental costs under noncancelable operating leases was
approximately $4,670, $4,386 and $3,284 in 2000, 1999 and 1998, respectively.
F-17
NUCO2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
Note 13 - Concentration of Credit and Business Risks
The Company's business activity is with customers located within the
United States. For each of the years ended June 30, 2000, 1999 and 1998 the
Company's sales to customers in the food and beverage industry were
approximately 99%.
There were no customers that accounted for greater than 5% of total
sales for the three years ended June 30, 2000, nor were there any customers that
accounted for greater than 5% of total accounts receivable at June 30, 2000 or
1999.
The Company purchases new bulk CO2 systems from the two major
manufacturers of such systems. The inability of both or either of these
manufacturers to deliver new systems to the Company could cause a delay in the
Company's ability to fulfill the demand for its services and a possible loss of
sales, which could affect operating results adversely.
Note 14 - Commitments and Contingencies
In May 1997, the Company entered into an exclusive ten-year carbon
dioxide supply agreement with The BOC Group, Inc. ("BOC"). The agreement ensures
readily available high quality CO2 as well as relatively stable liquid carbon
dioxide prices. Pursuant to the agreement, the Company must purchase all of its
liquid CO2 requirements from BOC. The agreement contains annual adjustments over
the prior contract year for an increase or decrease in the Producer Price Index
for Chemical and Allied Products ("PPI") 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
shall not exceed 3% per year in the first five contract years.
The Company is a defendant in legal actions which arise in the
normal course of business. In the opinion of management, the outcome of these
matters will not have a material effect on the Company's financial position or
results of operations.
Note 15 - Disclosures about Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments.
(a) Cash and cash equivalents
The carrying amount approximates fair value due to the short
maturity of these instruments.
(b) Long-term debt
The fair value of the Company's long-term debt has been estimated
based on the current rates offered to the Company for debt of the same remaining
maturities.
The carrying amounts and fair values of the Company's financial
instruments are as follows:
June 30,
--------
2000 1999
------- -------
Cash and cash equivalents $ 279 $ 1,579
Long-term debt, including current maturities 53,113 43,712
Subordinated debt 38,969 38,749
As of June 30, 2000 and 1999, the fair value of the Company's
interest rate swap (see Note 5) was not material.
F-18
NUCO2 INC.
Schedule II
Valuation and Qualifying Accounts
In Thousands
Column B Column C - Additions Column D Column E
-------- -------------------- -------- --------
Balance at Charge to
beginning of costs and Charged to Balance at
period expenses other accounts Deductions end of period
------ -------- -------------- ---------- -------------
Year ended June 30, 1998
Allowance for doubtful accounts $ 113 $ 451 $ 43 (1) $ 212 $ 395
Year ended June 30, 1999
Allowance for doubtful accounts $ 395 $ 665 $ - $ 502 $ 558
Year ended June 30, 2000
Allowance for doubtful accounts $ 558 $ 445 $ - $ 381 $ 622
(1) Initial reserve of acquired company.
F-19