Item 1. Business. 1 Item 2.
Item 2. Properties. 9 Item 3.
Item 3. Legal Proceedings. 9 Item 4.
Item 4. Submission of Matters to a Vote of Security Holders. 9
PART II. Item 5.
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters. 9 Item 6.
Item 6. Selected Financial Data. 11 Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 12 Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 18 Item 8
Item 8 Financial Statements and Supplementary Data. 18 Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. 18
PART III. Item 10.
Item 10. Directors and Executive Officers of the Registrant. 18 Item 11.
Item 11. Executive Compensation. 18 Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management. 18 Item 13.
Item 13. Certain Relationships and Related Transactions. 19
PART IV. Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 19
Signatures 22 Index to Financial Statements
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 99% 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:
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 92 service locations and approximately 73,000 bulk and high pressure CO2 customers in 45 states. Our customer base has increased by an average of 50% annually from 1996 to 2000. Today, the majority of our growth is driven by the conversion of high pressure CO2 users to bulk CO2 systems.
Service Locations
[OBJECT OMITTED]
Customer Base
[OBJECT OMITTED]
Our bulk CO2 customer base is highest in Florida, Texas, Georgia, California and New York.
Five States With Largest Bulk CO2 Customer Base
[OBJECT OMITTED]
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 $58.0 million in fiscal 2000, with an average increase of 50% annually from fiscal 1996 to fiscal 2000. 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 $16.1 million in fiscal 2000, with an average increase of 46% annually from fiscal 1996 to fiscal 2000.
Net Sales
[OBJECT OMITTED]
EBITDA
[OBJECT OMITTED]
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 140,000 bulk CO2 beverage users in the United States. Of these, approximately 68,000 are already our customers. We also currently service approximately 5,000 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)
[OBJECT OMITTED]
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 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 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 1998, 1999 and 2000, less than 5% of our bulk CO2 systems in service experienced service termination. 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 portion terminating in any one year. The largest number (approximately 26%) 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 5,000 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 The Coca-Cola Company that establishes a framework to develop a strategic alliance between us for providing Coke's fountain customers in the United States with quality CO2, CO2 dispensing systems, technology and service that are superior to systems available today. If we successfully develop a strategic alliance, the agreement ultimately contemplates, among other things, that we will be the sole preferred provider of bulk CO2 to Coke's customers, that we and Coke will develop differentiated CO2 sales and marketing programs to be used solely by Coke's and our sales associates exclusively for Coke's customers, and that Coke will not proactively market CO2 programs of other CO2 suppliers to customers that meet an agreed upon customer profile.
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 13 MiCell customers and expect that number to
increase if MiCell is successful in commercializing the MICO2 system. 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, 2000, we serviced approximately 73,000 bulk and high pressure CO2 customers, none of which accounted for more than 5% of our fiscal 2000 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 63 commission only independent sales representatives and 27 salaried sales personnel.
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.
Operations
At June 30, 2000, we operated 91 service locations (70 stationary depots and 21 mobile depots) located throughout our 44 state service area and operated 158 specialized bulk CO2 trucks, 95 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 substantially rolled 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.
The new mobile information system is the first phase of our planned RouteSmart(TM) leading edge delivery system. We anticipate that the next two phases of the RouteSmart(TM) delivery system, software-based forecasting and route design will be operational by March 31, 2001. The forecasting application will analyze customer CO2 usage and predict when a customer will run out of CO2 enabling us to schedule a delivery to prevent such an occurrence. The route design software will produce efficient delivery routes to minimize time and distance traveled between deliveries.
The fourth phase of the RouteSmart(TM) delivery system will be the development of a monitoring system installed at the customer's location to remotely inspect bulk CO2 tanks. It is anticipated that the system will provide readings of CO2 pressure, volume and purity either by automated telephone call to the tank or triggered by preset emergency readings. We anticipate that this phase of the RouteSmart(TM) delivery system will be operational in the next couple of years.
The final phase of the fully integrated RouteSmart(TM) delivery system is expected to be Internet-based customer support. It is anticipated that when this final phase of the RouteSmart(TM) delivery system is in place, customers will be able to log onto the Internet, and among other things, bring up their accounts, check payment balances as well as scheduled deliveries.
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 maintain an adequate inventory of bulk CO2 systems to meet expected customer demand.
Employees
At June 30, 2000, we employed 545 full-time employees, 174 of whom were involved in management, sales or customer support, 241 of whom were route drivers and 130 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, 2000, approximately 5,000 of our bulk CO2 customers were billed under rental plus per pound charge contracts and approximately 10,000 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.
2. Properties.
Our corporate headquarters are located in a 32,000 square foot rented facility in Stuart, Florida that accommodates corporate, administrative, marketing, sales and warehouse space. At June 30, 2000, we also rented 70 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 high and low sale prices for our Common Stock for each quarterly period during fiscal 1999 and 2000, as reported by the Nasdaq National Market.
Calendar 1998 High Low - ------------- ---- --- Third Quarter $ 10.500 $ 5.625 Fourth Quarter 8.500 5.000
Calendar 1999 - ------------- First Quarter $ 10.000 $ 6.250 Second Quarter 9.875 5.375 Third Quarter 9.375 5.000 Fourth Quarter 17.000 5.500
Calendar 2000 - ------------- First Quarter $ 17.750 $10.500 Second Quarter 13.750 5.500
At August 29, 2000, there were approximately 200 holders of record of our Common Stock, although there is a much larger number of beneficial owners.
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 underwriting discounts or commissions were paid.
On May 15, 2000, we sold 5,000 shares of our 8% Cumulative Convertible Preferred Stock to Chase Capital Investments, L.P., a Delaware limited partnership, for an aggregate consideration of $5.0 million in reliance upon the exemption provided by Section 4(2) of the Securities Act of 1933, as amended. Shares of the 8% Cumulative Convertible Preferred Stock may be converted into shares of our Common Stock at any time at a conversion price of $9.47 per share, which represents a 20% premium to the average closing price of the Common Stock on the Nasdaq National Market for the 20 trading days prior to May 12, 2000. No underwriting 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.
- -------------------- (1) EBITDA represents operating income (loss) 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, RELIANCE ON KEY SUPPLIERS AND AVAILABILITY OF MANAGERIAL PERSONNEL. THE FORWARD-LOOKING STATEMENTS ARE MADE AS OF THE DATE OF THIS FORM 10-K AND WE ASSUME NO OBLIGATION TO UPDATE THE FORWARD-LOOKING STATEMENTS OR TO UPDATE THE REASONS WHY ACTUAL RESULTS COULD DIFFER FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS.
Overview
We are the largest supplier in the United States of bulk CO2 systems and bulk CO2 for carbonating and dispensing fountain beverages. As of June 30, 2000, we operated a national network of 91 service locations in 44 states servicing approximately 73,000 bulk and high pressure customers. Currently, 99% of fountain beverage users in the Continental United States are within our current service area.
Growth in our customer base has averaged 50% annually from 1996 to 2000. Our rapid growth has been due to a combination of internal growth and 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 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 $12.0 million in fiscal 1996 to $58.0 million in fiscal 2000, an average increase of 50% 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 1998, 1999 and 2000, 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, (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 and (3) price increases. During fiscal 2000, we installed a net of approximately 700 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 $26.5 million at June 30, 2000.
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 route density is highest in Florida and is less developed in the other areas where we presently have operations. New multi-unit placement agreements combined with single-unit placements will help us in achieving route density. Our success in reaching multi-placement agreements is due in part to our national delivery system.
Our experience has been that as our depots mature their gross profit margins improve as volume grows and fixed costs remain essentially the same. For example, at the end of fiscal 2000, depots open greater than three years averaged a 56.8% gross margin. Many of these depots have gross margins greater than 60% and continue to improve. These same depots averaged a 54.0% gross margin at the end of fiscal 1999. Since our new depot openings have slowed drastically over the last 24 months, on a weighted average basis, we expect that gross margins at our mature depots will accelerate. Additionally, new technologies continue to enhance improvements in gross margins and we continue to investigate non-techological improvements in gross margins as well. 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.
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 $3.7 million in fiscal 1996 to $16.1 million in fiscal 2000, an average of 46% annually from fiscal 1996 to fiscal 2000.
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, 2000 Compared to Fiscal Year Ended June 30, 1999
Net Sales
Net sales increased $10.9 million, or 23.0%, from $47.1 million in 1999 to $58.0 million in 2000. 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, 2000, there were approximately 58,000 Company owned and 10,000 customer owned bulk CO2 systems in service, an increase of 9,000, or 15%, over the approximately 50,000 Company owned and 9,000 customer owned bulk CO2 systems in service at the end of 1999. Increases in net sales due to price increases were immaterial.
Cost of Products Sold
Cost of products sold increased by $3.7 million, or 14.7%, from $25.2 million in 1999 to $28.9 million in 2000, and decreased as a percentage of net sales from 53.6% in 1999 to 49.9% in 2000. The dollar increase is attributable to our continued growth and the percentage decrease is primarily attributable to our increased route densities. Bulk CO2 purchases increased by $0.8 million from $6.3 million in 1999 to $7.1 million in 2000 and decreased as a percentage of net sales from 13.4% to 12.2%. Fully loaded route drivers increased by $1.5 million from $8.2 million in 1999 to $9.7 million in 2000 and decreased as a percentage of net sales from 17.5% to 16.8%. Auto and truck expense increased by $1.1 million from $4.2 million in 1999 to $5.3 million in 2000 and increased as a percentage of net sales from 9.0% to 9.1%. Depot expense increased by $0.1 from $2.2 million in 1999 to $2.3 million in 2000 and decreased as a percentage of net sales from 4.7% to 3.9%.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $2.3 million, or 22.1%, from $10.6 million in 1999 to $12.9 million in 2000, and decreased as a percentage of net sales from 22.4% in 1999 to 22.2% in 2000. The dollar increase is primarily attributable to (1) growth in the number of marketing and administrative personnel and their related expenses and (2) an increase in telephone expense. Fully loaded marketing, administrative and executive personnel increased by $1.0 million from $6.7 million in 1999 to $7.7 million in 2000, and decreased as a percentage of net sales from 14.2% in 1999 to 13.2% in 2000. The percentage decrease is attributable to increased efficiencies. Telephone expense increased $0.4 million from $0.8 million in 1999 to $1.2 million in 2000 and is attributable to the introduction of a new mobile information system for use in our field operations.
Depreciation and Amortization
Depreciation and amortization increased by $2.7 million from $12.8 million in 1999 to $15.5 million in 2000. As a percentage of net sales, such expense decreased from 27.1% in 1999 to 26.8 % in 2000. Depreciation expense increased by $2.1 million from $8.7 million in 1999 to $10.8 million in 2000 principally due to the increase in bulk CO2 systems leased to customers. As a percentage of net sales, depreciation expense increased from 18.6% in 1999 to 18.7% in 2000. Amortization expense increased by $0.6 million from $4.1 million in 1999 to $4.7 million in 2000 primarily due to the increase in amortization of deferred lease acquisition costs and deferred charges. As a percentage of net sales, amortization expense decreased from 8.5% in 1999 to 8.0% in 2000.
Operating Income (Loss)
For the reasons described above, operating income was $0.6 million, or 1.1% of net sales, in 2000 compared to an operating (loss) of $1.4 million, or 3.1% of net sales, in 1999.
Interest Expense
Net interest expense increased by $2.5 million from $7.5 million in 1999 to $10.0 million in 2000, and increased as a percentage of net sales from 15.9% in 1999 to 17.3% in 2000. This increase is attributable to both increased levels of long-term and subordinated debt and increased interest rates in 2000 as compared to 1999.
Net Loss
For the reasons described above, net loss increased by $0.5 million, or 5.0%, from $8.9 million in 1999 to $9.4 million in 2000. No provision for income tax expense in either 1999 or 2000 has been made due to historical net losses. At June 30, 2000, we had net operating loss carryforwards for federal income tax purposes of $64.8 million, which are available to offset future federal taxable income through 2020.
EBITDA
For the reasons described above, EBITDA increased from $11.3 million in 1999 to $16.1 million in 2000, or 42.5%, and increased as a percentage of net sales from 24.0% to 27.8%.
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 1998 to $47.1 million in 1999. Approximately $3.6 million, or 30.2%, of the increase represented net sales from fifteen acquisitions during 1998 which are included for the full year in 1999 as compared to from their dates of acquisition in 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 50,000 Company owned and 9,000 customer owned bulk CO2 systems in service, an increase of 13,000, or 28%, over the approximately 39,000 Company owned and 7,000 customer owned bulk CO2 systems in service at the end of 1998. Increases in net sales due to price increase were immaterial.
Cost of Products Sold
Cost of products sold increased by $6.6 million, or 35.8%, from $18.6 million in 1998 to $25.2 million in 1999, and increased as a percentage of net sales from 53.0% in 1998 to 53.6% in 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 1998 to $6.3 million in 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 1998 to $8.2 million in 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 1998 to $4.2 million in 1999 and decreased as a percentage of net sales from 9.2% to 9.0%. Depot expense increased by $0.5 million from $1.7 million in 1998 to $2.2 million in 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 1998 to $10.6 million in 1999, and decreased as a percentage of net sales from 26.8% in 1998 to 22.4% in 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 1998 to $6.7 million in 1999, and decreased as a percentage of net sales from 16.1% in 1998 to 14.2% in 1999.
Depreciation and Amortization
Depreciation and amortization increased by $3.9 million from $8.9 million in 1998 to $12.8 million in 1999. As a percentage of net sales, such expense increased from 25.4% in 1998 to 27.1% in 1999. Depreciation expense increased by $2.7 million from $6.0 million in 1998 to $8.7 million in 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 1998 to 18.6% in 1999. Amortization expense increased by $1.2 million from $2.9 million in 1998 to $4.0 million in 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 1998 to 8.5% in 1999.
Operating Loss
For the reasons described above, operating loss decreased by $0.4 million, or 20.2%, from $1.8 million in 1998 to $1.4 million in 1999, and decreased as a percentage of net sales from 5.2% in 1998 to 3.1% in 1999.
Interest Expense
Net interest expense increased by $3.9 million from $3.6 million in 1998 to $7.5 million in 1999, and increased as a percentage of net sales from 10.4% in 1998 to 15.9% in 1999. This increase is attributable to the increased level of long-term and subordinated debt in 1999 as compared to 1998.
During 1998, $0.2 million 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 1998 to $8.9 million in 1999. No provision for income tax expense in either 1998 or 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 2019.
EBITDA
For the reasons described above, EBITDA increased from $7.1 million in 1998 to $11.3 million in 1999, or 59.3%, and increased as a percentage of net sales from 20.3% to 24.0%.
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, 2000, we anticipated making cash capital expenditures of at least $10.0 million to $30.0 million during each of 2001 and 2002, 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.
In May 2000, we sold 5,000 shares of our 8% Cumulative Convertible Preferred Stock, no par value (the "Convertible Preferred Stock"), for $1,000 per share (the "Liquidation Preference"). Cumulative dividends are payable quarterly in arrears at the rate of 8.0% per annum on the Liquidation Preference, and, to the extent not paid in cash, will be added to the Liquidation Preference. Shares of the Convertible Preferred Stock may be converted into shares of Common Stock at any time at a conversion price of $9.47 per share, which represents a 20% premium to the average closing price of the Common Stock on the Nasdaq National Market for the 20 trading days prior to May 12, 2000. Additionally, we must redeem the Convertible Preferred Stock upon the occurrence of a change in control of the Company.
During fiscal 2000, our capital resources included cash flows from operations, available borrowing capacity under our credit facility and proceeds from the issuance of our Convertible Preferred Stock.
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.
As of June 30, 2000, a total of $52.8 million was outstanding under the Amended SunTrust Facility with interest at three hundred seventy-five basis points above the 180-day London InterBank Offering Rate ("LIBOR") (10.02% to 10.61% at June 30, 2000).
Working Capital. At June 30, 2000, we had negative working capital of $0.6 million. At June 30, 1999, we had negative working capital of $0.5 million.
Cash Flows from Operating Activities. During 2000 and 1999, net cash provided by operating activities was $6.6 million and $4.2 million, respectively. Cash flows from operating activities increased by $2.4 million during 2000 compared to 1999 primarily due to an increase in the change in accounts payable and an increase in depreciation. The increase in accounts payable in 2000 was $1.4 million and in 1999 was $0.1 million. Depreciation and amortization of property and equipment increased $2.1 million from $8.7 million in 1999 to $10.8 million in 2000.
Cash Flows from Investing Activities. During 2000 and 1999, we made net capital expenditures of $19.2 million and $24.0 million, respectively, primarily for purchases of new bulk CO2 systems and associated installation and direct placement costs.
Cash Flows from Financing Activities. During 2000 and 1999, net cash provided by financing activities was $12.8 million and $22.6 million, respectively. For 2000 and 1999, cash flows provided by financing activities were primarily from the issuance of subordinated debt, borrowings under our revolving credit facility and the issuance of the Convertible Preferred Stock.
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
Our computer and other business operating systems were unaffected by the "Year 2000" problem, having successfully rolled over from 1999 to 2000. We are also unaware of any Year 2000 issues affecting any of our significant business partners, suppliers or customers.
Inflation
The modest levels of inflation in the general economy have not affected our results of operations. Additionally, our customer contracts generally provide for annual increases in the monthly rental rate based on increases in the consumer price index. We believe that inflation will not have a material adverse effect on our future results of operations.
Our bulk CO2 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, 2000, a total of $52.8 million was outstanding under the Amended SunTrust Facility with interest at three hundred seventy-five basis points above the 180 day LIBOR rate (10.02% to 10.61% at June 30, 2000). Based upon $52.8 million outstanding under the Amended SunTrust Facility at June 30, 2000, our annual interest cost under the Amended SunTrust Facility would increase by $0.5 million 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 August 31, 2000 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 1, 2000 and it terminates on September 3, 2002. Pursuant to the Swap, we pay a fixed interest rate of 7% 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 7% 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.
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 30, 2000 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 30, 2000 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 30, 2000 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 30, 2000 pursuant to Regulation 14A.
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 herein.
(2) Financial Statement Schedules
II - Valuation and Qualifying Accounts.
(3) Exhibits:
Exhibit No. Exhibit
3.1 -- Amended and Restated Articles of Incorporation of the Company. (2)
3.2 -- Articles of Amendment to the Articles of Incorporation of the Company, dated December 18, 1995. (5)
3.3 -- Articles of Amendment to the Articles of Incorporation of the Company, dated December 17, 1996. (5)
3.4 -- Articles of Amendment to the Articles of Incorporation of the Company, dated May 10, 2000. (1)
3.5 -- Bylaws of the Company. (2)
10.1 -- 1995 Stock Option Plan. (1)
10.2 -- Directors' Stock Option Plan. (2)
10.3 -- Noncompetition Agreement between the Company and Edward M. Sellian, dated November 30, 1995. (2)
10.4 -- Lease for 2528 North Tamiami Trail, Ft. Myers, Florida, between the Company and Edward M. Sellian. (2)
10.5 -- Lease for 2800 Southeast Market Place, Stuart, Florida between the Company and Edward M. Sellian. (3)
10.6 -- Lease for 2820 Southeast Market Place, Stuart, Florida between the Company and Edward M. Sellian dated as of February 1, 1998. (5)
10.7 -- Amended and Restated Revolving Credit Agreement ("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"). (6)
10.8 -- First Amendment to Amended and Restated Revolving Credit Agreement dated as of June 16, 1999. (6)
10.9 -- Second Amendment and Waiver to Amended and Restated Revolving Credit Agreement dated as of February 7, 2000.(1)
10.10 -- Third Amendment to Amended and Restated Revolving Credit Agreement dated as of May 12, 2000. (1)
10.11 -- Senior Subordinated Note Purchase Agreement ("Senior Subordinated Note Purchase Agreement"), dated as of October 31, 1997 between the Company, the Subsidiary Guarantors and the Investors. (5)
10.12 -- Amendment No. 1 to Senior Subordinated Note Purchase Agreement dated as of November 14, 1997. (5)
10.13 -- Amendment No. 2 to Senior Subordinated Note Purchase Agreement dated as of June 30, 1998. (5)
10.14 -- Amendment No. 3 to Senior Subordinated Note Purchase Agreement dated as of May 4, 1999. (6)
10.15 -- Amendment No. 4 to Senior Subordinated Note Purchase Agreement dated as of January __, 2000. (1)
10.16 -- Amendment No. 5 to Senior Subordinated Note Purchase Agreement dated as of May 12, 2000. (1)
10.17 -- Preferred Stock Purchase Agreement, dated as of May 15, 2000 by and between the Company and Chase Capital Investments, L.P. (1)
10.18 -- Warrant Agreement ("Warrant Agreement") dated as of October 31, 1997 among the Company and the Initial Holders. (5)
10.19 -- Amendment No. 1 to Warrant Agreement dated as of November 14, 1997. (5)
10.20 -- Amendment No. 2 to Warrant Agreement dated as of May 4, 1999. (6)
10.21 -- Employment Agreement between the Company and Michael DeDomenico, dated as of June 2, 2000. (1)
21 -- Subsidiaries (5)
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) and (No. 333- 30042) of the independent auditors' report included herein. (1)
27 -- Financial Data Schedule. (1)
(b) Reports on Form 8-K
None.
- --------------------------- (1) Included herein. (2) 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. (3) 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).
(4) Incorporated by reference to the Company's Form 10-KSB for the year ended June 30, 1997. (5) Incorporated by reference to the Company's Form 10-K for the year ended June 30, 1998. (6) Incorporated by reference to the Company's Form 10-K for the year ended June 30, 1999.
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, 2000 /s/ Edward M. Sellian ---------------------------------- Edward M. Sellian, Chairman of the Board
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, 2000 - --------------------------- Craig L. Burr
/s/ Michael E. DeDomenico Director, September 28, 2000 - --------------------------- Chief Executive Officer Michael E. DeDomenico
/s/ Robert L. Frome Director September 28, 2000 - --------------------------- Robert L. Frome
/s/ Robert Ranieri Director September 28, 2000 - --------------------------- Robert Ranieri
Director - --------------------------- Daniel Raynor
/s/ Edward M. Sellian - --------------------------- Director September 28, 2000 Edward M. Sellian
/s/ Richard D. Waters, Jr. Director September 28, 2000 - --------------------------- Richard D. Waters, Jr.
Director - --------------------------- John E. Wilson
/s/ Joann Schirripa Chief Financial Officer September 28, 2000 - --------------------------- Joann Schirripa
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2000 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, 2000. 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, 2000 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, 2000 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.
/s/ MARGOLIN, WINER & EVENS LLP -------------------------------- MARGOLIN, WINER & EVENS LLP
Garden City, New York August 18, 2000
NUCO2 INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts) ASSETS (NOTE 5)
See accompanying notes to consolidated financial statements.
NUCO2 INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
See accompanying notes to consolidated financial statements.
NUCO2 INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands, except share amounts)
See accompanying notes to consolidated financial statements.
NUCO2 INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands, except per share amounts)
See accompanying notes to consolidated financial statements.
NUCO2 INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
In 1998, the Company wrote-off a restrictive covenant and the related liability in the amount of $19 due to the employee resigning.
In 1998, the Company repaid long-term debt in the amount of $20,783 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 was recorded.
In 1999, the Company repaid long-term debt in the amount of $5,000 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 was recorded. Additionally, in connection with the repricing of the Company's 2004 warrants, original issue discount in the amount of $473 was recorded.
In 2000, the Company increased the carrying amount of the redeemable preferred stock by $50 for dividends that have not been paid and accordingly reduced additional paid-in capital by a like amount.
See accompanying notes to consolidated financial statements.
NUCO2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts)
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
NUCO2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts)
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 $3,794 and $2,582 at June 30, 2000 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 $1,679 and $1,005 at June 30, 2000 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 $3,464 and $2,436 at June 30, 2000 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 $1,063 and $701 at June 30, 2000 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 to six years. Accumulated amortization of deferred lease acquisition costs was $2,898 and $1,932 at June 30, 2000 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.
NUCO2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts)
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 Loss Per Common Share
Net 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
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. 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. Carbo Co. had operations in Nebraska, Kansas, Oklahoma, Iowa, Missouri, Arkansas and South Dakota. The Company funded $5,000 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. The Company funded $1,075 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. 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.
NUCO2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts)
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. The Company paid $674 cash and issued 18,835 shares of Common Stock at market, for a value of $275.
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. The Company paid approximately $4,650 cash and funded $6,500 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. 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. 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. 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. The Company paid cash for these transactions.
The Company did not consumate any acquisitions during the fiscal years ended June 30, 2000 and 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 $16,257 in the year ended June 30, 1998, which is being amortized on a straight-line basis over twenty years. The results of operations of the acquired companies are included in the Company's consolidated financial statements since the effective date of the acquisitions.
The following summarized, unaudited, pro forma results of operations for the year ended June 30, 1998 assumes that the acquisitions described above occurred as of the beginning of the year:
Net sales $ 39,079 (Loss) before extraordinary item (6,134) Net (loss) (6,321) Net (loss) per common share (0.88)
NUCO2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts)
Note 3 - Property and Equipment, Net
Property and equipment, net consists of the following:
June 30, -------- 2000 1999 -------- -------- Leased equipment $112,427 $ 95,925 Equipment and cylinders 15,061 13,940 Systems held for installation 4,757 5,151 Vehicles 412 448 Computer equipment 2,454 2,063 Office furniture and fixtures 1,382 1,216 Leasehold improvements 1,613 1,485 -------- -------- 138,106 120,228 Less accumulated depreciation and amortization 30,986 20,563 -------- --------
$107,120 $ 99,665 ======== ========
Capitalized component parts and direct costs associated with installation of equipment leased to others included in leased equipment was $26,265 and $19,418 at June 30, 2000 and 1999, respectively. Accumulated depreciation and amortization of these costs were $10,324 and $6,332 at June 30, 2000 and 1999, respectively.
Depreciation and amortization of property and equipment was $10,841, $8,743 and $6,046 for the years ended June 30, 2000, 1999, and 1998, respectively.
Note 4 - Leases
The Company leases equipment to its customers generally pursuant to five-year or six year noncancelable operating leases which expire on varying dates through June 2006. At June 30, 2000, 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, --------------------
2001 $ 38,179 2002 34,531 2003 27,140 2004 18,895 2005 14,834 Thereafter 5,520 -------- $139,099 ========
NUCO2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts)
Note 5 - Long-Term Debt
Long-term debt consists of the following:
(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, 2000, $22.25 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, except the Company may accrue and cumulate, but not pay, cash dividends on the 8% convertible preferred stock. The Company is also 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, 2000 are as follows:
Year Ending June 30, -------------------- 2001 $ 33 2002 52,787 2003 40 2004 44 2005 48 Thereafter 161 ------- $ 53,113 =======
Extraordinary item - loss on extinguishment of debt
During the year ended June 30, 1998, the Company incurred an extraordinary charge of $187, for the write-off of deferred financing costs in connection with the early repayment of debt.
NUCO2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts)
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, from May 4, 1999 to September 30, 1999, the interest rate on the original $30.0 million of Notes increased to 14% from 12% per annum. Interest will increase from 12% to 14% per annum during any quarter in which certain financial ratios are not met.
Note 7 - Redeemable Preferred Stock
In May 2000, the Company sold 5,000 shares of its 8% Cumulative Convertible Preferred Stock, no par value (the "Convertible Preferred Stock"), for $1,000 per share (the initial "Liquidation Preference"). Cumulative dividends are payable quarterly in arrears at the rate of 8% per annum on the Liquidation Preference, and, to the extent not paid in cash, are added to the Liquidation Preference. During the year ended June 30, 2000, the carrying amount (and Liquidation Preference) of the Convertible Preferred Stock was increased by $50 for dividends accrued. Shares of the Convertible Preferred Stock may be converted into shares of Common Stock at any time at a conversion price of $9.47 per share, which represents a 20% premium to the average closing price of the Common Stock on the Nasdaq National Market for the 20 trading days prior to May 12, 2000. In connection with the sale, costs in the amount of $65 were charged to paid in capital. The convertible Preferred Stock shall be mandatorily redeemed by the Company within 30 days after a Change in Control (as defined) of the Company (the date of such redemption being the "Mandatory Redemption Date") at an amount equal to the then effective Liquidation Preference plus accrued and unpaid dividends thereon from the last dividend payment date to the Mandatory Redemption Date, plus if the Mandatory Redemption Date is on or prior to the fourth anniversary of the issuance of the stock, the amount of any dividends that would have accrued and been payable on the Convertible Preferred Stock from the Mandatory Redemption Date through the fourth anniversary date.
In addition, outstanding shares of Convertible Preferred Stock vote on an "as converted basis" with the holders of the Common Stock as a single class on all matters that the holders of the Common Stock are entitled to vote upon.
Note 8 - 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. On February 14, 2000, the lending institution exercised warrants to purchase 57,385 shares of Common Stock pursuant to the cashless exercise contained in the warrants. In connection with the cashless exercise, warrants to purchase 27,532 shares of Common Stock were cancelled.
In connection with the Company's Initial Public Offering in December 1995, representatives of the Underwriter received warrants to purchase up to an aggregate of 33,000 shares of Common Stock. Such warrants are exercisable for a period of five years, at an exercise price of $10.80 per share. As of June 30, 2000 the warrants are outstanding.
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 14). 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. As of June 30, 2000 the warrant is outstanding.
NUCO2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts)
(b) Stock Option Plans
The board of directors adopted the 1995 Option Plan (the "1995 Plan"). Under the 1995 Plan, the Company has reserved 1,550,000 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, 1998, 1999 and 2000, options for 105,900 shares, 277,307 shares and 481,808 shares were exercisable, respectively. The weighted-average fair value per share of options granted during the years ended June 30, 1998, 1999 and 2000 were $2.81, $2.20 and $3.06, respectively. As of June 30, 2000, the weighted-average remaining life of the options was 6.98 years.
The following table summarizes the transactions pursuant to the 1995 Plan.
Weighted-Average Shares Exercise Price Exercise Price ------ -------------- -------------- 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 Granted 315,000 $6.75-$7.50 $6.79 Expired or canceled 26,526 $5.50-$11.25 $9.85 Exercised 966 $5.50 $5.50 --------- ------------- -------- Outstanding at June 30, 2000 1,091,734 $5.50-$11.28 $8.58 ========= ============= ========
The board of directors of the Company adopted the Directors' Stock Option Plan (the "Directors' Plan"). Under the Directors' Plan, each non-employee director will receive options for 6,000 shares of Common Stock on the date of his or her first election to the board of directors. In addition, on the third anniversary of each director's first election to the Board, and on each three year anniversary thereafter, each non-employee director will receive an additional option to purchase 6,000 shares of Common Stock. The exercise price per share for all options granted under the Directors' Plan will be equal to the fair market value of the Common Stock as of the date of grant. All options vest in three equal annual installments beginning on the first anniversary of the date of grant. The maximum term for all options is ten years. As of June 30, 1998, 1999 and 2000 options for 14,000 shares, 8,000 shares and 16,000 shares were exercisable, respectively. 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, 1999 and 2000 were $4.11, $2.58 and $2.37 respectively. As of June 30, 2000, the weighted-average remaining life of the options was 7.51 years.
Weighted-Average Shares Exercise Price Exercise Price ------ -------------- -------------- Outstanding at June 30, 1997 24,000 $9.00 $9.00 Granted 6,000 $12.50 $12.50 Expired or canceled 8,000 $9.00 $9.00 ------ ------------- ------ Outstanding at June 30, 1998 22,000 $9.00-$12.50 $9.95 Granted 18,000 $6.06-$8.94 $7.21 Expired or canceled 10,000 $9.00 $9.00 ------ ------------- ------ Outstanding at June 30, 1999 30,000 $6.06-$12.50 $8.63 Granted 6,000 $7.00 $7.00 Expired or canceled 4,000 $8.94 $8.94 ------ ------------- ------ Outstanding at June 30, 2000 32,000 $6.06-$12.50 $8.28 ====== ============= ======
NUCO2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts)
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 1998, 1999 and 2000; expected volatility of 39% to 40%, risk-free interest rate of 4.3% to 6.6%, expected dividend yield of 0% and expected lives of one to five years. The Company presents the following pro forma disclosures for employee stock options:
The pro forma adjustment for stock based compensation costs under SFAS 123 for the years ending 1998, 1999 and 2000 is approximately $340, $530 and $333, respectively. No stock based compensation was recognized in the financial statements pursuant to APB Opinion No. 25.
Note 9 - Earnings per Share
Basic (loss) per common share has been computed by dividing the net (loss), after giving effect to preferred stock dividends, by the weighted average number of common shares outstanding during the period. Diluted (loss) per share has been computed on the basis of the weighted average number of common and, if dilutive, common equivalent shares outstanding during the period. Common equivalent shares for stock options and warrants calculated pursuant to the treasury stock method for the years ended June 30, 2000, 1999 and 1998 were 438,131 shares, 52,668 shares and 136,972 shares, respectively. These shares were not included in diluted EPS because they would have been antidilutive. Additionally, options and warrants to purchase 1,000,000 shares and 43,715 shares for $17.00 per share and $16.40 per share, respectively, were outstanding during the year ended June 30, 2000 and 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. Also, not included in the computation of diluted EPS for the year ended June 30, 2000, were 533,262 shares of Common Stock issuable upon conversion of 5,000 shares of Convertible Preferred Stock issued during the year ended June 30, 2000, because the effect would be antidilutive.
NUCO2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts)
Note 10 - Income Taxes
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities are as follows:
June 30, -------- 2000 1999 ---- ---- Deferred tax assets: Allowance for doubtful accounts $ 234 $ 210 Amortization expense 730 512 Other 10 11 Net operating loss carryforwards 24,368 17,143 -------- -------- Total gross deferred tax assets 25,342 17,876 Less valuation allowance (9,796) (6,236) -------- -------- Net deferred tax assets 15,546 11,640 -------- -------- Deferred tax liabilities: Depreciation expense (15,546) (11,640) -------- -------- Total gross deferred tax liabilities (15,546) (11,640) -------- -------- Net deferred taxes $ -- $ -- ======== ========
At June 30, 2000, the Company had net operating loss carryforwards for Federal income tax purposes of approximately $64,800, which are available to offset future Federal taxable income, if any, in varying amounts through June 2020. The net change in the total valuation allowance for the years ended June 30, 2000 and 1999 was an increase of $3,560 and $3,470 respectively.
Note 11 - Related Party Transactions
The Company entered into leases with the chairman of the board and chief executive officer for certain warehouse/depots and office facilities with future annual rentals of approximately:
Year Ending June 30, -------------------- 2001 $ 235 2002 109 2003 60 ---- $ 404 ====
Rental expense was $305, $275 and $247 in 2000, 1999 and 1998, respectively, under these leases.
Note 12 - Lease Commitments
The Company leases office equipment, trucks and warehouse/depot and office facilities under operating leases (including related party leases, see Note 11) that expire at various dates through 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, -------------------- 2001 $ 4,466 2002 4,094 2003 2,846 2004 1,416 2005 409 Thereafter 63 ------ $13,294 ======
Total rental costs under noncancelable operating leases was approximately $4,670, $4,386 and $3,284 in 2000, 1999 and 1998, respectively.
NUCO2 INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts)
Note 13 - Concentration of Credit and Business Risks
The Company's business activity is with customers located within the United States. For each of the years ended June 30, 2000, 1999 and 1998 the Company's sales to customers in the food and beverage industry were approximately 99%.
There were no customers that accounted for greater than 5% of total sales for the three years ended June 30, 2000, nor were there any customers that accounted for greater than 5% of total accounts receivable at June 30, 2000 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.
Note 14 - Commitments and Contingencies
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 15 - Disclosures about Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of financial instruments.
(a) Cash and cash equivalents
The carrying amount approximates fair value due to the short maturity of these instruments.
(b) Long-term debt
The fair value of the Company's long-term debt has been estimated based on the current rates offered to the Company for debt of the same remaining maturities.
The carrying amounts and fair values of the Company's financial instruments are as follows:
June 30, -------- 2000 1999 ------- -------
Cash and cash equivalents $ 279 $ 1,579 Long-term debt, including current maturities 53,113 43,712 Subordinated debt 38,969 38,749
As of June 30, 2000 and 1999, the fair value of the Company's interest rate swap (see Note 5) was not material.
NUCO2 INC. Schedule II Valuation and Qualifying Accounts In Thousands
(1) Initial reserve of acquired company.