-----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, LANRJxU5iFGGpILHdeNGqpJbSbWrhiw8XSP1P8QuYZJ0X+by6vTqFjopuI/4pbxP ACwbUAJT4F14Y7QQijqbIA== 0001130319-02-000798.txt : 20020816 0001130319-02-000798.hdr.sgml : 20020816 20020816162213 ACCESSION NUMBER: 0001130319-02-000798 CONFORMED SUBMISSION TYPE: 6-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020816 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: 1934 Act SEC FILE NUMBER: 333-43061 FILM NUMBER: 02741528 BUSINESS ADDRESS: STREET 1: 6560 MCMILLAN WAY STREET 2: W6W 1L2 CITY: VANCOUVER STATE: A1 BUSINESS PHONE: 7024816955 MAIL ADDRESS: STREET 1: 6560 MCMILLAN WAY STREET 2: W6W 1L2 CITY: DARTMOUTH NOVA SCOTIA STATE: A1 ZIP: 00000 6-K 1 o07723e6vk.txt QUARTERLY REPORT PERIOD ENDED JUNE 30, 2002 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 June 30, 2002 Sparkling Spring Water Group Limited ------------------------------------ 19 Fielding Avenue, Dartmouth, Nova Scotia, Canada B3B 1C9 ---------------------------------------------------------- (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: /s/ Robin Chakrabarti ---------------------------- Name: Robin Chakrabarti Title: Vice President and Treasurer Date: August 16, 2002 --------------- Sparkling Spring Water Group Limited Quarterly Report On Form 6-K For The Quarter Ended June 30, 2002 INDEX
Page Part I Financial Information Item 1. Financial Statements Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001...................................................1 Consolidated Statements of Operations for the three and six month periods ended June 30, 2002 and 2001....................................2 Consolidated Statements of Cash Flows for the six months ended June 30, 2002 and 2001............................................3 Notes to Consolidated Financial Statements............................. 4 Item 2. Management's Discussion And Analysis Of Financial Condition And Results Of Operations...........................8 Item 3. Quantitative and Qualitative Disclosures About Market Risk.............15 Part II Other Information Item 1. Legal Proceedings......................................................15 Item 2. Changes in Securities and Use of Proceeds..............................15 Item 3. Defaults Upon Senior Securities........................................15 Item 4. Submission of Matters to a Vote of Security Holders....................15 Item 5. Other Information......................................................15 Item 6. Exhibits and Reports on Form 6-K.......................................15
Part I Financial Information Item 1. Financial Statements SPARKLING SPRING WATER GROUP LIMITED CONSOLIDATED BALANCE SHEETS
(in thousands of U.S. dollars) June 30, December 31, 2002 2001 ----------- ------------ (Unaudited) ASSETS Current Cash and cash equivalents $ 27 $ 287 Accounts receivable 14,015 11,639 Inventories [note 5] 1,793 1,508 Prepaid expenses 2,132 1,964 -------- -------- Total current assets 17,967 15,398 Fixed assets 43,384 41,266 Goodwill 46,602 44,987 Deferred charges 2,097 2,335 Other assets 155 1,872 -------- -------- Total assets $110,205 $105,858 ======== ======== LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIENCY) Current Accounts payable and accrued liabilities $ 9,365 $ 8,419 Income tax payable 587 377 Customer deposits 7,142 6,684 Unearned revenue 3,566 3,772 Bank operating facility [Note 7] 9,352 -- Current portion of long-term debt 3,863 5,723 -------- -------- Total current liabilities 33,875 24,975 -------- -------- Obligations under capital leases and other debt 2,563 2,858 Obligations under non-compete agreements 105 126 Senior bank debt [note 7] 16,236 27,617 Subordinated notes payable 81,105 81,105 Due to parent company [note 8] 3,826 -- -------- -------- Total long-term liabilities 103,835 111,706 -------- -------- Shareholder's equity (deficiency) Capital Stock Issued and outstanding: Class D common shares - 1,383,328 6,240 5,517 Class E common shares - 5,860 178 157 -------- -------- 6,418 5,674 Additional paid-in capital 1,809 1,809 Cumulative translation adjustment (4,868) (6,425) Deficit (30,864) (31,881) -------- -------- Total shareholder's equity (deficiency) (27,505) (30,823) -------- -------- Total liabilities and shareholder's equity (deficiency) $110,205 $105,858 ======== ========
See accompanying notes 1 SPARKLING SPRING WATER GROUP LIMITED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Three Months Six Months Six Months Ended Ended Ended Ended (in thousands of U.S. dollars) June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001 ------------- ------------- ------------- ------------- Revenue: Water $13,706 $13,051 $25,301 $24,355 Rental 3,953 4,191 7,912 7,834 Other 2,392 2,295 4,415 4,421 ------- ------- ------- ------- Total revenue 20,051 19,537 37,628 36,610 ------- ------- ------- ------- Cost of sales: Water 2,392 2,501 4,469 4,721 Other 806 808 1,474 1,502 ------- ------- ------- ------- Total cost of sales 3,198 3,309 5,943 6,223 ------- ------- ------- ------- Gross profit 16,853 16,228 31,685 30,387 Expenses: Selling, delivery and administrative 10,037 10,415 19,325 20,119 Integration and related expenses [note 9] -- 185 -- 300 Depreciation 2,483 2,519 5,047 4,910 Amortization 8 440 16 904 ------- ------- ------- ------- Operating profit 4,325 2,669 7,297 4,154 Interest and related expenses 2,866 3,139 5,781 6,138 ------- ------- ------- ------- Income (loss) before income taxes and extraordinary item 1,459 (470) 1,516 (1,984) Provision for income taxes 306 295 499 475 ------- ------- ------- ------- Net income (loss) before extraordinary item 1,153 (765) 1,017 (2,459) Extraordinary item [note 10] -- 480 -- 480 ------- ------- ------- ------- Net income (loss) 1,153 (285) 1,017 (1,979) Other comprehensive income (loss): Foreign currency translation adjustment 1,945 637 1,557 (1,240) ------- ------- ------- ------- Comprehensive income (loss) $ 3,098 $ 352 $ 2,574 $(3,219) ======= ======= ======= ======= Basic earnings (loss) per share before extraordinary item $ 0.83 $ (0.55) $ 0.73 $ (1.77) ======= ======= ======= ======= Diluted earnings (loss) per share before extraordinary item $ 0.83 $ (0.55) $ 0.73 $ (1.77) ======= ======= ======= ======= Basic earnings (loss) per share $ 0.83 $ (0.20) $ 0.73 $ (1.42) ======= ======= ======= ======= Diluted earnings (loss) per share $ 0.83 $ (0.20) $ 0.73 $ (1.42) ======= ======= ======= =======
See accompanying notes 2 SPARKLING SPRING WATER GROUP LIMITED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Six Months Ended Months Ended (in thousands of U.S. dollars) June 30, June 30, 2002 2001 ------------ ------------ OPERATING ACTIVITIES Net income (loss) $ 1,017 $ (1,979) Items not requiring cash Depreciation 5,047 4,910 Amortization 16 904 Deferred taxes -- (139) Extraordinary item -- (480) Amortization of deferred financing costs 198 229 ------- -------- 6,278 3,445 Net change in non-cash working capital balances (1,582) 138 ------- -------- Cash provided by operating activities 4,696 3,583 ------- -------- INVESTING ACTIVITIES Purchase of fixed assets, net (5,583) (5,944) Acquisitions [note 6] -- (5,071) ------- -------- Cash used in investing activities (5,583) (11,015) ------- -------- FINANCING ACTIVITIES Increase in long-term debt -- 7,322 Repayment of long-term debt (5,042) (674) Increase in other liabilities -- 13 Advances from parent 3,826 -- Decrease in deferred charges and other assets 1,717 468 ------- -------- Cash provided by financing activities 501 7,129 ------- -------- Effect of foreign currency translation on cash 126 (2) Decrease in cash and cash equivalents during the period (260) (305) Cash and cash equivalents, beginning of period 287 556 ------- -------- Cash and cash equivalents, end of period $ 27 $ 251 ======= ======== SUPPLEMENTAL CASH FLOW DISCLOSURE Interest paid $ 5,614 $ 5,955 ======= ======== Income taxes paid $ 289 $ 998 ======= ========
See accompanying notes 3 SPARKLING SPRING WATER GROUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE six months ENDED JUNE 30, 2002 (Unaudited) 1. Basis of Presentation Sparkling Spring Water Group Limited ("Sparkling Spring" or the "Company") is incorporated under the laws of the Province of Nova Scotia, Canada and provides bottled water to home and office markets in Western Canada, the Maritime Provinces of Canada, England, Scotland and the Pacific Northwestern United States. The Company uses the U.S. dollar as its reporting currency. Balance sheet accounts of all non-U.S. entities which are considered to be self-sustaining are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. Income statement accounts of all non-U.S. entities are translated into U.S. dollars at average exchange rates prevailing during the period. Gains and losses on translation are included in a separate component of shareholder's equity titled "cumulative translation adjustment." The accompanying unaudited consolidated financial statements have been prepared on a historical cost basis by management 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 cash flows 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, 2001 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 six month period ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ended December 31, 2002 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. Earnings Per Share The weighted average number of shares used to calculate basic and diluted loss per share is 1,389,188 for the three and six months ended June 30, 2002 and 2001. The Company has no outstanding warrants or options. 4. Change in Accounting Principles Commencing in the fourth quarter of 2001, amounts received in advance for water cooler rental leases have been deferred and recognized as revenue over the period of the lease. In prior periods, the Company recorded revenue from water cooler rentals when billed. The new method of accounting for water cooler leases was adopted to more appropriately match the revenues earned from water cooler leases to the period to which the lease relates. In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets", effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests. The Company adopted the new rules as of January 1, 2002. As a result, the Company no longer amortizes goodwill. The Company has evaluated the provisions of the new rules related to impairment testing, it has confirmed that as of December 31, 2001, that such tests will not result in any material effect on its results of operations or financial position. 4 The following unaudited pro forma information presents a summary of the net loss and basic and diluted loss per share as if the Company had changed its method of accounting for water cooler rental leases and adopted SFAS No. 142 on January 1, 2001.
Three Months Three Months Six Months Six Months Ended Ended Ended Ended June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001 ------------- ------------- ------------- ------------- (thousands of dollars except per share amounts) Net income (loss) as reported $1,153 $ (285) $1,017 $(1,979) Add back: Goodwill amortization -- 318 -- 676 Add back: Impact of change in accounting principle for water cooler rental leases -- (284) -- (29) ------ ------ ------ ------- Adjusted net income (loss) $1,153 $ (251) $1,017 $(1,332) ====== ====== ====== ======= Basic and diluted income (loss) per share as reported $ 0.83 $(0.20) $ 0.73 $ (1.42) Add back: Goodwill amortization -- 0.23 -- 0.49 Add back: Impact of change in accounting principle for water cooler rental leases -- (0.21) -- (0.03) ------ ------ ------ ------- Adjusted basic and diluted income (loss) per share $ 0.83 $(0.18) $ 0.73 $ (0.96) ====== ====== ====== =======
5. Inventories Inventories consist of the following (thousands of dollars):
June 30, 2002 December 31, 2001 ------------- ----------------- (unaudited) Packaging materials $ 362 $ 268 Coolers not yet in service 455 318 Goods for resale 555 554 Cooler parts 311 262 Other 110 106 ------ ------ $1,793 $1,508 ====== ======
5 6. Acquisitions On May 31, 2001, the Company purchased the home and office bottled water assets of CC Beverage (US) Corporation (CC Beverage) for approximately $5.1 million. CC Beverage operates primarily in the north Washington State USA market. In 2001, the Company purchased and integrated the assets of the home and office bottled water division of Canada's Choice and integrated the home and office customers of Polaris Water Company into its Western Canadian operations for approximately $1.3 million. The following unaudited pro forma information presents a summary of consolidated results of operations as if the acquisitions of the home and office assets of CC Beverage and Canada's Choice had occurred at January 1, 2001. In addition, the pro forma information reflects the impact of the Customer Service Agreement with Sparkling Spring Water Holdings Limited ("Holdings"), whereby effective July 1, 2001, the home and office customers of Polaris Water Company Inc. (a subsidiary of Holdings) are managed by Sparkling Spring and the home and office customers of Sparkling Springs's Cullyspring Water Co., Inc. subsidiary are managed by Holdings.
Three Months Three Months Six Months Six Months (thousands of dollars except Ended Ended Ended Ended per share amounts) June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001 ------------- ------------- ------------- ------------- Total revenue $20,051 $19,779 $37,628 $37,577 Net income (loss) 1,153 (325) 1,017 (2,139) Extraordinary item -- 480 -- 480 Basic earnings (loss) per share 0.83 (0.23) 0.73 (1.54)
7. Senior Bank Debt The Company has available a $35.5 million multi-currency facility that provides for a $15 million operating line (the "Operating Line Facility") which is renewable annually by April 30th, an $8.5 million acquisition line maturing April 30, 2006 (the "Acquisition Facility") and a $12 million term loan maturing October 31, 2005 (the "Term Loan Facility") which was available for the Company to repurchase, at its discretion, certain of the Company's outstanding 11.5% Senior Subordinated Notes due 2007 (the "Notes"). The Acquisition Facility will be reduced by $1.5 million on April 30, 2003 and varying amounts annually through April 30, 2006. The Term Loan Facility will be reduced by $3.0 million on October 31, 2002 and varying amounts annually thereafter to October 31, 2005. The Company has pledged as collateral a first priority security interest granted in favor of the lenders over substantially all of the assets of the Company and its subsidiaries. Sparkling Spring's obligations under the facility rank senior to the payment of the Notes. As at June 30, 2002, the Company has approximately $2.6 million in letters of credit outstanding under the Operating Line Facility which are pledged as collateral for outstanding bank operating lines in the U.K. and U.S. 8. Due to Parent Company The Company's parent company has advanced the Company approximately $3.8 million for general working capital purposes. The amount due to parent company is unsecured, without specified terms of repayment and bears interest at the prime rate as published in the Wall Street Journal. 9. Integration and Related Expenses In the six months ended June 30, 2001, the Company incurred costs of approximately $115,000 to consolidate its administrative operations in England and Scotland to one facility in Scotland. In addition, during the period non-recurring costs of $185,000 were accrued to integrate Cascade Clear into the Company's existing operations. The costs incurred related to training, conversion of computer systems, reduction and relocation of staff, closing costs and other business integration costs. 10. Extraordinary Item In February 2001, Sparkling Spring Water Holdings Limited, parent of Sparkling Spring, paid approximately $1.8 million plus accrued interest to repurchase $2.495 million face value of Sparkling Spring's outstanding 11.5% Senior Subordinated Notes due 2007. In May 2001, the Notes were contributed to Sparkling Spring as additional paid-in capital and the Notes were retired. A gain of $480,000 related to the repurchase and retirement of the Notes has been recorded net of applicable income taxes of $139,000 and costs of $67,000 representing a write-off of a proportionate amount of deferred charges incurred in connection with the issuance of the Notes in November of 1997. 6 11. Summary of Business Segments The primary focus of the Company is the sale of bottled water and the rental of related water coolers, and as a result it has only one reportable segment. Geographic information is summarized as follows:
Three Months Three Months Six Months Six Months (thousands of dollars) Ended Ended Ended Ended June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001 ------------- ------------- ------------- ------------- Revenue: Canada $ 9,898 $ 8,661 $18,587 $16,203 United Kingdom 6,892 6,358 12,816 12,153 United States 3,261 4,518 6,225 8,254 ------- ------- ------- ------- $20,051 $19,537 $37,628 $36,610 ======= ======= ======= ======= Net income before depreciation, amortization, interest, income taxes and extraordinary item: Canada $ 3,351 $ 2,766 $ 6,067 $ 4,650 United Kingdom 2,770 1,952 4,923 3,657 United States 1,149 1,201 2,136 2,299 Unallocated corporate overhead (454) (291) (766) (638) ------- ------- ------- ------- $ 6,816 $ 5,628 $12,360 $ 9,968 ======= ======= ======= ======= Average Exchange Rates: Canadian Dollar $0.6434 $0.6489 $0.6353 $0.6518 U.K. Pounds Sterling $1.4621 $1.4211 $1.4441 $1.4396
12. Comparative Figures Certain of the comparative figures have been reclassified to conform with the presentation adopted in the current period. 7 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 our financial position and operating results during the periods included in the accompanying consolidated financial statements. OVERVIEW We are a leading provider of bottled water delivered directly to residential and commercial customers in the United States, Canada and the United Kingdom. Our primary focus is on the bottling and delivery of high-quality drinking water in three- and five-gallon bottles to homes and offices, and the rental of water coolers. We also engage in other bottled water-related activities, including the sale of water in small-sized (i.e., 2.5 gallon or smaller) containers, cups, coffee, water filtration devices, water through vending machines and cooler sanitization and maintenance services. Our water cooler rental and customer location base was 210,000 as at June 30, 2002 compared to 196,000 as at June 30, 2001. We recognize revenue from the sale of bottled water and other products and services when we deliver the products or perform the services. Prior to 2001, we recognized revenue from water cooler rentals when we billed our customer. When we entered into a one-year water cooler rental lease with a customer, we billed the customer for the entire year and recognized the entire amount as revenue at that time. In 2001, we began recognizing those amounts as revenue over the period of the lease. We adopted the new method of accounting to more appropriately match revenues earned from water cooler leases to the period to which the lease relates. Our cost of sales primarily consists of the cost of materials, including: o water, labels and caps; o variable overhead, such as routine equipment maintenance, energy costs at the bottling facilities, pallets and laboratory testing; o direct production labor; and o production management. Our gross margins may vary depending upon the level of sales of bottled water to home and offices compared to the level of sales of smaller, retail-sized containers of bottled water to retail stores. In 2000 and 2001, the average product margin (excluding the allocation of production overhead) we realized on sales of bottled water in small-sized containers to retail stores was approximately 34% and 40%, compared to approximately 94% and 94% for bottled water delivered to home and offices. While we do not focus our sales effort on sales of small-sized containers of bottled water to retail stores, home and office delivery businesses that we acquire may have a larger percentage of this type of business than we do, thus impacting our gross margins when we combine our businesses. Our selling, delivery and administrative expenses, which typically equal over 50% of our revenues, primarily consist of o administrative overhead; o the cost to deliver bottled water to homes and offices, including the cost of delivery drivers, maintenance of delivery trucks and gasoline; and o selling expenses, which include the cost of our call centers and sales staff. 8 Of our total selling, delivery and administrative expenses in 2000 and 2001, administrative expenses were approximately 40% and 41% of the total, delivery expenses were approximately 42% and 43%, and selling expenses were approximately 18% and 16%. Selling, delivery and administrative expenses as a percentage of revenue are affected by, among other factors, the proportion of our revenue that represents sales of small-sized water bottles to retail stores, which sales have relatively lower associated delivery and administrative expenses than our home and office delivery sales. We define "adjusted EBITDA" to mean operating profit plus depreciation, amortization and integration and related expenses. Integration and related expenses represent non-recurring costs incurred in integrating acquired businesses into our existing business or consolidating existing operations. Our adjustments to more typical measures of EBITDA are intended to facilitate a better understanding of our operating results net of the effect of nonrecurring or nonoperating items, such as extraordinary gains or losses, changes in accounting principles and integration expenses. Neither EBITDA nor adjusted EBITDA is required by generally accepted accounting principles in the United States. Because EBITDA is not calculated in the same manner by all companies, our presentation may not be comparable to other similarly-titled measures reported by other companies. Our interest and related expenses include interest we pay on our senior credit facility and senior subordinated notes, as well as payments we make under capital lease obligations and non-competition agreements and amortization of financial costs. We transact business in currencies other than the U.S. dollar, but report in U.S. dollars. In 2001, approximately 47% of our revenue was generated in Canadian dollars, 33% in British pounds sterling, and 20% in U.S. dollars. Accordingly, movements in foreign currency exchange rates can affect our results. Bottled water sales are subject to seasonal variations, with decreased sales during cold weather months and increased sales during warm weather months. Water cooler rentals are typically paid monthly and partially mitigate the seasonal effect of water sales. We have grown significantly in recent years through both internal growth and acquisitions. To expand our geographic presence and enhance profitability in our existing markets, we have acquired 22 businesses since April 1993. We have accounted for our acquisitions using the purchase method of accounting, and included the results of the acquired companies in our results from the date of the acquisition. We incur integration and related expenses in connection with integrating acquired businesses into our existing business. These expenses are non-recurring costs incurred to reduce and relocate staff, convert the acquired businesses' computer systems, close acquired facilities and blend new customers into our existing routes. Prior to 2002, we amortized the goodwill associated with our acquisitions in accordance with generally accepted accounting principles. Effective January 1, 2002, we ceased amortization of that goodwill in accordance with changes to those accounting principles and instead we will write-down goodwill if and when we determine that the goodwill has been impaired, as provided by recently established accounting guidelines. See "-- Recently Issued Accounting Standards." In addition, prior to 2001 we amortized the cost of non-competition agreements that we obtained in connection with our acquisitions. In 2001, we wrote-off all of the unamortized portion of our existing non-competition agreements after we determined that those agreements no longer had value. 9 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain of our statement of operations and other data as a percentage of revenue.
Three Months Three Months Six Months Six Months Ended Ended Ended Ended June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001 ------------- ------------- ------------- ------------- Revenue 100% 100% 100% 100% Cost of sales 15.9 16.9 15.8 17.0 ---- ---- ---- ---- Gross profit 84.1 83.1 84.2 83.0 Selling, delivery and administrative 50.1 53.3 51.3 55.0 ---- ---- ---- ---- Adjusted EBITDA 34.0 29.8 32.9 28.0 Integration and related expenses -- 0.9 -- 0.8 Depreciation and amortization 12.4 15.2 13.5 15.9 ---- ---- ---- ---- Operating profit 21.6 13.7 19.4 11.3 Interest and related expenses 14.3 16.1 15.4 16.7 ---- ---- ---- ---- Income (loss) before income taxes and extraordinary item 7.3 (2.4) 4.0 (5.4) Provision for income taxes 1.5 1.5 1.3 1.3 ---- ---- ---- ---- Net income (loss) before extraordinary item 5.8 (3.9) 2.7 (6.7) Extraordinary item -- 2.4 -- 1.3 ---- ---- ---- ---- Net income (loss) 5.8 (1.5) 2.7 (5.4) ==== ==== ==== ====
10 THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2001 REVENUE. Revenue increased $0.6 million, or 2.6%, to $20.1 million in the second quarter of 2002 compared to $19.5 million in the same period in 2001. The increase was the result of a 10.3% increase in revenue due to the effects of our acquisitions completed in 2001 and from internal growth from increased volume in our existing home and office delivery business. Growth in revenue from these factors was offset by a decrease in sales of water in small-sized containers, which fell 52.3% during the 2002 period. The decrease in small-sized container sales was due to the sale of the Washington State small-sized container bottling operations to our parent company's Seattle operations in May 2001. COST OF SALES. Cost of sales decreased $0.1 million, or 3.4%, to $3.2 million in the second quarter of 2002 compared to $3.3 million in the second quarter of 2001. Cost of sales as a percentage of revenue decreased from 16.9% in the second quarter of 2001 to 15.9% in the second quarter of 2002 due to an increase in the percentage of revenues derived from higher margin sales of home and office water and cooler rental revenue and a decrease in lower margin sales of water in small-sized containers. SELLING, DELIVERY AND ADMINISTRATIVE EXPENSES. Selling, delivery and administrative expenses decreased $0.4 million, or 3.6%, to $10.0 million in the second quarter of 2002 compared to $10.4 million for the same period in 2001. Selling, delivery and administrative expenses as a percentage of revenue decreased to 50.1% in the second quarter of 2002 from 53.3% in the second quarter of 2001. The decrease is attributable to efficiencies achieved from the integration of the acquisitions completed in 2001 and the absorption of some corporate expenses by our parent company. ADJUSTED EBITDA. Adjusted EBITDA increased by $1.0 million, or 17.3%, to $6.8 million in the second quarter of 2002 from $5.8 million in the second quarter of 2001, as a result of increased revenue combined with decreases in cost of sales and selling, delivery and administrative expenses as a percentage of revenue. As a percentage of revenue, adjusted EBITDA increased to 34.0% in the second quarter of 2002 from 29.8% in the second quarter of 2001. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense decreased $0.5 million, or 15.8%, to $2.5 million in the second quarter of 2002 from $3.0 million in the second quarter of 2001. The decrease is due primarily to the implementation of recent accounting standards which resulted in the elimination of amortization of goodwill, offset by the impact on depreciation of significant increases in fixed assets as a result of the acquisitions we consummated in 2000 and 2001 and our capital expenditure program. INTEREST AND RELATED EXPENSES. Interest and related expenses decreased $0.2 million, or 8.7%, to $2.9 million in the second quarter of 2002 from $3.1 million in the second quarter of 2001. The decrease was the result of lower average borrowing rates on our variable rate debt and repurchases of our senior subordinated notes in 2001. NET INCOME. Net income was $1.2 million for the quarter ended June 30, 2002 compared to a loss of $0.3 million for the same period in 2001. The increase in net income of $1.5 million is due principally to the increased adjusted EBITDA and reduction in the amortization of goodwill in 2002. SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2001 REVENUE. Revenue increased $1.0 million, or 2.7%, to $37.6 million in the six months ended June 2002 compared to $36.6 million in the same period in 2001. The increase was the result of a 9.0% increase in revenue due to the effects of our acquisitions completed in 2001 and from internal growth from increased volume in our existing home and office delivery business. Growth in revenue from these factors was offset by a decrease in sales of water in small-sized containers, which fell 55.4%. The decrease in small-sized container sales was due to the sale of the Washington State small-sized container bottling operations to our parent company's Seattle operations in May 2001. The increase also was partially offset by a decrease in reported revenues of $0.4 million as a result of unfavorable foreign currency translations to U.S. dollars due to declines in the exchange rates of the British pound sterling and Canadian dollar relative to the U.S. dollar. COST OF SALES. Cost of sales decreased $0.3 million, or 4.5%, to $5.9 million in the six months ended June 2002 compared to $6.2 million in the six months ended June 2001. Cost of sales as a percentage of revenue decreased from 17.0% in 2001 to 15.8% in 2002 due to an increase in the percentage of revenues derived from higher margin sales of home and office water and cooler rental revenue and a decrease in lower margin sales of water in small-sized containers. 11 SELLING, DELIVERY AND ADMINISTRATIVE EXPENSES. Selling, delivery and administrative expenses decreased $0.8 million, or 3.9%, to $19.3 million for the six months ended June 2002 compared to $20.1 million for the same period in 2001. Selling, delivery and administrative expenses as a percentage of revenue decreased to 51.3% in the six months ended June 2002 from 55.0% in the six months ended June 2001. The decrease is attributable to efficiencies achieved from the integration of the acquisitions completed in 2001 and the absorption of some corporate expenses by our parent company. ADJUSTED EBITDA. Adjusted EBITDA increased by $2.1 million, or 20.3%, to $12.4 million in the six months ended June 2002 from $10.3 million in the six months ended June 2001, as a result of increased revenue combined with decreases in cost of sales and selling, delivery and administrative expenses as a percentage of revenue. The increase in adjusted EBITDA in the six months ended June 2002 was reduced by $0.1 million due to significant decreases in the exchanges rates of the British pound sterling and Canadian dollar relative to the U.S. dollar compared to the six months ended June 2001. As a percentage of revenue, adjusted EBITDA increased to 32.9% in the six months ended June 2002 from 28.0% in the six months ended June 2001. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense decreased $0.7 million, or 12.9%, to $5.1 million in the six months ended June 2002 from $5.8 million in the six months ended June 2001. The decrease is due primarily to the implementation of recent accounting standards which resulted in the elimination of amortization of goodwill, offset by the impact on depreciation of significant increases in fixed assets as a result of the acquisitions we consummated in 2000 and 2001 and our capital expenditure program. INTEREST AND RELATED EXPENSES. Interest and related expenses decreased $0.3 million, or 5.8%, to $5.8 million in the six months ended June 2002 from $6.1 million in the six months ended June 2001. The decrease was the result of lower average borrowing rates on our variable rate debt and repurchases of our senior subordinated notes in 2001. NET INCOME. Net income was $1.0 million for the six months ended June 30, 2002 compared to a loss of $2.0 million for the same period in 2001. The increase in net income of $3.0 million is due principally to the increased adjusted EBITDA, a reduction in the amortization of goodwill in 2002, and a decrease in interest and related expenses. LIQUIDITY AND CAPITAL RESOURCES Historically, we have funded our capital and operating requirements with a combination of cash flow from operations, borrowings under bank credit facilities, the issuance of senior subordinated notes and the sale of capital stock. We have utilized these sources of funds to for operations, and to make acquisitions, fund capital expenditures and service debt. Net cash provided by operating activities was $4.7 million for the six months ended June 30, 2002 and $3.6 million for the six months ended June 30, 2001. The increase is due primarily to the increase in adjusted EBITDA of $2.1 million offset by an increase in working capital of $1.7 million. Net cash used in investment activities was $5.6 million in 2002 and $11.0 million in 2001. The amount for 2001 includes $5.1 million related to the acquisition of Cascade Clear in May 2001. There were no acquisitions in 2002. The Company made net capital expenditures of $5.6 million in the six months ended June 30, 2002 and $5.9 million in the six months ended June 30, 2001. The capital expenditures for 2002 include $1.8 million for fleet purchases, $1.3 million for bottles, and $0.8 million for coolers. Based on the Company's existing operations, management expects that the Company's capital expenditures will total approximately $8.8 million in 2002. Net cash provided by financing activities was $0.5 million for the six months ended June 30, 2002 compared to $7.1 million for the same period in 2001. The decrease is due primarily to advances under the senior credit facility to fund acquisitions in 2001. For the six months ended June 30, 2002, no acquisitions were completed. We believe that existing cash balances, cash generated from operations and available borrowings under our existing senior credit facility will be sufficient to finance the Company's working capital and capital expenditure requirements for at least the next twelve months. However, if we elect to pursue acquisition opportunities or expand our existing operations more rapidly than we anticipate, our cash needs may significantly increase. In that case, we may require additional financing within that period. We cannot assure you that additional financing will be available on satisfactory terms or at all. 12 As of June 30, 2002, our total debt was $117.1 million, compared to $117.4 million as of December 31, 2001. Our total debt primarily consists of our 11.5% senior subordinated notes due 2007 and our senior credit facility, both of which are guaranteed by our subsidiaries. Our senior subordinated notes had $81.1 million principal amount outstanding as of June 30, 2002, including $6.5 million of notes held by our parent. Our $35.5 million multi-currency senior credit facility consists of a $15 million operating line which is renewable annually by April 30th, an $8.5 million acquisition facility that matures on April 30, 2006 and a $12 million term loan that matures on October 31, 2005. The term loan facility was used by us to repurchase certain of our outstanding senior subordinated notes. Our payment obligations under the senior credit facility are secured by a first priority security interest over substantially all of the assets of us and our subsidiaries. As of June 30, 2002, we had approximately $7.6 million in direct borrowings and $2.6 million in letters of credit outstanding under the operating line facility, $7.2 million outstanding under the acquisition facility and $12.0 million outstanding under the term loan. In addition, we had $1.5 million in borrowings outstanding under other local credit facilities secured by the letters of credit outstanding under our senior credit facility. The acquisition facility is required to be reduced by $1.5 million on April 30, 2003 and, by varying amounts annually through April 30, 2006. The term loan is required to be reduced by $3.0 million on October 31, 2002, and by varying amounts annually thereafter to October 31, 2005. At June 30, 2002, we had $4.8 million available to borrow under the operating line facility, $1.3 million available under the acquisition loan facility and $1.1 million available in the aggregate under other local credit facilities secured by letters of credit under our senior credit facility. Amounts outstanding under the senior credit facility bear interest at specified rates based on the Canadian prime rate, U.S. prime rate, U.S. base rate, Sterling LIBOR and U.S. LIBOR. The agreements governing the senior credit facility require us and our subsidiaries to maintain certain financial ratios based on our consolidated EBITDA and the agreement governing the senior credit facility and the senior subordinated notes provide for restrictions on paying dividends and certain other payments, merging, selling assets, making investments and capital expenditures and incurring additional debt. In addition to our senior credit facility, senior subordinated notes and other facilities, we had capital lease and other debt obligations of $3.5 million as of June 30, 2002 and $4.3 million as of December 31, 2001. On May 15, 2002, our parent, Sparkling Spring Water Holdings Limited, filed a registration statement on Form F-1 with the Securities and Exchange Commission with respect to a proposed initial public offering of its common shares. In connection with the proposed initial public offering, our parent entered into a commitment letter with several banks providing for the replacement of our $35.5 million senior credit facility and other senior bank debt with a new senior credit facility in an amount of up to $75.0 million. The new senior credit facility is contingent upon, among other things, our parent completing its initial public offering and customary due diligence. We cannot be sure that the conditions will be satisfied and that the facility will be made available to us. In addition, our parent has stated in its registration statement that it intends to redeem or repurchase our senior subordinated notes with the proceeds from the sale of its common shares in its initial public offering. Our parent may not complete its proposed initial public offering and the net proceeds from the offering, if any, may be insufficient to redeem or repurchase the notes. EXCHANGE RATE EXPOSURE AND RISK MANAGEMENT We transact business in currencies other than the U.S. dollar, but report in U.S. dollars. In 2001, approximately 47% of our revenue was generated in Canadian dollars, 33% in British pounds sterling, and 20% in U.S. dollars. Accordingly, movements in foreign currency exchange rates can affect our results. As a result of our foreign currency exposure, exchange rate fluctuations have a significant impact in the form of both translation risk and transaction risk on our income statement. Translation risk is the risk that our consolidated financial statements for a particular period or as of a certain date may be affected by changes in the prevailing rates of the various currencies of the jurisdictions in which we do business against the U.S. dollar. Transaction risk is the risk that currency fluctuations may impact the local currency value of transactions executed in currencies other than the local currency. 13 We occasionally enter into swaps, short-term foreign currency forward transactions and other derivative transactions to hedge known payments denominated in currencies other than U.S. dollars or future cash flows from our operations outside of the United States. In December 1997, we entered into cross-currency swap transactions in Canadian dollars (notional amount of U.S.$28 million) and British pound sterling (notional amount of U.S.$30 million) for the purpose of managing risks associated with future foreign currency fluctuations. The Canadian dollar swap was terminated in October 1998, generating cash proceeds to us of $3.4 million and the British pound sterling swap was terminated in September 2000, realizing cash proceeds to us of $4.1 million. Concurrent with the termination of the British pound sterling swap, we entered into a new $30 million Canadian dollar swap. In December 2000, we received cash proceeds of $0.9 million for entering into a mirror swap to the new Canadian dollar swap. Subsequent to year-end 2000, we closed out the Canadian dollar swap and the mirror swap, for no net proceeds. As of June 30, 2002, our only outstanding derivative arrangement was a forward transaction for Euros in the notional amount of 1,000,000 Euros. RECENTLY ISSUED ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets", effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests. We adopted the new rules as of January 1, 2002. As a result, we no longer amortize goodwill. Amortization of goodwill for the six months ended June 30, 2001 was $676,000. The Company has evaluated the provisions of the new rules related to impairment testing, it has confirmed that as of December 31, 2001, that such tests will not result in any material effect on its results of operations or financial position. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. We are required to adopt SFAS No. 143 as of January 1, 2003. The adoption of this Statement is not expected to have a material impact on our financial position or results of operations. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". This new Statement also supercedes certain aspects of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", with regard to reporting the effects of a disposal of a segment of a business. The new rule requires operating losses from discontinued operations to be reported in future periods, as incurred. In addition, businesses below the operating segment level may qualify for discontinued operations treatment. We adopted the provisions of the Statement as of January 1, 2002. Adoption of the Statement will primarily affect us if and when qualifying future business dispositions occur. CERTAIN CRITICAL ACCOUNTING POLICIES In December 2001, the SEC issued a financial reporting release, FR-60, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies." In this connection, the following information has been provided about certain critical accounting policies that are important to the consolidated financial statements and that entail, to a significant extent, the use of estimates, assumptions and the application of management's judgment. Our allowance for doubtful accounts related to accounts receivables is primarily based upon historical experience, as well as management judgment as to the economic and business environment. In determining the allowance, management evaluates both internal credit metrics and historical write-off and recovery rates. To the extent historical experience is not indicative of future performance, or other assumptions used by management do not prevail, losses could differ significantly, resulting in either higher or lower allowances, as applicable. 14 \ SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Report contains forward-looking statements, including statements regarding, among other items expectations as to our future capital requirements, including funding those requirements; our future earnings and other operating results; and other discussions of future plans, strategies, objectives, expectations, intentions and other matters that involve predictions of future events. Other statements contained in this Report are forward-looking statements and may not be based on historical fact, such as statements containing the words "believes," "may," "will," "estimates," "continue," "anticipates," "intends," "plans," "expects" and words of similar import. These forward-looking statements are subject to risks, uncertainties and assumptions. The risks, uncertainties and assumptions involve known and unknown risks and are inherently subject to significant uncertainties and contingencies, many of which are beyond our control. Actual results may differ materially from those projected in forward-looking statements. You should not unduly rely on these forward-looking statements, which are based on our current expectations. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events, except as required by law. New factors emerge from time to time, and it is not possible for us to predict all of these factors. Further, we cannot assess the effect of each such factor on our business or the extent to which any factor, or combination of factors, may cause actual results to be materially different from those contained in any forward-looking statement. Item 3. Quantitative and Qualitative Disclosures About Market Risk See Exchange Rate Exposure and Risk Management Part II Other Information Item 1. Legal Proceedings Nothing to Report Item 2. Changes in Securities and Use of Proceeds Nothing to Report Item 3. Defaults Upon Senior Securities Nothing to Report Item 4. Submission of Matters to a Vote of Security Holders Not Applicable Item 5. Other Information Nothing to Report Item 6. Exhibits and Reports on Form 6-K Nothing to Report. See our Form 20-F filed with the Securities and Exchange Commission on May 24, 2002, file number 333-43061. 15 -----END PRIVACY-ENHANCED MESSAGE-----