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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
/ X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction period from ___________ to ___________
Commission file number: 0-27378
NUCO2 INC.
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(Exact Name of Registrant as Specified in Its Charter)
FLORIDA 65-0180800
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2800 S.E Market Place, Stuart, Florida 34997
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (561) 221-1754
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. /X/
(continued next page)
The aggregate market value at September 18, 1998 of shares of the
Registrant's common stock, $.001 par value per share (based upon the closing
price of $6.1875 per share of such stock on the Nasdaq National Market on such
date), held by non-affiliates of the Registrant was approximately $34,807,701.
Solely for the purposes of this calculation, shares held by directors and
executive officers of the Registrant have been excluded. Such exclusion should
not be deemed a determination or an admission by the Registrant that such
individuals are, in fact, affiliates of the Registrant.
At September 18, 1998, there were outstanding 7,216,664 shares of
the Registrant's common stock, $.001 par value.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Items 10, 11, 12 and 13 of Part III is
incorporated by reference to the Registrant's definitive proxy statement to be
filed not later than October 28, 1998 pursuant to Regulation 14A.
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PART I
1. BUSINESS.
GENERAL
NuCo2 Inc., a Florida corporation organized in 1990 (together with its
subsidiaries, the "Company"), is the dominant national supplier of liquid carbon
dioxide ("bulk CO2") to retail establishments such as restaurants, convenience
stores, taverns, theaters, theme parks, resorts and stadiums for use in the
carbonation and dispensing of fountain beverages.
For the fiscal year ended June 30, 1998, the Company had net sales of
approximately $35.1 million, compared to net sales of approximately $18.9
million for the fiscal year ended June 30, 1997, an increase of 85.2%. The
Company believes that earnings before interest, taxes, depreciation and
amortization ("EBITDA") is the principal financial measure by which the Company
should be measured as it continues to achieve national market presence and to
build route density. EBITDA for the fiscal year ended June 30, 1998 was
approximately $7.1 million, compared to EBITDA of approximately $4.1 million for
the fiscal year ended June 30, 1997, with fourth quarter fiscal 1998 net sales
and EBITDA setting record levels.
Starting from its Florida base, the Company, through a combination of
internal growth and over 30 acquisitions, expanded its service area to 44
states, operating 68 service and supply depots and servicing over 47,700 bulk
CO2 customers as of August 31, 1998. During the fiscal year ended June 30, 1998,
the Company expanded its service area by 13 states and during the fiscal year
ended June 30, 1997, the Company expanded its service area by 12 states. The
Company services most of the major national and regional restaurant and
convenience store chains, movie theater operators and theme parks throughout the
continental United States including McDonald's, Pizza Hut, Kentucky Fried
Chicken, Burger King, Checkers, Chevy's, 7-Eleven, Circle K, EZ Serve, Conoco,
Carmike Cinemas, AMC Theaters, Friendly's Restaurant, Applebee's, Cracker
Barrel, Shoney's, Inc., Hard Rock Cafe, Planet Hollywood, Universal Studios,
Walt Disney World, Raymond James Stadium and Pro Player Stadium.
The Company offers its customers two principal services: a stationary
bulk CO2 system installed on the customer's premises and routine filling of the
system with bulk CO2 on a defined schedule. The bulk CO2 system utilizes a
cryogenic vessel that preserves carbon dioxide in its liquid form and then
converts the liquid product to gaseous carbon dioxide, the necessary ingredient
for beverage carbonation. Typically the bulk CO2 system is owned by the Company
and leased to the customer under a five year noncancelable contract, although
some customers own their own bulk CO2 system.
Carbon dioxide is universally used for the carbonation and dispensing
of fountain beverages. In most instances, carbon dioxide is presently supplied
to fountain beverage users in the form of gas, which is transported and stored
in high pressure cylinders. The Company's 44 state service area enables the
Company to reach over 96% of potential CO2 beverage users in the continental
United States. The Company believes that bulk CO2 systems will eventually
displace most high pressure cylinders in the beverage CO2 market because from a
user's perspective, bulk CO2 systems enjoy several qualitative and economic
advantages over high pressure cylinders, and, therefore, the bulk CO2 industry
presents substantial opportunity for growth. The Company estimates that it
currently services approximately 9,000 high pressure CO2 customers and that
there is a total of approximately 800,000 potential beverage CO2 users in the
United States.
The Company intends to continue to expand its bulk CO2 business through
a combination of internal growth, conversion of high pressure CO2 beverage users
and acquisitions, building route densities in order to achieve operating
economies of scale and profitability throughout its service area.
In April 1997, the Company signed an agreement with MiCell Technologies
Inc. ("MiCell") to be the exclusive United States and Canadian supplier of bulk
CO2 systems and liquid carbon dioxide to the MiCell customer base in the
industrial laundry and professional garment care industry (dry cleaning) that
will utilize the MiCare garment cleaning fluid system technology developed and
patented by MiCell. This system utilizes carbon dioxide in conjunction with
non-toxic cleaning solutions. MiCell surfacants allow for a wide range of
performance in liquid CO2 systems, that in addition to garment care, also
includes parts cleaning, precision cleaning and textile processing. MiCell is
currently field testing its system and expects to commence commercialization by
the end of 1998.
In July 1997, the Company reached an agreement with Geotechnical
Instruments, Inc. to be the exclusive distributor in the United States of
stationary carbon dioxide detectors.
INDUSTRY OVERVIEW
CO2 is universally used for the carbonation and dispensing of
fountain beverages. The Company believes that bulk CO2 technology will
eventually displace most high pressure cylinders in the beverage CO2 market and,
therefore, the bulk CO2 industry presents substantial opportunity for growth.
Major restaurant and convenience store chains continue to adopt this new
technology and search for qualified suppliers to install and service these
systems. Unlike high pressure cylinders, which are typically changed when empty
and transported to the supplier's depot for refilling, bulk CO2 systems are
permanently installed at the customer's site and are kept charged by filling by
the supplier from a specialized bulk CO2 truck on a constant "stay filled"
basis. Advantages to users of bulk CO2 systems include enhanced safety, improved
beverage quality and product yields, reduced employee handling and cylinder
storage requirements, and elimination of system downtime and product waste
during cylinder changeovers.
Many types of businesses compete in the beverage CO2 business, and
market share is fragmented. High pressure cylinders and bulk CO2 service are
most frequently provided by distributors of industrial gases. These companies
generally provide a number of products and services in addition to CO2, and
often view bulk CO2 systems as high-service adjuncts to their core business.
Industrial gas distributors generally have been reluctant to attempt to convert
their cylinder CO2 customers to bulk CO2 systems for several reasons, that
include the capital outlays required to purchase the bulk CO2 systems, the
idling of high pressure cylinders and associated equipment, and the
inefficiencies that would result from splitting their CO2 customer base between
two CO2 technologies. Other competitors in the beverage CO2 market include
fountain supply companies and distributors of restaurant supplies and groceries,
which firms vary greatly in size. There are a number of small companies that
provide bulk CO2 service that operate on a local or regional geographic scope.
Many of these suppliers lack the capital necessary to offer bulk CO2 systems to
customers on lease, or to purchase additional or replacement specialized bulk
CO2 trucks and stationary depots.
Management believes that demand for bulk CO2 systems will be driven
by the safety, product quality and other operating advantages afforded to users
by such systems, and the increasing availability and acceptance within the food
and beverage industry of bulk CO2 systems. In addition, the Company believes
that, other than the Company, qualified suppliers of bulk CO2 systems do not
presently exist in many regions of the United States.
COMPETITIVE STRATEGY
The central elements of the Company's competitive strategy are the
following:
Focus on Bulk CO2 Market. Unlike many of its competitors for whom
bulk CO2 is a secondary service line, the Company has no material lines of
business at present other than the provision of bulk CO2, and does not
anticipate diversifying into other product or service lines. All aspects of the
Company's operations are guided by its focus on the bulk CO2 business, including
its selection of operating equipment, design of delivery routes, location of
depots, structure of customer contracts, content of employee training programs
and design of management information and accounting systems. By restricting its
scope of activities to the bulk CO2 business, and largely avoiding the dilution
of management time and Company resources that would be required by other service
lines, the Company believes it is able to maximize the level of service it
provides to its bulk CO2 customers. The Company also believes that its focus on
this product line also helps minimize operating costs through the use of
equipment dedicated to bulk CO2 applications and through the high level of
product experience held by its employees.
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Company Owned Equipment. The Company generally places a Company
owned bulk CO2 system on the customer's premises under a long-term supply
contract. This arrangement is often appealing to the customer since the Company
bears the initial capital cost of the equipment and installation, with the
customer only facing a predictable and modest monthly usage fee. The Company
believes that its ability to place its equipment on the customers premises helps
create customer loyalty.
Long term Customer Contracts. The Company typically enters into five
year bulk CO2 system lease agreements with its customers. Generally, these
contracts are classified as one of two types: "budget plan" service contracts
and "rental plus per pound charge" contracts. Pursuant to budget plan contracts,
customers pay fixed monthly charges for the lease of a Company owned bulk CO2
system installed on the customer's premises and refills of bulk CO2 according to
a predetermined schedule. The bulk CO2 is included in the monthly rental charge
up to a predetermined maximum annual volume. If the maximum annual volume is
exceeded, the customer is charged for additional bulk CO2 delivered. Pursuant to
rental plus per pound charge contracts, the Company also leases a bulk CO2
system to the customer, but the customer is charged on a per pound basis for all
bulk CO2 delivered. In exchange for a noncancelable monthly charge, the Company
installs and rents to its customers a Company owned bulk CO2 system and, through
a delivery routing system, services the bulk CO2 system and supplies bulk CO2 to
the customer's site on a regular basis. Even with customers that own their own
bulk CO2 systems, the Company seeks to arrange for multi-year supply contracts.
The Company believes that the use of long-term contracts provides benefits to
both itself and its customers. Customers are able to largely eliminate CO2
supply interruptions and the need to operate CO2 equipment themselves, while the
contract adds stability to the Company's revenue base. After the expiration of
the initial term of a contract, the term of the contract continues in effect
until either the Company or the customer notifies the other of its desire to
terminate. Generally, the Company has been successful contracting with its
customers for a new long-term supply contract. To date, the Company's experience
has been that contracts roll-over without a significant portion of contracts
expiring without renewal in any one year. The largest number (approximately 40%)
of the Company's current contracts with customers expire by their terms in 2003.
Capture Advantages of Scale and Route Density. In many of its
current markets the Company has established itself as the leading or dominant
supplier of bulk CO2, and believes it enjoys cost advantages over its
competitors due to the greater density of the Company's route structure; a lower
average time and distance traveled between stops, and a lower average cost per
delivery. Greater scale may also lead to better vehicle and fixed asset
utilization, as well as the ability to spread fixed marketing and administrative
costs over a broader revenue base.
Superior Customer Service. The Company seeks to differentiate itself
through its attention to customer service. Each bulk CO2 system serviced by the
Company has a label with a toll-free help line for the customer's use. The
Company has an advanced dispatch and delivery system, including the ability to
communicate by radio with route personnel at all times. The Company responds to
service calls on a 24-hour, seven day a week basis, and the experience level of
its personnel aids in the resolution of equipment failures or other service
interruptions, whether or not caused by the Company's equipment. Recognizing the
public visibility of its customers, the Company carefully maintains the
appearance of its vehicles and the professional image of its employees.
Rapid Installation and Diverse Configurations. The bulk CO2 system
installed at the customer's site consists of a cryogenic vessel for the storage
of liquid CO2 and related valves, regulators and gas lines. The Company operates
a fleet of 77 installation vehicles with dedicated installation personnel. A key
attribute in marketing the Company's services to multi-unit customers is its
ability to rapidly install bulk CO2 systems at customers' locations with minimal
disruption. The Company offers systems ranging from 50 to 600 pounds of CO2
capacity. With the recent introduction of the 50 pound capacity system, the
range of system sizes permits the Company to market its services to a broad
range of potential customers.
Attractive Pricing to Customer. The Company carefully monitors the
prices offered in its markets by providers of high pressure CO2 cylinders.
Despite the customer-level advantages of bulk CO2 systems over high pressure
cylinders, the Company generally prices its services comparably to the price of
high pressure cylinders. This has proved an effective inducement to cause
customers to convert from cylinders to bulk CO2 systems. When appropriate, the
Company will adjust pricing to meet local market conditions in order to build
route density.
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GROWTH STRATEGY
The objective of the Company is to strengthen its position as the
dominant national supplier of bulk CO2 systems for beverage applications. The
Company intends to implement its strategy through (i) internal market
development by which it builds route densities necessary to become the lowest
cost operator and (ii) a program of strategic acquisitions, by which it will
enter a new market area, or through tuck-in acquisitions whereby it consolidates
an underpenetrated existing market.
Internal Market Development. The majority of growth is driven by the
conversion of high pressure cylinder CO2 users to bulk CO2 systems. The
Company's ability to drive conversion is illustrated by its success in the
Florida market, where it continues to rapidly add new bulk CO2 system
installations, even after actively marketing in the state since 1990. The
Company's internal growth initiatives consist of marketing multi-system
placements to corporate and franchised operations of large restaurant,
convenience store and theater chains. The Company's relationships with chain
customers in one geographic market frequently help it to establish service with
these same chains when the Company expands to new markets. As the Company enters
a new market, the Company may seek to establish an initial presence through
acquisition. After accessing the chain accounts in a new market, the Company
attempts to rapidly build route density by leasing bulk CO2 systems to
independent restaurants, convenience stores and theaters.
The Company believes that optimal route density is achieved at
approximately 350 accounts per bulk CO2 truck, and the Company typically employs
targeted sales efforts to build density within an existing route. The Company
maintains a "hub and spoke" route structure and establishes additional
stationary bulk CO2 depots as a service area expands through geographic growth.
The Company's route density and market share is highest in Florida, and is less
developed in the other areas where the Company presently has operations. The
Company's entry to these states was accomplished largely by acquisitions of
businesses with more thinly developed route networks than are typical for the
Company. The Company expects to benefit from route efficiencies and other
economies of scale as it builds its customer base in these states through more
intensive internal marketing initiatives.
Strategic Acquisitions. It has been the Company's experience that
acquisition opportunities on satisfactory terms have been regularly available.
The Company estimates that there are more than 100 distributors throughout the
United States that service between 250 and 750 bulk CO2 accounts and
approximately 10 distributors that each service between 1,000 and 6,000
accounts, many of which may represent attractive acquisition candidates for the
Company. The Company has generally been able to acquire smaller distributors at
prices near their asset value. Since this cost per system is similar to the
Company's internal installation costs, these acquisitions represent an economic
means of acquiring accounts. The Company's strategy is to acquire bulk CO2
operations in strategic markets in new territories, as well as, target tuck-in
operations that can be easily integrated into established routes. These
transactions typically involve the purchase of installed bulk CO2 systems,
equipment and customer lists and require little additional administrative
expense to operate. With these acquisitions, all administrative functions such
as billing, dispatching and accounting are moved to the Company's headquarters
in Stuart, Florida.
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As the Company enters a new market, or consolidates an existing
market, incumbent bulk CO2 distributors may be willing to be acquired on
satisfactory terms for the following reasons: (i) distributors realize that
successful competition with the Company will be difficult if the Company has
already achieved greater route density; (ii) a distributor's primary business
often is distribution of other industrial gases and welding supplies, with bulk
CO2 not representing a key service, and a reasonable offer to purchase a
non-core business is often appealing; (iii) because of the operating
efficiencies the Company brings to the accounts serviced, the accounts have more
value for the Company than for the seller; (iv) a distributor may have little
opportunity for growth because of its inability to access capital; and (v) there
are few other credible buyers competing with the Company.
MARKETING AND CUSTOMERS
The Company markets its bulk CO2 systems to large customers such as
restaurant and convenience store chains, movie theater operators and theme
parks. The Company's customers include most of the major national and regional
chains throughout the United States. The Company approaches large chains on a
corporate or regional level for approval to become the exclusive supplier of
bulk CO2 on a national basis or within a designated territory. The Company then
directs its sales efforts to the managers or owners of the individual or
franchised operating units. Whereas the large chains offer immediate penetration
on a national or regional basis, the small operators are important accounts
because they provide geographic density which optimizes delivery efficiency and
reduces cost on a per customer basis. The introduction of smaller bulk CO2
systems (50 and 100 pound capacity vessels), which the Company helped develop,
allows the Company to penetrate the market for lower volume users of CO2 such as
mall-based food courts, small restaurants and mass-market retailers.
As of August 31, 1998, the Company distributed bulk CO2 to over
47,700 customers, none of which accounted for more than 5% of the Company's
fiscal 1998 net sales. The Company has negotiated multi-system placements or CO2
supply contracts with numerous customers, including McDonald's, Pizza Hut,
Kentucky Fried Chicken, Burger King, Checkers, Chevy's,7-Eleven, Circle K, EZ
Serve, Conoco, Carmike Cinemas, AMC Theaters, Friendly's Restaurant, Applebee's,
Cracker Barrel, Shoney's, Inc., Hard Rock Cafe, Planet Hollywood, Universal
Studios, Walt Disney World , Raymond James Stadium and Pro Player Stadium. The
Company's relationships with chain customers in one geographic market frequently
help it establish service with these same chains when the Company expands to new
markets. After accessing the chain accounts in a new market, the Company
attempts to rapidly build route density by leasing bulk CO2 systems to
independent restaurants, convenience stores and theaters.
The Company also supplies high pressure gases in cylinder form,
including CO2, helium and nitrogen. The Company estimates that it currently
services approximately 9,000 high pressure CO2 customers, most of whom were
either customers of acquired companies or are low volume users for which it is
not economical to convert to bulk CO2 systems. However, with the introduction of
50 and 100 pound capacity bulk CO2 systems, the Company anticipates that many
low volume users will convert from high pressure cylinders. Helium and nitrogen
are mostly supplied to existing bulk customers in connection with filling
balloons and dispensing beer, respectively.
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OPERATIONS
As of August 31, 1998, the Company operated 68 bulk CO2 service and
supply depots located throughout its service area and operates 153 specialized
bulk CO2 trucks, 77 installation and service vehicles and 17 high pressure
cylinder delivery trucks. Each specialized bulk CO2 truck covers up to 350
accounts, depending on market density, refilling customer systems on a regular
schedule. All delivery quantities are measured by flow meters installed on the
Company's tank trucks. This information is then loaded onto the Company's
centralized billing system, which is maintained on an IBM AS/400 computer.
Service and supply depots are equipped with large storage tanks (up to 40 tons)
which receive liquefied CO2 from large capacity tanker trucks and from which the
Company's bulk CO2 trucks refill for delivery to customers. In most cases, the
tank is accessible from the outside of the establishment.
The Company has a record of timely bill collections, with accounts
receivable historically averaging 37 days of sales. The Company attributes its
successful collection history to several factors: (i) the Company generates
invoices immediately after delivery; (ii) since fountain soda is generally a
highly profitable item, customers are less likely to risk their CO2 supply by
not paying their bills; (iii) the Company performs continuous proprietary
account monitoring and may interrupt service to those customers that are behind
on their accounts; and (iv) the use of a locking device on the fill port
prevents customers from receiving bulk CO2 from other sources while bills to the
Company remain unpaid.
All dispatch and billing functions are conducted from the Company's
corporate headquarters, with route drivers, installers and service personnel
operating from the Company's depots.
BULK CO2 SUPPLY
Bulk CO2 is currently a readily available commodity product which is
processed and sold by various sources. In May 1997, the Company entered into an
exclusive ten year carbon dioxide supply agreement with The BOC Group, Inc. (the
"BOC CO2 Supply Agreement"). The agreement provides readily available, high
quality CO2 as well as relatively stable bulk carbon dioxide prices at
competitive levels.
BULK CO2 SYSTEMS
The Company purchases new bulk CO2 systems from Minnesota Valley
Engineering, Inc. and Taylor-Wharton Cryogenics (a division of Harsco
Corporation), the two major manufacturers. The Company believes that it has been
the largest single purchaser of bulk CO2 systems from the two principal
manufacturers combined. The Company purchases vessels in six sizes (50, 100,
250, 300, 400 or 600 lbs.) depending on the CO2 needs of its customers. The
Company's vessels are vacuum insulated containers with extremely high insulation
characteristics allowing the storage of CO2, in its liquid form, at very low
temperatures. The vessels operate under low pressure, are fully automatic and
require no electricity. The service life of the Company's vessels, based upon
manufacturers' estimates, is expected to exceed 20 years with minimal
maintenance.
The Company's in-house service department coordinates all
installations and repairs of equipment. In addition to the normal single unit
bulk CO2 system installation, the Company has performed many complex multi-unit
installations in stadiums (e.g., Pro Players Stadium and Miami Arena) and
amusement parks (e.g. Universal Studios). These installations involve erecting
custom-designed piping systems to link bulk CO2 systems situated in remote
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locations. The Company's strong technical capabilities represent an important
competitive advantage and have often resulted in the equipment manufacturers
consulting with the Company on product modifications.
TRADEMARKS
"NuCo2(R)" is a registered trademark of the Company. The Company
markets its services utilizing the "NuCo2(R)" trademark.
REGULATORY MATTERS
The business of the Company is subject to federal and state laws and
regulations adopted for the protection of the environment, the health and safety
of employees and users of the Company's products. The transportation of bulk CO2
is subject to regulation by various federal, state and local agencies, including
the U.S. Department of Transportation. These regulatory authorities have broad
powers, and the Company is subject to regulatory and legislative changes that
can affect the economics of the industry by requiring changes in operating
practices or by influencing the demand for, and the costs of providing services.
In addition, the Company voluntarily complies with applicable safety standards.
Management believes that the Company is in compliance in all material respects
with all such laws, regulations and standards currently in effect and that the
cost of compliance with such laws, regulations and standards has not and is not
anticipated to have a material adverse effect on the Company.
COMPETITION
The Company competes with other distributors of bulk CO2 and high
pressure CO2, including several regional industrial gas distributors, numerous
small independent operators and distributors of restaurant supplies and
groceries. Bulk CO2 systems typically are serviced by industrial and welding
supply companies, specialty gas distributors and fountain supply companies.
These suppliers range widely in size. Some of the Company's competitors have
significantly greater financial, technical or marketing resources than the
Company. The Company believes that its ability to compete depends on a number of
factors, including price, product quality, availability and reliability, credit
terms, name recognition, delivery time and post-sale service and support.
EMPLOYEES
At June 30, 1998 the Company had 451 full-time employees, of whom
147 were involved in an executive, marketing or administrative capacity, 214 of
whom were route drivers and 90 of whom were in installation functions. The
Company considers its relationship with its employees to be good.
SEASONALITY
Of the Company's over 46,000 bulk CO2 customers, as of June 30, 1998
approximately 8,300 were billed utilizing a "rental plus per pound charge"
program. Additionally, 6,800 accounts use their own bulk CO2 systems and are
billed by the pound for bulk CO2 delivered. Customers purchasing bulk CO2 by the
pound will tend to consume less CO2 in the winter months and the Company's net
sales to such customers will be correspondingly lower in times of cold or
inclement weather.
BACKLOG
As of June 30, 1998, the Company had a backlog of approximately
2,500 orders for its budget plan service.
2. PROPERTIES.
The Company's corporate headquarters are located in a 32,400 square
foot facility in Stuart, Florida. This facility accommodates corporate,
administrative, marketing, sales and warehouse space. Annual rent for the
facility is $237,175. As of August 31, 1998, the Company also leased liquid CO2
service and supply depots at 68 locations in 35 states. The properties on which
such facilities are located are leased on terms consistent with market rentals
prevailing in the location's area. The Company believes that its existing
facilities are adequate for its current needs and that additional facilities in
its service area are available to meet future needs.
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3. LEGAL PROCEEDINGS.
The Company is involved from time to time in litigation arising in
the ordinary course of business, none of which is expected to have a material
adverse effect on the financial condition or results of operations of the
Company.
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
-8-
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock trades on the Nasdaq National Market under the
symbol "NUCO".
The following table sets forth, for the periods indicated, the
highest and lowest bid quotations for the Common Stock, as reported by the
Nasdaq National Market. The prices reported reflect inter-dealer prices, without
retail mark-up, mark-down or commission, and may not reflect actual
transactions.
CALENDAR 1996 HIGH LOW
- ------------- ---- ---
Third Quarter 31 19 1/2
Fourth Quarter 22 11 1/4
CALENDAR 1997
First Quarter 17 5/8 11
Second Quarter 18 3/8 11 7/8
Third Quarter 18 1/4 14 3/8
Fourth Quarter 16 1/8 10 1/4
CALENDAR 1998
First Quarter 13 3/4 10 1/2
Second Quarter 13 1/4 9 7/8
At June 30, 1998, there were approximately 196 holders of record of
the Company's Common Stock. This number does not include an indeterminate number
of shareholders whose shares are held by brokers in "street name."
The Company has not paid any cash dividends on the Common Stock
since its inception and the Board of Directors does not anticipate declaring any
cash dividends on the Common Stock in the foreseeable future. The Company
currently intends to utilize any earnings it may achieve for the development of
its business and working capital purposes. In addition, the payment of cash
dividends on the Common Stock is restricted by financial covenants in the
Company's credit facility with SunTrust Bank, South Florida, National
Association and 12% Senior Subordinated Notes due October 31, 2004.
6. SELECTED CONSOLIDATED FINANCIAL DATA.
The Selected Consolidated Financial Data set forth below reflect the
historical results of operations, financial condition and operating data of the
Company for the periods indicated and should be read in conjunction with the
consolidated financial statements and notes thereto and Management's Discussion
and Analysis of Financial Condition and Results of Operations included elsewhere
herein.
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Fiscal Year Ended June 30,
--------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands, except per share amounts and Operating Data)
INCOME STATEMENT DATA:
Net sales.............................................. $ 35,077 $ 18,944 $ 11,966 $ 6,062 $ 4,221
Cost of products sold.................................. 18,578 8,992 5,177 2,503 1,897
Selling, general and administrative expenses........... 9,396 5,859 3,066 1,448 1,093
Depreciation and amortization.......................... 8,912 4,246 2,417 1,380 803
--------- -------- --------- -------- ---------
Operating income (loss)................................ (1,809) (153) 1,305 731 428
Interest expense, net.................................. 3,639 (681) 1,258 1,264 953
Other expenses......................................... - - - - 145
--------- -------- --------- -------- ---------
Income (loss) before extraordinary item................ (5,448) 527 47 (533) (670)
Extraordinary item..................................... 187 - 860 - -
--------- -------- --------- -------- ---------
Net income (loss)...................................... (5,635) 527 (813) (533) (670)
Dividends on Preferred Stock........................... - - (111) - -
--------- -------- ---------- -------- ---------
Net income (loss)...................................... $ (5,635) $ 527 $ (924) $ (533) $ (670)
========== ======== ========= ======== =========
Income (loss) per common share before
extraordinary item............................... $ (0.75) $ .07 $ (.02) $ (.17)
Extraordinary item..................................... (0.03) - (.19) -
--------- -------- ---------- --------
Net income (loss) per common share $ (0.78) $ .07 $ (.21) $ (.17)
Weighted average shares outstanding.................... 7,210 7,318 4,500 3,379
OTHER DATA:
EBITDA (1)............................................. $ 7,103 $ 4,093 $ 3,722 $ 2,111 $ 1,231
OPERATING DATA:
Company owned bulk CO2 systems serviced:
Beginning of period.............................. 21,919 12,884 7,967 4,237 2,558
New installations, net........................... 9,446 5,817 3,337 1,703 1,329
Acquisitions..................................... 7,930 3,218 1,580 2,027 350
--------- --------- --------- -------- ---------
Total Company owned bulk CO2 systems serviced:......... 39,295 21,919 12,884 7,967 4,237
Customer owned bulk CO2 systems serviced............... 6,800 4,800 2,900 2,300
--------- --------- --------- --------
Total bulk CO2 systems serviced........................ 46,095 26,719 15,784 10,267
Service and supply depots.............................. 65 38 24 15 7
BALANCE SHEET DATA:
Cash and cash equivalents.............................. 337 11,673 43,001 562 58
Total assets........................................... 124,498 73,344 74,633 21,143 9,864
Total debt (including short-term debt)................. 59,328 9,546 10,844 17,391 9,369
Total shareholders' equity (deficit)................... 55,643 60,702 60,684 743 (724)
- ---------------------
(1) EBITDA represents operating income plus depreciation and amortization.
Information regarding EBITDA is presented because of its use by certain
investors as one measure of an issuer's ability to generate cash flow.
EBITDA should not be considered an alternative to, or more meaningful
than, operating income or cash flows from operating activities as an
indicator of an issuer's operating performance.
-10-
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks and
uncertainties. The Company's 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, the Company's expansion into new
markets, competition, technological advances, Year 2000 issues and availability
of managerial personnel.
OVERVIEW
At June 30, 1998 the Company leased approximately 39,300 bulk CO2
systems to its customers, principally pursuant to five year noncancelable lease
contracts. These customers include restaurants, convenience stores, theaters,
taverns and other businesses which dispense carbonated beverages. Generally,
these contracts are classified as one of two types: "budget-plan" service
contracts and "rental plus per pound charge" contracts. Pursuant to budget plan
service contracts, customers pay a fixed monthly charge for the lease of a
Company owned bulk CO2 system installed on the customer's premises and refills
of bulk CO2 according to a predetermined schedule. The bulk CO2 is included in
the monthly rental charge up to a predetermined maximum annual volume. If the
maximum annual volume is exceeded, the customer is charged for additional bulk
CO2 delivered. Pursuant to rental plus per pound charge contracts, the Company
also leases a bulk CO2 system to the customer, but the customer is charged on a
per pound basis for all bulk CO2 delivered. The Company's contracts generally
provide for price increases based upon increases in the consumer price index.
The Company provides some services besides those offered under the
above two types of contracts. As of June 30, 1998, the Company provided "fill
only" service to approximately 6,800 customers.
As of June 30, 1998, approximately 15,100 of the Company's
approximately 46,100 bulk CO2 customers were billed on a per pound basis which
varies with the quantity of bulk CO2 delivered. These customers will tend to
consume less CO2 in the winter months, and this may cause the Company's revenues
and earnings for its fiscal quarters ending in December and March to be
relatively lower than for its other quarters. As of June 30, 1998, approximately
31,000 of the Company's approximately 46,100 bulk CO2 customers were billed at a
flat monthly rate which generally does not vary throughout the year.
The Company's installed base of bulk CO2 systems has increased
through internally generated new customers and through acquisitions. As route
density increases, route profitability increases as the fixed costs associated
with the route are spread over a larger revenue base. Since the Company's
inception in February 1990 to June 30, 1998, approximately 23,800 Company owned
bulk CO2 systems have been installed and approximately 21,800 customer accounts
have been acquired through 35 acquisitions.
The Company intends to continue to grow through a combination of
internal growth and acquisitions. The Company requires significant capital to
purchase and install bulk CO2 systems at customers' locations and to grow the
network of service and supply depots and specialized CO2 delivery vehicles
required to service these installations. Once installed, however, there are
minimal additional capital requirements for bulk CO2 systems in service, and the
Company has generally experienced significant positive cash flows on a per-unit
basis, represented by per-unit operating income adjusted for per-unit non-cash
charges for depreciation and amortization. The Company believes its current
installed base of bulk CO2 systems is stable, partly due to the existence of
long-term contracts with its customers. In fiscal 1996, 1997 and 1998, less than
5% of Company owned bulk CO2 systems experienced service termination. Service
termination is typically caused by restaurant closure. Affected bulk CO2 systems
are either removed and reconditioned for use with other customers, or left in
place when prospects for a new restaurant in the same location are deemed
favorable.
GENERAL
Under the budget plan, the Company's net sales consist of charges to
customers for the use of Company owned bulk CO2 systems and a predetermined
quantity of liquid CO2. On customer invoices, the Company does not separate
charges for equipment use from charges for liquid CO2 delivered; customers are
presented with a single amount payable. Customers are invoiced monthly in
advance of services rendered. For customers on rental plus per pound charge
contracts, invoices are broken down into the two respective services, with the
charge for liquid CO2 supply varying with the amount delivered.
-11-
The Company's net sales also include revenues received from customers to which
it supplies only CO2 refill services, based on the amount delivered.
Cost of products sold is comprised of purchased CO2 and labor,
vehicle and depot costs associated with the Company's storage and delivery of
bulk CO2 to customers. Selling, general and administrative expenses consist of
salaries, dispatch and communications costs, and expenses associated with
marketing, administration, accounting and employee training. Consistent with the
capital intensive character of its business, the Company incurs significant
depreciation and amortization expenses. These stem from the depreciation of
Company owned bulk CO2 systems; depreciation and amortization of bulk system
installation costs; amortization of sales commissions, and amortization of
goodwill, deferred financing costs and other intangible assets.
With respect to bulk CO2 systems, the Company only capitalizes costs
that are associated with specific successful placements of such systems with
customers under noncancelable contracts and which would not be incurred by the
Company but for a successful placement. All other service, marketing and
administrative costs are expensed as incurred. Capitalized component parts and
direct costs associated with installation of bulk CO2 equipment leased to
customers was approximately $3.2 million, $6.3 million and $12.4 million at the
end of fiscal 1996, 1997 and 1998, respectively. Depreciation and amortization
expense related to capitalized component parts and direct costs associated with
installation was approximately $406,000, $924,000 and $1.8 million for fiscal
1996, 1997 and 1998, respectively.
The Company believes EBITDA is useful as a means of measuring the
growth and earning power of its business. In addition, the Company's current
bank credit facility utilizes EBITDA for its formal calculation of financial
leverage, affecting the amount of funds available to the Company for borrowing
under such credit facility. EBITDA represents operating income plus depreciation
and amortization. Information regarding EBITDA is presented because of its use
by certain investors as one measure of a corporation's ability to generate cash
flow. EBITDA should not be considered an alternative to, or more meaningful
than, operating income or cash flows from operating activities as an indicator
of a corporation's operating performance. EBITDA excludes significant costs of
doing business and should not be considered in isolation from GAAP measures.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage relationship which the various items bear to net sales:
YEAR ENDED JUNE 30,
-------------------
1998 1997 1996
---- ---- ----
Income Statement Data:
Net sales.............................................. 100.0% 100.0% 100.0%
Cost of products sold.................................. 53.0 47.5 43.3
Selling, general and administrative expenses........... 26.8 30.9 25.6
Depreciation and amortization.......................... 25.4 22.4 20.2
-------- ------ ------
Operating income (loss)................................ (5.2) (.8) 10.9
Interest expense (income).............................. 10.4 (3.6) 10.5
-------- ------- ------
Income (loss) before extraordinary item................ (15.6) 2.8 .4
Extraordinary item..................................... .5 -- (7.2)
-------- ------- ------
Net income (loss)...................................... (16.1%) 2.8% (6.8%)
========= ===== =======
Other Data:
EBITDA.............................................. 20.3% 21.6% 31.1%
========= ===== =======
-12-
FISCAL YEAR ENDED JUNE 30, 1998 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1997
Net sales increased $16.1 million, or 85.2%, from $18.9 million in
fiscal 1997 to $35.1 million in fiscal 1998. Approximately $6.1 million of the
increase represented net sales from the 15 acquisitions during the fiscal year
ended June 30, 1998. In addition, approximately $2.9 million of the increase
represented net sales from the nine acquisitions during fiscal 1997 which are
included for the full year in fiscal 1998 as compared to from their dates of
acquisition in fiscal 1997. At June 30, 1998, there were approximately 39,300
Company owned bulk systems in service, an increase of 17,400 over the
approximately 21,900 Company owned bulk systems in service at the end of fiscal
1997. Of such increase, approximately 7,900 resulted from acquisitions of
businesses completed during fiscal 1998 and the remaining 9,500 resulted from
internal marketing efforts. Increases in net sales due to price increases were
insignificant.
Cost of products sold increased by $9.6 million from $9.0 million in
fiscal 1997 to $18.6 million in fiscal 1998, and increased as a percentage of
net sales from 47.5% in fiscal 1997 to 53.0% in fiscal 1998. This increase was
attributable to the expansion of the Company into new territories. Fully loaded
route drivers increased by $3.2 million from $3.0 million in fiscal 1997 to $6.2
million in fiscal 1998, and increased as a percentage of net sales from 16.0% to
17.7%. The number of depots operated by the Company at June 30, 1998 increased
to 65, compared to 38 at June 30, 1997. Rent expense and utilities increased by
$850,000 from $729,000 in fiscal 1997 to $1.6 million in fiscal 1998, and
increased as a percentage of net sales from 3.8% to 4.5%. Auto and truck expense
increased by $1.5 million from $1.5 million in fiscal 1997 to $3.0 million in
fiscal 1998 and increased as a percentage of net sales from 7.8% to 8.5%. When
the Company opens new depots and expands into new markets, higher costs
expressed as a percentage of net sales are incurred until route density is
achieved. The Company typically services approximately 350 customers per
delivery vehicle in its mature markets. In new territories, a delivery vehicle
can initially service as few as 100 customers.
Selling, general and administrative expenses increased by $3.5
million from $5.9 million in fiscal 1997 to $9.4 million in fiscal 1998, and
decreased as a percentage of net sales from 30.9% in fiscal 1997 to 26.8% in
fiscal 1998. The dollar increase was primarily attributable to growth in the
number of marketing and administrative personnel and their associated expenses,
as well as the costs of expanding the Company's geographic areas of service.
Fully loaded marketing, administrative and executive personnel increased by $2.4
million from $3.2 million in fiscal 1997 to $5.6 million in fiscal 1998, and
decreased as a percentage of net sales from 16.9% in fiscal 1997 to 16.1% in
fiscal 1998. The percentage decrease is attributable to economies of scale. At
June 30, 1997 the Company had operations in 30 states and at the end of fiscal
1998, the Company had operations in 43 states.
Depreciation and amortization increased by $4.7 million from $4.2
million in fiscal 1997 to $8.9 million in fiscal 1998. As a percentage of net
sales, such expense increased from 22.4% in fiscal 1997 to 25.4% in fiscal 1998.
Depreciation expense increased by $2.9 million from $3.1 million in fiscal 1997
to $6.0 million in fiscal 1998 principally due to the increase in bulk CO2
systems leased to customers. As a percentage of net sales, depreciation expense
increased from 16.5% in fiscal 1997 to 17.2% in fiscal 1998. Amortization
expense increased by $1.8 million from $1.1 million in fiscal 1997 to $2.9
million in fiscal 1998 primarily due to the increase in amortization of deferred
lease acquisition costs and goodwill and customer lists resulting from
acquisitions. As a percentage of net sales, amortization expense increased from
5.9% in fiscal 1997 to 8.2% in fiscal 1998.
Net interest income in fiscal 1997 was $681,000 compared to net
interest expense in fiscal 1998 of $3.6 million. This change is attributable to
the decreased level of cash and cash equivalents and the increased level of
long-term and subordinated debt in fiscal 1998 as compared to fiscal 1997.
During fiscal 1998, the Company wrote-off $187,000 of deferred
financing costs related to its NationsBank credit facility which was replaced by
a new syndicated bank group facility led by SunTrust Bank.
For the reasons described above, the Company's net income in fiscal
1997 was $527,000 compared to a net loss of $5.6 million in fiscal 1998. The
Company has made no provision for income tax expense in either fiscal 1997 or
fiscal 1998 due to its historical net losses. At June 30, 1998, the Company had
net operating loss carryforwards for federal income tax purposes of $26.2
million, which are available to offset future federal taxable income through
2013.
For the reasons described above, EBITDA increased from $4.1 million
in fiscal 1997 to $7.1 million in fiscal 1998, but decreased as a percentage of
net sales from 21.6% to 20.3%.
-13-
FISCAL YEAR ENDED JUNE 30, 1997 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1996
Net sales increased $7.0 million, or 58.3%, from $12.0 million in
fiscal 1996 to $18.9 million in fiscal 1997. Approximately $938,000 of the
increase represented net sales resulting from the May 1996 acquisition of the
BevServ Division of The Coca-Cola Bottling Company of New York, Inc.
("BevServ"). In addition, approximately $332,000 of the increase represented net
sales from three acquisitions in fiscal 1996 which are included for the full
year in fiscal 1997 as compared to from their dates of acquisition in fiscal
1996 and approximately $1.4 million of the increase represented net sales from
the eight acquisitions in fiscal 1997. At June 30, 1997, there were 21,919
Company owned systems in service, an increase of 9,035 over the 12,884 Company
owned systems in service at the end of fiscal 1996. Of such increase, 3,218
resulted from acquisitions of businesses completed during fiscal 1997 and the
remaining 5,817 resulted from internal marketing efforts. Approximately 31% of
the acquired systems were obtained through the May 1997 acquisition of the bulk
CO2 assets of BOC Gases ("BOC"). Increases in net sales due to price increases
were insignificant.
Cost of products sold increased by $3.8 million from $5.2 million in
fiscal 1996 to $9.0 million in fiscal 1997, and increased as a percentage of net
sales from 43.3% in fiscal 1996 to 47.5% in fiscal 1997. This increase was
attributable to the expansion of the Company into new territories. Fully loaded
route drivers increased by $1.3 million from $1.8 million in fiscal 1996 to $3.0
million in fiscal 1997, and increased as a percentage of net sales from 14.8% to
16.0%. The number of depots operated by the Company at June 30, 1997 increased
to 38, compared to 24 at June 30, 1996. Rent expense and utilities increased by
$451,000 from $278,000 in fiscal 1996 to $729,000 in fiscal 1997, and increased
as a percentage of net sales from 2.3% to 3.8%. When the Company opens new
depots and expands into new markets, higher costs expressed as a percentage of
net sales are incurred until route density is achieved. The Company typically
services approximately 350 customers per delivery vehicle in its mature markets.
In new territories, a delivery vehicle can initially service as few as 100
customers.
Selling, general and administrative expenses increased by $2.8
million from $3.1 million in fiscal 1996 to $5.9 million in fiscal 1997, and
increased as a percentage of net sales from 25.6% in fiscal 1996 to 30.9% in
fiscal 1997. The increase was primarily attributable to growth in the number of
marketing and administrative personnel and their associated expenses, as well as
the costs of expanding the Company's geographic areas of service. Fully loaded
marketing, administrative and executive personnel increased by $1.6 million from
$1.6 million in fiscal 1996 to $3.2 million in fiscal 1997, and increased as a
percentage of net sales from 13.5% in fiscal 1996 to 16.9% in fiscal 1997. At
June 30, 1996 the Company had operations in 18 states and at the end of fiscal
1997, the Company had operations in 30 states.
Depreciation and amortization increased by $1.8 million from $2.4
million in fiscal 1996 to $4.2 million in fiscal 1997. As a percentage of net
sales, such expense increased from 20.2% in fiscal 1996 to 22.4% in fiscal 1997.
Depreciation expense increased by $1.5 million from $1.6 million in fiscal 1996
to $3.1 million in fiscal 1997 principally due to the increase in bulk CO2
systems leased to customers. As a percentage of net sales, depreciation expense
increased from 13.4% in fiscal 1996 to 16.5% in fiscal 1997. Amortization
expense increased by $308,000 from $808,000 in fiscal 1996 to $1.1 million in
fiscal 1997 primarily due to the increase in amortization of deferred lease
acquisition costs, goodwill and customer lists resulting from acquisitions. As a
percentage of net sales, amortization expense decreased from 6.8% in fiscal 1996
to 5.9% in fiscal 1997.
Net interest expense in fiscal 1996 was $1.3 million compared to net
interest income in fiscal 1997 of $681,000. This change is attributable to the
repayment of debt from the proceeds of the Company's initial public offering in
December 1995 (the "IPO") and the increased level of cash and cash equivalents
in the 1997 period from the Company's secondary public offering in June 1996
(the "Secondary Offering").
During fiscal 1996, the Company wrote-off $785,000 of deferred
financing costs and incurred $75,000 in prepayment penalties related to debt
which was repaid with the proceeds of the IPO.
For the reasons described above, the Company's net loss in fiscal
1996 was $813,000 compared to net income of $527,000 in fiscal 1997; however,
net income before extraordinary item in fiscal 1996 was $46,822. The Company has
made no provision for income tax expense in either fiscal 1996 or fiscal 1997
due to its historical net losses. At June 30, 1997 the Company had net operating
loss carryforwards for federal income tax purposes of $12.5 million, which are
available to offset future federal taxable income through 2012.
For the reasons described above, EBITDA increased from $3.7 million
in fiscal 1996 to $4.1 million in fiscal 1997, but decreased as a percentage of
net sales from 31.1% to 21.6%.
-14-
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements consist principally of capital
expenditures associated with placing new bulk CO2 systems into service at
customers' locations; payments of interest on its outstanding indebtedness;
payments for acquired businesses; and working capital. Whenever possible, the
Company seeks to obtain the use of vehicles, land, buildings, and other office
and service equipment under operating leases as a means of conserving capital.
As of June 30, 1998, the Company anticipated making cash capital expenditures of
at least $20.0 million to $30.0 million during each of fiscal 1999 and fiscal
2000, primarily for purchases of bulk C02 systems that it expects to place into
service during this time. Once bulk CO2 systems are placed into service, the
Company has generally experienced positive cash flows on a per-unit basis, as
there are minimal additional capital expenditures required for ordinary
operations. In addition to the capital expenditures related to internal growth,
the Company continually reviews opportunities to acquire bulk CO2 service
businesses, and may require cash in an amount dictated by the scale and terms of
any such transactions successfully concluded.
During the fiscal year ended June 30, 1998, the Company's capital
resources included cash flows from operations, available borrowing capacity
under the Company's credit facilities (NationsBank credit facility through
October 1997 and SunTrust Facility thereafter) and proceeds from the sale of its
12% Senior Subordinated Promissory Notes due 2004 (the "Notes"). In July and
September of 1997, certain assets, primarily consisting of bulk CO2 systems,
were acquired for $6.0 million in cash and $6.8 million in borrowings under the
Company's NationsBank credit facility. Effective October 1, 1997, a newly formed
wholly-owned subsidiary of the Company purchased all of the issued and
outstanding shares of common stock of Koch Compressed Gases, Inc. for an
aggregate purchase price of $5.0 million which was funded through a borrowing
under the NationsBank credit facility. On October 31, 1997, the Company repaid
its outstanding indebtedness under the NationsBank credit facility which totaled
approximately $21.0 million with a portion of the proceeds of the Notes. The
Notes which aggregated $30.0 million were sold with seven year warrants to
purchase an aggregate of 655,738 shares of Common Stock at an exercise price of
$16.40 per share. Additionally, NationsBanc Montgomery Securities, Inc., the
placement agent for the Notes, 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 October 31, 1997, the Company finalized a $50.0 million senior
secured revolving credit facility with SunTrust Bank, South Florida, National
Association ("SunTrust Facility"). Pursuant to the SunTrust Facility, upon the
achievement of $15.0 million annualized one quarter EBITDA on a pro-forma basis
for acquisitions, the Company shall automatically request that the SunTrust
Facility be increased by an additional $50.0 million to a total of $100.0
million. Additionally, the SunTrust Facility provides for interest and an unused
facility fee based on a pricing grid calculated quarterly on senior funded debt
to annualized EBITDA. The SunTrust Facility expires on October 31, 2000;
however, it contains a two year renewal option. Additionally, it is
collateralized by substantially all of the assets of the Company. In December
1997, SunTrust closed on a syndication of the SunTrust Facility with three
additional banks.
In July and August 1998, the 12% Senior Subordinated Promissory Note
Agreement and the SunTrust Facility, respectively, were amended to adjust
certain financial covenants as of June 30, 1998 and prospectively. In exchange
for the amendment to the 12% Senior Subordindated Promissory Note Agreement, the
exercise price for 612,023 warrants was reduced from $16.40 per stock unit to
$12.40 per stock unit. The Company believes that it will be able to comply with
all of the financial covenants, as amended, during the next fiscal year.
For the period November 1997 through March 1998, the Company
purchased assets from various carbonic gas distributors consisting primarily of
bulk CO2 and high pressure assets for $5.3 million cash, $18.7 million in
borrowings under the Company's SunTrust Facility and the issuance of 18,835
shares of Common Stock with a market value of $275,000.
As of June 30, 1998, a total of $29.0 million was outstanding under
the SunTrust Facility with interest at two hundred twenty-five basis points
above the 90-day London InterBank Offering Rate ("LIBOR") (7.875% to 8.00% at
June 30, 1998).
Working Capital. At June 30, 1997 the Company had working capital of
$9.5 million. At June 30, 1998, the Company had negative working capital of $3.1
million.
Cash Flows from Operating Activities. During fiscal 1997 and fiscal
1998, net cash provided by operating activities was $4.3 million and $7.4
million, respectively. Cash flows from operating activities increased by $3.1
million for the fiscal year ended June 30, 1998 compared to the same period in
1997 primarily due to an increase in accounts payable and depreciation and
amortization.
-15-
Cash Flows from Investing Activities. During fiscal 1997 and fiscal
1998, the Company made net capital expenditures of $16.9 million and $23.5
million, respectively, for new bulk CO2 systems and associated installation and
direct placement costs. In addition, during the year ended June 30, 1997, the
Company made eight acquisitions and expended cash of $17.7 million and during
fiscal 1998 the Company made15 acquisitions and expended cash of $12.4 million.
Cash Flows From Financing Activities. During fiscal 1997 cash flows
used in financing activities were $2.4 million. During fiscal 1998, cash flows
provided by financing activities were $18.6 million. For the fiscal year ended
June 30, 1997, cash flows used in financing activities were primarily from
repayment of long-term debt owed and the redemption of a warrant. For the fiscal
year ended June 30, 1998, cash flows provided by financing activities were
primarily from the issuance of subordinated debt and borrowings under the
Company's SunTrust Facility.
The Company believes that cash from operating activities and
available borrowings under the SunTrust Facility will be sufficient to fund
proposed operations for at least the next 12 months at its anticipated rate of
growth.
YEAR 2000
The Company has conducted a review to identify which of its computer
and other business operating systems will be affected by the "Year 2000" problem
and has developed a project plan and schedule to solve this issue. Among the
functions and systems impacted could be inventory and accounting systems,
dispatch and delivery systems, electronic data interchange, and mechanical
systems operating everything from office building environmental controls to
telephone switches and fax machines. The Company is on schedule to be Year 2000
compliant by June 30, 1999. The Company believes that the costs of
modifications, upgrades, or replacements of software, hardware, or capital
equipment which would not be incurred but for Year 2000 compatibility
requirements have not and will not have a material impact on the Company's
financial position or results of operations.
The Company is also engaged in communications with its significant
business partners, suppliers and customers to determine the extent to which the
Company is vulnerable to such third parties' failure to address their own Year
2000 issues. The Company's assessment of the impact of its Year 2000 issues
includes an assessment of the Company's vulnerability to such third parties. The
Company is seeking assurances from its significant business partners, suppliers
and customers that their computer applications will not fail due to Year 2000
problems. Nevertheless, the Company does not control, and can give no assurances
as to the substance or success of the Year 2000 compliance efforts of such
independent third parties and the Company believes that there is a risk that
certain of these third parties on whom the Company's finances and operations
depend will experience Year 2000 problems that could affect the financial
position or results of operations of the Company. These risks include, but are
not limited to, the potential inability of suppliers to correctly or timely
provide necessary services, materials and components for the Company's
operations; the inability of the Company's customers to timely or correctly
process and pay the Company's invoices; and the inability of lenders, lessors or
other sources of the Company's necessary capital and liquidity to make funds
available to the Company when required.
In case the Company does experience severe Year 2000 financial and
operating problems, notwithstanding its efforts to avoid or mitigate problems
inherent in its own computer systems or the adverse effects of Year 2000
problems experienced by third parties on whom it is substantially reliant, the
Company has begun development of contingency plans.
INFLATION
The modest levels of inflation in the general economy since the
Company began business in 1990 have not affected its results of operations.
Additionally, the Company's contracts with its customers generally contain an
annual lease rate adjustment clause based on any increases in the consumer price
index. The Company believes that inflation will not have a material adverse
effect on its future results of operations.
The BOC CO2 Supply Agreement contains annual adjustments over the
prior contract year for an increase or decrease in the Producer Price Index for
Chemical and Allied Products ("PPI") or the average percentage increase in the
selling price of bulk merchant carbon dioxide purchased by BOC's large,
multi-location beverage customers in the United States. However, such increases
shall not exceed 3% per year in the first five contract years.
-16-
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As discussed under "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
above, as of June 30, 1998, a total of $29.0 million was outstanding under the
SunTrust Facility with interest at two hundred twenty-five basis points above
the 90 day LIBOR rate (7.875% to 8.00% at June 30, 1998). Based upon $29.0
million outstanding under the SunTrust Facility at June 30, 1998, the Company's
annual interest cost under the SunTrust Facility would increase by $290,000 for
each one percent increase in LIBOR (i.e., from 8.0% to 9.0%).
In order to reduce the Company's exposure to increases in LIBOR, and
consequently to increases in interest payments, on June 9, 1998 the Company
entered into an interest rate swap transaction (the "Swap") with SunTrust Bank,
Atlanta, in the amount of $10.0 million (the "Notional Amount"). The effective
date of the Swap is September 2, 1998 and it terminates on September 5, 2000.
Pursuant to the Swap, the Company pays a fixed interest rate of 6% per annum and
receives a LIBOR-based floating rate. The effect of the Swap is to neutralize
any changes in LIBOR on the Notional Amount. If LIBOR decreases below 6% during
the period the Swap is in effect, interest payments by the Company on the
Notional Amount will be greater than if the Company had not entered into the
Swap, since by exchanging LIBOR for a fixed interest rate, the Company would not
benefit from falling interest rates on LIBOR, a variable interest rate.
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See page F-1
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On July 2, 1996, the Audit Committee of the Board of Directors of
the Company dismissed KPMG Peat Marwick LLP ("KPMG") as independent accountants
to the Company and appointed Cooper, Selvin & Strassberg LLP as the new
independent accountants to the Company. KPMG's accountant's report on the
financial statements of the Registrant for the fiscal year ended June 30, 1995
(the period for which KPMG was engaged as independent accountants) did not
contain any adverse opinion or disclaimer of opinion and was not qualified or
modified as to uncertainty, audit scope, or accounting principles. In November
1997, the partners and employees of Cooper, Selvin & Strassberg LLP joined the
firm of Margolin, Winer & Evens LLP.
PART III
The information required by Items 10, 11, 12 and 13 of this Part III
is incorporated by reference to the definitive proxy statement to be filed by
the Company no later than October 28, 1998 pursuant to Regulation 14A.
-17-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
(1) Financial statements.
See Index to Financial Statements which appears on page F-1
herein.
(2) Financial Statement Schedules
II - Valuation and Qualifying Accounts.
(3) Exhibits:
EXHIBIT NO. EXHIBIT
**3.1 -- Amended and Restated Articles of Incorporation of
the Company.
*3.2 -- Articles of Amendment to the Articles of
Incorporation of the Company, dated December 18,
1995.
*3.3 -- Articles of Amendment to the Articles of
Incorporation of the Company, dated December 17,
1996.
**3.4 -- Bylaws of the Company.
*10.1 -- 1995 Stock Option Plan.
**10.2 -- Directors' Stock Option Plan.
**10.3 -- Noncompetition Agreement between the Company and
Joseph M. Criscuolo, dated November 30, 1995.
**10.4 -- Noncompetition Agreement between the Company and
Edward M. Sellian, dated November 30, 1995.
**10.5 -- Lease for 2528 North Tamiami Trail, Ft. Myers,
Florida, between the Company and Edward M.
Sellian.
***10.6 -- Lease for 2800 Southeast Market Place, Stuart,
Florida between the Company and Edward M. Sellian.
*10.7 -- Lease for 2820 Southeast Market Place, Stuart,
Florida between the Company and Edward M. Sellian
dated as of February 1, 1998.
****10.8 -- Employment agreement between the Company and Joann
Sabatino, dated October 16, 1996.
*10.9 -- Revolving Credit Agreement, dated as of October
31, 1997 by and between the Company and SunTrust
Bank, South Florida, National Association.
*10.10 -- Waiver and Amendment No. 1 to Revolving Credit
Agreement dated as of August 25, 1998 by and among
the Company and SunTrust Bank, South Florida,
National Association.
*10.11 -- Senior Subordinated Note Purchase Agreement, dated
as of October 31, 1997 between the Company, the
Subsidiary Guarantors and the Investors.
-18-
*10.12 -- Amendment No. 1 to Senior Subordinated Note
Purchase Agreement dated as of November 14, 1997
between the Company, the Subsidiary Guarantors and
the Investors.
*10.13 -- Amendment No. 2 to Senior Subordinated Note
Purchase Agreement dated as of June 30, 1998
between the Company, the Subsidiary Guarantors and
the Investors.
*10.14 -- Warrant Agreement dated as of October 31, 1997
among the Company and the Initial Holders.
*10.15 -- Amendment No. 1 to Warrant Agreement dated as of
November 14, 1997, between the Company and the
Initial Holders.
*11 -- Statement re: computation of per share earnings.
*****16 -- Letter of KPMG Peat Marwick dated July 2, 1996.
*21 -- Subsidiaries
*23 -- Consent of Margolin, Winer & Evens LLP to the
incorporation by reference to the Company's
Registration Statement on Form S-8 (No. 333-06705)
of the independent auditors' report included
herein.
*27 -- Financial Data Schedule.
(b) REPORTS ON FORM 8-K
No reports were filed on Form 8-K in the quarter ended June 30,
1998.
- ---------------------------
* Included herein.
** Incorporated by reference to the Company's Registration Statement on
Form SB-2, filed with the Commission on November 7, 1995 (Commission
File No. 33-99078), as amended.
*** Incorporated by reference to the Company's Registration Statement on
Form SB-2, filed with the Commission on June 7, 1996 (Commission
File No. 333-3352).
**** Incorporated by reference to the Company's Form 10-KSB for the
fiscal year ended June 30, 1997.
***** Incorporated by reference to the Company's Form 8-K dated July 2,
1996.
-19-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
NUCO2 INC.
Dated: September 24, 1998 /S/ EDWARD M. SELLIAN
---------------------
Edward M. Sellian,
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/S/ EDWARD M. SELLIAN Director September 24, 1998
- ------------------------
Edward M. Sellian
/S/ JOHN A. KERNEY Director September 24, 1998
- ------------------------
John A. Kerney
/S/ ROBERT L. FROME Director September 24, 1998
- ------------------------
Robert L. Frome
/S/ ROBERT RANIERI Director September 24, 1998
- -----------------------
Robert Ranieri
/S/ DANIEL RAYNOR Director September 24, 1998
- ------------------------
Daniel Raynor
/S/ JOANN SABATINO Chief Financial Officer September 24, 1998
- ------------------------
Joann Sabatino
-20-
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE NO.
--------
NUCO2 INC.
REPORT OF INDEPENDENT AUDITORS ...............................................................................F-2
CONSOLIDATED FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 1997 AND 1998...................................................F-3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE FISCAL YEARS ENDED JUNE 30, 1996, 1997 AND
1998.....................................................................................................F-4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE FISCAL YEARS ENDED JUNE 30, 1996,
1997 AND 1998............................................................................................F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE FISCAL YEARS ENDED JUNE 30, 1996, 1997 AND
1998.....................................................................................................F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS....................................................................F-8
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE FISCAL YEARS ENDED JUNE 30, 1996,
1997 AND 1998............................................................................................F-22
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
NuCo2 Inc.
Stuart, Florida
We have audited the accompanying consolidated balance sheets of NuCo2 Inc. as of
June 30, 1997 and 1998, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended June 30, 1998. We have also audited the financial statement schedule
listed in the accompanying index. These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of NuCo2
Inc. as of June 30, 1997 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1998 in conformity with generally accepted accounting principles. Also,
in our opinion, the related financial statement schedule when considered in
relation to the basic financial statement taken as a whole, presents fairly, in
all material respects, the information set forth therein.
MARGOLIN, WINER & EVENS LLP
Garden City, New York
September 18, 1998
F-2
NuCo2 INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(NOTE 6)
JUNE 30,
--------
1997* 1998
----- ----
Current assets:
Cash and cash equivalents $ 11,672,506 $ 336,510
Trade accounts receivable; net of allowance for doubtful
accounts of $113,054 and $395,491, respectively 2,120,880 4,457,505
Inventories 85,601 211,027
Prepaid expenses and other current assets 276,858 262,437
----------- -----------
Total current assets 14,155,845 5,267,479
----------- -----------
Property and equipment, net (Note 4) 46,803,050 85,435,933
----------- -----------
Other assets:
Goodwill, net 7,580,763 22,891,846
Deferred charges, net 272,608 2,004,259
Customer lists, net 1,755,919 3,963,588
Restrictive covenants, net 1,401,833 2,275,964
Deferred lease acquisition costs, net 1,274,577 2,475,139
Deposits 99,863 184,059
----------- -----------
12,385,563 33,794,855
----------- -----------
$ 73,344,458 $124,498,267
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt (Note 6) $ 2,180,601 $ 139,251
Accounts payable 1,514,048 6,596,722
Accrued expenses 709,507 323,254
Accrued interest 19,568 844,153
Accrued payroll 232,469 476,458
Other current liabilities 22,699 7,179
----------- -----------
Total current liabilities 4,678,892 8,387,017
Long-term debt, excluding current maturities (Note 6) 7,365,740 29,460,614
Subordinated debt (Note 7) - 29,728,571
Customer deposits 598,177 1,279,178
----------- -----------
Total Liabilities 12,642,809 68,855,380
----------- -----------
Commitments and contingencies (Note 14)
Shareholders' equity (Note 8):
Preferred Stock; no par value; 5,000,000 shares authorized;
none issued - -
Common Stock; par value $.001 per share; 30,000,000 shares authorized;
issued and outstanding 7,197,718 shares at June 30, 1997 and 7,216,664
shares at June 30, 1998 7,198 7,217
Additional paid-in capital 63,233,043 63,809,014
Accumulated deficit (2,538,592) (8,173,344)
------------- -------------
Total shareholders' equity 60,701,649 55,642,887
----------- -----------
$ 73,344,458 $124,498,267
=========== ============
* Restated to conform to current year's classifications.
See accompanying notes to consolidated financial statements.
F-3
NuCo2 INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30,
--------------------
1996 1997 1998
-------- ---------- -------
Net sales $ 11,965,999 $ 18,943,569 $ 35,077,361
----------- --------------- -------------
Costs and expenses:
Cost of products sold 5,177,320 8,991,823 18,578,063
Selling, general and administrative expenses 3,066,381 5,858,934 9,396,003
Depreciation and amortization 2,417,492 4,246,035 8,912,124
----------- --------------- --------------
10,661,193 19,096,792 36,886,190
----------- --------------- --------------
Operating income (loss) 1,304,806 (153,223) (1,808,829)
Other expenses (income):
Interest expense 1,402,773 884,627 3,809,138
Interest (income) (144,789) (1,565,289) (170,160)
------------ ---------------- --------------
Income (loss) before extraordinary item 46,822 527,439 (5,447,807)
----------- --------------- --------------
Extraordinary item - loss on extinguishment of debt (Note 6) 859,522 - 186,945
----------- --------------- -------------
Net income (loss) $ (812,700) $ 527,439 $ (5,634,752)
============ =============== ==============
Dividends on Preferred Stock $ (110,917) $ - $ -
============ =============== ==============
Net income (loss) available to common shareholders $ (923,617) $ 527,439 $ (5,634,752)
============ =============== ==============
Basic and Diluted EPS
Income (loss) before extraordinary item $ (0.02) $ 0.07 $ (0.75)
Extraordinary item (0.19) - (0.03)
------------ ---------------- -------------
Net income (loss) $ (0.21) $ 0.07 $ (0.78)
============ ================ =============
Weighted average number of common and common
equivalent shares outstanding
Basic 4,499,989 7,164,924 7,210,350
============ ================ ============
Diluted 4,499,989 7,317,926 7,210,350
============ ================ ============
See accompanying notes to consolidated financial statements.
F-4
NuCo2 INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Series A Series B Series C Series D
--------------------- ------------------ ----------------- -------------------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------
Balance, June 30, 1995 485 $ 485,000 500 $500,000 500 $ 500,000 1,500 $1,500,000
Redemption of Series A (485) (485,000) - - - - - -
Redemption of Series B - - (500) (500,000) - - - -
Conversion of Series C - - - - (500) (500,000) - -
Conversion of Series D - - - - - - (1,500)
Conversion of subordinated debt
and exercise of warrants and
options - - - - - - - -
Issuance of 2,022,576 shares of com-
mon stock - Initial Public Offering - - - - - - - -
Issuance of 1,761,165 shares of com-
mon stock - secondary offering - - - - - - - -
Net (loss) - - - - - - - -
Dividends declared on
preferred stock - - - - - - - -
---------- ---------- ------- --------- -------- --------- ------- --------
Balance, June 30, 1996 - - - - - - - -
Issuance of 34,289 shares of
common stock - exercise of options - - - - - - - -
Redemption of warrant - - - - - - - -
Additional expense - secondary
offering - - - - - - - -
Issuance of 33,962 shares of common
stock - asset acquisition - - - - - - - -
Net income - - - - - - - -
---------- ---------- ------- --------- -------- --------- ------- ---------
Balance, June 30, 1997 - - - - - - - -
Issuance of 18,835 shares of common
stock - asset acquisition - - - - - - - -
Issuance of 111 shares of common
stock - exercise of options - - - - - - - -
Issuance of warrants - - - - - - - -
Net (loss) - - - - - - - -
---------- ---------- ------- --------- -------- --------- ------- ---------
Balance, June 30, 1998 - - - - - - - -
========== ========== ======= ========= ======== ========= ======= =========
Common Stock Additional
------------------------- Paid-in Accumulated Shareholders'
Shares Amount Capital Deficit Equity
-------- ------ ------------- ----------- ------------
Balance, June 30, 1995 1,932,953 $ 1,933 $9,317 $ (2,253,331) $ 742,919
Redemption of Series A - - - - (485,000)
Redemption of Series B - - 499,500 - (500)
Conversion of Series C 155,164 155 499,845 - 0
Conversion of Series D (1,500,000) 300,266 300 1,499,700 0
Conversion of subordinated debt
and exercise of warrants and
options 957,343 957 805,400 - 806,357
Issuance of 2,022,576 shares of com-
mon stock - Initial Public Offering 2,022,576 2,023 16,149,341 - 16,151,364
Issuance of 1,761,165 shares of com-
mon stock - secondary offering 1,761,165 1,761 44,641,484 - 44,643,245
Net (loss) - - - (812,700) (812,700)
Dividends declared on
preferred stock - - (361,275) (361,275)
------------ --------- ------------- -------------- --------------
Balance, June 30, 1996 7,129,467 7,129 63,743,312 (3,066,031) 60,684,410
Issuance of 34,289 shares of
common stock - exercise of options 34,289 34 152,319 - 152,353
Redemption of warrant - - (1,143,450) - (1,143,450)
Additional expense - secondary
offering - - (59,100) - (59,100)
Issuance of 33,962 shares of common
stock - asset acquisition 33,962 35 539,962 - 539,997
Net income - - - 527,439 527,439
------------ --------- ------------- ------------- -------------
Balance, June 30, 1997 7,197,718 7,198 63,233,043 (2,538,592) 60,701,649
Issuance of 18,835 shares of common
stock - asset acquisition 18,835 19 274,972 - 274,991
Issuance of 111 shares of common
stock - exercise of options 111 - 999 - 999
Issuance of warrants - - 300,000 - 300,000
Net (loss) - - - (5,634,752) (5,634,752)
------------ --------- ------------ --------------- ---------------
Balance, June 30, 1998 7,216,664 $ 7,217 $ 63,809,014 $ (8,173,344) $ 55,642,887
============ ========= ============ =============== ===============
See accompanying notes to consolidated financial statements.
F-5
NuCo2 INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30,
1996* 1997* 1998
----------- ---------- -------
Net income (loss) before extraordinary item $ 46,822 $ 527,439 $ (5,447,807)
Extraordinary item - loss on extinguishment of debt 859,522 - 186,945
------------- ------------ -------------
Net income (loss) (812,700) 527,439 (5,634,752)
Cash flows from operating activities:
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization of property and equipment 1,609,063 3,130,022 6,045,652
Amortization of other assets 808,429 1,116,013 2,866,471
Loss on disposal of property and equipment 155,592 294,411 499,704
Write-off of deferred financing costs 784,069 - 186,945
Changes in operating assets and liabilities:
Decrease (increase) in:
Trade accounts receivable (646,224) (735,238) (2,189,832)
Inventories (11,441) (33,176) (115,968)
Prepaid expenses and other current assets (356,368) 108,090 14,421
Increase (decrease) in:
Accounts payable 278,794 (712,747) 4,542,532
Accrued expenses (42,347) 363,361 (395,794)
Accrued payroll 22,954 (93,592) 243,989
Accrued interest (84,517) 193,800 824,585
Other current liabilities 39,064 (50,830) (41,061)
Customer deposits 100,463 236,392 591,296
--------------- ------------ ------------
Net cash provided by operating activities 1,844,831 4,343,945 7,438,188
--------------- ------------ ------------
Cash flows from investing activities:
Proceeds from disposal of property and equipment 126,850 2,133,776 410,868
Purchase of property and equipment (6,971,472) (16,945,522) (23,456,104)
Acquisition of businesses (1,767,460) (17,692,662) (12,406,907)
Increase in deferred lease acquisition costs (514,258) (914,999) (1,805,874)
(Increase) decrease in deposits (238,364) 160,500 (79,661)
---------------- ------------ -------------
Net cash used in investing activities $ (9,364,704) $(33,258,907) $(37,337,678)
---------------- ------------- -------------
* Restated to conform to current year's classifications.
F-6
NuCo2 INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
YEARS ENDED JUNE 30,
1996 1997 1998
------- ---------- -------
Cash flows from financing activities:
Proceeds from issuance of Common Stock $ 60,794,609 $ (59,100) $ -
Net proceeds from issuance of long-term debt
and subordinated debt 10,551,728 - 21,610,820
Repayment of long-term debt (19,943,243) (1,309,704) (831,409)
Increase in loan payable to shareholder 200,000 - -
Repayment of loan payable to shareholder (200,000) - -
Increase in deferred charges (694,457) (53,307) (2,216,916)
Decrease in deferred interest payable (306,535) - -
Exercise of warrants and options 403,444 152,353 999
Preferred stock dividends (361,275) - -
Redemption of Series A preferred stock (485,000) - -
Redemption of Series B preferred stock (500) - -
Redemption of warrant - (1,143,450) -
-------------- ------------- -------------
Net cash provided by (used in) financing activities 49,958,771 (2,413,208) 18,563,494
-------------- ------------- -------------
Increase (decrease) in cash and cash equivalents 42,438,898 (31,328,170) (11,335,996)
Cash and cash equivalents, beginning of year 561,778 43,000,676 11,672,506
-------------- ------------ -------------
Cash and cash equivalents, end of year $ 43,000,676 $ 11,672,506 $ 336,510
============== ============ =============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 1,661,645 $ 903,729 $ 2,966,659
============= =========== =============
Income taxes $ - $ - $ -
============= =========== =============
Supplemental schedule of noncash investing and financing activities:
Acquisition of businesses:
Fair value of assets acquired $ 4,269,535 $ 1,098,718 $ 26,426,234
Cost in excess of net assets of businesses acquired 746,910 244,000 16,256,879
Liabilities assumed or incurred (3,248,985) (56,250) (30,001,215)
Issuance of Common Stock (539,996) (274,991)
------------- ----------- -------------
Cash paid 1,767,460 $ 746,472 $ 12,406,907
============= =========== =============
In connection with the IPO in December 1995, the Company converted
$2.0 million of Series C and Series D Preferred Stock into Common Stock. In
addition, the Company converted $406,707 of subordinated debt and $499,500 of
Series B Preferred Stock into shares of Common Stock and additional paid-in
capital, respectively.
In 1996 and 1997 the Company purchased equipment and incurred debt
in the amount of $89,570 and $11,604, respectively.
In 1998, the Company wrote-off a restrictive covenant and the
related liability in the amount of $19,231 due to the employee resigning.
In 1998, the Company repaid long-term debt in the amount of
$20,782,995 with the proceeds of the issuance of subordinated debt. In
connection therewith, detachable warrants were issued and original issue
discount in the amount of $300,000 was recorded.
See accompanying notes to consolidated financial statements.
F-7
NuCo2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Description of Business and Summary of Significant Accounting
Policies
(a) Basis of Presentation
The consolidated financial statements include the accounts of NuCo2
Inc. and its wholly-owned subsidiary, NuCo2 Acquisition Corp. which was formed
during the year ended June 30, 1998 to acquire the stock of Koch Compressed
Gases, Inc. (see Note 3). All material intercompany accounts and transactions
have been eliminated.
(b) Description of Business
The Company is a supplier of bulk CO2 dispensing systems to customers
in the food, beverage, lodging and recreational industries in the United States.
(c) Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased
with an original maturity of three months or less to be cash equivalents.
(d) Inventories
Inventories, consisting primarily of carbon dioxide gas, are stated
at the lower of cost or market. Cost is determined by the first-in, first-out
method.
(e) Property and Equipment
Property and equipment are stated at cost. The Company does not
depreciate bulk systems held for installation until the systems are in service
and leased to customers. Upon installation, the systems, component parts and
direct costs associated with the installation are transferred to the leased
equipment account. These costs are associated with successful placements of such
systems with customers under noncancelable contracts and which would not be
incurred by the Company but for a successful placement. Upon early service
termination, the unamortized portion of direct costs associated with the
installation are charged to cost of products sold. Depreciation and amortization
is computed using the straight-line method over the estimated useful lives of
the respective assets or the lease terms for leasehold improvements, whichever
is shorter.
The depreciable lives of property and equipment are as follows:
ESTIMATED LIFE
--------------
Leased equipment 5-20 years
Equipment and cylinders 3-20 years
Vehicles 3-5 years
Computer equipment 3-7 years
Office furniture and fixtures 5-7 years
Leasehold improvements lease term
F-8
NuCo2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Description of Business and Summary of Significant Accounting
Policies - (Continued)
(f) Other Assets
Goodwill, Net
Goodwill, net, represents costs in excess of net assets of
businesses acquired and is being amortized on a straight-line basis over twenty
years. Accumulated amortization of goodwill was $390,603 and $1,370,779 at June
30, 1997 and 1998, respectively. The Company periodically assesses the
recoverability of the cost of its goodwill, as well as of its other intangible
assets, based on a review of projected undiscounted cash flows of the related
operating assets. These cash flows are prepared and reviewed by management in
connection with the Company's annual long range planning process.
Deferred Charges, Net
Deferred charges, net, consist of the unamortized portion of
financing costs which are being amortized over the term of the related
indebtedness, ranging from thirty-six to eighty-four months. Accumulated
amortization of deferred charges was $368,238 and $417,646 at June 30, 1997 and
1998, respectively. Included in the consolidated statements of operations for
the years ended June 30, 1996 and 1998 are extraordinary write-offs of deferred
financing fees in connection with the reduction of certain indebtedness.
Customer Lists, Net
Customer lists, net, consist of the unamortized portion of
customer lists acquired in connection with asset acquisitions which are being
amortized over five years, the average life of customer leases. Accumulated
amortization of customer lists was $565,090 and $1,380,411 at June 30, 1997 and
1998, respectively. The Company's policy is to value customer lists based on the
estimated value of future cash flows over the life of the customer lease.
Restrictive Covenants, Net
Restrictive covenants, net, consist of covenants not to compete
arising in connection with asset acquisitions which are being amortized over
their contractual lives ranging from thirty to one hundred and twenty months.
Accumulated amortization of restrictive covenants was $173,167 and $353,993 at
June 30, 1997 and 1998, respectively. The Company's policy is to value
restrictive covenants based on the negotiated contractual value of the
restrictive covenant or a third party appraisal.
Deferred Lease Acquisition Costs, Net
Deferred lease acquisition costs, net, consist of commissions
associated with the acquisition of new leases and are being amortized over the
life of the related leases, generally five years. Accumulated amortization of
deferred lease acquisition costs was $709,830 and $1,197,756 at June 30, 1997
and 1998, respectively. Upon early service termination, the unamortized portion
of deferred lease acquisition costs are charged to selling, general and
administrative expenses.
(g) Revenue Recognition
The Company earns its revenues from the leasing of CO2 systems
and related gas sales. The Company, as lessor, recognizes revenue from leasing
of CO2 systems on a straight-line basis over the life of the related leases. The
majority of CO2 system leases generally include payments for leasing of
equipment and a continuous supply of CO2 until usage reaches a pre-determined
maximum annual level, beyond which the customer pays for CO2 on a per pound
basis. Other CO2 and gas sales are recorded upon delivery to the customer.
F-9
NuCo2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Description of Business and Summary of Significant Accounting
Policies - (Continued)
(h) Income Taxes
Income taxes are accounted for under Financial Accounting
Standards Board Statement No. 109, Accounting for Income Taxes. Statement No.
109 requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. Under
Statement No. 109, the effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the enactment
date.
(i) Net Income or Loss Per Common Share
Net income or loss per common share is presented in accordance
with SFAS No. 128, "Earnings per Share." Basic earnings per common share are
computed using the weighted average number of common shares outstanding during
the period. Diluted earnings per common share incorporate the incremental shares
issuable upon the assumed exercise of stock options and warrants to the extent
they are not anti-dilutive.
In connection with the Initial Public Offering (IPO), 155,164 and
300,266 shares of Common Stock were issued upon conversion of the Company's
Series C convertible preferred stock and Series D convertible preferred stock,
respectively. An additional 805,209 shares of Common Stock were issued upon the
conversion of the convertible portion of the Senior Subordinated Notes and
118,167 shares of Common Stock upon exercise of warrants and options. The above
shares have been treated as outstanding since July 1, 1995. Stock options and
warrants to purchase an additional 152,851 shares of Common Stock granted during
1995 have also been treated as outstanding since July 1, 1995, using the
treasury stock method.
(j) Use Of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(k) Employee Benefit Plan
On June 1, 1996, the Company adopted a deferred compensation plan
under Section 401(K) of the Internal Revenue Code which covers all eligible
employees. Under the provisions of the plan, eligible employees may defer a
percentage of their compensation subject to the Internal Revenue Service limits.
Contributions to the plan are made only by employees.
NOTE 2 - Public Offerings
(a) Initial Public Offering (IPO)
In connection with the Company's Initial Public Offering,
2,022,576 shares of Common Stock were sold in December 1995. In addition,
representatives of the Underwriters acquired warrants to purchase up to 110,000
shares of Common Stock. Such warrants are exercisable for a period of five
years, at an exercise price of $10.80. In July 1996, the Company redeemed and
canceled a warrant to purchase 77,000 shares of its Common Stock for $1,143,450.
This amount represented the approximate market value of such warrant on the date
of redemption.
F-10
NuCo2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Public Offerings - (Continued)
The gross proceeds the Company received from the sale of the
2,022,576 shares of Common Stock were $18,203,184. After deducting the
underwriters' discounts and commissions and other offering expenses, the net
proceeds were $16,151,364.
Prior to the IPO, the Company had outstanding approximately $2.9
million in principal amount of Senior Subordinated Notes, a portion of which was
convertible at the option of the holders thereof into Common Stock. The holders
of the Senior Subordinated Notes converted, effective upon the closing of the
IPO, approximately $407,000 of the principal amount of the Senior Subordinated
Notes into an aggregate of 805,209 shares of Common Stock. The Company repaid
the remaining principal of the Senior Subordinated Notes and accrued interest
thereon with a portion of the net proceeds of the IPO. The Company also had
outstanding 485 shares of Series A Preferred Stock, 500 shares of Series B
Preferred Stock, 500 shares of Series C Preferred Stock and 1,500 shares of
Series D Preferred Stock. Effective upon closing of the IPO, (i) the Company
redeemed with a portion of the net proceeds of the IPO all of the outstanding
Series A Preferred Stock and Series B Preferred Stock for an aggregate of
$485,500 plus approximately $243,000 of dividends and (ii) all of the
outstanding Series C Preferred Stock and Series D Preferred Stock automatically
converted into an aggregate of 455,430 shares of Common Stock. The Company used
a portion of the net proceeds of the IPO to pay dividends of approximately
118,000 on the Series C Preferred Stock and Series D Preferred Stock. In
addition, the holders of warrants to purchase an aggregate of 118,167 shares of
Common Stock exercised such warrants effective upon the closing of the IPO.
Prior to the IPO, the board of directors approved, among other
things, an increase in the number of shares authorized of Common Stock of the
Company to 20,000,000 shares, reduced the par value to $ .001 per share, and
increased the number of authorized shares of preferred stock to 5,000,000
shares.
The Company's board of directors also declared an approximate
3,866-for-1 stock split of the Company's Common Stock. This stock split resulted
in the issuance of an additional 1,932,453 shares of Common Stock of the
Company. All share, per share and conversion amounts relating to Common Stock,
stock options and warrants, included in the accompanying consolidated financial
statements have been restated to reflect this stock split.
In December 1996, the shareholders voted and approved another
increase in the number of shares authorized of the Company's Common Stock to
30,000,000 shares.
(b) Secondary Public Offering
In connection with the Company's Secondary Public Offering,
1,425,165 shares of Common Stock were sold in June 1996. In addition, an
over-allotment option for an additional 336,000 shares of Common Stock was
exercised.
The net proceeds the Company received from the sale of the
1,761,165 shares of Common Stock, after deducting the underwriters' discounts
and commissions and other offering expenses was $44,584,145. The Company repaid
$1,963,486 of indebtedness outstanding under its credit facility with the
proceeds. The Company utilized the remaining proceeds to fund internal growth,
for the acquisition of additional bulk CO2 systems leasing businesses and for
general corporate purposes.
NOTE 3 - Acquisitions
Effective May 15 1996, the Company acquired substantially all of
the assets associated with the bulk CO2 operating segment of the BevServ
Division of The Coca-Cola Bottling Company of New York, Inc. (BevServ) for
$2,914,374. The Company financed the acquisition through available borrowings
under its NationsBank credit facility (see Note 6).
In August 1996, the Company acquired the bulk CO2 operations of
two affiliated companies operating in Ohio, Kentucky and Indiana for an
aggregate purchase of approximately $1,350,000. The Company paid cash for these
transactions.
F-11
NuCo2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Acquisitions - (Continued)
In March 1997, the Company acquired certain assets of three
unrelated companies operating in Texas for an aggregate purchase price of
approximately $2,875,000. The Company paid cash for these transactions.
In April 1997, the Company acquired certain assets of Texas
Oxygen, Inc./Texas CO2, Inc. for an aggregate purchase price of approximately
$3,925,000. The Company paid cash for these transactions.
In May 1997, the Company acquired certain assets from two
companies, City Carbonic Company, Inc. and the BOC Group, Inc. City Carbonic
Company, Inc. operating in Oklahoma, Kansas, Texas and Arkansas, sold assets for
an aggregate purchase price of approximately $3,290,000. The BOC Group, Inc.
beverage bulk CO2 operations were located in Massachusetts, Pennsylvania and
Tennessee and were acquired for an aggregate purchase price of approximately
$5,233,000. The Company paid cash for these transactions.
In June 1997, the Company acquired certain assets of a business
operating in Georgia for a purchase price of $1,350,000. The Company paid
approximately $750,000 cash, incurred liabilities of $60,000 and issued 33,962
shares of Common Stock at market, for a value of $540,000.
Effective July 15, 1997, the Company purchased substantially all
of the assets of a bulk CO2 company operating in Colorado for a purchase price
of $675,000. The purchase price was funded through a borrowing under the
Company's NationsBank credit facility (see Note 6).
Effective July 31, 1997, the Company purchased certain assets
from CC Acquisition Corp. (Carbo Co.) for an aggregate purchase price of
$11,000,000. Carbo Co. had operations in Nebraska, Kansas, Oklahoma, Iowa,
Missouri, Arkansas and South Dakota. The Company funded $5,000,000 through a
borrowing under its $30 million NationsBank credit facility (see Note 6) and
paid cash for the balance.
In September 1997, the Company purchased certain assets of a bulk
CO2 company with operations in Arizona for an aggregate purchase price of
$1,084,250. The Company funded $1,075,000 through a borrowing under its
NationsBank credit facility (see Note 6) and paid cash for the balance.
Effective October 1, 1997, a newly formed wholly-owned subsidiary
of the Company purchased all of the issued and outstanding shares of Common
Stock of Koch Compressed Gases, Inc. ("Koch") for an aggregate purchase price of
approximately $5,000,000. Koch operated a bulk CO2 business as well as provided
carbon dioxide and other gases in high-pressure cylinders throughout the
tri-state New York metropolitan area. The purchase price was funded through a
borrowing under the Company's NationsBank credit facility (see Note 6).
In November 1997, the Company purchased substantially all of the
assets of a bulk CO2 company operating in Texas for a purchase price of
$949,240. The Company paid $674,249 cash and issued 18,835 shares of Common
Stock at market, for a value of $274,991.
Effective December 2, 1997, the Company purchased certain assets
from four related carbonic gas distributors, Miller Carbonic Systems Co. Inc.,
Miller Carbonic, Inc., Carbonic National Systems, Inc., and Carbonic Gas
Service, Inc., operating primarily in Illinois, Indiana, Wisconsin and Michigan
for an aggregate purchase price of $11,150,000. The Company paid approximately
$4,650,000 cash and funded $6,500,000 through a borrowing under the Company's
SunTrust Facility (see Note 6).
Effective December 2, 1997, the Company purchased certain assets
of a bulk CO2 company with operations in Kansas for a purchase price of
approximately $990,000. The purchase price was funded through a borrowing under
the Company's SunTrust Facility (see Note 6).
F-12
NuCo2 Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Acquisitions - (Continued)
Effective January 23, 1998, the Company purchased substantially
all of the assets of a bulk CO2 company operating in California for a purchase
price of $4,500,000. The purchase price was funded through a borrowing under the
Company's SunTrust Facility (see Note 6).
Effective March 2, 1998, the Company purchased certain assets
from Florida Carbonic Distributor, Inc., a carbonic gas distributor operating in
Florida for a purchase price of $6,300,000. The purchase price was funded
through a borrowing under the Company's SunTrust Facility (see Note 6).
In March 1998, the Company purchased certain assets from three
unrelated carbonic gas distributors with operations in Texas, Maine and Alabama
for an aggregate purchase price of $406,000. The Company paid cash for these
transactions.
These acquisitions were accounted for by the purchase method of
accounting and, accordingly, the purchase prices and direct costs of the
acquisitions have been allocated to the respective assets and liabilities of the
acquired companies based upon their estimated fair market values at the date of
acquisition. This resulted in goodwill of approximately $775,000, $4,732,000 and
$16,257,000 in the three years ended June 30, 1998, respectively, which is being
amortized on a straight-line basis over twenty years. The results of operations
of the acquired companies are included in the Company's consolidated financial
statements since the effective date of the acquisitions.
The following summarized, unaudited, pro forma results of
operations assume that the acquisitions described above occurred as of the
beginning of the fiscal year preceding the date of acquisition:
YEAR ENDED JUNE 30,
-------------------
1996 1997 1998
---- ---- ----
Net sales $ 18,923,657 $33,104,161 $39,078,542
Income (loss) before extraordinary item (681,264) (1,751,557) (6,133,862)
Net (loss) (1,540,786) (1,751,557) (6,320,807)
Net (loss) per common share (0.34) (0.24) (0.88)
NOTE 4 - Property and Equipment, Net
Property and equipment, net consists of the following:
JUNE 30,
--------
1997 1998
---- ----
Leased equipment $42,207,142 $ 77,378,765
Equipment and cylinders 6,114,340 12,126,813
Systems held for installation 2,028,937 3,925,539
Vehicles 209,190 622,092
Computer equipment 798,421 1,516,153
Office furniture and fixtures 766,901 997,142
Leasehold improvements 1,005,173 1,039,442
Construction in progress - 221,999
---------- ------------
53,130,104 97,827,945
Less accumulated depreciation and amortization 6,327,054 12,392,012
---------- ------------
$46,803,050 $ 85,435,933
========== ============
Capitalized component parts and direct costs associated with
installation of equipment leased to others included in leased equipment was
$6,335,593 and $12,429,913 at June 30, 1997 and 1998, respectively. Accumulated
depreciation and amortization of these costs were $1,934,704 and $3,525,574 at
June 30, 1997 and 1998, respectively.
Depreciation and amortization of property and equipment was
$1,609,063, $3,130,022 and $6,045,652 for the years ended June 30, 1996, 1997
and 1998, respectively.
F-13
NuCo2 Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - Leases
The Company leases equipment to its customers generally pursuant
to five-year noncancelable operating leases which expire on varying dates
through June 2004. At June 30, 1998, future minimum rentals due from customers
which includes, where applicable, a continuous supply of CO2 (see Note 1(g)),
are as follows:
YEAR ENDING JUNE 30,
1999 $ 18,809,633
2000 17,439,211
2001 14,839,213
2002 10,853,434
2003 4,324,464
Thereafter 1,194
-----------
$ 66,267,149
===========
NOTE 6 - Long-Term Debt
Long-term debt consists of the following:
JUNE 30,
--------
1997 1998
---- ----
Note payable issued in connection with a 1995 asset acquisition of $479,000, principal
and interest (at 7%) payments of $9,485 payable monthly, maturing January 2000
and collateralized by the purchased assets with a net book value of $440,638 at June
30, 1998. $ 268,263 $ 170,114
Note payable to bank of $6,000,000, interest only for 12 months and principal payments
of $100,000 plus interest at a fixed rate of 8.51% payable monthly for twenty-three
months commencing January 1997 (repaid October 1997). 5,400,000 -
Note payable to bank of $10,000,000, interest only for 12 months at two hundred
seventy-five basis points above the 30-day London InterBank Offering Rate
("LIBOR"), with the principal amount outstanding at the end of 12 months
(December 1996) and 24 months (December 1997) converted to term loans
calculated on a 60 month amortization schedule. The first converted, acquisition
facility, term loan of $3,248,010 is due in monthly installments of approximately
$54,144 (repaid October 1997). 2,977,343 -
Note payable to bank of $13,000,000, interest only for 12 months at two hundred
seventy-five basis points above LIBOR with the principal amount outstanding at the
end of 12 months (December 1996) and 24 months (December 1997) converted to
term loans calculated on a 60 month amortization schedule. The first converted,
tank facility, term loan of $908,455 is due in monthly installments of
approximately $15,141 (repaid October 1997). 832,750 -
Note payable to bank of $29,000,000 under a $50 million facility, interest only through
October 2000. Drawings at June 30, 1998 are at 6 month LIBOR rates plus 2.25%.
(7.875% to 8.00%) (a) - 29,000,000
Note payable assumed in connection with the acquisition of the stock of Koch of
$388,082, principal and interest (9%) payments of $4,413 through April 2003 and
$5,405 from May 2003 through April 2008. - 375,741
Various notes payable 67,985 54,010
--------- ----------
9,546,341 29,599,865
Less current maturities of long-term debt 2,180,601 139,251
--------- -----------
Long-term debt, excluding current maturities $7,365,740 $29,460,614
========== ============
F-14
NuCo2 Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Long-Term Debt - (Continued)
(a) The $50.0 million syndicated bank facility ("SunTrust
Facility") replaced the Company's prior facility with NationsBank of Florida,
N.A. ("NationsBank"). Pursuant to the SunTrust Facility, upon the achievement of
$15.0 million annualized one quarter EBITDA pro-formaed for acquisitions, the
Company shall automatically request that the SunTrust Facility be increased by
an additional $50.0 million to a total of $100.0 million. As of June 30, 1998,
$21.0 million is currently available under the initial facility. Additionally,
the SunTrust Facility contains interest rates and an unused facility fee based
on a pricing grid calculated quarterly on senior funded debt to annualized
EBITDA. The applicable LIBOR margin pursuant to the pricing grid ranges from
1.25% to 2.75%, the applicable unused facility fee pursuant to the pricing grid
ranges from 0.1875% to 0.50% and the applicable base rate margin pursuant to the
pricing grid ranges from 0.00% to 0.50%.
The Company is entitled to select the Base Rate or LIBOR, plus
applicable margin, for principal drawings under the SunTrust Facility. Base Rate
is defined as the higher of the prime lending rate of SunTrust or the Federal
Funds rate plus one-half of one percent (1/2%) per annum. Interest only is
payable periodically until the expiration of the SunTrust Facility at which time
all outstanding principal and interest is due. The SunTrust Facility expires on
October 31, 2000; however, it contains a two year renewal option subject to
approval. Additionally, it is collateralized by substantially all of the assets
of the Company. The Company is precluded from declaring or paying any dividends
and is required to meet certain affirmative and negative covenants including,
but not limited to financial covenants.
On June 9, 1998, the Company entered into an interest rate swap
transaction (the "Swap") with SunTrust Bank, Atlanta, in the amount of $10.0
million (the "Notional Amount"). The effective date of the Swap is September 2,
1998 and terminates on September 5, 2000. Pursuant to the Swap, the Company pays
a fixed interest rate of 6% per annum and receives a LIBOR-based floating rate.
The aggregate maturities of long-term debt for each of the five
years subsequent to June 30, 1998 are as follows:
YEAR ENDING JUNE 30,
1999 $ 139, 251
2000 96,977
2001 29,033,495
2002 36,638
2003 40,073
Thereafter 253,431
-----------
$ 29,599,865
Extraordinary item - loss on extinguishment of debt
For the years ended June 30, 1996 and 1998, the Company incurred
an extraordinary charge of $859,522 and $186,945, respectively, for the
write-off of deferred financing costs and prepayment penalties in connection
with the early repayment of debt.
NOTE 7 - SUBORDINATED DEBT
Represents unsecured Senior Subordinated Promissory Notes
("Notes") with interest only at 12% per annum payable semi-annually on April 30
and October 31, due October 31, 2004. The Notes were sold with detachable seven
year warrants to purchase an aggregate of 655,738 shares of the Company's Common
Stock at an exercise price of $16.40 per share (see Note 16). The face amount of
the Notes is $30,000,000. The effective rate of the notes is 12.1% per annum
after giving effect to the amortization of the original issue discount. The
Company is required to meet certain affirmative and negative covenants including
financial covenants. Additionally, NationsBanc Montgomery Securities, Inc., the
placement agent, received a warrant to purchase an aggregate of 30,000 shares of
the Company's Common Stock at an exercise price of $14.64 per share which
expires on October 31, 2004.
F-15
NuCo2, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - Shareholders' Equity
See Note 2 for discussion of conversion and repayment of
preferred stock and dividends declared and paid.
(a) Stock Option Plans
The board of directors adopted the 1995 Option Plan (the "1995
Plan"). Under the 1995 Plan, the Company has reserved 850,000 shares of Common
Stock for employees of the Company. Under the terms of the 1995 Plan, options
granted may be either incentive stock options or non-qualified stock options, or
both. The exercise price of incentive options shall be at least equal to 100% of
the fair market value of the Company's Common Stock at the date of the grant,
and the exercise price of non-qualified stock options issued to employees may
not be less than 75% of the fair market value of the Company's Common Stock at
the date of the grant. The maximum term for all options is 10 years. Options
granted to date vest in three or four installments commencing one year from the
date of grant. As of June 30, 1997 and 1998, options for 41,437 shares and
105,900 shares are exercisable, respectively. As of June 30, 1996, no options
were exercisable. The weighted-average fair value of options granted during the
years June 30, 1996, 1997 and 1998 were $5.67, $2.93 and $2.81, respectively. As
of June 30, 1998, the weighted-average remaining life of the options was 7.04
years.
The following table summarizes the transactions pursuant to the
1995 Plan.
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE EXERCISE PRICE
------ -------------- ----------------
Outstanding at June 30, 1995 -0- -0- -0-
Granted 130,991 $9-$17.50 $13.87
Expired or canceled 340 $9 $9
Exercised -0- -0- -0-
------- --------- -------
Outstanding at June 30, 1996 130,651 $9-$17.50 $13.88
Granted 222,500 $11.25 $11.25
Expired or canceled 6,225 $9-11.25 $9.31
Exercised 322 $9 $9
------- --------- ------
Outstanding at June 30, 1997 346,604 $9-$17.50 $12.28
Granted 343,000 $10.25-$11.28 $10.43
Expired or canceled 77,067 $9-$17.50 $17.29
Exercised 111 $9 $9
------- --------- ------
Outstanding at June 30, 1998 612,426 $9-$11.28 $10.61
======= ========= ======
The board of directors of the Company adopted the Directors'
Stock Option Plan (the "Directors' Plan"). Under the Directors' Plan, each
non-employee director will receive options for 6,000 shares of Common Stock on
the date of his or her first election to the board of directors. In addition, on
the third anniversary of each director's first election to the Board, and on
each three year anniversary thereafter, each non-employee director will receive
an additional option to purchase 6,000 shares of Common Stock. The exercise
price per share for all options granted under the Directors' Plan will be equal
to the fair market value of the Common Stock as of the date of grant. All
options vest in three equal annual installments beginning on the first
anniversary of the date of grant. The maximum term for all options is ten years.
As of June 30, 1998, options to purchase a total of 16,000 shares of Common
Stock at an exercise price of $9 per share and a total of 6,000 shares of Common
Stock at an exercise price of $12.50 per share had been issued and were
outstanding. As of June 30, 1997 and 1998, options for 8,000 shares and 14,000
shares were currently exercisable. As of June 30, 1996, no options were
exercisable. No options have been exercised under the Directors' Plan. The
weighted-average fair value of options granted during the years ended June 30,
1996 and 1998 were $3.07 and $4.11, respectively. No options were granted during
the year ended June 30, 1997. As of June 30, 1998, the weighted-average
remaining life of the options was 8.05 years.
(b) Warrants
In August 1994, the Company granted a five year warrant to
purchase 73,042 shares of Common Stock at $3.22 per share to a shareholder of
the Company in connection with the guarantee of certain indebtedness. This
warrant was exercised in 1996. Proceeds to the Company for the exercise of this
warrant aggregated $235,195.
In May 1997, the Company granted a warrant to purchase 1,000,000
shares of Common Stock to BOC pursuant to the supply agreement (see Note 14c).
The warrant is exercisable from May 1, 1999 to May 1, 2002 at an exercise price
of $17 per share and from May 1, 2002 until April 30, 2007 at an exercise price
of $20 per share. The option may be exercised earlier for a material breach in
the supply contract or a change in control of the Company. As of June 30, 1998,
the warrant was not exercisable.
F-16
NuCo2 Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Shareholders' Equity - (Continued)
(c) Non-Qualified Stock Options
During 1995, the Company granted options to purchase 67,934
shares of Common Stock at $4.40 per share to certain officers and employees.
These options vest one year after date of grant and are exercisable for 10
years. In June and July 1996, these options were exercised. In 1992, the Company
also granted options to purchase 45,125 shares of Common Stock to a company in
connection with the issuance of the senior subordinated convertible notes. These
options were also exercised in 1996. Proceeds to the Company for the exercise of
non qualified stock options in 1996 and 1997 aggregated $164,455 and $149,455,
respectively.
Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, defines a fair value based method of
accounting for stock options. It is effective for fiscal years beginning after
December 15, 1995. The Statement allows an entity to continue to measure cost
using the accounting method prescribed by APB Opinion No. 25, Accounting for
Stock Issued to Employees, and to make pro forma disclosures of net income and
earnings per share as if the fair value based method of accounting had been
applied. The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in fiscal 1996, 1997 and 1998; expected volatility
of 40%, risk-free interest rate of 5.4% to 6.5%, expected dividend yield of 0%
and expected lives of one to five years. The Company adopted SFAS 123 in fiscal
year ended June 30, 1997 and presents the following pro forma disclosures rather
than change its present method of accounting for employee stock options:
YEAR ENDED JUNE 30,
-------------------
1996 1997 1998
---- ---- ----
Net income (loss) available to common shareholders $ (993,617) $ 27,439 $ (5,974,752)
Net income (loss) per common share $ (0.22) $ 0.01 $ (0.83)
========== ========= ==============
Weighted average number of common and
common equivalent shares outstanding 4,499,989 7,302,662 7,210,350
========== ========= ==============
The pro forma adjustment for stock based compensation costs under
SFAS 123 for the years ending 1996, 1997 and 1998 is approximately $70,000,
$500,000 and $340,000, respectively. No stock based compensation was recognized
in the financial statements pursuant to APB Opinion No. 25.
NOTE 9 - Earnings per Share
In February 1997, the FASB issued Statement 128, "Earnings Per
Share". Statement 128 supersedes APB Opinion No. 15, "Earnings Per Share" and
specifies the computation, presentation and disclosure requirements for earnings
per share ("EPS") for entities with publicly held Common Stock or potential
Common Stock. It replaces the presentation of primary EPS with the presentation
of basic EPS and replaces fully diluted EPS with diluted EPS. It also requires
dual presentation of basic and diluted EPS on the face of the statement of
operations for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. Statement 128 is
effective for financial statements for periods ending after December 15, 1997.
Earnings per share of Common Stock for the years ended June 30,
1996 and 1997 have been restated to conform to the guidelines of Statement 128.
F-17
NuCo2 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Earnings Per Share - (Continued)
Incremental shares for stock options and warrants pursuant to
the treasury stock method for the year ended June 30, 1996 were 179,197. These
shares were not included in diluted EPS because after giving effect to preferred
stock dividends their inclusion would have been antidilutive. Additionally,
options to purchase 75,000 shares at $17.50 were outstanding for a portion of
1996 but were not included in the computation of diluted EPS because the
exercise price was greater than the average market price of common shares.
Following is a reconciliation of the numerator and denominator
of the basic and diluted per share computations for income from continuing
operations for the year ended June 30, 1997.
Weighted Per-Share
Net Income Average Shares Amount
Basic EPS
Income available to common shareholders $ 527,439 7,164,924 $ 0.07
Effect of dilutive options and warrants - 153,002 -
-------- ---------- --------
Diluted EPS $ 527,439 7,317,926 $ 0.07
======== ========== ========
Incremental shares for stock options and warrants calculated
pursuant to the treasury stock method for the year ended June 30, 1998 were
136,972. These shares were not included in diluted EPS because they would have
been antidilutive. Additionally, options and warrants to purchase 75,000 shares,
1,000,000 shares, 655,738 shares, 30,000 shares and 6,000 shares for $17.50,
$17.00, $16.40, $14.64 and $12.50, respectively, were outstanding during all or
a portion of the year ended June 30, 1998 but were not included in the
computation of diluted EPS because the options and warrants exercise price was
greater than the average market price of the common shares.
NOTE 10 - Income Taxes
The tax effects of temporary differences that give rise to
significant portions of deferred tax assets and deferred tax liabilities are as
follows:
JUNE 30,
--------
1997 1998
---- ----
Deferred tax assets:
Allowance for doubtful accounts $ 42,500 $ 111,000
Amortization expense 137,800 269,900
Other 3,700 4,200
Net operating loss carryforwards 4,696,200 9,862,700
----------- ----------
Total gross deferred tax assets 4,880,200 10,247,800
Less valuation allowance (636,400) (2,766,200)
----------- ----------
Net deferred tax assets 4,243,800 7,481,600
----------- ----------
Deferred tax liabilities:
Depreciation expense (4,243,800) (7,481,600)
----------- ----------
Total gross deferred tax liabilities (4,243,800) (7,481,600)
----------- ----------
Net deferred taxes $ - $ -
=========== ==========
At June 30, 1998, the Company had net operating loss carryforwards
for Federal income tax purposes of approximately $26,230,000, which are
available to offset future Federal taxable income, if any, in varying amounts
through June 2013. The net change in the total valuation allowance for the years
ended June 30, 1997 and 1998 was a decrease of $206,100 and an increase of
$2,129,800, respectively.
F-18
NuCo2 Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - Related Party Transactions
The Company entered into leases with the chairman of the board
and chief executive officer for certain warehouse/depots and office facilities
with annual rentals of approximately:
YEAR ENDING JUNE 30,
1999 $ 274,000
2000 274,000
2001 233,000
2002 109,000
2003 60,000
------------
$ 950,000
Rental expense was $87,081, $166,549 and $246,551 in 1996, 1997
and 1998, respectively, under these leases.
NOTE 12 - Lease Commitments
The Company leases office equipment, trucks and warehouse/depot
and office facilities under operating leases (including related party leases,
see Note 11) that expire at various dates through December 2004. Primarily all
of the leases contain renewal options and escalations for real estate taxes,
common charges, etc. Future minimum lease payments under noncancelable operating
leases (that have initial noncancelable lease terms in excess of one year) are
as follows:
YEAR ENDING JUNE 30,
1999 $ 3,543,000
2000 3,101,000
2001 2,767,000
2002 2,392,000
2003 1,503,000
Thereafter 694,000
----------------
$ 14,000,000
Total rental expense under noncancelable operating leases was
approximately $763,900, $1,413,000 and $3,284,000 in 1996, 1997 and 1998,
respectively.
NOTE 13 - Concentration of Credit and Business Risks
The Company's business activity is with customers located within
the United States. As of June 30, 1996, 1997 and 1998, the Company's sales to
customers in the food and beverage industry were approximately 97%, 98% and 99%,
respectively.
There were no customers that accounted for greater than 5% of
total sales for the three years ended June 30, 1998, nor were there any
customers that accounted for greater than 5% of total accounts receivable at
June 30, 1997 or 1998.
The Company purchases new bulk CO2 systems from the two major
manufacturers of such systems. The inability of both or either of these
manufacturers to deliver new systems to the Company could cause a delay in the
Company's ability to fulfill the demand for its services and a possible loss of
sales, which could affect operating results adversely.
NOTE 14 - Commitments and Contingencies
(a) Employment Agreement
The Company has an employment agreement with an officer of the
Company that currently provides minimum annual compensation of $150,000 per year
through October 1999. The contract provides for additional compensation in the
form of bonuses to be determined by the board of directors and incentive and
non-qualified stock options pursuant to the Company's 1995 Plan to purchase up
to 100,000 shares of the Company's Common Stock. The agreement also calls for a
covenant against competition which extends one year beyond termination for any
reason.
F-19
NuCo2 Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 - Commitments and Contingencies - (Continued)
(b) Consulting Agreement
Effective April 13, 1998, the Company entered into a three year
consulting agreement with the former president of the Company. Pursuant to the
terms of the agreement, the former president shall receive $50,000 per annum and
shall not compete with the Company for a period of two years after the
expiration of the contract. Simultaneously, options to purchase 75,000 shares of
Common Stock were canceled.
(c) Supply Agreement
In May 1997, the Company entered into an exclusive ten-year
carbon dioxide supply agreement with The BOC Group, Inc. ("BOC"). The agreement
ensures readily available high quality CO2 as well as relatively stable liquid
carbon dioxide prices. Pursuant to the agreement, the Company must purchase all
of its liquid CO2 requirements from BOC. The agreement contains annual
adjustments over the prior contract year for an increase or decrease in the
Producer Price Index for Chemical and Allied Products ("PPI") or the average
percentage increase in the selling price of bulk merchant carbon dioxide
purchased by BOC's large, multi-location beverage customers in the United
States. However, such increases shall not exceed 3% per year in the first five
contract years.
(d) Other
Carbonic Designs, Inc. ("CDI") had asserted claims against the
Company and three other defendants for violation of the Texas Free Enterprise
and AntiTrust Act of 1983, business disparagement, tortious interference with
contract and prospective business relations. CDI sought damages in unspecified
amounts. The Company settled this lawsuit in December 1997 for an immaterial
amount.
The Company is a defendant in legal actions which arise in the
normal course of business. In the opinion of management, the outcome of these
matters will not have a material effect on the Company's financial position or
results of operations.
NOTE 15 - Disclosures about Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments.
(a) Cash and cash equivalents
The carrying amount approximates fair value due to the short
maturity of these instruments.
(b) Long-term debt
The fair value of the Company's long-term debt has been estimated
based on the current rates offered to the Company for debt of the same remaining
maturities.
The carrying amounts and fair values of the Company's financial
instruments are as follows:
June 30,
1997 1998
------- ----
Carrying Amount Carrying Amount
and Fair Value and Fair Value
-------------- --------------
Cash and cash equivalents $ 11,672,506 $ 336,510
Long-term debt, including current maturities 9,546,341 29,599,865
Subordinated debt - 29,728,571
As of June 30, 1998, the fair value of the Company's interest rate swap (see
Note 6) was not material.
F-20
NuCo2 Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - Subsequent Events
In July and August 1998, the 12% Senior Subordinated Promissory
Note Agreement and the SunTrust Facility, respectively, were amended to adjust
certain financial covenants as of June 30, 1998 and prospectively. In exchange
for the amendment to the 12% Senior Subordinated Promissory Note Agreement, the
exercise price for 612,023 warrants was reduced from $16.40 per stock unit to
$12.40 per stock unit.
F-21
NuCo2 Inc.
Schedule II
Valuation and Qualifying Accounts
Column B Column C - Additions Column E
-------- -------------------- ----------
Balance at Charged to Charged to Column D Balance at
beginning costs and other -------- end of
of period expenses accounts Deductions period
--------- -------- -------- ---------- ------
Year ended June 30, 1996
Allowance for doubtful accounts $172,468 $122,129 $ - $ 83,968 $ 210,629
Year ended June 30, 1997
Allowance for doubtful accounts $210,629 $143,210 $ - $ 240,785 $ 113,054
Year ended June 30, 1996
Allowance for doubtful accounts $113,054 $450,871 $43,276(1) $ 211,710 $ 395,491
(1) Initial reserve of acquired company
F-22