|
IT
EM
1.
|
FINANCIAL
STATEMENTS
|
NUCO
2
INC.
B
AL
ANCE
SHEETS
(In
thousands, except share amounts)
ASSETS
|
|
|
|
|
|
|
|
|
|
|
(UNAUDITED)
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
384
|
|
|
$
|
343
|
|
|
Trade
accounts receivable; net of allowance for doubtful Accounts of
$767 and
$1,004, respectively
|
|
|
10,536
|
|
|
|
11,823
|
|
|
Inventories
|
|
|
313
|
|
|
|
297
|
|
|
Prepaid
insurance expense and deposits
|
|
|
3,776
|
|
|
|
3,121
|
|
|
Prepaid
expenses and other current assets
|
|
|
2,592
|
|
|
|
1,412
|
|
|
Deferred
tax assets – current portion
|
|
|
8,250
|
|
|
|
8,264
|
|
|
Total
current assets
|
|
|
25,851
|
|
|
|
25,260
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
121,654
|
|
|
|
122,364
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill,
net
|
|
|
25,909
|
|
|
|
25,909
|
|
|
Deferred
financing costs, net
|
|
|
209
|
|
|
|
254
|
|
|
Customer
lists, net
|
|
|
5,949
|
|
|
|
6,761
|
|
|
Non-competition
agreements, net
|
|
|
266
|
|
|
|
512
|
|
|
Deferred
lease acquisition costs, net
|
|
|
5,943
|
|
|
|
5,744
|
|
|
Deferred
tax assets, net
|
|
|
594
|
|
|
|
3,813
|
|
|
Other
|
|
|
228
|
|
|
|
221
|
|
|
|
|
|
39,098
|
|
|
|
43,214
|
|
|
Total
assets
|
|
$
|
186,603
|
|
|
$
|
190,838
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
7,035
|
|
|
$
|
6,061
|
|
|
Accrued
expenses
|
|
|
2,619
|
|
|
|
2,043
|
|
|
Accrued
insurance
|
|
|
1,508
|
|
|
|
1,054
|
|
|
Accrued
interest
|
|
|
161
|
|
|
|
121
|
|
|
Accrued
payroll
|
|
|
2,149
|
|
|
|
2,357
|
|
|
Other
current liabilities
|
|
|
1,288
|
|
|
|
314
|
|
|
Total
current liabilities
|
|
|
14,760
|
|
|
|
11,950
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
27,500
|
|
|
|
34,750
|
|
|
Customer
deposits
|
|
|
4,316
|
|
|
|
4,246
|
|
|
Total
liabilities
|
|
|
46,576
|
|
|
|
50,946
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
|
|
Common
stock; par value $.001 per share; 30,000,000 shares authorized;
issued
15,965,136 shares at December 31, 2007 and 15,921,066 shares at
June 30,
2007
|
|
|
16
|
|
|
|
16
|
|
|
Additional
paid-in capital
|
|
|
177,177
|
|
|
|
174,831
|
|
|
Less
treasury stock at cost; 1,195,604 shares at December 31, 2007 and
921,409
shares at June 30, 2007
|
|
|
(30,018
|
)
|
|
|
(22,937
|
)
|
|
Accumulated
deficit
|
|
|
(7,079
|
)
|
|
|
(12,126
|
)
|
|
Accumulated
other comprehensive income (loss)
|
|
|
(69
|
)
|
|
|
108
|
|
|
Total
shareholders’ equity
|
|
|
140,027
|
|
|
|
139,892
|
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
186,603
|
|
|
$
|
190,838
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
NUCO
2
INC.
STA
TE
MENTS
OF INCOME
(In
thousands, except per share amounts)
(UNAUDITED)
|
|
|
Three
Months Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
Product
sales
|
|
$
|
22,455
|
|
|
$
|
21,319
|
|
|
Equipment
rentals
|
|
|
11,630
|
|
|
|
10,642
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
34,085
|
|
|
|
31,961
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
Cost
of products sold, excluding depreciation and amortization
|
|
|
14,759
|
|
|
|
13,645
|
|
|
Cost of equipment rentals, excluding depreciation and
amortization
|
|
|
2,453
|
|
|
|
2,101
|
|
|
Selling,
general and administrative expenses
|
|
|
6,947
|
|
|
|
7,834
|
|
|
Depreciation
and amortization
|
|
|
5,025
|
|
|
|
4,897
|
|
|
Loss
on asset disposal
|
|
|
794
|
|
|
|
542
|
|
|
|
|
|
29,978
|
|
|
|
29,019
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
4,107
|
|
|
|
2,942
|
|
|
Interest
expense
|
|
|
512
|
|
|
|
550
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before provision for income taxes
|
|
|
3,595
|
|
|
|
2,392
|
|
|
Provision
for income taxes
|
|
|
1,538
|
|
|
|
1,009
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,057
|
|
|
$
|
1,383
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average outstanding shares of common stock:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
14,768
|
|
|
|
15,776
|
|
|
Diluted
|
|
|
15,137
|
|
|
|
16,087
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per basic share
|
|
$
|
0.14
|
|
|
$
|
0.09
|
|
|
Net
income per diluted share
|
|
$
|
0.14
|
|
|
$
|
0.09
|
|
See
accompanying notes to financial statements.
NUCO
2
INC.
STA
TE
MENTS
OF INCOME
(In
thousands, except per share amounts)
(UNAUDITED)
|
|
|
Six
Months Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
45,848
|
|
|
$
|
42,870
|
|
|
Equipment rentals
|
|
|
23,170
|
|
|
|
21,447
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
69,018
|
|
|
|
64,317
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
Cost
of products sold, excluding depreciation and amortization
|
|
|
29,290
|
|
|
|
27,918
|
|
|
Cost
of equipment rentals, excluding depreciation and
amortization
|
|
|
4,585
|
|
|
|
2,605
|
|
|
Selling,
general and administrative expenses
|
|
|
13,318
|
|
|
|
14,391
|
|
|
Depreciation
and amortization
|
|
|
10,048
|
|
|
|
9,742
|
|
|
Loss
on asset disposal
|
|
|
1,740
|
|
|
|
984
|
|
|
|
|
|
58,981
|
|
|
|
55,640
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
10,037
|
|
|
|
8,677
|
|
|
Interest
expense
|
|
|
1,092
|
|
|
|
1,126
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before provision for income taxes
|
|
|
8,945
|
|
|
|
7,551
|
|
|
Provision
for income taxes
|
|
|
3,898
|
|
|
|
3,649
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
5,047
|
|
|
$
|
3,902
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average outstanding shares of common stock:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
14,806
|
|
|
|
15,725
|
|
|
Diluted
|
|
|
15,159
|
|
|
|
16,035
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per basic share
|
|
$
|
0.34
|
|
|
$
|
0.25
|
|
|
Net
income per diluted share
|
|
$
|
0.33
|
|
|
$
|
0.24
|
|
See
accompanying notes to financial statements.
NUCO
2
INC.
STAT
EMENT
OF SHAREHOLDERS’ EQUITY
(In
thousands, except share amounts)
(UNAUDITED)
|
|
|
Common
Stock
|
|
|
Additional
Paid-In
|
|
|
Treasury
Stock
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
June 30, 2007
|
|
|
15,921,066
|
|
|
$
|
16
|
|
|
$
|
174,831
|
|
|
|
921,409
|
|
|
$
|
(22,937
|
)
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap
transaction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
1,641
|
|
|
|
-
|
|
|
|
-
|
|
|
Excess
tax benefits from share-based arrangements
|
|
|
-
|
|
|
|
-
|
|
|
|
281
|
|
|
|
-
|
|
|
|
-
|
|
|
Issuance
of 44,070 shares of common stock -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
exercise
of
options
|
|
|
44,070
|
|
|
|
-
|
|
|
|
424
|
|
|
|
-
|
|
|
|
-
|
|
|
Purchase
of treasury stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
274,195
|
|
|
|
(7,081
|
)
|
|
Balance,
December 31, 2007
|
|
|
15,965,136
|
|
|
$
|
16
|
|
|
$
|
177,177
|
|
|
|
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
|
|
|
Accumulated
Other Comprehensive
|
|
|
Total
Shareholders'
|
|
|
|
|
Deficit
|
|
|
Income
(Loss)
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
June 30, 2007
|
|
$
|
(12,126
|
)
|
|
$
|
108
|
|
|
$
|
139,892
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
5,047
|
|
|
|
-
|
|
|
|
5,047
|
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap
transaction
|
|
|
-
|
|
|
|
(177
|
)
|
|
|
(177
|
)
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
4,870
|
|
|
Share-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
1,641
|
|
|
Excess
tax benefits from share-based arrangements
|
|
|
-
|
|
|
|
-
|
|
|
|
281
|
|
|
Issuance
of 44,070 shares of common stock -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
exercise
of
options
|
|
|
-
|
|
|
|
-
|
|
|
|
424
|
|
|
Purchase
of treasury stock
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,081
|
)
|
|
Balance,
December 31, 2007
|
|
$
|
(7,079
|
)
|
|
$
|
(69
|
)
|
|
$
|
140,027
|
|
See
accompanying notes to financial statements.
NUCO
2
INC.
S
TAT
EMENTS
OF CASH FLOWS
(In
thousands)
(UNAUDITED)
|
|
|
Six
Months Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
5,047
|
|
|
$
|
3,902
|
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization of property and equipment
|
|
|
8,402
|
|
|
|
8,120
|
|
|
Bad
debt expense
|
|
|
501
|
|
|
|
1,495
|
|
|
Amortization
of other assets
|
|
|
1,646
|
|
|
|
1,622
|
|
|
Loss
on asset disposal
|
|
|
1,740
|
|
|
|
984
|
|
|
Change
in net deferred tax asset
|
|
|
3,514
|
|
|
|
3,512
|
|
|
Share-based
compensation
|
|
|
1,641
|
|
|
|
1,944
|
|
|
Excess
tax benefits from share-based arrangements
|
|
|
(281
|
)
|
|
|
(1,174
|
)
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Decrease
(increase) in:
|
|
|
|
|
|
|
|
|
|
Trade
accounts receivable
|
|
|
787
|
|
|
|
(2,020
|
)
|
|
Inventories
|
|
|
(16
|
)
|
|
|
(4
|
)
|
|
Prepaid
insurance expense and deposits
|
|
|
(655
|
)
|
|
|
2,051
|
|
|
Prepaid
expenses and other current assets
|
|
|
(1,355
|
)
|
|
|
(1,269
|
)
|
|
Increase
(decrease) in:
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
972
|
|
|
|
681
|
|
|
Accrued
expenses
|
|
|
595
|
|
|
|
401
|
|
|
Accrued
insurance
|
|
|
454
|
|
|
|
(2,474
|
)
|
|
Accrued
payroll
|
|
|
(207
|
)
|
|
|
85
|
|
|
Accrued
interest
|
|
|
39
|
|
|
|
(33
|
)
|
|
Other
current liabilities
|
|
|
974
|
|
|
|
(180
|
)
|
|
Customer
deposits
|
|
|
70
|
|
|
|
310
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
23,868
|
|
|
|
17,953
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(9,009
|
)
|
|
|
(14,694
|
)
|
|
Proceeds
on sale of assets
|
|
|
29
|
|
|
|
-
|
|
|
Increase
in deferred lease acquisition costs
|
|
|
(1,214
|
)
|
|
|
(1,058
|
)
|
|
Increase
in other assets
|
|
|
(7
|
)
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
$
|
(10,201
|
)
|
|
$
|
(15,771
|
)
|
See
accompanying notes to financial statements.
NUCO
2
INC.
STATEMENTS
OF CASH FLOWS
(In
thousands)
(Continued)
|
|
|
Six
Months Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Net
proceeds from issuance of long-term debt
|
|
$
|
4,050
|
|
|
$
|
2,550
|
|
|
Repayment
of long-term debt
|
|
|
(11,300
|
)
|
|
|
(7,500
|
)
|
|
Purchase
of treasury stock
|
|
|
(7,081
|
)
|
|
|
-
|
|
|
Exercise
of options
|
|
|
424
|
|
|
|
1,440
|
|
|
Excess
tax benefits from share-based arrangements
|
|
|
281
|
|
|
|
1,174
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in financing activities
|
|
$
|
(13,626
|
)
|
|
$
|
(2,336
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
41
|
|
|
|
(154
|
)
|
|
Cash
and cash equivalents, beginning of period
|
|
|
343
|
|
|
|
341
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of period
|
|
$
|
384
|
|
|
$
|
187
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,128
|
|
|
$
|
1,160
|
|
|
Income
taxes
|
|
$
|
141
|
|
|
$
|
235
|
|
See
accompanying notes to financial statements.
NUCO
2
INC.
NOTE
S
TO FINANCIAL STATEMENTS
(UNAUDITED
)
NOTE
1 –
BASIS OF PRESENTATION
The
accompanying unaudited financial
statements have been prepared in accordance with the instructions to Form
10-Q
used for quarterly reports under Section 13 or 15(d) of the Securities Exchange
Act of 1934, and therefore, do not include all information and footnotes
necessary for a fair presentation of financial position, results of operations
and cash flows in conformity with generally accepted accounting
principles.
The
financial information included in
this report has been prepared in conformity with the accounting principles,
and
methods of applying those accounting principles, reflected in the 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 AND SIGNIFICANT ACCOUNTING
POLICIES
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 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 consolidated 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.
In
July 2006, the FASB issued
Interpretation 48, “
Accounting
for Uncertainty in Income Taxes - An Interpretation of FASB Statement
No. 109”
(“FIN No. 48”).
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. The Company adopted the provisions of FIN No.
48 effective July 1, 2007. The adoption 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.
Please
see the Company's Form 10-K
for a discussion of the significant accounting policies.
NOTE
3 -
EARNINGS PER SHARE AND OTHER COMPREHENSIVE INCOME
(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 December
31,
|
|
|
Six
Months Ended December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic
|
|
|
14,768
|
|
|
|
15,776
|
|
|
|
14,806
|
|
|
|
15,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
options and warrants to purchase
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
of common stock - remaining shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
after
assuming repurchase with proceeds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from
exercise
|
|
|
369
|
|
|
|
311
|
|
|
|
353
|
|
|
|
310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - diluted
|
|
|
15,137
|
|
|
|
16,087
|
|
|
|
15,159
|
|
|
|
16,035
|
|
(b)
Other Comprehensive Income
Comprehensive
income 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.” The components of
other comprehensive income are as follows for the periods presented (in
thousands):
|
|
|
Three
Months Ended December
31,
|
|
|
Six
Months Ended December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Net
income
|
|
$
|
2,057
|
|
|
$
|
1,383
|
|
|
$
|
5,047
|
|
|
$
|
3,902
|
|
|
Interest
rate swap transaction (Note 4)
|
|
|
73
|
|
|
|
2
|
|
|
|
(177
|
)
|
|
|
(178
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
2,130
|
|
|
$
|
1,385
|
|
|
$
|
4,870
|
|
|
$
|
3,724
|
|
NOTE
4 –
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 December 31, 2007.
As
of December 31, 2007, a total of
$27.5 million was outstanding under the 2005 Credit Facility, primarily
consisting of Libor (Eurodollar Rate) loans, with a weighted average interest
rate of 6.4% 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 income 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 six months
ended December 31, 2007, we recorded a loss of $0.2 million, representing
the
change in fair value of Swap A from June 30, 2007 through December 31, 2007,
as
other comprehensive loss.
NOTE
5 –
SHAREHOLDERS’ EQUITY
(a) Stock
Option Plans
The
Company recognized $0.9 million and
$1.6 million ($0.6 million and $1.2 million, net of income taxes) in stock
option compensation during the three and six months ended December 31, 2007
as
compared to $1.2 million and $1.9 million ($0.9 million and $1.4 million,
net of
taxes) during the three and six months ended December 31, 2006.
(b) Share
Repurchase
Plan
On
January 31, 2007, the Company
publicly announced that its Board of Directors authorized a share repurchase
program under which the Company may repurchase up to $50 million of its common
shares through December 31, 2007. During the six months ended December 31,
2007,
the Company purchased a total of 274,195 common shares at an average price
of
$25.83 per share for an aggregate purchase price of $7.1 million.
NOTE
6 –
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 six months ended December 31, 2007, was approximately 42.8%
and 43.5%, 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. During the three and six months ended
December 31, 2007, the Company recorded $0.1 million and $0.3 million,
respectively, as additional paid-in capital representing the excess tax benefit
associated with the disqualifying disposition of incentive stock options
and
exercise of non-qualified stock options.
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
7 –
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
8 –
SUBSEQUENT EVENTS
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 NuCO
2
Merger
Co., a Florida corporation and a wholly owned subsidiary of Parent (“Merger
Sub”), pursuant to which Merger Sub will merge with and into the Company (the
“Merger”) with the Company being the surviving corporation in the Merger. Under
the terms of the Merger Agreement, 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 applicable appraisal rights
under
Florida law) will be converted automatically into the right to receive $30.00
in
cash. The closing of the Merger is subject to regulatory approval,
satisfying the conditions of the proposed financing and other customary closing
conditions, including the approval of the transaction by shareholders of
the
Company. Merger Sub and Parent are affiliates of Aurora Capital Group, a
Los
Angeles-based private equity firm.
IT
EM
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 December 31, 2007, we operated a national network of 128
service locations (116 stationary and 12 mobile) servicing approximately
116,100
customer locations in 45 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 100 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 57,800 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 December 31, 2007, we operated a total of 364 specialized bulk CO
2
delivery
vehicles and technical service vehicles that logged approximately 15 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 $7.1 million at December 31, 2007.
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 December
31,
|
|
Six
Months Ended December
31,
|
|
Income
Statement Data:
|
2007
|
|
2006
|
|
2007
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
sales
|
65.9
|
%
|
66.7
|
%
|
66.4
|
%
|
|
|
66.7
|
%
|
|
Equipment
rentals
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
100.0
|
|
100.0
|
|
100.0
|
|
|
|
100.0
|
|
Cost
of products sold, excluding
depreciation
and amortization
|
43.3
|
|
42.7
|
|
42.4
|
|
|
|
43.4
|
|
Cost
of equipment rentals, excluding
depreciation
and amortization
|
7.2
|
|
6.6
|
|
6.6
|
|
|
|
4.1
|
|
|
Selling,
general and administrative expenses
|
20.5
|
|
24.5
|
|
19.3
|
|
|
|
22.4
|
|
|
Depreciation
and amortization
|
14.7
|
|
15.3
|
|
14.6
|
|
|
|
15.1
|
|
|
Loss
on asset disposal
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
12.0
|
|
9.2
|
|
14.6
|
|
|
|
13.5
|
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
10.5
|
|
7.5
|
|
13.0
|
|
|
|
11.7
|
|
|
Provision
for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
%
|
|
%
|
|
%
|
|
|
|
%
|
Three
Months Ended December 31, 2007 Compared to the Three Months Ended December
31,
2006
Total
Revenues
Total
revenues increased by $2.1 million, or 6.6%, from $32.0 million in 2006 to
$34.1
million in 2007. Revenues derived from our bulk CO
2
service
plans increased by $1.7 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 $0.4 million. The number of customer
locations utilizing our products and services increased from approximately
115,900 at December 31, 2006 to approximately 116,100 at December 31, 2007,
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 December
31,
|
|
Service
Plan
|
|
2007
|
|
2006
|
|
|
|
Bulk
budget plan
1
|
|
48.4%
|
|
51.3%
|
|
|
|
Equipment
lease/product purchase plan
2
|
|
20.5
|
|
17.7
|
|
|
|
Product
purchase plan
3
|
|
10.9
|
|
10.7
|
|
|
|
High
pressure cylinder
4
|
|
5.4
|
|
5.8
|
|
|
|
Other
revenues
5
|
|
14.8
|
|
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
$1.2
million, or 5.3%, from $21.3 million in 2006 to $22.5 million in
2007. The increase in revenues is primarily due to a 0.6% increase in
the average number of customer locations serviced and pricing
initiatives. In addition, sales of products and services other than
bulk CO
2
increased
by $0.4 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 $1.0 million,
or 9.3%, from $10.6 million in 2006 to $11.6 million in 2007, primarily due
to a
1.3% 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 from 95,700 at December
31, 2006 to 96,400 at December 31, 2007.
Cost
of Products Sold, Excluding Depreciation and Amortization
Cost
of products sold, excluding
depreciation and amortization, increased from $13.6 million in 2006 to $14.8
million in 2007, while increasing as a percentage of product sales revenue
from
64.0% to 65.7%.
Raw
product costs increased by $0.5 million, from $5.3 million in 2006 to $5.8
million in 2007, due in large part to a $0.4 million increase in CO
2
costs. The volume of CO
2
sold by us
increased 3.7%, primarily due to a 0.6% increase in our average customer
base,
and an increase in the average usage of 2.5%.
Operational
costs, primarily wages and
benefits related to cost of products sold, decreased from $5.6 million in
2006
to $5.5 million in 2007.
Truck
delivery expenses increased from
$2.1 million in 2006 to $2.4 million in 2007 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
2006 to $1.1 in 2007.
Cost
of Equipment Rentals, Excluding Depreciation and Amortization
Cost
of
equipment rentals, excluding depreciation and amortization, increased from
$2.1
million in 2006 to $2.5 million in 2007, while increasing as a percentage
of
equipment rentals revenue from 19.7% to 21.1%. 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 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 reduces 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 $7.8 million
in 2006 to $6.9 million in 2007, while decreasing as a percentage of total
revenues from 24.5% in 2006 to 20.5% in 2007.
Selling
related expenses decreased by $0.4 million, from $1.4 million in 2006 to
$1.0
million in 2007. In October 2006 and January 2007, as part of our new
strategic growth plan, we reduced our sales force by 28
associates. We expect the full impact of this reduction to be fully
seen throughout fiscal 2008.
General
and administrative expenses
decreased by $0.5 million, or 7.6%, from $6.5 million in 2006 to $6.0 million
in
2007. This decrease is primarily due to a decrease in bad debt
expense of $0.7 million due to improved collections experience over the last
year.
Depreciation
and Amortization
Depreciation
and amortization increased from $4.9 million in 2006 to $5.0 million in
2007. As a percentage of total revenues, depreciation and
amortization expense decreased from 15.3% in 2006 to 14.7% in 2007.
Depreciation
expense increased from $4.1 million in 2006 to $4.2 million in 2007, decreasing
as a percentage of revenues from 12.8% to 12.4%.
Amortization
expense remained consistent at $0.8 million in both 2006 and 2007.
Loss
on Asset Disposal
Loss
on asset disposal increased from
$0.5 million in 2006 to $0.8 million in 2007, increasing as a percentage
of
total revenues from 1.7% to 2.3%. This increase is primarily due to
the write-off of deferred lease acquisition costs and soft costs associated
with
customer attrition. The attrition increase is primarily related to the
disposition of lower revenue generating accounts.
Operating
Income
For
the reasons previously discussed,
operating income increased by $1.2 million from $2.9 million in 2006 to $4.1
million in 2007. As a percentage of total revenues, operating income
increased from 9.2% to 12.0%.
Interest
Expense
Interest
expense decreased from $0.6 million in 2006 to $0.5 million in 2007, while
the
effective interest rate of our debt remained consistent at 6.7% for the three
months ended December 31, 2006 and 2007. 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 $1.2 million,
or
50.3%, from $2.4 million in 2006 to $3.6 million in 2007.
Provision
for Income Taxes
During
the three months ended December
31, 2006 and 2007, 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 December 31,
2007 was 42.8%, as compared to 42.2% for the three months ended December
31,
2006.
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 $1.4 million in 2006 to $2.1 million in 2007.
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 December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Net
income
|
|
$
|
2,057
|
|
|
$
|
1,383
|
|
|
Interest
expense
|
|
|
512
|
|
|
|
550
|
|
|
Depreciation
and amortization
|
|
|
5,025
|
|
|
|
4,897
|
|
|
Provision
for income taxes
|
|
|
1,538
|
|
|
|
1,009
|
|
|
EBITDA
|
|
|
9,132
|
|
|
|
7,839
|
|
|
Noncash
option compensation
|
|
|
885
|
|
|
|
1,245
|
|
|
EBITDA
excluding the impact of option compensation
|
|
$
|
10,017
|
|
|
$
|
9,084
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows provided by (used in):
|
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
10,889
|
|
|
$
|
9,104
|
|
|
Investing
activities
|
|
$
|
(5,352
|
)
|
|
$
|
(7,455
|
)
|
|
Financing
activities
|
|
$
|
(5,399
|
)
|
|
$
|
(1,934
|
)
|
Six
Months Ended December 31, 2007 Compared to the Six Months Ended December
31,
2006
Total
Revenues
Total
revenues increased by $4.7 million, or 7.3%, from $64.3 million in 2006 to
$69.0
million in 2007. Revenues derived from our bulk CO
2
service
plans increased by $3.5 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 $1.2 million. The number of customer locations utilizing our products
and
services increased from approximately 115,900 customers at December 31, 2006,
to
approximately 116,100 customers at December 31, 2007, due primarily to organic
growth.
The
following table sets forth, for the periods indicated, the percentage of
total
revenues by service plan:
|
|
|
Six
Months Ended December
31,
|
|
|
Service
Plan
|
|
2007
|
|
|
2006
|
|
|
Bulk
budget plan
1
|
|
|
48.7
|
%
|
|
|
51.6
|
%
|
|
Equipment
lease/product purchase plan
2
|
|
|
20.3
|
|
|
|
18.0
|
|
|
Product
purchase plan
3
|
|
|
10.9
|
|
|
|
10.6
|
|
|
High
pressure cylinder
4
|
|
|
5.4
|
|
|
|
5.5
|
|
|
Other
revenues
5
|
|
|
14.7
|
|
|
|
14.3
|
|
|
|
|
|
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
$2.9
million, or 6.9%, from $42.9 million in 2006 to $45.8 million in
2007. The increase in revenues is primarily due to a 1.5% increase in
the average number of customer locations serviced combined with slight increase
in the quantity of CO
2
sold to
the average customer. In addition, sales of products and services other than
bulk CO
2
increased
by $1.2 million due in large part to an increase in revenues derived from
cylinder products, fuel surcharges, and other revenues, partially offset
by a
decrease in equipment sales.
Equipment
Rentals -
Revenues
derived from the lease portion of our service plans increased by $1.8 million,
or 8.0%, from $21.4 million in 2006 to $23.2 million in 2007, primarily due
to a
2.3% increase in the average number of customer locations leasing equipment
from
us, including the impact 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 95,700 for 96,400 for the six months
ended December 31, 2007 and 2006, respectively.
Cost
of Products Sold, Excluding Depreciation and Amortization
Cost
of products sold, excluding
depreciation and amortization, increased from $27.9 million in 2006 to $29.3
million in 2007, while decreasing as a percentage of product sales revenue
from
65.1% to 63.9%.
Raw
product costs increased by $0.8
million, from $10.9 million in 2006 to $11.7 million in 2007, due in large
part
to a $0.6 million increase in CO
2
costs. The volume of CO
2
sold by us
increased 3.9%, primarily due to the 1.5% increase in our average customer
base
and an increase in usage of 1.8%.
Operational
costs, primarily wages and
benefits related to cost of products sold, remained consistent at $10.9 million
for the six months ended December 2006 and 2007
Truck
delivery expenses increased from
$4.3 million in 2006 to $4.7 million in 2007. 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 three months, we have begun to
implement 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 from $1.8 million
in
2006 to $1.9 million in 2007.
Cost
of Equipment Rentals, Excluding Depreciation and Amortization
Cost
of
equipment rentals, excluding depreciation and amortization, increased from
$2.6
million in 2006 to $4.6 million in 2007 while increasing as a percentage
of
equipment rentals revenue from 12.1% to 19.8%. During the second
quarter of 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 deceased by $0.9 million from
$14.4 million in 2006 to $13.3 million in 2007, while decreasing as a percentage
of total revenues from 22.4% in 2006 to 19.3% in 2007.
Selling
related expenses decreased by $0.7 million, from $2.7 million in 2006 to
$2.0
million in 2007. In October 2006 and January 2007, as part of our new
strategic growth plan, we reduced our sales force by 28
associates. We expect the full impact of this reduction to be fully
seen throughout fiscal 2008.
General
and administrative expenses
decreased by $0.4 million, or 3.3%, from $11.7 million in 2006 to $11.3 million
in 2007.
Depreciation
and Amortization
Depreciation
and amortization increased from $9.7 million in 2006 to $10.0 million in
2007. As a percentage of total revenues, depreciation and
amortization expense decreased from 15.1% in 2006 to 14.6% in 2007.
Depreciation
expense increased from $8.1 million in 2006 to $8.4 million in
2007. The increase was due in large part to the purchase and
placement of additional bulk CO
2
tanks at
customer sites.
Amortization
expense remained consistent at $1.6 million in both 2006 and 2007.
Loss
on Asset Disposal
Loss
on asset disposal increased from
$1.0 million in 2006 to $1.7 million in 2007, increasing as a percentage
of
total revenues from 1.5% to 2.5%. This increase is primarily
due to the write-off of deferred lease acquisition costs and soft costs
associated with customer attrition. The attrition increase is primarily related
to the disposition of lower revenue generating accounts.
Operating
Income
For
the reasons previously discussed,
operating income increased by $1.3 million from $8.7 million in 2006 to $10.0
million in 2007. As a percentage of total revenues, operating income
increased from 13.5% to 14.6%.
Interest
Expense
Interest
expense remained consistent at $1.1 million in both 2006 and 2007, while
the
effective interest rate of our debt increased from 6.6% per annum in 2006
to
6.8% per annum in 2007 due to rising libor rates over the past
year. 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 $1.3 million,
or
18.5%, from $7.6 million in 2006 to $8.9 million in 2007.
Provision
for Income Taxes
During
the six months ended December
31, 2006 and 2007, 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 six months ended December 31,
2007 was 43.5%, as compared with 48.3% last year. Included in the 2006 rate
is
$0.5 million in income tax expense associated with a decrease in state and
local
net operating loss carryforwards expected to be available to offset future
taxable income.
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 $3.9 million 2006 to $5.0 million in 2007.
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.
|
|
|
Six
Months Ended December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Net
income
|
|
$
|
5,047
|
|
|
$
|
3,902
|
|
|
Interest
expense
|
|
|
1,092
|
|
|
|
1,126
|
|
|
Depreciation
and amortization
|
|
|
10,048
|
|
|
|
9,742
|
|
|
Provision
for income taxes
|
|
|
3,898
|
|
|
|
3,649
|
|
|
EBITDA
|
|
|
20,085
|
|
|
|
18,419
|
|
|
Noncash
option compensation
|
|
|
1,641
|
|
|
|
1,944
|
|
|
EBITDA
excluding the impact of option compensation
|
|
$
|
21,726
|
|
|
$
|
20,363
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows provided by (used in):
|
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
23,868
|
|
|
$
|
17,953
|
|
|
Investing
activities
|
|
$
|
(10,201
|
)
|
|
$
|
(15,771
|
)
|
|
Financing
activities
|
|
$
|
(13,626
|
)
|
|
$
|
(2,336
|
)
|
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.
On
January 29, 2007, our Board of Directors authorized a share repurchase program
under which we may repurchase up to $50 million of our common shares from
time
to time in the open market through December 31, 2007. The share repurchase
program commenced on February 5, 2007. During the six months ended
December 31, 2007, we purchased a total of 274,195 common shares at an average
price of $25.83 per share for an aggregate purchase price of $7.1
million.
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 December
31, 2007.
As
of
December 31, 2007, a total of $27.5 million was outstanding pursuant to the
2005
Credit Facility, primarily consisting of Libor (Eurodollar Rate) loans with
a
weighted average interest rate of 6.4% per annum.
Other
During
the six months ended December
31, 2007, 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 December 31, 2007 and June 30, 2007, we had
working capital of $11.1 million and $13.3 million, respectively.
Cash
Flows from Operating
Activities:
During 2006 and 2007, net cash generated by operating
activities was $18.0 million and $23.9 million, respectively. Cash
used by our working capital assets improved by $1.7 million, partially offset
by
the cash generated from our results of operations.
Cash
Flows from Investing
Activities.
During 2006 and 2007, net cash used in investing
activities was $15.8 million and $10.2 million,
respectively. Investing activities in 2006 included $9.0 million
associated with the purchase and installation of tanks at customer sites
as
compared with $14.7 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 2006, cash flows used in financing
activities was $2.3 million, compared to $13.6 million used in financing
activities in 2007. During 2007, we made repayments on outstanding
debt of approximately $7.3 million as compared to repayments of approximately
$5.0 million in 2006. Additionally, as previously discussed during
the six months ended December 31, 2007, we repurchased a total of 274,194
common
shares for an aggregate purchase price of $7.1 million.
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 December 31, 2007, we operated a
total of 364 specialized bulk CO
2
delivery
vehicles and technical service vehicles that logged approximately 15 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.
In
July 2006, the FASB issued
Interpretation Number 48,
“
Accounting
for Uncertainty in Income
Taxes - An Interpretation of FASB Statement No. 109
” (“FIN No. 48”). 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. FIN No. 48 is
mandatory for years beginning after December 15, 2006; accordingly, we
adopted FIN No. 48 effective July 1, 2007. The adoption of FIN No. 48 did
not
have a material impact on our results of operations, as we had no potential
liabilities that would have met the pre-FIN No. 48 accrual criteria, discussed
above, at June 30, 2007 or December 31, 2007.