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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from ___________ to ___________
Commission file number: 0-27378
NUCO2 INC.
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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: (772) 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 18, 2002 of shares of the
Registrant's common stock, $.001 par value per share (based upon the closing
price of $10.00 per share of such stock on the Nasdaq National Market on such
date), held by non-affiliates of the Registrant was approximately $98,554,000.
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 18, 2002, there were outstanding 10,633,405 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 28, 2002 pursuant to Regulation 14A.
NUCO2 INC.
Index
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Page
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PART I.
Item 1. Business. 1
Item 2. Properties. 7
Item 3. Legal Proceedings. 7
Item 4. Submission of Matters to a Vote of Security Holders. 7
PART II.
Item 5. Market For Registrant's Common Equity and
Related Stockholder Matters. 7
Item 6. Selected Financial Data. 8
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations. 9
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 22
Item 8 Financial Statements and Supplementary Data. 23
Item 9. Changes in and Disagreements
With Accountants on Accounting and Financial Disclosure. 23
PART III.
Item 10. Directors and Executive Officers of the Registrant. 23
Item 11. Executive Compensation. 23
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters. 23
Item 13. Certain Relationships and Related Transactions. 23
PART IV.
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K. 23
Signatures 27
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 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
Arby's McDonald's Applebee's Official All Star Cafe
Bumpers Drive-In Panera Bread Company Bahama Breeze Outback Steakhouse
Burger King Papa Gino's Bertucci's Perkins Family Restaurants
Captain D's Pizza Hut Cheesecake Factory Pizzeria Uno
Carl's Jr. Quizno's Classic Subs Chevy's Ponderosa Steak House
Checker's Drive-In Sbarro Chili's Red Lobster/Olive Garden
Chick-Fil-A Schlotzsky's Deli Cooker Bar & Grill Rio Bravo Cantina
Churchs Chicken Sonic Drive-In Don Pablo's Roadhouse Grill
D'Angelo's Sandwich Shop Steak'n Shake Friendly's Restaurant Ruby Tuesday
Dunkin' Donuts Taco Bell Hard Rock Cafe Ryan's Family Steak House
Hardee's Wendy's Landry's Shoney's
KFC White Castle Longhorn Steakhouse Spaghetti Warehouse
Krystal Macaroni Grill
Contract Feeders Wholesale Clubs Convenience/Petroleum
ARAmark BJ's Wholesale 7-Eleven Golden Pantry
Compass Group Costco AM/PM Pantry Stores
Host Marriott Sam's Club BP/Amoco Phillips 66
Sodexho Circle K Racetrac Petroleum
Coastal Mark Shell ETD
Sports Venues Conoco Spectrum Stores
AMF Bowling Centers Exxon Sunshine Jr.
Brunswick Recreation Centers E-Z Serve Tom Thumb
Derby Lane Farm Stores
Georgia Dome
Madison Square Garden Movie Theatres
Pro Player Stadium Litchfield Cinemas United Artist Cinemas
Raymond James Stadium Loew's Cineplex Wallace Theatres
Staples Center Regal Cinemas
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 98 service
locations and approximately 71,000 bulk and high pressure CO2 customers in 45
states as of June 30, 2002. 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]
Our bulk CO2 customer base is highest in Florida, Texas, Georgia,
New York and California. 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 $72.3 million in fiscal 2002.
Net Sales
(in millions)
[OBJECT OMITTED]
Opportunity for Growth
CO2 is universally used for carbonating fountain beverages. Bulk CO2
systems are permanently installed at the customer's site and are filled by the
supplier from a specialized bulk CO2 truck, unlike high pressure cylinders which
are typically changed out when empty and transported to the supplier's depot for
refilling. 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.
2
We estimate there are currently approximately 140,000 bulk CO2
beverage users in the United States. Of these, approximately 70,000 are already
our customers. We also currently service approximately 1,000 stand alone high
pressure CO2 customers. There are an estimated 600,000 convertible fountain
beverage users in the continental United States suitable for bulk CO2 services.
Therefore, the bulk CO2 industry presents substantial opportunity for growth.
[OBJECT OMITTED]
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. 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. Presently, we offer bulk CO2 systems ranging from 300
to 600 lbs. of CO2 capacity. This range of bulk CO2 system sizes permits us to
market our services to a range of potential customers.
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 paying 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
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. 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.
We also supply high pressure gases in cylinder form, including CO2,
helium and nitrogen. We estimate that we currently service approximately 1,000
stand-alone 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 ("Coca-Cola") that
establishes a framework to develop a strategic alliance between us for providing
Coca-Cola's fountain customers in the United States with quality CO2 and CO2
dispensing systems, technology and services that are superior to that which have
thus far been available.
3
The framework for the strategic alliance was established in March
2000. With the first phase of the program successfully completed, phase two is
now being implemented and a business plan is being developed jointly by the
companies that will address far-reaching aspects of the strategic alliance,
including, but not limited to, sales and marketing efforts, service, product
quality, carbonation process monitoring and coordination of all aspects of the
business process.
The agreement contemplates that we will be the sole preferred
provider of bulk CO2 to Coca-Cola's customers. We will jointly develop a
differentiated CO2 marketing program to be used exclusively for Coca-Cola's
customers.
Marketing and Customers
At June 30, 2002, we serviced approximately 71,000 bulk and high
pressure CO2 customers, none of which accounted for more than 2% of our fiscal
2002 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.
Our products and services are sold by a sales force of 38 commission only
independent sales representatives and 39 salaried sales personnel.
Competition
We are the largest and the sole national supplier of bulk CO2
systems and bulk CO2 for carbonating 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 product quality, availability and reliability, price, 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 advantages over
our competitors due to the density of our route structure and a lower average
time and distance traveled between stops. 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 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, suppliers vary widely in size and some of our competitors
have significantly greater financial, technical or marketing resources than we
do.
4
Operations
At June 30, 2002, we operated 98 service locations (76 stationary
depots and 22 mobile depots) located throughout our 45 state service area and
operated 161 specialized bulk CO2 trucks and 76 technical service vehicles. 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.
Implementation of our Intelligent Distribution System,
AccuRoute(TM), continued during the year. AccuRoute(TM) includes these core
components:
Portable Account Link (PAL)
This is the mobile information system for use in our delivery
operation. 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. PAL has been
operational since the spring of 2000.
Scheduling System
In order to ensure reliability and consistent service levels to the
customer, deliveries are made at a fixed interval. Information from the
scheduling system is used to determine the proper frequency. Accounts are
closely monitored by our field and corporate personnel. Each account is placed
into the correct frequency grouping based on delivery history, seasonality, and
promotions reported to us by the customer.
The scheduling system analyzes a customer's CO2 usage and determines
the optimal next delivery date, considering both maximum payload delivery and
safety stock held in the customer's tank. The foundation of the scheduling
system is the delivery information gathered by the PAL system. The scheduling
system utilizes sophisticated computer algorithms that consider:
1. Tank size
2. Delivery history
3. Seasonal factors
4. Safety margins
Based on delivered quantities over time, the scheduling system
determines a daily usage rate. Usage, combined with tank size and last delivery
date, is used to determine how often a customer's tank must be filled.
The scheduling system was first deployed during the fall of 2000 and
currently is being significantly refined and enhanced.
Route Optimization
The route optimization system will produce efficient delivery routes
to minimize time and distance traveled between deliveries. We expect that this
will significantly improve the levels of service to our customers by enabling
our drivers to deliver more stops in less time. Testing of a potential
third-party solution has taken place and we expect that additional solutions
will be evaluated in the near future. Final selection should occur, and initial
implementation begin during fiscal 2003.
Mobile Fleet Communication
We have implemented two-way voice communication and text messaging
primarily using the Nextel(R) wireless communication system. This system allows
for real-time, voice communication or two-way text messaging with delivery and
service personnel, regardless of their location virtually anywhere in the
country. This capability has greatly increased our ability to maximize the
utilization of our resources and to provide the highest level of customer
service.
5
Remote Tank Monitoring
This system will provide readings of CO2 pressure and volume either
on demand by polling the monitor on the tank or will automatically generate an
alert when a predetermined set point is reached. We envision that this system
will especially benefit those customers that experience large swings in CO2
usage, such as theaters, sports venues and seasonal customers. We are presently
reviewing remote tank monitoring alternatives with our strategic partners,
Coca-Cola and The BOC Group, Inc., and our major supplier of bulk CO2 systems,
as well as several other solution providers. Initial testing of remote tank
monitoring began in December 2001 and continues.
Customer Extranet
Customers will be able to log on to a secure Web site and among
other things, maintain their accounts, review account balances and delivery
history, as well as scheduled deliveries, and place orders or request special
service. The Customer Extranet is expected to be deployed in the fall of 2002.
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 requirements contract with The BOC Group, Inc., the
multinational industrial gases company, that provides a stable supply of high
quality CO2 at competitive prices. 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 the two major manufacturers of
such systems and we believe that we are the largest purchaser of bulk CO2
systems from these manufacturers combined. We currently purchase bulk CO2
systems in four sizes (300, 400, 450 or 600 lbs. of 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, 2002, we employed 541 full-time employees, 215 of whom
were involved in management, sales or customer support, 251 of whom were route
drivers and 75 of whom were in technical service 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, 2002, approximately 13,000 of our bulk CO2 customers
were billed under rental plus per pound charge contracts or 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.
6
2. Properties.
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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, 2002, we also rented 76
stationary service locations throughout 45 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.
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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.
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Not applicable.
5. Market For Registrant's Common Equity and Related Stockholder Matters.
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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 2001 and 2002, as
reported by the Nasdaq National Market.
Calendar 2000 High Low
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Third Quarter $ 9.000 $ 6.031
Fourth Quarter 8.375 5.031
Calendar 2001
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First Quarter $ 13.875 $ 7.563
Second Quarter 15.800 11.125
Third Quarter 13.200 7.940
Fourth Quarter 12.850 9.820
Calendar 2002
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First Quarter $ 13.050 $ 11.120
Second Quarter 14.010 10.900
At September 19, 2002, 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 November 1, 2001, we sold 2,500 shares of our Series B 8%
Cumulative Convertible Preferred Stock without registration under the Securities
Act of 1933, as amended (the "Securities Act") to Paribas North America, Inc., a
Delaware corporation, for aggregate cash proceeds of $2.5 million in reliance
upon the exemption from registration provided by Section 4(2) of the Securities
Act. Shares of the Series B 8% Cumulative Convertible Preferred Stock may be
converted into shares of our Common Stock at any time at a conversion price of
$12.92 per share. No underwriting discounts or commissions were paid.
On August 22, 2002, we sold 1,663,846 shares of our Common Stock
without registration under the Securities Act to 24 "accredited investors" at a
price of $9.75 per share for aggregate cash proceeds of $16,222,499 in reliance
7
upon the exemption from registration provided by Section 4(2) of the Securities
Act and Regulation D thereunder. Commissions in the amount of $920,138 were
paid.
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,
--------------------------
2002 2001* 2000* 1999* 1998*
---- ---- ---- ---- ----
(in thousands, except per share amounts and Operating Data)
Income Statement Data:
Net sales ............................................. $ 72,312 $ 67,633 $ 57,951 $ 47,098 $ 35,077
Cost of products sold ................................. 35,491 33,177 28,565 24,548 18,178
Selling, general and administrative expenses .......... 17,614 17,368 12,352 10,121 9,296
Depreciation and amortization ......................... 16,319 17,475 15,501 12,763 8,912
Loss on asset disposal ................................ 4,661 4,891 901 1,110 500
--------- --------- --------- --------- ---------
Operating (loss) income ............................... (1,773) (5,278) 632 (1,444) (1,809)
Interest expense, net ................................. 8,402 10,207 10,015 7,489 3,639
--------- --------- --------- --------- ---------
(Loss) before extraordinary item ...................... (10,175) (15,485) (9,383) (8,933) (5,448)
Extraordinary item .................................... 796 -- -- -- 187
--------- --------- --------- --------- ---------
Net (loss) ............................................ $ (10,971) $ (15,485) $ (9,383) $ (8,933) $ (5,635)
========= ========= ========= ========= =========
(Loss) per common share before
extraordinary item ............................... $ (1.23) $ (2.01) $ (1.30) $ (1.24) $ (0.75)
Extraordinary item .................................... (0.09) -- -- -- (0.03)
--------- --------- --------- --------- ---------
Net (loss) per common share ........................... $ (1.32) $ (2.01) $ (1.30) $ (1.24) $ (0.78)
Weighted average shares outstanding ................... 8,742 7,926 7,238 7,217 7,210
*Restated to conform to current year's classifications
Other Data:
EBITDA (1) ............................................ $ 14,546 $ 12,197 $ 16,133 $ 11,319 $ 7,103
Operating Data:
Company owned bulk CO2 systems serviced
Beginning of period .............................. 60,000 58,000 50,395 39,295 21,919
New installations, net ........................... 1,000 2,000 7,605 11,100 9,446
Acquisitions ..................................... -- -- -- -- 7,930
--------- --------- --------- --------- ---------
Total company owned bulk CO2 systems serviced ......... 61,000 60,000 58,000 50,395 39,295
Customer owned bulk CO2 systems serviced .............. 9,000 9,000 10,000 8,605 6,800
--------- --------- --------- --------- ---------
Total bulk CO2 systems serviced ....................... 70,000 69,000 68,000 59,000 46,095
Total high pressure CO2 customers ..................... 1,000 2,000 5,000 6,000 9,000
--------- --------- --------- --------- ---------
Total customers ....................................... 71,000 71,000 73,000 65,000 55,095
Stationary depots ..................................... 76 74 70 69 63
Mobile depots ......................................... 22 19 21 15 2
Bulk CO2 trucks ....................................... 161 157 158 166 150
Technical service vehicles ............................ 76 87 95 86 76
High pressure cylinder delivery trucks ................ -- 2 7 7 17
Balance Sheet Data:
Cash and cash equivalents ............................. $ 1,562 $ 626 $ 279 $ 1,579 $ 337
Total assets .......................................... 132,638 138,016 148,549 141,630 124,498
Total debt (including short-term debt) ................ 87,660 87,346 92,082 82,461 59,328
Redeemable preferred stock ............................ 8,552 5,466 5,050 -- --
Total shareholders' equity ............................ 25,219 33,982 38,240 47,733 55,643
- -------------------
8
(1) EBITDA represents operating (loss) income plus depreciation and
amortization. Information regarding EBITDA is presented because of its
use by certain investors as one measure of a corporation's ability to
generate cash flow. EBITDA should not be considered an alternative to,
or more meaningful than, operating income, net income or cash flows from
operating activities as an indicator of a corporation's operating
performance.
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
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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 fountain beverages. As of June 30, 2002, we
operated a national network of 98 service locations in 45 states servicing
approximately 71,000 bulk and high pressure customers. Currently, 99% of
fountain beverage users in the continental United States are within our present
service area. Historically, due to a combination of internal growth and
acquisitions, we have experienced high levels of growth in terms of number of
customers and net sales, averaging 20% to 50% per year from 1995 through 2000.
Today, the majority of our growth is internal resulting from the conversion of
high pressure CO2 users to bulk CO2 systems.
During the fiscal years ended June 30, 2001 and 2002, we
deliberately slowed new customer contract signings and the related installation
rate of bulk CO2 systems. This decision was made to enable us to focus on
improving our operating effectiveness in order to better position us for future
growth. We decentralized service location management from our headquarters in
Stuart, Florida to the depot locations themselves and in connection with this
decision hired new full-time depot and regional managers. This slowed our gross
margin improvement plan in fiscal 2001 and 2002, although it is anticipated to
enhance it in the future. We also devoted significant resources to developing
and implementing our new AccuRoute(TM) system to improve our productivity and
better service our customers. The result of this decision was that our revenue
growth slowed from prior years although revenue still grew at 16.7% and 6.9% in
fiscal 2001 and 2002, respectively. In addition, the ramp down in growth enabled
our sales force to concentrate on signing higher margin new customers and
resigning existing customers at increased rates. Because of these initiatives,
we feel that we will be ready to accelerate our growth in the second quarter of
fiscal 2003.
During fiscal 2002, early increases in net sales were primarily the
result of pricing initiatives on both new and renewal customers. During the
quarter ended March 31, 2002, revenue growth reflected a strategic decision to
reduce fuel and other surcharges along with a planned reduction in our high
pressure cylinder business. The weak economy also impacted revenues during the
year due to a large number of small independent restaurant closings, reduced
volume on per pound and fill only customers and slower growth in new customer
installations.
We believe that our future revenue growth, gains in gross margin and
profitability will be dependent upon (i) increases in route density in existing
markets and the expansion and penetration of bulk CO2 system installations in
new market regions, both resulting from successful ongoing marketing, (ii)
improved operating efficiencies and (iii) price increases. New multi-unit
placement agreements combined with single-unit placements will drive
improvements in achieving route density. Our success in reaching multi-placement
agreements is due in part to our national delivery system. We maintain a "hub
and spoke" route structure and establish additional stationary bulk CO2 service
locations as service areas expand through geographic growth. Our entry into many
states was accomplished largely through the acquisition of businesses having
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 regional and local marketing initiatives. Greater density
should also lead to enhanced utilization of vehicles and other fixed assets and
the ability to spread fixed marketing and administrative costs over a broader
revenue base.
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Generally, our experience has been that as our service locations
mature their gross profit margins improve as a result of their volume growing
while fixed costs remain essentially unchanged. New service locations typically
operate at low or negative gross margins in the early stages and detract from
our highly profitable service locations in more mature markets. Fiscal 2001 and
2002 were periods of transition for us in which we achieved significant progress
in better positioning ourselves for the next phase of growth. We continue to
focus on improving operating effectiveness, increasing prices and strengthening
management. We anticipate that these initiatives will contribute positively to
all areas of our Company.
GENERAL
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 $18.9 million in fiscal
1997 to $72.3 million in fiscal 2002. We believe that our revenue base is stable
due to the existence of long-term contracts with our customers which generally
rollover with a limited number expiring without renewal in any one year. Revenue
growth is largely dependent on (1) the rate of new bulk CO2 system
installations, (2) the growth in bulk CO2 sales at (i) customers having rental
plus per pound charge contracts and (ii) customers who own their own bulk CO2
systems, and (3) price increases.
Cost of products sold is comprised of purchased CO2, vehicle and
service location costs associated with the storage and delivery of CO2. Selling,
general and administrative expenses consist of wages and benefits, dispatch and
communications costs, as well as 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
and related installation costs, amortization of sales commissions, and
amortization of deferred financing costs and other intangible assets.
With respect to bulk CO2 systems, we capitalize costs that are
associated with specific installations of such systems with customers under
non-cancelable contracts and which would not be incurred but for a successful
placement. All other service, marketing and administrative costs are expensed as
incurred.
We believe that earnings before interest, taxes, depreciation and
amortization ("EBITDA") is one of the principal financial measures by which we
should be measured as we continue to achieve national market presence and to
build route density. 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, net 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.
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 costs of this expansion and the
significant depreciation expense recognized on our installed network have
resulted in accumulated net losses of $53.0 million at June 30, 2002.
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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,
2002 2001* 2000*
---- ---- ----
Income Statement Data:
Net sales .................................. 100.0% 100.0% 100.0%
Cost of products sold ...................... 49.1 49.1 49.3
Selling, general and administrative expenses 24.4 25.7 21.2
Depreciation and amortization .............. 22.6 25.8 26.8
Loss on asset disposal ..................... 6.4 7.2 1.6
------- ------- -------
Operating (loss) income .................... (2.5) (7.8) 1.1
Interest expense, net ...................... 11.6 15.1 17.3
------- ------- -------
(Loss) before extraordinary item ........... (14.1) (22.9) (16.2)
Extraordinary item - extinguishment of debt. (1.1) -- --
------- ------- -------
Net (loss) ................................. (15.2)% (22.9)% (16.2)%
======= ======= =======
Other Data:
EBITDA .................................. 20.1% 18.0% 27.8%
======= ======= =======
*Restated to conform to current year's classifications.
FISCAL YEAR ENDED JUNE 30, 2002 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2001
Net Sales
Net sales increased $4.7 million, or 6.9%, from $67.6 million in
2001 to $72.3 million in 2002. The increase in sales is primarily a result of
improved pricing initiatives on both new and renewal customers, offset by our
strategic decision to reduce fuel and other surcharges and the planned reduction
in the stand alone high pressure cylinder business made in the third quarter of
fiscal 2002.
Cost of Products Sold
Costs of products sold increased by $2.3 million, or 7.0%, from
$33.2 million in 2001 to $35.5 million in 2002, and as a percentage of net
sales, equaled 49.1% in both fiscal years. Operational wages and benefits
increased by $1.2 million from $13.3 million in 2001 to $14.5 million in 2002,
and as a percentage of net sales, increased from 19.7% in 2001 to 20.1% in 2002.
The increases are primarily attributable to increased field management personnel
to enhance the operational effectiveness of our depots locally. CO2 purchases
increased by $1.0 million from $7.5 million in 2001 to $8.5 million in 2002, and
as a percentage of net sales, increased from 11.2% in 2001 to 11.8% in 2002. The
dollar increase is attributable to increased purchases of CO2, partially offset
by lower per pound costs, based on volume incentive pricing. Truck expenses
decreased $0.6 million in 2001 to $5.3 million in 2002 while decreasing as a
percentage of sales from 10.8% in 2001 to 8.8% in 2002. The dollar decrease is
primarily attributable to decreased fuel and truck repair costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $0.2
million, or 1.4%, from $17.4 million in 2001 to $17.6 million in 2002, and as a
percentage of net sales decreased from 25.7% in 2001 to 24.4% in 2002. The
increase is primarily attributable to increases in selling, executive and
administrative wages and benefits, and other general expenses, offset by a
decrease in bad debt expense. Selling and administrative wages and benefits
increased by $0.2 million from $9.7 million in 2001 to $9.9 million in 2002.
These costs include wages and benefits associated with the hiring of incremental
sales and corporate management. Other general expenses increased $0.3 million
from $4.6 million in 2001 to $4.9 million in 2002. Bad debt expense decreased
$0.3 million from $3.1 million in 2001 to $2.8 million in 2002. As a percentage
of net sales, bad debt expense decreased from 4.5% in 2001 to 3.8% in 2002. The
decrease is primarily attributable to corrective action taken on the potential
uncollectability of certain accounts receivable that came to light as a result
of several issues in the billing and cash application areas noted in the prior
year. We believe that the factors that gave rise to these issues have been
addressed in order to prevent their reoccurrence in the future. Although there
was a decrease in bad debt expense for 2002 compared to 2001, a charge of $1.9
million was recorded in the fourth quarter to increase reserves due to the
unusually high closure rate among independent operators who have gone out of
business in recent periods because of unfavorable economic conditions.
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Depreciation and Amortization
Depreciation and amortization decreased from $17.5 million in 2001
to $16.3 million in 2002. As a percentage of net sales, depreciation and
amortization expense decreased from 25.8% in 2001 to 22.6% in 2002. Depreciation
expense increased from $12.3 million in 2001 to $12.6 million in 2002 primarily
as a result of new asset additions. Amortization expense decreased by $1.4
million from $5.1 million in 2001 to $3.7 million in 2002. The decrease in
amortization expense is a result of our adoption of Statement of Financial
Accounting Standard No. 142 ("SFAS 142"), "Goodwill and Other Intangible
Assets". This accounting standard requires that goodwill be separately disclosed
from other intangible assets in the balance sheet, and no longer be amortized,
but tested for impairment on a periodic basis. In accordance with this standard
we discontinued the amortization of goodwill effective July 1, 2001. For fiscal
2002, we were not required to recognize an impairment of goodwill.
Loss on Asset Disposal
Loss on asset disposal decreased $0.2 million from $4.9 million in
2001 to $4.7 million in 2002 and as a percentage of net sales, decreased from
7.2% in 2001 to 6.4% in 2002. In June 2001, as a result of our plan to
discontinue further installation of 50 and 100 lb. tanks, a loss of $1.2 million
was recorded. Additionally, in 2001, we recognized a loss of $1.8 million as a
result of adopting a more conservative approach of immediately removing tanks
upon service termination, compared with the prior practice of leaving a tank in
place when prospects for a new customer at the same location appeared likely.
During 2002, an additional loss in the amount of $1.1 million was recognized
relating to 50 and 100 lb. tanks that were removed from service during the year.
In June 2002, we adopted a plan to replace all 50 and 100 lb. tanks in service
at customers over a three to four year period. Our decision to replace these
small tanks was based on an evaluation of undiscounted cash flows, contribution
to depot fixed overhead, pricing and targeted margins. As a result of our
decision, the remaining 50 and 100 lb. tanks were written down to their
estimated net realizable value and a loss on impairment of $1.8 million was
recorded in June 2002. As of June 30, 2002, the net book value of 50 and 100 lb.
tanks totaled $2.8 million which will be depreciated over a remaining period of
time that they are expected to be utilized.
Operating Loss
Operating loss decreased by $3.5 million from $5.3 million in 2001
to $1.8 million in 2002. As a percentage of net sales, operating loss decreased
from 7.8% in 2001 to 2.5% in 2002.
Interest Expense, Net
Interest expense, net, decreased by $1.8 million, from $10.2 million
in 2001 to $8.4 million in 2002, and decreased as a percentage of net sales from
15.1% in 2001 to 11.6% in 2002. The dollar decrease is primarily attributable to
an overall decline in interest rates as well as lower average debt levels.
Extraordinary Item
Extraordinary item, extinguishment of debt, totaled $0.8 million in
2002. This charge is attributable to the write-off of deferred charges related
to our prior credit facility. The refinancing of our prior credit facility
occurred during the first quarter of 2002 (see Note 5 to Consolidated Financial
Statements).
Net Loss
Net loss decreased by $4.5 million, or 29.2%, from $15.5 million in
2001 to $11.0 million in 2002. No provision for income tax expense in either
2001 or 2002 has been made due to historical net losses. At June 30, 2002, we
had net operating loss carryforwards for federal income tax purposes of $105.0
million, which are available to offset future federal taxable income, if any, in
varying amounts through June 2022.
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EBITDA
For the reasons described above, EBITDA increased by approximately
$2.3 million, or 19.3%, from $12.2 million in 2001 to $14.5 million in 2002 and
increased as a percentage of net sales from 18.0% to 20.1%.
FISCAL YEAR ENDED JUNE 30, 2001 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2000
(Restated to conform to current year's classifications.)
Net Sales
Net sales increased $9.6 million, or 16.7%, from $58.0 million in
2000 to $67.6 million in 2001. Of the $9.6 million increase, $4.8 million, or
50.0% was attributable to increased volume and $4.8 million, or 50.0% was
attributable to increased pricing. The volume increase in 2001 was primarily
realized as a result of having a full year's revenue from customers who signed
contracts with us during 2000. During 2001, we slowed our growth to focus on
improving our operating efficiencies and strengthening management and to enable
our sales force to focus on enhancing pricing initiatives for both new and
renewal contracts in order to better position us for future growth.
Cost of Products Sold
Cost of products sold increased $4.6 million, or 16.1%, from $28.6
million in 2000 to $33.2 million in 2001, and as a percentage of net sales was
49.3% and 49.1% in 2000 and 2001, respectively. CO2 purchases increased $0.5
million from $7.1 million in 2000 to $7.6 million in 2001, while decreasing as a
percentage of net sales from 12.2% in 2000 to 11.2% in 2001. The dollar increase
is attributable to increased purchases of CO2, offset by lower per pound costs,
based on increased volume purchases, and the percentage decrease is attributable
to lower costs per pound. Operations wages and benefits increased by $3.3
million from $9.8 million in 2000 to $13.3 million in 2001 and increased as a
percentage of net sales from 17.0% in 2000 to 19.4% in 2001. The increases are
primarily attributable to increased field management personnel to enhance the
management of our depots locally and the temporary reassignment of a portion of
our installers' responsibilities to other operational activities during this
slower growth period. We will continue to increase field management personnel in
fiscal 2002. In addition, the implementation of our new Intelligent Distribution
System ("AccuRoute(TM)"), had an initial negative impact on our gross margin.
Although AccuRoute(TM) enables us to make less frequent deliveries to our
customers and should have resulted in an immediate cost savings, many of our
customers perceived that they were getting low on gas and called for immediate
deliveries. Thus, we incurred additional expenses, as we made unscheduled
deliveries to these accounts. We believe, that as our customers become more
aware of our new delivery schedule, this problem will not reoccur in the future.
In 2001, we also experienced increased driver turnover. Truck expenses increased
$0.8 million from $5.2 million in 2000 to $6.0 million in 2001 while decreasing
as a percentage of sales from 9.0% in 2000 to 8.8% in 2001. The dollar increase
is primarily attributable to increased fuel costs and insurance.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $5.0 million
from $12.4 million in 2000 to $17.4 million in 2001, and increased as a
percentage of net sales from 21.2% in 2000 to 25.7% in 2001. The increase is
primarily attributable to increases in bad debt expense and in selling,
executive and administrative wages and benefits and a decrease in advertising
allowances from the prior year. Bad debt expense increased $2.7 million from
$0.4 million in 2000 to $3.1 million in 2001. As a percentage of net sales, bad
debt expense increased from 0.8% in 2000 to 4.5% in 2001. The increase is
primarily attributable to increased reserves due to the potential
uncollectibility of certain accounts receivable that came to light as a result
of several issues in the billing and cash application areas. We believe that the
factors that gave rise to these issues have been addressed in order to prevent
their reoccurrence in the future. Selling, executive and administrative wages
and benefits increased $1.9 million from $7.8 million in 2000 to $9.7 million in
2001, and increased as a percentage of net sales from 13.5% in 2000 to 14.4% in
2001. The increase is primarily attributable to increased costs associated with
the hiring of our new management team. These costs include wages, relocation
expenses, recruiting fees and a signing bonus. Advertising allowances decreased
$0.7 million from $0.8 million in 2000 to $0.1 million in 2001, and decreased as
a percentage of net sales from 1.5% in 2000 to 0.2 % in 2001. The decrease is a
result of lower advertising allowances from our tank manufacturers, due to
decreased levels of purchases, consistent with our planned slower growth during
2001.
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Depreciation and Amortization
Depreciation and amortization increased $2.0 million from $15.5
million in 2000 to $17.5 million in 2001. As a percentage of net sales, such
expense decreased from 26.8% in 2000 to 25.8% in 2001. Depreciation expense
increased $1.5 million from $10.8 million in 2000 to $12.3 million in 2001
principally due to the increase in bulk CO2 systems leased to customers. The
increase in 2001 is partially attributable to us having a full year's
deprecation in 2001 for customers who signed contracts with us in 2000. As a
percentage of net sales, depreciation expense decreased from 18.8% in 2000 to
18.2% in 2001. Amortization expense increased by $0.5 million from $4.7 million
in 2000 to $5.2 million in 2001 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 8.0% in 2000 to 7.6% in 2001.
Loss On Asset Disposal
Loss on asset disposal increased $4.0 million from $0.9 million in
2000 to $4.9 million in 2001 and as a percentage of net sales, increased from
1.6% in 2000 to 7.2% in 2001. The dollar increase is primarily attributable to
write-downs on fixed assets. During the fourth quarter, we decided to focus on
the placement of larger tanks on a prospective basis in order to enhance
margins. We adopted a plan to discontinue the installation of 50 and 100 pound
tanks and to dispose of the 50 and 100 pound tanks held for installation; in
connection therewith, a loss of $1.2 million was recorded. In addition, in an
effort to improve asset control and utilization, write-offs of $1.8 million were
recorded, as we adopted a more conservative approach of immediately removing
tanks upon service termination, compared to the prior practice of leaving a tank
in place when prospects for a new customer at the same location appeared likely.
We also wrote-down to net realizable value excess tank bodies for our bulk
trucks, many of which were obsolete due to capacity requirements, and
high pressure cylinders. We recorded charges of $0.8 million associated with
these write-downs.
Operating (Loss) Income
For the reasons described above, the operating loss was $5.3 million
or 7.8% of net sales, in 2001 compared to operating income of $0.6 million, or
1.1% of net sales, in 2000.
Interest Expense, Net
Interest expense, net, increased $0.2 million from $10.0 million in
2000 to $10.2 million in 2001, and decreased as a percentage of net sales from
17.3% in 2000 to 15.1% in 2001. Increased levels of long-term debt, on average
through 2001, were partially offset by the favorable rate environment in effect
during the latter half of the year.
Net Loss
For the reasons described above, the net loss increased $6.1 million
or 65.0%, from $9.4 million in 2000 to $15.5 million in 2001. No provision for
income tax expense in either 2000 or 2001 has been made due to historical net
losses. At June 30, 2001, we had net operating loss carryforwards for federal
income tax purposes of $86.5 million, which are available to offset future
federal taxable income, if any, in varying amounts through June 2021.
EBITDA
For the reasons described above, EBITDA decreased from $16.1 million
in 2000 to $12.2 million in 2001. As a percentage of net sales, EBITDA decreased
from 27.8% in 2000 to 18.0% in 2001.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 141 "Business Combinations"
("SFAS 141"), and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS
142"). SFAS 141 requires all business combinations initiated after June 30, 2001
to be accounted for using the purchase method. Under SFAS 142, goodwill and
intangible assets with indefinite lives are no longer amortized but are reviewed
annually (or more frequently if impairment indicators arise) for impairment.
Separable intangible assets that are not deemed to have indefinite lives will
continue to be amortized over their useful lives. We adopted this statement in
the first quarter of fiscal 2002, resulting in no goodwill amortization expense
in fiscal 2002. Accumulated amortization of goodwill was $5,006 at June 30, 2002
and 2001.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). This statement
addresses financial accounting and reporting for the impairment of long-lived
assets and for long-lived assets to be disposed of. SFAS 144 supercedes SFAS
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." However, SFAS 144 retains the fundamental
provisions of Statement No. 121 for (a) recognition and measurement of the
impairment of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of by sale. SFAS 144 was early adopted by us
during the year ended June 30, 2002.
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In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS
Statements No. 4, 44 and 64, Amendment of SFAS Statement No. 13, and Technical
Corrections" ("SFAS 145"). Among other things, SFAS 145 rescinds the provisions
of SFAS No. 4 that require companies to classify certain gains and losses from
debt extinguishments as extraordinary items. The provisions of SFAS 145 related
to classification of debt extinguishment are effective for fiscal years
beginning after May 15, 2002. Gains and losses from extinguishment of debt will
be classified as extraordinary items only if they meet the criteria in APB
Opinion No. 30; otherwise such costs will be classified within income from
operations. We intend to adopt SFAS 145 during the first quarter of fisal 2003.
We are currently reviewing whether or not the fiscal 2002 extraordinary item
will have to be reclassified.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146") which addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3 "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." The principal difference between
SFAS 146 and EITF 94-3 relates to SFAS 146's requirements for recognition of a
liability for a cost associated with an exit or disposal activity. SFAS 146
requires that a liability be recognized when the liability is incurred. Under
EITF 94-3, a liability for an exit cost was recognized at the date of an
entity's commitment to an exit plan. SFAS 146 also establishes that fair value
is the objective for initial measurement of the liability. The provisions of
SFAS 146 are effective for exit or disposal activities that are initiated after
December 31, 2002, but early application is encouraged. We do not expect the
adoption of SFAS 146 to have a material impact on our financial statements or
results of operations.
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, 2002, we
anticipated making cash capital expenditures of approximately $24.0 million in
2003, primarily for purchases of bulk CO2 systems for new customers, the
replacement of 50 and 100 lb. tanks in service at existing customers and
replacement units for our bulk truck fleet. In June 2002, we adopted a plan to
replace all 50 and 100 lb. tanks in service at customers over a three to four
year period. While this decision will not increase revenue through new
customers, it is expected to improve operating efficiencies, gross margins and
profitability. The capital expenditures related to the 50 and 100 lb. tank and
bulk truck fleet replacement programs are expected to be approximately $1.9
million and $1.8 million, respectively, in fiscal 2003. 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 accounts, and may
require cash in an amount dictated by the scale and terms of any such
transactions successfully concluded.
On September 24, 2001, we entered into a $60.0 million second
amended and restated revolving credit facility with a syndicate of banks
("Amended Credit Facility"). Pursuant to the Amended Credit Facility, we may
request, at any time absent a default, that the Amended Credit Facility be
increased by an additional $15.0 million to a total of $75.0 million. This new
facility replaced our prior facility, which was due to expire in May 2002. The
Amended Credit Facility contains interest rates and an unused facility fee based
on a pricing grid calculated quarterly on total debt to annualized EBITDA. We
are entitled to select the Base Rate or LIBOR, plus applicable margin, for
principal drawings under the Amended Credit Facility. The applicable LIBOR
margin pursuant to the pricing grid currently ranges from 2.50% to 4.75%, 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 currently
ranges from 1.50% to 3.75%. Interest only is payable periodically until the
expiration of the Amended Credit Facility. Additionally, it is collateralized by
substantially all of our assets. 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.
As of June 30, 2002 and 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. On September 27, 2002, the Amended
Credit Facility was amended to adjust certain financial covenants for the
quarter ended June 30, 2002 and prospectively, and to extend the maturity to
November 17, 2003.
In October 1997, we issued $30.0 million of our 12% Senior
Subordinated Promissory Notes ("Notes") with interest only payable semi-annually
on April 30 and October 31, due October 31, 2004. On May 4, 1999, we sold an
additional $10.0 million of our 12% Senior Subordinated Promissory Notes
("Additional Notes"). Except for their October 31, 2005 maturity date, the
Additional Notes are substantially identical to the Notes. As of June 30, 2002
and 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. On
September 27, 2002, concurrently with the amendment to the Amended Credit
Facility, certain financial covenants of the Notes and Additional Notes were
amended to adjust certain financial covenants for the quarter ended June 30,
2002, and prospectively.
Although we believe that we will be able to comply with the current
provisions of our borrowing arrangements, circumstances may result in our having
to obtain waivers or further modifications in the future.
In November 2001, we sold 2,500 shares of our Series B 8%
Cumulative Convertible Preferred Stock, no par value (the "Series B Preferred
Stock"), for $1,000 per share (the "Liquidation Preference"). Cumulative
15
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 Series B Preferred Stock may be
converted into shares of Common Stock at any time at a current conversion price
of $12.92 per share. Additionally, we must redeem the Series B Preferred Stock
upon the occurrence of a change in control of the Company.
During 2002, our capital resources included cash flows from
operations, proceeds from the sale of our Series B Preferred Stock, the exercise
of stock options and warrants, and available borrowing capacity under the
Amended Credit Facility. As of June 30, 2002, a total of $48.0 million was
outstanding under the Amended Credit Facility with interest at 3.5% above LIBOR
(5.355% to 5.42875%).
On August 22, 2002, we completed the private placement of 1,663,846
shares of our Common Stock to 24 accredited investors at a price of $9.75 per
share realizing net cash proceeds of approximately $15.1 million after expenses.
Pursuant to the requirements of the Amended Credit Facility, we used the
proceeds to pay down outstanding debt under the Amended Credit Facility.
We believe that cash flows from operations and available borrowings
under the Amended Credit Facility will be sufficient to fund proposed operations
for at least the next twelve months.
WORKING CAPITAL. At June 30, 2002 and June 30, 2001, we had working
capital of $2.3 million and $1.2 million, respectively.
CASH FLOWS FROM OPERATING ACTIVITIES. During 2002 and 2001, net cash
provided by operations was $10.9 million and $5.2 million, respectively. The
increase of $5.7 million in 2002 compared to 2001 is primarily a result of a
$4.5 million decrease in the net loss in 2002. Considering non-cash items, cash
flows from operating activities increased by $4.0 million in 2002. The remaining
increase of $1.7 million is primarily due to changes in working capital
components that affect the calculation of cash flows from operating activities
under the indirect method of reporting cash flows.
CASH FLOWS FROM INVESTING ACTIVITIES. During 2002 and 2001, net cash
used in investing activities was $12.8 million and $11.8 million, respectively.
These investing activities were primarily attributable to the acquisition,
installation and direct placement costs of bulk CO2 systems.
CASH FLOWS FROM FINANCING ACTIVITIES. During 2002 and 2001, cash
flows provided by financing activities were $2.9 million and $6.9 million,
respectively. In 2001, cash flows from financing activities included $12.0
million from the issuance of 1,111,111 shares of Common Stock and the exercise
of stock options, offset by the net repayment of long-term debt. In 2002, cash
flows from financing activities included $5.4 million from the issuance of 2,500
shares of Series B Preferred Stock and the exercise of stock options, offset
principally by an increase in deferred financing costs under the Amended Credit
Facility.
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 supply contract with The BOC Group, Inc. ("BOC")
provides for annual adjustments in the purchase price for bulk CO2 based upon
increases or decreases in the Producer Price Index for Chemical and Allied
Products or the average percentage increase in the selling price of bulk
merchant carbon dioxide purchased by BOC's large, multi-location beverage
customers in the United States.
CRITICAL ACCOUNTING POLICIES
In preparing our financial statements, we make estimates,
assumptions and judgments that can have a significant impact on our revenue,
operating income and net income, as well as on the reported amounts of certain
assets and liabilities on our balance sheet. We believe that the estimates,
assumptions and judgments involved in the accounting policies described below
have the greatest potential impact on our financial statements, so we consider
these to be our critical accounting policies. Estimates in each of these areas
are based on historical experience and a variety of assumptions that we believe
are appropriate. Actual results may differ from these estimates.
16
Valuation of Long-Lived Assets
We review our long-lived assets for impairment, principally property
and equipment, whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be fully recoverable. To determine
recoverability of our long-lived assets, we evaluate the probability that future
undiscounted net cash flows will be greater that the carrying amount of our
assets. Impairment is measured based on the difference between the carrying
amount of our assets and their estimated fair value. See Note 2 of the financial
statements for more information regarding asset write-downs recognized during
the years ended June 30, 2002 and 2001.
Reserves for Uncollectible Accounts Receivable
We make ongoing assumptions relating to the collectibility of our
accounts receivable. The accounts receivable amount on our balance sheet
includes a reserve for accounts that might not be paid. In determining the
amount of the reserve, we consider our historical level of credit losses. We
also make judgments about the creditworthiness of significant customers based on
ongoing credit evaluations, and we assess current economic trends that might
impact the level of credit losses in the future. As discussed in Note 15 of the
financial statements, in spite of our regular monitoring of accounts receivable,
we recorded additional reserves for uncollectible accounts receivable of $1.9
million and $1.7 million as of June 30, 2002 and 2001, respectively. While we
believe that our current reserves are adequate to cover potential credit losses,
we cannot predict future changes in the financial stability of our customers and
we cannot guarantee that our reserves will continue to be adequate. If actual
credit losses are significantly greater than the reserve we have established,
that would increase our general and administrative expenses and reduce our
reported net income. Conversely, if actual credit losses are significantly less
than our reserve, this would eventually decrease our general and administrative
expenses and increase our reported net income.
Deferred Income Taxes
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. In assessing
the realizability of deferred tax assets, we consider whether it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. We consider the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making this
assessment and record a valuation allowance to reduce our deferred tax assets to
the amount that is expected to be realized in future periods.
ISSUES AND UNCERTAINTIES
While we are optimistic about our long-term prospects, the following
issues and uncertainties, among others, should be considered in evaluating our
outlook.
WE HAVE INCURRED LOSSES SINCE OUR INCEPTION AND FACE UNCERTAINTY IN OUR ABILITY
TO BECOME A PROFITABLE COMPANY.
We have incurred substantial losses since our inception in 1990. Our
net loss was $9.4 million for fiscal 2000, $15.5 million for fiscal 2001 and
$11.0 million for fiscal 2002. We are uncertain whether we will install a
sufficient number of our bulk CO2 systems or obtain sufficient market acceptance
to allow us to achieve or sustain profitability. Our losses to date have
resulted primarily from expenses we incurred in 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 base of bulk CO2 systems have resulted in significant
operating losses to date and accumulated net losses of $53.0 million at June 30,
2002.
17
WE HAVE SUBSTANTIAL INDEBTEDNESS AND OUR OBLIGATION TO SERVICE THAT INDEBTEDNESS
COULD DIVERT FUNDS FROM OPERATIONS AND LIMIT OUR ABILITY TO OBTAIN ADDITIONAL
FUNDING TO EXPAND OUR BUSINESS.
As of June 30, 2002, we had outstanding indebtedness of $88.0
million, which included $48.0 million under our revolving credit facility and
$40.0 million of our 12% senior subordinated promissory notes due 2004 and 2005.
If we are unable to generate sufficient cash flow to service our
indebtedness, we will have to:
o reduce or delay planned capital expenditures,
o sell assets,
o restructure or refinance our indebtedness or
o seek additional equity capital.
We are uncertain whether any of these strategies can be effected on
satisfactory terms, if at all, particularly in light of our high levels of
indebtedness. In addition, the extent to which we continue to have substantial
indebtedness could have significant consequences, including:
o our ability to obtain additional financing in the future
for working capital, capital expenditures, product
research and development, acquisitions and other general
corporate purposes may be materially limited or
impaired,
o a substantial portion of our cash flow from operations
may need to be dedicated to the payment of interest on
our indebtedness and therefore not available to finance
our business, and
o our high degree of indebtedness may make us more
vulnerable to economic downturns, limit our ability to
withstand competitive pressures or reduce our
flexibility in responding to changing business and
economic conditions.
Also, our lenders require that we comply with financial and business
covenants. If we fail to maintain these covenants, our lenders could declare us
in default. They could demand the repayment of our indebtedness to them if this
default were not cured or waived. At various times 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.
OUR FUTURE OPERATING RESULTS REMAIN UNCERTAIN DESPITE THE GROWTH RATE IN OUR
REVENUE.
You should not consider growth rates in our revenue to be indicative
of growth rates in our operating results. In addition, you should not consider
prior growth rates in our revenue to be indicative of future growth rates in our
revenue. The timing and amount of future revenues will depend almost entirely on
our ability to obtain agreements with new customers to install bulk CO2 systems
18
and use our services. Our future operating results will depend on many factors,
including:
o the level of product and price competition,
o the ability to manage our growth,
o the ability to hire additional employees, and
o the ability to control costs.
WE LACK PRODUCT DIVERSITY, AND OUR BUSINESS DEPENDS ON CONTINUED MARKET
ACCEPTANCE BY THE FOOD AND BEVERAGE INDUSTRY OF OUR PRODUCT AND CONSUMER
PREFERENCE FOR CARBONATED BEVERAGES.
We depend on continued market acceptance of our bulk CO2 systems by
the food and beverage industry, which accounts for approximately 95% of our
revenues. Unlike many of our competitors for whom bulk CO2 is a secondary
business, we have no material lines of business other than the leasing of bulk
CO2 systems and the sale of CO2. We do not anticipate diversifying into other
product or service lines in the future. The retail beverage CO2 industry is
mature, with only limited growth in total demand for CO2 foreseen. Our ability
to grow is dependent upon the success of our marketing efforts to acquire new
customers and their acceptance of bulk CO2 systems as a replacement for high
pressure CO2 cylinders. While the food and beverage industry to date has been
receptive to bulk CO2 systems, we cannot be certain that the operating results
of our installed base of bulk CO2 systems will continue to be favorable or that
past results will be indicative of future market acceptance of our service. In
addition, any recession experienced by the food and beverage industry or any
significant shift in consumer preferences away from carbonated beverages to
other types of beverages could harm our business, financial condition, results
of operations and ability to service our indebtedness.
OUR MARKET IS HIGHLY COMPETITIVE AND OUR ABILITY OR INABILITY TO RESPOND TO
VARIOUS COMPETITIVE FACTORS MAY RESULT IN A LOSS OF CURRENT CUSTOMERS AND A
FAILURE TO ATTRACT NEW CUSTOMERS.
The industry in which we operate is highly competitive. While 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, we compete regionally with several direct competitors.
We cannot be certain that these competitors will not substantially increase
their installed base of bulk CO2 systems and expand their service nationwide.
Because there are no major barriers to entry, we also face the risk of a
well-capitalized competitor's entry into our existing or future markets. In
addition, we compete with numerous distributors of bulk and high pressure CO2,
including:
o industrial gas and welding supply companies,
o specialty gas companies,
o restaurant and grocery supply companies and
o fountain supply companies.
These suppliers vary widely in size. Some of our competitors have
significantly greater financial, technical or marketing resources than we do.
Our competitors might succeed in developing technologies, products or services
that are superior, less costly or more widely used than those that have or are
being developed by us or that would render our technologies or products obsolete
or noncompetitive. In addition, competitors may have an advantage over us with
customers who prefer dealing with one company that can supply bulk CO2 as well
as fountain syrup. We cannot be certain that we will be able to compete
effectively with current or future competitors. Competitive pressures could
seriously harm our business, financial condition and results of operations and
our ability to service our indebtedness.
OUR ABILITY OR INABILITY TO MANAGE GROWTH MAY OVEREXTEND OUR MANAGEMENT AND
OTHER RESOURCES, CAUSING INEFFICIENCIES, WHICH MAY ADVERSELY AFFECT OUR
OPERATING RESULTS.
We have experienced rapid growth and intend to continue to expand
our operations aggressively. Because of our limited product line, we must expand
operations to become profitable. We may be unable to:
o manage effectively the expansion of our operations,
o implement and develop our systems, procedures or
controls,
o adequately support our operations or
o achieve and manage the currently projected installations
of bulk CO2 systems.
19
If we are unable to manage growth effectively, our business,
financial condition and results of operations and our ability to service our
indebtedness could be seriously harmed. The growth in the size and scale of our
business has placed, and we expect it will continue to place, significant
demands on our personnel and operating systems. Our additional planned expansion
may further strain management and other resources. Our ability to manage growth
effectively will depend on our ability to:
o improve our operating systems,
o expand, train and manage our employee base and
o develop additional service capacity.
WE ARE DEPENDENT ON THIRD-PARTY SUPPLIERS AND IF THESE SUPPLIERS CEASE DOING
BUSINESS WITH US, WE MAY HAVE DIFFICULTY FINDING SUITABLE REPLACEMENTS TO MEET
OUR NEEDS.
We do not conduct manufacturing operations and depend, and will
continue to depend, on outside parties for the manufacture of bulk CO2 systems
and components. We intend to significantly expand our installed base of bulk CO2
systems. Our expansion may be limited by the manufacturing capacity of our
third-party manufacturers. Manufacturers may not be able to meet our
manufacturing needs in a satisfactory and timely manner. If there is an
unanticipated increase in demand for bulk CO2 systems, we may be unable to meet
such demand due to manufacturing constraints. We purchase bulk CO2 systems from
Chart Industries, Inc. and Taylor Wharton Cryogenics (a division of Harsco
Corporation), the two major manufacturers of bulk CO2 systems. Should either
manufacturer cease manufacturing bulk CO2 systems, we would be required to
locate additional suppliers. We may be unable to locate alternate manufacturers
on a timely basis. A delay in the supply of bulk CO2 systems could cause
potential customers to delay their decision to purchase our services or to
choose not to purchase our services. This would result in delays in or loss of
revenues, which would adversely affect our financial condition and results of
operations and our ability to service our indebtedness.
In addition, we purchase CO2 for resale to our customers. In May
1997, we entered into a ten year supply contract with The BOC Group, Inc. for
the purchase of bulk CO2. In the event that BOC is unable to fulfill our
requirements, we would have to locate additional suppliers. A delay in locating
additional suppliers or our inability to locate additional suppliers would
result in loss of revenues, which would adversely affect our financial condition
and results of operations and our ability to service our indebtedness.
WE DEPEND UPON KEY PERSONNEL AND IF WE LOSE THE SERVICES OF THESE KEY PERSONNEL,
OUR ABILITY TO SELL OUR PRODUCT AND GROW OUR BUSINESS COULD BE SEVERELY
IMPAIRED. OUR INABILITY TO ATTRACT, HIRE AND RETAIN ADDITIONAL QUALIFIED
EMPLOYEES COULD ALSO SEVERELY IMPAIR OUR BUSINESS AND BE DETRIMENTAL TO THE
VALUE OF YOUR INVESTMENT.
Our performance is substantially dependent on the continued services
of our executive officers and key employees. Our long-term success will depend
on our ability to recruit, retain and motivate highly skilled personnel.
Competition for such personnel is intense. We have at times experienced
difficulties in recruiting qualified personnel, and we may experience
difficulties in the future. The inability to attract and retain necessary
technical and managerial personnel could seriously harm our business, financial
condition and results of operations and our ability to service our indebtedness.
We do not maintain "key man" life insurance on any employee.
WE MUST KEEP PACE WITH TECHNOLOGICAL CHANGES TO REMAIN COMPETITIVE SINCE
IMPROVEMENTS IN OUR COMPETITOR'S PRODUCTS MAY MAKE OUR PRODUCT OBSOLETE.
Our success depends in part on our ability to obtain new bulk CO2
customers by converting existing users of high pressure CO2 cylinders to bulk
CO2 systems and to keep pace with continuing changes in technology and consumer
preferences while remaining price competitive. Our failure to develop
technological improvements or to adapt our products and services to
technological change on a timely basis could, over time, seriously harm our
business, financial condition and results of operations and our ability to
service our indebtedness.
YOU MAY NOT BE ABLE TO SELL OUR STOCK ON TERMS FAVORABLE TO YOU BECAUSE OUR
COMMON SHARE PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE.
Our common share price has fluctuated substantially since our
initial public offering in December 1995. The market price of our common shares
could decline from current levels or continue to fluctuate. The market price of
our common shares may be significantly affected by the following factors:
o announcements of technological innovations or new
products or services by us or our competitors,
o trends and fluctuations in the use of bulk CO2 systems,
20
o timing of bulk CO2 systems installations relative to
financial reporting periods,
o release of reports,
o operating results below expectations,
o changes in, or our failure to meet, financial estimates
by securities analysts,
o industry developments,
o market acceptance of bulk CO2 systems,
o economic and other external factors, and
o period-to-period fluctuations in our financial results.
In addition, the securities markets have from time to time
experienced significant price and volume fluctuations that are unrelated to the
operating performance of particular companies. These market fluctuations may
also materially and adversely affect the market price of our common shares.
OUR OPERATING RESULTS MAY FLUCTUATE DUE TO SEASONALITY SINCE CONSUMERS TEND TO
DRINK FEWER QUANTITIES OF CARBONATED BEVERAGES DURING THE WINTER MONTHS.
Approximately 6% of our bulk CO2 customers lease our bulk CO2
systems and, in addition, are billed by the pound for bulk CO2 delivered.
Approximately 13% of our bulk CO2 customers own their own bulk CO2 systems and
are billed by the pound for all CO2 delivered. We believe that, on a relative
basis, customers purchasing bulk CO2 by the pound tend to consume less CO2 in
the winter months. Our sales to such customers will be correspondingly lower in
times of cold or inclement weather. We cannot be certain, however, that these
seasonal trends will continue. Consequently, we are unable to predict revenues
for any future quarter with any significant degree of accuracy.
FOR THE FORESEEABLE FUTURE, YOUR ONLY RETURN ON INVESTMENT, IF ANY, WILL OCCUR
ON THE SALE OF OUR STOCK BECAUSE WE DO NOT INTEND TO PAY DIVIDENDS.
We have never declared or paid any cash dividends on our capital
stock. We currently intend to retain any future earnings for funding growth.
Therefore, we do not expect to pay any dividends in the foreseeable future. In
addition, the payment of cash dividends is restricted by financial covenants in
our loan agreements.
OUR OPERATING RESULTS ARE AFFECTED BY RISING INTEREST RATES SINCE MORE OF OUR
CASH FLOW WILL BE NEEDED TO SERVICE OUR INDEBTEDNESS.
The interest rate on our revolving credit facility fluctuates with
market interest rates resulting in greater interest costs in times of rising
interest rates. Consequently, our profitability is sensitive to changes in
interest rates.
OUR INSURANCE POLICIES MAY NOT COVER ALL OPERATING RISKS AND A CASUALTY LOSS
BEYOND OUR COVERAGE COULD NEGATIVELY IMPACT OUR BUSINESS.
Our operations are subject to all of the operating hazards and risks
normally incidental to handling, storing and transporting CO2. As a compressed
gas, CO2 is classified as a hazardous material. We maintain insurance policies
in such amounts and with such coverages and deductibles that we believe are
reasonable and prudent. We cannot assure you that our insurance will be adequate
to protect us from all liabilities and expenses that may arise from claims for
personal and property damage arising in the ordinary course of business or that
current levels of insurance will be maintained or available at economical
prices. If a significant liability claim is brought against us that is not
covered by insurance, our business, financial condition, and results of
operations and ability to service our indebtedness could be seriously harmed.
OUR BUSINESS IS SUBJECT TO EXTENSIVE GOVERNMENTAL REGULATION, WHICH MAY INCREASE
OUR COST OF DOING BUSINESS. IN ADDITION, FAILURE TO COMPLY WITH THESE
REGULATIONS MAY SUBJECT US TO FINES, PENALTIES AND/OR INJUNCTIONS THAT MAY
ADVERSELY AFFECT OUR OPERATING RESULTS.
Our business is subject to federal and state laws and regulations
adopted for the protection of the environment, the health and safety of our
employees and users of our products and services. The transportation of bulk CO2
is subject to regulation by various federal, state and local agencies, including
the U.S. Department of Transportation. These regulatory authorities have broad
powers, and we are subject to regulatory and legislative changes that can affect
the economics of our industry by requiring changes in operating practices or
influencing the demand for and the cost of providing services. A significant
increase in the cost of our operations could adversely affect our chances for
profitability.
21
OUR OFFICERS AND DIRECTORS ARE ABLE TO EXERT SIGNIFICANT CONTROL OVER MATTERS
REQUIRING SHAREHOLDER APPROVAL, WHICH MAY ADVERSELY AFFECT THE PRICE THAT
INVESTORS ARE WILLING TO PAY FOR OUR COMMON STOCK.
Executive officers, directors and entities affiliated with them
beneficially own, in the aggregate, approximately 29% of our outstanding common
shares (including common shares issuable upon conversion of preferred stock).
These shareholders, if acting together, would be able to significantly influence
all matters requiring approval by our shareholders, including the election of
directors and the approval of significant corporate transactions, such as
mergers or other business combination transactions. This concentration of
ownership may also have the effect of delaying or preventing an acquisition or
change in control of our company, which could have a material adverse effect on
our common share price.
OUR PREFERRED STOCK AND PROVISIONS OF OUR CHARTER AND FLORIDA LAW MAY NEGATIVELY
AFFECT THE ABILITY OF A POTENTIAL BUYER TO PURCHASE ALL OR SOME OF OUR STOCK AT
AN OTHERWISE ADVANTAGEOUS PRICE, WHICH MAY LIMIT THE PRICE INVESTORS ARE WILLING
TO PAY FOR OUR COMMON STOCK.
Our common shares are subordinate to all outstanding classes of
preferred stock in the payment of dividends and other distributions on our
stock, including distributions upon liquidation or dissolution of NuCo2. We have
outstanding two series of preferred stock, the Series A 8% cumulative
convertible preferred stock and the Series B 8% cumulative convertible preferred
stock. Our board of directors has the authority to issue up to an additional
4,992,500 shares of preferred stock. If we designate or issue other series of
preferred stock, it will create additional securities that will have dividend
and liquidation preferences over the common shares. If we issue convertible
preferred stock, a subsequent conversion may dilute the current shareholders'
interest. Without any further vote or action on the part of the shareholders,
our board of directors will have the authority to determine the price, rights,
preferences, privileges and restrictions of the preferred stock. Although the
issuance of preferred stock will provide us with flexibility in connection with
possible acquisitions and other corporate purposes, the issuance of preferred
stock may make it more difficult for a third party to acquire a majority of our
outstanding voting stock. We are subject to several anti-takeover provisions
that apply to a public corporation organized under Florida law. These provisions
generally require that an "affiliated transaction" (certain transactions between
a corporation and a holder of more than 10% of its outstanding voting
securities) must be approved by a majority of disinterested directors or the
holders of two-thirds of the voting shares not beneficially owned by an
"interested shareholder." Additionally, "control shares" (shares acquired in
excess of certain specified thresholds) acquired in specified control share
acquisitions have voting rights only to the extent conferred by resolution
approved by shareholders, excluding holders of shares defined as "interested
shares."
A Florida corporation may opt out of the Florida anti-takeover laws
if its articles of incorporation or, depending on the provision in question, its
bylaws so provide. We have not opted out of the provisions of the anti-takeover
laws. Consequently, these laws could prohibit or delay a merger or other
takeover or change of control and may discourage attempts by other companies to
acquire us.
FUTURE SALES OF SHARES MAY ADVERSELY AFFECT OUR STOCK PRICE SINCE ANY INCREASE
IN THE AMOUNT OF OUTSTANDING SHARES MAY HAVE A DILUTIVE EFFECT ON OUR STOCK.
If our shareholders sell substantial amounts of our common shares in
the public market, the market price of our common shares could fall. These sales
could be due to shares issued upon exercise of outstanding options and warrants
and upon conversion of preferred stock. These sales also might make it more
difficult for us to sell equity or equity-related securities in the future at a
time and price that we deem appropriate. We have outstanding options under our
1995 stock option plan, directors' stock option plan and options granted to
directors to purchase an aggregate of 1,308,450 common shares at an average
exercise price of $9.96 per share and outstanding warrants to purchase an
aggregate of 1,416,462 common shares at an average exercise price of $10.05 per
share. In addition, we also have outstanding Series A 8% cumulative convertible
preferred stock and Series B 8% cumulative convertible preferred stock that is
convertible at $9.28 and $12.92 per share, respectively, into 641,803 and
205,342 common shares, respectively.
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, 2002, a total of $48.0 million was outstanding under the
Amended Credit Facility with interest at 3.5% above LIBOR (5.355% to 5.42875%
at June 30, 2002). Based upon $48.0 million outstanding under the Amended Credit
Facility at June 30, 2002, our annual interest cost under the Amended Credit
Facility would increase by approximately $0.5 million for each 1% increase in
LIBOR.
In order to reduce our exposure to increases in LIBOR, and
consequently to increases in interest payments, we entered into an interest rate
swap transaction (the "Swap") in the amount of $12.5 million (the "Notional
Amount") which terminates on September 28, 2003.
22
Pursuant to the Swap, we pay a fixed interest rate of 5.23% 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 the LIBOR based rate
decreases below 5.23% 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 28, 2002 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 28, 2002 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 28, 2002 pursuant to Regulation 14A.
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 28, 2002 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.
23
(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. (3)
3.3 -- Articles of Amendment to the Articles of
Incorporation of the Company, dated December
17, 1996. (3)
3.4 -- Articles of Amendment to the Articles of
Incorporation of the Company, dated May 10,
2000. (5)
3.5 -- Articles of Amendment to the Articles of
Incorporation of the Company, dated November
1, 2001. (8)
3.6 -- Bylaws of the Company. (2)
10.1 -- 1995 Stock Option Plan. (5)
10.2 -- Directors' Stock Option Plan. (2)
10.3 -- Second Amended and Restated Revolving Credit
Agreement ("Credit Agreement"), dated as of
September 24, 2001, by and among the
Company, SunTrust Bank ("SunTrust"), the
other banks signatory to the Credit
Agreement, SunTrust in its capacity as
Administrative Agent, as Issuing Bank and as
Swing Line Lender, Heller Financial, Inc.,
in its capacity as Syndication Agent and BNP
Paribas, in its capacity as Documentation
Agent. (7)
10.4 -- First Amendment and Waiver to Second Amended
and Restated Revolving Credit Agreement
dated as of May 10, 2002, by and among the
Company, SunTrust Bank, Heller Financial,
Inc. and BNP Paribas. (9)
10.5 -- Second Amendment and Waiver to Second
Amended and Restated Revolving Credit
Agreement dated as of September 27, 2002, by
and among the Company, SunTrust Bank, Heller
Financial, Inc., and BNP Paribas. (1)
10.6 -- Senior Subordinated Note Purchase Agreement
("Senior Subordinated Note Purchase
Agreement"), dated as of October 31, 1997
between the Company, the Subsidiary Grantors
and the Investors. (3)
10.7 -- Amendment No. 1 to Senior Subordinated Note
Purchase Agreement dated as of November 14,
1997. (3)
10.8 -- Amendment No. 2 to Senior Subordinated Note
Purchase Agreement dated as of June 30,
1998. (3)
10.9 -- Amendment No. 3 to Senior Subordinated Note
Purchase Agreement dated as of May 4, 1999.
(4)
10.10 -- Amendment No. 4 to Senior Subordinated Note
Purchase Agreement dated as of January 14,
2000. (5)
24
10.11 -- Amendment No. 5 to Senior Subordinated Note
Purchase Agreement dated as of May 12, 2000.
(5)
10.12 -- Amendment No. 6 to Senior Subordinated Note
Purchase Agreement dated as of December 5,
2000. (6)
10.13 -- Amendment No. 7 to Senior Subordinated Note
Purchase Agreement dated as of September 24,
2001. (7)
10.14 -- Amendment No. 8 to Senior Subordinated Note
Purchase Agreement dated as of May 10, 2002.
(9)
10.15 -- Amendment No. 9 to Senior Subordinated Note
Purchase Agreement dated as of September 27,
2002. (1)
10.16 -- Preferred Stock Purchase Agreement, dated as
of May 15, 2000, by and between the Company
and Chase Capital Investments, L.P. (5)
10.17 -- Preferred Stock Purchase Agreement, dated as
of November 1, 2001, by and between the
Company and Paribas North America, Inc. (8)
10.18 -- Warrant Agreement ("Warrant Agreement")
dated as of October 31, 1997 among the
Company and the Initial Holders. (3)
10.19 -- Amendment No. 1 to Warrant Agreement dated
as of November 14, 1997. (3)
10.20 -- Amendment No. 2 to Warrant Agreement dated
as of May 4, 1999. (4)
10.21 -- Stock Purchase Agreement, dated as of
December 7, 2000 by and between The BOC
Group, Inc., a Delaware corporation and the
Company. (6)
10.22 -- Stock Purchase Agreement, dated as of August
22, 2002, by and between the Company and the
purchasers named therein. (1)
10.23 -- Registration Right Agreement, dated as of
August 22, 2002, by and between the Company
and the selling shareholders named therein.
(10)
10.24 -- Employment Agreement between the Company and
Michael DeDomenico, dated as of June 2,
2000. (5)
10.25 -- Employment Agreement between the Company and
Gregg F. Stewart, dated as of May 3, 2001.
(7)
10.26 -- Employment Agreement between the Company and
Louis Romano, dated as of February 15, 2002.
(1)
10.27 -- Employment Agreement between the Company and
William Scott Wade, dated as of May 13,
2002. (1)
23 -- Consent of Margolin, Winer & Evens LLP
to the incorporation by reference to the
Company's Registration Statements on Form
S-8 (Nos. 333-06705, 333- 30042 and
333-89096) and Form S-3 (No. 333-99201) of
the independent auditors' report included
herein. (1)
99.1 -- Certification of Chief Executive Officer,
dated September 30, 2002. (1)
99.2 -- Certification of Chief Financial Officer,
dated September 30, 2002. (1)
(b) Reports on Form 8-K
-------------------
None.
25
- ---------------------------
(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 Form 10-K for the year
ended June 30, 1998.
(4) Incorporated by reference to the Company's Form 10-K for the year
ended June 30, 1999.
(5) Incorporated by reference to the Company's Form 10-K for the year
ended June 30, 2000.
(6) Incorporated by reference to the Company's Form 10-Q for the quarter
ended December 31, 2000.
(7) Incorporated by reference to the Company's Form 10-K for the year
ended June 30, 2001.
(8) Incorporated by reference to the Company's Form 10-Q for the quarter
ended December 31, 2001.
(9) Incorporated by reference to the Company's Form 10-Q for the quarter
ended March 31, 2002.
(10) Incorporated by reference to the Company's Registration Statement on
From S-3, filed with the Commission on September 5, 2002 (Commission
File No. 333-99201).
26
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 30, 2002 /s/ Michael E. DeDomenico
-------------------------
Michael E. DeDomenico
Chief Executive Officer
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 30, 2002
- -----------------------
Craig L. Burr
/s/ Michael E. DeDomenico Director, September 30, 2002
- ------------------------- Chief Executive Officer
Michael E. DeDomenico
/s/ Robert L. Frome Director September 30, 2002
- ------------------------
Robert L. Frome
/s/ Daniel Raynor Director September 30, 2002
- -----------------
Daniel Raynor
Director
--------------
John Walsh
/s/ Richard D. Waters, Jr. Director September 30, 2002
- --------------------------
Richard D. Waters, Jr.
/s/ John E. Wilson Director September 30, 2002
- ------------------------
John E. Wilson
/s/ Gregg F. Stewart Chief Financial Officer September 30, 2002
- --------------------
Gregg F. Stewart
27
NUCO2 INC.
a Florida corporation
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
Section 302 Certification
I, Michael E. DeDomenico, certify that:
(1) I have reviewed this annual report on Form 10-K of NuCo2 Inc.,
a Florida corporation (the "registrant");
(2) Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this annual report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;
Date: September 30, 2002
By: /s/ Michael E. DeDomenico
-------------------------
Michael E. DeDomenico
Chief Executive Officer
NUCO2 INC.
a Florida corporation
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
Section 302 Certification
I, Gregg F. Stewart, certify that:
(1) I have reviewed this annual report on Form 10-K of NuCo2 Inc.,
a Florida corporation (the "registrant");
(2) Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this annual report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;
Date: September 30, 2002
By: /s/ Gregg F. Stewart
--------------------------------
Gregg F. Stewart
Chief Financial Officer
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
--------
NUCO2 INC.
Independent Auditors' Report ........................................................................ F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 2002 and 2001..................................... F-3
Consolidated Statements of Operations for the Fiscal Years Ended June 30, 2002, 2001 and
2000 .................................................................................... F-4
Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended June 30, 2002,
2001 and 2000............................................................................ F-5
Consolidated Statements of Cash Flows for the Fiscal Years Ended June 30, 2002, 2001 and
2000 .................................................................................... F-6
Notes to Consolidated Financial Statements........................................................... F-8
Schedule II - Valuation and Qualifying Accounts for the Fiscal Years Ended June 30, 2002,
2001 and 2000 ............................................................................ F-21
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, 2002 and 2001, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended June 30, 2002. 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 auditing standards generally accepted
in the United States of America. 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, 2002 and 2001, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
June 30, 2002 in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, the related financial statement
schedule when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
herein.
MARGOLIN, WINER & EVENS LLP
Garden City, New York
September 9, 2002, except for Notes 5 and 6,
as to which the date is September 27, 2002
F-2
NUCO2 INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
ASSETS
June 30,
----------------
2002 2001*
---------- -------------
Current assets:
Cash and cash equivalents $ 1,562 $ 626
Trade accounts receivable; net of allowance for doubtful
accounts of $3,085 and $2,506, respectively 7,171 7,746
Inventories 235 199
Prepaid expenses and other current assets 1,966 1,218
--------- ---------
Total current assets 10,934 9,789
--------- ---------
Property and equipment, net 95,084 100,370
--------- ---------
Other assets:
Goodwill, net 19,222 19,222
Deferred financing costs, net 2,524 2,079
Customer lists, net 281 1,046
Restrictive covenants, net 1,282 1,672
Deferred lease acquisition costs, net 2,991 3,426
Other assets 320 412
--------- ---------
26,620 27,857
--------- ---------
Total assets $ 132,638 $ 138,016
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 40 $ 36
Accounts payable 3,512 2,958
Accrued expenses 2,304 2,939
Accrued interest 1,479 1,343
Accrued payroll 897 880
Other current liabilities 371 413
--------- ---------
Total current liabilities 8,603 8,569
Long-term debt, excluding current maturities 48,254 48,144
Subordinated debt 39,366 39,166
Customer deposits 2,644 2,689
--------- ---------
Total liabilities 98,867 98,568
--------- ---------
Commitments and contingencies
Redeemable preferred stock 8,552 5,466
--------- ---------
Shareholders' equity:
Preferred stock; no par value; 5,000,000 shares authorized;
issued and outstanding 7,500 shares at June 30, 2002 and
issued and outstanding 5,000 shares at June 30, 2001 -- --
Common stock; par value $.001 per share; 30,000,000 shares
authorized; issued and outstanding 8,969,059 shares at
June 30, 2002 and 8,651,125 at June 30, 2001 9 9
Additional paid-in capital 78,584 76,290
Accumulated deficit (52,945) (41,974)
Accumulated other comprehensive loss (429) (343)
--------- ---------
Total shareholders' equity 25,219 33,982
--------- ---------
Total liabilities and shareholders' equity $ 132,638 $ 138,016
========= =========
*Restated to conform to current year's classifications.
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,
----------------------------------
2002 2001* 2000*
-------- -------- ----------
Net sales $ 72,312 $ 67,633 $ 57,951
-------- -------- --------
Costs and expenses:
Cost of products sold 35,491 33,177 28,565
Selling, general and administrative expenses 17,614 17,368 12,352
Depreciation and amortization 16,319 17,475 15,501
Loss on asset disposal 4,661 4,891 901
-------- -------- --------
74,085 72,911 57,319
-------- -------- --------
Operating (loss) income (1,773) (5,278) 632
Interest expense, net 8,402 10,207 10,015
-------- -------- --------
(Loss) before extraordinary item (10,175) (15,485) (9,383)
Extraordinary item - (loss) on
extinguishment of debt (796) -- --
-------- -------- --------
Net (loss) $(10,971) $(15,485) $ (9,383)
======== ======== ========
Basic and diluted earnings per common share
(Loss) before extraordinary item $ (1.23) $ (2.01) $ (1.30)
Extraordinary item, extinguishment of debt (0.09) -- --
-------- -------- --------
Net (loss) $ (1.32) $ (2.01) $ (1.30)
======== ======== ========
Weighted average number of common and common
equivalent shares outstanding
Basic and diluted 8,742 7,926 7,238
======== ======== ========
*Restated to conform to current year's classifications.
See accompanying notes to consolidated financial statements.
F-4
NUCO2 INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share amounts)
Accumulated Total
Other Share-
Additional Accumulated Comprehensive holders'
Paid-In Deficit Loss Equity
Common Stock Capital ------- ---- ------
----------------------- ------------
Shares Amount
------ ------
Balance, June 30, 1999 7,216,664 $ 7 $ 64,832 $ (17,106) $ -- $ 47,733
Net (loss) -- -- -- (9,383) -- (9,383)
Issuance of 5,000 shares of
redeemable preferred stock -- -- (65) -- -- (65)
Redeemable preferred stock dividend -- -- (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 -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance, June 30, 2000 7,275,015 7 64,722 (26,489) -- 38,240
---------- ---------- ---------- ---------- ---------- ----------
Comprehensive (loss):
Net (loss) -- -- -- (15,485) -- (15,485)
Other comprehensive expense:
Interest rate swap transaction -- -- -- -- (343) (343)
----------
Total comprehensive (loss) (15,828)
Redeemable preferred stock dividend -- -- (416) -- -- (416)
Issuance of 1,111,111 shares of common stock 1,111,111 1 9,918 -- -- 9,919
Issuance of 264,999 shares of common stock-
exercise of options 264,999 1 2,066 -- -- 2,067
---------- ---------- ---------- ---------- ---------- ----------
Balance, June 30, 2001 8,651,125 9 76,290 (41,974) (343) 33,982
---------- ---------- ---------- ---------- ---------- ----------
Comprehensive (loss):
Net (loss) -- -- -- (10,971) -- (10,971)
Other comprehensive expense:
Interest rate swap transaction -- -- -- -- (86) (86)
----------
Total comprehensive (loss) (11,057)
Redeemable preferred stock dividend -- -- (586) -- -- (586)
Issuance of 65,574 shares
of common stock - exercise of warrants 65,574 -- 436 -- -- 436
Issuance of 252,360 shares of common stock -
exercise of options 252,360 -- 2,444 -- -- 2,444
---------- ---------- ---------- ---------- ---------- ----------
Balance, June 30, 2002 8,969,059 $ 9 $ 78,584 $ (52,945) $ (429) $ 25,219
========== ========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
F-5
NUCO2 INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended June 30,
--------------------
2002 2001* 2000
------- ------- --------
Cash flows from operating activities:
Net (loss) $(10,971) $(15,485) $ (9,383)
Adjustments to reconcile net (loss) to net cash provided by operating
activities:
Depreciation and amortization of property and equipment 12,604 12,349 10,841
Amortization of other assets 3,715 5,126 4,660
Amortization of original issue discount 201 197 220
Loss on asset disposal 4,661 4,891 901
Loss on extinguishment of debt 796 -- --
Changes in operating assets and liabilities:
Decrease (increase) in:
Trade accounts receivable 575 1,116 (2,094)
Inventories (36) 23 (8)
Prepaid expenses and other current assets (747) (306) (319)
Increase (decrease) in:
Accounts payable 714 (5,562) 1,418
Accrued expenses (634) 2,356 (165)
Accrued payroll 17 504 (168)
Accrued interest 51 (485) 11
Other current liabilities (43) 151 218
Customer deposits (45) 338 427
-------- -------- --------
Net cash provided by operating activities 10,858 5,213 6,559
-------- -------- --------
Cash flows from investing activities:
Proceeds from disposal of property and equipment 91 31 63
Purchase of property and equipment (11,675) (10,509) (19,162)
Increase in restrictive covenants (160) (80) --
Acquisition of businesses -- (36) --
Increase in deferred lease acquisition costs (928) (1,164) (1,610)
(Increase) decrease in other assets (145) (3) 15
-------- -------- --------
Net cash used in investing activities $(12,817) $(11,761) $(20,694)
-------- -------- --------
*Restated to conform to current year's classifications.
See accompanying notes to consolidated financial statements.
F-6
NUCO2 INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Continued)
Years Ended June 30,
--------------------
2002 2001* 2000
-------- ------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock $ -- $ 9,919 $ --
Proceeds from issuance of redeemable preferred stock 2,500 -- 4,935
Net proceeds from issuance of long-term debt
and subordinated debt 50,000 5,900 9,500
Repayment of long-term debt (49,887) (10,833) (99)
Increase in deferred financing costs (2,598) (158) (1,506)
Exercise of options and warrants 2,880 2,067 5
-------- -------- --------
Net cash provided by financing activities 2,895 6,895 12,835
-------- -------- --------
Increase (decrease) in cash and cash equivalents 936 347 (1,300)
Cash and cash equivalents, beginning of year 626 279 1,579
-------- -------- --------
Cash and cash equivalents, end of year $ 1,562 $ 626 $ 279
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 8,066 $ 10,497 $ 9,788
======== ======== ========
Income taxes $ -- $ -- $ --
======== ======== ========
Supplemental disclosure of non-cash investing and financing activities:
In 2002, 2001 and 2000, the Company increased the carrying amount of
the redeemable preferred stock by $586, $416 and $50, respectively, for
dividends that have not been paid and accordingly reduced additional paid-in
capital by a like amount.
In 2001, the Company transferred the net realizable value of certain
fixed assets held for sale in the amount of $237 to other assets.
In 2001, the Company entered into a restrictive covenant agreement
with a former executive officer in the amount of $480. At June 30, 2002 and
2001, the unpaid portion of the agreement totaled $240 and $400, respectively,
and is included in accounts payable.
*Restated to conform to current year's classifications.
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. 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 direct 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 expensed. 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) Goodwill and Other Intangible Assets
Goodwill, net of accumulated amortization of $5,006, represents the
cost in excess of the fair value of the tangible and identifiable intangible net
assets of businesses acquired and, prior to July 1, 2001, was amortized on a
straight-line basis over 20 years. Effective July 1, 2001, the Company adopted
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets. Under this new standard, goodwill and indefinite life
intangible assets are no longer amortized but are subject to annual impairment
tests. Other intangible assets with finite lives will continue to be amortized
on a straight-line basis over the periods of expected benefit. The Company's
other intangible assets consist of customer lists and restrictive covenants
principally acquired in connection with asset acquisitions. Customer lists are
being amortized over five years, the average life of customer leases, and
restrictive covenants are being amortized over their contractual lives which
range from thirty to one hundred and twenty months.
F-8
NUCO2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(g) Deferred Financing Cost, Net
Financing costs are being amortized on a straight-line method
over the term of the related indebtedness, ranging from seventeen to eighty-four
months. Accumulated amortization of financing costs was $2,314 and $3,153 at
June 30, 2002 and 2001, respectively.
(h) 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 on a straight-line
method. Accumulated amortization of deferred lease acquisition costs was $4,687
and $3,713 at June 30, 2002 and 2001, respectively. Upon early service
termination, the unamortized portion of deferred lease acquisition costs are
expensed.
(i) 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.
(j) 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.
(k) 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.
F-9
NUCO2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(l) 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. Estimates used when accounting for items such as allowances
for doubtful accounts, depreciation and amortization periods, valuation of
long-lived assets and income taxes are regarded by management as being
particularly significant. These estimates and assumptions are evaluated on an
on-going basis and may require adjustment in the near term. Actual results could
differ from those estimates.
(m) Impairment of Long-Lived Assets
Long-lived assets, other than goodwill, consist of property and
equipment, customer lists, and restrictive covenants. Long-lived assets being
retained for use by the Company are tested for recoverability whenever events or
changes in circumstances indicate that their carrying values may not be
recoverable by comparing the carrying value of the assets with the estimated
future undiscounted cash flows that are directly associated with and that are
expected to arise as a direct result of the use and eventual disposition of the
asset. Impairment losses are recognized only if the carrying amount of a
long-lived asset is not recoverable and exceeds its fair value. The impairment
loss would be calculated as the difference between asset carrying values and the
fair value of the asset with fair value generally estimated based on the present
value of the estimated future net cash flows.
Long-lived assets to be disposed of by abandonment continue to
be classified as held and used until they cease to be used. If the Company
commits to a plan to abandon a long-lived asset before the end of its previously
estimated useful life, depreciation estimates are revised to reflect the use of
the asset over its shortened useful life. Long-lived assets to be disposed of by
sale that meet certain criteria are classified as held for sale and are reported
at the lower of their carrying amounts or fair values less cost to sell.
(n) 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.
(o) Recent Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 141, "Business
Combinations" ("SFAS 141"), and SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). SFAS 141 requires all business combinations initiated
after June 30, 2001 to be accounted for using the purchase method. Under SFAS
142, goodwill and intangible assets with indefinite lives are no longer
amortized but are reviewed annually (or more frequently if impairment indicators
arise) for impairment. Separable intangible assets that are not deemed to have
indefinite lives will continue to be amortized over their useful lives. The
Company adopted this statement in the first quarter of fiscal 2002, resulting in
no goodwill amortization expense in fiscal 2002. Accumulated amortization of
goodwill was $5,006 at June 30, 2002 and 2001.
In August 2001, the FASB issued SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). This statement
addresses financial accounting and reporting for the impairment of long-lived
assets and for long-lived assets to be disposed of. SFAS 144 supercedes SFAS
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." However, SFAS 144 retains the fundamental
provisions of Statement No. 121 for (a) recognition and measurement of the
impairment of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of by sale. SFAS 144 was early adopted by the
Company during the year ended June 30, 2002.
In April 2002, the FASB issued SFAS No. 145, "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections" ("SFAS 145"). Among other things, SFAS 145 rescinds the
provisions of SFAS No. 4 that require companies to classify certain gains and
losses from debt extinguishments as extraordinary items. The provisions of SFAS
145 related to classification of debt extinguishments are effective for fiscal
years beginning after May 15, 2002. Gains and losses from extinguishment of debt
will be classified as extraordinary items only if they meet the criteria in APB
Opinion No. 30; otherwise such costs will be classified within income from
operations. The Company intends to adopt SFAS 145 during the first quarter of
fiscal 2003. The Company is currently reviewing whether or not the fiscal 2002
extraordinary item will have to be reclassified.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146") which addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3 "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." The principal difference between
SFAS 146 and EITF 94-3 relates to SFAS 146's requirements for recognition of a
liability for a cost associated with an exit or disposal activity. SFAS 146
requires that a liability be recognized when the liability is incurred. Under
EITF 94-3, a liability for an exit cost was recognized at the date of an
entity's commitment to an exit plan. SFAS 146 also establishes that fair value
is the objective for initial measurement of the liability. The provisions of
SFAS 146 are effective for exit or disposal activities that are initiated after
December 31, 2002, but early application is encouraged. The Company does not
expect the adoption of SFAS 146 to have a material impact on its financial
statements or results of operations.
F-10
NUCO2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
Note 2 - Property and Equipment, Net
Property and equipment, net consists of the following:
June 30,
--------
2002 2001
---- ----
Leased equipment $119,773 $116,233
Equipment and cylinders 15,357 14,478
Tanks held for installation 4,868 3,980
Vehicles 325 325
Computer equipment 3,897 3,392
Office furniture and fixtures 1,406 1,390
Leasehold improvements 1,674 1,636
-------- --------
147,300 141,434
Less accumulated depreciation and amortization 52,216 41,064
-------- --------
$ 95,084 $100,370
======== ========
Capitalized component parts and direct costs associated with
installation of equipment leased to others included in leased equipment was
$32,406 and $29,385 at June 30, 2002 and 2001, respectively. Accumulated
depreciation and amortization of these costs was $18,258 and $14,143 at June 30,
2002 and 2001, respectively. Upon early service termination, the Company writes
off the remaining net book value of direct costs associated with the
installation of equipment.
Depreciation and amortization of property and equipment was
$12,604, $12,349 and $10,841 for the years ended June 30, 2002, 2001, and 2000,
respectively.
In June 2001, the Company adopted a plan to discontinue
installation of 50 and 100 pound tanks and to dispose of the 50 and 100 pound
tanks held for installation. The Company's supply of uninstalled 50 and 100
pound tanks was written down to $163, their estimated net realizable value, and
a loss of $1,155 was reflected in the statement of operations within the
caption, loss on asset disposal. These tanks were disposed of in fiscal 2002.
During fiscal 2002, an additional loss in the amount of $1,125 was recognized
relating to 50 and 100 pound tanks that were removed from service during the
year. Management continued to review the recoverability of the remaining 50 and
100 pound tanks in service and in June 2002, adopted a plan to replace all 50
and 100 pound tanks in service at customers over a three to four year period.
The Company's decision to replace these small tanks was based on an evaluation
of undiscounted cash flows, contribution to fixed depot overhead, pricing and
targeted margins. As a result of the Company's decision, the remaining 50 and
100 pound tanks were written down to their estimated net realizable value and a
loss on impairment of $1,809 was recorded in June 2002. As of June 30, 2002, the
net book value of the installed 50 and 100 pound tanks totaled $2,765, which
will be depreciated over the remaining period of time that they are expected to
be utilized.
Note 3 - Goodwill
The Company adopted SFAS 142 as of July 1, 2001, resulting in no
goodwill amortization expense in the year ended June 30, 2002. Under the new
standard, goodwill and indefinite life intangible assets are no longer amortized
but are subject to annual impairment tests. The Company completed the
transitional and annual impairment tests required by SFAS 142 and was not
required to recognize an impairment of goodwill. The Company recorded goodwill
amortization expense of $1,212 in each of the years ended June 30, 2001 and
2000. If the guidance of the statement had been applied retroactively, prior
year results would have been different than previously reported. A
reconciliation of net income as reported to adjusted net income for the
exclusion of goodwill amortization is as follows:
F-11
NUCO2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
Fiscal Year Ended June 30,
--------------------------
2001 2000
---- ----
Reported net (loss) $ (15,485) $ (9,383)
Add goodwill amortization 1,212 1,212
---------- ---------
Adjusted net (loss) $ (14,273) $ (8,171)
========== =========
Reported basic and diluted (loss) per share $ (2.01) $ (1.30)
Add goodwill amortization .15 .17
---------- ---------
Adjusted basic and diluted (loss) per share $ (1.86) $ (1.13)
========== =========
Changes in the carrying amount of goodwill for the year ended June 30,
2002, of the Company's single operating segment is as follows:
Balance July 1, 2001 $19,222
Goodwill acquired during the period -
-------
Balance June 30, 2002 $19,222
=======
Information regarding the Company's other intangible assets is as follows:
Carrying Accumulated
Amount Amortization Net
------ ------------ ---
As of June 30, 2002:
Restrictive Covenants $3,110 $1,828 $1,282
Customer Lists 5,370 5,089 281
------ ------ ------
Total $8,480 $6,917 $1,563
====== ====== ======
As of June 30, 2001:
Restrictive Covenants $3,110 $1,438 $1,672
Customer Lists 5,370 4,324 1,046
------ ------ ------
Total $8,480 $5,762 $2,718
====== ====== ======
Amortization expense for other intangible assets was $1,155, $1,235
and $1,390 for the years ended June 30, 2002, 2001 and 2000, respectively. There
were no adjustments or changes in amortization periods of other intangible
assets as a result of the initial application of SFAS 142.
Estimated amortization expense for each of the next five years is
$559, $304, $279, $226 and $161, for fiscal years ended June 30, 2003, 2004,
2005, 2006 and 2007, respectively.
Note 4 - Leases
The Company leases equipment to its customers generally pursuant to
five-year or six-year non-cancelable operating leases which expire on varying
dates through June 2008. At June 30, 2002, future minimum rentals due from
customers which includes, where applicable, a continuous supply of CO2 (see Note
1(i)), are approximately as follows:
F-12
NUCO2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
Year Ending June 30,
2003 $ 40,182
2004 32,854
2005 28,648
2006 20,312
2007 11,731
Thereafter 4,950
------------------
$ 138,677
==================
Note 5 - Long-Term Debt
Long-term debt consists of the following:
June 30,
2002 2001
---- ----
Note payable to bank under credit facility. Drawings at June 30, 2002 are at
LIBOR rates plus 3.50% (5.355% to 5.42875%). Drawings at June 30, 2001
are at LIBOR rates plus 3.25% (7.055% to 7.2813%). $ 48,000 $ 47,850
Various notes payable 294 330
--------- ---------
48,294 48,180
Less current maturities of long-term debt 40 36
--------- ---------
Long-term debt, excluding current maturities $ 48,254 $ 48,144
========= =========
In September 2001, the Company entered into a $60.0 million second
amended and restated revolving credit facility with a syndicate of banks
("Amended Credit Facility"). Pursuant to the Amended Credit Facility, the
Company may request, at any time absent a default, that the Amended Credit
Facility be increased by an additional $15.0 million to a total of $75.0
million. This new facility replaced the Company's prior facility, which was due
to expire in May 2002. The Amended Credit Facility contains interest rates and
an unused commitment fee based on a pricing grid calculated quarterly on total
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 Credit Facility. The applicable LIBOR margin pursuant to the pricing
grid currently ranges from 2.50% to 4.75%, the applicable unused commitment fee
pursuant to the pricing grid ranges from .375% to .50% and the applicable Base
Rate margin pursuant to the pricing grid currently ranges from 1.50% to 3.75%.
Interest only is payable periodically until the expiration of the Amended Credit
Facility. The Amended Credit Facility is collateralized by substantially all of
the Company's assets. Additionally, the Company is precluded from declaring or
paying any cash dividends, except the Company may accrue and accumulate, but not
pay, cash dividends on the Preferred Stock. The Company is also required to meet
certain affirmative and negative covenants including, but not limited to,
financial covenants.
As of June 30, 2002, the Company was not in compliance with certain
financial covenants. On September 27, 2002, the Amended Credit Facility was
amended to adjust certain financial covenants for the quarter ended June 30,
2002 and prospectively, and the maturity was extended to November 17, 2003.
As of June 30, 2002, a total of $48.0 million was outstanding
pursuant to the Amended Credit Facility with interest at 3.50% above LIBOR
(5.355% to 5.42875%).
Effective July 1, 2000, the Company adopted Statement of Financial
Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. All derivatives, whether designated in
hedging relationships or not, are required to be recorded on the balance sheet
at fair value. For a derivative designated as a cash flow hedge, the effective
portions of changes in the fair value of the derivative are recorded in other
comprehensive income and are recognized in the income statement when the hedged
item affects earnings. Ineffective portions of changes in the fair value of cash
flow hedges are recognized in earnings.
The Company uses derivative instruments to manage exposure to
interest rate risks. The Company's objectives for holding derivatives are to
minimize the risks using the most effective methods to eliminate or reduce the
impacts of this exposure. As of June 30, 2002, the Company was a party to a Swap
with a notional amount of $12.5 million and a termination date of September 28,
F-13
NUCO2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
2003. Under the Swap, the Company pays a fixed interest rate of 5.23% per annum
and receives a LIBOR-based floating rate.
The Swap, which is designated as a cash flow hedge, is deemed to be
a highly effective transaction, and accordingly the loss on the derivative
instrument is reported as a component of other comprehensive loss. For the years
ended June 30, 2002 and 2001, the Company recorded losses of $86 and $343,
respectively, representing the change in fair value of the Swap, as other
comprehensive loss. The net derivative loss will be classified into earnings
over the term of the underlying cash flow hedge.
The aggregate maturities of long-term debt for each of the five
years subsequent to June 30, 2002 are as follows:
Year Ending June 30,
2003 $ 40
2004 48,044
2005 48
2006 52
2007 57
Thereafter 53
------------
$ 48,294
============
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
common stock at an exercise price of $16.40 per share. The effective interest
rate on the Notes is 12.1% per annum after giving effect to the amortization of
the original issue discount. The Company is required to meet certain affirmative
and negative covenants. Additionally, NationsBanc Montgomery Securities, Inc.,
the placement agent, received a warrant to purchase an aggregate of 30,000
shares of common stock at an exercise price of $14.64 per share which expires on
October 31, 2004.
On May 4, 1999, the Company sold an additional $10.0 million of its
12% Senior Subordinated Promissory Notes ("Additional Notes"). Except for their
October 31, 2005 maturity date, the Additional Notes are substantially identical
to the Notes described above. The Additional Notes were sold with detachable
6-1/2 year warrants to purchase an aggregate of 372,892 shares of common stock
at an exercise price of $6.65 per share. In connection with the sale of the
Additional Notes, certain financial covenants governing the Notes and the
Additional Notes were adjusted as of March 31, 1999 and prospectively, and the
exercise price for 612,023 of the warrants issued in connection with the sale of
the Notes was reduced to $6.65 per share, of which 65,574 were exercised and
converted to shares of common stock during the year ended June 30, 2002. The
effective interest rate on the Additional Notes is 13.57% per annum after giving
effect to the amortization of the original issue discount.
As of June 30, 2002, the Company was not in compliance with certain
financial covenants under the Notes and Additional Notes. On September 27, 2002,
concurrently with the amendment to the Amended Credit Facility, the Company
amended the Notes and Additional Notes to adjust certain financial covenants for
the quarter ended June 30, 2002 and prospectively. If the total net funded debt
coverage ratio (as defined) exceeds the applicable ratio for each fiscal quarter
ending on or after June 30, 2002, the interest rate on the Notes and Additional
Notes will increase by an additional 75 basis points per annum up to a maximum
of 14% per annum.
Note 7 - Preferred Stock
In May 2000, the Company sold 5,000 shares of its Series A 8%
Cumulative Convertible Preferred Stock, no par value (the "Series A 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. Shares of the Series A Preferred Stock may be converted
into shares of common stock at any time at a current conversion price of $9.28
per share. In connection with the sale, costs in the amount of $65 were charged
to paid-in capital.
In November 2001, the Company sold 2,500 shares of its Series B 8%
Cumulative Convertible Preferred Stock, no par value (the "Series B 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
F-14
NUCO2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
Preference, and, to the extent not paid in cash, are added to the Liquidation
Preference. Shares of the Series B Preferred Stock may be converted into shares
of common stock at any time at a current conversion price of $12.92 per share.
During the fiscal years ended June 30, 2002, 2001 and 2000, the
carrying amount (and Liquidation Preferences) of the Series A Preferred Stock
and Series B Preferred Stock ("Preferred Stock") was increased by $586, $416 and
$50, respectively, for dividends accrued. The 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 Preferred
Stock, the amount of any dividends that would have accrued and been payable on
the Preferred Stock from the Mandatory Redemption Date through the fourth
anniversary date.
In addition, outstanding shares of 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 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 13). In December 2000, BOC purchased 1,111,111 shares of Common Stock for
$9.00 per share. In addition, the warrant was reduced to 400,000 shares. On the
date of issuance of the Common Stock, the closing price of the Common Stock on
the Nasdaq National Market was $8.00 per share. The warrant is exercisable at an
exercise price of $17.00 per share until April 30, 2007.
In January 2001, the Company granted to each
non-employee director options for 10,000 shares of Common Stock. An aggregate of
50,000 options were granted at an exercise price equal to the average closing
price of the Common Stock on the Nasdaq National Market for the 20 trading days
prior to January 2, 2001, or $7.82. All options vest in five equal installments
commencing in January 2001, and have a ten-year term. As of June 30, 2001 and
2002, options for 10,000 and 20,000 shares, respectively, were exercisable.
(b) Stock Option Plans
The board of directors adopted the 1995 Option Plan
(the "1995 Plan"). Under the 1995 Plan, the Company has reserved 1,950,000
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 ten years. Options granted to date vest in equal installments from
one to five years. As of June 30, 2000, 2001 and 2002 options for 481,808
581,499 and 503,072 shares, were exercisable, respectively. The weighted-average
fair value per share of options granted during the years ended June 30, 2000,
2001 and 2002 were $3.06, $4.30 and $4.78, respectively. As of June 30, 2002,
the weighted-average remaining life of the options was 7.77 years.
F-15
NUCO2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
The following table summarizes the transactions pursuant to the 1995
Plan.
Weighted-Average
Shares Exercise Price Exercise Price
------ -------------- ---------------
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
Granted 372,000 $6.19-$11.95 $ 10.39
Expired or canceled 30,400 $5.50-$11.25 $ 6.95
Exercised 262,999 $5.50-$11.25 $ 7.79
--------- ------------- ---------
Outstanding at June 30, 2001 1,170,335 $5.50-$11.95 $ 9.38
Granted 429,100 $10.55-$12.55 $ 12.15
Expired or canceled 184,625 $5.50-$12.40 $ 10.55
Exercised 252,360 $5.50-$11.28 $ 9.69
--------- ------------- ---------
Outstanding at June 30, 2002 1,162,450 $5.50-$12.55 $ 10.15
========= ============= =========
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, 2000, 2001 and 2002 options for 16,000 shares, 22,000 shares and
34,000 shares were exercisable, respectively. The weighted-average fair value
per share of options granted during the years ended June 30, 2000, 2001 and 2002
were $2.37, $3.87 and $3.55, respectively. As of June 30, 2002, the
weighted-average remaining life of the options was 7.44 years.
Weighted-Average
Shares Exercise Price Exercise Price
------ -------------- --------------
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
Granted 24,000 $7.13-$13.25 $ 8.97
Canceled 6,000 $ 7.75 $ 7.75
Exercised 2,000 $ 8.94 $ 8.94
------ ------------ ---------
Outstanding at June 30, 2001 48,000 $6.06-$13.25 $ 8.66
Granted 12,000 $11.00-$11.20 $ 11.10
------ ------------ ---------
Outstanding at June 30, 2002 60,000 $6.06-$13.25 $ 9.15
====== ============ =========
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 2000, 2001 and 2002; expected volatility
of 39% to 40%, risk-free interest rate of 3.7% 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:
F-16
NUCO2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
Years Ended June 30,
--------------------
2002 2001 2000
---- ---- ----
Net (loss) available to common shareholders $(12,456) $(16,387) $ (9,766)
Net (loss) per common share $ (1.43) $ (2.07) $ (1.35)
======== ======== ========
Weighted average number of common and
common equivalent shares outstanding 8,742 7,926 7,238
======== ======== ========
The pro forma adjustment for stock based compensation costs under
SFAS 123 for the years ending 2000, 2001 and 2002 is approximately $333, $486
and $899, 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. Common equivalent
shares for stock options and warrants are calculated pursuant to the treasury
stock method. During the years ended June 30, 2002, 2001 and 2000, the Company
excluded the equivalent of 671,155, 411,238 and 438,131 shares of common stock
in the computation of loss per share as these options and warrants to purchase
common stock were anti-dilutive. Additionally, options and warrants to purchase
400,000 shares, 43,715 shares, and 159,064 shares for $17.00 per share, $16.40
per share, and $12.27-$14.64 per share, respectively, were outstanding during
all or a portion of the year ended June 30, 2002, options and warrants to
purchase 400,000 shares, 43,715 shares, and 36,000 shares for $17.00 per share,
$16.40 per share, and $13.25-$14.64 per share, respectively, were outstanding
during all or a portion of the year ended June 30, 2001, and 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, 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
years ended June 30, 2002, 2001 and 2000, were 841,609, 577,191 and 533,262
shares, respectively, of Common Stock issuable upon conversion of 7,500 shares
of Convertible Preferred Stock because the effect would be anti-dilutive.
Years Ended June 30,
--------------------
2002 2001 2000
---- ---- ----
Net (loss) $(10,971) $(15,485) $ (9,383)
Preferred stock dividends (586) (416) (50)
-------- -------- --------
Net (loss) available for common shareholders $(11,557) $(15,901) $ (9,433)
======== ======== ========
Weighted average outstanding shares of common stock 8,742 7,926 7,238
======== ======== ========
Net (loss) per share - basic and diluted $ (1.32) $ (2.01) $ (1.30)
======== ======== ========
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,
--------
2002 2001
---- ----
Deferred tax assets:
Allowance for doubtful accounts $ 1,080 $ 877
Amortization expense 933 822
Other 5 17
Net operating loss carryforwards 36,716 30,275
-------- --------
Total gross deferred tax assets 38,734 31,991
Less valuation allowance (18,845) (14,487)
-------- --------
Net deferred tax assets 19,889 17,504
-------- --------
Deferred tax liabilities:
Depreciation expense (19,889) (17,504)
-------- --------
Total gross deferred tax liabilities (19,889) (17,504)
-------- --------
Net deferred taxes $ -- $ --
======== ========
F-17
NUCO2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
At June 30, 2002, the Company had net operating loss carryforwards
for Federal income tax purposes of approximately $105.0 million, which are
available to offset future Federal taxable income, if any, in varying amounts
through June 2022. The net change in the total valuation allowance for the years
ended June 30, 2002 and 2001 was an increase of $4,358 and $4,691, respectively.
Note 11 - Lease Commitments
The Company leases office equipment, trucks and warehouse/depot
and office facilities under operating leases that expire at various dates
through March 2011. 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,
2003 $ 4,027
2004 2,639
2005 1,898
2006 1,308
2007 762
Thereafter 1,125
------------
$ 11,759
============
Total rental costs under non-cancelable operating leases were
approximately $5,130, $4,856 and $4,670 in 2002, 2001 and 2000, respectively.
Note 12 - 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, 2002, 2001 and 2000 the
Company's sales to customers in the food and beverage industry were
approximately 99%.
There were no customers that accounted for greater than 2% of
total sales for each of the three years ended June 30, 2002, nor were there any
customers that accounted for greater than 5% of total accounts receivable at
June 30, 2002 or 2001.
The Company purchases new bulk CO2 systems from the two major
manufacturers of such systems. The inability of either of both 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 adversely affect operating results.
Note 13 - Commitments and Contingencies
In May 1997, the Company entered into an exclusive ten-year
carbon dioxide supply agreement with The BOC Group, Inc. ("BOC") (See Note 8).
The agreement ensures readily available high quality CO2 as well as relatively
stable liquid carbon dioxide prices. Pursuant to the agreement, the Company
purchases virtually 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.
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 14 - 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, accounts receivable and
accounts payable
The carrying amounts approximate fair value due to the
short maturity of these instruments.
F-18
NUCO2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(b) Long-term and subordinated debt
The fair value of the Company's long-term and
subordinated 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,
--------
2002 2001
---- ----
Cash and cash equivalents $ 1,562 $ 626
Accounts receivable 7,171 7,746
Accounts payable 3,512 2,958
Long-term debt, including current maturities 48,294 48,180
Subordinated debt 39,366 39,166
Note 15 - Selected Quarterly Financial Data (unaudited)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
2002 2001 2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ---- ---- ----
(Restated) (Restated) (Restated)
Net sales $ 18,089 $ 16,113 $ 18,607 $ 16,432 $ 17,743 $ 17,028 $ 17,873 $ 18,060
Gross profit (b) 9,275 8,100 9,626 8,378 8,781 8,997 9,139 8,981
Net (loss) (c)(d) (1,913) (2,392) (789) (2,329) (1,812) (1,799) (6,457) (8,965)
Basic and diluted earnings per
common share
Net (loss) (a) $ (0.23) $ (0.34) $ (0.11) $ (0.32) $ (0.23) $ (0.23) $ (0.74) $ (1.07)
(a) Per common share amounts for the quarters have each been
calculated separately. Accordingly, quarterly amounts may not add to total year
earnings per share because of differences in the average common shares
outstanding during each period.
(b) Gross profit as presented herein, for each of the quarters
of the year ended June 30, 2001, differs from that previously reported in the
Company's Form 10-K for the year ended June 30, 2001 due to the
reclassification during the year ended June 30, 2002 of certain depot expenses.
Previously, depot telephone, recruiting and postage expenses were included in
selling, general and administrative expenses; presently, such expenses are
reported as components of costs of sales. The effect of the reclassification was
to decrease the gross profit by $84, $88, $85 and $90 for the 1st, 2nd, 3rd and
4th quarters of the year ended June 30, 2001, respectively.
(c) During the fourth quarter of fiscal 2001, the Company's
management continued to monitor and evaluate the collectibility and potential
impairment of its assets, in particular, accounts receivable and certain fixed
assets. In connection therewith, an additional allowance for doubtful accounts
of $1,692 and reserves and write-downs on fixed assets of $3,926 were recorded
in the fourth quarter. The potential uncollectibility of certain accounts
receivable and the related increase in the allowance for doubtful accounts came
to light as a result of the Company having experienced several problems in the
billing (specifically due to inaccurate address information on customers) and
cash application areas. Management believes that the factors that gave rise to
this situation have been addressed to prevent a reoccurrence of the problem in
the future. The reserves and write-downs on fixed assets were primarily due to
the Company's decision, reached during the fourth quarter of 2001, to focus on
the placement of larger tanks on a prospective basis (Note 2) and a more
conservative approach of immediately removing tanks upon service termination,
compared to the prior practice of leaving a tank in place when prospects for a
new customer at the same location appeared likely, in an effort to enhance asset
control and utilization. Additionally, the Company recorded $466 in recruiting
expense, moving expense and severance pay in connection with its new management
team. It is management's opinion that these adjustments were properly recorded
in the fourth quarter of 2001 based upon facts and circumstances that became
available in that period.
(d) During the fourth quarter of fiscal 2002, the Company's
management continued to monitor and evaluate the collectibility and potential
impairment of its accounts receivable and certain fixed assets. In connection
therewith, an additional allowance for doubtful accounts of $1,862 and
write-downs of fixed assets of $1,809 were recorded in the fourth quarter. The
potential uncollectibility of certain accounts receivable and the related
increase in the allowance for doubtful accounts came to light as a result of the
Company having experienced several problems relating to unusually high closure
rates among independent operators who have gone out of business in recent
periods due to unfavorable economic conditions.
F-19
NUCO2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
The write-downs of fixed assets were due to the Company's decision, reached
during the fourth quarter of 2002, to replace all 50 and 100 pound tanks in
service at customer locations over a three to four year period (Note 2). It is
management's opinion that these adjustments are properly recorded in the fourth
quarter based upon facts and circumstances that became available in that period.
(e) Net loss as presented herein, for each of the first three
quarters of the year ended June 30, 2002, differs from that previously reported
in the Company's Forms 10-Q due to year-end adjustments relating to depreciation
of property and equipment, the recording of amortization of customer lists and
loss on asset disposals. Depreciation expense was adjusted to correct an error
that resulted from a faulty computer software upgrade. The customer list
amortization adjustment resulted from the determination that the decision to
reclassify customer lists into goodwill at the time of initial adoption of SFAS
142 was inappropriate. The loss on asset disposals related to the 50 and 100
pound tanks that were removed from service during the year, but which were not
written off until year-end. The effect of the adjustments on each of the first
three quarters was as follows:
1st Quarter 2nd Quarter 3rd Quarter
----------- ----------- -----------
Net (loss) originally reported $(1,407) $ (478) $(1,004)
Adjustments:
Depreciation of property and equipment - - (320)
Amortization of customer lists (210) (202) (194)
Loss on asset disposal (296) (109) (294)
--------- ----------- -------
Net (loss) as adjusted $(1,913) $ (789) $(1,812)
========= =========== =======
Basic and diluted earnings per common
share
Net (loss) originally reported $ (0.18) $(0.07) $(0.13)
Adjustments (0.05) (0.04) (0.10)
--------- ------- -------
Net (loss) as adjusted $ (0.23) $(0.11) $(0.23)
========= ======= =======
F-20
Note 16 - Subsequent Event
On August 22, 2002, the Company completed the private placement
of 1,663,846 shares of its common stock to 24 accredited investors at a price of
$9.75 per share realizing net cash proceeds of approximately $15.1 million after
expenses. Pursuant to the requirements of the Amended Credit Facility, the
Company used the proceeds to pay down outstanding debt under the Amended Credit
Facility.
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
of period expenses other accounts Deductions end of period
--------- -------- -------------- ---------- -------------
Year ended June 30, 2000
Allowance for doubtful accounts $ 558 $ 445 $ -- $ 381 $ 622
Year ended June 30, 2001
Allowance for doubtful accounts $ 622 $3,061 $ -- $1,177 $2,506
Year ended June 30, 2002
Allowance for doubtful accounts $2,506 $2,753 $ -- $2,174 $3,085
F-21