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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2003
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
Incorporation or Organization) Identification No.)
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 March 31, 2003
----- -----------------------------
Common Stock, $.001 par value 10,633,405 shares
NUCO2 INC.
INDEX
-----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Balance Sheets as of March 31, 2003 and June 30, 2002 3
Statements of Operations for the Three Months
Ended March 31, 2003 and March 31, 2002 4
Statements of Operations for the Nine Months
Ended March 31, 2003 and March 31, 2002 5
Statement of Shareholders' Equity for the Nine Months
Ended March 31, 2003 6
Statements of Cash Flows for the Nine Months
Ended March 31, 2003 and March 31, 2002 7
Notes to Financial Statements 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 23
ITEM 4. CONTROLS AND PROCEDURES 23
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 24
SIGNATURES 25
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NUCO2 INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
------
March 31, 2003 June 30, 2002
-------------- -------------
(unaudited)
Current assets:
Cash and cash equivalents $ 517 $ 1,562
Trade accounts receivable, net of allowance for doubtful
accounts of $2,360 and $3,085, respectively 6,694 7,171
Inventories 197 235
Prepaid expenses and other current assets 2,476 1,966
--------- ---------
Total current assets 9,884 10,934
--------- ---------
Property and equipment, net 93,233 95,084
--------- ---------
Other assets:
Goodwill, net 19,222 19,222
Non-competition agreements, net 1,055 1,282
Customer lists, net 24 281
Deferred financing costs, net 1,888 2,524
Deferred lease acquisition costs, net 2,896 2,991
Other assets 199 320
--------- ---------
25,284 26,620
--------- ---------
Total assets $ 128,401 $ 132,638
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current maturities of long-term debt $ 43 $ 40
Accounts payable 3,188 3,512
Accrued expenses 3,006 2,304
Accrued interest 2,403 1,479
Accrued payroll 723 897
Other current liabilities 312 371
--------- ---------
Total current liabilities 9,675 8,603
Long-term debt, less current maturities 32,421 48,254
Subordinated debt 39,526 39,366
Customer deposits 2,974 2,644
--------- ---------
Total liabilities 84,596 98,867
--------- ---------
Commitments and contingencies
Redeemable preferred stock 9,076 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 March 31, 2003
and 8,969,059 shares at June 30, 2002 11 9
Additional paid-in capital 93,119 78,584
Accumulated deficit (58,146) (52,945)
Accumulated other comprehensive loss (255) (429)
--------- ---------
Total shareholders' equity 34,729 25,219
--------- ---------
Total liabilities and shareholders' equity $ 128,401 $ 132,638
========= =========
See accompanying Notes to Financial Statements.
3
NUCO2 INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended March 31,
----------------------------
2003 2002*
---- ----
Net sales $ 18,340 $ 17,743
-------- --------
Costs and expenses:
Cost of products sold, excluding depreciation
and amortization 8,743 8,964
Selling, general and administrative expenses 3,832 3,914
Depreciation and amortization 4,355 4,044
Loss on asset disposals 364 599
-------- --------
17,294 17,521
-------- --------
Operating income 1,046 222
Interest expense 1,823 2,035
-------- --------
Net (loss) $ (777) $ (1,813)
======== ========
Basic and diluted (loss) per share $ (0.09) $ (0.23)
======== ========
Weighted average number of common and common
equivalent shares outstanding, basic and diluted 10,633 8,734
======== ========
*Restated - See Notes 1, 2 and 8 to the Financial Statements.
See accompanying Notes to Financial Statements.
4
NUCO2 INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Nine Months Ended March 31,
---------------------------
2003 2002*
---- ----
Net sales $ 55,119 $ 54,439
-------- --------
Costs and expenses:
Cost of products sold, excluding depreciation
and amortization 26,584 26,763
Selling, general and administrative expenses 13,591 11,237
Depreciation and amortization 13,171 12,242
Loss on asset disposals 1,229 1,560
-------- --------
54,575 51,802
-------- --------
Operating income 544 2,637
Loss on early extinguishment of debt -
write-off of deferred financing costs -- 796
Interest expense 5,745 6,361
-------- --------
Net (loss) $ (5,201) $ (4,520)
======== ========
Basic and diluted (loss) per share $ (0.55) $ (0.57)
======== ========
Weighted average number of common and common
equivalent shares outstanding, basic and diluted 10,320 8,692
======== ========
*Restated - See Notes 1, 2 and 8 to the Financial Statements.
See accompanying Notes to Financial Statements.
5
NUCO2 INC.
STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
Accumulated
Common Stock Additional Other Total
---------------------- 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) (5,201) (5,201)
Other comprehensive income:
Interest rate swap transaction 174 174
----------
Total comprehensive (loss) (5,027)
Redeemable preferred stock dividend (526) (526)
Issuance of common stock,
net of issuance costs 1,663,846 2 15,055 15,057
Exercise of options 500 6 6
----------- ----------- ----------- ----------- ----------- ----------
Balance, March 31, 2003 10,633,405 $ 11 $ 93,119 $ (58,146) $ (255) $ 34,729
=========== =========== =========== =========== =========== ==========
See accompanying Notes to Financial Statements.
6
NUCO2 INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Nine Months Ended March 31,
---------------------------
2003 2002*
---- -----
Cash flows from operating activities:
Net loss $ (5,201) $ (4,520)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization of property and equipment 10,490 9,430
Amortization of other assets 2,681 2,812
Amortization of original issue discount 160 143
Loss on asset disposals 1,229 1,560
Loss on early extinguishment of debt -- 796
Changes in operating assets and liabilities
Decrease (increase) in:
Trade accounts receivable 577 405
Inventories 39 (27)
Prepaid expenses and other current assets (511) 147
Increase (decrease) in
Accounts payable (324) (875)
Accrued expenses 1,583 (934)
Other current liabilities (56) 79
Customer deposits 430 (807)
-------- --------
Net cash provided by operating activities 11,097 8,209
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (9,781) (8,311)
Increase in deferred lease acquisition costs (810) (680)
Increase in other assets (21) (547)
-------- --------
Net cash used in investing activities (10,612) (9,538)
-------- --------
Cash flows from financing activities:
Repayment of long-term debt (15,831) (51,377)
Proceeds from issuance of long-term debt -- 51,500
Proceeds from issuance of common stock 16,222
Issuance costs - common stock (1,167) --
Proceeds from issuance of redeemable preferred stock -- 2,500
Exercise of stock options 6 670
Increase in deferred charges (760) (2,116)
-------- --------
Net cash (used in) provided by financing activities (1,530) 1,177
-------- --------
Decrease in cash and cash equivalents (1,045) (152)
Cash and cash equivalents at the beginning of period 1,562 626
-------- --------
Cash and cash equivalents at the end of period $ 517 $ 474
======== ========
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Interest $ 4,489 $ 4,974
======== ========
Income taxes $ -- $ --
======== ========
*Restated - See Notes 1, 2 and 8 to the Financial Statements.
See accompanying Notes to Financial Statements.
7
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 three and nine months ended
March 31, 2002 differs from the net loss as previously reported in the Company's
Form 10-Qs for such periods due to fiscal year-end adjustments. These
adjustments related to the amortization of customer lists and loss on asset
disposals (see Note 8).
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 December 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 148, "ACCOUNTING FOR
STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE" ("SFAS 148"). SFAS 148
amends SFAS No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION" ("SFAS 123"), to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require
prominent disclosure in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on the reported results. The provisions of SFAS 148 are effective
for financial statements for fiscal years ending after December 15, 2002. The
adoption of SFAS 148 did not impact the Company's financial position, results of
operations or cash flows for the periods presented (see Note 7).
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 losses 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 nine months ended
March 31, 2002 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.
8
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 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 Nine Months Ended
March 31, March 31,
--------- ---------
2003 2002 2003 2002
-------- -------- -------- --------
Net (loss) $ (777) $ (1,813) $ (5,201) $ (4,520)
Redeemable preferred stock dividends (178) (165) (526) (420)
-------- -------- -------- --------
Net (loss) available to common shareholders $ (955) $ (1,978) $ (5,727) $ (4,940)
======== ======== ======== ========
Weighted average outstanding shares of common stock 10,633 8,734 10,320 8,692
(Loss) per share - basic and diluted $ (0.09) $ (0.23) $ (0.55) $ (0.57)
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"). 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).
Prior to June 30, 2002, the Amended Credit Facility was amended to
adjust certain financial covenants for the quarter ended June 30, 2002 and
prospectively, and non-compliance with the minimum EBITDA covenant for the three
9
months ended March 31, 2002 was waived. 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 September 30, 2002, and prospectively, non-compliance with
its financial covenants for the three months ended June 30, 2002 was waived, and
the maturity of the Amended Credit Facility was extended to November 17, 2003.
As of September 30, 2002, the Company was in compliance with all of the
financial covenants under the Amended Credit Facility. On February 7, 2003, the
Amended Credit Facility was amended to adjust certain financial covenants for
the three months ended March 31, 2003 and prospectively, non-compliance with the
minimum EBITDA covenant for the three months ended December 31, 2002 was waived,
the maturity of the Amended Credit Facility was extended to April 29, 2004, and
the Amended Credit Facility was reduced to $45.0 million. As of March 31, 2003,
the Company was in compliance with all of the financial covenants under the
Amended Credit Facility.
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.
As of March 31, 2003, a total of $32.5 million was outstanding
pursuant to the Amended Credit Facility with interest at 4.00% above LIBOR
(4.59% to 5.66%).
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 March 31, 2003, 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 nine
months ended March 31, 2003 and 2002, the Company recorded gains of $174,000 and
$36,000, respectively, representing the change in fair value of the Swap, as
other comprehensive income. The net derivative gain 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.
10
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.
As of March 31, 2003, the Company was in compliance with all of the
financial covenants under the 1997 Notes and 1999 Notes. On February 7, 2003,
the interest coverage ratio governing the 1997 Notes and 1999 Notes was amended
for the quarter ending March 31, 2003 and prospectively.
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 Convertible 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 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 nine months ended
March 31, 2003, 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 $526,000, 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. STOCK OPTION PLANS
The board of directors of the Company 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. 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 generally vest in equal installments from one to
five years, though a limited number of grants were partially vested at the grant
date. As of June 30, 2002 and March 31, 2003 options for 503,072 and 510,436
shares were exercisable, respectively. The weighted-average fair value per share
of options granted during the three months ended March 31, 2003 and 2002 were
$1.67 and $4.91, respectively; while the weighted-average fair value per share
of options granted during the nine months ended March 31, 2003 and 2002 were
$2.41 and $3.52 respectively As of March 31, 2003, the weighted-average
remaining life of the options was 8.05 years.
11
The following table summarizes the transactions pursuant to the 1995
Plan.
Weighted
Average
Exercise
Shares Price Exercise Price
-----------------------------------------
Outstanding at June 30, 2002 1,162,450 $10.15 $ 5.50 - $13.04
Additions 326,350 6.87 4.49 - 9.90
Exercises (500) 11.25 11.25 - 11.25
Cancellations (198,030) 11.39 5.50 - 13.04
-----------------------------------------
Outstanding at March 31, 2003 1,290,270 $ 9.13 $ 4.49 - $13.04
=========================================
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, 2002 and March 31, 2003 options for 34,000 and 44,000 shares were
exercisable, respectively. The weighted-average fair value per share of options
granted during the three months ended March 31, 2003 and 2002 were $1.68 and $0,
respectively; while the weighted-average fair value per share of options granted
during the nine months ended March 31, 2003 and 2002 were $1.82 and $3.52,
respectively. As of March 31, 2003, the weighted-average remaining life of the
options was 6.74 years.
Weighted
Average
Exercise
Shares Price Exercise Price
--------------------------------------
Outstanding at June 30, 2002 60,000 $ 9.15 $ 6.06 - $13.25
Additions 6,000 8.69 8.69 - 8.69
--------------------------------------
Outstanding at March 31, 2003 66,000 $ 9.11 $ 6.06 - $13.25
======================================
Statement of Financial Accounting Standards No. 123, "ACCOUNTING FOR
STOCK-BASED COMPENSATION" ("SFAS 123"), defines a fair value based method of
accounting for stock options. SFAS 123 allows an entity to continue to measure
cost using the accounting method prescribed by APB Opinion No. 25,"ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES" ("APB 25") 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
weighted-average assumptions, expected volatility and risk-free interest rate,
as listed in the table below. The following table illustrates the effect on net
income and earnings per share if the Company had applied the fair value
recognition provisions of SFAS 123 to stock-based compensation. However, no
stock based compensation was recognized in the financial statements pursuant to
APB 25.
Three Months Ended March 31, Nine Months Ended March 31,
---------------------------- ---------------------------
2003 2002 2003 2002
------- ------- ------- ---------
Net income, as reported $ (777) $(1,813) $(5,201) $ (4,520)
Less:
Stock-based compensation
- fair value measurement (56) (221) (507) (663)
------- ------- ------- ---------
$ (833) $(2,034) $(5,708) $ (5,183)
======= ======= ======= =========
Basic and diluted loss per share - reported $ (0.09) $ (0.23) $ (0.55) $ (0.57)
======= ======= ======= =========
Basic and diluted loss per share - pro forma $ (0.10) $ (0.25) $ (0.60) $ (0.64)
======= ======= ======= =========
12
Three Months Ended March 31, Nine Months Ended March 31,
Weighted Average Assumptions for ---------------------------- ---------------------------
Grants During: 2003 2002 2003 2002
----- ----- ----- ----
Expected volatility 40% 40% 40% 40%
Risk free interest rate 2.6% - 2.8% 4.2% - 4.8% 2.6% - 3.2% 3.7% - 4.8%
Expected dividend yield 0% 0% 0% 0%
Expected lives 3-4 years 1-5 years 3 - 4 years 1-5 years
All grants under the 1995 Plan have an expected volatility between
39-40%, risk free interest rate of 2.55% to 6.60%, expected dividend yield of
0%, and expected lives of one to five years.
NOTE 8. PRIOR PERIOD ADJUSTMENTS
Net loss as presented herein, for the three and nine months ended
March 31, 2002, differs from the net loss previously reported in the Company's
Form 10-Qs for such periods 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 and $0.6
million, respectively, based on the incorrect decision to reclassify customer
lists into goodwill at the time of the initial adoption of SFAS 142, "GOODWILL
AND OTHER INTANGIBLE ASSET." Depreciation expense was increased by $0.3 million
during the three months ended March 31, 2002 to correct for a prior
understatement.
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 and $0.7 million, respectively, as a result of 50 and
100 lb. tanks that were removed from service during the three and nine months
ended March 31, 2002, 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 Nine Months
------------ -----------
Ended March 31, 2002
--------------------------
Net (loss) originally reported $(1,004) $(2,889)
Adjustments:
Amortization of customers lists (194) (606)
Depreciation of property and equipment (320) (320)
Loss on asset disposals (295) (705)
------- -------
Net (loss) as adjusted $(1,813) $(4,520)
======= =======
Basic and diluted earnings per common share:
Net (loss) originally reported $ (0.13) $ (0.38)
Adjustments (0.10) (0.19)
------- -------
Net (loss) as adjusted $ (0.23) $ (0.57)
======= =======
The Company's accumulated deficit, as previously reported as of
March 31, 2002, was $44.9 million compared to the accumulated deficit of $46.5
million, as adjusted.
13
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 March 31, 2003, we
operated a national network of 102 service locations in 45 states servicing
approximately 73,000 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.
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,
2002 and the first two quarters of fiscal 2003 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.
14
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 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 $58.1 million at March 31, 2003.
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 Nine Months Ended
March 31, March 31,
------------------ -----------------
2003 2002* 2003 2002*
---- ---- ---- ----
Income Statement Data:
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold, excluding
depreciation and amortization 47.7 50.5 48.2 49.2
Selling, general and administrative expenses 20.9 22.0 24.7 20.6
Depreciation and amortization 23.7 22.8 23.9 22.5
Loss on asset disposals 2.0 3.4 2.2 2.8
---- ---- ---- ----
Operating income 5.7 1.3 1.0 4.9
Loss on early extinguishment of debt - - - 1.5
Interest expense 9.9 11.5 10.4 11.7
------ -------- -------- -------
Net (loss) (4.2)% (10.2)% (9.4)% (8.3)%
====== ======== ======== =======
*RESTATED, SEE NOTES 1, 2 AND 8 TO THE FINANCIAL STATEMENTS.
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
NET SALES
Net sales increased by $0.6 million, or 3.4%, from $17.7 million in
2002 to $18.3 million in 2003. Sales derived from our sales plans increased by
$0.7 million, or 4.0%, due to an increase in the number of accounts, and $0.2
million, or 1.3%, due to pricing initiatives and changes in the amount CO2 sold
to the average customer under our variable product purchase plans. Improvements
in pricing are the direct result of our efforts to obtain favorable pricing
terms from the average customer, partially offset by the impact of a national
restaurant organization receiving favorable pricing terms in exchange for
15
placement of an increased number of their restaurants with us. These
improvements in sales derived from an increase in the number of active customers
and pricing initiatives were partially offset by a decrease of $0.3 million from
the rental of high pressure cylinders and the sale of gases other than CO2.
The following table sets forth, for the periods indicated, the
percentage relationship which our service plans bear to net sales:
Three Months March 31,
----------------------
Service Plan 2003 2002
----- -----
Bulk budget plan(1) 78.2% 80.3%
Equipment lease/product purchase plan(2) 10.8 7.7
Product purchase plan(3) 10.8 11.1
Stand alone high pressure cylinder(4) 0.2 0.9
----- -----
100.0% 100.0%
===== =====
(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.
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.
COST OF PRODUCTS SOLD
Costs of products sold decreased by $0.3 million, or 2.5%, from $9.0
million in 2002 to $8.7 million in 2003, and as a percentage of net sales,
decreased from 50.5% in 2002 to 47.7% in 2003. Product costs increased by $0.1
million, representing 14.3% of net sales in both 2003 and 2002. Truck expenses
increased by $0.2 million, primarily due to a greater number of trucks in
service and higher fuel costs than a year ago.
Operational wages decreased by $0.2 million, from $3.5 million in
2002 to $3.3 million in 2003 due primarily to a planned reduction in headcount
compared to the same quarter last year; unabsorbed tank installation expenses
decreased by $0.5 million from $0.6 million in 2002 to $0.1 million in 2003 due
to greater operating efficiencies. Other operational costs increased by $0.2
million from $1.1 million in 2002 to $1.3 million in 2003 due primarily to
increased tank repair costs and equipment lease rental costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased by $0.1
million from $3.9 million in 2002 to $3.8 million in 2003, or 2.1%, while
decreasing as a percentage of net sales from 22.0% in 2002 to 20.9% in 2003.
Selling expenses increased from $0.7 million in 2002 to $0.8 million in 2003
million.
General and administrative expenses decreased by $0.2 million from
$3.2 million in 2002 to $3.0 million in 2003. The decrease was primarily due to
a planned reduction in headcount, effective December 2002, resulting in a
savings of $0.4 million compared to last year, and a reduction in bad debt
expense of $0.1 million due to improvements in our internal collection
procedures. These savings were partially offset by an increase in property
taxes, insurance and other expenses of $0.4 million.
16
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased from $4.0 million in 2002 to
$4.4 million in 2003. As a percentage of net sales, depreciation and
amortization expense increased from 22.8% in 2002 to 23.7% in 2003. Depreciation
expense increased from $3.1 million in 2002 to $3.6 million in 2003 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 decreased from $0.9 million in 2002 to $0.8 million in 2003, primarily
due a decrease in amortization related to the acquisition of customer lists,
many of which were fully amortized as of March 31, 2003, partially offset by an
increase in the amortization of financing charges.
LOSS ON ASSET DISPOSALS
Loss on asset disposals decreased from $0.6 million in 2002 to $0.4
million in 2003, while decreasing as a percentage of net sales from 3.4% to
2.0%. During 2002, we recognized $0.3 million related to the disposition of 50
and 100 lb. tanks removed from service.
OPERATING INCOME
For the reasons previously discussed, operating income increased by
$0.8 million from $0.2 million in 2002 to $1.0 million in 2003. As a percentage
of net sales, operating income increased from 1.3% in 2002 to 5.7% in 2003.
INTEREST EXPENSE
Interest expense decreased by $0.2 million, from $2.0 million in
2002 to $1.8 million in 2003, and decreased as a percentage of net sales from
11.5% in 2002 to 9.9% in 2003, primarily due to a decrease in the average level
of outstanding debt. This reduction of debt is primarily due to $15.1 million
generated from the private placement of 1.7 million shares of our Common Stock
in August 2002, $14.5 million of which was used to reduce the outstanding
balance of our senior facility. The effective interest rate of all debt
outstanding during 2003 was 10.1%, as compared to 9.4% in 2002.
NET (LOSS)
For the reasons described above, our net loss improved by $1.0
million from $1.8 million in 2002 to $0.8 million in 2003. No provision for
income tax expense has been made due to historical net losses.
EBITDA
Earnings before interest, taxes, depreciation and amortization
("EBITDA") is one of the principal financial measures by which we measure our
financial performance. 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. In addition, our lenders also use EBITDA to
assess our compliance with debt covenants. 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) as
modified by certain defined adjustments.
EBITDA, as set forth in the table below increased by approximately
$1.1 million, or 26.6%, from $4.3 million in 2002 to $5.4 million in 2003 and
increased as a percentage of net sales from 24.0% to 29.4%.
17
Three Months Ended March 31,
----------------------------
2003 2002
------- -------
Net (loss) $ (777) $(1,813)
Interest expense 1,823 2,035
Depreciation and amortization 4,355 4,044
------- -------
EBITDA $ 5,401 $ 4,266
======= =======
Cash flows provided by (used in):
Operating activities $ 7,601 $ 2,288
Investing activities $(3,461) $(2,613)
Financing activities $(3,818) $ (892)
NINE MONTHS ENDED MARCH 31, 2003 COMPARED TO NINE MONTHS ENDED MARCH 31, 2002
Net sales increased by $0.8 million, or 1.2%, from $54.4 million in
2002 to $55.2 million in 2003. Sales derived from our sales plans increased by
$0.9 million, or 1.6%, due to an increase in the number of accounts, and $0.5
million, or 1.0%, due to pricing initiatives and changes in the amount CO2 sold
to the average customer under our variable product purchase plans. Improvements
in pricing are the direct result of our efforts to obtain favorable pricing
terms from average customer, partially offset by the impact of a national
restaurant organization receiving favorable pricing terms in exchange for
placement of an increased number of their restaurants with us. These
improvements in sales derived from the increase in the number of active
customers and pricing initiatives were partially offset by a decrease of $0.7
million rental of high pressure cylinders and the sale of gases other than CO2.
The following table sets forth, for the periods indicated, the
percentage relationship which our service plans bear to net sales:
Nine Months Ended March 31,
---------------------------
Service Plan 2003 2002
---------- ----------
Bulk budget plan(1) 78.8% 78.7%
Equipment lease/product purchase plan(2) 9.5 8.4
Product purchase plan(3) 11.3 12.0
Stand alone high pressure cylinder(4) 0.4 0.9
-------- --------
100.0% 100.0%
======== ========
(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.
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.
COST OF PRODUCTS SOLD
Costs of products sold decreased by $0.2 million from $26.8 million
in 2002 to $26.6 million in 2003, and decreased as a percentage of sales from
49.2% to 48.2%. Product costs decreased by $0.1 million, while representing
14.6% and 14.9% of net sales in 2003 and 2002, respectively.
18
Unabsorbed tank installation expenses decreased by $0.6 million from
$1.2 million in 2002 to $0.6 million in 2003 due to greater operating
efficiencies, while truck and operational wage expenses decreased by $0.2
million. These improvements were partially offset by a $0.7 million increase in
other operational costs from $3.3 million in 2002 to $4.0 million in 2003
primarily due to increased tank repair costs and equipment lease rental costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by $2.4
million, or 21.0%, from $11.2 million in 2002 to $13.6 million in 2003, and
increased as a percentage of net sales from 20.6% in 2001 to 24.7% in 2003.
Selling expenses increased by $0.7 million, from $2.0 million in
2002 to $2.7 million in 2003. Wages and related benefits increased by $0.5
million; however, as previously mentioned, we reduced the headcount of our sales
organization in February 2003, which we believe will result in improvements to
our selling wage and related expenses on a going-forward basis, while not
hindering our ability to generate account bookings.
General and administrative expenses increased by $1.7 million from
$9.2 million in 2002 to $10.9 million in 2003. The increase is attributable to
an increase in administrative wages and benefits of $0.4 million, which is
primarily attributable to severance costs recognized in connection with a
planned headcount reduction during the three months ended December 31, 2002.
Professional and consulting fees also increased by $0.8 million, primarily due
to non-recurring fees incurred during the first six months of fiscal 2003 for
repairs of certain software, improvements in our processes to track and collect
customer receivables, and other process improvements. Other general and
administrative expenses increased $0.5 million, the result of increased depot
related taxes, insurance costs and other general expenses.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased from $12.2 million in 2002
to $13.2 million in 2003. As a percentage of net sales, depreciation and
amortization expense increased from 22.5% in 2002 to 23.9% in 2003. Depreciation
expense increased from $9.4 million in 2002 to $10.5 million in 2003 due in part
to our plan to replace all 50 and 100 lb. tanks over the next three to four
years, resulting in accelerated depreciation expense of $0.8 million in 2003
related to the shortened lives of these assets. Amortization expense decreased
from $2.8 million in 2002 to $2.7 million in 2003, primarily due a decrease in
amortization related to the acquisition of customer lists, many of which were
fully amortized as of March 31, 2003, partially offset by an increase in the
amortization of financing charges.
LOSS ON ASSET DISPOSALS
Loss on asset disposals decreased from $1.6 million in 2002 to $1.2
million in 2003, while decreasing as a percentage of net sales from 2.8% to
2.2%. During 2002, we recognized $0.7 million related to the disposition of 50
and 100 lb. tanks removed from service, compared to $0.2 million in 2003.
OPERATING INCOME
For the reasons previously discussed, operating income decreased by
$2.1 million from $2.6 million in 2002 to $0.5 million in 2003. As a percentage
of net sales, operating income decreased from 4.9% in 2002 to 1.0% in 2003.
LOSS ON EARLY EXTINGUISHMENT OF DEBT
We accelerated the recognition of $0.8 million in deferred financing
costs in 2002 associated with the refinancing of our long-term debt.
INTEREST EXPENSE
Interest expense decreased by $0.7 million, from $6.4 million in
2002 to $5.7 million in 2003, and decreased as a percentage of net sales from
11.7% in 2002 to 10.4% in 2003, primarily due to a decrease in the average level
of outstanding debt. This reduction of debt is primarily due to $15.1 million
generated from the private placement of 1.7 million shares of our Common Stock
in August 2002, $14.5 million of which was used to reduce the outstanding
balance of our senior facility. The effective interest rate of all debt
outstanding during 2003 was 9.9%, as compared to 9.6% in 2002.
19
NET (LOSS)
For the reasons described above, net (loss) increased from $4.5
million in 2002 to $5.2 million in 2003. No provision for income tax expense has
been made due to historical net losses.
EBITDA
Earnings before interest, taxes, depreciation and amortization
("EBITDA") is one of the principal financial measures by which we measure our
financial performance. 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 the 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. In addition, our lenders also use EBITDA to
assess our compliance with debt covenants. 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) as
modified by certain defined adjustments.
EBITDA decreased by $1.2 million, or 7.8%, from $14.9 million in
2002 to $13.7 million in 2003 and decreased as a percentage of net sales from
27.3% to 24.9%.
Nine Months Ended March 31,
---------------------------
2003 2002
-------- --------
Net (loss) $ (5,201) $ (4,520)
Interest expense 5,745 6,361
Depreciation and amortization 13,171 12,242
Early Extinguishment of Debt - 796
-------- --------
EBITDA $ 13,715 $ 14,879
======== ========
Cash flows provided by (used in):
Operating activities $ 11,097 $ 8,209
Investing activities $(10,612) $ (9,538)
Financing activities $ (1,530) $ 1,177
LIQUIDITY AND CAPITAL RESOURCES
Our cash requirements consist principally of (1) capital
expenditures associated with purchasing and placing new bulk CO2 systems into
service at customers' sites; (2) payments of interest on outstanding
indebtedness; and (3) working capital. Whenever possible, we seek to obtain the
use of vehicles, land, buildings, and other office and service equipment under
operating leases as a means of conserving capital. As of March 31, 2003, we
anticipated making cash capital expenditures of approximately $16 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, as appropriate, 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. 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"). 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 commitment 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
20
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 our assets. Additionally, we are precluded from declaring
or paying any cash dividends, except we may accrue and accumulate, but not pay,
cash dividends on the redeemable preferred stock. We are also 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.
Prior to June 30, 2002, the Amended Credit Facility was amended to
adjust certain financial covenants for the quarter ended June 30, 2002 and
prospectively, and non-compliance with the minimum EBITDA covenant for the three
months ended March 31, 2002 was waived. As of June 30, 2002, we were not in
compliance with certain of our financial covenants. On September 27, 2002, the
Amended Credit Facility was amended to adjust certain financial covenants for
the quarter ended September 30, 2002, and prospectively, non-compliance with
financial covenants for the three months ended June 30, 2002 was waived, and the
maturity of the Amended Credit Facility was extended to November 17, 2003. 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, we were in compliance with all of the
financial covenants under the Amended Credit Facility. On February 7, 2003, the
Amended Credit Facility was amended to adjust certain financial covenants
prospectively, non-compliance with the minimum EBITDA covenant for the three
months ended December 31, 2002 was waived, the maturity of the Amended Credit
Facility was extended to April 29, 2004, and the Amended Credit Facility was
reduced to $45.0 million. As of March 31, 2002, we were in compliance with all
of the financial covenants under the Amended Credit Facility.
As of March 31, 2003, a total of $32.5 million was outstanding under
the Amended Credit Facility with interest 4.00% above LIBOR (4.59% to 5.66%).
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, December 31, 2002, and March
31, 2003, we were in compliance with all of the financial covenants under the
1997 Notes and 1999 Notes. On February 7, 2003, the interest coverage ratio
governing the 1997 Notes and 1999 Notes was amended for the quarter ended March
31, 2003 and prospectively.
During the nine months ended March 31, 2003, 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.
The table below sets forth our contractual obligations, (in
thousands):
21
Less than 1
Contractual obligations Total Year 2-3 Years 4-5 Years Thereafter
-------------------------------------------------------------------
Senior debt $32,464 $ 43 $32,189 $ 195 $ 37
Subordinated debt 39,526 - 39,526 - -
Non-competition agreements 120 120 - - -
Operating leases 12,383 3,860 4,959 2,611 953
------- ------- ------- ------- -------
Total obligations $84,493 $ 4,023 $76,674 $ 2,806 $ 990
======= ======= ======= ======= =======
WORKING CAPITAL. At March 31, 2003 and June 30, 2002, we had working
capital of $0.2 million and $2.3 million, respectively.
CASH FLOWS FROM OPERATING ACTIVITIES. Cash flows generated from
operating activities increased from $8.2 million in 2002 to $11.1 million in
2003, primarily the result of a $3.8 million improvement in cash derived from
operating assets, partially offset by a decrease in our net income and non-cash
adjustments to income.
CASH FLOWS FROM INVESTING ACTIVITIES. During 2003 and 2002, net cash
used in investing activities was $10.6 million and $9.5 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 2003, cash flows used
in financing activities was $1.5 million compared to cash flow provided by
financing activities of $1.2 million in 2002. In 2003, cash flows from financing
activities included $15.1 million from the issuance of 1.7 million shares of
Common Stock, offset by $15.8 million from the net repayment of long-term debt.
In 2002, 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. In addition, cash flows from
financing activities included proceeds of $2.5 million from the issuance of
Series B Preferred Stock and the exercise of stock options, partially offset by
an increase in deferred financing charges 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 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 December 2002, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 148, "ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND
DISCLOSURE" ("SFAS 148"). SFAS 148 amends SFAS No. 123, "ACCOUNTING FOR
STOCK-BASED COMPENSATION" ("SFAS 123"), to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 to require prominent disclosure in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on the
reported results. The provisions of SFAS 148 are effective for financial
statements for fiscal years ending after December 15, 2002. The adoption of SFAS
148 did not impact our financial position, results of operations or cash flows
for the periods presented.
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 losses will be classified as a
22
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 nine
months ended March 31, 2002 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.
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 March 31, 2003, a total of $32.5 million was outstanding under the
Amended Credit Facility with interest at 4.00% above LIBOR (4.59% to 5.66%).
Based upon $32.5 million outstanding under the Amended Credit Facility at March
31, 2003, 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-Q for the quarter ended
September 30, 2002, the Chief Executive Officer and Chief Financial Officer
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, were deficient in certain areas. During the quarters ended December
31, 2002 and March 31, 2003, we undertook certain corrective actions. While
there have been no significant changes in internal controls or in other factors
that could significantly affect these controls subsequent to the date of their
most recent evaluation, we continue to improve the effectiveness of our
disclosure controls and procedures.
23
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit No. Exhibit
---------- -------
99.1 - Certification of Chief Executive Officer dated May 15, 2003
99.2 - Certification of Chief Financial Officer dated May 15, 2003
(b) Reports on Form 8-K.
A report on From 8-K dated March 27, 2003 reporting an Item 5 event was
filed during the quarter ended March 31, 2003.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NuCo2 Inc.
Dated: May 15, 2003 By: /s/ Robert R. Galvin
----------------------------
Robert R. Galvin
Chief Financial Officer
25
-------------------------------------
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: May 15, 2003 /s/ Michael E. DeDomenico
--------------------------------
Michael E. DeDomenico
Chief Executive Officer
26
-------------------------------------
SECTION 302 10-Q CERTIFICATIONS
-------------------------------------
I, Robert R. Galvin, 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: May 15, 2003 /s/ Robert R. Galvin
----------------------------
Robert R. Galvin
Chief Financial Officer
27