NUCO
2
INC
.
I
nd
ex
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3
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4
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5
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6
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8
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10
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15
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26
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27
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27
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28
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P
AR
T I.
|
FINANCIAL
INFORMATION
|
I
TEM
1.
|
FINANCIAL
STATEMENTS
|
NUCO
2
INC.
BAL
ANCE SHEETS
(In
thousands, except share amounts)
ASSETS
|
|
March 31, 2008
|
|
|
June 30, 2007
|
|
|
|
(UNAUDITED)
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
332
|
|
|
$
|
343
|
|
Trade
accounts receivable; net of allowance for doubtful
|
|
|
|
|
|
|
|
|
accounts of $626 and $1,004, respectively
|
|
|
8,863
|
|
|
|
11,823
|
|
Inventories
|
|
|
312
|
|
|
|
297
|
|
Prepaid
insurance expense and deposits
|
|
|
3,743
|
|
|
|
3,121
|
|
Prepaid
expenses and other current assets
|
|
|
6,416
|
|
|
|
1,412
|
|
Deferred
tax assets – current portion
|
|
|
6,725
|
|
|
|
8,264
|
|
Total
current assets
|
|
|
26,391
|
|
|
|
25,260
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
121,782
|
|
|
|
122,364
|
|
|
|
|
|
|
|
|
|
|
Goodwill,
net
|
|
|
25,909
|
|
|
|
25,909
|
|
Deferred
financing costs, net
|
|
|
187
|
|
|
|
254
|
|
Customer
lists, net
|
|
|
5,590
|
|
|
|
6,761
|
|
Non-competition
agreements, net
|
|
|
185
|
|
|
|
512
|
|
Deferred
lease acquisition costs, net
|
|
|
6,065
|
|
|
|
5,744
|
|
Deferred
tax assets, net
|
|
|
482
|
|
|
|
3,813
|
|
Other
|
|
|
234
|
|
|
|
221
|
|
|
|
|
38,652
|
|
|
|
43,214
|
|
Total
assets
|
|
$
|
186,825
|
|
|
$
|
190,838
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS' EQUITY
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
8,193
|
|
|
$
|
6,061
|
|
Accrued
expenses
|
|
|
2,685
|
|
|
|
2,043
|
|
Accrued
insurance
|
|
|
1,725
|
|
|
|
1,054
|
|
Accrued
interest
|
|
|
280
|
|
|
|
121
|
|
Accrued
payroll
|
|
|
2,836
|
|
|
|
2,357
|
|
Other
current liabilities
|
|
|
631
|
|
|
|
314
|
|
Total
current liabilities
|
|
|
16,350
|
|
|
|
11,950
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
25,350
|
|
|
|
34,750
|
|
Customer
deposits
|
|
|
4,333
|
|
|
|
4,246
|
|
Total
liabilities
|
|
|
46,033
|
|
|
|
50,946
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
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|
Shareholders'
equity:
|
|
|
|
|
|
|
|
|
Common
stock; par value $.001 per share; 30,000,000 shares
authorized;
|
|
|
|
|
|
|
|
|
issued 16,008,636 shares at March 31, 2008
|
|
|
|
|
|
|
|
|
and 15,921,066 shares at June 30, 2007
|
|
|
16
|
|
|
|
16
|
|
Additional
paid-in capital
|
|
|
178,910
|
|
|
|
174,831
|
|
Less
treasury stock at cost; 1,195,604 shares at March 31, 2008
|
|
|
|
|
|
|
|
|
and 921,409 shares at June 30, 2007
|
|
|
(30,018
|
)
|
|
|
(22,937
|
)
|
Accumulated
deficit
|
|
|
(5,139
|
)
|
|
|
(12,126
|
)
|
Accumulated
other comprehensive income (loss)
|
|
|
(2,977
|
)
|
|
|
108
|
|
Total
shareholders’ equity
|
|
|
140,792
|
|
|
|
139,892
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
186,825
|
|
|
$
|
190,838
|
|
See
accompanying notes to financial statements.
NUCO
2
INC.
(In
thousands, except per share amounts)
(UNAUDITED)
|
|
Three Months Ended March
31,
|
|
|
|
2008
|
|
|
2007
|
|
Revenues:
|
|
|
|
|
|
|
Product
sales
|
|
$
|
22,401
|
|
|
$
|
20,995
|
|
Equipment
rentals
|
|
|
11,974
|
|
|
|
10,919
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
34,375
|
|
|
|
31,914
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
Cost
of products sold, excluding depreciation and amortization
|
|
|
15,101
|
|
|
|
13,728
|
|
Cost
of equipment rentals, excluding depreciation
|
|
|
|
|
|
|
|
|
and amortization
|
|
|
2,447
|
|
|
|
1,999
|
|
Selling,
general and administrative expenses
|
|
|
7,108
|
|
|
|
7,952
|
|
Depreciation
and amortization
|
|
|
5,077
|
|
|
|
5,158
|
|
Loss
on asset disposal
|
|
|
676
|
|
|
|
522
|
|
|
|
|
30,409
|
|
|
|
29,359
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
3,966
|
|
|
|
2,555
|
|
Interest
expense
|
|
|
410
|
|
|
|
509
|
|
|
|
|
|
|
|
|
|
|
Income
before provision for income taxes
|
|
|
3,556
|
|
|
|
2,046
|
|
Provision
for income taxes
|
|
|
1,615
|
|
|
|
935
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,941
|
|
|
$
|
1,111
|
|
|
|
|
|
|
|
|
|
|
Weighted
average outstanding shares of common stock:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
14,797
|
|
|
|
15,680
|
|
Diluted
|
|
|
15,191
|
|
|
|
15,896
|
|
|
|
|
|
|
|
|
|
|
Net
income per basic share
|
|
$
|
0.13
|
|
|
$
|
0.07
|
|
Net
income per diluted share
|
|
$
|
0.13
|
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
NUCO
2
INC.
(In
thousands, except per share amounts)
(UNAUDITED)
|
|
Nine Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
Revenues:
|
|
|
|
|
|
|
Product
sales
|
|
$
|
68,249
|
|
|
$
|
63,865
|
|
Equipment
rentals
|
|
|
35,144
|
|
|
|
32,366
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
103,393
|
|
|
|
96,231
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
Cost
of products sold, excluding depreciation and amortization
|
|
|
44,392
|
|
|
|
41,648
|
|
Cost
of equipment rentals, excluding depreciation
|
|
|
|
|
|
|
|
|
and amortization
|
|
|
7,032
|
|
|
|
4,603
|
|
Selling,
general and administrative expenses
|
|
|
20,427
|
|
|
|
22,343
|
|
Depreciation
and amortization
|
|
|
15,124
|
|
|
|
14,900
|
|
Loss
on asset disposal
|
|
|
2,416
|
|
|
|
1,506
|
|
|
|
|
89,391
|
|
|
|
85,000
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
14,002
|
|
|
|
11,231
|
|
Interest
expense
|
|
|
1,502
|
|
|
|
1,635
|
|
|
|
|
|
|
|
|
|
|
Income
before provision for income taxes
|
|
|
12,500
|
|
|
|
9,596
|
|
Provision
for income taxes
|
|
|
5,513
|
|
|
|
4,584
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
6,987
|
|
|
$
|
5,012
|
|
|
|
|
|
|
|
|
|
|
Weighted
average outstanding shares of common stock:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
14,803
|
|
|
|
15,711
|
|
Diluted
|
|
|
15,182
|
|
|
|
15,979
|
|
|
|
|
|
|
|
|
|
|
Net
income per basic share
|
|
$
|
0.47
|
|
|
$
|
0.32
|
|
Net
income per diluted share
|
|
$
|
0.46
|
|
|
$
|
0.31
|
|
See
accompanying notes to financial statements.
NUCO
2
INC.
STAT
EME
NT OF SHAREHOLDERS’ EQUITY
(In
thousands, except share amounts)
(UNAUDITED)
|
|
Common
Stock
|
|
|
Additional
Paid-In
Capital
|
|
|
Treasury
Stock
|
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
June 30, 2007
|
|
|
15,921,066
|
|
|
$
|
16
|
|
|
$
|
174,831
|
|
|
|
921,409
|
|
|
$
|
(22,937
|
)
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in fair value of hedging instruments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
2,511
|
|
|
|
-
|
|
|
|
-
|
|
Excess
tax benefits from share-based arrangements
|
|
|
-
|
|
|
|
-
|
|
|
|
170
|
|
|
|
-
|
|
|
|
-
|
|
Issuance
of 87,570 shares of common stock -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
exercise of
options
|
|
|
87,570
|
|
|
|
-
|
|
|
|
1,398
|
|
|
|
-
|
|
|
|
-
|
|
Purchase
of treasury stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
274,195
|
|
|
|
(7,081
|
)
|
Balance,
March 31, 2008
|
|
|
16,008,636
|
|
|
$
|
16
|
|
|
$
|
178,910
|
|
|
|
1,195,604
|
|
|
$
|
(30,018
|
)
|
See
accompanying notes to financial statements.
NUCO
2
INC.
STATEMENT
OF SHAREHOLDERS’ EQUITY
(In
thousands, except share amounts)
(UNAUDITED)
|
|
Accumulated
Deficit
|
|
|
Accumulated
Other Comprehensive
Income
(Loss)
|
|
|
Total
Shareholders'
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
June 30, 2007
|
|
$
|
(12,126
|
)
|
|
$
|
108
|
|
|
$
|
139,892
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
6,987
|
|
|
|
-
|
|
|
|
6,987
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of hedging
instruments
|
|
|
-
|
|
|
|
(3,085
|
)
|
|
|
(3,085
|
)
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
3,902
|
|
Share-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
2,511
|
|
Excess
tax benefits from share-based arrangements
|
|
|
-
|
|
|
|
-
|
|
|
|
170
|
|
Issuance
of 87,570 shares of common stock -
exercise of
options
|
|
|
-
|
|
|
|
-
|
|
|
|
1,398
|
|
Purchase
of treasury stock
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,081
|
)
|
Balance,
March 31, 2008
|
|
$
|
(5,139
|
)
|
|
$
|
(2,977
|
)
|
|
$
|
140,792
|
|
See
accompanying notes to financial statements.
NUCO
2
INC.
STATEM
ENTS
OF CASH FLOWS
(In
thousands)
(UNAUDITED)
|
|
Nine Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$
|
6,987
|
|
|
$
|
5,012
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization of property and equipment
|
|
|
12,680
|
|
|
|
12,380
|
|
Bad
debt expense
|
|
|
806
|
|
|
|
1,990
|
|
Amortization
of other assets
|
|
|
2,444
|
|
|
|
2,520
|
|
Loss
on asset disposal
|
|
|
2,416
|
|
|
|
1,506
|
|
Change
in net deferred tax asset
|
|
|
5,039
|
|
|
|
4,156
|
|
Share-based
compensation
|
|
|
2,511
|
|
|
|
3,245
|
|
Excess
tax benefits from share-based arrangements
|
|
|
(170
|
)
|
|
|
(1,370
|
)
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease
(increase) in:
|
|
|
|
|
|
|
|
|
Trade
accounts receivable
|
|
|
2,154
|
|
|
|
(1,036
|
)
|
Inventories
|
|
|
(15
|
)
|
|
|
(3
|
)
|
Prepaid
insurance expense and deposits
|
|
|
(622
|
)
|
|
|
1,712
|
|
Prepaid
expenses and other current assets
|
|
|
(391
|
)
|
|
|
62
|
|
Increase
(decrease) in:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
2,132
|
|
|
|
(2,794
|
)
|
Accrued
expenses
|
|
|
705
|
|
|
|
339
|
|
Accrued
insurance
|
|
|
671
|
|
|
|
(2,488
|
)
|
Accrued
payroll
|
|
|
479
|
|
|
|
1,762
|
|
Accrued
interest
|
|
|
158
|
|
|
|
9
|
|
Other
current liabilities
|
|
|
318
|
|
|
|
39
|
|
Customer
deposits
|
|
|
86
|
|
|
|
407
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
38,388
|
|
|
|
27,448
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds
on sale of assets
|
|
|
38
|
|
|
|
-
|
|
Purchase
of property and equipment
|
|
|
(13,951
|
)
|
|
|
(17,582
|
)
|
Increase
in deferred lease acquisition costs
|
|
|
(1,865
|
)
|
|
|
(1,722
|
)
|
Increase
in other assets
|
|
|
(11
|
)
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
$
|
(15,789
|
)
|
|
$
|
(19,325
|
)
|
See
accompanying notes to financial statements.
NUCO
2
INC.
STATEMENTS
OF CASH FLOWS
(In
thousands)
(UNAUDITED)
(Continued)
|
|
Nine Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
Capitalized
debt issuance costs
|
|
$
|
(2,796
|
)
|
|
$
|
-
|
|
Treasury
Shares repurchased
|
|
|
(7,081
|
)
|
|
|
(12,514
|
)
|
Purchase
of swaption
|
|
|
(4,900
|
)
|
|
|
-
|
|
Exercise
of options and warrants
|
|
|
1,398
|
|
|
|
2,070
|
|
Excess
tax benefits from share-based payment arrangements
|
|
|
170
|
|
|
|
1,370
|
|
Repayment
of long-term debt
|
|
|
(18,201
|
)
|
|
|
(9,400
|
)
|
Proceeds
from issuance of long-term debt
|
|
|
8,800
|
|
|
|
10,250
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in financing activities
|
|
$
|
(22,610
|
)
|
|
$
|
(8,224
|
)
|
|
|
|
|
|
|
|
|
|
Decrease
in cash and cash equivalents
|
|
|
(11
|
)
|
|
|
(101
|
)
|
Cash
and cash equivalents, beginning of period
|
|
|
343
|
|
|
|
341
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of period
|
|
$
|
332
|
|
|
$
|
240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Cash Flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,551
|
|
|
$
|
1,626
|
|
Income
taxes
|
|
$
|
258
|
|
|
$
|
269
|
|
See
accompanying notes to financial statements.
During
the nine months ended March 31, 2007, a certain officer exercised
stock
options in a non-cash transaction. The officer surrendered 6,800
shares of
previously
acquired common stock in exchange for 25,366 newly issued shares.
The
company
recorded $171, the market value of the surrendered shares, as treasury
stock.
NUCO
2
INC.
NOTES
TO FI
NANCIAL STATEMENTS
(UNAUDITED
)
NOTE 1 –
BASIS OF PRESENTATION
The accompanying unaudited financial
statements have been prepared in accordance with the instructions to Form 10-Q
used for quarterly reports under Section 13 or 15(d) of the Securities Exchange
Act of 1934, and therefore, do not include all information and footnotes
necessary for a fair presentation of financial position, results of operations
and cash flows in conformity with generally accepted accounting
principles.
The financial information included in
this report has been prepared in conformity with the accounting principles, and
methods of applying those accounting principles, reflected in the audited
financial statements for the fiscal year ended June 30, 2007 of NuCO
2
Inc. (the
“Company”) included in Form 10-K (“Form 10-K”), filed with the Securities and
Exchange Commission (“SEC”).
All adjustments (consisting of normal
recurring adjustments) necessary for a fair statement of the results for the
interim periods presented have been recorded. This quarterly report
on Form 10-Q should be read in conjunction with the Company's audited financial
statements for the fiscal year ended June 30, 2007. The results of
operations for the periods presented are not necessarily indicative of the
results to be expected for the full fiscal year. The Company
anticipates that reported revenue will fluctuate on a quarterly basis due to
seasonal variations. Based on historical data and expected trends,
the Company anticipates that demand for the delivery of CO
2
will be
highest in the first fiscal quarter and lowest in the third fiscal
quarter.
Certain prior period amounts have been
reclassified to conform with the current year presentation.
NOTE 2 –
RECENT ACCOUNTING PRONOUNCEMENTS
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standard (“SFAS”) No. 141R, “
Business Combinations
” (“SFAS
No. 141R”). SFAS No. 141R will require, among other things, the expensing of
direct transaction costs, including deal costs and restructuring costs as
incurred, acquired in process research and development assets to be capitalized,
certain contingent assets and liabilities to be recognized at fair value and
earn-out arrangements, including contingent consideration, may be required to be
measured at fair value until settled, with changes in fair value recognized each
period into earnings. SFAS No. 141R will become effective for the
Company on a prospective basis for transactions occurring in fiscal 2010 and
early adoption is not permitted. SFAS No. 141R may have a material
impact on the Company’s financial position, results of operations and cash flows
if it enters into a material business combination after the standard’s effective
date.
In
December 2007, the FASB issued SFAS No. 160, “
Noncontrolling Interests in
Consolidated Financial Statements
” (“SFAS No. 160”). SFAS No.
160 will change the accounting for and reporting of minority interests. Under
the new standard, minority interests, will be referred to as noncontrolling
interests and will be reported as equity in the parent company’s consolidated
financial statements. Transactions between the parent company and the
noncontrolling interests will be treated as transactions between shareholders
provided that the transactions do not create a change in control. Gains and
losses will be recognized in earnings for transactions between the parent
company and the noncontrolling interests, unless control is achieved or
lost. SFAS No. 160 requires retrospective adoption of the
presentation and disclosure requirements for existing minority interests. All
other requirements of SFAS No. 160 shall be applied prospectively. SFAS No. 160
is effective for the Company beginning in the first quarter of fiscal year 2010
and earlier adoption is not permitted. SFAS No. 160 may have a
material impact on the Company’s financial position, results of operations and
cash flows if it enters into material transactions or acquires a noncontrolling
interest after the standard’s effective date.
In February 2007, the FASB issued SFAS
No. 159,
“The Fair Value
Option for Financial Assets and Financial Liabilities – Including an Amendment
of FASB Statement No. 115”
(“SFAS No. 159”), which provides
companies with an option to report selected financial assets and liabilities at
their fair values. The objective is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. SFAS No. 159 is expected to expand the use
of fair value measurement, which is consistent with the FASB’s long-term
measurement objectives for accounting for financial instruments. SFAS
No. 159 will become effective for the Company on July 1,
2008. The Company is currently evaluating the impact, if any, that
the adoption of SFAS No. 159 will have on its financial condition,
results of operations or cash flows.
In September 2006, the FASB issued
SFAS No. 157,
“Fair Value
Measurements”
(“SFAS No. 157”), which defines fair value,
establishes guidelines for measuring fair value and expands disclosures
regarding fair value measurements. SFAS No. 157 is effective for fiscal
years beginning after November 15, 2007. The Company is currently
evaluating what impact, if any, the adoption of SFAS No. 157 will have on
its financial condition, results of operations or cash flows.
Please
see the Company's Form 10-K for a discussion of other significant accounting
policies.
NOTE 3 –
AGREEMENT AND PLAN OF MERGER
On
January 29, 2008, the Company entered into an Agreement and Plan of Merger (the
“Merger Agreement”) with NuCO2 Acquisition Corp., a Delaware corporation
(“Parent”), and NuCO2 Merger Co., a Florida corporation and a wholly owned
subsidiary of Parent (“Merger Sub”). Subject to the terms and
conditions of the Merger Agreement, Merger Sub will merge with and into the
Company (the “Merger”) with the Company being the surviving corporation in the
Merger and, at the effective time of the Merger, each issued and outstanding
share of common stock, par value $0.001 per share (the “Common Stock”), of the
Company (other than treasury shares, shares owned by Parent, Merger Sub or any
direct or indirect wholly owned subsidiary of Parent and shares owned by
stockholders who perfect their appraisal rights under Florida law) will be
converted automatically into the right to receive $30.00 in cash, without
interest.
Merger
Sub and Parent are affiliates of Aurora Capital Group, a Los Angeles-based
private equity firm (“Aurora”).
In order
to reduce the Company’s exposure to increases in interest rates in connection
with the debt
financing
for the Merger (the “Merger Financing”), on January 30, 2008,
the Company
purchased an option, for a premium of $4.9 million, to enter into a pay fixed
rate swap (“Swaption I”) that grants the Company the right (but not the
obligation) to enter into a pay fixed swap at the effective time of the Merger
with respect to amounts to be borrowed under the Merger
Financing. The underlying swap is in the notional amount of $335.0
million, and the option expires on June 30, 2008. Under the Merger Agreement,
Parent will reimburse the Company for its unrecouped costs associated with
Swaption I in the event that the Merger Agreement is terminated and, upon such
reimbursement, the Company will assign Swaption I to Parent. Swaption
I meets the requirements to be designated as a cash flow hedge and is deemed a
highly effective transaction. Accordingly, changes in the fair value
of Swaption I are recorded as other comprehensive income (loss). At
March 31, 2008, the Company recorded a loss of $2.8 million, representing the
change in fair value of Swaption I from January 30, 2008 through March 31, 2008,
as other comprehensive loss.
The
Company has incurred approximately $2.8 million in capitalized debt issuance
costs associated with the Merger Financing, which are included in prepaid
expenses and other current assets at March 31, 2008.
NOTE 4 -
EARNINGS PER SHARE AND OTHER COMPREHENSIVE INCOME (LOSS)
(a)
Earnings per Share
The
Company calculates earnings per share in accordance with the requirements of
SFAS No. 128,
"Earnings Per
Share."
The weighted average shares outstanding used to calculate basic
and diluted earnings per share were calculated as follows (in
thousands):
|
|
Three Months Ended March
31,
|
|
|
Nine Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic
|
|
|
14,797
|
|
|
|
15,680
|
|
|
|
14,803
|
|
|
|
15,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
options and warrants to purchase
shares
of common stock - remaining shares after
assuming
repurchase with proceeds
from
exercise
|
|
|
394
|
|
|
|
216
|
|
|
|
379
|
|
|
|
268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - diluted
|
|
|
15,191
|
|
|
|
15,896
|
|
|
|
15,182
|
|
|
|
15,979
|
|
(b)
Other Comprehensive Income (Loss)
Comprehensive
income (loss) is defined as the change in equity (net assets) of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources, and is comprised of net income and “other comprehensive
income (loss).” The components of other comprehensive income (loss) are as
follows for the periods presented (in thousands):
|
|
Three Months Ended March
31,
|
|
|
Nine Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
income
|
|
$
|
1,941
|
|
|
$
|
1,111
|
|
|
$
|
6,987
|
|
|
$
|
5,012
|
|
Interest
rate swap transaction (Note 4)
|
|
|
(2,909
|
)
|
|
|
(48
|
)
|
|
|
(3,085
|
)
|
|
|
(225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss)
|
|
$
|
(968
|
)
|
|
$
|
1,063
|
|
|
$
|
3,902
|
|
|
$
|
4,787
|
|
NOTE 5 –
LONG TERM DEBT
(a)
Revolving Credit Facility
On May 27, 2005, the Company terminated
its previous credit facility and entered into a $60.0 million revolving credit
facility with Bank of America, N.A. (the “2005 Credit Facility”), maturing on
May 27, 2010. The Company is entitled to select either Base Rate Loans (as
defined) or Eurodollar Rate Loans (as defined), plus applicable margin, for
principal borrowings under the 2005 Credit Facility. Applicable margin is
determined by a pricing grid, as amended in March 2006, based on the Company’s
Consolidated Leverage Ratio (as defined) as follows:
Pricing
Level
|
|
Consolidated
Leverage Ratio
|
Eurodollar
Rate
Loans
|
Base
Rate
Loans
|
I
|
|
Greater
than or equal to 2.50x
|
2.000%
|
0.500%
|
II
|
|
Less
than 2.50x but greater than or equal to 2.00x
|
1.750%
|
0.250%
|
III
|
|
Less
than 2.00x but greater than or equal to 1.50x
|
1.500%
|
0.000%
|
IV
|
|
Less
than 1.50x but greater than or equal to 0.50x
|
1.250%
|
0.000%
|
V
|
|
Less
than 0.50x
|
1.000%
|
0.000%
|
Interest is payable periodically on
borrowings under the 2005 Credit Facility. The 2005 Credit Facility is
uncollateralized. The Company is required, on a quarterly basis, to assess and
meet certain affirmative and negative covenants, including financial covenants.
These financial covenants are based on a measure that is not consistent with
accounting principles generally accepted in the United States of America. Such
measure is EBITDA (as defined), which represents earnings before interest,
taxes, depreciation and amortization, as further modified by certain defined
adjustments. The failure to meet these covenants, absent a waiver or amendment,
would place the Company in default and cause the debt outstanding under the 2005
Credit Facility to immediately become due and payable. In connection with the
Company’s share repurchase program announced during the quarter ended March 31,
2007, the 2005 Credit Facility was amended to modify certain
covenants. The Company was in compliance with all covenants under the
2005 Credit Facility as of the first assessment date on June 30, 2005 and
through March 31, 2008.
As of March 31, 2008, a total of $25.4
million was outstanding under the 2005 Credit Facility, primarily consisting of
Libor (Eurodollar Rate) loans, with a weighted average interest rate of 4.33%
per annum.
Effective
July 1, 2000, the Company adopted SFAS No. 133, “
Accounting for Derivative
Instruments and Hedging Activities,”
as amended, which, among other
things, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. All derivatives, whether
designated in hedging relationships or not, are required to be recorded on the
balance sheet at fair value. For a derivative designated as a cash
flow hedge, the effective portions of changes in the
fair
value of the derivative are recorded as other comprehensive income and are
recognized in the statement of operations when the hedged item affects
earnings. Ineffective portions of changes in the fair value of cash
flow hedges (if any) are recognized in earnings.
The
Company uses derivative instruments to manage exposure to interest rate
risks. The Company’s objectives for holding derivatives are to
minimize the risks using the most effective methods to eliminate or reduce the
impact of this exposure.
In order
to reduce the Company’s exposure to increases in Eurodollar rates, and
consequently to increases in interest payments, the Company entered into an
interest rate swap transaction (the “2005 Swap”), comprised of two instruments
(“Swap A” and “Swap B”), on September 28, 2005, with an effective date of
October 3, 2005. Swap A, in the amount of $15.0 million (the “A
Notional Amount”), matures on October 3, 2008 and Swap B, in the amount of $5.0
million (the “B Notional Amount”), matured on April 3, 2007. Pursuant
to Swap A, the Company currently pays a fixed interest rate of 4.69% per annum
and receives a Eurodollar-based floating rate. The effect of Swap A
is to neutralize any changes in Eurodollar rates on the A Notional
Amount. The 2005 Swap meets the requirements to be designated as a
cash flow hedge and is deemed a highly effective
transaction. Accordingly, changes in the fair value of Swap A are
recorded as other comprehensive income (loss). During the nine months
ended March 31, 2008, the Company recorded a loss of $0.3 million, representing
the change in fair value of Swap A from June 30, 2007 through March 31, 2008, as
other comprehensive loss (see Note 4(b)).
NOTE 6 –
SHAREHOLDERS’ EQUITY
(a) Stock
Option Plans
The Company recognized $0.9 million and
$2.5 million ($0.6 million and $1.8 million, net of income taxes) in stock
option compensation during the three and nine months ended March 31, 2008 as
compared to $1.3 million and $3.2 million ($0.9 million and $2.3 million, net of
income taxes) during the three and nine months ended March 31,
2007.
NOTE 7 –
INCOME TAXES
The Company accounts for income taxes
under SFAS No. 109,
“Accounting for Income Taxes”
(“SFAS 109”). Deferred income taxes reflect the net tax effects of
net operating loss carryforwards and temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes.
As of June 30, 2007, the Company had
net operating loss carryforwards for federal income tax purposes of
approximately $91 million and for state purposes in varying amounts, expiring
through June 2025. The Company’s effective rate, exclusive of the
impact of the net operating loss carryforwards for the three and nine months
ended March 31, 2008, was approximately 45.4% and 44.1%,
respectively. If an “ownership change” for federal income tax
purposes were to occur in the future, the Company’s ability to use its
pre-ownership change federal and state net operating loss carryforwards (and
certain built-in losses, if any) would be subject to an annual usage limitation,
which under certain circumstances may prevent the Company from being able to
utilize a portion of such loss carryforwards in future tax periods and may
reduce its after-tax cash flow.
In
July 2006, the FASB issued Interpretation 48 (“FIN No. 48”), “
Accounting for Uncertainty in Income
Taxes — An Interpretation of FASB Statement No. 109
.” FIN No. 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with SFAS 109. FIN No. 48 also
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN No. 48 also provides guidance on
derecognition, classification, interest and penalties.
Effective
July 1, 2007, the Company adopted the provisions of FIN No. 48. The
implementation of FIN No. 48 did not have a material impact on the Company, as
it had no uncertain tax positions recorded at June 30, 2007 or December 31,
2007. The Company recognizes interest accrued related to unrecognized
tax benefits in interest expense and penalties in operating expense. The Company
does not currently anticipate that the total amount of unrecognized tax benefits
will significantly increase or decrease by the end of Fiscal 2008. The Company
is no longer subject to tax examinations by tax authorities for fiscal years
ended on or prior to June 30, 2004.
NOTE 8 –
COMMITMENTS AND CONTINGENCIES
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 9 –
SUBSEQUENT EVENTS
On April
10, 2008, the Company sold Swaption I (refer to Note 3) and purchased a new
option to enter into a pay fixed rate swap (“Swaption II”) that grants
the Company the right (but not the obligation) to enter into a pay fixed swap at
the effective time of the Merger with respect to amounts to be borrowed under
the Merger Financing, for a net cost of $3.64 million. The underlying
swap is in the notional amount of $355.0 million, due to an anticipated increase
in the principal amount of the Merger Financing, and the option expires on June
30, 2008. Parent will reimburse the Company for its unrecouped costs associated
with Swaptions I and II in the event that the Merger Agreement is terminated
and, upon such reimbursement, the Company will assign Swaption II to Parent.
Swaption II meets the requirements to be designated as a cash flow hedge and is
deemed a highly effective transaction. Accordingly, changes in the
fair value of Swaption II are recorded as other comprehensive income
(loss). The Company will evaluate the fair value of Swaption II in
accordance with
SFAS No.
133, “
Accounting
for Derivative Instruments and Hedging Activities,”
on a
quarterly basis.
On May 8,
2008, the Company’s shareholders approved the Merger Agreement with affiliates
of Aurora Capital Group. The transaction is expected to close by the end of May
2008.
ITE
M 2.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THIS MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTAINS
FORWARD-LOOKING STATEMENTS REGARDING FUTURE EVENTS AND OUR FUTURE RESULTS THAT
ARE BASED ON CURRENT EXPECTATIONS, ESTIMATES, FORECASTS, AND PROJECTIONS ABOUT
THE INDUSTRY IN WHICH WE OPERATE AND THE BELIEFS AND ASSUMPTIONS OF OUR
MANAGEMENT. WORDS SUCH AS “EXPECTS,” “ANTICIPATES,” “TARGETS,”
“GOALS,” “PROJECTS,” “INTENDS,” “PLANS,” “BELIEVES,” “SEEKS,” “ESTIMATES,”
VARIATIONS OF SUCH WORDS AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH
FORWARD-LOOKING STATEMENTS. IN ADDITION, ANY STATEMENTS THAT REFER TO
PROJECTIONS OF OUR FUTURE FINANCIAL PERFORMANCE, OUR ANTICIPATED GROWTH AND
TRENDS IN OUR BUSINESS, AND OTHER CHARACTERIZATIONS OF FUTURE EVENTS OR
CIRCUMSTANCES, ARE FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED
THAT THESE FORWARD-LOOKING STATEMENTS ARE ONLY PREDICTIONS AND ARE SUBJECT TO
RISKS, UNCERTAINTIES, AND ASSUMPTIONS THAT ARE DIFFICULT TO
PREDICT. THEREFORE, ACTUAL RESULTS MAY DIFFER MATERIALLY AND
ADVERSELY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS.
Overview
We believe we are the leading supplier
of bulk CO
2
systems
and bulk CO
2
for
carbonating fountain beverages in the United States based on the number of bulk
CO
2
systems leased to customers and the only company in our industry to operate a
national network of bulk CO
2
service
locations. As of March 31, 2008, we operated a national network of 129 service
locations (117 stationary and 12 mobile) servicing approximately 116,400
customer locations in 43 states. Currently, virtually all fountain
beverage users in the continental United States are within our present service
area.
We market our bulk CO
2
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 many of the major national and regional chains throughout the United
States. Our success in reaching multi-unit placement agreements is
due in part to our national delivery system. We typically approach
large chains on a corporate or regional level for approval to become the
exclusive supplier of bulk CO
2
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 CO
2
systems to
independent restaurants, convenience stores and theaters.
We have entered into master service
agreements which include 102 restaurant and convenience store concepts that
provide fountain beverages. These master service agreements generally provide
for a commitment on the part of the operator for all of its currently owned
locations and may also include future locations. We currently service
approximately 59,300 chain and franchisee locations with chains that have signed
master service agreements. We are actively working on expanding the
number of master service agreements with numerous restaurant
chains.
We believe that our future revenue
growth, gains in gross margin and profitability will be dependent upon (1)
increases in route density in our existing markets and the expansion and
penetration of bulk CO
2
system
installations in new market regions, both resulting from successful ongoing
marketing, (2) improved operating efficiencies and (3) price
increases. New multi-unit placement agreements combined with
single-unit placements will drive improvements in achieving route
density. We maintain a highly efficient route structure and establish
additional service locations as service areas expand through geographic growth.
Our entry into many states was accomplished largely through the acquisition of
businesses having thinly developed route networks. We expect to
benefit from route efficiencies and other economies of scale as we build our
customer base in these states through intensive regional and local marketing
initiatives. Greater density should also lead to enhanced utilization of
vehicles and other fixed assets and the ability to spread fixed marketing and
administrative costs over a broader revenue base.
Generally, our experience has been that
as our service locations mature their gross profit margins improve as a result
of business volume growth while fixed costs remain essentially
unchanged. New service locations typically operate at low or negative
gross margins in the early stages and detract from our highly profitable service
locations in more mature markets. Accordingly, we believe that we are
in position to build our customer base while maintaining and improving upon our
superior levels of customer service, with minimal changes required to support
our infrastructure. However, while the past several years have been
years of strong growth, for the foreseeable future, we plan to increase our
focus on improving operating effectiveness, pricing for our services and
strengthening our workforce.
General
Substantially all of our revenues have
been derived from the rental of bulk CO
2
systems
installed at customers’ sites, the sale of bulk CO
2
and high
pressure cylinder revenues. Revenues have grown from $72.3 million in
fiscal 2002 to $130.1 million in fiscal 2007. We believe that our
revenue base is stable due to the existence of long-term contracts with our
customers, which generally rollover with a limited number expiring without
renewal in any one year. Revenue growth is largely dependent on (1)
the rate of new bulk CO
2
system
installations, (2) the growth in bulk CO
2
sales and
(3) price increases.
Cost of products sold is comprised of
purchased CO
2
and
vehicle and service location costs associated with the storage and delivery of
CO
2
. As
of March 31, 2008, we operated a total of 359 specialized bulk CO
2
delivery
vehicles and technical service vehicles that logged approximately 14.6 million
miles over the last twelve months. While significant fluctuations in
fuel prices impact our operating costs, such impact is largely offset by fuel
surcharges billed to the majority of our customers. Consequently,
while the impact on our gross profit and operating income is substantially
mitigated, rising fuel prices do result in lower gross profit
margins. Cost of equipment rentals is comprised of costs associated
with customer equipment leases, including the repair and refurbishment of leased
assets. Selling, general and administrative expenses consist of wages
and benefits, dispatch and communications costs, as well as expenses associated
with marketing, administration, accounting and employee
training. Consistent with the capital intensive nature of our
business, we incur significant depreciation and amortization
expenses. These stem from the depreciation of our bulk CO
2
systems
and related installation costs, amortization of deferred lease acquisition
costs, and amortization of deferred financing costs and other intangible
assets. With respect to company-owned bulk CO
2
systems,
we capitalize direct installation costs associated with installation of such
systems with customers under non-cancelable contracts and which would not be
incurred but for a successful placement. All other service, marketing
and administrative costs are expensed as incurred.
Since 1990, we have devoted significant
resources to building a sales and marketing organization, adding administrative
personnel and developing a national infrastructure to support the rapid growth
in the number of our installed base of bulk CO
2
systems. The costs
of this expansion and the
significant depreciation expense recognized on
our installed network have resulted in an
accumulated deficit of $5.1 million at March 31, 2008.
Results
of Operations
The
following table sets forth, for the periods indicated, the percentage
relationship which the various items bear to total revenues:
|
Three Months Ended March
31,
|
|
|
Nine Months Ended March
31,
|
Income
Statement Data:
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
sales
|
65.2
|
%
|
|
65.8
|
%
|
|
66.0
|
%
|
|
|
66.4
|
%
|
Equipment
rentals
|
34.8
|
|
|
34.2
|
|
|
34.0
|
|
|
|
33.6
|
|
Total
revenues
|
100.0
|
|
|
100.0
|
|
|
100.0
|
|
|
|
100.0
|
|
Cost
of products sold, excluding
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
43.9
|
|
|
43.0
|
|
|
42.9
|
|
|
|
43.3
|
|
Cost
of equipment rentals, excluding
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
7.1
|
|
|
6.3
|
|
|
6.8
|
|
|
|
4.8
|
|
Selling,
general and administrative expenses
|
20.7
|
|
|
24.9
|
|
|
19.8
|
|
|
|
23.2
|
|
Depreciation
and amortization
|
14.8
|
|
|
16.2
|
|
|
14.6
|
|
|
|
15.5
|
|
Loss
on asset disposal
|
2.0
|
|
|
1.6
|
|
|
2.3
|
|
|
|
1.5
|
|
Operating
income
|
11.5
|
|
|
8.0
|
|
|
13.6
|
|
|
|
11.7
|
|
Interest
expense
|
1.2
|
|
|
1.6
|
|
|
1.5
|
|
|
|
1.7
|
|
Income
before income taxes
|
10.3
|
|
|
6.4
|
|
|
12.1
|
|
|
|
10.0
|
|
Provision
for income taxes
|
4.7
|
|
|
2.9
|
|
|
5.3
|
|
|
|
4.8
|
|
Net
income
|
5.6
|
%
|
|
3.5
|
%
|
|
6.8
|
%
|
|
|
5.2
|
%
|
Three
Months Ended March 31, 2008 Compared to the Three Months Ended March 31,
2007
Total
Revenues
Total
revenues increased by $2.5 million, or 7.7%, from $31.9 million in 2007 to $34.4
million in 2008. Revenues derived from our bulk CO
2
service
plans increased by $1.6 million, primarily due to pricing initiatives and an
increase in the number of customer locations serviced. Revenues
derived from the sale of high pressure cylinder products, fuel surcharges, and
equipment sales increased by $0.9 million. The number of customer
locations utilizing our products and services increased from approximately
116,000 at March 31, 2007 to approximately 116,400 at March 31, 2008, due
primarily to organic growth.
The
following table sets forth, for the periods indicated, the percentage of total
revenues by service plan:
|
|
|
Three Months Ended March
31,
|
|
Service
Plan
|
|
2008
|
|
|
2007
|
|
|
Bulk
budget plan
1
|
|
|
47.9
|
%
|
|
|
51.0
|
%
|
|
Equipment
lease/product purchase plan
2
|
|
|
20.7
|
|
|
|
18.1
|
|
|
Product
purchase plan
3
|
|
|
10.7
|
|
|
|
10.5
|
|
|
High
pressure cylinder
4
|
|
|
5.3
|
|
|
|
5.7
|
|
|
Other
revenues
5
|
|
|
15.4
|
|
|
|
14.7
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
1
Combined fee for bulk CO
2
tank
and bulk CO
2.
|
|
|
|
|
|
|
2
Fee for bulk CO
2
tank
and, separately, bulk CO
2
usage.
|
|
|
|
|
|
|
3
Bulk CO
2
only.
|
|
|
|
|
|
|
4
High pressure CO
2
cylinders and non-CO
2
gases.
|
|
|
|
|
|
|
5
Surcharges and other charges.
|
|
|
|
|
|
Product Sales -
Revenues
derived from the product sales portion of our service plans increased by $1.4
million, or 6.7%, from $21.0 million in 2007 to $22.4 million in
2008. The increase in revenues is primarily due to a slight increase
in the average number of customer locations serviced, a 1.6% increase in product
usage, and pricing initiatives. In addition, sales of products and
services other than bulk CO
2
increased
by $0.7 million due in large part to an increase in revenues derived from
cylinder products, fuel surcharges, equipment sales, and other
revenues.
Equipment Rentals -
Revenues
derived from the lease portion of our service plans increased by $1.1 million,
or 9.7%, from $10.9 million in 2007 to $12.0 million in 2008, primarily due to a
0.7% increase in the average number of customer locations leasing equipment from
us, including the impact of price increases to a significant number of our
customers consistent with the Consumer Price Index, partially offset by
incentive pricing provided to multiple national restaurant organizations
utilizing our equipment under the bulk budget plan and equipment lease/product
purchase plans pursuant to master service agreements. The number of
customer locations renting equipment from us increased slightly from 96,000 at
March 31, 2007 to 97,000 at March 31, 2008.
Cost
of Products Sold, Excluding Depreciation and Amortization
Cost of products sold, excluding
depreciation and amortization, increased from $13.7 million in 2007 to $15.1
million in 2008, while increasing as a percentage of product sales revenue from
65.4% to 67.4%.
Raw
product costs increased by $0.4 million, from $5.1 million in 2007 to $5.5
million in 2008, due in large part to a $0.3 million increase in CO
2
costs. The volume of CO
2
sold by us
increased 2.4%, primarily due to a 0.2% increase in our average customer base,
and an increase in usage of 1.6%.
Operational costs, primarily wages and
benefits related to cost of products sold, increased from $5.6 million in 2007
to $6.0 million in 2008.
Truck delivery expenses increased from
$2.1 million in 2007 to $2.6 million in 2008 primarily due to the increased
customer base and fuel costs. We have been able to continue to
minimize the impact of increased fuel costs and variable lease costs associated
with truck usage by continuing to improve efficiencies in the timing and routing
of deliveries. During the last six months of fiscal 2007, we
implemented a new routing routine at select locations across the
country. The full implementation of “alpha routing” will be
systematically implemented through the end of fiscal 2008.
Occupancy
and shop costs related to cost of products sold increased from $0.9 million in
at March 31, 2007 to $1.0 million at March 31, 2008.
Cost
of Equipment Rentals, Excluding Depreciation and Amortization
Cost of
equipment rentals, excluding depreciation and amortization, increased from $2.0
million in 2007 to $2.4 million in 2008, while increasing as a percentage of
equipment rentals revenue from 18.3% to 20.4%. During the second
fiscal quarter of 2007, we made a strategic decision to be more selective with
customer activations on a going forward basis, while improving both operating
and customer service metrics. As part of this decision, rather than
reducing the number of technicians, we have increased our emphasis on the
assessment, upgrade and service of our bulk CO
2
tanks at
customer sites. To the degree that our installers and other personnel
are involved in such activities, as compared to initial installation of tanks at
customer sites, which consumed the substantial majority of our technicians’
efforts over the past several years, the related expense is recognized in our
statement of income as incurred. We are continuing to increase
capacity to repair and service tanks, which is expected to reduce our need to
purchase new tanks. Tank repair and service costs are expensed as
incurred as compared to the purchase of a tank, which is capitalized at
cost.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses decreased by $0.9 million from $8.0 million
in 2007 to $7.1 million in 2008, while decreasing as a percentage of total
revenues from 24.9% in 2007 to 20.7% in 2008.
Selling
related expenses decreased by $0.1 million, from $1.1 million in 2007 to $1.0
million in 2008. In January 2007, as part of our new strategic growth
plan, we reduced our sales force by 14 associates. We expect the full
impact of this reduction to be fully seen throughout fiscal 2008.
General and administrative expenses
decreased by $0.7 million, or 10.3%, from $6.8 million in 2007 to $6.1 million
in 2008. This decrease is primarily due to a decrease in bad debt
expense of $0.2 million due to improved collections experience over the last
year, and a decrease in stock compensation expense of $0.4 million attributable
to fewer stock options granted in the quarter ended March 31, 2008 as compared
to 2007, and a decrease in professional fees of $0.3 million. Additionally,
included in 2007 is approximately $0.3 million for severance paid to a former
executive consistent with the requirements of his employment agreement and wages
and related costs who were separated as part of our strategic plan announced in
January 2007. These amounts were offset by an increase of
approximately $0.5 million in costs associated with the Merger Transaction,
which were not incurred in the prior year.
Depreciation
and Amortization
Depreciation
and amortization decreased from $5.2 million in 2007 to $5.1 million in
2008. As a percentage of total revenues, depreciation and
amortization expense decreased from 16.2% in 2007 to 14.8% in 2008.
Depreciation
expense remained consistent at $4.3 million for the three months ended both
March 31, 2007 and 2008.
Amortization
expense decreased slightly from $0.9 million for the three months ended March
31, 2007, to $0.8 million for the three months ended March 31,
2008.
Loss
on Asset Disposal
Loss on asset disposal increased from
$0.5 million in 2007 to $0.7 million in 2008, increasing as a percentage of
total revenues from 1.6% to 2.0%. This increase is primarily due to
the write-off of deferred lease acquisition costs and unamortized initial
installation costs associated with customer attrition.
Operating
Income
For the reasons previously discussed,
operating income increased by $1.4 million from $2.6 million in 2007 to $4.0
million in 2008. As a percentage of total revenues, operating income
increased from 8.0% to 11.5%.
Interest
Expense
Interest
expense decreased from $0.5 million in 2007 to $0.4 million in 2008, while the
effective interest rate of our debt decreased from 6.5% to 6.2% for the three
months ended March 31, 2007 and March 31, 2008, respectively. See
“Quantitative and Qualitative Disclosures About Market Risk.”
Income
Before Provision for Income Taxes
Primarily, for the reasons described
above, income before provision for income taxes increased by $1.6 million, or
74.0%, from $2.0 million in 2007 to $3.6 million in 2008.
Provision
for Income Taxes
During the three months ended March 31,
2007 and 2008, we recognized a tax provision consistent with our effective tax
rate. However, while we anticipate continuing to recognize a full tax
provision in future periods, we expect to pay only AMT and state/local taxes
until such time that our net operating loss carryforwards are fully
utilized. Our effective rate for the three months ended March 31,
2008 was 45.4%, as compared to 45.7% for the three months ended March 31,
2007.
As of June 30, 2007, we had net
operating loss carryforwards for federal income tax purposes of $91 million and
for state purposes in varying amounts, expiring through June 2025. If
an “ownership change” for federal income tax purposes were to occur in the
future, our ability to use our pre-ownership change federal and state net
operating loss carryforwards (and certain built in losses, if any) would be
subject to an annual usage limitation, which under certain circumstances may
prevent us from being able to utilize a portion of such loss carryforwards in
future tax periods and may reduce our after-tax cash flow.
Net
Income
For the reasons described above, net
income increased from $1.1 million in 2007 to $1.9 million in 2008.
Non-GAAP
Measures EBITDA and EBITDA Excluding Option Compensation
Earnings before interest, taxes,
depreciation and amortization ("EBITDA") is one of the principal financial
measures by which we measure our financial performance. EBITDA is a widely
accepted financial indicator used by many investors, lenders and analysts to
analyze and compare companies on the basis of operating performance, and we
believe that EBITDA provides useful information regarding our ability to service
our debt and other obligations. However, EBITDA does not represent cash flow
from operations, nor has it been presented as a substitute to operating income
or net income as indicators of our operating performance. EBITDA excludes
significant costs of doing business and should not be considered in isolation or
as a substitute for measures of performance prepared in accordance with
accounting principles generally accepted in the United States of America. In
addition, our calculation of EBITDA may be different from the calculation used
by our competitors, and therefore comparability may be affected. In addition,
our lender also uses EBITDA to assess our compliance with debt covenants. These
financial covenants are based on a measure that is not consistent with
accounting principles generally accepted in the United States of America. Such
measure is EBITDA (as defined) as modified by certain defined
adjustments.
|
|
Three Months Ended March
31,
|
|
|
|
2008
|
|
|
2007
|
|
Net
income
|
|
$
|
1,941
|
|
|
$
|
1,111
|
|
Interest
expense
|
|
|
410
|
|
|
|
509
|
|
Depreciation
and amortization
|
|
|
5,077
|
|
|
|
5,158
|
|
Provision
for income taxes
|
|
|
1,615
|
|
|
|
935
|
|
EBITDA
|
|
|
9,043
|
|
|
|
7,713
|
|
Noncash
option compensation
|
|
|
870
|
|
|
|
1,301
|
|
EBITDA
excluding the impact of option compensation
|
|
$
|
9,913
|
|
|
$
|
9,014
|
|
|
|
|
|
|
|
|
|
|
Cash
flows provided by (used in):
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
14,520
|
|
|
$
|
9,495
|
|
Investing
activities
|
|
$
|
(5,588
|
)
|
|
$
|
(3,554
|
)
|
Financing
activities
|
|
$
|
(8,984
|
)
|
|
$
|
(5,888
|
)
|
Nine
Months Ended March 31, 2008 Compared to the Nine Months Ended March 31,
2007
Total
Revenues
Total
revenues increased by $7.2 million, or 7.4%, from $96.2 million in 2007 to
$103.4 million in 2008. Revenues derived from our bulk CO
2
service plans increased by $5.0 million, primarily due to an increase in the
number of customer locations, while revenues derived from the sale of high
pressure cylinder products, fuel surcharges, equipment sales and other revenues
increased by $2.2 million.
The $2.2
million increase in other sales is primarily due to a $0.6 million increase in
nitrogen generator lease revenues in the nine months ended March 31, 2008, as
compared to 2007, as customer demand for this product has increased over the
prior year. In addition, fuel surcharges to customers have steadily
increased in the last nine months as fuel costs have risen.
The number of
customer locations utilizing our products and services increased from
approximately 116,000 customers at March 31, 2007 to approximately 116,400
customers at March 31, 2008, due primarily to organic growth.
The
following table sets forth, for the periods indicated, the percentage of total
revenues by service plan:
|
|
|
Nine Months Ended March 31,
|
|
Service
Plan
|
|
2008
|
|
|
2007
|
|
|
Bulk
budget plan
1
|
|
|
48.4
|
%
|
|
|
51.4
|
%
|
|
Equipment
lease/product purchase plan
2
|
|
|
20.4
|
|
|
|
18.0
|
|
|
Product
purchase plan
3
|
|
|
10.8
|
|
|
|
10.6
|
|
|
High
pressure cylinder
4
|
|
|
5.4
|
|
|
|
5.5
|
|
|
Other
revenues
5
|
|
|
15.0
|
|
|
|
14.5
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
1
Combined fee for bulk CO
2
tank
and bulk CO
2.
|
|
|
|
|
|
|
|
|
|
2
Fee for bulk CO
2
tank
and, separately, bulk CO
2
usage.
|
|
|
|
|
|
|
|
|
|
3
Bulk CO
2
only.
|
|
|
|
|
|
|
|
|
|
4
High pressure CO
2
cylinders and non-CO
2
gases.
|
|
|
|
|
|
|
|
|
|
5
Surcharges and other charges.
|
|
|
|
|
|
|
|
|
Product Sales -
Revenues
derived from the product sales portion of our service plans increased by $4.3
million, or 6.9%, from $63.9 million in 2007 to $68.2 million in
2008. The increase in revenues is primarily due to a slight increase
in the average number of customer locations serviced, a 1.7% increase in product
usage, and pricing initiatives. In addition, sales of products and
services other than bulk CO
2
increased
by $1.5 million due in large part to an increase in revenues derived from
cylinder products, fuel surcharges, equipment sales, and other
revenues.
Equipment Rentals -
Revenues
derived from the lease portion of our service plans increased by $2.7 million,
or 8.6%, from $32.4 million in 2007 to $35.1 million in 2008, primarily due to a
1.8% increase in the average number of customer locations leasing equipment from
us, including the impact of price increases to a significant number of our
customers consistent with the Consumer Price Index, offset by incentive pricing
provided to multiple national restaurant organizations utilizing our equipment
under the bulk budget plan and equipment lease/product purchase plans pursuant
to master service agreements.
The number of customer
locations renting equipment from us increased from 96,000 for the nine months
ended March 31, 2007, to 97,000 for the nine months ended March 31, 2008.
Additionally,
nitrogen generator lease revenues increased by $0.6 million in the nine months
ended march 31, 2008 due to increased customer
demand.
Cost
of Products Sold, Excluding Depreciation and Amortization
Cost of products sold, excluding
depreciation and amortization, increased from $41.6 million in 2007 to $44.4
million in 2008, while decreasing as a percentage of product sales revenue from
65.2% to 65.0%.
Raw product costs increased by $1.4
million, from $15.9 million in 2007 to $17.3 million in 2008, due in large part
to a $0.9 million increase in CO
2
costs. The volume of CO
2
sold by us
increased 3.5%, primarily due to the 1.1% increase in our average customer base
and an increase in usage of 1.7%.
Operational costs, primarily wages and
benefits related to cost of products sold, increased from $16.6 million for the
nine months ended March 31, 2007 to $17.0 million for the nine months ended
March 31, 2008. This increase was primarily due to increased delivery personnel
wages of $0.4 million.
Truck delivery expenses increased from
$6.4 million in 2007 to $7.2 million in 2008. The increase in expenses is due to
the rising costs of fuel over the last nine months. Despite rising
fuel costs, we have been able to continue to partially minimize the impact of
increased fuel costs and variable lease costs associated with truck usage by
continuing to improve efficiencies in the timing and routing of
deliveries. During the last year, we have implemented a new
routing routine at select locations across the country. The full
implantation of “alpha routing” will be systematically implemented through the
end of fiscal 2008.
Occupancy
and shop costs related to cost of products sold increased slightly from $2.8
million in 2007 to $2.9 million in 2008.
Cost
of Equipment Rentals, Excluding Depreciation and Amortization
Cost of
equipment rentals, excluding depreciation and amortization, increased from $4.6
million in 2007 to $7.0 million in 2008 while increasing as a percentage of
equipment rentals revenue from 14.2% to 20.0%. During fiscal 2007, we
made a strategic decision to be more selective with our customer activations on
a going forward basis, while improving both operating and customer service
metrics. As part of this decision, rather than reducing the number of
technicians, we are increasing our emphasis on the assessment, upgrade and
service of our bulk CO
2
tanks at
customer sites. To the degree that our installers and other personnel
are involved in such activities, as compared to initial installation of tanks at
customer sites, which consumed the substantial majority of our technicians’
efforts over the past several years, the related expense is recognized in our
statement of operations as incurred. We are increasing capacity to
repair and service tanks, which is and will continue to reduce our need to
purchase new tanks. Tank repair and service costs are expensed as
incurred as compared to the purchase of a tank, which is capitalized at
cost.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses decreased by $1.9 million from $22.3 million
in 2007 to $20.4 million in 2008, while decreasing as a percentage of total
revenues from 23.2% in 2007 to 19.8% in 2008. This decrease is
primarily due to an overall reduction in salary expense of $0.7 million, which
is consistent with our reduction in the sales force by 28 sales personnel from
October 2006 through January 2007, along with a decrease of $1.2 million in bad
debt expense, which is due to our increased collection activity for the nine
months ended March 31, 2008 as compared to the nine months ended March 31,
2007.
Selling
related expenses decreased by $0.7 million, from $3.8 million in 2007 to $3.1
million in 2008, primarily the result of the planned conversion of select
independent sales representatives to salaried employees and expenses directed
towards training, marketing and growth opportunities.
General and administrative expenses
decreased by $1.1 million, or 6.2%, from $18.5 million in 2007 to $17.4 million
in 2008, primarily due to a decrease in bad debt expense of $1.2 million due to
improved collections on outstanding accounts receivable in 2008 as compared to
2007, and approximately $0.8 million in expenses related to the Merger
Transaction.
Depreciation
and Amortization
Depreciation
and amortization increased from $14.9 million in 2007 to $15.1 million in
2008. As a percentage of total revenues, depreciation and
amortization expense decreased from 15.5% in 2007 to 14.6% in 2008.
Depreciation
expense increased from $12.4 million in 2007 to $12.7 million in
2008. The increase was due in large part to the purchase and
placement of additional bulk CO
2
tanks at
customer sites.
Amortization
expense decreased slightly from $2.5 million for the nine months ended March 31,
2007, to $2.4 million for the nine months ended March 31, 2008.
Loss
on Asset Disposal
Loss on asset disposal increased from
$1.5 million in 2007 to $2.4 million in 2008, increasing as a percentage of
total revenues from 1.6% to 2.3%. This increase is primarily
due to the write-off of deferred lease acquisition costs and unamoritzed initial
installation costs associated with customer attrition.
Operating
Income
For the reasons previously discussed,
operating income increased by $2.8 million from $11.2 million in 2007 to $14.0
million in 2008. As a percentage of total revenues, operating income
increased from 11.7% to 13.5%.
Interest
Expense
Interest
expense decreased from $1.6 million in 2007 to $1.5 million in 2008, which is
consistent with the reduction in our outstanding debt balance over the last nine
months. The effective interest rate of our debt increased from 6.5%
in 2007 to 6.6% in 2008. See “Quantitative and Qualitative
Disclosures About Market Risk.”
Income
Before Provision for Income Taxes
Primarily for the reasons described
above, income before provision for income taxes increased by $2.9 million, or
30.3%, from $9.6 million in 2007 to $12.5 million in 2008.
Provision
for Income Taxes
During the six months ended March 31,
2007 and 2008, we recognized a tax provision consistent with our effective tax
rate. However, while we anticipate continuing to recognize a full tax
provision in future periods, we expect to pay only AMT and state/local taxes
until such time that our net operating loss carryforwards are fully
utilized. Our effective rate for the nine months ended March 31, 2008
was 44.1%, as compared to 47.8% for the nine months ended March 31,
2007.
As of June 30, 2007, we had net
operating loss carryforwards for federal income tax purposes of $91 million and
for state purposes in varying amounts, expiring through June 2025. If
an “ownership change” for federal income tax purposes were to occur in the
future, our ability to use our pre-ownership change federal and state net
operating loss carryforwards (and certain built in losses, if any) would be
subject to an annual usage limitation, which under certain circumstances may
prevent us from being able to utilize a portion of such loss carryforwards in
future tax periods and may reduce our after-tax cash flow.
Net
Income
For the reasons described above, net
income increased from $5.0 million 2007 to $7.0 million in 2008.
Non-GAAP
Measures EBITDA and EBITDA Excluding Option Compensation
Earnings before interest, taxes,
depreciation and amortization ("EBITDA") is one of the principal financial
measures by which we measure our financial performance. EBITDA is a widely
accepted financial indicator used by many investors, lenders and analysts to
analyze and compare companies on the basis of operating performance, and we
believe that EBITDA provides useful information regarding our ability to service
our debt and other obligations. However, EBITDA does not represent cash flow
from operations, nor has it been presented as a substitute to operating income
or net income as indicators of our operating performance. EBITDA excludes
significant costs of doing business and should not be considered in isolation or
as a substitute for measures of performance prepared in accordance with
accounting principles generally accepted in the United States of America. In
addition, our calculation of EBITDA may be different from the calculation used
by our competitors, and therefore comparability may be affected. In addition,
our lender also uses EBITDA to assess our compliance with debt covenants. These
financial covenants are based on a measure that is not consistent with
accounting principles generally accepted in the United States of America. Such
measure is EBITDA (as defined) as modified by certain defined
adjustments.
|
|
Nine
Months Ended March 31
|
|
|
|
2008
|
|
|
2007
|
|
Net
income
|
|
$
|
6,987
|
|
|
$
|
5,012
|
|
Interest
expense
|
|
|
1,502
|
|
|
|
1,635
|
|
Depreciation
and amortization
|
|
|
15,124
|
|
|
|
14,900
|
|
Provision
for income taxes
|
|
|
5,513
|
|
|
|
4,584
|
|
EBITDA
|
|
|
29,126
|
|
|
|
26,131
|
|
Noncash
option compensation
|
|
|
2,511
|
|
|
|
3,245
|
|
EBITDA
excluding the impact of option compensation
|
|
$
|
31,637
|
|
|
$
|
29,376
|
|
|
|
|
|
|
|
|
|
|
Cash
flows provided by (used in):
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
38,388
|
|
|
$
|
27,448
|
|
Investing
activities
|
|
$
|
(15,789
|
)
|
|
$
|
(19,325
|
)
|
Financing
activities
|
|
$
|
(22,610
|
)
|
|
$
|
(8,224
|
)
|
Liquidity
and Capital Resources
Our cash requirements consist
principally of (1) capital expenditures associated with purchasing and placing
new bulk CO
2
systems
into service at customers' sites; (2) payments of principal and interest on
outstanding indebtedness; and (3) working capital. Whenever possible,
we seek to obtain the use of vehicles, land, buildings, and other office and
service equipment under operating leases as a means of conserving
capital. We anticipate making cash capital expenditures of
approximately $23.1 million for internal growth over the next twelve months,
primarily for purchases of bulk CO
2
systems
and utilization of existing bulk CO
2
systems
for new customers.
Long
Term Debt
On May 27, 2005, we terminated our
previous credit facility and entered into a $60.0 million revolving credit
facility with Bank of America, N.A. (the “2005 Credit Facility”). The 2005
Credit Facility matures on May 27, 2010. We are entitled to select either Base
Rate Loans (as defined) or Eurodollar Rate Loans (as defined), plus applicable
margin, for principal borrowings under the 2005 Credit Facility. Applicable
margin is determined by a pricing grid, as amended March 2006, based on our
Consolidated Leverage Ratio (as defined) as follows:
Pricing
Level
|
|
Consolidated
Leverage
Ratio
|
Eurodollar
Rate
Loans
|
Base
Rate
Loans
|
I
|
|
Greater
than or equal to
2.50x
|
2.000%
|
0.500%
|
II
|
|
Less
than 2.50x but greater
than
or equal to 2.00x
|
1.750%
|
0.250%
|
III
|
|
Less
than 2.00x but greater
than
or equal to 1.50x
|
1.500%
|
0.000%
|
IV
|
|
Less
than 1.50x but greater
than
or equal to 0.50x
|
1.250%
|
0.000%
|
V
|
|
Less
than 0.50x
|
1.000%
|
0.000%
|
Interest is payable periodically on
borrowings under the 2005 Credit Facility. The 2005 Credit Facility is
uncollateralized. We are required to meet certain affirmative and negative
covenants, including financial covenants. We are required to assess our
compliance with these financial covenants under the 2005 Credit Facility on a
quarterly basis. These financial covenants are based on a measure that is not
consistent with accounting principles generally accepted in the United States of
America. Such measure is EBITDA (as defined), which represents earnings before
interest, taxes, depreciation and amortization, as further modified by certain
defined adjustments. The failure to meet these covenants, absent a waiver or
amendment, would place us in default and cause the debt outstanding under the
2005 Credit Agreement to immediately become due and payable. In
connection with our share repurchase program announced during the quarter ended
March 31, 2007, the 2005 Credit Facility was amended to modify certain
covenants. We were in compliance with all covenants under the 2005
Credit Facility as of June 30, 2005 and all subsequent periods through March 31,
2008.
As of
March 31, 2008, a total of $25.4 million was outstanding pursuant to the 2005
Credit Facility, primarily consisting of Libor (Eurodollar Rate) loans with a
weighted average interest rate of 4.33% per annum.
Other
During the nine months ended March 31,
2008, our capital resources included cash flows from operations and available
borrowing capacity under the 2005 Credit Facility. We believe that
cash flows from operations and available borrowings under the 2005 Credit
Facility will be sufficient to fund proposed operations for at least the next
twelve months.
Working
Capital
. As of March 31, 2008 and June 30, 2007, we had
working capital of $10.0 million and $13.3 million, respectively.
Cash Flows from Operating
Activities:
During 2007 and 2008, net cash generated by operating
activities was $27.4 million and $38.4 million, respectively. Cash
used by our working capital assets improved by $7.7 million, partially offset by
the cash generated from our results of operations. This increase is
due in part to increased collection activity on outstanding customer
accounts.
Cash Flows from Investing
Activities.
During 2007 and 2008, net cash used in investing
activities was $19.3 million and $15.8 million,
respectively. Investing activities in 2008 included $14.0 million
associated with the purchase and installation of tanks at customer sites as
compared with $17.6 million last year. As previously noted, we have increased
our capacity to repair and service tanks resulting in a reduction in the number
of tanks purchased.
Cash Flows from Financing
Activities.
During 2008, cash flows used in financing
activities was $22.6 million, compared to $8.2 million used in financing
activities in 2007. During 2008, we made net repayments on
outstanding debt of $9.4 million. Additionally, as previously
discussed, in January 2008, we purchased a swaption for $4.9 million to hedge
against rising interest rates in relation to the Company’s anticipated financing
transaction related to the merger with Aurora Capital Group (“Aurora”). Pursuant
to the anticipated merger, we
entered into an interest
rate swap to hedge the risk rising interest rates between the date of the merger
agreement and the expected closing date of the transaction.
Additionally,
we incurred approximately $2.8 million in deferred debt issuance costs
associated with the anticipated Merger Financing. This year, we also
incurred approximately $7.1 million associated with the repurchase of
outstanding shares of our common stock as compared to $12.5 million during the
same period lat year.
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 CO
2
exclusive
requirements contract with The BOC Group, Inc. (“BOC”) provides for annual
adjustments in the purchase price for bulk CO
2
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, whichever is less.
As of March 31, 2008, we operated a
total of 359 specialized bulk CO
2
delivery
vehicles and technical service vehicles that logged approximately 14.6 million
miles over the last twelve months. While significant increases in
fuel prices impact our operating costs, such impact is largely offset by fuel
surcharges billed to the majority of our customers.
Recent
Accounting Pronouncements
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standard (“SFAS”) No. 141R, “
Business Combinations
” (“SFAS
No. 141R”). SFAS No. 141R will require, among other things, the expensing of
direct transaction costs, including deal costs and restructuring costs as
incurred, acquired in process research and development assets to be capitalized,
certain contingent assets and liabilities to be recognized at fair value and
earn-out arrangements, including contingent consideration, may be required to be
measured at fair value until settled, with changes in fair value recognized each
period into earnings. In addition, material adjustments made to the
initial acquisition purchase accounting will be required to be recorded back to
the acquisition date. This will cause companies to revise previously reported
results when reporting comparative financial information in subsequent filings.
SFAS No. 141R will become effective for us on a prospective basis for
transactions occurring in 2009 and earlier adoption is not
permitted. We are currently evaluating the impact, if any, that the
adoption of SFAS No. 141R will have on our financial condition results of
operations or cash flows.
In
December 2007, the FASB issued SFAS No. 160, “
Noncontrolling Interests in
Consolidated Financial Statements
” (“SFAS No. 160”). SFAS No. 160 will
change the accounting for and reporting of minority interests. Under the new
standard, minority interests, will be referred to as noncontrolling interests
and will be reported as equity in the parent company’s consolidated financial
statements. Transactions between the parent company and the noncontrolling
interests will be treated as transactions between shareholders provided that the
transactions do not create a change in control. Gains and losses will be
recognized in earnings for transactions between the parent company and the
noncontrolling interests, unless control is achieved or lost. SFAS No. 160
requires retrospective adoption of the presentation and disclosure requirements
for existing minority interests. All other requirements of SFAS No. 160 shall be
applied prospectively. SFAS No. 160 is effective for us beginning in the first
quarter of fiscal year 2009 and earlier adoption is not permitted. We are
currently evaluating the impact, if any, that the adoption of SFAS No. 160 will
have on our financial condition, results of operations or cash
flows.
In
February 2007, the FASB issued SFAS No. 159,
“The Fair Value Option for Financial
Assets and Financial Liabilities – Including an Amendment of FASB Statement
No. 115”
(“SFAS No. 159”), which provides companies with an
option to report selected financial assets and liabilities at their fair values.
The objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. SFAS No. 159 is expected to expand the use of fair value
measurement, which is consistent with the FASB’s long-term measurement
objectives for accounting for financial instruments. SFAS No. 159 will
become effective for us on July 1, 2008. We are currently
evaluating the impact, if any, that the adoption of SFAS No. 159 will have on
our financial condition, results of operations or cash flows.
In September 2006, the FASB issued
SFAS No. 157,
“Fair Value
Measurements”
(“SFAS No. 157”), which defines fair value,
establishes guidelines for measuring fair value and expands disclosures
regarding fair value measurements. SFAS No. 157 is effective for fiscal
years beginning after November 15, 2007. We are currently evaluating what
impact, if any, the adoption of SFAS No. 157 will have on our financial
condition, results of operations or cash flows.
ITEM
3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As
discussed under “Management’s Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources” above, as of March
31, 2008, a total of $25.4 million was outstanding under the 2005 Credit
Facility with a weighted average interest rate of 4.33% per
annum. Based upon the $25.4 million outstanding under the 2005 Credit
Facility at December 31, 2007, our annual interest cost under the 2005 Credit
Facility would increase by $0.3 million for each 1% increase in Eurodollar
interest rates.
On
January 29, 2008, the Company entered into an Agreement and Plan of Merger (the
“Merger Agreement”) with NuCO
2
Acquisition Corp., a
Delaware corporation (“Parent”), and NuCO2 Merger Co., a Florida corporation and
a wholly owned subsidiary of Parent (“Merger Sub”). Subject to the
terms and conditions of the Merger Agreement, Merger Sub will merge with and
into the Company (the “Merger”) with the Company being the surviving corporation
in the Merger and, at the effective time of the Merger, each issued and
outstanding share of common stock, par value $0.001 per share (the “Common
Stock”), of the Company (other than treasury shares, shares owned by Parent,
Merger Sub or any direct or indirect wholly owned subsidiary of Parent and
shares owned by stockholders who perfect their appraisal rights under Florida
law) will be converted automatically into the right to receive $30.00 in cash,
without interest.
In order
to reduce the Company’s exposure to increases in interest rates in connection
with the debt financing for the Merger (the “Merger Financing”), on January 30,
2008, the Company purchased an option, for a premium of $4.9 million, to enter
into a pay fixed rate swap (“Swaption I”) that grants the Company the right (but
not the obligation) to enter into a pay fixed swap at the effective time of the
Merger with respect to amounts to be borrowed under the Merger
Financing. The underlying swap is in the notional amount of $335.0
million, and the option expires on June 30, 2008. Under the Merger Agreement,
Parent will reimburse the Company for its unrecouped costs associated with
Swaption I in the event that the Merger Agreement is terminated and, upon such
reimbursement, the Company will assign Swaption I to Parent. Swaption
I meets the requirements to be designated as a cash flow hedge and is deemed a
highly effective transaction. Accordingly, changes in the fair value
of Swaption I are recorded as other comprehensive income (loss). At
March 31, 2008, the Company recorded a loss of $2.8 million, representing the
change in fair value of Swaption I from January 30, 2008 through March 31, 2008,
as other comprehensive loss.
In order
to reduce our exposure to increases in Eurodollar rates, and consequently to
increases in interest payments, we entered into an interest rate swap
transaction (the “2005 Swap”) comprised of two instruments (“Swap A” and “Swap
B”) on September 28, 2005, with an effective date of October, 3,
2005. Swap A, in the amount of $15.0 million (the “A Notional
Amount”), matures on October 3, 2008 and Swap B, in the amount of $5.0 million
(the “B Notional Amount”), matured on April 3, 2007. Pursuant to Swap
A, we currently pay a fixed interest rate of 4.69% per annum and receive a
Eurodollar-based floating rate. The effect of Swap A is to neutralize
any changes in Eurodollar rates on the A Notional Amount. The 2005
Swap meets the requirements to be designated as a cash flow hedge and is deemed
a highly effective transaction. Accordingly, changes in the fair
value of Swap A are recorded as other comprehensive income
(loss). During the nine months ended March 31, 2008, we recorded a
loss of $0.3 million, representing the change in fair value of Swap A from June
30, 2007 through March 31, 2008, as other comprehensive loss.
ITE
M
4. CONTROLS
AND PROCEDURES
Evaluation of disclosure
controls and procedures
.
Based on
our management’s evaluation (with the participation of our principal executive
officer and principal financial officer), as of the end of the period covered by
this report, our principal executive officer and principal financial officer
have concluded that our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended,
(the “Exchange Act”) are effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in SEC rules and forms.
Changes in internal control
over financial reporting
. There have been no changes in our internal
control over financial reporting during the quarter ended March 31, 2008 that
have materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PAR
T
II. OTHER
INFORMATION.
ITEM
6. EXHIBITS.
Exhibit
No.
|
Exhibit
|
|
|
31.1
|
Section
302 Certification of Principal Executive Officer.
|
31.2
|
Section
302 Certification of Principal Financial Officer.
|
32.1
|
Section
906 Certification of Principal Executive Officer.
|
32.2
|
Section
906 Certification of Principal Financial
Officer.
|
S
IGNA
TURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
NuCO
2
Inc.
|
|
|
|
|
Dated: May
12, 2008
|
By:
|
|
|
|
Robert
R. Galvin
|
|
|
Chief
Financial Officer
|
|
|
|