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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1999
OR
/ / 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 20, 1999 of shares of the
Registrant's common stock, $.001 par value per share (based upon the closing
price of $7.00 per share of such stock on the Nasdaq National Market on such
date), held by non-affiliates of the Registrant was approximately $38,870,000.
Solely for the purposes of this calculation, shares held by directors and
executive officers of the Registrant have been excluded. Such exclusion should
not be deemed a determination or an admission by the Registrant that such
individuals are, in fact, affiliates of the Registrant.
At September 20, 1999, 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, 1999 pursuant to Regulation 14A.
NUCO2 INC.
Index
Page
PART I.
Item 1. Business. 1
Item 2. Properties. 9
Item 3. Legal Proceedings. 9
Item 4. Submission of Matters to a Vote of Security Holders. 9
PART II.
Item 5. Market For Registrant's Common Equity and
Related Stockholder Matters. 9
Item 6. Selected Financial Data. 9
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 11
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 18
Item 8 Financial Statements and Supplementary Data. 18
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure. 18
PART III.
Item 10. Directors and Executive Officers of the Registrant. 18
Item 11. Executive Compensation. 18
Item 12. Security Ownership of Certain
Beneficial Owners and Management. 18
Item 13. Certain Relationships and Related Transactions. 18
PART IV.
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K. 19
Signatures 22
Index to Financial Statements F-1
1. Business.
General
NuCo2 Inc. is the largest supplier in the United States of bulk CO2
systems and bulk CO2 for carbonating and dispensing fountain beverages. In most
instances, CO2 is presently supplied to fountain beverage users in the form of
gas, which is transported and stored in high pressure cylinders. Bulk CO2 is a
relatively new technology that is replacing high pressure CO2 as the beverage
carbonation system of choice. We are the first and only company to operate a
national network of service locations with over 97% of fountain beverage users
in the Continental United States within our current service area.
Our customers are many of the major national and regional restaurant
and convenience store chains, movie theater operators, theme parks, resorts and
sports venues, including:
QUICK SERVE RESTAURANTS CASUAL/DINNER HOUSES
Burger King Captain D's Applebee's Landry's
Pizza Hut Sonic Drive-In Outback Steakhouse Red Lobster/Olive Garden
Taco Bell White Castle Chili's Shoney's
KFC Roy Rogers Ryan's Family Steak House Longhorn Steakhouse
McDonald's Dunkin' Donuts Pizzeria Uno Ponderosa Steak House
Wendy's Pizza Inn Hard Rock Cafe Friendly's Restaurant
Krystal Bumpers Drive-In Official All Star Cafe Ruby Tuesday
Hardee's Checker's Spaghetti Warehouse Roadhouse Grill
Churchs Chicken
CONTRACT FEEDERS WHOLESALE CLUBS CONVENIENCE/PETROLEUM
Sodexho Marriott BJ's Wholesale 7-Eleven Exxon
Host Marriott Costco Circle K Shell ETD
Daka International Sam's Club Coastal Mart E-Z Serve
ARAmark Total Petroleum Racetrac Petroleum
Fine Host Golden Pantry Spectrum Stores
Sport Services Handy Way Sunshine Jr.
Christy's Market Star Enterprises
SPORTS VENUES Phillips 66 BP/Amoco
Pro Player Stadium
Madison Square Garden MOVIE THEATRES
Georgia Dome Regal Cinemas General Cinema
Derby Lane American Multi Cinema Carmike Cinemas
AMF Bowling Centers Sony/Loew's Cinemas United Artists Cinemas
Litchfield Cinemas
We are a Florida corporation, incorporated in 1990. Through a
combination of internal growth and over 30 acquisitions, we have expanded our
service area from one service location and 19 customers in Florida to 84 service
locations and approximately 65,000 bulk and high pressure CO2 customers in 44
states. Our customer base has increased by an average of 78% annually. Today,
the majority of our growth is driven by the conversion of high pressure CO2
users to bulk CO2 systems.
1
[MAP WITH SERVICE AREA AND DEPOT LOCATIONS]
Customer Base
Fiscal Year Ended June 30
1995 1996 1997 1998 1999
10,467 16,184 28,719 55,095 65,000
55% 77% 92% 18%
Our bulk CO2 customer base is highest in Florida, Texas, Georgia
and New York. We expanded our service area by one state during fiscal 1999, 13
states during fiscal 1998 and 12 states during fiscal 1997.
States with Largest Bulk CO2 Customer Base
Florida Texas Georgia New York
11,804 6,081 5,004 2,754
2
Substantially all of our revenues have been derived from the rental
of bulk CO2 systems installed at customers' sites, the sale of CO2 and high
pressure cylinder revenues. Revenues have grown from $812,000 in fiscal 1991 to
$47.1 million in fiscal 1999, an average increase of 68% annually. We believe
that earnings before interest, taxes, depreciation and amortization ("EBITDA")
is the principal financial measure by which we should be measured as we continue
to achieve national market share and build route density. EBITDA has grown from
$15,000 in fiscal 1991 to $11.3 million in fiscal 1999, an average increase of
72% annually from fiscal 1994 to fiscal 1999.
Net Sales
(in millions)
For Fiscal Year Ended June 30
1995 1996 1997 1998 1999
6.1 12.0 18.9 35.1 47.1
97% 58% 85% 34%
EBITDA
(in millions)
For Fiscal Year Ended June 30
1995 1996 1997 1998 1999
2.1 3.7 4.1 7.1 11.3
76% 10% 74% 59%
3
Opportunity for Growth
CO2 is universally used for the carbonation and dispensing of
fountain beverages. Unlike high pressure cylinders, which are typically changed
out when empty and transported to the supplier's depot for refilling, bulk CO2
systems are permanently installed at the customer's site and are filled by the
supplier from a specialized bulk CO2 truck on a constant "stay fill" basis.
Advantages to users of bulk CO2 systems over high pressure cylinders include
enhanced safety, improved beverage quality and product yields, reduced employee
handling and cylinder storage requirements, and elimination of downtime and
product waste during high pressure cylinder changeovers. Consequently, we
believe that bulk CO2 systems will eventually displace most high pressure
cylinders in the fountain beverage market.
There are currently approximately 120,000 bulk CO2 beverage users in
the United States. Of these, approximately 59,000 are already our customers. We
also currently service approximately 6,000 high pressure CO2 customers and
estimate that there are approximately 800,000 fountain beverage users in the
Continental United States and therefore the bulk CO2 industry presents
substantial opportunity for growth.
Total Beverage CO2 Users (800,000)
Bulk CO2 High Pressure NUCO2 Inc. Market Share
Users CO2 Users of Bulk CO2 Users
(120,000) (680,000) (59,000)
15% 85% 49%
Products and Services
We offer our customers two principal services: (1) a stationary bulk
CO2 system installed on the customer's site and (2) routine filling of the bulk
CO2 system with bulk CO2 on a three to four week cycle. The bulk CO2 system
installed at a customer's site consists of a cryogenic vessel for the storage of
bulk CO2 and related valves, regulators and gas lines. The cryogenic vessel
preserves CO2 in its liquid form and then converts the liquid product to gaseous
CO2, the necessary ingredient for beverage carbonation. We offer bulk CO2
systems ranging from 50 to 600 lbs. of CO2 capacity. This range of bulk CO2
system sizes permits us to market our services to a broad range of potential
customers.
Presently, we typically enter into a six year bulk CO2 system lease
and CO2 supply agreement with our customers. Generally, these agreements are
classified as one of two types: (1) "budget plan" service contracts or (2)
"rental plus per pound charge" contracts. Under budget plan contracts, customers
pay a fixed monthly charge for the lease of a bulk CO2 system installed on the
customer's site and refills of bulk CO2. The bulk CO2 is included in the monthly
rental charge up to a predetermined maximum annual volume. This arrangement is
appealing to the customer since we bear the initial cost of the equipment and
installation, with the customer only facing a predictable
4
and modest monthly usage fee. If the maximum annual volume of CO2 is exceeded,
the customer is charged on a per pound basis for additional bulk CO2 delivered.
Under rental plus per pound charge contracts, we also lease a bulk CO2 system to
the customer, but the customer is charged on a per pound basis for all bulk CO2
delivered. Although the bulk CO2 system is typically owned by us and leased to
the customer, some customers own their own bulk CO2 systems. Even with customers
that own their own their own bulk CO2 systems, we seek to arrange for long-term
bulk CO2 supply contracts.
We believe that the use of long-term contracts provides benefits to
both us and our customers. Customers are able to largely eliminate CO2 supply
interruptions and the need to operate CO2 equipment themselves, while the
contract adds stability to our revenue base. In each of fiscal 1997, 1998 and
1999, less than 5% of our bulk CO2 systems in service experienced service
terminatiion. Service termination is typically caused by restaurant closure.
After the expiration of the initial term of a contract, the contract generally
renews unless we or the customer notifies the other of intent to cancel. To
date, our experience has been that contracts generally "roll-over" without a
significant terminating in any one year. The largest number (approximately 40%)
of our current contracts expire in 2003.
We also supply high pressure gases in cylinder form, including CO2,
helium and nitrogen. We estimate that we currently service approximately 6,000
high pressure CO2 customers, most of whom are very low volume users. Helium and
nitrogen are supplied mostly to existing customers in connection with filling
balloons and dispensing beer, respectively.
We have an agreement with MiCell Technologies Inc. ("MiCell") to be
the exclusive supplier in the United States and Canada of bulk CO2 systems and
bulk CO2 to MiCell's customers in the dry cleaning industry that use the MICO2
garment cleaning fluid system technology developed and patented by MiCell. While
perchloroethylele ("perc") has been used effectively in the dry cleaning
industry for years, there are growing concerns that perc may be a health hazard
and tighter controls have been placed on its use. Dry cleaners and other
businesses that use perc must dispose of it as hazardous waste. The MICO2 system
is an alternative to perc and uses a combination of CO2 and specialty detergents
as a cleaning solvent. MiCell believes that the MICO2 system is environmentally
benign, non-carcinogenic, safe for garments and does a better job of cleaning
than any of the alternatives. MiCell completed field testing of the MICO2 system
and began its sale in November 1998. We currently service 5 MiCell customers and
expect that number to increase if MiCell is successful in commercializing the
MICO2 system. Consequently, we may eventually have significant revenues outside
of the fountain beverage industry. Tests of the MICO2 system have indicated that
the average dry cleaner customer will use approximately 10 times the volume of
bulk CO2 that an average fountain beverage customer uses.
We also have an agreement with Geotechnical Instruments, Inc. to be
the exclusive distributor in the United States of stationary carbon dioxide
detectors. Escaped CO2 in an enclosed area displaces oxygen and can lead to
asphyxiation. Our bulk CO2 systems are typically installed in store rooms or
basements at a customer's site. Municipalities have increasingly been requiring
the use of carbon dioxide detectors as a preventive measure.
Marketing and Customers
At June 30, 1999, we serviced approximately 65,000 bulk and high
pressure CO2 customers, none of which accounted for more than 5% of our fiscal
1999 net sales. We market our bulk CO2 products and services to large customers
such as restaurant and convenience store chains, movie theater operators, theme
parks, resorts and sports venues. Our customers include most of the major
national and regional chains throughout the United States. We approach large
chains on a corporate or regional level for approval to become the exclusive
supplier of bulk CO2 products and services on a national basis or within a
designated territory. We then direct our sales efforts to the managers or owners
of the individual or franchised operating units. Our relationships with chain
customers in one geographic market frequently help us to establish service with
these same chains when we expand into new markets. After accessing the chain
accounts in a new market, we attempt to rapidly build route density by leasing
bulk CO2 systems to independent restaurants, convenience stores and theaters.
While 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 costs on a
per customer basis. The introduction of smaller bulk CO2 systems (50 and 100 lb.
capacity vessels), which we helped develop, allows us to penetrate the market
for lower volume users of CO2 such as mall-based food courts, small restaurants
and mass-market retailers. Our products and services are sold by a sales force
of 75 commission only independent sales representatives and 33 salaried sales
personnel.
5
Competition
We are the largest as well as the sole national supplier of bulk CO2
systems and bulk CO2 for carbonating and dispensing fountain beverages. In many
of our markets, we are a leading or the dominant supplier of bulk CO2 services.
Major restaurant and convenience store chains continue to adopt bulk
CO2 technology and search for qualified suppliers to install and service bulk
CO2 systems. With the exception of us, we believe that qualified suppliers of
bulk CO2 services do not presently exist in many regions of the United States.
Unlike many of our competitors for whom bulk CO2 is a secondary service line, we
have no material lines of business at present other than the provision of bulk
CO2 services. All aspects of our operations are guided by our focus on the bulk
CO2 business, including our selection of operating equipment, design of delivery
routes, location of service locations, structure of customer contracts, content
of employee training programs and design of management information and
accounting systems. By restricting the scope of our activities to the bulk CO2
business, and largely avoiding the dilution of management time and resources
that would be required by other service lines, we believe that we are able to
maximize the level of service we provide to our bulk CO2 customers.
We offer a wide range of innovative sales, marketing and billing
programs. We believe that our ability to compete depends on a number of factors,
including price, product quality, availability and reliability, name
recognition, delivery time and post-sale service and support. Despite the
customer-level advantages of bulk CO2 systems over high pressure cylinders, we
generally price our services comparably to the price of high pressure cylinders.
This has proved an effective inducement to cause customers to convert from high
pressure cylinders to bulk CO2 systems. We believe that we enjoy cost advantages
over our competitors due to the density of our route structure, a lower average
time and distance traveled between stops and a lower average cost per delivery.
Each bulk CO2 system serviced by us has a label with a toll-free help line for
the customer's use. We respond to service calls on a 24-hour, 7-day-a-week
basis, and the experience level of our personnel aids in the resolution of
equipment failures or other service interruptions, whether or not caused by our
equipment. Recognizing the public visibility of our customers, we carefully
maintain the appearance of our vehicles and the professional image of our
employees.
Many types of businesses compete in the fountain beverage CO2
business and market share is fragmented. High pressure cylinders and bulk CO2
services are most frequently provided by distributors of industrial gases. These
companies generally provide a number of products and services in addition to CO2
and often view bulk CO2 systems as high-service adjuncts to their core business.
Industrial gas distributors generally have been reluctant to attempt to convert
their high pressure cylinder customers to bulk CO2 systems for several reasons
including the capital outlays required to purchase bulk CO2 systems and the
idling of existing high pressure cylinders and associated equipment. Other
competitors in the fountain beverage CO2 business include fountain supply
companies and distributors of restaurant supplies and groceries which vary
greatly in size. There are also a number of small companies that provide bulk
CO2 services that operate on a local or regional geographic scope. While many of
these suppliers lack the capital necessary to offer bulk CO2 systems to
customers on lease, or to purchase additional or replacement specialized bulk
CO2 trucks and equipment, suppliers vary widely in size and some of our
competitors have significantly greater financial, technical or marketing
resources than we do.
6
Operations
At June 30, 1999, we operated 84 service locations (69 stationary
depots and 15 mobile depots) located throughout our 44 state service area and
operated 166 specialized bulk CO2 trucks, 86 installation vehicles and seven
high pressure cylinder delivery trucks. Each specialized bulk CO2 truck refills
bulk CO2 systems at customers' sites on a regular cycle and CO2 delivery
quantities are measured by flow meters installed on the bulk CO2 trucks. Each
stationary depot is equipped with a storage tank (up to 40 tons) which receives
bulk CO2 from large capacity tanker trucks and from which our specialized bulk
CO2 trucks are filled with bulk CO2 for delivery to customers. In most
instances, the bulk CO2 system at a customer's site is accessible from the
outside of the establishment and delivery of bulk CO2 does not cause any
interference with the operations of the customer. All dispatch and billing
functions are conducted from our corporate headquarters in Stuart, Florida, with
route drivers, installers and service personnel operating from our service
locations.
We have begun rolling out a new mobile information system for use in
our field operations. The system utilizes a hand held device to provide field
personnel with up to date delivery route and customer account information and
also serves as an input source to record all delivery transaction information.
At the end of the driver's shift, all delivery transaction information is
transmitted electronically to our headquarters in Stuart, Florida and downloaded
into our computer systems. We believe that this new system will revolutionize
our route management system and lead to improved efficiencies in virtually all
aspects of our operations. Anticipated benefits include improved route
efficiencies and monitoring of driver performance, a reduction in courier
charges for overnight shipment of delivery tickets and in employee hours to
manually input delivery tickets since delivery information will be transmitted
electronically, virtual elimination of illegible delivery tickets and
consequently a reduction in billing errors and customer disputes and a reduction
in paperwork as well as telephone calls to and from the field.
Bulk CO2 Supply
Bulk CO2 is currently a readily available commodity product which is
processed and sold by various sources. In May 1997, we entered into a ten year
bulk CO2 exclusive requirements contract with The BOC Group, Inc. that provides
high quality CO2 as well as relatively stable prices at competitive levels. In
addition, the agreement provides that if sufficient quantities of bulk CO2
become unavailable for any reason, we will receive treatment as a preferred
customer.
Bulk CO2 Systems
We purchase new bulk CO2 systems from their two major manufacturers
pursuant to purchase agreements and we believe that we are the largest purchaser
of bulk CO2 systems from these manufacturers combined. We purchase bulk CO2
systems in six sizes (50, 100, 250, 300, 400 or 600 lbs. bulk CO2 capacity)
depending on the needs of our customers. Bulk CO2 systems are vacuum insulated
containers with extremely high insulation characteristics allowing the storage
of CO2, in its liquid form, at very low temperatures. Bulk CO2 systems operate
under low pressure, are fully automatic, and require no electricity. Based upon
manufacturers' estimates, the service life of a bulk CO2 system is expected to
exceed 20 years with minimal maintenance. We generally maintain a 60 day
inventory of bulk CO2 systems to meet expected customer demand.
7
Employees
At June 30, 1999, we employed 543 full-time employees, 178 of whom
were involved in an executive, marketing or administrative capacity, 264 of whom
were route drivers and 101 of whom were in installation functions. We consider
our relationship with our employees to be good.
Trademarks
We market our services using the NuCo2(R) trademark which has been
registered by us with the United States Patent and Trademark Office. The current
registration expires in 2007.
Seasonality
At June 30, 1999, approximately 6,000 of our bulk CO2 customers were
billed under rental plus per pound charge contracts and approximately 9,600 of
our bulk CO2 customers own their own bulk CO2 systems and are billed by the
pound for all bulk CO2 delivered. Customers who purchase bulk CO2 by the pound
tend to consume less CO2 in the winter months and our revenues to such customers
will be correspondingly lower in times of cold or inclement weather.
Regulatory Matters
Our business is subject to various federal, state and local laws and
regulations adopted for the protection of the environment, the health and safety
of employees and users of our products. For example, the transportation of bulk
CO2 is subject to regulation by various federal, state and local agencies,
including the U.S. Department of Transportation. Regulatory authorities have
broad powers and we are subject to regulatory and legislative changes that can
affect the economics of the industry by requiring changes in operating practices
or by influencing the demand for, and the costs of, providing services. We
believe that we are in compliance in all material respects with all such laws,
regulations and standards currently in effect and that the cost of compliance
with such laws, regulations and standards has not and is not anticipated to
materially adversely effect us.
8
2. Properties.
Our corporate headquarters are located in a 32,400 square foot
rented facility in Stuart, Florida that accommodates corporate, administrative,
marketing, sales and warehouse space. At June 30, 1999, we also rented 69
stationary service locations throughout 44 states. These facilities are rented
on terms consistent with market conditions prevailing in the area. We believe
that our existing facilities are suitable for our current needs and that
additional or replacement facilities, if needed, are available to meet future
needs.
3. Legal Proceedings.
We are involved from time to time in litigation arising in the
ordinary course of business, none of which is expected to have a material
adverse effect on our financial condition or results of operations.
4. Submission of Matters to a Vote of Security Holders.
Not applicable.
5. Market For Registrant's Common Equity and Related Stockholder
Matters.
Our common stock trades on the Nasdaq National Market under the
symbol "NUCO".
The following table indicates the range of high and low bid
information for our common stock for each quarterly period during fiscal 1998
and 1999, as reported by Nasdaq. Such over-the-counter market quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not necessarily reflect actual transactions.
Calendar 1997 High Low
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
Third Quarter 10 3/8 5 1/2
Fourth Quarter 8 1/2 5
Calendar 1999
First Quarter 9 7/8 6 1/8
Second Quarter 9 5/8 5 1/4
At June 30, 1999, there were approximately 219 holders of record of
our common stock. This number does not include an indeterminate number of
shareholders whose shares are held by brokers in "street name."
We have never paid cash dividends on our common stock and we do not
anticipate declaring any cash dividends on our common stock in the foreseeable
future. We intend to retain all future earnings for use in the development of
our business. In addition, the payment of cash dividends is restricted by
financial covenants in our loan agreements.
On May 4, 1999, in connection with and in consideration for the
purchase of $10.0 million of our 12% Senior Subordinated Promissory Notes due
2005 by an existing holder of our 12% Senior Subordinated Promissory Notes due
2004 and an affiliate of SunTrust Bank, South Florida, National Association, we
issued warrants to purchase 372,892 shares of our Common Stock at an exercise
price of $6.65 per share in reliance upon the exemption provided by Section 4(2)
of the Securities Act of 1933, as amended. No discounts or commissions were
paid.
6. Selected Financial Data.
The Selected Financial Data set forth below reflect our historical
results of operations, financial condition and operating data for the periods
indicated and should be read in conjunction with the consolidated financial
statements and notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations included elsewhere in this Form
10-K.
9
Fiscal Year Ended June 30,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(in thousands, except per share amounts and Operating Data)
Income Statement Data:
Net Sales.......................................... $ 47,098 $ 35,077 $ 18,944 $ 11,966 $ 6,062
Cost of products sold.............................. 25,225 18,578 8,992 5,177 2,503
Selling, general and administrative expenses....... 10,554 9,396 5,859 3,066 1,448
Depreciation and amortization...................... 12,763 8,912 4,246 2,417 1,380
----------- ----------- --------- -------- -------
Operating income (loss)............................ (1,444) (1,809) (153) 1,305 731
Interest expense, net.............................. 7,489 3,639 (681) 1,258 1,264
----------- ----------- ---------- -------- -------
Income (loss) before extraordinary item............ (8,933) (5,448) 527 47 (533)
Extraordinary item................................. - 187 - 860 -
----------- ----------- --------- -------- -------
Net income (loss) (8,933) (5,635) 527 (813) (533)
Dividends on Preferred Stock....................... - - - (111) -
----------- ----------- --------- -------- -------
Net income (loss).................................. $ (8,933) $ (5,635) $ 527 $ (924) $ (533)
=========== ============ ========= ========= =======
Income (loss) per common share before
extraordinary item............................ $ (1.24) $ (0.75) $ .07 $ (.02) $ (.17)
Extraordinary item................................. - (0.03) - (.19) -
------------ ----------- --------- -------- -------
Net income (loss) per common share $ (1.24) $ (0.78) $ .07 $ (.21) $ (.17)
Weighted average shares outstanding................ 7,217 7,210 7,318 4,500 3,379
Other Data:
EBITDA (1)......................................... $ 11,319 $ 7,103 $ 4,093 $ 3,722 $2,111
Operating Data:
Company owned bulk CO2 systems serviced:
Beginning of period........................... 39,295 21,919 12,884 7,967 4,237
New installations, net........................ 11,100 9,446 5,817 3,337 1,703
Acquisitions - 7,930 3,218 1,580 2,027
----------- ----------- --------- -------- -------
Total Company owned bulk CO2 systems serviced: 50,395 39,295 21,919 12,884 7,967
Customer owned bulk CO2 systems serviced........... 8,605 6,800 4,800 2,900 2,300
----------- ----------- --------- -------- -------
Total bulk CO2 systems serviced.................... 59,000 46,095 26,719 15,784 10,267
Total high pressure CO2 customers.................. 6,000 9,000 2,000 400 200
----------- ----------- --------- -------- -------
Total customers.................................... 65,000 55,095 28,719 16,184 10,467
Stationary depots.................................. 69 63 38 24 15
Mobile depots...................................... 15 2 0 0 0
Bulk CO2 trucks.................................... 166 150 83 49 30
Installation vehicles.............................. 86 76 36 19 18
High pressure cylinder delivery trucks............. 7 17 1 1 1
Balance Sheet Data:
Cash and cash equivalents.......................... $ 1,579 $ 337 $ 11,673 $ 43,001 $ 562
Total assets....................................... 141,630 124,498 73,344 74,633 21,143
Total debt (including short-term debt)............. 82,460 59,328 9,546 10,844 17,391
Total shareholders' equity......................... $ 47,733 $ 55,643 $ 60,702 $ 60,684 $ 743
10
- --------------------
(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.
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. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED
IN THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH DIFFERENCES
INCLUDE, BUT ARE NOT LIMITED TO, OUR EXPANSION INTO NEW MARKETS, COMPETITION,
TECHNOLOGICAL ADVANCES, YEAR 2000 ISSUES AND AVAILABILITY OF MANAGERIAL
PERSONNEL.
Overview
We are the largest supplier in the United States of bulk CO2 systems
and bulk CO2 for carbonating and dispensing fountain beverages. We currently
operate a national network of 84 service locations in 44 states servicing
approximately 65,000 bulk and high pressure customers. Over 97% of fountain
beverage users in the Continental United States are within our current service
area.
Growth in our customer base has averaged 78% annually. Our rapid
growth has been due to a combination of internal growth and over 30
acquisitions. Today, the majority of our growth is driven by the conversion of
high pressure CO2 users to bulk CO2 systems. Our success in conversions is
demonstrated in the Florida market where we continue to rapidly add new bulk CO2
system installations, even after actively marketing in the state since 1990.
Substantially all of our revenues have been derived from the rental
of bulk CO2 systems installed at customers' sites, the sale of CO2 and high
pressure cylinder revenues. Revenues have grown from $812,000 in fiscal 1991 to
$47.1 million in fiscal 1999, an average increase of 68% annually. We believe
that our revenue base is stable due to the existence of long-term contracts with
our customers which generally roll-over without a significant portion expiring
without renewal in any one year. In each of fiscal 1997, 1998 and 1999, less
than 5% of our bulk CO2 systems in service experienced service termination.
Service termination is typically caused by restaurant closure. Affected bulk CO2
systems are either removed and reconditioned, or left in place when prospects
for a new restaurant at the same location appear likely. Revenue growth is
largely dependent on both (1) the rate of new bulk CO2 system installations and
(2) the growth in bulk CO2 sales at (i) customers on the rental plus per pound
charge contracts and (ii) customers that own their own bulk CO2 systems. During
fiscal 1999, we installed a net of 925 bulk CO2 systems monthly.
Cost of products sold is comprised of purchased CO2 and labor,
vehicle and service location costs associated with the storage and delivery of
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 nature of our business, we incur significant depreciation and
amortization expenses. These stem from the depreciation of our bulk CO2 systems;
depreciation and amortization of bulk CO2 system installation costs;
amortization of sales commissions; and amortization of goodwill, deferred
financing costs and other intangible assets.
With respect to bulk CO2 systems, we only capitalize costs that are
associated with specific successful placements of such systems with customers
under noncancelable contracts and which would not be incurred but for a
successful placement. All other service, marketing and administrative costs are
expended as incurred.
Since 1990, we have devoted significant resources to building a
sales and marketing organization, adding administrative personnel and developing
a national infrastructure to support the rapid growth in the number of our
installed base of bulk CO2 systems. The cost of this expansion and the
significant depreciation expense of our installed network have resulted in
significant operating losses to date and accumulated net losses of $17.1 million
at June 30, 1999.
11
We believe that our future revenue growth, gains in gross margin and
profitability will be dependent upon increases in route density and the
expansion and penetration of bulk CO2 system installations in existing and new
market regions resulting from successful ongoing marketing.
Our experience has been that gross margins at service locations
have generally increased with the length of time that the service location is in
operation. Gross margins in our mature markets are generally in the 55% to 65%
range. For the quarter ended June 30, 1999, 36% of our stationary service
locations were open over three years and averaged a 58% gross margin, 19% of our
stationary service locations were open between two and three years and averaged
a 54% gross margin, 42% of our stationary service locations were open between
one and two years and averaged a 35% gross margin and 3% of our stationary
service locations were open under one year and averaged a 39% gross margin.
Additionally, we operate 15 mobile service locations with an average 43% gross
margin for the quarter ended June 30, 1999. New service locations typically
operate at low or negative gross margins in the early stages and detract from
our highly profitable service locations in mature markets. Increases in gross
margins at service locations are directly related to increases in the number of
customers serviced. New accounts are being added to newer depots for which there
is substantial excess capacity, and therefore, relatively little additional cost
is incurred to service new customers. New multi-unit placement agreements
combined with single-unit placements will help us in achieving route density.
During fiscal 1999, we reached multi-unit placement agreements with national and
regional chains aggregating approximately 7,000 locations. Our success in
reaching these multi-placement agreements is due in part to our national
delivery system. As our customer base increases, we anticipate that our
financial performance on a sequential basis will improve at an accelerated rate.
Our route density is highest in Florida and is less developed in the other areas
where we presently have operations.
We believe that optimal route density is achieved at over 400
accounts serviced per bulk CO2 truck and we typically employ targeted sales
efforts to build density within an existing delivery route. We maintain a "hub
and spoke" route structure and establish additional stationary bulk CO2 service
locations as a service area expands through geographic growth. Our entry into
many states was accomplished largely through business acquisitions with thinly
developed route networks. We expect to benefit from route efficiencies and other
economies of scale as we build our customer base in these states through
intensive marketing initiatives. 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.
We believe that earnings before interest, taxes, depreciation and
amortization ("EBITDA") is the principal financial measure by which we should be
measured as we continue to achieve national market presence and to build route
density. Our revolving credit facility utilizes EBITDA for its calculation of
financial leverage, affecting the amount of funds available to us to borrow.
Information regarding EBITDA is presented because of its use by certain
investors as one measure of a corporation's ability to generate cash flow.
EBITDA should not be considered as an alternative to, or more meaningful than,
operating income 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. EBITDA
has grown from $15,000 in fiscal 1991 to $11.3 million in fiscal 1999, an
average increase of 72% annually from fiscal 1994 to fiscal 1999.
12
Results of Operations
The following table sets forth, for the periods indicated, the
percentage relationship which the various items bear to net sales:
Fiscal Year Ended June 30,
1999 1998 1997
---- ---- ----
Income Statement Data:
Net sales......................................... 100.0% 100.0% 100.0%
Cost of products sold............................. 53.6 53.0 47.5
Selling, general and administrative expenses...... 22.4 26.8 30.9
Depreciation and amortization..................... 27.1 25.4 22.4
------- --------- -------
Operating loss.................................... (3.1) (5.2) (.8)
Interest expense (income)......................... 15.9 10.4 (3.6)
------- ---------- --------
Income (loss) before extraordinary item........... (19.0) (15.6) 2.8
Extraordinary item................................ - .5 -
------- --------- ------
Net income (loss)................................. (19.0%) (16.1%) 2.8%
======== ========== ======
Other Data:
EBITDA......................................... 24.0% 20.3% 21.6%
======== =========== ======
Fiscal Year Ended June 30, 1999 Compared to Fiscal Year Ended June 30, 1998
Net Sales
Net sales increased $12.0 million, or 34.3%, from $35.1 million in
fiscal 1998 to $47.1 million in fiscal 1999. Approximately $3.6 million, or
30.2%, of the increase represented net sales from fifteen acquisitions during
fiscal 1998 which are included for the full year in fiscal 1999 as compared to
from their dates of acquisition in fiscal 1998. The remainder of the increase in
net sales was primarily due to internal growth in the number of Company owned
and customer owned bulk CO2 systems serviced. At June 30, 1999, there were
approximately 50,400 Company owned and 8,600 customer owned bulk CO2 systems in
service, an increase of 12,900, or 28%, over the approximately 39,300 Company
owned and 6,800 customer owned bulk CO2 systems in service at the end of fiscal
1998. Increases in net sales due to price increase were insignificant.
Cost of Products Sold
Cost of products sold increased by $6.6 million, or 35.8%, from
$18.6 million in fiscal 1998 to $25.2 million in fiscal 1999, and increased as a
percentage of net sales from 53.0% in fiscal 1998 to 53.6% in fiscal 1999. The
dollar increase is attributable to our continued growth. The percentage increase
is largely attributable to an increase in bulk CO2 purchases as a percentage of
net sales. Bulk CO2 purchases increased by $2.1 million from $4.2 million in
fiscal 1998 to $6.3 million in fiscal 1999 and increased as a percentage of net
sales from 12.1% to 13.4%. Fully loaded route drivers increased by $2.0 million
from $6.2 million in fiscal 1998 to $8.2 million in fiscal 1999 and decreased as
a percentage of net sales from 17.7% to 17.5%. Auto and truck expense increased
by $1.0 million from $3.2 million in fiscal 1998 to $4.2 million in fiscal 1999
and decreased as a percentage of net sales from 9.2% to 9.0%. Depot expense
increased by $476,000 from $1.7 million in fiscal 1998 to $2.2 million in fiscal
1999 and decreased as a percentage of net sales from 4.9% to 4.7%.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $1.2
million, or 12.3%, from $9.4 million in fiscal 1998 to $10.6 million in fiscal
1999, and decreased as a percentage of net sales from 26.8% in fiscal 1998 to
22.4% in fiscal 1999. The dollar increase is primarily attributable to growth in
the number of marketing and administrative personnel and their associated
expenses. The percentage decrease is attributable to economies of scale. Fully
loaded marketing, administrative and executive personnel increased by $1.1
million from $5.6 million in fiscal 1998 to $6.7 million in fiscal 1999, and
decreased as a percentage of net sales from 16.1% in fiscal 1998 to 14.2% in
fiscal 1999. At June 30, 1999, we had operations in 44 states and employed 178
marketing, administrative and executive
13
personnel, and at the end of fiscal 1998, we had operations in 43 states and
employed 146 marketing, administrative and executive personnel.
Depreciation and Amortization
Depreciation and amortization increased by $3.9 million from $8.9
million in fiscal 1998 to $12.8 million in fiscal 1999. As a percentage of net
sales, such expense increased from 25.4% in fiscal 1998 to 27.1% in fiscal 1999.
Depreciation expense increased by $2.7 million from $6.0 million in fiscal 1998
to $8.7 million in fiscal 1999 principally due to the increase in bulk CO2
systems leased to customers. As a percentage of net sales, depreciation expense
increased from 17.2% in fiscal 1998 to 18.6% in fiscal 1999. Amortization
expense increased by $1.2 million from $2.9 million in fiscal 1998 to $4.0
million in fiscal 1999 primarily due to the increase in amortization of deferred
lease acquisition costs, deferred charges and goodwill and customer lists
resulting from acquisitions. As a percentage of net sales, amortization expense
increased from 8.2% in fiscal 1998 to 8.5% in fiscal 1999.
Operating Loss
For the reasons described above, operating loss decreased by
$365,000, or 20.2%, from $1.8 million in fiscal 1998 to $1.4 million in fiscal
1999, and decreased as a percentage of net sales from 5.2% in fiscal 1998 to
3.1% in fiscal 1999.
Interest Expense
Net interest expense increased by $3.9 million from $3.6 million in
fiscal 1998 to $7.5 million in fiscal 1999, and increased as a percentage of net
sales from 10.4% in fiscal 1998 to 15.9% in fiscal 1999. This increase is
attributable to the increased level of long-term and subordinated debt in fiscal
1999 as compared to fiscal 1998.
During fiscal 1998, $187,000 of deferred financing costs relating to
our prior credit facility was written off.
Net Loss
For the reasons described above, net loss increased by $3.3 million,
or 58.5%, from $5.6 million in fiscal 1998 to $8.9 million in fiscal 1999. No
provision for income tax expense in either fiscal 1998 or fiscal 1999 has been
made due to historical net losses. At June 30, 1999, we had net operating loss
carryforwards for federal income tax purposes of $45.6 million, which are
available to offset future federal taxable income through 2014.
EBITDA
For the reasons described above, EBITDA increased from $7.1 million
in fiscal 1998 to $11.3 million in fiscal 1999, or 59.3%, and increased as a
percentage of net sales from 20.3% to 24.0%.
Fiscal Year Ended June 30, 1998 Compared to Fiscal Year Ended June 30, 1997
Net Sales
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 resulting from 15 acquisitions during the fiscal
year ended June 30, 1998. In addition, approximately $2.9 million of the
increase represented net sales from 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.
14
Cost of Products Sold
Cost of products sold increased by $9.6 million, or 106.6%, 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 our expansion 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 we operated at June 30, 1998 increased to 65,
compared to 38 at June 30, 1997. Depot expense increased by $956,000 from
$775,000 in fiscal 1997 to $1.7 million in fiscal 1998, and increased as a
percentage of net sales from 4.1% to 4.9%. Auto and truck expense increased by
$1.7 million from $1.5 million in fiscal 1997 to $3.2 million in fiscal 1998 and
increased as a percentage of net sales from 8.2% to 9.2%. When we open new
depots and expand into new markets, higher costs expressed as a percentage of
net sales are incurred until route density is achieved. We typically service
approximately 350 customers per delivery vehicle in mature markets. In new
territories, a delivery vehicle can initially service as few as 100 customers.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $3.5
million, or 60.4%, 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 our 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, we had operations in 30 states and at the end of fiscal 1998, we
had operations in 43 states.
Depreciation and Amortization
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.
Operating Loss
For the reasons described above, operating loss increased by $1.7
million, from $153,000 in fiscal 1997 to $1.8 million in fiscal 1998, and
increased as a percentage of net sales from 0.8% in fiscal 1997 to 5.2% in
fiscal 1999.
Interest Expense
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, $187,000 of deferred financing costs relating to
our prior credit facility was written off.
Net Income/Loss
For the reasons described above, net income in fiscal 1997 was
$527,000 compared to a net loss of $5.6 million in fiscal 1998. No provision for
income tax expense in either fiscal 1997 or fiscal 1998 has been made due to
historical net losses. At June 30, 1998, we 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.
15
EBITDA
For the reasons described above, EBITDA increased from $4.1 million
in fiscal 1997 to $7.1 million in fiscal 1998, or 73.6%, but decreased as a
percentage of net sales from 21.6% to 20.3%.
Liquidity and Capital Resources
Our cash requirements consist principally of (1) capital
expenditures associated with purchasing and placing new bulk CO2 systems into
service at customers' sites; (2) payments of interest on outstanding
indebtedness; and (3) working capital. Whenever possible, we seek to obtain the
use of vehicles, land, buildings, and other office and service equipment under
operating leases as a means of conserving capital. As of June 30, 1999, we
anticipated making cash capital expenditures of at least $20.0 million to $40.0
million during each of fiscal 2000 and fiscal 2001, primarily for purchases of
bulk CO2 systems that we expect to place into service. Once bulk CO2 systems are
placed into service, we generally experience positive cash flows on a per-unit
basis, as there are minimal additional capital expenditures required for
ordinary operations. In addition to capital expenditures related to internal
growth, we review opportunities to acquire bulk CO2 service businesses, and may
require cash in an amount dictated by the scale and terms of any such
transactions successfully concluded.
During fiscal 1999, our capital resources included cash flows from
operations, available borrowing capacity under our credit facility and proceeds
from the sale of our 12% Senior Subordinated Promissory Notes due 2005 (the
"2005 Notes").
On May 4, 1999, we entered into a $75.0 million amended and
restated revolving credit facility with a syndicate of banks led by SunTrust
Bank, South Florida, National Association ("Amended SunTrust Facility"). The
Amended SunTrust Facility contains interest rates and an unused facility fee
based on a pricing grid calculated quarterly on senior funded debt to annualized
EBITDA. We are entitled to select the Base Rate or LIBOR, plus applicable
margin, for principal drawings under the Amended SunTrust Facility. The
applicable LIBOR margin pursuant to the pricing grid ranges from 1.75% to 3.5%,
the applicable unused facility fee pursuant to the pricing grid ranges from
.375% to .50% and the applicable Base Rate margin pursuant to the pricing grid
ranges from 0.25% to 2.00%. Interest only is payable periodically until the
expiration of the Amended SunTrust Facility. The Amended SunTrust Facility
expires May 4, 2002, however, it contains a two year renewal option subject to
approval. Additionally, it is collateralized by substantially all of our assets.
Drawings pursuant to the Amended SunTrust Facility are limited to availability
under a formula predicated upon multiples of EBITDA. We are precluded from
declaring or paying any cash dividends and are required to meet certain
affirmative and negative covenants, including but not limited to financial
covenants. At various dates in the past we have been unable to meet certain
covenants and have had to obtain waivers or modifications of terms from our
lenders. Although we believe that we will be able to comply with the current
provisions of our borrowing arrangements, circumstances may result in our having
to obtain waivers or further modifications in the future. We believe that we
have an excellent relationship with our lenders.
Simultaneously with the Amended SunTrust Facility, we sold $10.0
million of our 2005 Notes. Except for their October 31, 2005 maturity date, the
2005 Notes are substantially identical to our 12% Senior Subordinated Promissory
Notes due 2004 (the "2004 Notes"). The 2005 Notes were sold with detachable
6-1/2 year warrants to purchase an aggregate of 372,892 shares of our Common
Stock at an exercise price of $6.65 per stock unit. In connection with the sale
of the 2005 Notes, certain financial covenants governing the 2004 Notes and the
2005 Notes were adjusted as of March 31, 1999 and prospectively and the exercise
price for 612,023 warrants issued in connection with the sale of the 2004 Notes
was reduced from $12.40 per share to $6.65 per stock unit. Additionally,
effective May 4, 1999, the interest rate on the original $30.0 million of Notes
increased to 14% per annum and will continue at 14% per annum during any quarter
during which certain financial ratios are not met.
As of June 30, 1999, a total of $43.3 million was outstanding under
the Amended SunTrust Facility with interest at three hundred fifty basis points
above the 180-day London InterBank Offering Rate ("LIBOR") (8.88% at June 30,
1999).
Working Capital. At June 30, 1998, we had negative working capital
of $3.1 million. At June 30, 1999, we had negative working capital of $455,000.
16
Cash Flows from Operating Activities. During fiscal 1998 and fiscal
1999, net cash provided by operating activities was $7.4 million and $4.2
million, respectively. Cash flows from operating activities decreased by $3.2
million during fiscal 1999 compared to fiscal 1998 primarily due to an increase
in net loss and a decrease in the change in accounts payable. Net loss increased
by $3.3 million from $5.6 million in fiscal 1998 to $8.9 million in fiscal 1999.
The increase in accounts payable in fiscal 1998 was $4.5 million and in fiscal
1999 was $105,000.
Cash Flows from Investing Activities. During fiscal 1999 and fiscal
1998, we made net capital expenditures of $24.0 million and $23.5 million,
respectively, primarily for purchases of new bulk CO2 systems and associated
installation and direct placement costs. In addition, during fiscal 1998, we
made 15 acquisitions and expended cash of $12.4 million.
Cash Flows from Financing Activities. During fiscal 1999 and fiscal
1998, net cash provided by financing activities was $22.7 million and $18.6
million, respectively. For fiscal 1999 and fiscal 1998, cash flows provided by
financing activities were primarily from the issuance of subordinated debt and
borrowings under our revolving credit facility.
We believe that cash from operating activities and available
borrowings under the Amended SunTrust Facility will be sufficient to fund
proposed operations for at least the next 12 months at our anticipated rate of
growth.
Year 2000
We have conducted a review to identify which of our computer and
other business operating systems will be affected by the "Year 2000" problem and
have 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. We believe 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 our financial position or results of
operations.
We are also engaged in communications with our significant business
partners, suppliers and customers to determine the extent to which we are
vulnerable to such third parties' failure to address their own Year 2000 issues.
Our assessment of the impact of Year 2000 issues includes an assessment of our
vulnerability to such third parties. We are seeking assurances from our
significant business partners, suppliers and customers that their computer
applications will not fail due to Year 2000 problems. Nevertheless, we do 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 we believe that
there is a risk that certain of these third parties on whom our finances and
operations depend will experience Year 2000 problems that could affect our
financial position or results of operations. These risks include, but are not
limited to, the potential inability of suppliers to correctly or timely provide
necessary services, materials and components for our operations; the inability
of our customers to timely or correctly process and pay our invoices; and the
inability of lenders, lessors or other sources of our necessary capital and
liquidity to make funds available to us when required.
Because we are unaware of any material Year 2000 compliance issues,
we lack a Year 2000-specific contingency plan. If Year 2000 compliance issues
are discovered, we will evaluate the need for one or more contingency plans
relating to such issues. If we are unable to develop and implement appropriate
contingency plans, as needed, in a timely manner, we may experience delays in,
or increased costs associated with, implementation of changes to address any
such issues, which could have material adverse effect on our business, operating
results or financial condition.
Inflation
The modest levels of inflation in the general economy have not
affected our results of operations. Additionally, our customer contracts
generally provide for annual increases in the monthly rental rate based on
increases in the consumer price index. We believe that inflation will not have a
material adverse effect on our future results of operations.
17
Our bulk CO2 requirements contract with The BOC Group, Inc. provides
for annual adjustments in the purchase price for bulk CO2 based upon increases
or decreases in the Producer Price Index for Chemical and Allied Products or the
average percentage increase in the selling price of bulk merchant carbon dioxide
purchased by BOC's large, multi-location beverage customers in the United
States, however, such increases are limited to 3% annually until June 2002.
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, 1999, a total of $43.3 million was outstanding under the
Amended SunTrust Facility with interest at three hundred fifty basis points
above the 180 day LIBOR rate (8.88% at June 30, 1999). Based upon $43.3 million
outstanding under the Amended SunTrust Facility at June 30, 1999, our annual
interest cost under the Amended SunTrust Facility would increase by $433,000 for
each one percent increase in LIBOR (i.e., from 8.0% to 9.0%).
In order to reduce our exposure to increases in LIBOR, and
consequently to increases in interest payments, on June 9, 1998 we 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, we pay a fixed interest rate of 6% per annum and receive a LIBOR-based
floating rate. The effect of the Swap is to neutralize any changes in LIBOR on
the Notional Amount. If LIBOR decreases below 6% during the period the Swap is
in effect, interest payments by us on the Notional Amount will be greater than
if we had not entered into the Swap, since by exchanging LIBOR for a fixed
interest rate, we would not benefit from falling interest rates on LIBOR, a
variable interest rate. We do not enter into speculative derivative transactions
or leveraged swap transactions.
8. Financial Statements and Supplementary Data.
See page F-1.
9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not applicable.
10. Directors and Executive Officers of the Registrant.
The information required by Item 10 is incorporated by reference to
our definitive proxy statement to be filed with the Securities and Exchange
Commission no later than October 28, 1999 pursuant to Regulation 14A.
11. Executive Compensation.
The information required by Item 11 is incorporated by reference to
our definitive proxy statement to be filed with the Securities and Exchange
Commission no later than October 28, 1999 pursuant to Regulation 14A.
12. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item 12 is incorporated by reference to
our definitive proxy statement to be filed with the Securities and Exchange
Commission no later than October 28, 1999 pursuant to Regulation 14A.
13. Certain Relationships and Related Transactions.
The information required by Item 13 is incorporated by reference to
our definitive proxy statement to be filed with the Securities and Exchange
Commission no later than October 28, 1999 pursuant to Regulation 14A.
18
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:
19
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
Edward M. Sellian, dated November 30, 1995.
**10.4 -- Lease for 2528 North Tamiami Trail, Ft. Myers,
Florida, between the Company and Edward M.
Sellian.
***10.5 -- Lease for 2800 Southeast Market Place, Stuart,
Florida between the Company and Edward M.
Sellian.
*****10.6 -- Lease for 2820 Southeast Market Place, Stuart,
Florida between the Company and Edward M.
Sellian dated as of February 1, 1998.
****10.7 -- Employment agreement between the Company and
Joann Sabatino, dated October 16, 1996.
*10.8 -- Amended and Restated Revolving Credit Agreement,
dated as of May 4, 1999 by and among the
Company, SunTrust Bank, South Florida, National
Association, Bank Austria Creditanstalt
Corporate Finance, Inc., The Provident Bank and
Bank Leumi Le-Israel B.M. (the "Lenders") and
SunTrust Bank, South Florida, National
Association, as agent for the Lenders (the
"Agent").
*10.9 -- First Amendment to Amended and Restated Credit
Agreement dated as of June 16, 1999 by and among
the Company, the Lenders and the Agent.
*****10.10 -- Senior Subordinated Note Purchase Agreement,
dated as of October 31, 1997 between the
Company, the Subsidiary Guarantors and the
Investors.
*****10.11 -- Amendment No. 1 to Senior Subordinated Note
Purchase Agreement dated as of November 14, 1997
between the Company, the Subsidiary Guarantors
and the Investors.
*****10.12 -- Amendment No. 2 to Senior Subordinated Note
Purchase Agreement dated as of June 30, 1998
between the Company, the Subsidiary Guarantors
and the Investors.
*10.13 -- Amendment No. 3 to Senior Subordinated Note
Purchase Agreement dated as of May 4, 1999
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.
20
*****10.15 -- Amendment No. 1 to Warrant Agreement dated as of
November 14, 1997, between the Company and the
Initial Holders.
*10.16 -- Amendment No. 2 to Warrant Agreement dated as of
May 4, 1999 between the Company and the Holders.
*****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
The Company filed a Form 8-K dated May 4, 1999 reporting an Item 5
event.
- ---------------------------
* 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 10-K for the fiscal
year ended June 30, 1998.
21
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 28, 1999 /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/ Craig L. Burr Director September 28, 1999
------------------------
Craig L. Burr
/s/ Robert L. Frome Director September 28,1999
------------------------
Robert L. Frome
/s/ John A. Kerney Director September 28, 1999
------------------------
John A. Kerney
/s/ Robert Ranieri Director September 28, 1999
------------------------
Robert Ranieri
/s/ Daniel Raynor Director September 28, 1999
------------------------
Daniel Raynor
/s/ Edward M. Sellian Director September 28, 1999
------------------------
Edward M. Sellian
/s/ Joann Sabatino Chief Financial September 28, 1999
------------------------ Officer
Joann Sabatino
22
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, 1998 and 1999..........F-3
Consolidated Statements of Operations for the Fiscal
Years Ended June 30, 1997, 1998 and 1999......................F-4
Consolidated Statements of Shareholders' Equity for the
Fiscal Years Ended June 30, 1997, 1998 and 1999...............F-5
Consolidated Statements of Cash Flows for the Fiscal
Years Ended June 30, 1997, 1998 and 1999......................F-6
Notes to Consolidated Financial Statements................................F-8
Schedule II - Valuation and Qualifying Accounts for the Fiscal
Years Ended June 30, 1997, 1998 and 1999..........................F-19
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, 1998 and 1999, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended June 30, 1999. 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, 1998 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1999 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 herein.
MARGOLIN, WINER & EVENS LLP
Garden City, New York
August 20, 1999
F-2
NuCo2 Inc.
CONSOLIDATED BALANCE SHEETS
ASSETS
(NOTE 5)
June 30,
--------
1998* 1999
----------- ------------
Current assets:
Cash and cash equivalents $ 336,510 $ 1,579,191
Trade accounts receivable; net of allowance for doubtful
accounts of $395,491 and $557,592, respectively 4,285,158 6,767,716
Inventories 211,027 213,605
Prepaid expenses and other current assets 434,784 593,487
------------- -------------
Total current assets 5,267,479 9,153,999
------------- -------------
Property and equipment, net (Note 3) 85,435,933 99,664,890
------------- -------------
Other assets:
Goodwill, net 22,891,846 21,645,293
Deferred charges, net 2,004,259 2,915,167
Customer lists, net 3,963,588 2,897,638
Restrictive covenants, net 2,275,964 1,928,700
Deferred lease acquisition costs, net 2,475,139 3,236,919
Deposits 184,059 187,595
------------- -------------
33,794,855 32,811,312
------------- -------------
$ 124,498,267 $ 141,630,201
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt (Note 5) $ 139,251 $ 96,748
Accounts payable 6,596,722 6,701,695
Accrued expenses 323,254 747,631
Accrued interest 844,153 1,473,704
Accrued payroll 476,458 543,924
Other current liabilities 7,179 45,570
------------- -------------
Total current liabilities 8,387,017 9,609,272
Long-term debt, excluding current maturities (Note 5) 29,460,614 43,615,025
Subordinated debt (Note 6) 29,728,571 38,748,695
Customer deposits 1,279,178 1,924,528
------------- -------------
Total Liabilities 68,855,380 93,897,520
------------- -------------
Commitments and contingencies (Note 13)
Shareholders' equity (Note 7):
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 7,216,664 shares at June 30, 1998 and 1999 7,217 7,217
Additional paid-in capital 63,809,014 64,831,748
Accumulated deficit (8,173,344) (17,106,284)
------------- -------------
Total shareholders' equity 55,642,887 47,732,681
------------- -------------
$ 124,498,267 $ 141,630,201
============= =============
*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,
1997 1998 1999
---- ---- ----
Net sales $ 18,943,569 $ 35,077,361 $ 47,097,670
------------ ------------ ------------
Costs and expenses:
Cost of products sold 8,991,823 18,578,063 25,224,746
Selling, general and administrative expenses 5,858,934 9,396,003 10,554,146
Depreciation and amortization 4,246,035 8,912,124 12,762,707
------------ ------------ ------------
19,096,792 36,886,190 48,541,599
------------ ------------ ------------
Operating (loss) (153,223) (1,808,829) (1,443,929)
Other expenses (income):
Interest expense 884,627 3,809,138 7,524,966
Interest (income) (1,565,289) (170,160) (35,955)
------------ ------------ ------------
Income (loss) before extraordinary item 527,439 (5,447,807) (8,932,940)
------------ ------------ ------------
Extraordinary item - loss on extinguishment of debt (Note 5) -- 186,945 --
------------ ------------ ------------
Net income (loss) $ 527,439 $ (5,634,752) $ (8,932,940)
============ ============ ============
Basic and Diluted EPS
Income (loss) before extraordinary item $ 0.07 $ (0.75) $ (1.24)
Extraordinary item -- (0.03) --
------------ ------------ ------------
Net income (loss) $ 0.07 $ (0.78) $ (1.24)
============ ============ ============
Weighted average number of common and common
equivalent shares outstanding
Basic 7,164,924 7,210,350 7,216,664
============ ============ ============
Diluted 7,317,926 7,210,350 7,216,664
============ ============ ============
See accompanying notes to consolidated financial statements.
F-4
NuCo2 Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Total
Common Stock Additional Accumulated Shareholders'
Shares Amount Paid-In Capital Deficit Equity
------ ------ --------------- ------- ------
Balance, June 30, 1996 7,129,467 $ 7,129 $ 63,743,312 $ (3,066,031) $ 60,684,410
Issuance of 34,289 share's 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
Issuance and repricing of warrants -- -- 1,022,734 -- 1,022,734
Net (loss) -- -- -- (8,932,940) (8,932,940)
------------ ------------ ------------ ------------ ------------
Balance, June 30, 1999 7,216,664 $ 7,217 $ 64,831,748 $(17,106,284) $ 47,732,681
============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
F-5
NuCo2 Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30,
--------------------
1997 1998* 1999
---- ----- ----
Income (loss) before extraordinary item $ 527,439 $ (5,447,807) $ (8,932,940)
Extraordinary item - loss on extinguishment of debt -- (186,945) --
------------ ------------ ------------
Net income (loss) 527,439 (5,634,752) (8,932,940)
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 3,130,022 6,045,652 8,743,134
Amortization of other assets 1,116,013 2,866,471 4,019,574
Loss on disposal of property and equipment 294,411 499,704 1,109,738
Write-off of deferred financing costs -- 186,945 --
Changes in operating assets and liabilities:
Decrease (increase) in:
Trade accounts receivable (735,238) (2,017,485) (2,482,558)
Inventories (33,176) (115,968) (2,578)
Prepaid expenses and other current assets 108,090 (157,926) (158,703)
Increase (decrease) in:
Accounts payable (712,747) 4,542,532 104,973
Accrued expenses 363,361 (395,794) 424,377
Accrued payroll (93,592) 243,989 67,466
Accrued interest 193,800 824,585 629,551
Other current liabilities (50,830) (41,061) 38,391
Customer deposits 236,392 591,296 645,350
------------ ------------ ------------
Net cash provided by operating activities 4,343,945 7,438,188 4,205,775
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from disposal of property and equipment 2,133,776 410,868 104,173
Purchase of property and equipment (16,945,522) (23,456,104) (24,048,318)
Acquisition of businesses (17,692,662) (12,406,907) 45,460
Increase in deferred lease acquisition costs (914,999) (1,805,874) (1,717,579)
(Increase) decrease in deposits 160,500 (79,661) (3,536)
------------ ------------ ------------
Net cash used in investing activities $(33,258,907) $(37,337,678) $(25,619,800)
------------ ------------ ------------
* Restated to conform to current year's classifications.
See accompanying notes to consolidated financial statements.
F-6
NuCo2 Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
Years Ended June 30,
--------------------
1997 1998 1999
---- ---- ----
Cash flows from financing activities:
Proceeds from issuance of Common Stock $ (59,100) $ -- $ --
Net proceeds from issuance of long-term debt
and subordinated debt -- 21,610,820 24,292,857
Repayment of long-term debt (1,309,704) (831,409) (138,092)
Increase in deferred charges (53,307) (2,216,916) (1,498,059)
Exercise of warrants and options 152,353 999 --
Redemption of warrant (1,143,450) -- --
------------ ------------ ------------
Net cash provided by (used in) financing activities (2,413,208) 18,563,494 22,656,706
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents (31,328,170) (11,335,996) 1,242,681
Cash and cash equivalents, beginning of year 43,000,676 11,672,506 336,510
------------ ------------ ------------
Cash and cash equivalents, end of year $ 11,672,506 $ 336,510 $ 1,579,191
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 903,729 $ 2,966,659 $ 6,870,822
============ ============ ============
Income taxes $ -- $ -- $ --
============ ============ ============
Supplemental schedule of noncash investing and
financing activities:
Acquisition of businesses:
Fair value of assets acquired $ 1,098,718 $ 26,426,234 $ --
Cost in excess of net assets of businesses acquired 244,000 16,256,879 --
Liabilities assumed or incurred (56,250) (30,001,215) --
Issuance of Common Stock (539,996) (274,991) --
------------ ------------ ------------
Cash paid $ 746,472 $ 12,406,907 $ --
============ ============ ============
In 1997, the Company purchased equipment and incurred debt in the amount
of $11,604.
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.
In 1999, the Company repaid long-term debt in the amount of $5,000,000
with the proceeds of the issuance of subordinated debt. In connection therewith,
detachable warrants were issued and original issue discount in the amount of
$549,032 was recorded. Additionally, in connection with the repricing of the
Company's 2004 warrants, original issue discount in the amount of $473,702 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 2). 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 $1,370,779 and $2,582,372 at
June 30, 1998 and 1999, 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 $417,646 and $1,004,797 at June 30, 1998
and 1999, respectively. Included in the consolidated statements of operations
for the year ended June 30, 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 $1,380,411 and $2,435,861 at June 30, 1998
and 1999, 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 $353,993 and $701,257 at
June 30, 1998 and 1999, 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 $1,197,756 and $1,932,060 at June 30, 1998
and 1999, 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.
(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 - Acquisitions
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.
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.
F-10
NuCo2 Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Acquisitions (continued)
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 credit facility.
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 credit facility 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 credit
facility 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 credit facility.
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 5).
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 5).
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 5).
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 5).
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.
The Company did not consumate any acquisitions during the fiscal
year ended June 30, 1999.
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 $4,732,000 and
$16,257,000 in the two 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.
F-11
NuCo2 Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Acquisitions (continued)
The following summarized, unaudited, pro forma results of
operations assume that the acquisitions described above occurred as of the
beginning of the earliest year presented:
Year Ended June 30,
-------------------
1997 1998
---- ----
Net sales $ 33,104,161 $ 39,078,542
(Loss) before extraordinary item (1,751,557) (6,133,862)
Net (loss) (1,751,557) (6,320,807)
Net (loss) per common share (0.24) (0.88)
Note 3 - Property and Equipment, Net
Property and equipment, net consists of the following:
June 30,
--------
1998 1999
---- ----
Leased equipment $ 77,378,765 $ 95,925,286
Equipment and cylinders 12,126,813 13,939,944
Systems held for installation 3,925,539 5,150,513
Vehicles 622,092 448,363
Computer equipment 1,516,153 2,062,704
Office furniture and fixtures 997,142 1,216,246
Leasehold improvements 1,039,442 1,484,856
Construction in progress 221,999 --
------------ --------------
- - 97,827,945 120,227,912
Less accumulated depreciation
and amortization 12,392,012 20,563,022
------------ ---------------
$ 85,435,933 $ 99,664,890
============ ===============
Capitalized component parts and direct costs associated with
installation of equipment leased to others included in leased equipment was
$12,429,913 and $19,417,952 at June 30, 1998 and 1999, respectively. Accumulated
depreciation and amortization of these costs were $3,525,574 and $6,332,121 at
June 30, 1998 and 1999, respectively.
Depreciation and amortization of property and equipment was
$3,130,022, $6,045,652 and $8,743,134 for the years ended June 30, 1997, 1998,
and 1999, respectively.
Note 4 - Leases
The Company leases equipment to its customers generally pursuant
to five-year noncancelable operating leases which expire on varying dates
through June 2005. At June 30, 1999, future minimum rentals due from customers
which includes, where applicable, a continuous supply of CO2 (see Note 1(g)),
are approximately as follows:
Year Ending June 30,
2000 $ 31,935,000
2001 28,932,000
2002 24,973,000
2003 17,226,000
2004 9,064,000
Thereafter 5,295,000
--------------
$ 117,425,000
==============
F-12
NuCo2 Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Long-Term Debt
Long-term debt consists of the following:
June 30,
1998 1999
Note payable to bank under credit facility. Drawings at June 30, 1999 are at
LIBOR rates plus 3.5% (8.8831%). Drawings at June 30, 1998 are at 6 month
LIBOR rates plus 2.25%. (7.875% to 8.00%) (a) $ 29,000,000 $ 43,250,000
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. 375,741 355,788
Various notes payable 224,124 105,985
------------ ------------
29,599,865 43,711,773
Less current maturities of long-term debt 139,251 96,748
------------ ------------
Long-term debt, excluding current maturities $ 29,460,614 $ 43,615,025
============ ============
(a) On May 4, 1999, the Company entered into a $75.0 million
amended and restated revolving credit facility with a syndicate of banks led by
SunTrust Bank, South Florida, N.A. ("Amended SunTrust Facility"). The Amended
SunTrust Facility amended and restated the Company's existing $50.0 million
syndicated facility which had been entered into in October 1997. As of June 30,
1999, $31.75 million is available under the Amended SunTrust Facility. The
Amended SunTrust Facility contains interest rates and an unused facility fee
based on a pricing grid calculated quarterly on senior funded debt to annualized
EBITDA (as defined). The Company is entitled to select the Base Rate or LIBOR,
plus applicable margin, for principal drawings under the Amended SunTrust
Facility. The applicable LIBOR margin pursuant to the pricing grid ranges from
1.75% to 3.5%. The applicable unused facility fee pursuant to the pricing grid
ranges from .375% to .50%. Interest only is payable periodically until the
expiration of the Amended SunTrust Facility on May 4, 2002; there is, however, a
two year renewal option subject to approval. The Amended SunTrust Facility is
collateralized by substantially all of the assets of the Company. The Company is
precluded from declaring or paying any cash dividends and is required to meet
certain affirmative and negative covenants including, but not limited to,
financial covenants. Pursuant to the Amended SunTrust Facility, drawings are
limited to availability under a formula predicated upon multiples of EBITDA.
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, 1999 are as follows:
Year Ending June 30,
2000 $ 96,748
2001 33,495
2002 43,286,638
2003 40,073
2004 43,826
Thereafter 210,993
----------------
$ 43,711,773
================
Extraordinary item - loss on extinguishment of debt
During the year ended June 30, 1998, the Company incurred an
extraordinary charge of $186,945, for the write-off of deferred financing costs
in connection with the early repayment of debt.
F-13
NuCo2 Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Subordinated Debt
In October 1997, the Company issued $30.0 million of its 12%
Senior Subordinated Promissory Notes ("Notes") with interest only payable
semi-annually on April 30 and October 31, due October 31, 2004. The Notes were
sold with detachable seven year warrants to purchase an aggregate of 655,738
shares of the Company's Common Stock at an exercise price of $16.40 per share.
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. 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.
On May 4, 1999, the Company sold an additional $10.0 million of
its 12% Senior Subordinated Promissory Notes ("Additional Notes"). Except for
their October 31, 2005 maturity date, the Additional Notes are substantially
identical to the Notes described above. The Additional Notes were sold with
detachable 6-1/2 year warrants to purchase an aggregate of 372,892 shares of
Common Stock at an exercise price of $6.65 per share. In connection with the
sale of the Additional Notes, certain financial covenants governing the Notes
and the Additional Notes were adjusted as of March 31, 1999 and prospectively
and the exercise price of 612,023 of the warrants issued in connection with the
sale of the Notes was reduced to $6.65 per share. The effective rate of the
Additional Notes is 13.57% per annum after giving effect to the amortization of
the original issue discount. Additionally, effective May 4, 1999, the interest
rate on the original $30.0 million of Notes increased to 14% and will continue
at 14% during any quarter which certain financial ratios are not met.
Note 7 - Shareholders' Equity
(a) Non-Qualified Stock Options and Warrants
In June 1995, the Company granted a ten year warrant to purchase
84,917 shares of Common Stock at $5.00 per share to the Company's then current
lending institution in connection with a refinancing. As of June 30, 1999 the
warrant is outstanding.
In June 1995, the Company granted options to purchase 67,934
shares of Common Stock at $4.40 per share to certain officers and employees. In
June and July 1996, these options were exercised. Proceeds to the Company from
the exercise of these stock options in fiscal 1997 aggregated $149,455.
In connection with the Company's Initial Public Offering in
December 1995, representatives of the Underwriters received warrants to purchase
up to an aggregate of 110,000 shares of Common Stock. Such warrants are
exercisable for a period of five years, at an exercise price of $10.80 per
share. In July 1996, the Company redeemed and canceled a warrant issued to one
of the representatives of the underwriters to purchase 77,000 shares of Common
Stock for $1,143,450. This amount represented the approximate market value of
such warrant on the date of redemption.
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 13c).
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.
(b) 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 to five installments over periods of three to four
and one-half years. As of June 30, 1997, 1998 and 1999, options for 41,437
shares, 105,900 shares and 277,307 shares are exercisable, respectively. The
weighted-average fair value per share of options granted during the years ended
June 30, 1997, 1998 and 1999 were $2.93, $2.81 and $2.20, respectively. As of
June 30, 1999, the weighted-average remaining life of the options was 6.9 years.
F-14
NuCo2 Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Shareholders' Equity (continued)
The following table summarizes the transactions pursuant to the 1995
Plan.
Weighted-Average
Shares Exercise Price Exercise Price
------ -------------- --------------
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 341,500 $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 610,926 $9-$11.28 $10.61
Granted 214,500 $5.50-$7 $5.74
Expired or canceled 21,200 $9-$11.25 $10.40
------- ------------- --------
Outstanding at June 30, 1999 804,226 $5.50-$11.28 $9.32
======= ============= ========
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, 1997, 1998 and 1999 options for 8,000 shares, 14,000 shares and
8,000 shares were currently exercisable and options for 24,000 shares, 22,000
shares and 30,000 shares were outstanding. No options have been exercised under
the Directors' Plan. The weighted-average fair value per share of options
granted during the years ended June 30, 1998 and 1999 were $4.11 and $2.58,
respectively. During the fiscal years ended June 30, 1998 and 1999, 6,000
options and 18,000 options were granted, respectively. No options were granted
during the year ended June 30, 1997. As of June 30, 1999, the weighted-average
remaining life of the options was 8.7 years.
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, defines a fair value based method of accounting for
stock options. The Statement allows an entity to continue to measure cost using
the accounting method prescribed by APB Opinion No. 25, Accounting for Stock
Issued to Employees, and to make pro forma disclosures of net income and
earnings per share as if the fair value based method of accounting had been
applied. The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in fiscal 1997, 1998 and 1999; expected volatility
of 39% to 40%, risk-free interest rate of 4.3% 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,
-------------------
1997 1998 1999
---- ---- ----
Net income (loss) available to common shareholders $ 27,439 $ (5,974,752) $ (9,462,940)
Net income (loss) per common share $ 0.01 $ (0.83) $ (1.31)
========= ============ ===============
Weighted average number of common and
common equivalent shares outstanding 7,302,662 7,210,350 7,216,664
========== ============ ==============
The pro forma adjustment for stock based compensation costs
under SFAS 123 for the years ending 1997, 1998 and 1999 is approximately
$500,000, $340,000 and $530,000, respectively. No stock based compensation was
recognized in the financial statements pursuant to APB Opinion No. 25.
F-15
NuCo2 Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - 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 year ended June 30, 1997 has
been restated to conform to the guidelines of Statement 128.
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 years ended June 30, 1998 and 1999
were 136,972 shares and 52,668 shares, respectively. These shares were not
included in diluted EPS because they would have been antidilutive. Additionally,
options and warrants to purchase 1,075,000 shares, 655,738 shares and 36,000
shares for $17.00-$17.50 per share, $16.40 per share and $12.50-$14.64 per
share, respectively, and options and warrants to purchase 1,043,715 shares,
321,810 shares and 350,416 shares for $16.40-$17.00 per share, $11.00-$14.64 per
share and $8.94-$10.80 per share, respectively, were outstanding during all or a
portion of the years ended June 30, 1998 and 1999, respectively, 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 9 - 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,
1998 1999
Deferred tax assets:
Allowance for doubtful accounts $ 111,000 $ 209,600
Amortization expense 269,900 512,500
Other 4,200 10,900
Net operating loss carryforwards 9,862,700 17,143,400
----------- ----------
Total gross deferred tax assets 10,247,800 17,876,400
Less valuation allowance (2,766,200) (6,236,400)
----------- -----------
Net deferred tax assets 7,481,600 11,640,000
----------- -----------
Deferred tax liabilities:
Depreciation expense (7,481,600) (11,640,000)
----------- -----------
Total gross deferred tax liabilities (7,481,600) (11,640,000)
----------- -----------
Net deferred taxes $ - $ -
=========== ===========
F-16
NuCo2 Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Income Taxes (continued)
At June 30, 1999, the Company had net operating loss carryforwards for
Federal income tax purposes of approximately $45,600,000 which are available to
offset future Federal taxable income, if any, in varying amounts through June
2014. The net change in the total valuation allowance for the years ended June
30, 1998 and 1999 was an increase of $2,129,800 and $3,470,200, respectively.
Note 10 - 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,
2000 $ 276,000
2001 235,000
2002 109,000
2003 60,000
2004 -
--------------
$ 681,000
==============
Rental expense was $166,549, $246,551 and $274,711 in 1997, 1998
and 1999, respectively, under these leases.
Note 11 - Lease Commitments
The Company leases office equipment, trucks and warehouse/depot
and office facilities under operating leases (including related party leases,
see Note 10) that expire at various dates through June 2006. 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,
2000 $ 4,293,000
2001 3,954,000
2002 3,559,000
2003 2,412,000
2004 1,115,000
Thereafter 257,000
----------------
$ 15,590,000
================
Total rental expense under noncancelable operating leases was
approximately $1,413,000, $3,284,000 and $4,386,142 in 1997, 1998 and 1999,
respectively.
Note 12 - Concentration of Credit and Business Risks
The Company's business activity is with customers located within
the United States. For the years ended June 30, 1997, 1998 and 1999 the
Company's sales to customers in the food and beverage industry were
approximately 98%, 99% and 99%, respectively.
There were no customers that accounted for greater than 5% of
total sales for the three years ended June 30, 1999, nor were there any
customers that accounted for greater than 5% of total accounts receivable at
June 30, 1998 or 1999.
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.
F-17
NuCo2 Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 - 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.
(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.
The Company is a defendant in legal actions which arise in the
normal course of business. In the opinion of management, the outcome of these
matters will not have a material effect on the Company's financial position or
results of operations.
Note 14 - Disclosures about Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments.
(a) Cash and cash equivalents
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,
--------
1998 1999
------- --------
Carrying Amount Carrying Amount
and Fair Value and Fair Value
-------------- --------------
Cash and cash equivalents $ 336,510 $ 1,579,191
Long-term debt, including current maturities 29,599,865 43,711,773
Subordinated debt 29,728,571 38,748,695
As of June 30, 1998 and 1999, the fair value of the Company's
interest rate swap (see Note 5) was not material.
F-18
NuCo2 Inc.
Schedule II
Valuation and Qualifying Accounts
Column B Column C - Additions Column D Column E
-------- -------------------- -------- --------
Balance at Charge to
beginning of costs and Charged to Balance at
period expenses other accounts Deductions end of period
------ -------- -------------- ---------- -------------
Year ended June 30, 1997
Allowance for doubtful accounts $210,629 $143,210 $ -- $240,785 $113,054
Year ended June 30, 1998
Allowance for doubtful accounts $113,054 $450,871 $ 43,276(1) $211,710 $395,491
Year ended June 30, 1999
Allowance for doubtful accounts $395,491 $665,219 $ -- $503,118 $557,592
(1) Initial reserve of acquired company
F-19