Back to GetFilings.com
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, 2004
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 (I.R.S. Employer
of Incorporation or Organization) Identification No.)
2800 SE Market Place, Stuart, FL 34997
(Address of Principal Executive Offices) (Zip Code)
(772) 221-1754
(Registrant's Telephone Number, Including Area Code)
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, 2004
----- -----------------------------
Common Stock, $.001 par value 10,706,691 shares
NUCO2 INC.
Index
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Balance Sheets as of March 31, 2004 and 3
June 30, 2003
Statements of Operations for the Three Months Ended 4
March 31, 2004 and March 31, 2003
Statement of Operations for the Nine Months Ended 5
March 31, 2004 and March 31, 2003
Statement of Shareholders' Equity for the Nine 6
Months Ended March 31, 2004
Statements of Cash Flows for the Nine Months 7
Ended March 31, 2004 and March 31, 2003
Notes to Financial Statements 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 17
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 29
ABOUT MARKET RISK
ITEM 4. CONTROLS AND PROCEDURES 29
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 29
SIGNATURES 30
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NUCO2 INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
------
March 31, 2004 June 30, 2003
-------------- -------------
(unaudited)
Current assets:
Cash and cash equivalents $ 292 $ 455
Trade accounts receivable, net of allowance for doubtful
accounts of $2,179 and $2,299, respectively 5,832 6,217
Inventories 228 210
Prepaid expenses and other current assets 3,258 1,605
--------- ---------
Total current assets 9,610 8,487
--------- ---------
Property and equipment, net 91,984 92,448
--------- ---------
Other assets:
Goodwill, net 19,222 19,222
Deferred financing costs, net 2,344 1,593
Customer lists, net 18 25
Non-competition agreements, net 773 985
Deferred lease acquisition costs, net 3,304 2,892
Other assets 191 194
--------- ---------
25,852 24,911
--------- ---------
Total assets $ 127,446 $ 125,846
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current maturities of long-term debt $ 4,897 $ 2,294
Accounts payable 4,424 4,095
Accrued expenses 1,326 1,315
Accrued interest 603 981
Accrued payroll 684 1,212
Other current liabilities 380 329
--------- ---------
Total current liabilities 12,314 10,226
Senior debt facilities, excluding current maturities 35,624 28,659
Long-term subordinated debt 28,726 39,576
Customer deposits 3,241 3,191
--------- ---------
Total liabilities 79,905 81,652
--------- ---------
Commitments and contingencies
Redeemable preferred stock 9,824 9,258
--------- ---------
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 10,706,691 shares at March 31, 2004
and 10,633,405 shares at June 30, 2003 11 11
Additional paid-in capital 95,163 92,938
Accumulated deficit (57,457) (57,884)
Accumulated other comprehensive loss -- (129)
--------- ---------
Total shareholders' equity 37,717 34,936
--------- ---------
Total liabilities and shareholders' equity $ 127,446 $ 125,846
========= =========
See accompanying notes to financial statements
3
NUCO2 INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended March 31,
----------------------------
2004 2003*
---- -----
Product sales $ 12,361 $ 11,132
Equipment rentals 7,711 7,208
-------- -------
Total revenues 20,072 18,340
-------- -------
Costs and expenses:
Cost of products sold, excluding depreciation and amortization 8,361 7,957
Cost of equipment rentals, excluding depreciation
and amortization 627 793
Selling, general and administrative expenses 3,748 3,832
Depreciation and amortization 3,776 4,355
Loss on asset disposals 331 357
-------- -------
16,843 17,294
-------- -------
Operating income 3,229 1,046
Unrealized loss on financial instrument (Note 4) 177 --
Interest expense 1,980 1,823
-------- -------
Income (loss) before income taxes 1,072 (777)
Provision for income taxes -- --
-------- -------
Net income (loss) $ 1,072 $ (777)
======== =======
Weighted average outstanding shares of common stock:
Basic 10,683 10,633
======== =======
Diluted 11,964 10,633
======== =======
Net income (loss) per basic share $ 0.08 $ (0.09)
======== =======
Net income (loss) per diluted share $ 0.07 $ (0.09)
======== =======
Pro forma amounts assuming adoption of EITF Issue No. 00-21,
"Revenue Arrangements with Multiple Deliverables" is applied
retroactively (Note 2):
Net income (loss) $ 1,072 $ (1,075)
======== ========
Net income (loss) per basic share $ 0.08 $ (0.12)
======== ========
Net income (loss) per diluted share $ 0.07 $ (0.12)
======== ========
See accompanying notes to financial statements.
*Restated to conform to current year presentation.
4
NUCO2 INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Nine Months Ended March 31,
---------------------------
2004 2003*
---- -----
Product sales $ 36,576 $ 33,991
Equipment rentals 23,188 21,128
-------- --------
Total revenues 59,764 55,119
-------- --------
Costs and expenses:
Cost of products sold, excluding depreciation and amortization 25,364 23,688
Cost of equipment rentals, excluding depreciation
and amortization 1,844 2,915
Selling, general and administrative expenses 11,530 13,591
Depreciation and amortization 11,481 13,171
Loss on asset disposals 1,050 1,210
-------- --------
51,269 54,575
-------- --------
Operating income 8,495 544
Loss on early extinguishment of debt (Notes 4 and 5) 1,964 --
Unrealized loss on financial instrument (Note 4) 177 --
Interest expense 5,927 5,745
-------- --------
Income (loss) before income taxes 427 (5,201)
Provision for income taxes -- --
-------- --------
Net income (loss) $ 427 $ (5,201)
======== ========
Weighted average number of common and common
equivalent shares outstanding, basic and diluted 10,656 10,320
======== ========
Basic and diluted (loss) per share $ (0.01) (0.55)
======== ========
Pro forma amounts assuming adoption of EITF Issue No. 00-21,
"Revenue Arrangements with Multiple Deliverables" is applied
retroactively (Note 2):
Net income (loss) $ 427 $ (5,256)
======== ========
Basic and diluted (loss) per share $ (0.01) $ (0.56)
======== ========
See accompanying notes to financial statements.
*Restated to conform to current year presentation.
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, 2003 10,633,405 $ 11 $92,938 $ (57,884) $ (129) $ 34,936
Comprehensive income (loss):
Net income (loss) -- -- -- 427 -- 427
Other comprehensive income:
Interest rate swap transaction -- -- -- -- 129 129
--------
Total comprehensive income (loss) 556
Issuance and extension of warrants (Note 5) -- -- 2,333 -- -- 2,333
Issuance of 25,644 shares of common stock -
exercise of warrants 25,644 -- 15 -- -- 15
Issuance of 47,642 shares of common stock -
exercise of options 47,642 -- 443 -- -- 443
Redeemable preferred stock dividend -- -- (566) -- -- (566)
----------- ------- ------- --------- ----------- ---------
Balance, March 31, 2004 10,706,691 $ 11 $95,163 $ (57,457) $ -- $ 37,717
=========== ======= ======= ========= =========== =========
See accompanying notes to financial statements.
6
NUCO2 INC.
STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
Nine Months Ended March 31,
---------------------------
2004 2003*
---- -----
Cash flows from operating activities:
Net income (loss) $ 427 $ (5,201)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization of property and equipment 9,983 10,490
Amortization of other assets 1,498 2,681
Amortization of original issue discount 300 160
Paid-in-kind interest 776 --
Loss on disposals 1,050 1,210
Loss on early extinguishment of debt 1,964 --
Unrealized loss on financial instrument 177 --
Changes in operating assets and liabilities:
Decrease (increase) in:
Trade accounts receivable 385 577
Inventories (18) 39
Prepaid expenses and other current assets (1,653) (511)
Increase (decrease) in:
Accounts payable 329 (324)
Accrued expenses 11 679
Accrued payroll (528) (174)
Accrued interest (513) 1,097
Other current liabilities 51 (56)
Customer deposits 50 430
-------- --------
Net cash provided by operating activities 14,289 11,097
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (10,528) (9,781)
Increase in deferred lease acquisition costs (1,208) (810)
Decrease (increase) in other assets 3 (21)
-------- --------
Net cash used in investing activities (11,733) (10,612)
-------- --------
Cash flows from financing activities:
Repayment of long-term debt (74,582) (15,830)
Proceeds from issuance of common stock -- 16,222
Issuance cost - common stock -- (1,168)
Proceeds from issuance of long-term debt 74,150 --
Exercise of warrants 15 --
Exercise of stock options 443 6
Increase in deferred financing costs (2,745) (760)
-------- --------
Net cash used in financing activities (2,719) (1,530)
-------- --------
Decrease in cash and cash equivalents (163) (1,045)
Cash and cash equivalents at the beginning of period 455 1,562
-------- --------
Cash and cash equivalents at the end of period $ 292 $ 517
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period
for:
Interest $ 5,277 $ 4,489
======== ========
Income taxes $ -- $ --
======== ========
See accompanying notes to financial statements.
*Restated to conform to current year presentation.
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 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, 2003 included in Form 10-K filed with the Securities and Exchange
Commission, except as stated below regarding the adoption of EITF Issue No.
00-21, "Revenue Arrangements with Multiple Deliverables" ("EITF 00-21").
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, 2003. The results of operations
for the periods presented are not necessarily indicative of the results to be
expected for the full fiscal year. As a result of the adoption of EITF 00-21,
the Company anticipates that reported revenue will fluctuate on a quarterly
basis due to seasonal variations. Based on historical data and expected trends,
the Company anticipates that revenue from the delivery of CO2 will be highest in
the first quarter and lowest in the third quarter.
NOTE 2. ACCOUNTING PRONOUNCEMENTS
In April 2003, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 149, "AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES" ("SFAS 149"). SFAS 149 amends and clarifies financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under SFAS No. 133. SFAS 149 is
effective for contracts entered into or modified after June 30, 2003, and
designated hedges after June 30, 2003, except for those provisions of SFAS 149
which relate to SFAS No. 133 implementation issues that have been effective for
fiscal quarters that began prior to June 15, 2003. For those issues, the
provisions that are currently in effect should continue to be applied in
accordance with their respective effective dates. In addition, certain
provisions of SFAS 149, which relate to forward purchases or sales of
when-issued securities or other securities that do not yet exist, should be
applied to both existing contracts and new contracts entered into after June 30,
2003. The adoption of SFAS 149 had no material impact on the Company's financial
position, results of operations or cash flows.
In May 2003, the FASB issued SFAS No. 150, "ACCOUNTING FOR CERTAIN
FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY"
("SFAS 150"). SFAS 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. SFAS 150 requires that an issuer classify a financial instrument
that is within the scope of SFAS 150 as a liability. SFAS 150 was effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is originally effective for the first interim period beginning after June 15,
2003. The adoption of SFAS 150 had no material impact on the Company's financial
position, results of operations or cash flows.
On July 1, 2003, the Company adopted EITF 00-21. EITF 00-21
addresses certain aspects of the accounting by a vendor for arrangements under
which the vendor will perform multiple revenue generating activities. The
Company's bulk CO2 budget plan agreements provide for a fixed monthly payment to
cover the use of a bulk CO2 system and a predetermined maximum quantity of CO2.
As of March 31, 2004, approximately 56,000 of the Company's customer locations
utilized this plan. Prior to July 1, 2003, the Company, as lessor, recognized
revenue from leasing CO2 systems under its budget plan agreements on a
straight-line basis over the life of the related leases. The Company developed a
methodology for the purpose of separating the aggregate revenue stream between
the rental of the equipment and the sale of the CO2. Effective July 1, 2003,
revenue attributable to the lease of equipment, including equipment leased under
the budget plan, is recorded on a straight-line basis over the term of the lease
and revenue attributable to the supply of CO2 and other gases, including CO2
provided under the budget plan, is recorded upon delivery to the customer.
8
The Company has elected to apply EITF 00-21 retroactively to all
budget plan agreements in existence as of July 1, 2003. Based on the Company's
analysis, the aggregate amount of CO2 actually delivered under budget plans
during the quarter ended June 30, 2003 is not materially different than the
corresponding portion of the fixed charges attributable to CO2. Accordingly, the
Company believes the cumulative effect of the adoption of EITF 00-21 as of July
1, 2003 is not significant. However, the effect of adopting EITF 00-21 in the
manner described above resulted in a decrease in revenue and net income during
the three and nine months ended March 31, 2004 of approximately $(322,000) or
$(0.03) per share and $(37,000), or $(0.00) per share, respectively. Solely for
comparative purposes, the Company has separated equipment rentals and CO2 sales
in the statements of operations for the three and nine months ended March 31,
2003; however, all revenue derived from budget plans for those periods is
recognized on a straight-line basis as disclosed in the Company's summary of
significant accounting policies included in its prior Annual Reports on Form
10-K.
Under the budget plan, each customer has a maximum CO2 allowance
that is measured and reset on the contract anniversary date. At that date, it is
appropriate to record revenue for contract billings in excess of actual
deliveries of CO2. Because of the large number of customers under the budget
plan and the fact that the anniversary dates for determining maximum quantities
are spread throughout the year, the Company's methodology necessarily involves
the use of estimates and assumptions to separate the aggregate revenue stream
derived from equipment rentals to budget plan customers, and also to approximate
the recognition of revenue from CO2 sales to budget plan customers when earned.
The Company believes that the adoption of EITF 00-21 has the most impact on the
recognition of revenue on a quarterly basis as CO2 usage fluctuates during a
fiscal year based on factors such as weather, and traditional summer and holiday
periods. Over a twelve-month period, the Company believes the effect is less
significant since seasonal variations are largely eliminated and CO2 allowances
under budget plan agreements are measured and reset annually.
If the guidance of EITF 00-21 had been applied retroactively, prior
year results would have been different than previously reported as follows (in
thousands, except per share amounts):
Three Months Ended March 31, Nine Months Ended March 31,
--------------------------- ----------------------------
2004 2003 2004 2003
---- ---- ---- ----
Revenues, as reported $ 20,072 $ 18,340 $ 59,764 $ 55,119
Adoption of EITF 00-21 -- (298) -- (55)
-------- -------- -------- --------
Revenues, as adjusted $ 20,072 $ 18,042 $ 59,764 $ 55,064
======== ======== ======== ========
Net income (loss), as reported $ 1,072 $ (777) $ 427 $ (5,201)
Adoption of EITF 00-21 -- (298) -- (55)
-------- -------- -------- --------
Net income (loss), as adjusted $ 1,072 $ (1,075) $ 427 $ (5,256)
======== ======== ======== ========
Basic income (loss) per share, as reported $ 0.08 $ (0.09) $ (0.01) $ (0.55)
Adoption of EITF 00-21 -- (0.03) -- (0.01)
-------- -------- -------- --------
Basic income (loss) per share, as adjusted $ 0.08 $ (0.12) $ (0.01) $ (0.56)
======== ======== ======== ========
Diluted income (loss) per share, as reported $ 0.07 $ (0.09) $ (0.01) $ (0.55)
Adoption of EITF 00-21 -- (0.03) -- (0.01)
-------- -------- -------- --------
Diluted income (loss) per share, as adjusted $ 0.07 $ (0.12) $ (0.01) $ (0.56)
======== ======== ======== ========
In December 2003, the FASB revised FASB Interpretation No. 46,
"CONSOLIDATION OF VARIABLE INTEREST ENTITIES." Application of this
Interpretation is required in a company's financial statements for interests in
variable interest entities that are considered special-purpose entities for
reporting periods ending after March 15, 2004. FASB Interpretation No. 46 did
not effect the Company's financial position, results of operations, or cash
flows.
In December 2003, the FASB revised SFAS No. 132, "EMPLOYER
DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS" (SFAS 132). SFAS
132 requires additional disclosures regarding the assets, obligations, cash
flows, and net periodic benefit cost of defined benefit plans and other defined
benefit postretirement plans. SFAS 132 requires that this information be
provided separately for pension plans and other postretirement benefit plans.
The adoption of the revised SFAS No. 132, effective January 1, 2004, had no
material impact on the Company's financial position, results of operations, or
cash flows.
NOTE 3. EARNINGS (LOSS) PER COMMON SHARE
The Company calculates earnings per share in accordance with the
requirements of SFAS No. 128, "Earnings Per Share." The weighted average shares
outstanding used to calculate basic and diluted earnings (loss) per share were
calculated as follows (in thousands):
9
Three Months Ended March 31, Nine Months Ended March 31,
---------------------------- ---------------------------
2004 2003 2004 2003
---- ---- ---- ----
Weighted average shares outstanding - basic 10,683 10,633 10,656 10,320
Outanding options and warrants to purchase
shares of common stock - remaining
shares after assuming repurchase with proceeds
from exercise 1,281 -- -- --
------ ------ ------ ------
Weighted average shares outstanding - diluted 11,964 10,633 10,656 10,320
====== ====== ====== ======
The Company excluded the equivalent of 4,317 shares of common stock
for the three months ended March 31, 2003, and 931,143 and 280,500 shares of
common stock for the nine months ended March 31, 2004 and 2003, respectively, as
these options and warrants to purchase common stock were anti-dilutive for these
periods. In addition, the Company excluded the effects of the conversion of its
outstanding redeemable preferred stock using the "if converted" method, as the
effect would be anti-dilutive (Note 6). The Company's redeemable preferred stock
was convertible into 954,024 shares of common stock as of March 31, 2004.
The following table presents the Company's net income (loss)
available to common shareholders and income (loss) per share, basic and diluted
(in thousands, except per share amounts):
Three Months Ended March 31, Nine Months Ended March ber 31,
---------------------------- -------------------------------
2004 2003 2004 2003
---- ---- ---- ----
Net income (loss) $ 1,072 $ (777) $ 427 $ (5,201)
Redeemable preferred stock dividends (193) (178) (566) (524)
-------- -------- -------- --------
Net income (loss) -
available to common shareholders $ 879 $ (955) $ (139) $ (5,725)
======== ======== ======== ========
Weighted average outstanding shares of
common stock:
Basic 10,683 10,633 10,656 10,320
Diluted 11,964 10,633 10,656 10,320
Basic income (loss) per share $ 0.08 $ (0.09) $ (0.01) $ (0.55)
======== ======== ======== ========
Diluted income (loss) per share $ 0.07 $ (0.09) $ (0.01) $ (0.55)
======== ======== ======== ========
NOTE 4. SENIOR DEBT FACILITIES
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 facility replaced the Company's prior
facility, which was due to expire in May 2002. The Company was required to
assess compliance with its debt covenants under the Amended Credit Facility on a
quarterly basis. These financial covenants were based on a measure that is not
consistent with accounting principles generally accepted in the United States of
America. Such measure was EBITDA (as defined), which represented 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 have placed the Company in default and caused the debt
outstanding under the Amended Credit Facility to become immediately due and
payable. The Amended Credit Facility also included 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 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 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. 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
10
was amended to adjust certain financial covenants for the quarter ended December
31, 2002 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 and June 30, 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.
On August 25, 2003, the Company terminated the Amended Credit
Facility and entered into a $50.0 million senior credit facility with a
syndicate of banks (the "Senior Credit Facility"). The Senior Credit Facility
consists of a $30.0 million A term loan facility (the "A Term Loan"), a $10.0
million B term loan facility (the "B Term Loan"), and a $10.0 million revolving
loan facility (the "Revolving Loan Facility"). The A Term Loan matures on August
25, 2007, the B Term Loan matures on August 25, 2008 and the Revolving Loan
Facility matures on August 25, 2007. The B Term Loan is subordinate in right of
payment to the A Term Loan and borrowings under the Revolving Loan Facility. The
Company is entitled to select either Eurodollar Loans (as defined) or Base Rate
Loans (as defined), plus applicable margin, for principal borrowings under the
Senior Credit Facility. The applicable Eurodollar Loan margin for A Term Loans
and borrowings pursuant to the Revolving Loan Facility ranges from 3.5% to 4.0%,
and the applicable Base Rate Loan margin ranges from 2.5% to 3.0%, provided that
until delivery to the lenders of the Company's financial statements for the
quarter ending June 30, 2004, the margin on Eurodollar Loans is 4.0% and the
margin for Base Rate Loans is 3.0%. The applicable Eurodollar Loan margin and
Base Rate Loan margin for B Term Loans is 7.5% and 6.5%, respectively.
Applicable margin is determined by a pricing grid based on the Company's
Consolidated Total Leverage Ratio (as defined). At closing, the Company borrowed
the A Term Loan, the B Term Loan and $3.0 million under the Revolving Loan
Facility. Interest is payable periodically on borrowings under the Senior Credit
Facility. In addition, commencing on December 31, 2003 and on the last day of
each quarter thereafter, the Company is required to make principal repayments on
the A Term Loan in increasing amounts. The Senior Credit Facility is
collateralized by all of the Company's assets. Additionally, the Company is
precluded from declaring or paying any cash dividends, except it may accrue and
accumulate, but not pay, cash dividends on its outstanding 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 its compliance with these financial covenants
under the Senior 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 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 the Company in
default and cause the debt outstanding under the Senior Credit Facility to
immediately become due and payable. The Senior Credit Facility also includes
certain cross-default provisions to the Company's 16.3% Senior Subordinated
Notes due February 27, 2009 (see Note 5). As of September 30, 2003, December 31,
2003 and March 31, 2004, the Company was in compliance with all covenants under
the Senior Credit Facility.
In connection with the termination of the Amended Credit Facility,
during the first quarter of fiscal 2004, the Company recognized a loss from the
write-off of $860,000 in unamortized financing costs associated with the Amended
Credit Facility and recorded $2,162,000 in financing costs associated with the
Senior Credit Facility. Such costs will be amortized over the life of the Senior
Credit Facility.
As of March 31, 2004, a total of $40.3 million was outstanding
pursuant to the Senior Credit Facility with a weighted average interest rate of
6.1%.
Effective July 1, 2000, the Company adopted SFAS No. 133 "ACCOUNTING
FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES," as amended by SFAS No. 149,
"AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES,"
which, among other things, 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
11
minimize the risks using the most effective methods to eliminate or reduce the
impacts of this exposure. Prior to August 25, 2003, the Company was a party to
an interest rate swap agreement (the "Prior Swap") with a notional amount of
$12.5 million and a termination date of September 28, 2003. Under the Prior
Swap, the Company paid a fixed interest rate of 5.23% per annum and received a
LIBOR-based floating rate. In conjunction with the termination of the Prior Swap
prior to maturity, the Company paid $86,000.
The Prior Swap, which was designated as a cash flow hedge, was
deemed to be a highly effective transaction, and accordingly the loss on the
derivative instrument was reported as a component of other comprehensive income.
For the nine months ended March 31, 2004 and 2003, the Company recorded $129,000
and $174,000, respectively, representing the change in fair value of the Prior
Swap, as other comprehensive income.
In order to reduce the Company's exposure to increases in Eurodollar
rates, and consequently to increases in interest payments, the Company entered
into an interest rate swap transaction (the "Swap") on October 2, 2003, in the
amount of $20.0 million ("Notional Amount") with an effective date of March 15,
2004 and a maturity date of September 15, 2005. Pursuant to the Swap, the
Company pays a fixed interest rate of 2.12% per annum and receives a
Eurodollar-based floating rate. The effect of the Swap is to neutralize any
changes in Eurodollar rates on the Notional Amount. As the Swap was not
effective until March 15, 2004 and no cash flows were exchanged prior to that
date, the Swap did not meet the requirements to be designated as a cash flow
hedge. As such, an unrealized loss of $177,000 was recognized in the Company's
results of operations for the three and nine months ended March 31, 2004,
reflecting the change in fair value of the Swap from inception to the effective
date. As of March 31, 2004, the Swap met the requirements to be designated as a
cash flow hedge and is deemed a highly effective transaction.
NOTE 5. LONG-TERM 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. Prior to August 25, 2003,
the Original Issue Discount was 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
was 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 were 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 was 13.57% per annum.
During the fiscal year ended June 30, 2002, 65,574 of the warrants
issued in connection with the 1997 Notes were exercised and converted into
shares of the Company's common stock. On August 22, 2002, in conjunction with
the private placement of 1,663,846 shares of the Company's common stock (see
Note 4), the remaining warrants issued in conjunction with the 1997 Notes and
the warrants issued in connection with the 1999 Notes were adjusted pursuant to
anti-dilution provisions to provide for the purchase of an additional 21,906
shares of the Company's common stock. In addition, in November 2003, warrants to
purchase 24,144 shares of the Company's common stock issued in connection with
the 1997 Notes were exercised pursuant to the cashless exercise provision
contained in the warrants. In connection with the cashless exercise, warrants to
purchase 26,672 shares of the Company's common stock were canceled.
As of December 31, 2002, the Company was in compliance with all of
the financial covenants under the 1997 Notes and 1999 Notes. On February 7,
12
2003, the interest coverage ratio governing the 1997 Notes and 1999 Notes was
amended for the quarter ending March 31, 2003 and prospectively. As of March 31,
2003 and June 30, 2003, the Company was in compliance with all of the financial
covenants under the 1997 Notes and 1999 Notes.
On August 25, 2003, concurrently with the closing of the Senior
Credit Facility, the Company prepaid the 1997 Notes and 1999 Notes and issued
$30.0 million of the Company's 16.3% Senior Subordinated Notes Due February 27,
2009 (the "New Notes") with interest only payable quarterly in arrears on
February 28, May 31, August 31 and November 30 of each year, commencing November
30, 2003. Interest on the New Notes is 12% per annum payable in cash and 4.3%
per annum payable "in kind" by adding the amount of such interest to the
principal amount of the New Notes then outstanding. Ten year warrants to
purchase an aggregate of 425,000 shares of the Company's common stock at an
exercise price of $8.79 per share were issued in connection with the New Notes.
Utilizing the Black-Scholes Model, the warrants issued in connection with the
New Notes were valued at $3.70 per warrant, or an aggregate value of $1,573,000.
In addition, the maturity date of 665,403 existing warrants, 335,101 due to
expire in 2004 and 330,302 due to expire in 2005, was extended to February 2009,
resulting in additional value of $1.31 and $0.97 per warrant, respectively, or
an aggregate value of $760,090. 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 $27.7 million to the debt and $2.3 million to
the 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. As with the Senior Credit Facility,
the Company is required to meet certain affirmative and negative covenants under
the New Notes, including but not limited to financial covenants. As of September
30, 2003, December 31, 2003 and March 31, 2004, the Company was in compliance
with all of the covenants under the New Notes.
In connection with the early repayment of the 1997 Notes and 1999
Notes, during the first quarter of fiscal 2004, the Company recognized a loss of
$1,018,000 attributable to the unamortized financing costs and Original Issue
Discount associated with the 1997 Notes and 1999 Notes, and recorded $581,000 of
financing costs associated with the New Notes. Such fees are being amortized
over the life of the New Notes. The weighted average effective interest rate of
the New Notes, including the amortization of deferred financing costs and
Original Issue Discount, is 18.0%.
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
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 nine months ended March 31, 2004 and 2003, the carrying
amount (and Liquidation Preferences) of the Series A Preferred Stock and Series
B Preferred Stock ("Preferred Stock") was increased by $566,000 and $524,000,
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 2,400,000
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
13
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 annual installments from
one to five years, though a limited number of grants were partially vested at
the grant date. The weighted-average fair value per share of options granted
during the nine months ended March 31, 2004 and 2003 was $4.02 and $2.38,
respectively.
The following summarizes the transactions pursuant to the 1995 Plan:
Weighted Average
Options Exercise Price Per Options
Outstanding Option Exercisable
----------- ------ -----------
Outstanding at June 30, 2002 1,162,450 $ 10.15 503,072
Granted 326,350 6.87
Expired or canceled (199,780) 11.36
Exercised (500) 11.25
---------
Outstanding at March 31, 2003 1,288,520 $ 9.13 498,559
=========
Outstanding at June 30, 2003 1,288,520 $ 9.13 640,373
Granted 195,200 12.19
Expired or canceled (72,500) 12.35
Exercised (47,642) 9.31
---------
Outstanding at March 31, 2004 1,363,578 $ 9.39 752,376
=========
The following table sets forth certain information as of March 31,
2004:
Options Outstanding Options Exercisable
----------------------------------------------------------- ----------------------------------------
Range of Exercise Weighted Average Weighted Average Weighted Average
Prices Options Outstanding Remaining Life Exercise Price Options Exercisable Exercise Price
------ ------------------- -------------- -------------- ------------------- --------------
$ 0.00 - $ 5.00 150,113 8.01 $ 4.83 95,361 $ 4.84
$ 5.01 - $10.00 604,215 7.05 7.56 326,071 7.37
$10.01 - $15.00 609,250 7.48 12.32 330,944 11.88
--------- ----- ------ -------- ------
1,363,578 7.35 $ 9.39 752,376 $ 9.04
========== ===== ======= ======== ======
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.
The weighted-average fair value per share of options granted during the nine
months ended March 31, 2004 and 2003 was $4.08 and $2.66, respectively.
The following summarizes the transactions pursuant to the Directors'
Plan:
14
Weighted Average
Options Exercise Price Per Options
Outstanding Option Exercisable
----------- ------ -----------
Outstanding at June 30, 2002 60,000 $ 9.15 34,000
Granted 6,000 8.69
Expired or canceled - -
Exercised - -
--------
Outstanding at March 31, 2003 66,000 $ 9.11 45,998
========
Outstanding at June 30, 2003 66,000 $ 9.11 45,997
Granted 24,000 13.71
Expired or canceled - -
Exercised - -
--------
Outstanding at March 31, 2004 90,000 $10.34 59,994
========
The following table sets forth certain information as of March 31,
2004:
Options Outstanding Options Exercisable
------------------------------------------------------------- ---------------------------------------
Range of Exercise Weighted Average Weighted Average Weighted Average
Prices Options Outstanding Remaining Life Exercise Price Options Exercisable Exercise Price
------ ------------------- -------------- -------------- ------------------- --------------
$ 5.01 - $10.00 42,000 5.55 $ 7.46 37,998 $ 7.34
$ 10.01 - $15.00 36,000 7.64 11.89 18,000 12.27
$ 15.01 - $20.00 12,000 9.94 15.74 3,996 15.74
------- ----- ------ ------- ------
90,000 6.97 $10.34 59,994 $ 9.38
======= ===== ======= ======= ======
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 (in thousands, except per
share amounts) 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.
15
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------- --------------------
2004 2003 2004 2003
---- ---- ---- ----
Net income (loss), as reported $ 1,072 $ (777) $ 427 $(5,201)
Less:
Stock-based compensation
- fair value measurement (419) (353) (891) (812)
------- ------- ------- -------
Net income (loss), pro forma 653 (1,130) (464) (6,013)
Preferred stock dividends (193) (178) (566) (524)
------- ------- ------- -------
Net income (loss) available to
common shareholders - pro forma $ 460 $(1,308) $(1,030) $(6,537)
======= ======= ======= =======
Basic income (loss) per share - reported $ 0.08 $ (0.09) $ (0.01) $ (0.55)
======= ======= ======= =======
Basic income (loss) per share - pro forma $ 0.04 $ (0.12) $ (0.10) $ (0.63)
======= ======= ======= =======
Diluted income (loss) per share - reported $ 0.07 $ (0.09) $ (0.01) $ (0.55)
======= ======= ======= =======
Diluted income (loss) per share - pro forma $ 0.04 $ (0.12) $ (0.10) $ (0.63)
======= ======= ======= =======
Expected volatility 35% - 40% 37% - 40% 35% - 40% 37% - 40%
Risk free interest rate 2.6% - 3.6% 2.6% - 2.8% 2.6% - 3.1% 2.6% - 3.2%
Expected dividend yield 0% 0% 0% 0%
Expected lives 3-4 years 4 years 3-4 years 3-4 years
NOTE 8. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) are as follows for the periods presented:
Three Months Ended March 31, Nine Months Ended March 31,
2004 2003 2004 2003
---- ---- ---- ----
Net income (loss) $ 1,072 $ (777) $ 427 $(5,201)
Interest rate swap transaction (Note 5) -- 107 129 174
------- ------- ------- -------
Comprehensive income (loss) $ 1,072 $ (670) $ 556 $(5,027)
======= ======= ======= =======
16
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 customers. As of March 31, 2004, we
operated a national network of 103 service locations in 45 states servicing
approximately 79,000 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, virtually all of our growth is internal resulting from the conversion of
high pressure CO2 users to bulk CO2 systems and conversions of competitive bulk
CO2 system users.
We believe that our future revenue growth, gains in gross margin and
profitability will be dependent upon (i) increases in route density in existing
markets and the expansion and penetration of bulk CO2 system installations in
new market regions, both resulting from successful ongoing marketing, (ii)
improved operating efficiencies and (iii) price increases. New multi-unit
placement agreements combined with single-unit placements will drive
improvements in achieving route density. Our success in reaching multi-placement
agreements is due in part to our national delivery system. We maintain a "hub
and spoke" route structure and establish additional stationary bulk CO2 service
locations as service areas expand through geographic growth. Our entry into many
states was accomplished largely through the acquisition of businesses having
thinly developed route networks. We expect to benefit from route efficiencies
and other economies of scale as we build our customer base in these states
through intensive regional and local marketing initiatives. Greater density
should also lead to enhanced utilization of vehicles and other fixed assets and
the ability to spread fixed marketing and administrative costs over a broader
revenue base.
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. During the last
two years, we have experienced a significant improvement in gross margin due to
net new customer activations and operating improvements, including efficiencies
in delivery of product to our customers, such as reductions in unscheduled
deliveries, total miles driven, miles driven between stops and improvements to
our safety record. Accordingly, we believe that we are in position to build our
customer base while maintaining and improving upon our superior levels of
customer service, with minimal changes required to our support infrastructure.
We continue to be focused on improving operating effectiveness, increasing
prices for our services and strengthening our workforce, and 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 $47.1 million in fiscal
1999 to $74.4 million in fiscal 2003. 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 and (3) price increases.
17
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.
Cost of products sold is comprised of purchased CO2, vehicle, and
service location costs associated with the storage and delivery of CO2. Cost of
equipment rentals is comprised of costs associated with customer equipment
leases. Selling, general and administrative expenses consist of wages and
benefits, dispatch and communications costs, as well as expenses associated with
marketing, administration, accounting and administrative employee training. With
respect to bulk CO2 systems, we capitalize costs based on a standard amount per
installation 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. Costs incurred in excess of the standard amount
per installation, if any, are expensed in the statement of operations. All other
service, marketing and administrative costs are expensed as incurred.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage relationship which the various items bear to total revenues:
Three Months Ended March 31, Nine Months Ended March 31,
---------------------------- ---------------------------
Income Statement Data: 2004 2003 2004 2003
---- ---- ---- ----
Product sales 61.6% 60.7% 61.2% 61.7%
Equipment rentals 38.4 39.3 38.8 38.3
----- ------ ------ -----
Total revenues 100.0 100.0 100.0 100.0
Cost of products sold, excluding
depreciation and amortization 41.7 43.4 42.4 43.0
Cost of equipment rentals, excluding
depreciation and amortization 3.1 4.3 3.1 5.3
Selling, general and administrative expenses 18.7 20.9 19.3 24.7
Depreciation and amortization 18.8 23.8 19.2 23.8
Loss on asset disposals 1.6 1.9 1.8 2.2
------- ------ ----- -----
Operating income (loss) 16.1 5.7 14.2 1.0
Loss on early extinguishment of debt - - 3.3 -
Unrealized loss on financial instrument 0.9 - 0.3 -
Interest expense 9.9 9.9 9.9 10.4
------- ------ ----- -----
Net income (loss) before income taxes 5.3 (4.2) 0.7 (9.4)
Provision for income taxes - - - -
------- ------ ----- -----
Net income (loss) 5.3% (4.2)% 0.7% (9.4)%
======= ====== ===== =====
THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003
TOTAL REVENUES
Total revenues increased by $1.7 million, or 9.4%, from $18.3
million in 2003 to $20.1 million in 2004. Revenues derived from our bulk service
plans increased by $1.8 million, or 9.9%, due to an increase in the number of
accounts and the sale of gases other than CO2, partially offset by the net
impact of a $0.1 million decrease in revenue derived from a decrease in CO2 sold
and a reduction in pricing of CO2 to the average customer under our variable
product purchase plans, which includes our equipment lease and product purchase
plans, and the adoption of EITF 00-21 in July 2003.
We adopted EITF 00-21 effective in July 2003, resulting in a $0.3
million reduction in revenue in 2004. Had we adopted EITF 00-21 in 2003, total
revenues recognized for the three months ended March 31, 2003 would have
decreased by $0.3 million to $18.0 million. The following table sets forth, for
the periods indicated, the percentage relationship which our service plans bear
to total revenues:
18
Three Months Ended March 31,
----------------------------
Service Plan 2004 2003
---- ----
Bulk budget plan(1) 60.7% 66.0%
Equipment lease/product purchase plan(2) 12.3 8.9
Product purchase plan(3) 9.0 8.2
High pressure cylinder(4) 6.1 6.1
Other revenues(5) 11.9 10.8
----- -----
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 and non-CO2 gases.
(5) Surcharges and other charges.
During fiscal 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.
PRODUCT SALES - Revenues derived from the product sales portion of
our service contracts increased by $1.3 million, or 11.0%, from $11.1 million in
2003 to $12.4 million in 2004. The increase in revenues is due to a 8.2%
increase in the number of customer locations serviced and a 2.0% increase in
bulk CO2 used by the average customer. In addition, sales of gases and services
other than CO2, increased by 2.6% compared to last year.
EQUIPMENT RENTALS - Revenues derived from the lease portion of our
service contracts increased by $0.5 million, or 7.0%, from $7.2 million in 2003
to $7.7 million in 2004, primarily due to a 7.6% increase in the number of
customers leasing equipment from us and price increases to a significant number
of our customers, consistent with the Consumer Price Index, offset by incentive
pricing provided to multiple national restaurant organizations utilizing our
equipment under the equipment lease/product purchase plan.
COST OF PRODUCTS SOLD, EXCLUDING DEPRECIATION AND AMORTIZATION
Cost of products sold increased from $8.0 million in 2003 to $8.4
million in 2004, while decreasing as a percentage of product sales from 71.5% to
67.6%, due in large part to efficiencies realized in the cost of delivery, fleet
costs, workers' compensation and safety, discussed in further detail below.
Product costs increased by $0.43 million, from $2.6 million in 2003 to $2.9
million in 2004. The base price with our primary supplier of CO2 increased by
the Producer Price Index, while the volume of CO2 sold by us increased by 10.7%.
Operational costs, primarily wages and benefits related to cost of
product sold, increased from $3.1 million in 2003 to $3.4 million in 2004,
primarily due to an increase in route driver costs. As of March 31, 2004, we had
271 drivers as compared to 249 last year, primarily representing the filling of
open positions. However, some of the headcount increase in drivers was offset by
a reduction in depot and regional management headcount. In addition, while we
have realized a substantial savings in worker's compensation costs due to a
reduction in claims and severity, we continue to experience higher health care
costs, generally due to market conditions.
Truck delivery expenses decreased from $1.5 million in 2003 to $1.3
million in 2004. Increases in fuel costs were more than offset by a decrease in
insurance and repair costs. In addition, we have been able to minimize the
impact of increased fuel costs and variable lease costs associated with truck
usage by continuing to improve efficiencies in the timing and routing of
deliveries. Unscheduled deliveries so far this year improved over the same
period of the prior year by 21% while total miles driven remained flat on a
customer base that increased by 7.6%. Improvements in our safety record during
the nine months of this fiscal year have resulted in a significant reduction in
the amount of workers' compensation and vehicle accident claims expense.
Occupancy and shop costs related to cost of products sold remained
steady at $0.8 million in both 2003 and 2004.
COST OF EQUIPMENT RENTALS, EXCLUDING DEPRECIATION AND AMORTIZATION
Cost of equipment rentals, excluding depreciation and amortization,
decreased by $0.2 million from $0.8 million in 2003 to $0.6 million in 2004,
while deceasing as a percentage of equipment rental revenue from 11.0% to 8.1%.
19
The reduction in cost of equipment rentals reflected in expense is primarily
attributable to a greater percentage of costs being capitalized in connection
with our bulk CO2 systems due to increased efficiency of our technical
installers and the number of new activations. In addition, occupancy and shop
costs related to cost of equipment rentals decreased from $0.5 million in 2003
to $0.4 million in 2004, as we continued to realize savings in tank
refurbishment and repair costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased by $0.1
million from $3.8 million in 2003 to $3.7 million in 2004, while decreasing as a
percentage of total revenues from 20.9% in 2003 to 18.7% in 2004.
Selling related expenses remained constant at $0.7 million in both
2003 and 2004. Wages and related benefits decreased by $0.1 million due to a
reduction in the headcount of our sales organization in February 2003, offset by
increased advertising costs.
General and administrative expenses decreased by $0.1 million, or
2.6%, from $3.1 million in 2004 to $3.0 million in 2004. An increase in wages
related expenses, primarily due to increased health care costs and the
recognition of incentive wages to be paid based on achievement of
pre-established performance targets, were more than offset by a $0.2 million
reduction in consulting and recruiting expenses and a $0.1 million reduction in
expenses related to uncollectible accounts receivable. During fiscal 2003, we
initiated numerous procedures to improve our review and collection of
outstanding accounts receivable. Consulting fees decreased, primarily due to
non-recurring fees incurred during the first seven months of 2003 for repairs of
certain systems, improvements in our processes to track and collect customer
receivables, and other process improvements.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased from $4.4 million in 2003 to
$3.8 million in 2004. As a percentage of total revenues, depreciation and
amortization expense decreased from 23.8% in 2003 to 18.8% in 2004.
Depreciation expense decreased from $3.6 million in 2003 to $3.3
million in 2004. As we continue with our plan to replace all 50 and 100 lb.
tanks over the next three years, depreciation expense from these tanks, whose
expected useful lives were shortened to coincide with the replacement plan,
resulted in depreciation expense of $0.2 million in 2004, down from $0.3 million
in 2003.
Amortization expense decreased from $0.8 million in 2003 to $0.5
million in 2004. This decrease is due to a reduction in the amortization of
deferred charges from our current financing arrangements effective August 25,
2003 as compared to the amortization of fees related to our previous financing
arrangements, and to the amortization of customer lists, many of which were
fully amortized as of March 31, 2003.
LOSS ON ASSET DISPOSALS
Loss on asset disposals decreased from $0.4 million in 2003 to $0.3
million in 2004, while decreasing as a percentage of total revenues from 1.9% to
1.6%.
OPERATING INCOME
For the reasons previously discussed, operating income increased by
$2.2 million from $1.0 million in 2003 to $3.2 million in 2004. As a percentage
of total revenues, operating income improved from 5.7% in 2003 to 16.1% in 2004.
UNREALIZED LOSS ON FINANCIAL INSTRUMENT
In order to reduce our exposure to increases in Eurodollar interest
rates, and consequently to increases in interest payments, on October 2, 2003,
we entered into an interest rate swap transaction (the "Swap") in the amount of
$20.0 million (the "Notional Amount") with an effective date of March 15, 2004.
Pursuant to the Swap, we pay a fixed interest rate of 2.12% per annum and
receive a Eurodollar-based floating rate. The effect of the Swap is to
neutralize any changes in Eurodollar rates on the Notional Amount. As the Swap
was not effective until March 15, 2004 and no cash flows were exchanged prior to
that date, the Swap did not meet the requirements to be designated as a cash
flow hedge. As such, an unrealized loss of $177,000 was recognized in our
results of operations for the three months ended March 31, 2004, reflecting the
change in fair value of the Swap from inception to the effective date. As of
March 31, 2004, the Swap met the requirements to be designated as a cash flow
hedge and is deemed a highly effective transaction.
20
INTEREST EXPENSE
Interest expense increased from $1.8 million in 2003 to $2.0 million
in 2004, while remaining constant at 9.9% of total revenues in both 2003 and
2004. The effective interest rate of our debt increased from 10.0% to 11.3%,
primarily due to the terms of our refinancing in August 2003.
INCOME (LOSS) BEFORE TAXES
See discussion of Net Income (Loss).
PROVISION FOR INCOME TAXES
No provision for income tax expense has been made due to historical
net losses. At March 31, 2004, we had net operating loss carryforwards for
federal income tax purposes of approximately $100 million and for state purposes
in varying amounts, which are available to offset future federal taxable income,
if any, in varying amounts through June 2023. However, we may begin to incur
tax expense for the alternative minimum tax ("AMT") as and when we generate
taxable income.
NET INCOME (LOSS)
For the reasons described above, net income (loss) improved from
$(0.8) million in 2003 to $1.1 million in 2004.
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 (in thousands), increased by
$1.6 million, or 29.7%, from $5.4 million in 2003 to $7.0 million in 2004 and
increased as a percentage of total revenues from 29.4% to 34.9%.
Three Months Ended March 31,
----------------------------
2004 2003
------- -------
Net income (loss) $ 1,072 $ (777)
Interest expense 1,980 1,823
Depreciation and amortization 3,776 4,355
Unrealized loss on financial
instrument 177 -
------- -------
EBITDA $ 7,005 $ 5,401
======= =======
Cash flows provided by (used in):
Operating activities $ 6,895 $ 7,601
Investing activities $(4,047) $(3,460)
Financing activities $(2,758) $(3,818)
NINE MONTHS ENDED MARCH 31, 2004 COMPARED TO NINE MONTHS ENDED MARCH 31, 2003
TOTAL REVENUES
Total revenues increased by $4.7 million, or 8.4%, from $55.1
million in 2003 to $59.8 million in 2004. Revenues derived from our bulk service
plans increased by $5.6 million, or 10.1%, of which $4.3 million was due to an
increase in the number of accounts and $1.3 million to an increase in the sale
21
of gases and services other than CO2. These increases were partially offset by
the net impact of a $1.0 million decrease in revenue derived from a decrease in
CO2 sold and pricing of CO2 to the average customer under our variable product
purchase plans, which includes our equipment lease and product purchase plans.
The net impact of the adoption of EITF 00-21 to 2004 was to reduce
revenue under our bulk budget plans by $37,000. While we adopted EITF 00-21
effective in July 2003, the net impact to 2003 would had been to reduce revenue
under the bulk budget plans by $55,000. The following table sets forth, for the
periods indicated, the percentage relationship in which our service plans bear
to total revenues:
Nine Months Ended March 31,
---------------------------
Service Plan 2004 2003
---- -----
Bulk budget plan(1) 61.7% 66.5%
Equipment lease/product purchase plan(2) 11.9 8.0
Product purchase plan(3) 8.8 8.5
High pressure cylinder(4) 6.1 6.2
Other revenues(5) 11.5 10.8
------- -------
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 and non-CO2 gases.
(5) Surcharges and other charges.
During fiscal 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.
PRODUCT SALES - Revenues derived from the product sales portion of
our service contracts increased by $2.6 million, or 7.6%, from $34.0 million in
2003 to $36.6 million in 2004. The increase in revenues is due to a 8.0%
increase in the number of customer locations serviced and a 0.9% increase in CO2
used by the average customer. In addition, sales of gases and services other
than CO2, increased by 2.3% compared to last year. All of this was partially
offset by a 2.2% decrease in pricing of CO2. This decrease in pricing was due in
large part to incentive pricing provided to multiple national restaurant
organization utilizing both our equipment lease/product purchase, and product
only purchase plans.
EQUIPMENT RENTALS - Revenues derived from the lease portion of our
service contracts increased by $2.1 million, or 9.8%, from $21.1 million in 2003
to $23.2 million in 2004, primarily due to a 6.9% increase in the number of
customers leasing equipment from us and price increases to a significant number
of our customers, consistent with the Consumer Price Index, partially offset by
incentive pricing provided to multiple national restaurant organizations
utilizing our equipment under the equipment lease/product purchase plan.
COST OF PRODUCTS SOLD, EXCLUDING DEPRECIATION AND AMORTIZATION
Cost of products sold increased from $23.7 million in 2003 to $25.4
million in 2004, while decreasing as a percentage of product sales from 69.7% to
69.3%. Product costs increased by $1.1 million from $8.1 million in 2003 to $9.2
million in 2004. The base price with our primary supplier of CO2 increased by
the Producer Price Index, while the volume of CO2 sold by us increased by 10.1%,
primarily due to an 8.0% increase in our customer base.
Operational costs, primarily wages and benefits related to cost of
products sold, increased from $9.4 million in 2003 to $10.1 million in 2004,
primarily due to an increase in route driver costs. As of March 31, 2004, we had
271 drivers as compared to 249 last year, primarily representing the filling of
open positions. However, some of the headcount increase in drivers was offset by
a reduction in depot and regional management headcount. In addition, while we
have realized a substantial savings in worker's compensation costs due to a
reduction in claims and severity, we continue to experience higher health care
costs, generally due to market conditions.
Truck delivery expenses decreased from $3.9 million in 2003 to $3.8
million in 2004. Increases in lease costs were more than offset by a decrease in
insurance and repair costs. In addition, we have been able to minimize the
impact of increased fuel costs and variable lease costs associated with truck
22
usage by continuing to improve efficiencies in the timing and routing of
deliveries. Unscheduled deliveries so far this year improved over the same
period of the prior year by 17% while total miles driven remained flat on a
customer base that increased by 8.0%. Improvements in our safety record during
the nine months of this fiscal year have resulted in a significant reduction in
the amount of workers' compensation and vehicle accident claims expense.
Occupancy and shop costs related to cost of products sold remained
constant at $2.3 million in both 2003 and 2004.
COST OF EQUIPMENT RENTALS, EXCLUDING DEPRECIATION AND AMORTIZATION
Cost of equipment rentals, excluding depreciation and amortization,
decreased by $1.1 million from $2.9 million in 2003 to $1.8 million in 2004,
while deceasing as a percentage of equipment rental revenue from 13.8% to 8.0%.
The reduction in cost of equipment rentals reflected in expense is primarily
attributable to a greater percentage of costs being capitalized in connection
with our bulk CO2 systems due to increased efficiency of our technical
installers and the number of new activations. In addition, occupancy and shop
costs related to cost of equipment rentals decreased from $0.9 million in 2003
to $0.6 million in 2004, as we continue to realize savings in tank refurbishment
and repair costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased by $2.1
million from $13.6 million in 2003 to $11.5 million in 2004, while decreasing as
a percentage of total revenues from 24.7% in 2003 to 19.3% in 2004.
Selling related expenses decreased by $0.4 million, from $2.7
million in 2003 to $2.3 million in 2004, primarily the result of a decrease in
wages and related benefits due to a reduction in the headcount of our sales
organization in February 2003.
General and administrative expenses decreased by $1.7 million, or
15.0%, from $10.9 million in 2003 to $9.2 million in 2004. This improvement is
due to a $0.5 million reduction of administrative and executive wages, a $0.5
million reduction in expenses related to uncollectible accounts receivable, a
$0.2 million reduction in outside contract labor and a $0.7 million reduction in
consulting and recruiting expenses, offset by a $0.2 million increase in other
general expenses. During fiscal 2003, we initiated numerous procedures to
improve our review and collection of outstanding accounts receivable. Consulting
fees decreased, primarily due to non-recurring fees incurred during the first
seven months of fiscal 2003 for repairs of certain systems, improvements in our
processes to track and collect customer receivables, and other process
improvements.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased from $13.2 million in 2003
to $11.5 million in 2004. As a percentage of total revenues, depreciation and
amortization expense decreased from 23.8% in 2003 to 19.2% in 2004.
Depreciation expense decreased from $10.5 million in 2003 to $10.0
million in 2004. As we continue with our plan to replace all 50 and 100 lb.
tanks over the next three years, depreciation expense from these tanks, whose
expected useful lives were shortened to coincide with the replacement plan,
resulted in depreciation expense of $0.7 million in 2004, down from $1.0 million
in 2003.
Amortization expense decreased from $2.7 million in 2003 to $1.5
million in 2004. This decrease is due to a reduction in the amortization of
deferred charges from our current financing arrangements effective August 25,
2003 as compared to the amortization of fees related to our previous financing
arrangements, and to the amortization of customer lists, many of which were
fully amortized as of March 31, 2003.
LOSS ON ASSET DISPOSALS
Loss on asset disposals decreased from $1.2 million in 2003 to $1.0
million in 2004, while decreasing as a percentage of total revenues from 2.2% to
1.8%.
OPERATING INCOME
For the reasons previously discussed, operating income increased by
$8.0 million from $0.5 million in 2003 to $8.5 million in 2004. As a percentage
of total revenues, operating income improved from 1.0% in 2003 to 14.2% in 2004.
23
LOSS ON EARLY EXTINGUISHMENT OF DEBT
In the first quarter of fiscal 2004, we accelerated the recognition
of $1.5 million in deferred financing costs associated with the refinancing of
our long-term debt. In addition, we accelerated the recognition of the
unamortized portion of the Original Issue Discount associated with our 12%
Senior Subordinated Promissory Notes, $0.4 million, and paid $0.1 million in
conjunction with the early termination of an interest rate swap agreement.
UNREALIZED LOSS ON FINANCIAL INSTRUMENT
In order to reduce our exposure to increases in Eurodollar interest
rates, and consequently to increases in interest payments, on October 2, 2003,
we entered into an interest rate swap transaction (the "Swap") in the amount of
$20.0 million (the "Notional Amount") with an effective date of March 15, 2004.
Pursuant to the Swap, we pay a fixed interest rate of 2.12% per annum and
receive a Eurodollar-based floating rate. The effect of the Swap is to
neutralize any changes in Eurodollar rates on the Notional Amount. As the Swap
was not effective until March 15, 2004 and no cash flows were exchanged prior to
that date, the Swap did not meet the requirements to be designated as a cash
flow hedge. As such, an unrealized loss of $177,000 was recognized in our
results of operations for the nine months ended March 31, 2004, reflecting the
change in fair value of the Swap from inception to the effective date. As of
March 31, 2004, the Swap met the requirements to be designated as a cash flow
hedge and is deemed a highly effective transaction.
INTEREST EXPENSE
Interest expense increased from $5.7 million in 2003 to $5.9 million
in 2004, while decreasing as a percentage of total revenues from 10.4% in 2003
to 9.9% in 2004. The effective interest rate of our debt increased from 9.8% to
11.1%, primarily due to the terms of our refinancing in August 2003.
INCOME (LOSS) BEFORE TAXES
See discussion of Net Income (Loss).
PROVISION FOR INCOME TAXES
No provision for income tax expense has been made due to historical
net losses. At March 31, 2004, we had net operating loss carryforwards for
federal income tax purposes of approximately $100 million and for state purposes
in varying amounts, which are available to offset future federal taxable income,
if any, in varying amounts through June 2023. However, we may begin to incur tax
expense for the alternative minimum tax ("AMT") as and when we generate taxable
income.
NET INCOME (LOSS)
For the reasons described above, net income (loss) improved from
$(5.2) million in 2003 to $0.4 million in 2004.
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 (in thousands), increased by
$6.3 million, or 45.7%, from $13.7 million in 2003 to $20.0 million in 2004 and
increased as a percentage of total revenues from 24.9% to 33.4%.
24
Nine Months Ended March 31,
---------------------------
2004 2003
---- -----
Net (loss) $ 427 $ (5,201)
Interest expense 5,927 5,745
Depreciation and amortization 11,481 13,171
Unrealized loss on financial instrument 177 --
Loss on early extinguishment of debt 1,964 --
-------- --------
EBITDA $ 19,976 $ 13,715
======== ========
Cash flows provided by (used in):
Operating activities $ 14,289 $ 11,097
Investing activities $(11,733) $(10,612)
Financing activities $ (2,719) $ (1,530)
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 principal and 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, 2004, we anticipated making cash capital expenditures of approximately $18.0
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.
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. We were required to assess our compliance
with our debt covenants under the Amended Credit Facility on a quarterly basis.
These financial covenants were based on a measure that was not consistent with
accounting principles generally accepted in the United States of America. Such
measure was EBITDA (as defined), which represented earnings 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 have placed us in default and caused the debt outstanding under the
Amended Credit Facility to become immediately due and payable.
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 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. 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 for the quarter ended December 31,
2002 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 and June 30, 2003, we were in
compliance with all of the financial covenants under the Amended Credit
Facility.
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.
On August 25, 2003, we terminated the Amended Credit Facility and
entered into a $50.0 million senior credit facility with a syndicate of banks
(the "Senior Credit Facility"). The Senior Credit Facility consists of a $30.0
25
million A term loan facility (the "A Term Loan"), a $10.0 million B term loan
facility (the "B Term Loan"), and a $10.0 million revolving loan facility (the
"Revolving Loan Facility"). The A Term Loan matures on August 25, 2007, the B
Term Loan matures on August 25, 2008 and the Revolving Loan Facility matures on
August 25, 2007. The B Term Loan is subordinate in right of payment to the A
Term Loan and borrowings under the Revolving Loan Facility. The Company is
entitled to select either Eurodollar Loans (as defined) or Base Rate Loans (as
defined), plus applicable margin, for principal borrowings under the Senior
Credit Facility. The applicable Eurodollar Loan margin for A Term Loans and
borrowings pursuant to the Revolving Loan Facility ranges from 3.5% to 4.0%, and
the applicable Base Rate Loan margin ranges from 2.5% to 3.0%, provided that
until delivery to the lenders of our financial statements for the quarter ending
June 30, 2004, the margin on Eurodollar Loans is 4.0% and the margin for Base
Rate Loans is 3.0%. The applicable Eurodollar Loan margin and Base Rate Loan
margin for B Term Loans is 7.5% and 6.5%, respectively. Applicable margin is
determined by a pricing grid based on our Consolidated Total Leverage Ratio (as
defined). At closing, we borrowed the A Term Loan, the B Term Loan and $3.0
million under the Revolving Loan Facility. Interest is payable periodically on
borrowings under the Senior Credit Facility. In addition, commencing on December
31, 2003 and on the last day of each quarter thereafter, we are required to make
principal repayments of the A Term Loan in increasing amounts. The Senior Credit
Facility is collateralized by 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 our outstanding 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 these financial covenants under the Senior 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 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 Senior Credit Facility to immediately become due and
payable. The Senior Credit Facility also includes certain cross-default
provisions to our 16.3% Senior Subordinated Notes Due February 27, 2009. As of
September 30, 2003, December 31, 2003 and March 31, 2004, we were in compliance
with all of the covenants under the Senior Credit Facility.
In connection with the termination of the Amended Credit Facility,
during the first quarter of fiscal 2004, we recognized a loss of $0.9 million
from the write-off of unamortized financing costs associated with the Amended
Credit Facility and recorded $2.3 million in financing costs associated with the
Senior Credit Facility. Such costs are being amortized over the life of the
Senior Credit Facility.
As of March 31, 2004, a total of $40.3 million was outstanding
pursuant to the Senior Credit Facility with a weighted average interest rate of
6.1%.
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 were 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. 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. As of March 31, 2003 and June 30, 2003, we were in
compliance with all of the financial covenants under the 1997 Notes and 1999
Notes.
On August 25, 2003, concurrently with the closing of the Senior
Credit Facility, we prepaid the 1997 Notes and 1999 Notes and issued $30.0
million of our 16.3% Senior Subordinated Notes Due February 27, 2009 (the "New
Notes") with interest only payable quarterly in arrears on February 28, May 31,
August 31 and November 30 of each year, commencing November 30, 2003. Interest
on the New Notes is 12% per annum payable in cash and 4.3% per annum payable "in
kind" by adding the amount of such interest to the principal amount of the New
Notes then outstanding. Ten year warrants to purchase an aggregate of 425,000
shares of our common stock at an exercise price of $8.79 per share were issued
in connection with the New Notes. Utilizing the Black-Scholes Model, the
warrants issued in connection with the New Notes were valued at $3.70 per
warrant, or an aggregate value of $1,573,000. In addition, the maturity date of
665,403 existing warrants, 335,101 due to expire in 2004 and 330,302 due to
expire in 2005, was extended to February 2009, resulting in additional value of
$1.31 and $0.97 per warrant, respectively, or an aggregate value of $760,090. At
the date of issuance, in accordance with APB 14, "ACCOUNTING FOR CONVERTIBLE
DEBT AND DEBT ISSUED WITH PURCHASE WARRANTS," we allocated proceeds of $27.7
million to the debt and $2.3 million to the warrants, with the resulting
discount on the debt referred to as the Original Issue Discount. The Original
26
Issue Discount is being amortized as interest expense over the life of the debt.
As with the Senior Credit Facility, we are required to meet certain affirmative
and negative covenants under the New Notes, including but not limited to
financial covenants. As of September 30, 2003, December 31, 2003 and March 31,
2004, we were in compliance with all of the covenants under the New Notes.
In connection with the early repayment of the 1997 Notes and 1999
Notes, during the first quarter of fiscal 2004 we recognized a loss of $1.1
million attributable to the unamortized financing costs and Original Issue
Discount associated with the 1997 Notes and 1999 Notes, and recorded $0.5
million of financing costs and Original Issue Discount associated with New
Notes. Such fees are being amortized over the life of the New Notes. The
weighted average effective interest rate of the New Notes, including the
amortization of deferred financing costs and Original Issue Discount, is 18.0%.
During the nine months ended March 31, 2004, our capital resources
included cash flows from operations and available borrowing capacity under the
Senior Credit Facility. We believe that cash flows from operations and available
borrowings under the Senior 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):
Contractual obligations Total Less than 1 Year 2-3 Years 4-5 Years Thereafter
- ----------------------- --------------------------------------------------------------------------------------------
Senior credit facility & other debt $ 40,521 $ 4,897 $19,732 $ 15,892 $ -
Long-term subordinated debt 30,000 - - 30,000 -
Employment agreements 1,397 758 639 - -
Operating leases 19,590 4,587 7,784 5,034 2,185
-------- ------ ------ ------ ---------
Total obligations $ 91,508 $10,242 $28,155 $ 50,926 $ 2,185
======== ======== ======== ========= =========
In addition, in May 1997 we entered into a ten-year exclusive bulk
CO2 requirements contract with The BOC Group, Inc.
WORKING CAPITAL. At March 31, 2004 and June 30, 2003, we had working
capital of $(2.7) million and $(1.7) million, respectively.
CASH FLOWS FROM OPERATING ACTIVITIES. Cash flows provided by
operations increased by $3.2 million from $11.1 million in 2003 to $14.3 million
in 2004. The improvement is primarily due to our improvement in net income
(excluding non-cash charges) of $6.8 million, partially offset by a $3.6 million
reduction in cash resulting from changes in the working capital components of
our balance sheet, $1.5 million of which is due to the timing of interest
payments.
CASH FLOWS FROM INVESTING ACTIVITIES. During 2004 and 2003, net cash
used in investing activities was $11.7 million and $10.6 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 2004, cash flows used
in financing activities were $2.7 million compared to $1.5 million in 2003. In
2004, we refinanced our debt, as previously discussed, receiving proceeds of
$73.2 million, paying fees associated with the refinancing of $2.8 million,
while simultaneously paying off our previous financing facilities.
In 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.
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
27
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 2003, the FASB issued SFAS No. 149, "AMENDMENT OF STATEMENT
133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" ("SFAS 149"). SFAS 149
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities
under SFAS No. 133. SFAS 149 is effective for contracts entered into or modified
after June 30, 2003, and designated hedges after June 30, 2003, except for those
provisions of SFAS 149 which relate to SFAS No. 133 implementation issues that
have been effective for fiscal quarters that began prior to June 15, 2003. For
those issues, the provisions that are currently in effect should continue to be
applied in accordance with their respective effective dates. In addition,
certain provisions of SFAS 149, which relate to forward purchases or sales of
when-issued securities or other securities that do not yet exist, should be
applied to both existing contracts and new contracts entered into after June 30,
2003. The adoption of SFAS 149 had no material impact on our financial position,
results of operations or cash flows.
In May 2003, the FASB issued SFAS No. 150, "ACCOUNTING FOR CERTAIN
FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY"
("SFAS 150"). SFAS 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. SFAS 150 requires that an issuer classify a financial instrument
that is within the scope of SFAS 150 as a liability. SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is originally effective for the first interim period beginning after June 15,
2003. The adoption of SFAS 150 had no material impact on our financial position,
results of operations or cash flows.
On July 1, 2003, we adopted EITF Issue No. 00-21, "REVENUE
ARRANGEMENTS WITH MULTIPLE DELIVERABLES" ("EITF 00-21"). EITF 00-21 addresses
certain aspects of the accounting by a vendor for arrangements under which the
vendor will perform multiple revenue generating activities. As of March 31,
2004, approximately 56,000 of our customer locations utilized a plan agreement
that provides for a fixed monthly payment to cover the use of a bulk CO2 system
and a predetermined maximum quantity of CO2 ("budget plan"). Prior to July 1,
2003, as lessor, we recognized revenue from leasing CO2 systems under our budget
plan agreements on a straight-line basis over the life of the related leases. We
have developed a methodology for the purpose of separating the aggregate revenue
stream between the rental of the equipment and the sale of the CO2. Effective
July 1, 2003, revenue attributable to the lease of equipment, including
equipment leased under the budget plan, is recorded on a straight-line basis
over the term of the lease and revenue attributable to the supply of CO2 and
other gases, including CO2 provided under the budget plan, is recorded upon
delivery to the customer.
We have elected to apply EITF 00-21 retroactively to all budget plan
agreements in existence as of July 1, 2003. Based on our analysis, the aggregate
amount of CO2 actually delivered under budget plans during the quarter ended
June 30, 2003 is not materially different than the corresponding portion of the
fixed charges attributable to CO2. Accordingly, we believe the cumulative effect
of the adoption of EITF 00-21 as of July 1, 2003 is not significant. However,
the effect of adopting EITF 00-21 in the manner described above resulted in a
(decrease) in revenue and net income during the three and nine months ended
March 31, 2004 of approximately $(322,000), or $(0.03) per share and $(37,000)
or $(0.00) per share, respectively. Solely for comparative purposes, we have
separated equipment rentals and CO2 sales in the statements of operations for
the three and nine months ended March 31, 2003; however, all revenue derived
from budget plans for those periods is recognized on a straight-line basis as
disclosed in the summary of significant accounting policies included in our
prior Annual Reports on Form 10-K.
Under the budget plan, each customer has a maximum CO2 allowance
that is measured and reset on the contract anniversary date. At that date, it is
appropriate to record revenue for contract billings in excess of actual
deliveries of CO2. Because of the large number of customers under the budget
plan and the fact that the anniversary dates for determining maximum quantities
are spread throughout the year, our methodology involves the use of estimates
and assumptions to separate the aggregate revenue stream derived from equipment
rentals to budget plan customers, and also to approximate the recognition of
revenue from CO2 sales to budget plan customers when earned. We believe that the
adoption of EITF 00-21 has the most impact on the recognition of revenue on a
quarterly basis as CO2 usage fluctuates during a fiscal year based on factors
such as weather, and traditional summer and holiday periods. Over a twelve-month
period, we believe that the effect is less significant since seasonal variations
are largely eliminated and CO2 allowances under budget plan agreements are
measured and reset annually.
In December 2003, the FASB revised FASB Interpretation No. 46,
"CONSOLIDATION OF VARIABLE INTEREST ENTITIES." Application of this
Interpretation is required in a company's financial statements for interests in
28
variable interest entities that are considered special-purpose entities for
reporting periods ending after March 15, 2004. FASB Interpretation No. 46 did
not effect our financial position, results of operations, or cash flows.
In December 2003, the FASB revised SFAS No. 132, "EMPLOYER
DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS" (SFAS 132). SFAS
132 requires additional disclosures regarding the assets, obligations, cash
flows, and net periodic benefit cost of defined benefit plans and other defined
benefit postretirement plans. SFAS 132 requires that this information be
provided separately for pension plans and other postretirement benefit plans.
The adoption of the revised SFAS No. 132, effective January 1, 2004, had no
material impact on our financial position, results of operations, or cash flows.
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, 2004, a total of $40.3 million was outstanding under the
Senior Credit Facility with a weighted average interest rate of 6.1%. Based upon
the $40.3 million outstanding under the Senior Credit Facility at March 31,
2004, our annual interest cost under the Senior Credit Facility would increase
by $0.4 million for each 1% increase in Eurodollar interest rates.
In order to reduce our exposure to increases in Eurodollar interest
rates, and consequently to increases in interest payments, on October 2, 2003,
we entered into an interest rate swap transaction (the "Swap") in the amount of
$20.0 million (the "Notional Amount") with an effective date of March 15, 2004.
Pursuant to the Swap, we pay a fixed interest rate of 2.12% per annum and
receive a Eurodollar-based floating rate. The effect of the Swap is to
neutralize any changes in Eurodollar rates on the Notional Amount. We do not on
a routine basis enter into speculative derivative transactions or leveraged swap
transactions, except as disclosed. As the Swap was not effective until March 15,
2004 and no cash flows were exchanged prior to that date, the Swap did not meet
the requirements to be designated as a cash flow hedge. As such, an unrealized
loss of $177,000 was recognized in our results of operations for the three and
nine months ended March 31, 2004, reflecting the change in fair value of the
Swap from inception to the effective date. As of March 31, 2004, the Swap met
the requirements to be designated as a cash flow hedge and is deemed a highly
effective transaction.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on our
management's evaluation (with the participation of our principal executive
officer and principal financial officer), as of the end of the period covered by
this report, our principal executive officer and principal financial officer
have concluded that our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended,
(the "Exchange Act") are effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in SEC rules and forms.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. There was no
change in our internal control over financial reporting during our third fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit No. Exhibit
----------- -------
31.1 Section 302 Certification of Principal Executive Officer.
31.2 Section 302 Certification of Principal Financial Officer.
32.1 Section 906 Certification of Principal Executive Officer.
32.2 Section 906 Certification of Principal Financial Officer.
(b) Reports on Form 8-K
-------------------
(1) The Company filed a Form 8-K dated March 30, 2004 reporting Items
5 and 7.
29
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 14, 2004 By: /s/ Robert R. Galvin
------------------------------
Robert R. Galvin
Chief Financial Officer
30