-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TJzQMqRwe94l3AZ6uZuGGKKpE4L6ynqMJ17hAag+m8mxVYebz0msgqEzmQrnA05b QUDoN1HcJ1VhhO5M0h5rPQ== 0001047469-98-041872.txt : 19981123 0001047469-98-041872.hdr.sgml : 19981123 ACCESSION NUMBER: 0001047469-98-041872 CONFORMED SUBMISSION TYPE: 6-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981120 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPARKLING SPRING WATER GROUP LTD CENTRAL INDEX KEY: 0001050760 STANDARD INDUSTRIAL CLASSIFICATION: BOTTLED & CANNED SOFT DRINKS CARBONATED WATERS [2086] STATE OF INCORPORATION: A6 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 6-K SEC ACT: SEC FILE NUMBER: 333-43061 FILM NUMBER: 98755991 BUSINESS ADDRESS: STREET 1: ONE LANDMARK SQUARE CITY: STAMFORD STATE: CT ZIP: 06901 BUSINESS PHONE: 2033250077 MAIL ADDRESS: STREET 1: ONE LANDMARK SQUARE CITY: STAMFORD STATE: CT ZIP: 06901 6-K 1 FORM 6-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 6-K REPORT OF FOREIGN ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended September 30, 1998 Sparkling Spring Water Group Limited ------------------------------------ One Landmark Square, Stamford CT, USA 06901 ------------------------------------------- (Address of principal executive offices) [Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F] Form 20-F X Form 40-F ---- ---- [Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3 - 2(b) under the Securities Exchange Act of 1934.] Yes No X ---- ---- SIGNATURE 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. Sparkling Spring Water Group Limited By: -------------------------------------- Name: David M. Arnold Title: Vice President Finance, Treasurer Date: ----------------- TABLE OF ADDITIONAL REGISTRANTS
STATE OR OTHER PRIMARY STANDARD JURISDICTION OF INDUSTRIAL INCORPORATION OF CLASSIFICATION EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER ORGANIZATION CODE NUMBER Sparkling Spring Water Limited Nova Scotia 5149 Spring Water, Inc. Delaware 5149 Cullyspring Water Co., Inc. Washington 5149 Crystal Springs of Seattle, Inc. Delaware 5149 Crystal Springs Drinking Water, Inc. Washington 5149 Crystal Springs Acquisition, Inc. Delaware 5149 Mountain Fresh Acquisition Corp. Delaware 5149 Water Jug Enterprises Limited Nova Scotia 5149 Withey's Water Softening & Purification Ltd. Nova Scotia 5149 Aqua Care Water Softening & Purification Inc. Nova Scotia 5149 High Valley Water Limited Nova Scotia 5149 3003969 Nova Scotia Limited Nova Scotia 5149 Coastal Mountain Water Corp. British Columbia 5149 Canadian Springs Water Company Limited Nova Scotia 5149 Sparkling Spring Water UK Limited UK 5149 Aquaporte (UK) Limited UK 5149 Krystal Fountain Water Co. Limited UK 5149 Marlborough Employment Limited Scotland 5149 Water at Work Limited Scotland 5149 Natural Water Limited Scotland 5149
The address of the principal executive offices of each of the Additional Registrants is the same as for Sparkling Spring Water Group Limited, as set forth on the cover page of this Report. Sparkling Spring Water Group Limited Quarterly Report On Form 6 - K For The Quarter Ended September 30, 1998 INDEX
Page Part I Financial Information Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997. . . . . . . . . . . . . . . . . . . . . . 1 Consolidated Statements of Operations for the three and nine month periods ended September 30, 1998 and 1997. . . . . . . . . 2 Consolidated Statements of Cash Flows for the nine months ended September 30, 1998 and 1997. . . . . . . . . . . . . . . . 3 Notes to Consolidated Financial Statements . . . . . . . . . . . 4 Item 2. Management's Discussion And Analysis Of Financial Condition And Results Of Operations. . . . . . . . . . 7 Part II Other Information Item 6. Exhibits and Reports on Form 6-K . . . . . . . . . . . . . . . . 11
Part I Financial Information Item 1. Financial Statements SPARKLING SPRING WATER GROUP LIMITED CONSOLIDATED BALANCE SHEETS
September 30, December 31, 1998 1997 ------------- ------------ ASSETS (Unaudited) Current Cash and cash equivalents $ 6,784,579 $ 27,507,257 Accounts receivable 16,370,763 8,267,315 Inventories 1,730,144 1,751,562 Prepaid expenses 2,293,543 1,536,755 ------------ ------------ Total current assets 27,179,029 39,062,889 Deferred taxes 1,541,188 1,379,736 Fixed assets 31,586,649 23,307,315 Goodwill and deferred charges 52,886,421 43,248,972 Other assets 1,108,000 -- ------------ ------------ Total assets $114,301,287 $106,998,912 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current Accounts payable and accrued liabilities $ 11,175,464 $ 6,645,552 Income tax payable 811,751 1,042,567 Unearned revenue 304,535 75,488 Customer deposits 4,620,082 3,396,466 Debt due within one year 1,173,251 1,189,868 ------------ ------------ Total current liabilities 18,085,083 12,349,941 ------------ ------------ Obligations under capital leases 2,627,846 2,485,204 Senior bank loan 3,811,416 -- Other loans 814,235 1,123,617 Subordinated notes payable 100,000,000 100,000,000 ------------ ------------ Total long-term liabilities 107,253,497 103,608,821 ------------ ------------ Temporary equity (note 7) 262,080 -- ------------ ------------ Shareholders' equity (deficit) Capital Stock Issued and outstanding: Class D common shares 1,383,328 (1997-1,383,328) 5,760,564 6,269,204 Less: Subscriptions receivable (230,003) (230,003) ------------ ------------ 5,530,561 6,039,201 Cumulative translation adjustment (1,428,108) (770,729) Deficit (15,401,826) (14,228,322) ------------ ------------ Total shareholders' equity (deficit) (11,299,373) (8,959,850) ------------ ------------ Total liabilities and shareholders' equity (deficit) $114,301,287 $106,998,912 ============ ============
SEE ACCOMPANYING NOTES 1 SPARKLING SPRING WATER GROUP LIMITED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Twelve Weeks Nine Months Nine Months Ended Ended Ended Ended September 30, September 30, September 30, September 30, 1998 1997 1998 1997 ------------- ------------- ------------- ------------- Revenue: Water $10,645,773 $ 7,211,302 $27,126,999 $19,536,818 Rental 3,868,235 2,790,050 10,182,050 7,776,599 Other 1,973,796 1,496,208 5,492,216 4,484,361 ----------- ----------- ----------- ----------- Total revenue 16,487,804 11,497,560 42,801,265 31,797,778 ----------- ----------- ----------- ----------- Cost of sales: Water 1,964,701 1,476,184 5,422,273 3,881,307 Other 871,213 745,035 2,313,323 1,982,330 ----------- ----------- ----------- ----------- Total cost of sales 2,835,914 2,221,219 7,735,596 5,863,637 ----------- ----------- ----------- ----------- Gross profit 13,651,890 9,276,341 35,065,669 25,934,141 Expenses: Selling, delivery and administrative 8,783,326 5,657,137 23,199,363 16,817,876 Depreciation and amortization 1,912,501 1,147,774 5,504,505 3,918,398 Acquisition, integration and related expenses (note 9) 1,825,000 -- 1,825,000 -- ----------- ----------- ----------- ----------- Operating profit 1,131,063 2,471,430 4,536,801 5,197,867 Interest expense 1,693,960 1,172,146 5,997,125 2,900,528 ----------- ----------- ----------- ----------- Income (loss) before income taxes (562,897) 1,299,284 (1,460,324) 2,297,339 Provision for (recovery of) income taxes (100,000) 547,314 (286,820) 1,063,640 ----------- ----------- ----------- ----------- Net income (loss) $ (462,897) $ 751,970 $(1,173,504) $ 1,233,699 =========== =========== =========== =========== Basic earnings (loss) per share $(0.33) $0.44 $(0.85) $0.71 =========== =========== =========== =========== Diluted earnings per share $ N/A $0.40 N/A $0.64 =========== =========== =========== ===========
SEE ACCOMPANYING NOTES 2 SPARKLING SPRING WATER GROUP LIMITED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Nine Months Months Ended Ended September 30, September 30, 1998 1997 ------------- ------------- OPERATING ACTIVITIES Net income (loss) $ (1,173,504) $ 1,233,699 Items not requiring cash Depreciation and amortization 5,504,505 3,918,398 Deferred taxes (161,452) 301,794 Unrealized gain on cross currency swap (2,748,614) -- ------------ ------------ 1,420,935 5,453,891 Net change in non-cash working capital balances (1,126,435) (1,913,872) ------------ ------------ Cash provided by operating activities 294,500 3,540,019 ------------ ------------ INVESTING ACTIVITIES Purchase of fixed assets, net (7,888,658) (5,749,761) Acquisitions (14,853,048) (19,835,497) Increase in other assets (1,108,000) -- ------------ ------------ Cash used in investing activities (23,849,706) (25,585,258) ------------ ------------ FINANCING ACTIVITIES Increase in long-term debt 4,657,863 24,048,786 Repayment of long-term debt (1,379,094) (1,998,069) Issuance of common shares 262,080 19,153 Increase in deferred charges (875,339) (1,174,907) ------------ ------------ Cash provided by financing activities 2,665,510 20,894,963 ------------ ------------ Effect of foreign currency translation on cash 167,018 (182,590) ------------ ------------ Decrease in cash and cash equivalents during the period (20,722,678) (1,332,866) Cash and cash equivalents, beginning of period 27,507,257 2,230,735 ------------ ------------ Cash and cash equivalents, end of period $ 6,784,579 $ 897,869 ============ ============ SUPPLEMENTAL CASH FLOW DISCLOSURE Interest paid $ 6,130,173 $ 2,552,109 ============ ============ Income taxes paid $ 347,118 $ 207,890 ============ ============
SEE ACCOMPANYING NOTES 3 SPARKLING SPRING WATER GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (Unaudited) 1. Basis of Presentation Sparkling Spring Water Group Limited ("Sparkling Spring") is incorporated under the laws of the Province of Nova Scotia, Canada and provides containered water to home and office markets in British Columbia and the Maritime provinces of Canada, England, Scotland and the Pacific Northwestern United States. The Company uses the US$ as its reporting currency and the Canadian dollar as its functional currency. The accompanying unaudited consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles for interim financial information. Accordingly, they do not include all information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the unaudited interim consolidated financial statements of the Company reflect all adjustments necessary to present fairly the financial position of the Company, the results of its operations and the changes in its financial position for the interim periods presented. All such adjustments are of a normal recurring nature. The accompanying consolidated financial statements should be read in conjunction with the Audited Financial Statements for the year ended December 31, 1997 and the notes thereto contained in the Company's Annual Report on Form 20-F filed with the Securities and Exchange Commission. 2. Seasonal Nature of Business Operating results for the three and nine month periods ended September 30, 1998 are not necessarily indicative of the results that may be expected for the year ended December 31, 1998 due to the seasonal nature of the business. This seasonality results from a combination of higher unit sales of the Company's products in the second and third quarters and the accounting for such administrative and other overhead costs including but not limited to depreciation, amortization and interest expense which are not significantly impacted by business seasonality. 3. Inventories Inventories consist of the following:
September 30, December 31, 1998 1997 ------------- ------------ (unaudited) Packaging materials $ 893,327 $ 973,583 Goods for resale 540,783 502,608 Cooler parts 152,218 151,208 Other 143,816 124,163 ---------- ---------- $1,730,144 $1,751,562 ========== ==========
4. Reorganization The Board of Directors approved a reorganization of Sparkling Spring Water Group Limited ("Group") which became effective August 31, 1998. In this reorganization shareholders and option holders of Group exchanged their shares and options to acquire common stock of Group for shares and options to acquire common stock of a new holding company, Sparkling Spring Water Holdings Limited ("Holdings"). Holdings was formed to increase corporate flexibility and provide additional access to capital markets. Group has advanced $1.1 million to Holdings for administrative expenses and to provide partial payment to purchase stock options previously issued by Group to an executive officer who resigned in March 1998. This advance is in the form of a loan with interest at 15% per annum. 4 SPARKLING SPRING WATER GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (Unaudited) 5. Financial Instruments In December 1997, the Company entered into two cross currency interest rate swaps with a US bank to more closely match the interest requirements of its subordinated notes with the cash flows earned by the Company's Canadian and UK subsidiaries. The Company entered into a $30 million US six year swap in British pounds sterling and a $28 million US five year swap in Canadian dollars. The semi annual interest payments are approximately 1.1 million pounds on the pounds sterling swap and $2.2 million Canadian dollars on the Canadian swap. At September 30, 1998 and December 31, 1997, the aggregate fair market value of the two swaps was approximately $3,111,000 and $423,000 in favor of the Company respectively. Of these amounts approximately $2,749,000 and $115,000 were recorded as a reduction in interest expense for the nine months ended September 30, 1998 and the year ended December 31, 1997 respectively. In October 1998 the Company closed out its Canadian dollar swap, realizing cash proceeds of $3.4 million. 6. Earnings per Share The Company has adopted Statement of Financial Accounting Standard No. 128 (SFAS No. 128), Earnings per Share. SFAS No. 128 replaces the previous standards for presentation of primary and fully diluted earnings per share (EPS) with basic and diluted EPS. Basic EPS excludes the dilutive effect of the exercise of all outstanding options and warrants. Diluted EPS includes the dilutive effect of the exercise of all outstanding options and warrants. The effect of the exercise of outstanding options and warrants has not been included in the computation of earnings per share for the three and nine months ended September 30, 1998 as the effect would be antidilutive. The weighted average number of shares used to calculate basic and diluted earnings (loss) per share is 1,383,328 and 1,635,525 respectively for the three and nine month periods ended September 30, 1998 and 1,728,246 and 1,980,443 respectively for the three and nine month periods ended September 30, 1997. 7. Common Stock In January 1998, certain key managers of the Company subscribed for an aggregate of 9,360 shares of Common Stock of the Company. The shares were recorded at $28 per share, representing the estimated fair value as determined by an agreed upon formula. These managers have granted an option to Sparkling Spring enabling Sparkling Spring to repurchase these shares of Common Stock at any time at their estimated fair market value determined in accordance with the same agreed upon formula price. Sparkling Spring is obligated to repurchase these shares at the option of the key managers for the same formula price during a one-month period each year, subject to any financial covenants and financing requirements affecting the Company. The shares are shown as "Temporary Equity" in the Company's financial statements. 8. Acquisitions On February 24, 1998, the Company purchased all of the outstanding capital stock of Coastal Mountain Water Corp. (Coastal) for approximately $4.3 million. Coastal is based in Vancouver, British Columbia and focuses on the direct delivery of eighteen litre containers of water to residential and commercial customers and the rental of water coolers. On May 15, 1998, the Company purchased all of the outstanding shares of Krystal Fountain Water Co. Limited (Krystal Fountain) for approximately $6.7 million. Krystal Fountain operates in the M25 area in London, England. On August 31, 1998, the Company purchased the assets of the Springfield Water Division of Brio Industries Inc. for approximately $3.9 million. Springfield operates primarily in the Vancouver, British Columbia market. 5 SPARKLING SPRING WATER GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (Unaudited) 8. Acquisitions (cont'd) The following unaudited pro forma information presents a summary of consolidated results of operations as if the acquisitions of D&D and Company, Inc., High Valley Water Limited, Withey's Water Softening and Purification Limited, Marlborough Employment Limited, Soja Enterprises Inc., Crystal Spring Bottled Water Co., Inc., Cullyspring Water Co., Inc., Crystal Springs Drinking Water Inc., Coastal Mountain Water Corp., Krystal Fountain Water Co. Limited and Springfield Water Company had occurred at January 1, 1998 and January 1, 1997.
Nine Months Nine Months Ended Ended September 30, September 30, 1998 1997 ------------- ------------- Total revenue $45,661,928 $41,794,307 Net income (loss) (1,218,572) 502,484 Extraordinary item --- --- Basic income (loss) per share $ (0.88) $ 0.29
9. Acquisition, Integration and Related Expenses In 1998 the Company completed the acquisitions of Coastal Mountain Water Corp., Krystal Fountain Water Co. Limited and Springfield Water Company. In integrating these acquisitions into the Company's existing business, non - recurring costs were incurred to reduce and relocate staff, convert the acquired business' computer systems, close acquired facilities and blend acquired customers into the Company's existing routes. Further, costs were incurred in connection with a potential acquisition which will not be completed. The components of the acquisition, integration and related charges are as follows: Write-off of costs associated with an acquisition which did not close $ 125,000 Severance, relocation and related costs 350,000 Conversion of computer systems 375,000 Route blending 550,000 Facility closure and other integration costs 425,000 ---------- $1,825,000 ==========
10. Financing Arrangements On May 26, 1998, the Company completed a $40 million senior credit facility for purposes of financing future capital investments, working capital, business acquisitions and general corporate purposes. The loan facility matures in 2007. The Company's payment obligations under the credit facility are secured by a first priority security interest granted in favor of the lenders over substantially all of the assets of the Company. The Company's obligations under the credit facility rank senior to the payment of the Company's subordinated notes payable. 6 ITEM 2. Management's Discussion And Analysis Of Financial Condition And Results Of Operations The following is management's discussion and analysis of certain significant factors which have affected the Company's financial position and operating results during the periods included in the accompanying consolidated financial statements. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated certain statement of operations and other data of the Company.
Three Months Twelve Weeks Nine Months Nine Months Ended Ended Ended Ended September 30, September 30, September30, September 30, 1998 1997 1998 1997 ------------- ------------- ------------ ------------- Revenue 100 % 100 % 100 % 100 % Cost of sales 17.2 19.3 18.1 18.4 ----- ----- ----- ----- Gross profit 82.8 80.7 81.9 81.6 Selling, delivery and administrative 53.3 49.2 54.2 52.9 Acquisition, integration and related expenses 11.1 -- 4.2 -- ----- ----- ----- ----- EBITDA 18.4 31.5 23.5 28.7 Depreciation and amortization 11.6 10.0 12.9 12.3 ----- ----- ----- ----- Operating profit 6.8 21.5 10.6 16.4 Interest expense 10.3 10.2 14.0 9.1 ----- ----- ----- ----- Income (loss) before income taxes (3.5) 11.3 (3.4) 7.3 Provision for (recovery of) income taxes (0.6) 4.8 (0.7) 3.3 ----- ----- ----- ----- Net income (2.9) 6.5 (2.7) 4.0 ===== ===== ===== =====
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE TWELVE WEEKS ENDED SEPTEMBER 30, 1997 REVENUE. Revenue increased $5.0 million or 43.4% to $16.5 million in the three months ended September 30, 1998 compared to $11.5 million in the twelve weeks ended September 30, 1997. Approximately $1.7 million of this increase was due to additional delivery days in the longer 1998 quarter. In addition, revenue growth was reduced by approximately $0.3 million or 2.6% due to the decline in the Canadian Dollar less benefits from a slight increase in the exchange rate for the Pound. Revenues from acquisitions completed during and after the 1997 third quarter accounted for approximately $2.8 million of the increase. The balance of the increase was from growth in sales from the Company's increasing customer base. The Company's water cooler customer locations ended the third quarter at approximately 154,000 up from 137,000 at June 30, 1998. Approximately 9,000 of this increase came from the acquisition of Springfield. COST OF SALES. The cost of sales increased by $0.6 million or 27.7% to $2.8 million in 1998 compared to $2.2 million in 1997. Approximately $0.3 of the increase was due to the greater number of delivery days in the 1998 quarter. The balance of the increase was due to acquisitions completed since the 1997 period, an increase of $100,000 in the provision for obsolete inventory and growth in the Company's base operations. The cost of sales as a percentage of revenue decreased 2.1% from 19.3% in the 1997 period to 17.2% in the 1998 third quarter as a result of a lower percentage mix of lower margin small pack sales and other lower margin products including cups and coffee. 7 OPERATING EXPENSES. Selling, delivery and administrative operating expenses increased by $3.1 million or 55.3% to $8.8 million in the 1998 third quarter from $5.7 million in the 1997 period. Approximately $0.8 million of this increase was due to the greater number of delivery days in the 1998 third quarter. An increase in the allowance for doubtful accounts accounted for a further $0.5 million of the increase. The balance of the increase was the result of increased business operations from businesses acquired during and after the 1997 period and from the underlying growth in the Company's water cooler location base. At the end of the third quarter of 1998 the Company's actual water cooler rental account base was up over 34% over the period ending count in 1997. The acquisition adjusted water cooler account base was up by approximately 18%. As a percentage of revenue, selling, delivery and administrative expenses increased from 49.2% in the 1997 period to 53.3% in the 1998 third quarter. This increase was due to additional reserves for uncollectible accounts receivable, increased corporate personnel and systems expenditures and increased expenditures to fund customer growth. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased by 66.6% or $0.8 million to $1.9 million from $1.1 million in the 1997 period. Approximately $0.2 million of this increase was due to the greater number of delivery days in the 1998 third quarter. This increase reflects the significant increase in fixed and intangible assets acquired as a result of acquisitions consummated during and after the 1997 period. In addition, this increase is a result of depreciation of capital expenditures required to support the increase in the Company's water cooler customer base and capital expenditures required to maintain existing operations. OPERATING PROFIT. After including a charge of $1.8 million for costs incurred to integrate the 1998 acquisitions into the Company's operations (see Note 9 to the Notes to Consolidated Financial Statements included elsewhere in this Report), operating income decreased by $1.4 million from $2.5 million in the 1997 period to $1.1 million in the 1998 quarter. Excluding this charge, operating income increased 19.6% or $0.5 million to $3.0 million from $2.5 million in the 1997 period. As a percentage of revenue, operating profit decreased from 21.5% in the 1997 period to 6.8% in the 1998 quarter due principally to the acquisition and integration expenses and the increase in the allowance for doubtful accounts discussed above. Earnings before interest, taxes, depreciation and amortization expense decreased $0.6 million from $3.6 million in the 1997 period to $3.0 million in the third quarter. Excluding the integration charge EBITDA increased by $1.3 million or 34.5% to $4.9 million from $3.6 million in the 1997 period. INTEREST EXPENSE. Interest expense increased by $0.5 million from $1.2 million in the 1997 period to $1.7 million in the 1998 quarter. Interest expense was reduced by $1.4 million as a result of a reduction in interest expense accrued due to the fluctuating value of the Company's currency swaps (see Note 5 of the Notes to Consolidated Financial Statements included elsewhere in this Report). Interest expense for the 1998 third quarter was higher than the third quarter 1997 by $0.2 million as a result of more delivery days in the quarter. Excluding these two items, interest expense in the 1998 third quarter increased by $1.7 million over the 1997 period. This increase is the result of higher borrowing levels and interest rates as a result of the issuance of $100 million of 11.5% Senior Subordinated Notes in November of 1997. The proceeds from the Notes were used to refinance existing debt and complete a reorganization of the Company as well as to provide funding for future acquisitions, capital expenditures and working capital for the Company. NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1997 REVENUE. Revenue increased $11.0 million or 34.6% to $42.8 million in the nine months ended September 30, 1998 compared to $31.8 million in the nine months ended September 30, 1997. This increase was reduced by approximately $0.9 million or 2.7% due to the decline in the Canadian Dollar less benefits from a slight increase in the exchange rate for the Pound. Revenues from acquisitions completed during and after the 1997 third quarter accounted for approximately $8.9 million of the increase. The balance of the increase was from growth in sales from the Company's increasing customer base. The Company's water cooler customer locations ended the third quarter at approximately 154,000 up from 115,000 at December 31, 1997. Approximately 21,000 of this increase came from the acquisitions of Coastal , Krystal Fountain and Springfield. COST OF SALES. The cost of sales increased by $1.8 million or 31.9% to $7.7 million in 1998 compared to $5.9 million in 1997 largely as a result of acquisitions completed since the 1997 period. The cost of sales as a percentage of revenue decreased by 0.3% from 18.4% in 1997 to 18.1% in 1998 as a result of a lower percentage mix of lower margin small pack sales and other products including cups and coffee. 8 OPERATING EXPENSES. Selling, delivery, and administrative operating expenses increased by $6.4 million or 37.9% to $23.2 million for the nine months ended September 30, 1998 compared to $16.8 million in the 1997 period. This increase is due to increased business operations from businesses acquired during and after the 1997 period and from the underlying growth in the Company's water cooler location base. At the end of the third quarter of 1998 the Company's actual water cooler rental account base was up over 34% over the period ending count in 1997. The acquisition adjusted water cooler account base was up by approximately 18%. As a percentage of revenue, selling, delivery and administrative expenses increased from 52.9% for the nine months ended September 30, 1997 to 54.2% for the nine months ended September 30, 1998. This increase is due in part to an increase in the Company's allowance for doubtful accounts of $475,000, increased marketing expenditures to fund customer growth and increased administrative charges in corporate personnel and computer systems. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased by 40.5% or $1.6 million to $5.5 million from $3.9 million in the 1997 period. This increase was due to the significant increase in fixed and intangible assets acquired as a result of acquisitions consummated during and after the 1997 period. In addition, this increase is a result of depreciation of capital expenditures required to support the increase in the Company's water cooler customer base and capital expenditures required to maintain existing operations. OPERATING PROFIT. After including a charge of $1.8 million for costs incurred to integrate the 1998 acquisitions into the Company's operations, operating profit decreased $0.7 million to $4.5 million in 1998 from $5.2 million in 1997. Excluding this charge, operating profit increased 22.3% or $1.2 million from $5.2 million in 1997. As a percentage of revenue, operating profit decreased from 16.4% in the 1997 period to 10.6% in the nine months ended September 30, 1998 due principally to the acquisition charge as discussed above. Earnings before interest, taxes, depreciation and amortization expense increased by 10.2% or $0.9 million to $10.0 million from $9.1 million in the 1997 period as a result of the changes noted above. Excluding the acquisition and integration charge, EBITDA increased by $2.8 million or 30.2% to $11.9 million from $9.1 million in 1997. INTEREST EXPENSE. Interest expense increased by $3.1 million from $2.9 million in the 1997 period to $6.0 million in the 1998 period. Interest expense was reduced by approximately $2.7 million as a result of interest accrued due to the fluctuating value of the Company's currency swaps (see Note 5 of the Notes to Consolidated Financial Statements included elsewhere in this Report). Interest expense increased over 1997 as a result of higher borrowing levels and interest rates as a result of the issuance of $100 million of 11.5% Senior Subordinated Notes in November of 1997. The proceeds from the Notes were used to refinance existing debt and complete a reorganization of the Company as well as to provide funding for future acquisitions, capital expenditures and working capital for the Company. LIQUIDITY AND CAPITAL RESOURCES Historically, the Company has funded its capital and operating requirements with a combination of cash flow from operations, borrowings under bank credit facilities and equity investments from shareholders. The Company has utilized these sources of funds to make acquisitions, to fund significant capital expenditures at its properties, to fund operations and to service debt. The Company presently expects to fund its future capital and operating requirements at its existing operations through a combination of cash generated from operations, excess cash proceeds from the issuance of the Subordinated Notes and borrowings under the Senior Credit Facility (see below). Net cash provided by operating activities was $0.3 million for the nine months ended September 30, 1998 and $3.5 million for the nine months ended September 30, 1997. Net cash used in investment activities was $23.8 million in 1998 and $25.6 million in 1997. These amounts include $14.9 million related to three acquisitions completed in the nine months ended September 30, 1998 and six acquisitions completed in 1997 for $19.8 million. The Company made net capital expenditures of $7.9 million in the nine months ended September 30, 1998 and $5.7 million in 1997. Capital expenditures include expenditures related to the addition of bottling lines at existing facilities, construction of new bottling facilities, and the purchase of water bottles, water coolers and delivery trucks. Based on the Company's existing operations, management expects that the Company's capital expenditures will total approximately $8.5 to $9.0 million in 1998. The Company believes that the net proceeds from the sale of the Subordinated Notes together with available cash, cash generated from operations and available borrowings under the Senior Credit Facility will be sufficient to finance the Company's 9 working capital and capital expenditure requirements for 1998 as well as some acquisitions. However, there can be no assurance that such resources will be sufficient to meet the Company's anticipated requirements or that the Company will not require additional financing within this time frame. SENIOR CREDIT FACILITY On May 26, 1998, the Company closed a $40 million Senior Credit Facility (the "Credit Facility") with Toronto-Dominion. The Credit Facility will be used for general corporate purposes including working capital, acquisitions and capital expenditure financing. The Credit Facility is structured as a multi-currency revolving facility having a term of approximately six and one half years. Availability under the Credit Facility requires compliance with certain loan covenants. The Company's payment obligation under the Credit Facility is secured by a first priority security interest over substantially all of the assets of the Company; obligations under the Credit Facility rank senior to the payment of the Subordinated Notes. Amounts outstanding under the Credit Facility bear interest at specified rates based on the Canadian Banker's Acceptance or prime rates in the case of advances made in Canadian dollars, at specified rates based on the London inter-bank market in the case of advances made in British pounds sterling or U.S. dollars, and at specified rates based on the U.S. prime rate in the event of advances made in U.S. dollars. As of September 30, 1998, the Company had borrowings outstanding under the Credit Facility of $5.8 million Canadian. Based on current exchange rates and loan balances outstanding as of September 30, 1998, the Company has available $36.2 million US under the Credit Facility. YEAR 2000 The Company uses software and other technologies throughout its operations that will be affected by the Year 2000 issue. Each of the Company's business locations has established a team to identify and correct Year 2000 issues and in general have completed the assessment phase and are progressing with required modifications. The Company's principal financial and operational computer systems utilize software developed and supported by an outside computer software supplier. The supplier has upgraded its software for Year 2000 compliance. The software will be installed and tested at the Company's sites commencing in December 1998 and continuing in early 1999. In addition, the impact of Year 2000 on manufacturing plants and building facilities is also being addressed. The Company is also investigating the Year 2000 capabilities of suppliers, customers and other external entities, and developing contingency plans where necessary. The Company does not expect the costs associated with Year 2000 to be material to the Company's consolidated financial position, results of operations or cash flows. This expectation is based on the assumption that the Company has contemplated all significant actions required and that significant costs related to Year 2000 will not be incurred on behalf of the Company's customers or suppliers. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, SFAS No. 130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information were issued. These standards are applicable to the Company commencing with the December 31, 1998 Financial Statements and its March 31, 1999 Interim Financial Statements. The impact of SFAS No. 130 will be to include the change in the cumulative translation adjustment account in the determination of Comprehensive Income. The impact of SFAS No. 131 will be to disclose certain information about the revenues the Company derives from each of its major products in addition to segmented information for the countries in which it earns revenues and holds assets. 10 SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Statements included in this Report that do not relate to present or historical conditions are "forward looking statements" within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 (the "1995 Reform Act"). Additional oral or written forward-looking statements may be made by the Company from time to time, and such statements may be included in documents other than this Report that are filed with the SEC. Such forward-looking statements involve risks and uncertainties that could cause results or outcomes to differ materially from those expressed in such forward-looking statements. Forward-looking statements in this Report and elsewhere may include without limitation, statements relating to the Company's plans, strategies, objectives, expectations, intentions and adequacy of resources and are intended to be made pursuant to the safe harbor provisions of the 1995 Reform Act. Words such as "believes," "forecasts," "intends," "possible," "expects," "estimates," "anticipates," or "plans" and similar expressions are intended to identify forward-looking statements. Investors are cautioned that such forward-looking statements involve risks and uncertainties including without limitation the following: (i) the Company's plans, strategies, objectives, expectations and intentions are subject to change at any time at the discretion of the Company; (ii) the Company's ability to expand by acquisitions is dependent upon, and may be limited by, the availability of suitable acquisition candidates and the availability of financing therefor on suitable terms; (iii) the Company's ability to obtain financing will be affected by restrictions contained in the Indenture and the Company's other existing and future financing arrangements; (iv) the Company's proposed expansion strategy will be substantially dependent upon the Company's ability to hire and retain skilled management, financial, marketing and other personnel; (v) the Company's plans and results of operations will be affected by the Company's ability to successfully manage growth (including monitoring operations, controlling costs and maintaining effective quality and inventory controls; (vi) the market for attractive acquisitions in the bottled water industry is becoming increasingly competitive, which could make the Company's acquisition strategy more difficult to achieve; (vii) the Company's operations are subject to the jurisdiction of various governmental and regulatory agencies which regulate the quality of drinking water and other products and any failure by the Company to comply with existing and future laws and regulations could subject the Company to significant penalties or impose additional costs on the Company or otherwise have a material adverse affect on its financial position or results of operations; (viii) any interruption in the availability of water to the Company from municipal sources and local natural springs could have a material adverse affect on the Company's operations until suitable replacement sources are located; and (ix) other risks and uncertainties indicated from time to time in the Company's filings with the SEC. Part II Other Information Item 6. Exhibits and Reports on Form 6-K (a) Exhibits None (b) Reports on Form 6-K (incorporated by reference) Report on Form 6-K dated June 3, 1998 which covers: Press Release Dated May 19, 1998 Announcing the Acquisition of Krystal Fountain Water Co. Limited Press Release Dated May 27, 1998 Announcing the Completion of a $US 40 Million Senior Credit Facility with the Toronto Dominion Bank Report on Form 6-K dated July 13, 1998 covering the Press Release dated July 6, 1998 announcing 1st Quarter 1998 Financial Results Report on Form 6-K dated August 24, 1998 covering the Press Release dated August 18, 1998 announcing 2nd Quarter 1998 Financial Results Report on Form 6-K dated September 8, 1998 covering the Press Release dated August 31, 1998 announcing the acquisition of the assets of the Springfield Water Division of Brio Industries Inc. 11 -----END PRIVACY-ENHANCED MESSAGE-----