UNITED STATES
 SECURITIES AND EXCHANGE
COMMISSION
 Washington, D.C.
20549
 
 FORM 10-Q
 
 (Mark
One)
 
 xQUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For the
quarterly period ended March 31,
2008
 
 or
 
  ̈TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For the
transition period from 
to
 
 Commission
File Number: 0-27378
 
 NUCO2
      INC.(Exact
      name of registrant as specified in its
charter)
 
 Florida
              65-0180800(State
      or other jurisdiction of incorporation or organization)
              (I.R.S.
      Employer Identification No.)
 
 2800
      SE Market Place, Stuart, FL
              34997(Address
      of principal executive offices)
              (Zip
      Code)
 
 (772)
      221-1754(Registrant’s
      telephone number, including area code)N/A(Former
      name, former address and former fiscal year, if changed since last
      report)
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.     Yes x     No
 ̈
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
(Check one):
  Large
      accelerated filer  ̈
                Accelerated
      filer xNon-accelerated
      filer  ̈ (Do
      not check if a smaller reporting company)
                Smaller
      reporting company  ̈
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).     Yes  ̈     No
x
  Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date:
  Class
                
                Outstanding at March
      31, 2008Common Stock, $.001 par
      value
                
                14,813,032
      shares





NUCO2 INC.
 
 Index
 
 PART I.
              FINANCIAL INFORMATIONITEM 1.
              FINANCIAL STATEMENTSBalance
      Sheets as of March 31, 2008 (unaudited) andJune
      30, 2007
              3Statements
      of Income for the Three Months EndedMarch
      31, 2008 (unaudited) and  March 31, 2007(unaudited)
              4Statements
      of Income for the Nine Months EndedMarch
      31, 2008 (unaudited) and  March 31, 2007(unaudited)
              5Statement
      of Shareholders’ Equity for the Nine MonthsEnded
      March 31, 2008  (unaudited)
              6Statements
      of Cash Flows for the Nine MonthsEnded
      March 31, 2008 (unaudited) and March 31,
    2007(unaudited)
              8Notes to Financial Statements
              10ITEM 2.
              MANAGEMENT’S
      DISCUSSION AND ANALYSIS OFFINANCIAL
      CONDITION AND RESULTS OFOPERATIONS
              15ITEM 3.
              QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET
      RISK
              26ITEM 4.
              CONTROLS AND PROCEDURES
              27PART II.
              OTHER INFORMATIONITEM 6.
              EXHIBITS
              27SIGNATURES
              28
  
 2
 INDEX
 
 PART I.
              FINANCIAL
      INFORMATION
 
 ITEM 1.
              FINANCIAL
      STATEMENTS
 NUCO2
INC.
 BALANCE SHEETS
 (In
thousands, except share amounts)
 ASSETS
 March 31, 2008
                
                
                June 30, 2007(UNAUDITED)Current
      assets:Cash
      and cash equivalents
                
                $
                332
                
                
                $
                343Trade
      accounts receivable; net of allowance for doubtfulaccounts of $626 and $1,004, respectively
                
                
                8,863
                
                
                
                11,823Inventories
                
                
                312
                
                
                
                297Prepaid
      insurance expense and deposits
                
                
                3,743
                
                
                
                3,121Prepaid
      expenses and other current assets
                
                
                6,416
                
                
                
                1,412Deferred
      tax assets – current portion
                
                
                6,725
                
                
                
                8,264Total
      current assets
                
                
                26,391
                
                
                
                25,260Property
      and equipment, net
                
                
                121,782
                
                
                
                122,364Goodwill,
      net
                
                
                25,909
                
                
                
                25,909Deferred
      financing costs, net
                
                
                187
                
                
                
                254Customer
      lists, net
                
                
                5,590
                
                
                
                6,761Non-competition
      agreements, net
                
                
                185
                
                
                
                512Deferred
      lease acquisition costs, net
                
                
                6,065
                
                
                
                5,744Deferred
      tax assets, net
                
                
                482
                
                
                
                3,813Other
                
                
                234
                
                
                
                22138,652
                
                
                
                43,214Total
      assets
                
                $
                186,825
                
                
                $
                190,838LIABILITIES AND
      SHAREHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                
                $
                8,193
                
                
                $
                6,061Accrued
      expenses
                
                
                2,685
                
                
                
                2,043Accrued
      insurance
                
                
                1,725
                
                
                
                1,054Accrued
      interest
                
                
                280
                
                
                
                121Accrued
      payroll
                
                
                2,836
                
                
                
                2,357Other
      current liabilities
                
                
                631
                
                
                
                314Total
      current liabilities
                
                
                16,350
                
                
                
                11,950Long-term
      debt
                
                
                25,350
                
                
                
                34,750Customer
      deposits
                
                
                4,333
                
                
                
                4,246Total
      liabilities
                
                
                46,033
                
                
                
                50,946Commitments
      and contingenciesShareholders'
      equity:Common
      stock; par value $.001 per share; 30,000,000 shares
      authorized;issued 16,008,636 shares at March 31, 2008and 15,921,066 shares at June 30, 2007
                
                
                16
                
                
                
                16Additional
      paid-in capital
                
                
                178,910
                
                
                
                174,831Less
      treasury stock at cost; 1,195,604 shares at March 31, 2008and 921,409 shares at June 30, 2007
                
                
                (30,018
                )
                
                
                (22,937
                )Accumulated
      deficit
                
                
                (5,139
                )
                
                
                (12,126
                )Accumulated
      other comprehensive income (loss)
                
                
                (2,977
                )
                
                
                108Total
      shareholders’ equity
                
                
                140,792
                
                
                
                139,892Total
      liabilities and shareholders’ equity
                
                $
                186,825
                
                
                $
                190,838
  See
accompanying notes to financial statements.
   3
 INDEX
 NUCO2
INC.
 STATEMENTS OF INCOME
 (In
thousands, except per share amounts)
 (UNAUDITED)
 
 Three Months Ended March
31,2008
                
                
                2007Revenues:Product
      sales
                
                $
                22,401
                
                
                $
                20,995Equipment
      rentals
                
                
                11,974
                
                
                
                10,919Total
      revenues
                
                
                34,375
                
                
                
                31,914Costs
      and expenses:Cost
      of products sold, excluding depreciation and amortization
                
                
                15,101
                
                
                
                13,728Cost
      of equipment rentals, excluding depreciationand amortization
                
                
                2,447
                
                
                
                1,999Selling,
      general and administrative expenses
                
                
                7,108
                
                
                
                7,952Depreciation
      and amortization
                
                
                5,077
                
                
                
                5,158Loss
      on asset disposal
                
                
                676
                
                
                
                52230,409
                
                
                
                29,359Operating
      income
                
                
                3,966
                
                
                
                2,555Interest
      expense
                
                
                410
                
                
                
                509Income
      before provision for income taxes
                
                
                3,556
                
                
                
                2,046Provision
      for income taxes
                
                
                1,615
                
                
                
                935Net
      income
                
                $
                1,941
                
                
                $
                1,111Weighted
      average outstanding shares of common stock:Basic
                
                
                14,797
                
                
                
                15,680Diluted
                
                
                15,191
                
                
                
                15,896Net
      income per basic share
                
                $
                0.13
                
                
                $
                0.07Net
      income per diluted share
                
                $
                0.13
                
                
                $
                0.07
  See
accompanying notes to financial statements.
   4
 INDEX
 
 NUCO2
INC.
 STATEMENTS OF INCOME
 (In
thousands, except per share amounts)
 (UNAUDITED)
 
 Nine Months Ended March 31,2008
                
                
                2007Revenues:Product
      sales
                
                $
                68,249
                
                
                $
                63,865Equipment
      rentals
                
                
                35,144
                
                
                
                32,366Total
      revenues
                
                
                103,393
                
                
                
                96,231Costs
      and expenses:Cost
      of products sold, excluding depreciation and amortization
                
                
                44,392
                
                
                
                41,648Cost
      of equipment rentals, excluding depreciationand amortization
                
                
                7,032
                
                
                
                4,603Selling,
      general and administrative expenses
                
                
                20,427
                
                
                
                22,343Depreciation
      and amortization
                
                
                15,124
                
                
                
                14,900Loss
      on asset disposal
                
                
                2,416
                
                
                
                1,50689,391
                
                
                
                85,000Operating
      income
                
                
                14,002
                
                
                
                11,231Interest
      expense
                
                
                1,502
                
                
                
                1,635Income
      before provision for income taxes
                
                
                12,500
                
                
                
                9,596Provision
      for income taxes
                
                
                5,513
                
                
                
                4,584Net
      income
                
                $
                6,987
                
                
                $
                5,012Weighted
      average outstanding shares of common stock:Basic
                
                
                14,803
                
                
                
                15,711Diluted
                
                
                15,182
                
                
                
                15,979Net
      income per basic share
                
                $
                0.47
                
                
                $
                0.32Net
      income per diluted share
                
                $
                0.46
                
                
                $
                0.31
  
 See
accompanying notes to financial statements.
   5
 INDEX
 
 NUCO2
INC.
 STATEMENT OF SHAREHOLDERS’ EQUITY
 (In
thousands, except share amounts)
 (UNAUDITED)
 
 Common
      Stock
              
              
              Additional
      Paid-In
      Capital
              
              
              Treasury
      StockShares
              
              
              Amount
              
              
              
              
              Shares
              
              
              AmountBalance,
      June 30, 2007
              
              
              15,921,066
              
              
              $
              16
              
              
              $
              174,831
              
              
              
              921,409
              
              
              $
              (22,937
              )Comprehensive
      income:Net
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Other
      comprehensive income (loss):Change
      in fair value of hedging instruments
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
      comprehensive incomeShare-based
      compensation
              
              
              -
              
              
              
              -
              
              
              
              2,511
              
              
              
              -
              
              
              
              -Excess
      tax benefits from share-based arrangements
              
              
              -
              
              
              
              -
              
              
              
              170
              
              
              
              -
              
              
              
              -Issuance
      of 87,570 shares of common stock -exercise of
    options
              
              
              87,570
              
              
              
              -
              
              
              
              1,398
              
              
              
              -
              
              
              
              -Purchase
      of treasury stock
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              274,195
              
              
              
              (7,081
              )Balance,
      March 31, 2008
              
              
              16,008,636
              
              
              $
              16
              
              
              $
              178,910
              
              
              
              1,195,604
              
              
              $
              (30,018
              )
  
 See
accompanying notes to financial statements.
   6
 INDEX
 
 NUCO2
INC.
 STATEMENT
OF SHAREHOLDERS’ EQUITY
 (In
thousands, except share amounts)
 (UNAUDITED)
  Accumulated
      Deficit
                
                
                Accumulated
      Other Comprehensive Income
      (Loss)
                
                
                Total
      Shareholders' EquityBalance,
      June 30, 2007
                
                $
                (12,126
                )
                
                $
                108
                
                
                $
                139,892Comprehensive
      income:Net
      income
                
                
                6,987
                
                
                
                -
                
                
                
                6,987Other
      comprehensive income (loss):Change in fair value of hedging
      instruments
                
                
                -
                
                
                
                (3,085
                )
                
                
                (3,085
                )Total
      comprehensive income
                
                
                
                
                
                
                
                
                
                
                3,902Share-based
      compensation
                
                
                -
                
                
                
                -
                
                
                
                2,511Excess
      tax benefits from share-based arrangements
                
                
                -
                
                
                
                -
                
                
                
                170Issuance
      of 87,570 shares of common stock -exercise of
options
                
                
                -
                
                
                
                -
                
                
                
                1,398Purchase
      of treasury stock
                
                
                -
                
                
                
                -
                
                
                
                (7,081
                )Balance,
      March 31, 2008
                
                $
                (5,139
                )
                
                $
                (2,977
                )
                
                $
                140,792
   See
accompanying notes to financial statements.
   7
 INDEX
 
 
 NUCO2
INC.
 STATEMENTS OF CASH FLOWS
 (In
thousands)
 (UNAUDITED)
 
 Nine Months Ended March 31,2008
                
                
                2007Cash
      flows from operating activities:Net
      income
                
                $
                6,987
                
                
                $
                5,012Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization of property and equipment
                
                
                12,680
                
                
                
                12,380Bad
      debt expense
                
                
                806
                
                
                
                1,990Amortization
      of other assets
                
                
                2,444
                
                
                
                2,520Loss
      on asset disposal
                
                
                2,416
                
                
                
                1,506Change
      in net deferred tax asset
                
                
                5,039
                
                
                
                4,156Share-based
      compensation
                
                
                2,511
                
                
                
                3,245Excess
      tax benefits from share-based arrangements
                
                
                (170
                )
                
                
                (1,370
                )Changes
      in operating assets and liabilities:Decrease
      (increase) in:Trade
      accounts receivable
                
                
                2,154
                
                
                
                (1,036
                )Inventories
                
                
                (15
                )
                
                
                (3
                )Prepaid
      insurance expense and deposits
                
                
                (622
                )
                
                
                1,712Prepaid
      expenses and other current assets
                
                
                (391
                )
                
                
                62Increase
      (decrease) in:Accounts
      payable
                
                
                2,132
                
                
                
                (2,794
                )Accrued
      expenses
                
                
                705
                
                
                
                339Accrued
      insurance
                
                
                671
                
                
                
                (2,488
                )Accrued
      payroll
                
                
                479
                
                
                
                1,762Accrued
      interest
                
                
                158
                
                
                
                9Other
      current liabilities
                
                
                318
                
                
                
                39Customer
      deposits
                
                
                86
                
                
                
                407Net
      cash provided by operating activities
                
                
                38,388
                
                
                
                27,448Cash
      flows from investing activities:Proceeds
      on sale of assets
                
                
                38
                
                
                
                -Purchase
      of property and equipment
                
                
                (13,951
                )
                
                
                (17,582
                )Increase
      in deferred lease acquisition costs
                
                
                (1,865
                )
                
                
                (1,722
                )Increase
      in other assets
                
                
                (11
                )
                
                
                (21
                )Net
      cash used in investing activities
                
                $
                (15,789
                )
                
                $
                (19,325
                )
   See
accompanying notes to financial statements.
   8
 INDEX
 
 
 NUCO2
INC.
 STATEMENTS
OF CASH FLOWS
 (In
thousands)
 (UNAUDITED)
 
 
 (Continued)
 
 Nine Months Ended March 31,2008
                
                
                2007Cash
      flows from financing activities:Capitalized
      debt issuance costs
                
                $
                (2,796
                )
                
                $
                -Treasury
      Shares repurchased
                
                
                (7,081
                )
                
                
                (12,514
                )Purchase
      of swaption
                
                
                (4,900
                )
                
                
                -Exercise
      of options and warrants
                
                
                1,398
                
                
                
                2,070Excess
      tax benefits from share-based payment arrangements
                
                
                170
                
                
                
                1,370Repayment
      of long-term debt
                
                
                (18,201
                )
                
                
                (9,400
                )Proceeds
      from issuance of long-term debt
                
                
                8,800
                
                
                
                10,250Net
      cash used in financing activities
                
                $
                (22,610
                )
                
                $
                (8,224
                )Decrease
      in cash and cash equivalents
                
                
                (11
                )
                
                
                (101
                )Cash
      and cash equivalents, beginning of period
                
                
                343
                
                
                
                341Cash
      and cash equivalents, end of period
                
                $
                332
                
                
                $
                240Supplemental
      Cash Flow information:Cash
      paid during the period for:Interest
                
                $
                1,551
                
                
                $
                1,626Income
      taxes
                
                $
                258
                
                
                $
                269
 
 See
accompanying notes to financial statements.
  During
the nine months ended March 31, 2007, a certain officer exercised
 stock
options in a non-cash transaction.  The officer surrendered 6,800
shares of
 previously
acquired common stock in exchange for 25,366 newly issued shares.
The
 company
recorded $171, the market value of the surrendered shares, as treasury
stock.
  9
 INDEX
 NUCO2
INC.
 
 NOTES
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 NuCO2 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 CO2 will be
highest in the first fiscal quarter and lowest in the third fiscal
quarter.
 
 Certain prior period amounts have been
reclassified to conform with the current year presentation.
 
 NOTE 2 –
RECENT ACCOUNTING PRONOUNCEMENTS
 
 In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standard (“SFAS”) No. 141R, “Business Combinations” (“SFAS
No. 141R”). SFAS No. 141R will require, among other things, the expensing of
direct transaction costs, including deal costs and restructuring costs as
incurred, acquired in process research and development assets to be capitalized,
certain contingent assets and liabilities to be recognized at fair value and
earn-out arrangements, including contingent consideration, may be required to be
measured at fair value until settled, with changes in fair value recognized each
period into earnings.   SFAS No. 141R will become effective for the
Company on a prospective basis for transactions occurring in fiscal 2010 and
early adoption is not permitted.  SFAS No. 141R may have a material
impact on the Company’s financial position, results of operations and cash flows
if it enters into a material business combination after the standard’s effective
date.
 
 In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” (“SFAS No. 160”).  SFAS No.
160 will change the accounting for and reporting of minority interests. Under
the new standard, minority interests, will be referred to as noncontrolling
interests and will be reported as equity in the parent company’s consolidated
financial statements. Transactions between the parent company and the
noncontrolling interests will be treated as transactions between shareholders
provided that the transactions do not create a change in control. Gains and
losses will be recognized in earnings for transactions between the parent
company and the noncontrolling interests, unless control is achieved or
lost.  SFAS No. 160 requires retrospective adoption of the
presentation and disclosure requirements for existing minority interests. All
other requirements of SFAS No. 160 shall be applied prospectively. SFAS No. 160
is effective for the Company beginning in the first quarter of fiscal year 2010
and earlier adoption is not permitted.  SFAS No. 160 may have a
material impact on the Company’s financial position, results of operations and
cash flows if it enters into material transactions or acquires a noncontrolling
interest after the standard’s effective date.
 
 In February 2007, the FASB issued SFAS
No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities – Including an Amendment
of FASB Statement No. 115”(“SFAS No. 159”), which provides
companies with an option to report selected financial assets and liabilities at
their fair values. The objective is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. SFAS No. 159 is expected to expand the use
of fair value measurement, which is consistent with the FASB’s long-term
measurement objectives for accounting for financial instruments. SFAS
No. 159 will become effective for the Company on July 1,
2008.  The Company is currently evaluating the impact, if any, that
the adoption of  SFAS No. 159 will have on its financial condition,
results of operations or cash flows.
   10
 INDEX
 
 In September 2006, the FASB issued
SFAS No. 157, “Fair Value
Measurements” (“SFAS No. 157”), which defines fair value,
establishes guidelines for measuring fair value and expands disclosures
regarding fair value measurements. SFAS No. 157 is effective for fiscal
years beginning after November 15, 2007. The Company is currently
evaluating what impact, if any, the adoption of SFAS No. 157 will have on
its financial condition, results of operations or cash flows.
 
 Please
see the Company's Form 10-K for a discussion of other significant accounting
policies.
 
 NOTE 3 –
AGREEMENT AND PLAN OF MERGER
 
 On
January 29, 2008, the Company entered into an Agreement and Plan of Merger (the
“Merger Agreement”) with NuCO2 Acquisition Corp., a Delaware corporation
(“Parent”), and NuCO2 Merger Co., a Florida corporation and a wholly owned
subsidiary of Parent (“Merger Sub”).  Subject to the terms and
conditions of the Merger Agreement, Merger Sub will merge with and into the
Company (the “Merger”) with the Company being the surviving corporation in the
Merger and, at the effective time of the Merger, each issued and outstanding
share of common stock, par value $0.001 per share (the “Common Stock”), of the
Company (other than treasury shares, shares owned by Parent, Merger Sub or any
direct or indirect wholly owned subsidiary of Parent and shares owned by
stockholders who perfect their appraisal rights under Florida law) will be
converted automatically into the right to receive $30.00 in cash, without
interest. Merger
Sub and Parent are affiliates of Aurora Capital Group, a Los Angeles-based
private equity firm (“Aurora”).
  In order
to reduce the Company’s exposure to increases in interest rates in connection
with the debt financing
for the Merger (the “Merger Financing”), on January 30, 2008,the Company
purchased an option, for a premium of $4.9 million, to enter into a pay fixed
rate swap (“Swaption I”) that grants the Company the right (but not the
obligation) to enter into a pay fixed swap at the effective time of the Merger
with respect to amounts to be borrowed under the Merger
Financing.  The underlying swap is in the notional amount of $335.0
million, and the option expires on June 30, 2008. Under the Merger Agreement,
Parent will reimburse the Company for its unrecouped costs associated with
Swaption I in the event that the Merger Agreement is terminated and, upon such
reimbursement, the Company will assign Swaption I to Parent.  Swaption
I meets the requirements to be designated as a cash flow hedge and is deemed a
highly effective transaction.  Accordingly, changes in the fair value
of Swaption I are recorded as other comprehensive income (loss).  At
March 31, 2008, the Company recorded a loss of $2.8 million, representing the
change in fair value of Swaption I from January 30, 2008 through March 31, 2008,
as other comprehensive loss.
  The
Company has incurred approximately $2.8 million in capitalized debt issuance
costs associated with the Merger Financing, which are included in prepaid
expenses and other current assets at March 31, 2008.
  NOTE 4 -
EARNINGS PER SHARE AND OTHER COMPREHENSIVE INCOME (LOSS)
 
 (a)
Earnings per Share
 
 The
Company calculates earnings per share in accordance with the requirements of
SFAS No. 128, "Earnings Per
Share." The weighted average shares outstanding used to calculate basic
and diluted earnings per share were calculated as follows (in
thousands):
  Three Months Ended March
31,
                
                
                Nine Months Ended March 31,2008
                
                
                2007
                
                
                2008
                
                
                2007Weighted
      average shares outstanding - basic
                
                
                14,797
                
                
                
                15,680
                
                
                
                14,803
                
                
                
                15,711Outstanding
      options and warrants to purchaseshares
      of common stock - remaining shares afterassuming
      repurchase with proceedsfrom
      exercise
                
                
                394
                
                
                
                216
                
                
                
                379
                
                
                
                268Weighted
      average shares outstanding - diluted
                
                
                15,191
                
                
                
                15,896
                
                
                
                15,182
                
                
                
                15,979
  11
 INDEX
 (b)
Other Comprehensive Income (Loss)
 
 Comprehensive
income (loss) is defined as the change in equity (net assets) of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources, and is comprised of net income and “other comprehensive
income (loss).” The components of other comprehensive income (loss) are as
follows for the periods presented (in thousands):
 
 Three Months Ended March
31,
                
                
                Nine Months Ended March 31,2008
                
                
                2007
                
                
                2008
                
                
                2007Net
      income
                
                $
                1,941
                
                
                $
                1,111
                
                
                $
                6,987
                
                
                $
                5,012Interest
      rate swap transaction (Note 4)
                
                
                (2,909
                )
                
                
                (48
                )
                
                
                (3,085
                )
                
                
                (225
                )Comprehensive
      income (loss)
                
                $
                (968
                )
                
                $
                1,063
                
                
                $
                3,902
                
                
                $
                4,787
  NOTE 5 –
LONG TERM DEBT
 
 (a)
Revolving Credit Facility
 
 On May 27, 2005, the Company terminated
its previous credit facility and entered into a $60.0 million revolving credit
facility with Bank of America, N.A. (the “2005 Credit Facility”), maturing on
May 27, 2010. The Company is entitled to select either Base Rate Loans (as
defined) or Eurodollar Rate Loans (as defined), plus applicable margin, for
principal borrowings under the 2005 Credit Facility. Applicable margin is
determined by a pricing grid, as amended in March 2006, based on the Company’s
Consolidated Leverage Ratio (as defined) as follows:
  Pricing
                Level
              
              Consolidated
      Leverage Ratio
              Eurodollar
      Rate
                Loans
              Base
      Rate
                LoansI
              
              Greater
      than or equal to 2.50x
              2.000%
              0.500%II
              
              Less
      than 2.50x but greater than or equal to 2.00x
              1.750%
              0.250%III
              
              Less
      than 2.00x but greater than or equal to 1.50x
              1.500%
              0.000%IV
              
              Less
      than 1.50x but greater than or equal to 0.50x
              1.250%
              0.000%V
              
              Less
      than 0.50x
              1.000%
              0.000%
 
 Interest is payable periodically on
borrowings under the 2005 Credit Facility. The 2005 Credit Facility is
uncollateralized. The Company is required, on a quarterly basis, to assess and
meet certain affirmative and negative covenants, including financial covenants.
These financial covenants are based on a measure that is not consistent with
accounting principles generally accepted in the United States of America. Such
measure is EBITDA (as defined), which represents earnings before interest,
taxes, depreciation and amortization, as further modified by certain defined
adjustments. The failure to meet these covenants, absent a waiver or amendment,
would place the Company in default and cause the debt outstanding under the 2005
Credit Facility to immediately become due and payable. In connection with the
Company’s share repurchase program announced during the quarter ended March 31,
2007, the 2005 Credit Facility was amended to modify certain
covenants.  The Company was in compliance with all covenants under the
2005 Credit Facility as of the first assessment date on June 30, 2005 and
through March 31, 2008.
 
 As of March 31, 2008, a total of $25.4
million was outstanding under the 2005 Credit Facility, primarily consisting of
Libor (Eurodollar Rate) loans, with a weighted average interest rate of 4.33%
per annum.
   12
 INDEX
 
 (b)
              Hedging
      Activities
 
 Effective
July 1, 2000, the Company adopted SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” as amended, which, among other
things, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities.  All derivatives, whether
designated in hedging relationships or not, are required to be recorded on the
balance sheet at fair value.  For a derivative designated as a cash
flow hedge, the effective portions of changes in the fair
value of the derivative are recorded as other comprehensive income and are
recognized in the statement of operations when the hedged item affects
earnings.  Ineffective portions of changes in the fair value of cash
flow hedges (if any) are recognized in earnings.
 
 The
Company uses derivative instruments to manage exposure to interest rate
risks.  The Company’s objectives for holding derivatives are to
minimize the risks using the most effective methods to eliminate or reduce the
impact of this exposure.
 
 In order
to reduce the Company’s exposure to increases in Eurodollar rates, and
consequently to increases in interest payments, the Company entered into an
interest rate swap transaction (the “2005 Swap”), comprised of two instruments
(“Swap A” and “Swap B”), on September 28, 2005, with an effective date of
October 3, 2005.  Swap A, in the amount of $15.0 million (the “A
Notional Amount”), matures on October 3, 2008 and Swap B, in the amount of $5.0
million (the “B Notional Amount”), matured on April 3, 2007.  Pursuant
to Swap A, the Company currently pays a fixed interest rate of 4.69% per annum
and receives a Eurodollar-based floating rate.  The effect of Swap A
is to neutralize any changes in Eurodollar rates on the A Notional
Amount.  The 2005 Swap meets the requirements to be designated as a
cash flow hedge and is deemed a highly effective
transaction.  Accordingly, changes in the fair value of Swap A are
recorded as other comprehensive income (loss).  During the nine months
ended March 31, 2008, the Company recorded a loss of $0.3 million, representing
the change in fair value of Swap A from June 30, 2007 through March 31, 2008, as
other comprehensive loss (see Note 4(b)).
  NOTE 6 –
SHAREHOLDERS’ EQUITY
 
 (a)  Stock
Option Plans
 
 The Company recognized $0.9 million and
$2.5 million ($0.6 million and $1.8 million, net of income taxes) in stock
option compensation during the three and nine months ended March 31, 2008 as
compared to $1.3 million and $3.2 million ($0.9 million and $2.3 million, net of
income taxes) during the three and nine months ended March 31,
2007.
 
 NOTE 7 –
INCOME TAXES
 
 The Company accounts for income taxes
under SFAS No. 109, “Accounting for Income Taxes”
(“SFAS 109”).  Deferred income taxes reflect the net tax effects of
net operating loss carryforwards and temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes.
 
 As of June 30, 2007, the Company had
net operating loss carryforwards for federal income tax purposes of
approximately $91 million and for state purposes in varying amounts, expiring
through June 2025.  The Company’s effective rate, exclusive of the
impact of the net operating loss carryforwards for the three and nine months
ended March 31, 2008, was approximately 45.4% and 44.1%,
respectively.  If an “ownership change” for federal income tax
purposes were to occur in the future, the Company’s ability to use its
pre-ownership change federal and state net operating loss carryforwards (and
certain built-in losses, if any) would be subject to an annual usage limitation,
which under certain circumstances may prevent the Company from being able to
utilize a portion of such loss carryforwards in future tax periods and may
reduce its after-tax cash flow.
 
 In
July 2006, the FASB issued Interpretation 48 (“FIN No. 48”), “Accounting for Uncertainty in Income
Taxes — An Interpretation of FASB Statement No. 109.” FIN No. 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with SFAS 109. FIN No. 48 also
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return.  FIN No. 48 also provides guidance on
derecognition, classification, interest and penalties.
 
 Effective
July 1, 2007, the Company adopted the provisions of FIN No. 48. The
implementation of FIN No. 48 did not have a material impact on the Company, as
it had no uncertain tax positions recorded at June 30, 2007 or December 31,
2007.  The Company recognizes interest accrued related to unrecognized
tax benefits in interest expense and penalties in operating expense. The Company
does not currently anticipate that the total amount of unrecognized tax benefits
will significantly increase or decrease by the end of Fiscal 2008. The Company
is no longer subject to tax examinations by tax authorities for fiscal years
ended on or prior to June 30, 2004.
   13
 INDEX
 
 NOTE 8 –
COMMITMENTS AND CONTINGENCIES
 
 The Company is a defendant in legal
actions which arise in the normal course of business.  In the opinion
of management, the outcome of these matters will not have a material effect on
the Company’s financial position or results of operations.
 
 NOTE 9 –
SUBSEQUENT EVENTS
 
 On April
10, 2008, the Company sold Swaption I (refer to Note 3) and purchased a newoption to enter into a pay fixed rate swap (“Swaption II”) that grants
the Company the right (but not the obligation) to enter into a pay fixed swap at
the effective time of the Merger with respect to amounts to be borrowed under
the Merger Financing, for a net cost of $3.64 million.  The underlying
swap is in the notional amount of $355.0 million, due to an anticipated increase
in the principal amount of the Merger Financing, and the option expires on June
30, 2008. Parent will reimburse the Company for its unrecouped costs associated
with Swaptions I and II in the event that the Merger Agreement is terminated
and, upon such reimbursement, the Company will assign Swaption II to Parent.
Swaption II meets the requirements to be designated as a cash flow hedge and is
deemed a highly effective transaction.  Accordingly, changes in the
fair value of Swaption II are recorded as other comprehensive income
(loss).  The Company will evaluate the fair value of Swaption II in
accordance with SFAS No.
133, “Accounting
for Derivative Instruments and Hedging Activities,”on a
quarterly basis.
 On May 8,
2008, the Company’s shareholders approved the Merger Agreement with affiliates
of Aurora Capital Group. The transaction is expected to close by the end of May
2008.
   14
 INDEX
 
 ITEM 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 CO2 systems
and bulk CO2 for
carbonating fountain beverages in the United States based on the number of bulk
CO2
systems leased to customers and the only company in our industry to operate a
national network of bulk CO2 service
locations. As of March 31, 2008, we operated a national network of 129 service
locations (117 stationary and 12 mobile) servicing approximately 116,400
customer locations in 43 states.  Currently, virtually all fountain
beverage users in the continental United States are within our present service
area.
 
 We market our bulk CO2 products
and services to large customers such as restaurant and convenience store chains,
movie theater operators, theme parks, resorts and sports venues. Our customers
include 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 CO2 products
and services on a national basis or within a designated territory. We then
direct our sales efforts to the managers or owners of the individual or
franchised operating units. Our relationships with chain customers in one
geographic market frequently help us to establish service with these same chains
when we expand into new markets. After accessing the chain accounts in a new
market, we attempt to rapidly build route density by leasing bulk CO2 systems to
independent restaurants, convenience stores and theaters.
 
 We have entered into master service
agreements which include 102 restaurant and convenience store concepts that
provide fountain beverages. These master service agreements generally provide
for a commitment on the part of the operator for all of its currently owned
locations and may also include future locations. We currently service
approximately 59,300 chain and franchisee locations with chains that have signed
master service agreements.  We are actively working on expanding the
number of master service agreements with numerous restaurant
chains.
 
 We believe that our future revenue
growth, gains in gross margin and profitability will be dependent upon (1)
increases in route density in our existing markets and the expansion and
penetration of bulk CO2 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.
   15
 INDEX
 
 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 CO2 systems
installed at customers’ sites, the sale of bulk CO2 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 CO2 system
installations, (2) the growth in bulk CO2 sales and
(3) price increases.
 
 Cost of products sold is comprised of
purchased CO2 and
vehicle and service location costs associated with the storage and delivery of
CO2.  As
of March 31, 2008, we operated a total of 359 specialized bulk CO2 delivery
vehicles and technical service vehicles that logged approximately 14.6 million
miles over the last twelve months.  While significant fluctuations in
fuel prices impact our operating costs, such impact is largely offset by fuel
surcharges billed to the majority of our customers.  Consequently,
while the impact on our gross profit and operating income is substantially
mitigated, rising fuel prices do result in lower gross profit
margins.  Cost of equipment rentals is comprised of costs associated
with customer equipment leases, including the repair and refurbishment of leased
assets.  Selling, general and administrative expenses consist of wages
and benefits, dispatch and communications costs, as well as expenses associated
with marketing, administration, accounting and employee
training.  Consistent with the capital intensive nature of our
business, we incur significant depreciation and amortization
expenses.  These stem from the depreciation of our bulk CO2 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 CO2 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 CO2
systems.  The costs
of  this  expansion  and the
significant  depreciation  expense  recognized  on
our  installed  network  have resulted in an
accumulated deficit of $5.1 million at March 31, 2008.
 
 Results
of Operations
 
 The
following table sets forth, for the periods indicated, the percentage
relationship which the various items bear to total revenues:
   16
 INDEX
 
 Three Months Ended March
31,
              
              
              Nine Months Ended March
  31,Income
      Statement Data:
              2008
              
              
              2007
              
              
              2008
              
              
              
              2007Product
      sales
              65.2
              %
              
              65.8
              %
              
              66.0
              %
              
              
              66.4
              %Equipment
      rentals
              34.8
              
              
              34.2
              
              
              34.0
              
              
              
              33.6Total
      revenues
              100.0
              
              
              100.0
              
              
              100.0
              
              
              
              100.0Cost
      of products sold, excludingDepreciation
      and amortization
              43.9
              
              
              43.0
              
              
              42.9
              
              
              
              43.3Cost
      of equipment rentals, excludingDepreciation
      and amortization
              7.1
              
              
              6.3
              
              
              6.8
              
              
              
              4.8Selling,
      general and administrative expenses
              20.7
              
              
              24.9
              
              
              19.8
              
              
              
              23.2Depreciation
      and amortization
              14.8
              
              
              16.2
              
              
              14.6
              
              
              
              15.5Loss
      on asset disposal
              2.0
              
              
              1.6
              
              
              2.3
              
              
              
              1.5Operating
      income
              11.5
              
              
              8.0
              
              
              13.6
              
              
              
              11.7Interest
      expense
              1.2
              
              
              1.6
              
              
              1.5
              
              
              
              1.7Income
      before income taxes
              10.3
              
              
              6.4
              
              
              12.1
              
              
              
              10.0Provision
      for income taxes
              4.7
              
              
              2.9
              
              
              5.3
              
              
              
              4.8Net
      income
              5.6
              %
              
              3.5
              %
              
              6.8
              %
              
              
              5.2
              %
 
 Three
Months Ended March 31, 2008 Compared to the Three Months Ended March 31,
2007
 
 Total
Revenues
 
 Total
revenues increased by $2.5 million, or 7.7%, from $31.9 million in 2007 to $34.4
million in 2008.  Revenues derived from our bulk CO2 service
plans increased by $1.6 million, primarily due to pricing initiatives and an
increase in the number of customer locations serviced.  Revenues
derived from the sale of high pressure cylinder products, fuel surcharges, and
equipment sales increased by $0.9 million.  The number of customer
locations utilizing our products and services increased from approximately
116,000 at March 31, 2007 to approximately 116,400 at March 31, 2008, due
primarily to organic growth.
 
 The
following table sets forth, for the periods indicated, the percentage of total
revenues by service plan:
 
 Three Months Ended March
31,Service
      Plan
                
                2008
                
                
                2007Bulk
      budget plan1
                
                
                47.9
                %
                
                
                51.0
                %Equipment
      lease/product purchase plan2
                
                
                20.7
                
                
                
                18.1Product
      purchase plan3
                
                
                10.7
                
                
                
                10.5High
      pressure cylinder4
                
                
                5.3
                
                
                
                5.7Other
      revenues5
                
                
                15.4
                
                
                
                14.7100.0
                %
                
                
                100.0
                %
  1
      Combined fee for bulk CO2 tank
      and bulk CO2.2
      Fee for bulk CO2 tank
      and, separately, bulk CO2usage.3
      Bulk CO2
      only.4
      High pressure CO2
      cylinders and non-CO2
      gases.5
      Surcharges and other charges.
  Product Sales -Revenues
derived from the product sales portion of our service plans increased by $1.4
million, or 6.7%, from $21.0 million in 2007 to $22.4 million in
2008.  The increase in revenues is primarily due to a slight increase
in the average number of customer locations serviced, a 1.6% increase in product
usage, and pricing initiatives.  In addition, sales of products and
services other than bulk CO2 increased
by $0.7 million due in large part to an increase in revenues derived from
cylinder products, fuel surcharges, equipment sales, and other
revenues.
   17
 INDEX
 
 Equipment Rentals -Revenues
derived from the lease portion of our service plans increased by $1.1 million,
or 9.7%, from $10.9 million in 2007 to $12.0 million in 2008, primarily due to a
0.7% increase in the average number of customer locations leasing equipment from
us, including the impact of price increases to a significant number of our
customers consistent with the Consumer Price Index, partially offset by
incentive pricing provided to multiple national restaurant organizations
utilizing our equipment under the bulk budget plan and equipment lease/product
purchase plans pursuant to master service agreements.  The number of
customer locations renting equipment from us increased slightly from 96,000 at
March 31, 2007 to 97,000 at March 31, 2008.
 
 Cost
of Products Sold, Excluding Depreciation and Amortization
 
 Cost of products sold, excluding
depreciation and amortization, increased from $13.7 million in 2007 to $15.1
million in 2008, while increasing as a percentage of product sales revenue from
65.4% to 67.4%.
 
 Raw
product costs increased by $0.4 million, from $5.1 million in 2007 to $5.5
million in 2008, due in large part to a $0.3 million increase in CO2
costs.  The volume of CO2 sold by us
increased 2.4%, primarily due to a 0.2% increase in our average customer base,
and an increase in usage of 1.6%.
 
 Operational costs, primarily wages and
benefits related to cost of products sold, increased from $5.6 million in 2007
to $6.0 million in 2008.
 
 Truck delivery expenses increased from
$2.1 million in 2007 to $2.6 million in 2008 primarily due to the increased
customer base and fuel costs.  We have been able to continue to
minimize the impact of increased fuel costs and variable lease costs associated
with truck usage by continuing to improve efficiencies in the timing and routing
of deliveries.  During the last six months of fiscal 2007, we
implemented a new routing routine at select locations across the
country.  The full implementation of “alpha routing” will be
systematically implemented through the end of fiscal 2008.
 
 Occupancy
and shop costs related to cost of products sold increased from $0.9 million in
at March 31, 2007 to $1.0 million at March 31, 2008.
 
 Cost
of Equipment Rentals, Excluding Depreciation and Amortization
 
 Cost of
equipment rentals, excluding depreciation and amortization, increased from $2.0
million in 2007 to $2.4 million in 2008, while increasing as a percentage of
equipment rentals revenue from 18.3% to 20.4%.  During the second
fiscal quarter of 2007, we made a strategic decision to be more selective with
customer activations on a going forward basis, while improving both operating
and customer service metrics.  As part of this decision, rather than
reducing the number of technicians, we have increased our emphasis on the
assessment, upgrade and service of our bulk CO2 tanks at
customer sites.  To the degree that our installers and other personnel
are involved in such activities, as compared to initial installation of tanks at
customer sites, which consumed the substantial majority of our technicians’
efforts over the past several years, the related expense is recognized in our
statement of income as incurred.  We are continuing to increase
capacity to repair and service tanks, which is expected to reduce our need to
purchase new tanks.  Tank repair and service costs are expensed as
incurred as compared to the purchase of a tank, which is capitalized at
cost.
 
 Selling,
General and Administrative Expenses
 
 Selling,
general and administrative expenses decreased by $0.9 million from $8.0 million
in 2007 to $7.1 million in 2008, while decreasing as a percentage of total
revenues from 24.9% in 2007 to 20.7% in 2008.
 
 Selling
related expenses decreased by $0.1 million, from $1.1 million in 2007 to $1.0
million in 2008.  In January 2007, as part of our new strategic growth
plan, we reduced our sales force by 14 associates.  We expect the full
impact of this reduction to be fully seen throughout fiscal 2008.
 
 General and administrative expenses
decreased by $0.7 million, or 10.3%, from $6.8 million in 2007 to $6.1 million
in 2008.  This decrease is primarily due to a decrease in bad debt
expense of $0.2 million due to improved collections experience over the last
year, and a decrease in stock compensation expense of $0.4 million attributable
to fewer stock options granted in the quarter ended March 31, 2008 as compared
to 2007, and a decrease in professional fees of $0.3 million. Additionally,
included in 2007 is approximately $0.3 million for severance paid to a former
executive consistent with the requirements of his employment agreement and wages
and related costs who were separated as part of our strategic plan announced in
January 2007.  These amounts were offset by an increase of
approximately $0.5 million in costs associated with the Merger Transaction,
which were not incurred in the prior year.
   18
 INDEX
 
 Depreciation
and Amortization
 
 Depreciation
and amortization decreased from $5.2 million in 2007 to $5.1 million in
2008.   As a percentage of total revenues, depreciation and
amortization expense decreased from 16.2% in 2007 to 14.8% in 2008.
 
 Depreciation
expense remained consistent at $4.3 million for the three months ended both
March 31, 2007 and 2008.
 
 Amortization
expense decreased slightly from $0.9 million for the three months ended March
31, 2007, to $0.8 million for the three months ended March 31,
2008.
 
 Loss
on Asset Disposal
 
 Loss on asset disposal increased from
$0.5 million in 2007 to $0.7 million in 2008, increasing as a percentage of
total revenues from 1.6% to 2.0%.  This increase is primarily due to
the write-off of deferred lease acquisition costs and unamortized initial
installation costs associated with customer attrition.
 
 Operating
Income
 
 For the reasons previously discussed,
operating income increased by $1.4 million from $2.6 million in 2007 to $4.0
million in 2008.  As a percentage of total revenues, operating income
increased from 8.0% to 11.5%.
 
 Interest
Expense
 
 Interest
expense decreased from $0.5 million in 2007 to $0.4 million in 2008, while the
effective interest rate of our debt decreased from 6.5% to 6.2% for the three
months ended March 31, 2007 and March 31, 2008, respectively.  See
“Quantitative and Qualitative Disclosures About Market Risk.”
 
 Income
Before Provision for Income Taxes
 
 Primarily, for the reasons described
above, income before provision for income taxes increased by $1.6 million, or
74.0%, from $2.0 million in 2007 to $3.6 million in 2008.
 
 Provision
for Income Taxes
 
 During the three months ended March 31,
2007 and 2008, we recognized a tax provision consistent with our effective tax
rate.  However, while we anticipate continuing to recognize a full tax
provision in future periods, we expect to pay only AMT and state/local taxes
until such time that our net operating loss carryforwards are fully
utilized.  Our effective rate for the three months ended March 31,
2008 was 45.4%, as compared to 45.7% for the three months ended March 31,
2007.
 
 As of June 30, 2007, we had net
operating loss carryforwards for federal income tax purposes of $91 million and
for state purposes in varying amounts, expiring through June 2025.  If
an “ownership change” for federal income tax purposes were to occur in the
future, our ability to use our pre-ownership change federal and state net
operating loss carryforwards (and certain built in losses, if any) would be
subject to an annual usage limitation, which under certain circumstances may
prevent us from being able to utilize a portion of such loss carryforwards in
future tax periods and may reduce our after-tax cash flow.
 
 Net
Income
 
 For the reasons described above, net
income increased from $1.1 million in 2007 to $1.9 million in 2008.
   19
 INDEX
 
 Non-GAAP
Measures EBITDA and EBITDA Excluding Option Compensation
 
 Earnings before interest, taxes,
depreciation and amortization ("EBITDA") is one of the principal financial
measures by which we measure our financial performance. EBITDA is a widely
accepted financial indicator used by many investors, lenders and analysts to
analyze and compare companies on the basis of operating performance, and we
believe that EBITDA provides useful information regarding our ability to service
our debt and other obligations. However, EBITDA does not represent cash flow
from operations, nor has it been presented as a substitute to operating income
or net income as indicators of our operating performance. EBITDA excludes
significant costs of doing business and should not be considered in isolation or
as a substitute for measures of performance prepared in accordance with
accounting principles generally accepted in the United States of America. In
addition, our calculation of EBITDA may be different from the calculation used
by our competitors, and therefore comparability may be affected. In addition,
our lender also uses EBITDA to assess our compliance with debt covenants. These
financial covenants are based on a measure that is not consistent with
accounting principles generally accepted in the United States of America. Such
measure is EBITDA (as defined) as modified by certain defined
adjustments.
 
 Three Months Ended March
31,2008
                
                
                2007Net
      income
                
                $
                1,941
                
                
                $
                1,111Interest
      expense
                
                
                410
                
                
                
                509Depreciation
      and amortization
                
                
                5,077
                
                
                
                5,158Provision
      for income taxes
                
                
                1,615
                
                
                
                935EBITDA
                
                
                9,043
                
                
                
                7,713Noncash
      option compensation
                
                
                870
                
                
                
                1,301EBITDA
      excluding the impact of option compensation
                
                $
                9,913
                
                
                $
                9,014Cash
      flows provided by (used in):Operating
      activities
                
                $
                14,520
                
                
                $
                9,495Investing
      activities
                
                $
                (5,588
                )
                
                $
                (3,554
                )Financing
      activities
                
                $
                (8,984
                )
                
                $
                (5,888
                )
   Nine
Months Ended March 31, 2008 Compared to the Nine Months Ended March 31,
2007
 
 Total
Revenues
 
 Total
revenues increased by $7.2 million, or 7.4%, from $96.2 million in 2007 to
$103.4 million in 2008.  Revenues derived from our bulk CO2
service plans increased by $5.0 million, primarily due to an increase in the
number of customer locations, while revenues derived from the sale of high
pressure cylinder products, fuel surcharges, equipment sales and other revenues
increased by $2.2 million. The $2.2
million increase in other sales is primarily due to a $0.6 million increase in
nitrogen generator lease revenues in the nine months ended March 31, 2008, as
compared to 2007, as customer demand for this product has increased over the
prior year.  In addition, fuel surcharges to customers have steadily
increased in the last nine months as fuel costs have risen.The number of
customer locations utilizing our products and services increased from
approximately 116,000 customers at March 31, 2007 to approximately 116,400
customers at March 31, 2008, due primarily to organic growth.
   20
 INDEX
  The
following table sets forth, for the periods indicated, the percentage of total
revenues by service plan:
 
 Nine Months Ended March 31,Service
      Plan
                
                2008
                
                
                2007Bulk
      budget plan1
                
                
                48.4
                %
                
                
                51.4
                %Equipment
      lease/product purchase plan2
                
                
                20.4
                
                
                
                18.0Product
      purchase plan3
                
                
                10.8
                
                
                
                10.6High
      pressure cylinder4
                
                
                5.4
                
                
                
                5.5Other
      revenues5
                
                
                15.0
                
                
                
                14.5100.0
                %
                
                
                100.0
                %
  1
      Combined fee for bulk CO2 tank
      and bulk CO2.2
      Fee for bulk CO2 tank
      and, separately, bulk CO2usage.3
      Bulk CO2
      only.4
      High pressure CO2
      cylinders and non-CO2
      gases.5
      Surcharges and other charges.
  Product Sales -Revenues
derived from the product sales portion of our service plans increased by $4.3
million, or 6.9%, from $63.9 million in 2007 to $68.2 million in
2008.  The increase in revenues is primarily due to a slight increase
in the average number of customer locations serviced, a 1.7% increase in product
usage, and pricing initiatives.  In addition, sales of products and
services other than bulk CO2 increased
by $1.5 million due in large part to an increase in revenues derived from
cylinder products, fuel surcharges, equipment sales, and other
revenues.
 
 Equipment Rentals -Revenues
derived from the lease portion of our service plans increased by $2.7 million,
or 8.6%, from $32.4 million in 2007 to $35.1 million in 2008, primarily due to a
1.8% increase in the average number of customer locations leasing equipment from
us, including the impact of price increases to a significant number of our
customers consistent with the Consumer Price Index, offset by incentive pricing
provided to multiple national restaurant organizations utilizing our equipment
under the bulk budget plan and equipment lease/product purchase plans pursuant
to master service agreements.  The number of customer
locations renting equipment from us increased from 96,000 for the nine months
ended March 31, 2007, to 97,000 for the nine months ended March 31, 2008. Additionally,
nitrogen generator lease revenues increased by $0.6 million in the nine months
ended march 31, 2008 due to increased customer
demand.
  Cost
of Products Sold, Excluding Depreciation and Amortization
 
 Cost of products sold, excluding
depreciation and amortization, increased from $41.6 million in 2007 to $44.4
million in 2008, while decreasing as a percentage of product sales revenue from
65.2% to 65.0%.
 
 Raw product costs increased by $1.4
million, from $15.9 million in 2007 to $17.3 million in 2008, due in large part
to a $0.9 million increase in CO2
costs.    The volume of CO2 sold by us
increased 3.5%, primarily due to the 1.1% increase in our average customer base
and an increase in usage of 1.7%.
 
 Operational costs, primarily wages and
benefits related to cost of products sold, increased from $16.6 million for the
nine months ended March 31, 2007 to $17.0 million for the nine months ended
March 31, 2008. This increase was primarily due to increased delivery personnel
wages of $0.4 million.
 
 Truck delivery expenses increased from
$6.4 million in 2007 to $7.2 million in 2008. The increase in expenses is due to
the rising costs of fuel over the last nine months.  Despite rising
fuel costs, we have been able to continue to partially minimize the impact of
increased fuel costs and variable lease costs associated with truck usage by
continuing to improve efficiencies in the timing and routing of
deliveries.   During the last year, we have implemented a new
routing routine at select locations across the country.  The full
implantation of “alpha routing” will be systematically implemented through the
end of fiscal 2008.
 
 Occupancy
and shop costs related to cost of products sold increased slightly from $2.8
million in 2007 to $2.9 million in 2008.
   21
 INDEX
 
 Cost
of Equipment Rentals, Excluding Depreciation and Amortization
 
 Cost of
equipment rentals, excluding depreciation and amortization, increased from $4.6
million in 2007 to $7.0 million in 2008 while increasing as a percentage of
equipment rentals revenue from 14.2% to 20.0%.  During fiscal 2007, we
made a strategic decision to be more selective with our customer activations on
a going forward basis, while improving both operating and customer service
metrics.  As part of this decision, rather than reducing the number of
technicians, we are increasing our emphasis on the assessment, upgrade and
service of our bulk CO2 tanks at
customer sites.  To the degree that our installers and other personnel
are involved in such activities, as compared to initial installation of tanks at
customer sites, which consumed the substantial majority of our technicians’
efforts over the past several years, the related expense is recognized in our
statement of operations as incurred.  We are increasing capacity to
repair and service tanks, which is and will continue to reduce our need to
purchase new tanks.  Tank repair and service costs are expensed as
incurred as compared to the purchase of a tank, which is capitalized at
cost.
 
 Selling,
General and Administrative Expenses
 
 Selling,
general and administrative expenses decreased by $1.9 million from $22.3 million
in 2007 to $20.4 million in 2008, while decreasing as a percentage of total
revenues from 23.2% in 2007 to 19.8% in 2008.  This decrease is
primarily due to an overall reduction in salary expense of $0.7 million, which
is consistent with our reduction in the sales force by 28 sales personnel from
October 2006 through January 2007, along with a decrease of $1.2 million in bad
debt expense, which is due to our increased collection activity for the nine
months ended March 31, 2008 as compared to the nine months ended March 31,
2007.
 
 Selling
related expenses decreased by $0.7 million, from $3.8 million in 2007 to $3.1
million in 2008, primarily the result of the planned conversion of select
independent sales representatives to salaried employees and expenses directed
towards training, marketing and growth opportunities.
 
 General and administrative expenses
decreased by $1.1 million, or 6.2%, from $18.5 million in 2007 to $17.4 million
in 2008, primarily due to a decrease in bad debt expense of $1.2 million due to
improved collections on outstanding accounts receivable in 2008 as compared to
2007, and approximately $0.8 million in expenses related to the Merger
Transaction.
  Depreciation
and Amortization
 
 Depreciation
and amortization increased from $14.9 million in 2007 to $15.1 million in
2008.   As a percentage of total revenues, depreciation and
amortization expense decreased from 15.5% in 2007 to 14.6% in 2008.
 
 Depreciation
expense increased from $12.4 million in 2007 to $12.7 million in
2008.  The increase was due in large part to the purchase and
placement of additional bulk CO2 tanks at
customer sites.
 
 Amortization
expense decreased slightly from $2.5 million for the nine months ended March 31,
2007, to $2.4 million for the nine months ended March 31, 2008.
 
 Loss
on Asset Disposal
 
 Loss on asset disposal increased from
$1.5 million in 2007 to $2.4 million in 2008, increasing as a percentage of
total revenues from 1.6% to 2.3%.   This increase is primarily
due to the write-off of deferred lease acquisition costs and unamoritzed initial
installation costs associated with customer attrition.
 
 Operating
Income
 
 For the reasons previously discussed,
operating income increased by $2.8 million from $11.2 million in 2007 to $14.0
million in 2008.  As a percentage of total revenues, operating income
increased from 11.7% to 13.5%.
   22
 INDEX
 
 Interest
Expense
 
 Interest
expense decreased from $1.6 million in 2007 to $1.5 million in 2008, which is
consistent with the reduction in our outstanding debt balance over the last nine
months.  The effective interest rate of our debt increased from 6.5%
in 2007 to 6.6% in 2008.  See “Quantitative and Qualitative
Disclosures About Market Risk.”
 
 
 Income
Before Provision for Income Taxes
 
 Primarily for the reasons described
above, income before provision for income taxes increased by $2.9 million, or
30.3%, from $9.6 million in 2007 to $12.5 million in 2008.
 
 Provision
for Income Taxes
 
 During the six months ended March 31,
2007 and 2008, we recognized a tax provision consistent with our effective tax
rate.  However, while we anticipate continuing to recognize a full tax
provision in future periods, we expect to pay only AMT and state/local taxes
until such time that our net operating loss carryforwards are fully
utilized.  Our effective rate for the nine months ended March 31, 2008
was 44.1%, as compared to 47.8% for the nine months ended March 31,
2007.
 
 As of June 30, 2007, we had net
operating loss carryforwards for federal income tax purposes of $91 million and
for state purposes in varying amounts, expiring through June 2025.  If
an “ownership change” for federal income tax purposes were to occur in the
future, our ability to use our pre-ownership change federal and state net
operating loss carryforwards (and certain built in losses, if any) would be
subject to an annual usage limitation, which under certain circumstances may
prevent us from being able to utilize a portion of such loss carryforwards in
future tax periods and may reduce our after-tax cash flow.
 
 Net
Income
 
 For the reasons described above, net
income increased from $5.0 million 2007 to $7.0 million in 2008.
 
 Non-GAAP
Measures EBITDA and EBITDA Excluding Option Compensation
 
 Earnings before interest, taxes,
depreciation and amortization ("EBITDA") is one of the principal financial
measures by which we measure our financial performance. EBITDA is a widely
accepted financial indicator used by many investors, lenders and analysts to
analyze and compare companies on the basis of operating performance, and we
believe that EBITDA provides useful information regarding our ability to service
our debt and other obligations. However, EBITDA does not represent cash flow
from operations, nor has it been presented as a substitute to operating income
or net income as indicators of our operating performance. EBITDA excludes
significant costs of doing business and should not be considered in isolation or
as a substitute for measures of performance prepared in accordance with
accounting principles generally accepted in the United States of America. In
addition, our calculation of EBITDA may be different from the calculation used
by our competitors, and therefore comparability may be affected. In addition,
our lender also uses EBITDA to assess our compliance with debt covenants. These
financial covenants are based on a measure that is not consistent with
accounting principles generally accepted in the United States of America. Such
measure is EBITDA (as defined) as modified by certain defined
adjustments.
   23
 INDEX
  Nine
      Months Ended March 312008
                
                
                2007Net
      income
                
                $
                6,987
                
                
                $
                5,012Interest
      expense
                
                
                1,502
                
                
                
                1,635Depreciation
      and amortization
                
                
                15,124
                
                
                
                14,900Provision
      for income taxes
                
                
                5,513
                
                
                
                4,584EBITDA
                
                
                29,126
                
                
                
                26,131Noncash
      option compensation
                
                
                2,511
                
                
                
                3,245EBITDA
      excluding the impact of option compensation
                
                $
                31,637
                
                
                $
                29,376Cash
      flows provided by (used in):Operating
      activities
                
                $
                38,388
                
                
                $
                27,448Investing
      activities
                
                $
                (15,789
                )
                
                $
                (19,325
                )Financing
      activities
                
                $
                (22,610
                )
                
                $
                (8,224
                )
  Liquidity
and Capital Resources
 
 Our cash requirements consist
principally of (1) capital expenditures associated with purchasing and placing
new bulk CO2 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 CO2 systems
and utilization of existing bulk CO2 systems
for new customers.
  Long
Term Debt
 
 On May 27, 2005, we terminated our
previous credit facility and entered into a $60.0 million revolving credit
facility with Bank of America, N.A. (the “2005 Credit Facility”). The 2005
Credit Facility matures on May 27, 2010. We are entitled to select either Base
Rate Loans (as defined) or Eurodollar Rate Loans (as defined), plus applicable
margin, for principal borrowings under the 2005 Credit Facility. Applicable
margin is determined by a pricing grid, as amended March 2006, based on our
Consolidated Leverage Ratio (as defined) as follows:
 
 Pricing
                Level
              
              Consolidated
      Leverage
                Ratio
              Eurodollar
      Rate
                Loans
              Base
      Rate
                LoansI
              
              Greater
      than or equal to
                2.50x
              2.000%
              0.500%II
              
              Less
      than 2.50x but greater
                than
      or equal to 2.00x
              1.750%
              0.250%III
              
              Less
      than 2.00x but greater
                than
      or equal to 1.50x
              1.500%
              0.000%IV
              
              Less
      than 1.50x but greater
                than
      or equal to 0.50x
              1.250%
              0.000%V
              
              Less
      than 0.50x
              1.000%
              0.000%
 
 Interest is payable periodically on
borrowings under the 2005 Credit Facility. The 2005 Credit Facility is
uncollateralized. We are required to meet certain affirmative and negative
covenants, including financial covenants. We are required to assess our
compliance with these financial covenants under the 2005 Credit Facility on a
quarterly basis. These financial covenants are based on a measure that is not
consistent with accounting principles generally accepted in the United States of
America. Such measure is EBITDA (as defined), which represents earnings before
interest, taxes, depreciation and amortization, as further modified by certain
defined adjustments. The failure to meet these covenants, absent a waiver or
amendment, would place us in default and cause the debt outstanding under the
2005 Credit Agreement to immediately become due and payable.  In
connection with our share repurchase program announced during the quarter ended
March 31, 2007, the 2005 Credit Facility was amended to modify certain
covenants.  We were in compliance with all covenants under the 2005
Credit Facility as of June 30, 2005 and all subsequent periods through March 31,
2008.
   24
 INDEX
 
 As of
March 31, 2008, a total of $25.4 million was outstanding pursuant to the 2005
Credit Facility, primarily consisting of Libor (Eurodollar Rate) loans with a
weighted average interest rate of 4.33% per annum.
 
 Other
 
 During the nine months ended March 31,
2008, our capital resources included cash flows from operations and available
borrowing capacity under the 2005 Credit Facility.  We believe that
cash flows from operations and available borrowings under the 2005 Credit
Facility will be sufficient to fund proposed operations for at least the next
twelve months.
 
 Working
Capital.  As of March 31, 2008 and June 30, 2007, we had
working capital of $10.0 million and $13.3 million, respectively.
 
 Cash Flows from Operating
Activities: During 2007 and 2008, net cash generated by operating
activities was $27.4 million and $38.4 million, respectively.  Cash
used by our working capital assets improved by $7.7 million, partially offset by
the cash generated from our results of operations.  This increase is
due in part to increased collection activity on outstanding customer
accounts.
 
 Cash Flows from Investing
Activities.  During 2007 and 2008, net cash used in investing
activities was $19.3 million and $15.8 million,
respectively.  Investing activities in 2008 included $14.0 million
associated with the purchase and installation of tanks at customer sites as
compared with $17.6 million last year. As previously noted, we have increased
our capacity to repair and service tanks resulting in a reduction in the number
of tanks purchased.
 
 Cash Flows from Financing
Activities.  During 2008, cash flows used in financing
activities was $22.6 million, compared to $8.2 million used in financing
activities in 2007.  During 2008, we made net repayments on
outstanding debt of $9.4 million.  Additionally, as previously
discussed, in January 2008, we purchased a swaption for $4.9 million to hedge
against rising interest rates in relation to the Company’s anticipated financing
transaction related to the merger with Aurora Capital Group (“Aurora”). Pursuant
to the anticipated merger, we entered into an interest
rate swap to hedge the risk rising interest rates between the date of the merger
agreement and the expected closing date of the transaction. Additionally,
we incurred approximately $2.8 million in deferred debt issuance costs
associated with the anticipated Merger Financing.  This year, we also
incurred approximately $7.1 million associated with the repurchase of
outstanding shares of our common stock as compared to $12.5 million during the
same period lat year.
 
 Inflation
 
 The modest levels of inflation in the
general economy have not affected our results of
operations.  Additionally, our customer contracts generally provide
for annual increases in the monthly rental rate based on increases in the
consumer price index.  We believe that inflation will not have a
material adverse effect on our future results of operations.
 
 Our bulk CO2 exclusive
requirements contract with The BOC Group, Inc. (“BOC”) provides for annual
adjustments in the purchase price for bulk CO2 based upon
increases or decreases in the Producer Price Index for Chemical and Allied
Products or the average percentage increase in the selling price of bulk
merchant carbon dioxide purchased by BOC’s large, multi-location beverage
customers in the United States, whichever is less.
 
 As of March 31, 2008, we operated a
total of 359 specialized bulk CO2 delivery
vehicles and technical service vehicles that logged approximately 14.6 million
miles over the last twelve months.  While significant increases in
fuel prices impact our operating costs, such impact is largely offset by fuel
surcharges billed to the majority of our customers.
   25
 INDEX
 
 Recent
Accounting Pronouncements
 
 In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standard (“SFAS”) No. 141R, “Business Combinations” (“SFAS
No. 141R”). SFAS No. 141R will require, among other things, the expensing of
direct transaction costs, including deal costs and restructuring costs as
incurred, acquired in process research and development assets to be capitalized,
certain contingent assets and liabilities to be recognized at fair value and
earn-out arrangements, including contingent consideration, may be required to be
measured at fair value until settled, with changes in fair value recognized each
period into earnings.  In addition, material adjustments made to the
initial acquisition purchase accounting will be required to be recorded back to
the acquisition date. This will cause companies to revise previously reported
results when reporting comparative financial information in subsequent filings.
SFAS No. 141R will become effective for us on a prospective basis for
transactions occurring in 2009 and earlier adoption is not
permitted.  We are currently evaluating the impact, if any, that the
adoption of SFAS No. 141R will have on our financial condition results of
operations or cash flows.
 
 In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” (“SFAS No. 160”). SFAS No. 160 will
change the accounting for and reporting of minority interests. Under the new
standard, minority interests, will be referred to as noncontrolling interests
and will be reported as equity in the parent company’s consolidated financial
statements. Transactions between the parent company and the noncontrolling
interests will be treated as transactions between shareholders provided that the
transactions do not create a change in control. Gains and losses will be
recognized in earnings for transactions between the parent company and the
noncontrolling interests, unless control is achieved or lost. SFAS No. 160
requires retrospective adoption of the presentation and disclosure requirements
for existing minority interests. All other requirements of SFAS No. 160 shall be
applied prospectively. SFAS No. 160 is effective for us beginning in the first
quarter of fiscal year 2009 and earlier adoption is not permitted. We are
currently evaluating the impact, if any, that the adoption of SFAS No. 160 will
have on our financial condition, results of operations or cash
flows.
 
 In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities – Including an Amendment of FASB Statement
No. 115”(“SFAS No. 159”), which provides companies with an
option to report selected financial assets and liabilities at their fair values.
The objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. SFAS No. 159 is expected to expand the use of fair value
measurement, which is consistent with the FASB’s long-term measurement
objectives for accounting for financial instruments. SFAS No. 159 will
become effective for us on July 1, 2008.  We are currently
evaluating the impact, if any, that the adoption of SFAS No. 159 will have on
our financial condition, results of operations or cash flows.
 
 In September 2006, the FASB issued
SFAS No. 157, “Fair Value
Measurements” (“SFAS No. 157”), which defines fair value,
establishes guidelines for measuring fair value and expands disclosures
regarding fair value measurements. SFAS No. 157 is effective for fiscal
years beginning after November 15, 2007. We are currently evaluating what
impact, if any, the adoption of SFAS No. 157 will have on our financial
condition, results of operations or cash flows.
 
 
 ITEM
3.                            QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  As
discussed under “Management’s Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources” above, as of March
31, 2008, a total of $25.4 million was outstanding under the 2005 Credit
Facility with a weighted average interest rate of 4.33% per
annum.  Based upon the $25.4 million outstanding under the 2005 Credit
Facility at December 31, 2007, our annual interest cost under the 2005 Credit
Facility would increase by $0.3 million for each 1% increase in Eurodollar
interest rates.
   26
 INDEX
 
 On
January 29, 2008, the Company entered into an Agreement and Plan of Merger (the
“Merger Agreement”) with NuCO2 Acquisition Corp., a
Delaware corporation (“Parent”), and NuCO2 Merger Co., a Florida corporation and
a wholly owned subsidiary of Parent (“Merger Sub”).  Subject to the
terms and conditions of the Merger Agreement, Merger Sub will merge with and
into the Company (the “Merger”) with the Company being the surviving corporation
in the Merger and, at the effective time of the Merger, each issued and
outstanding share of common stock, par value $0.001 per share (the “Common
Stock”), of the Company (other than treasury shares, shares owned by Parent,
Merger Sub or any direct or indirect wholly owned subsidiary of Parent and
shares owned by stockholders who perfect their appraisal rights under Florida
law) will be converted automatically into the right to receive $30.00 in cash,
without interest.
  In order
to reduce the Company’s exposure to increases in interest rates in connection
with the debt financing for the Merger (the “Merger Financing”), on January 30,
2008, the Company purchased an option, for a premium of $4.9 million, to enter
into a pay fixed rate swap (“Swaption I”) that grants the Company the right (but
not the obligation) to enter into a pay fixed swap at the effective time of the
Merger with respect to amounts to be borrowed under the Merger
Financing.  The underlying swap is in the notional amount of $335.0
million, and the option expires on June 30, 2008. Under the Merger Agreement,
Parent will reimburse the Company for its unrecouped costs associated with
Swaption I in the event that the Merger Agreement is terminated and, upon such
reimbursement, the Company will assign Swaption I to Parent.  Swaption
I meets the requirements to be designated as a cash flow hedge and is deemed a
highly effective transaction.  Accordingly, changes in the fair value
of Swaption I are recorded as other comprehensive income (loss).  At
March 31, 2008, the Company recorded a loss of $2.8 million, representing the
change in fair value of Swaption I from January 30, 2008 through March 31, 2008,
as other comprehensive loss.
 In order
to reduce our exposure to increases in Eurodollar rates, and consequently to
increases in interest payments, we entered into an interest rate swap
transaction (the “2005 Swap”) comprised of two instruments (“Swap A” and “Swap
B”) on September 28, 2005, with an effective date of October, 3,
2005.  Swap A, in the amount of $15.0 million (the “A Notional
Amount”), matures on October 3, 2008 and Swap B, in the amount of $5.0 million
(the “B Notional Amount”), matured on April 3, 2007.  Pursuant to Swap
A, we currently pay a fixed interest rate of 4.69% per annum and receive a
Eurodollar-based floating rate.  The effect of Swap A is to neutralize
any changes in Eurodollar rates on the A Notional Amount.  The 2005
Swap meets the requirements to be designated as a cash flow hedge and is deemed
a highly effective transaction.  Accordingly, changes in the fair
value of Swap A are recorded as other comprehensive income
(loss).  During the nine months ended March 31, 2008, we recorded a
loss of $0.3 million, representing the change in fair value of Swap A from June
30, 2007 through March 31, 2008, as other comprehensive loss.
 
 
 ITEM
4.                      CONTROLS
AND PROCEDURES
 
  Evaluation of disclosure
controls and procedures.  Based on
our management’s evaluation (with the participation of our principal executive
officer and principal financial officer), as of the end of the period covered by
this report, our principal executive officer and principal financial officer
have concluded that our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended,
(the “Exchange Act”) are effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in SEC rules and forms.
  Changes in internal control
over financial reporting. There have been no changes in our internal
control over financial reporting during the quarter ended March 31, 2008 that
have materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
 
 PART
II.                      OTHER
INFORMATION.
 
 ITEM
6.                      EXHIBITS.
 
 Exhibit
      No.
                Exhibit31.1
                Section
      302 Certification of Principal Executive Officer.31.2
                Section
      302 Certification of Principal Financial Officer.32.1
                Section
      906 Certification of Principal Executive Officer.32.2
                Section
      906 Certification of Principal Financial
  Officer.
 
 27
 INDEX
 SIGNATURES
 
 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.
 
 NuCO2
      Inc.Dated:  May
      12, 2008
              By:
              /s/
      Robert R. GalvinRobert
      R. GalvinChief
      Financial Officer
  
 28