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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 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.
(Exact Name of Registrant as Specified in Its Charter)
Florida 65-0180800
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2800 Southeast Market Place, Stuart, FL 34997
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (772) 221-1754
N/A
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report.
Indicate by check /X/ whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check /X/ whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act). Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's
classes of Common Stock, as of the latest practicable date:
Class Outstanding at September 30, 2002
----- ---------------------------------
Common Stock, $.001 par value 10,633,405 shares
NUCO2 INC.
Index
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Balance Sheets as of September 30, 2002 and 3
June 30, 2002
Statements of Operations for the Three Months Ended 4
September 30, 2002 and September 30, 2001
Statement of Shareholders' Equity for the Three 5
Months Ended September 30, 2002
Statements of Cash Flows for the Three Months 6
Ended September 30, 2002 and September 30, 2001
Notes to Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 11
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 17
ABOUT MARKET RISK
ITEM 4. CONTROLS AND PROCEDURES 17
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NUCO2 INC.
BALANCE SHEETS
(In thousands, except share amounts)
ASSETS
September 30, 2002 June 30, 2002
------------------ -------------
(unaudited)
Current assets:
Cash and cash equivalents $ 1,139 $ 1,562
Trade accounts receivable, net of allowance for doubtful
accounts of $1,879 and $3,085, respectively 6,852 7,171
Inventories 232 235
Prepaid expenses and other current assets 2,069 1,966
--------- ---------
Total current assets 10,292 10,934
--------- ---------
Property and equipment, net 94,667 95,084
--------- ---------
Other assets:
Goodwill, net 19,222 19,222
Non-competition agreements, net 1,199 1,282
Customer lists, net 134 281
Deferred financing costs, net 2,317 2,524
Deferred lease acquisition costs, net 2,899 2,991
Other assets 342 320
--------- ---------
26,113 26,620
--------- ---------
Total assets $ 131,072 $ 132,638
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 41 $ 40
Accounts payable 2,740 3,512
Accrued expenses 2,201 2,304
Accrued interest 2,571 1,479
Accrued payroll 549 897
Other current liabilities 218 371
--------- ---------
Total current liabilities 8,320 8,603
Long-term debt, less current maturities 33,743 48,254
Subordinated debt 39,417 39,366
Customer deposits 2,847 2,644
--------- ---------
Total liabilities 84,327 98,867
--------- ---------
Commitments and contingencies
Redeemable preferred stock 8,723 8,552
--------- ---------
Shareholders' equity:
Preferred stock; no par value; 5,000,000 shares authorized;
7,500 shares issued and outstanding -- --
Common stock; par value $.001 per share; 30,000,000 shares authorized;
issued and outstanding 10,633,405 shares at September 30, 2002
and 8,969,059 shares at June 30, 2002 11 9
Additional paid-in capital 93,517 78,584
Accumulated deficit (55,055) (52,945)
Accumulated other comprehensive loss (451) (429)
--------- ---------
Total shareholders' equity 38,022 25,219
--------- ---------
Total liabilities and shareholders' equity $ 131,072 $ 132,638
========= =========
See accompanying Notes to Financial Statements.
3
NUCO2 INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(UNAUDITED)
Three Months Ended September 30,
--------------------------------
2002 2001*
---- ----
Net sales $ 18,678 $ 18,089
Costs and expenses:
Cost of products sold, excluding depreciation
and amortization 9,139 8,814
Selling, general and administrative expenses 4,627 3,551
Depreciation and amortization 4,419 4,108
Loss on asset disposals 611 562
-------- --------
18,796 17,035
-------- --------
Operating (loss) income (118) 1,054
Loss on early extinguishment of debt -
write-off of deferred financing costs -- 796
Interest expense 1,992 2,171
-------- --------
Net (loss) $ (2,110) $ (1,913)
======== ========
Basic and diluted (loss) per share $ (0.24) $ (0.23)
======== ========
Weighted average number of common and common
equivalent shares outstanding, basic and diluted 9,693 8,651
======== ========
*Restated - See Notes 1, 2 and 7 to the Financial Statements.
See accompanying Notes to Financial Statements.
4
NUCO2 INC.
STATEMENT OF SHAREHOLDERS' EQUITY
(In thousands, except share amounts)
(UNAUDITED)
Accumulated
Additional Other Total
Common Stock Paid-In Accumulated Comprehensive Shareholders'
Shares Amount Capital Deficit Loss Equity
------ ------ ------- ------- ---- ------
Balance, June 30, 2002 8,969,059 $ 9 $ 78,584 $ (52,945) $ (429) $ 25,219
Comprehensive (loss):
Net (loss) (2,110) (2,110)
Other comprehensive expense:
Interest rate swap transaction (22) (22)
-----------
Total comprehensive (loss) (2,132)
Redeemable preferred stock dividend (171) (171)
Issuance of common stock, 1,663,846 2 15,098 15,100
net issuance of costs
Exercise of options 500 6 6
----------- ----------- ----------- ----------- ----------- -----------
Balance, September 30, 2002 10,633,405 $ 11 $ 93,517 $ (55,055) $ (451) $ 38,022
=========== =========== =========== =========== =========== ===========
See accompanying Notes to Financial Statements.
5
NUCO2 INC.
STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
Three Months Ended September 30,
--------------------------------
2002 2001*
---- -----
Cash flows from operating activities:
Net (loss) $ (2,110) $ (1,913)
Adjustments to reconcile net (loss) to net cash provided
by operating activities:
Depreciation and amortization of property and equipment 3,450 3,137
Amortization of other assets 969 971
Amortization of original issue discount 52 50
Loss on disposals 611 562
Loss on early extinguishment of debt -- 796
Changes in operating assets and liabilities:
Decrease (increase) in:
Trade accounts receivable 319 (967)
Inventories 3 (14)
Prepaid expenses and other current assets (103) (747)
Increase (decrease) in:
Accounts payable (772) 1,586
Accrued expenses (103) (606)
Accrued payroll (348) (412)
Accrued interest 1,070 1,024
Other current liabilities (153) 6
Customer deposits 203 186
-------- --------
Net cash provided by operating activities 3,088 3,659
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (3,600) (3,254)
Increase in deferred lease acquisition costs (232) (227)
Increase in other assets (22) (166)
-------- --------
Net cash used in investing activities (3,854) (3,647)
-------- --------
Cash flows from financing activities:
Repayment of long-term debt (14,510) (47,860)
Proceeds from issuance of common stock 16,224 --
Issuance cost - common stock (1,124) --
Proceeds from issuance of long-term debt -- 50,000
Exercise of stock options 6 39
Increase in deferred financing costs (253) (2,048)
-------- --------
Net cash provided by financing activities 343 131
-------- --------
Increase (decrease) in cash and cash equivalents (423) 143
Cash and cash equivalents at the beginning of period 1,562 626
-------- --------
Cash and cash equivalents at the end of period $ 1,139 $ 769
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 870 $ 1,098
======== ========
Income taxes $ -- $ --
======== ========
*Restated - See Notes 1, 2 and 7 to the Financial Statements.
See accompanying Notes to Financial Statements.
6
NUCO2 INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared
in accordance with the instructions to Form 10-Q used for quarterly reports
under Section 13 or 15 (d) of the Securities Exchange Act of 1934, and
therefore, do not include all information and footnotes necessary for a fair
presentation of financial position, results of operations and cash flows in
conformity with generally accepted accounting principles. The accounts of NuCo2
Inc. (the "Company") and its wholly-owned subsidiaries, NuCo2 Acquisition Corp.
and Koch Compressed Gases, Inc. were merged during fiscal 2002.
Net loss as presented herein, for the quarter ended September 30,
2001 differs from the net loss as previously reported in the Company's Form 10-Q
for such quarter due to fiscal year-end adjustments. These adjustments related
to the amortization of customer lists and loss on asset disposals (see Note 7).
The financial information included in this report has been prepared
in conformity with the accounting principles and methods of applying those
accounting principles, reflected in the financial statements for the fiscal year
ended June 30, 2002 included in Form 10-K filed with the Securities and Exchange
Commission.
All adjustments necessary for a fair statement of the results for
the interim periods presented have been recorded. This quarterly report on Form
10-Q should be read in conjunction with the Company's audited financial
statements for the fiscal year ended June 30, 2002. The results of operations
for the periods presented are not necessarily indicative of the results to be
expected for the full fiscal year.
NOTE 2. ACCOUNTING PRONOUNCEMENTS
In the first quarter of fiscal 2003, the Company adopted 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 ("APB 30"); otherwise
such costs will be classified within income from continuing operations. In
accordance with APB 30 and SFAS 145, the Company has reclassified the $796,000
extraordinary loss on the early extinguishment of debt for the quarter ended
September 30, 2001 to a component of continuing operations.
In the first quarter of fiscal 2003, the Company adopted 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)" ("EITF 94-3").
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 adoption of SFAS 146 had no impact on the Company's results of
operations and financial position.
In the first quarter of fiscal 2003, the Company adopted SOP 01-06,
"Accounting by Certain Entities (Including Entities with Trade Receivables That
Lend to or Finance the Activities of Others)" ("SOP 01-06"). SOP 01-06 addresses
disclosures on accounting policies relating to trade accounts receivable and is
effective prospectively for financial statements issued for fiscal years
beginning after December 15, 2001. The adoption of SOP 01-06 had no impact on
the Company's results of operations or financial position.
NOTE 3. NET LOSS PER COMMON SHARE
Basic loss per common share has been computed by dividing the net
loss, after giving effect to redeemable preferred stock dividends (see Note 6),
by the weighted average number of common shares outstanding during the period.
Diluted loss per common share has been computed on the basis of the weighted
average number of common and, if dilutive, common
7
equivalent shares outstanding during the period. Common equivalent shares for
stock options and warrants calculated pursuant to the treasury stock method were
not included in diluted earnings per common share because they would have been
anti-dilutive. Also, not included in the computation of diluted earnings per
common share was the effect of outstanding shares of redeemable preferred stock
using the "if converted" method, because the effect would be anti-dilutive.
The following table presents the Company's net (loss) available to
common shareholders and (loss) per share, basic and diluted (in thousands,
except per share amounts):
Three Months Ended September 30,
--------------------------------
2002 2001
---- ----
Net (loss) $ (2,110) $ (1,913)
Redeemable preferred stock dividends (171) (110)
--------------- -------------
Net (loss) available for common shareholders $ (2,281) $ (2,023)
=============== =============
Weighted average outstanding shares of common stock 9,693 8,651
(Loss) per share - basic and diluted $ (0.24) $ (0.23)
============== ============
NOTE 4. LONG-TERM DEBT
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 0.375% to 0.50% 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 redeemable preferred stock. The Company is also
required to meet certain affirmative and negative covenants including, but not
limited to, financial covenants.
The Company is required to assess compliance with its debt covenants
under the Amended Credit Facility on a quarterly basis. These financial
covenants are based on a measure that is not consistent with accounting
principles generally accepted in the United States of America. Such measure is
EBITDA (as defined), which represents earnings (loss) before interest, taxes,
depreciation and amortization, as modified by certain defined adjustments. The
failure to meet these covenants, absent a waiver or amendment, would place the
Company in default and cause the debt outstanding under the Amended Credit
Facility to become immediately due and payable. The Amended Credit Facility also
includes certain cross-default provisions to the Company's 12% Senior
Subordinated Promissory Notes (see Note 5).
As of June 30, 2002, the Company was not in compliance with certain
of its 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 of the Amended Credit Facility was
extended to November 17, 2003. Prior to June 30, 2002, the Amended Credit
Facility was amended to adjust certain financial covenants for the quarter ended
March 31, 2002 and prospectively, and non-compliance with the minimum EBITDA
covenant for the three months ended March 31, 2002 was waived. As of September
30, 2002, the Company was in compliance with all of the financial covenants
under the Amended Credit Facility.
Inasmuch as the Amended Credit Facility matures in November 2003,
the outstanding debt thereunder, absent any modifications or changes, will be
reflected as a current liability on the balance sheet in the Company's next
quarterly report for the period ending December 31, 2002. The Company has begun
discussions with current and potential lenders for new borrowing arrangements
which will encompass the refinancing of the Amended Credit Facility and 12%
Senior Subordinated Promissory Notes. The new arrangements are expected to be
consummated prior to the filing of the Company's next quarterly report.
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
issuance costs of $1.1 million. Pursuant to the requirements of the Amended
Credit Facility, the Company used $14.5 million of the proceeds to pay down
outstanding debt under the Amended Credit Facility.
8
As of September 30, 2002, a total of $33.5 million was outstanding
pursuant to the Amended Credit Facility with interest at 3.50% above LIBOR
(5.2981% to 5.30%).
Effective July 1, 2000, the Company adopted SFAS 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 September 30, 2002, the Company was a party to
an interest rate swap agreement (the "Swap") with a notional amount of $12.5
million and a termination date of September 28, 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 three
months ended September 30, 2002 and 2001, the Company recorded losses of $22,000
and $133,000 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.
NOTE 5. SUBORDINATED DEBT
In October 1997, the Company issued $30.0 million of its 12% Senior
Subordinated Promissory Notes (the "1997 Notes") with interest only payable
semi-annually on April 30 and October 31, due October 31, 2004. The 1997 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. At the
date of issuance, in accordance with APB 14, "Accounting for Convertible Debt
and Debt Issued with Purchase Warrants," the Company allocated proceeds of $29.7
million to the debt and $0.3 million to warrants, with the resulting discount on
the debt referred to as the Original Issue Discount. The Original Issue Discount
is being amortized as interest expense over the life of the debt, resulting in
an effective interest rate on the 1997 Notes of 12.1% per annum. The amount
allocated to the warrants was credited to Additional Paid-In Capital. In
conjunction with the issuance of the 1997 Notes, the Company is required to meet
certain affirmative and negative covenants. In addition, 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 (the "1999 Notes"). Except for their
October 31, 2005 maturity date, the 1999 Notes are substantially identical to
the 1997 Notes described above. The 1999 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 return for modifying certain financial covenants governing the
1997 Notes, the exercise price of 612,053 of the warrants issued in connection
with the 1997 Notes was reduced to $6.65 per share. On May 4, 1999, the trading
range of the Company's common stock was $6.44 to $6.88 per share. To assist with
the valuation of the newly issued warrants and the repriced warrants, the
Company hired an outside consultant. Utilizing the Black-Scholes Model, the
warrants issued with the 1997 Notes were valued at $1.26 per warrant, or an
aggregate value of $773,702, and the warrants issued with the 1999 Notes at
$1.47 per warrant, or an aggregate value of $549,032. Both amounts are reflected
as Additional Paid-In Capital, offset by the Original Issue Discount, which is
netted against the outstanding balance of the 1997 Notes and 1999 Notes. After
giving effect to the amortization of the Original Issue Discount, the effective
interest rate on the 1999 Notes is 13.57% per annum.
NOTE 6. REDEEMABLE 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 $65,000 were
charged to paid-in capital.
In November 2001, the Company sold 2,500 shares of its Series B 8%
Cumulative Preferred Stock, no par value (the "Series B Preferred Stock"), at
the initial Liquidation Preference. Cumulative dividends are payable quarterly
in arrears at the rate of 8% per annum on the Liquidation Preference, and, to
9
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 year ended June 30, 2002 and the three months
ended September 30, 2002, the carrying amount (and Liquidation Preferences) of
the Series A Preferred Stock and Series B Preferred Stock ("Preferred Stock")
was increased by $586,000 and $171,000, 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 7. PRIOR PERIOD ADJUSTMENTS
Net loss as presented herein, for the quarter ended September 30,
2001 differs from the net loss previously reported in the Company's Form 10-Q
for such quarter due to fiscal year-end adjustments. These adjustments related
to the amortization of customer lists and loss on asset disposals. Customer list
amortization was increased by $0.2 million based on the determination that the
decision to reclassify customer lists into goodwill at the time of the initial
adoption of SFAS 142, "Goodwill and Other Intangible Assets," was inappropriate.
In addition, during the fiscal year ended June 30, 2001, the Company decided not
to replace its 50 and 100 lb. tanks as they were removed from service. In
conjunction with this decision, the loss on asset disposals was increased by
$0.3 million as a result of 50 and 100 lb. tanks that were removed from service
during the quarter ended September 30, 2001, but which were not written off
until June 2002. The impact of these adjustments on the Company's net (loss) and
(loss) per share are provided in the following table (in thousands, except per
share amounts):
Three Months Ended
September 30, 2002
------------------
Net (loss) originally reported $ (1,407)
Adjustments:
Amortization of customers lists (210)
Loss on asset disposals (296)
-----------
Net (loss) as adjusted $ (1,913)
===========
Basic and diluted earnings per
common share:
Net (loss) originally reported $ (0.18)
Adjustments (0.05)
-----------
Net (loss) as adjusted $ (0.23)
===========
The Company's accumulated deficit, as previously reported as of
September 30, 2001, was $43.4 million compared to the accumulated deficit of
$43.9 million, as adjusted.
10
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED
IN THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH DIFFERENCES
INCLUDE, BUT ARE NOT LIMITED TO, OUR EXPANSION INTO NEW MARKETS, COMPETITION,
TECHNOLOGICAL ADVANCES, RELIANCE ON KEY SUPPLIERS AND AVAILABILITY OF MANAGERIAL
PERSONNEL. THE FORWARD-LOOKING STATEMENTS ARE MADE AS OF THE DATE OF THIS FORM
10-Q AND WE ASSUME NO OBLIGATION TO UPDATE THE FORWARD-LOOKING STATEMENTS OR TO
UPDATE THE REASONS WHY ACTUAL RESULTS COULD DIFFER FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS.
OVERVIEW
We believe that we are the largest supplier in the United States of
bulk CO2 systems and bulk CO2 for carbonating fountain beverages based on the
number of bulk CO2 systems leased to our customers. As of September 30, 2002, we
operated a national network of 101 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. The ramp down in growth enabled our sales
force to concentrate on signing higher margin new customers and re-signing
existing customers at increased rates. As a result of these initiatives, we feel
that we will be ready to accelerate our growth in fiscal 2003.
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 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.
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
11
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 deferred lease acquisition
costs, 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.
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
contributed to accumulated net losses of $55.1 million at September 30, 2002.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage relationship which various items bear to net sales:
Three Months Ended
September 30,
-------------
2002 2001*
---- ----
Income Statement Data:
Net sales .................................. 100.0% 100.0%
Cost of products sold, excluding
depreciation and amortization ............ 48.9 48.7
Selling, general and administrative expenses 24.8 19.6
Depreciation and amortization .............. 23.6 22.7
Loss on asset disposals .................... 3.3 3.2
------- -------
Operating (loss) income .................... (0.6) 5.8
Loss on early extinguishment of debt ....... -- 4.4
Interest expense ........................... 10.7 12.0
------- -------
Net (loss) ................................. (11.3)% (10.6)%
======= =======
* Restated, see Notes 1, 2 and 7 to the Financial Statements.
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2001
NET SALES
Net sales increased $0.6 million, or 3.3%, from $18.1 million in
2001 to $18.7 million in 2002. Sales increased by $1.2 million, or 6.3%, from
improved customer pricing initiatives on both new and renewal customers, offset
primarily by $0.5 million due to our strategic decision to reduce fuel and other
surcharges. In addition, revenues declined by $0.1 million due primarily to
fewer customers utilizing our stand-alone high pressure cylinders. During the
fiscal year ended June 30, 2002, we adopted a plan to phase out those customers
that use only high pressure cylinders and who do not utilize one of our bulk CO2
service plans. Revenues derived from our stand-alone high pressure cylinder
customers may not be fully eliminated from our ongoing revenues inasmuch as our
goal is to convert these customers to a bulk CO2 service plan. Accordingly, the
expected declining revenues derived from stand-alone high pressure cylinder
customers is not expected to have a material impact on our results of
operations.
12
The following table sets forth, for the periods indicated, the
percentage relationship which our service plans bear to net sales:
Three Months Ended September 30,
--------------------------------
2002 2001
---- ----
Service Plan
Bulk budget plan(1) 79% 77%
Equipment lease/product purchase plan(2) 9 9
Product purchase plan(3) 11 13
Stand alone high pressure cylinder(4) 1 1
--- ---
100% 100%
=== ===
1. Combined fee for bulk CO2 tank and bulk CO2.
2. Fee for bulk CO2 tank and, separately, bulk CO2 usage.
3. Bulk CO2 only.
4. High pressure CO2 cylinders, not used in conjunction with a bulk CO2
plan.
COST OF PRODUCTS SOLD
Costs of products sold increased by $0.3 million, or 3.7%, from $8.8
million in 2001 to $9.1 million in 2002, and as a percentage of net sales,
increased from 48.7% in 2001 to 48.9% in 2002. Operational wages and benefits
increased by $0.3 million from $3.3 million in 2001 to $3.6 million in 2002, and
as a percentage of net sales, increased from 18.5% in 2001 to 19.3% in 2002. The
increase is primarily attributable to increased costs associated with employee
benefits and workers' compensation claims.
In addition, depot and distribution costs increased $0.1 million
from $2.5 million in 2001 to $2.6 million in 2002, due primarily to increased
truck repair costs, partially offset by a decrease in CO2 purchases of $0.1
million from $2.3 million in 2001 to $2.2 million in 2002, primarily due to
improved pricing and service efficiencies.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by $1.1
million, or 30.3%, from $3.6 million in 2001 to $4.6 million in 2002, and
increased as a percentage of net sales from 19.6% in 2001 to 24.8% in 2002.
Selling expenses increased by $0.4 million, from $0.6 million in
2001 to $1.0 million in 2002. The increase is attributable to an increase in
selling wages and benefits of $0.2 million from $0.5 million in 2001 to $0.7
million in 2002. In addition, we incurred additional marketing expenses of $0.1
million associated with trade shows and other marketing campaigns.
General and administrative expenses increased by $0.7 million from
$2.9 million in 2001 to $3.6 million in 2002. The increase is attributable to an
increase in administrative wages and benefits of $0.3 million from $1.7 million
in 2001 to $2.0 million in 2002. Other general and administrative expenses
increased $0.4 million from $1.1 million in 2001 to $1.5 million in 2002,
primarily the result of a $0.2 million increase in consulting costs and a $0.1
million increase in reserves for customer accounts receivable.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased from $4.1 million in 2001 to
$4.4 million in 2002. As a percentage of net sales, depreciation and
amortization expense increased from 22.7% in 2001 to 23.6% in 2002. Depreciation
expense increased from $3.1 million in 2001 to $3.4 million in 2002 principally
due to the acceleration of depreciation expense resulting from our plan to
replace all 50 and 100 lb. tanks over the next three to four years. Amortization
expense was $1.0 million during both 2002 and 2001.
LOSS ON ASSET DISPOSALS
Loss on asset disposals was $0.6 million during both 2001 and 2002,
and as a percentage of net sales, increased from 3.2% in 2001 to 3.3% in
2002.
OPERATING (LOSS) INCOME
For the reasons previously discussed, operating (loss) income
decreased by $1.2 million from 2001 to 2002. As a percentage of net sales,
operating income decreased from 5.8% in 2001 to (0.6)% in 2002.
13
LOSS ON EARLY EXTINGUISHMENT OF DEBT
We accelerated the recognition of $0.8 million in deferred financing
costs in 2001 associated with the refinancing of our long-term debt.
INTEREST EXPENSE
Interest expense decreased by $0.2 million, from $2.2 million in
2001 to $2.0 million in 2002, and decreased as a percentage of net sales from
12.0% in 2001 to 10.7% in 2002, due to the overall decline in interest rates and
lower average debt levels. During 2002, $14.5 million generated from the private
placement of 1.7 million shares of our common stock was used to reduce the
outstanding balance of our long-term debt. The effective interest rate of all
debt outstanding during 2002 was 9.5%, as compared to 9.8% in 2001.
NET (LOSS)
For the reasons described above, net (loss) increased from $1.9
million in 2001 to $2.1 million in 2002. No provision for income tax expense has
been made due to historical net losses in 2001 and 2002.
EBITDA
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. EBITDA is a widely accepted financial indicator used by
many investors, lenders and analysts to analyze and compare companies on the
basis of operating performance, and we believe that EBITDA provides useful
information regarding our ability to service our debt and other obligations.
However, EBITDA does not represent cash flow from operations, nor has it been
presented as a substitute to operating income or net income as indicators of our
operating performance. EBITDA excludes significant costs of doing business and
should not be considered in isolation or as a substitute for measures of
performance prepared in accordance with accounting principles generally accepted
in the United States of America. In addition, our calculation of EBITDA may be
different from the calculation used by our competitors, and therefore
comparability may be affected.
EBITDA decreased by approximately $0.9 million, or 16.7%, from $5.2
million in 2001 to $4.3 million in 2002 and decreased as a percentage of net
sales from 28.5% to 23.0%.
Three Months Ended September 30,
--------------------------------
2002 2001
-------- -------
Net (loss) $(2,110) $(1,913)
Interest expense 1,992 2,171
Depreciation and amortization 4,419 4,108
Loss on early extinguishment of debt -
write-off of deferred financing costs -- 796
------- -------
EBITDA $ 4,301 $ 5,162
======= =======
Cash flows provided by (used in):
Operating activities $ 3,088 $ 3,659
Investing activities $(3,854) $(3,647)
Financing activities $ 343 $ 131
LIQUIDITY AND CAPITAL RESOURCES
Our cash requirements consist principally of (1) capital
expenditures associated with purchasing and placing new bulk CO2 systems into
service at customers' sites; (2) payments of interest on outstanding
indebtedness; and (3) working capital. Whenever possible, we seek to obtain the
use of vehicles, land, buildings, and other office and service equipment under
operating leases as a means of conserving capital. As of September 30, 2002, we
anticipated making cash capital expenditures of approximately $24.0 million over
the next twelve months, primarily for purchases of bulk CO2 systems for new
customers, the replacement with larger bulk CO2 systems of 50 and 100 lb. bulk
CO2 systems in service at existing customers and replacement units for our truck
fleet. In June 2002, we adopted a plan to replace all 50 and 100 lb. bulk CO2
systems in service at customers over a three to four year period. While this
decision may not increase revenues generated from these customers, it is
expected to improve operating efficiencies, gross margins and profitability. The
capital expenditures related to the 50 and 100 lb. bulk CO2 replacement plan and
truck fleet replacement program are expected to be approximately $1.9 million
and $1.8 million, respectively, over the next twelve months. Once bulk CO2
systems are placed into service, we generally
14
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 (as
defined). 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
0.375% to 0.50% 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.
We are required to assess our compliance with our debt covenants
under the Amended Credit Facility on a quarterly basis. These financial
covenants are based on a measure that is not consistent with accounting
principles generally accepted in the United States of America. Such measure is
EBITDA (as defined), which represents earnings (loss) before interest, taxes,
depreciation and amortization, as further modified by certain defined
adjustments. The failure to meet these covenants, absent a waiver or amendment,
would place us in default and cause the debt outstanding under the Amended
Credit Facility to become immediately due and payable. The Amended Credit
Facility also includes certain cross-default provisions to our 12% Senior
Subordinated Promissory Notes.
As of June 30, 2002, we were not in compliance with certain of the
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 of the Amended Credit Facility was
extended to November 17, 2003. Prior to June 30, 2002, the Amended Credit
Facility was amended to adjust certain financial covenants for the quarter ended
March 31, 2002 and prospectively, and non-compliance with the minimum EBITDA
covenant for the three months ended March 31, 2002 was waived. As of September
30, 2002, we were in compliance with all of the financial covenants under the
Amended Credit Facility.
Inasmuch as the Amended Credit Facility matures in November 2003,
the outstanding debt thereunder, absent any modifications or changes, will be
reflected as a current liability on the balance sheet in our next quarterly
report for the period ending December 31, 2002. We have begun discussions with
current and potential lenders for new borrowing arrangements which will
encompass the refinancing of the Amended Credit Facility and our 12% Senior
Subordinated Promissory Notes. The new arrangements are expected to be
consummated prior to the filing of our next quarterly report.
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 $1.1
million of issuance costs. Pursuant to the requirements of the Amended Credit
Facility, we used $14.5 million of the proceeds to pay down outstanding debt
under the Amended Credit Facility. As of September 30, 2002, a total of $33.5
million was outstanding under the Amended Credit Facility with interest 3.50%
above LIBOR (5.2981% to 5.30%).
In October 1997, we issued $30.0 million of our 12% Senior
Subordinated Promissory Notes ("1997 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 ("1999 Notes"). Except for their October 31, 2005 maturity date, the 1999
Notes are substantially identical to the 1997 Notes. As of June 30, 2002 and at
various dates in the past we have been unable to meet certain covenants under
the 1997 Notes and 1999 Notes and have had to obtain waivers or modifications.
On September 27, 2002, concurrently with the amendment to the Amended Credit
Facility, certain financial covenants of the 1997 Notes and 1999 Notes were
amended to adjust certain financial covenants for the quarter ended June 30,
2002, and prospectively. As of September 30, 2002, we were in compliance with
all of the financial covenants under the 1997 Notes and 1999 Notes.
During the quarter ended September 30, 2002, our capital resources
included cash flows from operations, proceeds from the private placement of our
Common Stock and available borrowing capacity 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.
15
The table below sets forth our contractual obligations, (in
thousands):
Less than 2-3 4-5 There-
Contractual obligations Total 1 Year Years Years after
------------------------------------------------
Senior debt $33,784 $ 41 $33,594 $ 112 $ 37
Subordinated debt 39,417 -- 29,688 9,729 --
Non-competition agreements 200 160 40 -- --
Operating leases 11,151 3,708 4,275 2,116 1,052
------- ------- ------- ------- -------
Total obligations $84,552 $ 3,909 $67,597 $11,957 $ 1,089
======= ======= ======= ======= =======
WORKING CAPITAL. At September 30, 2002 and June 30, 2002, we had
working capital of $1.3 million and $2.3 million, respectively.
CASH FLOWS FROM OPERATING ACTIVITIES. Cash flows generated from
operating activities decreased from $3.7 million in 2001 to $3.1 million in
2002, primarily the result of a $0.6 million decrease in net income and non-cash
adjustments to income, offset by a $0.4 million decrease in working capital, of
which $0.1 million impacted cash flows from operating activities.
CASH FLOWS FROM INVESTING ACTIVITIES. During 2002 and 2001, net cash
used in investing activities was $3.9 million and $3.6 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 $0.3 million and $0.1 million,
respectively. In 2002, cash flows from financing activities included $15.1
million from the issuance of 1.7 million shares of Common Stock, offset by $14.5
million from the net repayment of long-term debt. In 2001, cash flows from
financing activities included $50.0 million from the refinancing of the Amended
Credit Facility that occurred in September 2001, offset by the net repayment of
long-term debt, and deferred financing costs.
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 exclusive requirements contract with The BOC Group,
Inc. ("BOC") provides for annual adjustments in the purchase price for bulk CO2
based upon increases or decreases in the Producer Price Index for Chemical and
Allied Products or the average percentage increase in the selling price of bulk
merchant carbon dioxide purchased by BOC's large, multi-location beverage
customers in the United States.
RECENT ACCOUNTING PRONOUNCEMENTS
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 ("APB 30"); otherwise such costs will be classified as a
component of continuing operations. We adopted SFAS 145 during the quarter ended
September 30, 2002. In accordance with APB 30 and SFAS 145, we have reclassified
the $796,000 extraordinary loss on the early extinguishment of debt for the
quarter ended September 30, 2001 to a component of continuing operations.
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)" ("EITF 94-3"). 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
adoption of SFAS 146 during the first quarter of fiscal 2003 had no impact on
our results of operations and financial position.
16
In the first quarter of fiscal 2003, we adopted SOP 01-06,
"Accounting by Certain Entities (Including Entities with Trade Receivables That
Lend to or Finance the Activities of Others)" ("SOP 01-06"). SOP 01-06 addresses
disclosures on accounting policies relating to trade accounts receivable and is
effective prospectively for financial statements issued for fiscal years
beginning after December 15, 2001. The adoption of SOP 01-06 had no impact on
our results of operations or financial position.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As discussed under "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
above, as of September 30, 2002, a total of $33.5 million was outstanding under
the Amended Credit Facility with interest at 3.50% above LIBOR (5.2981% to 5.30%
at September 30, 2002). Based upon $33.5 million outstanding under the Amended
Credit Facility at September 30, 2002, our annual interest cost under the
Amended Credit Facility would increase by $0.3 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. 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.
ITEM 4. CONTROLS AND PROCEDURES
As previously reported in our Form 10-K for the fiscal year ended
June 30, 2002, we discovered certain errors with respect to controls and
procedures affecting fixed assets. As a result of these errors, we have recently
begun a detailed review of, among other areas, fixed assets. In connection with
this ongoing review, the Chief Executive Officer and Chief Financial Officer
have concluded that our disclosure controls and procedures (as defined in Rules
13a-14 and 15d-14 under the Securities Exchange Act of 1934), while generally
effective, are deficient in certain areas. Management is addressing these
deficiencies to improve the effectiveness of our disclosure controls and
procedures.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) On August 22, 2002, we sold 1,663,846 shares of our Common
Stock without registration under the Securities Act of 1933,
as amended (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 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit No. Exhibit
----------- -------
99.1 Certification of Chief Executive Officer,
dated November 14, 2002.
99.2 Certification of Chief Financial Officer,
dated November 14, 2002.
(b) Reports on Form 8-K.
(1) The Company filed a Form 8-K dated July 11, 2002
reporting an Item 5 event.
(2) The Company filed a Form 8-K dated August 22, 2002
reporting an Item 5 event.
(3) The Company filed a Form 8-K dated September 18, 2002
reporting an Item 5 event.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NuCo2 Inc.
Dated: November 14, 2002 By: /s/ Gregg F. Stewart
------------------------------
Gregg F. Stewart
Chief Financial Officer
18
SECTION 302 10-Q CERTIFICATIONS
I, Michael E. DeDomenico, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NuCo2 Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Michael E. DeDomenico
-----------------------------
Michael E. DeDomenico
Chief Executive Officer
SECTION 302 10-Q CERTIFICATIONS
I, Gregg F. Stewart, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NuCo2 Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Gregg F. Stewart
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Gregg F. Stewart
Chief Financial Officer