UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2001
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: 0-24287
BLUE RHINO CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 56-1870472
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
104 CAMBRIDGE PLAZA DRIVE
WINSTON-SALEM, NORTH CAROLINA 27104
(Address of principal executive offices)
(336) 659-6900
(Registrant's telephone number, including area code)
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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
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 November 30, 2001
--------------------------------------- --------------------------------
Common stock, par value $.001 per share 9,325,063 Shares
1
BLUE RHINO CORPORATION
INDEX
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements (unaudited):
Condensed consolidated balance sheets as of October 31, 2001
and July 31, 2001.
Condensed consolidated statements of operations
for the three-month periods ended October 31, 2001 and 2000.
Condensed consolidated statements of cash flows
for the three-month periods ended October 31, 2001 and 2000.
Notes to condensed consolidated financial statements.
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Item 3: Quantitative and Qualitative Disclosures about Market Risk.
PART II: OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K.
SIGNATURES
2
PART I
FINANCIAL INFORMATION
ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BLUE RHINO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF OCTOBER 31, 2001 AND JULY 31, 2001
(IN THOUSANDS)
OCTOBER 31, JULY 31,
2001 2001
---- ----
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents ..................................... $ 1,542 $ 1,044
Accounts receivable, net ...................................... 13,624 19,619
Inventories ................................................... 6,636 7,960
Prepaid expenses and other current assets ..................... 4,655 9,402
--------- ---------
Total current assets ................................... 26,457 38,025
Cylinders leased under operating lease agreements, net .............. 31,930 31,466
Property, plant, and equipment, net ................................. 30,660 23,636
Intangibles, net .................................................... 32,271 32,282
Investment in joint venture ......................................... 122 455
Other assets ........................................................ 1,271 1,480
--------- ---------
Total assets ........................................... $ 122,711 $ 127,344
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................................. $ 7,605 $ 13,314
Current portion of long-term debt and capital lease obligations 2,923 2,333
Accrued liabilities ........................................... 3,370 3,617
--------- ---------
Total current liabilities .............................. 13,898 19,264
Long-term debt and capital lease obligations, less current maturities 54,399 53,171
--------- ---------
Total liabilities ...................................... 68,297 72,435
Stockholders' equity:
Common stock, $0.001 par value; 100,000,000 shares
authorized, 9,299,654 and 9,279,152 shares issued
and outstanding at October 31, 2001 and July 31, 2001,
respectively ................................................. 9 9
Preferred stock, $0.001 par value; 20,000,000
shares authorized, 2,850,000 shares issued and
outstanding at October 31, 2001 and July 31, 2001;
liquidation value $18,335 at October 31, 2001 ................ 3 3
Capital in excess of par ...................................... 78,070 77,567
Common stock warrants ......................................... 3,221 3,221
Accumulated deficit ........................................... (24,570) (24,789)
Accumulated other comprehensive loss .......................... (2,319) (1,102)
--------- ---------
Total stockholders' equity ............................. 54,414 54,909
--------- ---------
Total liabilities and stockholders' equity .......................... $ 122,711 $ 127,344
========= =========
The accompanying notes are an integral part of these financial statements.
3
BLUE RHINO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 31, 2001 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
OCTOBER 31,
-----------
2001 2000
---- ----
(Unaudited)
Net revenues ........................................ $36,839 $33,821
Operating costs and expenses:
Cost of sales .................................... 26,803 25,757
Selling, general, and administrative ............. 5,809 4,810
Depreciation and amortization .................... 1,836 1,637
------ ------
Total operating costs and expenses ............ 34,448 32,204
------ ------
Income from operations ........................ 2,391 1,617
Interest and other expenses (income):
Interest expense ................................. 1,541 1,209
Loss on investee ................................. 338 570
Other, net ....................................... (186) 20
------ ------
Income (loss) before income taxes ............. 698 (182)
Income taxes ........................................ 13 2
------ ------
Net income (loss) ............................. $ 685 $ (184)
Preferred dividends ................................. 466 128
------ ------
Income (loss) available to common stockholders $ 219 $ (312)
====== ======
Basic and diluted earnings (loss) per common share .. $ 0.02 $ (0.03)
Shares used in per share calculations:
Basic ............................................ 12,137 10,293
====== ======
Diluted .......................................... 12,556 10,293
====== ======
The accompanying notes are an integral part of these financial statements.
4
BLUE RHINO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED OCTOBER 31, 2001 AND 2000
(IN THOUSANDS)
THREE MONTHS ENDED
OCTOBER 31,
-----------
2001 2000
---- ----
(unaudited)
Cash flows from operating activities:
Net income (loss) .............................................................. $ 685 $ (184)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization ............................................ 1,836 1,637
Loss on investee ......................................................... 338 570
Other non-cash expenses .................................................. 149 70
Changes in operating assets and liabilities, net of business acquisitions:
Accounts receivable ................................................. 5,945 2,605
Inventories ......................................................... 844 191
Other current assets ................................................ (201) (1,300)
Accounts payable and accrued liabilities ............................ (6,815) (8,420)
-------- --------
Net cash provided by (used in) operating activities ............. 2,781 (4,831)
-------- --------
Cash flows from investing activities:
Business acquisitions .......................................................... (197) (1,151)
Purchases of property, plant, and equipment .................................... (810) (1,505)
Net advances to and investment in joint venture ................................ (775) (1,011)
Purchases of cylinders held under operating leases, net ........................ (293) (1,095)
Collections on notes receivable ................................................ 19 237
-------- --------
Net cash used in investing activities ........................... (2,056) (4,525)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of equity, net of expenses .............................. 36 9,644
Proceeds from notes payable to bank ............................................ 24,320 15,626
Payments on notes payable to bank .............................................. (23,620) (14,807)
Payments on long-term debt and capital lease obligations ....................... (963) (425)
-------- --------
Net cash (used in) provided by financing activities ............. (227) 10,038
-------- --------
Net increase in cash and cash equivalents ........................................... 498 682
Cash and cash equivalents at beginning of period .................................... 1,044 1,079
-------- --------
Cash and cash equivalents at end of period .......................................... $ 1,542 $ 1,761
======== ========
The accompanying notes are an integral part of these financial statements.
5
BLUE RHINO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2001 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of Blue Rhino
Corporation (the "Company") include the accounts of its wholly owned
subsidiaries: Uniflame Corporation ("Uniflame"); QuickShip, Inc. ("QuickShip");
Rhino Services, L.L.C.; CPD Associates, Inc. and USA Leasing, L.L.C. All
material intercompany transactions and balances have been eliminated in
consolidation.
The accompanying unaudited interim condensed consolidated financial
statements of the Company have been prepared by the Company in accordance with
the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and,
accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of items of a normal
recurring nature) considered necessary for a fair presentation have been
included. Operating results for the three-month periods ended October 31, 2001
are not necessarily indicative of the results that may be expected for the year
ending July 31, 2002.
The balance sheet at July 31, 2001 has been derived from the audited
financial statements of the Company as of July 31, 2001 but does not include all
of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements.
These financial statements should be read in conjunction with the
audited consolidated financial statements of Blue Rhino Corporation as of and
for the year ended July 31, 2001.
2. DERIVATIVE INSTRUMENTS
The Company accounts for derivative instruments in accordance with
Statement of Financial Accounting Standard No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement specifies that all
derivatives, whether designated in hedging relationships or not, are required to
be recorded on the balance sheet at fair value. If the derivative is designated
as a cash flow hedge, the effective portions of changes in the fair value of the
derivative are recorded in other comprehensive income ("OCI") and are recognized
in the income statement when the hedged item affects earnings. Ineffective
portions of changes in the fair value of cash flow hedges are recognized in
earnings.
The Company uses derivative instruments, which are designated as
cash flow hedges, to manage exposure to interest rate fluctuations and wholesale
propane price volatility. The Company's objective for holding derivatives is to
minimize risks by using the most effective methods to eliminate or reduce the
impacts of these exposures.
The net derivative loss recorded in OCI will be reclassified into
earnings over the term of the underlying cash flow hedges. The amount that will
be reclassified into earnings will vary depending upon the movement of the
underlying interest rates and propane prices. As interest rates and propane
prices decrease, the charge to earnings will increase. Conversely, as interest
rates and propane prices increase, the charge to earnings will decrease.
6
The following is a rollforward of the components of OCI for the
three months ended October 31, 2001 and 2000:
THREE MONTHS ENDED
OCTOBER 31,
-----------
2001 2000
---- ----
Beginning balance deferred in OCI ............................ $1,102 $131
Net change associated with current period hedge transactions . 1,659 115
Net amount reclassified into earnings during the year ........ (442) (19)
----- ---
Ending balance deferred in OCI ............................... $2,319 $227
===== ===
Total comprehensive loss for the three months ended October 31, 2001
and 2000 was ($532) and ($281) respectively.
3. INVESTMENT IN JOINT VENTURE
The Company has a 49% ownership interest in a joint venture, R4
Technical Center North Carolina, LLC ("R4 Tech"). R4 Tech was established in
April 2000 to operate and manage an automated propane bottling and cylinder
refurbishing plant. R4 Tech began operations in May 2000 and is being accounted
for under the equity method of accounting. The Company recognized its portion of
the loss in the joint venture for the three months ended October 31, 2001 and
October 31, 2000 of $338 and $570, respectively. During the three months ended
October 31, 2001 and October 31, 2000, the Company advanced $775 and $1,011,
respectively, to R4 Tech.
Effective September 30, 2001, the Company entered into a sale and
leaseback transaction with R4 Tech. The Company purchased all of the land,
buildings and equipment associated with the propane bottling and cylinder
refurbishing operation for $7,599. The purchase price was used by R4 Tech to
repay outstanding advances made by the Company. Contemporaneously with the sale,
R4 Tech leased back the land, buildings and equipment from the Company under the
terms of a three-year operating lease agreement. The sale and leaseback
transaction is not expected to have a material impact on the Company's
consolidated results of operations or financial position.
Summary financial information for R4 Tech for the three-month
periods ended October 31, 2001 and October 31, 2000 is as follows:
THREE MONTHS ENDED
OCTOBER 31,
2001 2000
---- ----
Net revenues ...... $ 2,992 $ 1,611
Gross profit/(loss) 144 (855)
Net loss .......... (681) (1,164)
4. GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, Business Combinations, and
No. 142, Goodwill and Other Intangible Assets, effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill (and intangible
assets deemed to have indefinite lives) will no longer be amortized but will be
subject to annual impairment tests in accordance with the Statements. Other
intangible assets will continue to be amortized over their useful lives.
The Company applied the new rules for accounting for goodwill and
other intangible assets beginning in the first quarter of fiscal 2002. As of
October 31, 2001, the Company has unamortized intangibles of $32.3 million that
will be subject to the transition provisions of the Statements. The Company has
not yet determined the impact of adopting these Statements on its earnings and
financial position, including whether it will be required to recognize any
transitional impairment losses as a cumulative effect of a change in accounting
principle. Application of the nonamortization provisions of the Statements is
expected to result in an increase in net income of approximately $2.6 million in
fiscal 2002.
7
5. EARNINGS (LOSS) PER SHARE
The following table sets forth a reconciliation of the numerators
and denominators in computing earnings (loss) per common share in accordance
with Statement of Financial Accounting Standards No. 128.
THREE MONTHS ENDED
OCTOBER 31,
-----------
2001 2000
---- ----
(unaudited)
Net income (loss) ................................. $ 685 $ (184)
Less: Preferred stock dividends .................... 466 128
-------- --------
Income (loss) applicable to common stockholders .... $ 219 $ (312)
======== ========
Income (loss) applicable to common stockholders .... $ 219 $ (312)
Weighted average number of common
shares outstanding (in thousands) .................. 12,137 10,293
-------- --------
Basic earnings (loss) per common share ............. $ 0.02 $ ( 0.03)
======== ========
Income (loss) applicable to common stockholders .... $ 219 $ (312)
Weighted average number of common shares
outstanding (in thousands) ......................... 12,137 10,293
Effect of potentially dilutive securities:
Common stock options ........................... 419 --
Common stock warrants .......................... -- --
-------- --------
Weighted average number of common shares outstanding
assuming dilution .................................. 12,556 10,293
-------- --------
Diluted earnings (loss) per common share .......... $ 0.02 $ ( 0.03)
======== ========
For the three months ended October 31, 2001, the diluted earnings
per common share calculation does not include common stock warrants representing
equivalents of 2,935,704 shares of common stock because the exercise prices are
greater than the average market price of the Company's common stock and the
effect would be anti-dilutive. Options to purchase common stock and the assumed
exercise of warrants for the three months ended October 31, 2000 have been
excluded from the computation of diluted loss per share as they were
anti-dilutive.
6. SEGMENT INFORMATION
The Company has two reportable segments: cylinder exchange and
products and other. The cylinder exchange segment relates to cylinder exchange
transactions and lease income from cylinders and cylinder displays. The products
and other segment includes the activities required to sell patio heaters,
grills, fireplace accessories and garden products, which are managed and
operated through Uniflame. In addition, the financial information related to
QuickShip, a retail shipping services company acquired in October 2000, is
included within the products segment as it is not currently material on a
stand-alone basis.
The Company evaluates performance and allocates resources based on
several factors, of which the primary financial measure is business segment
operating income, defined as earnings before interest, taxes, depreciation and
amortization before other non-operating expenses ("EBITDA").
The Company's reportable segments are strategic business units that
offer different products and services. They are managed separately because each
business requires different technology and operational strategies. The majority
of the products business segment was acquired in the Uniflame acquisition. The
Company's selected segment information as of and for the three months ended
October 31, 2001 and October 31, 2000 is as follows:
8
THREE MONTHS ENDED
OCTOBER 31,
-----------
2001 2000
---- ----
Net revenues:
Cylinder exchange............. $21,424 $16,961
Products and other............ 15,415 16,860
------- -------
$36,839 $33,821
======= =======
Segment EBITDA:
Cylinder exchange............. $ 2,926 $ 662
Products and other............ 1,301 2,592
------- -------
$ 4,227 $ 3,254
======= =======
AS OF OCTOBER 31,
2001 2000
---- ----
Total assets:
Cylinder exchange............. $ 88,483 $ 80,636
Products and other............ 34,228 37,909
-------- --------
$122,711 $118,545
======== ========
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CERTAIN STATEMENTS IN THIS SECTION AND ELSEWHERE IN THIS QUARTERLY
REPORT ON FORM 10-Q ARE FORWARD-LOOKING IN NATURE AND RELATE TO THE COMPANY'S
PLANS, OBJECTIVES, ESTIMATES, GOALS AND FUTURE FINANCIAL PERFORMANCE. THE TERMS
"MAY," "WILL," "SHOULD," "EXPECTS," "INTENDS," "PLANS," "ANTICIPATES,"
"BELIEVES," "ESTIMATES," "PREDICTS," "POTENTIAL," "CONTINUE" AND SIMILAR WORDS
OR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH
STATEMENTS ARE MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995 AND SPEAK ONLY AS OF THE DATE OF THIS
REPORT. THE STATEMENTS ARE BASED ON CURRENT EXPECTATIONS, ARE INHERENTLY
UNCERTAIN AND SUBJECT TO RISKS, AND SHOULD BE VIEWED WITH CAUTION. THE COMPANY'S
BUSINESS IS SUBJECT TO NUMEROUS RISKS AND UNCERTAINTIES INCLUDING, IN
PARTICULAR, THE COMPANY'S ABILITY TO PLACE BLUE RHINO CYLINDER EXCHANGE AT
ADDITIONAL RETAIL LOCATIONS, TO INTEGRATE ACQUISITIONS, TO LAUNCH NEW PRODUCTS
AND SERVICES AND TO MITIGATE THE EFFECTS OF HIGH PROPANE COMMODITY PRICES
SUCCESSFULLY. THESE AND OTHER RISKS AND UNCERTAINTIES, INCLUDING THOSE DETAILED
IN THE COMPANY'S REGISTRATION STATEMENT ON FORM S-3/A DATED OCTOBER 29, 2001 AND
ITS MOST RECENT ANNUAL REPORT ON FORM 10-K FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION, COULD CAUSE ACTUAL RESULTS, PERFORMANCE AND DEVELOPMENTS TO
BE MATERIALLY DIFFERENT FROM THOSE EXPRESSED OR IMPLIED BY ANY OF THESE
FORWARD-LOOKING STATEMENTS. THE COMPANY MAKES NO COMMITMENT TO UPDATE ANY
FORWARD-LOOKING STATEMENT OR TO DISCLOSE ANY FACTS, EVENTS, OR CIRCUMSTANCES
AFTER THE DATE HEREOF THAT MAY AFFECT THE ACCURACY OF ANY FORWARD-LOOKING
STATEMENT.
OVERVIEW
The following discussion and analysis should be read in conjunction
with the accompanying Condensed Consolidated Financial Statements and related
notes of Blue Rhino Corporation and its wholly owned subsidiaries, Uniflame
Corporation ("Uniflame"); QuickShip, Inc. ("QuickShip"); Rhino Services, L.L.C.;
CPD Associates, Inc. and USA Leasing, L.L.C. (collectively, the "Company," "Blue
Rhino," "us" or "we"), and with our audited consolidated financial statements as
of and for the fiscal year ended July 31, 2001, on file with the Securities and
Exchange Commission. The results of operations for the three-month period ended
October 31, 2001 are not necessarily indicative of results that may be expected
for the fiscal year ending July 31, 2002 or any other period, in part due to the
seasonality of our business.
Blue Rhino was founded in March 1994 and believes it has become the
leading national provider of gas grill cylinder exchange as well as a leading
provider of complementary propane and non-propane products to consumers, with
Blue Rhino cylinder displays at more than 27,000 retail locations in 46 states
and Puerto Rico. Cylinder exchange provides consumers with a convenient means to
exchange empty grill cylinders for clean, safe, precision-filled cylinders. We
offer cylinder exchange at many major home improvement centers, mass merchants,
hardware, grocery and convenience stores, including Home Depot, Lowe's,
Wal*Mart, Sears, Kmart, Kroger, Food Lion, Winn-Dixie, SuperAmerica, Circle
K and ExxonMobil. The number of retail locations we report in any period is net
of any retail locations at which we have discontinued our cylinder exchange
service, whether due to closings, relocations, performance, competitive,
regulatory or other factors.
We partner with retailers and independent distributors to provide
consumers with a nationally branded alternative to traditional grill cylinder
refill. We dedicate our efforts and capital to brand development, value-added
marketing, customer service, cylinders, displays, account growth, distributor
network development and management information systems. Our 43 independent
distributors invest in the vehicles and other operational infrastructure
necessary to operate cylinder exchange businesses. We believe that our
distributor network affords us the opportunity to service approximately 90% of
the cylinder exchange markets in the United States.
Our products segment revenue grew dramatically in fiscal 2001 due to
the acquisition of Uniflame in April 2000 as well as to growth in Uniflame's
sales. Uniflame's revenues are derived from products that use propane cylinders
as their fuel source, principally patio heaters and grills, and non-propane
products such as charcoal grills, fireplace accessories and garden products. The
majority of Uniflame's sales occur in the fall and winter months, which is
counterseasonal to our cylinder exchange segment. QuickShip, Inc., a retail
shipping services company acquired in October 2000, is included within the
products segment as it is not currently material on a stand-alone basis.
10
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED OCTOBER 31, 2001 WITH THE THREE MONTHS
ENDED OCTOBER 31, 2000
Net revenues. Net revenues increased 8.9% to $36.8 million for the
three months ended October 31, 2001 from $33.8 million for the three months
ended October 31, 2000. Net revenues consisted of $21.4 million from cylinder
exchange and $15.4 million from the products and other segment. The increase in
net revenues versus the same period in the prior year was due to the 26.3%
increase in cylinder exchange revenues, which was partially offset by an 8.6%
decrease in product revenues. The increase in cylinder exchange revenues
resulted from an approximately 25% increase in same store cylinder exchange
sales primarily driven by consumers switching from refill to exchange. The
decrease in product revenues was primarily due to the timing of shipments, as
many retailers have delayed shipments until later in the year. Despite the first
quarter decrease in product revenues, we currently expect that our product
revenues will increase for fiscal year 2002 as compared to fiscal 2001.
Gross margin. Our overall gross margin increased to 27.2% in the
first quarter of fiscal 2002 from 23.8% in the first quarter of fiscal 2001.
This increase was due primarily to the increase in cylinder exchange gross
margins and the reduction of lower margin product sales as a percentage of total
revenues. Cylinder exchange gross margins increased to 30.1% for the three
months ended October 31, 2001 from 24.8% for the three months ended October 31,
2000. The increase in gross margins was due primarily to the impact of voluntary
payments made in the prior year to our distributors to partially offset
unusually high wholesale propane prices. The voluntary payments were
discontinued effective March 1, 2001, when we made changes in the method in
which we pay our distributors and implemented our propane hedging strategy.
These changes, combined with price increases to retailers, have resulted in the
cylinder exchange gross margin improvement. The products segment also achieved a
slight increase in gross margins to 23.3% in the first quarter of fiscal 2002
from 22.9% in the first quarter of fiscal 2001 primarily due to a shift in sales
mix to products that carry a higher margin.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 20.8% to $5.8 million for the three months
ended October 31, 2001 from $4.8 million for the three months ended October 31,
2000. Selling, general and administrative expenses were flat in the cylinder
exchange segment, with an increase in reserves for bad debt caused by uncertain
economic conditions entirely offset primarily by a reduction in marketing costs.
The overall increase in selling, general and administrative expenses was due
primarily to an increase in costs to support growth at Uniflame and additional
costs related to QuickShip, which was acquired in October 2000. We currently
anticipate that revenues will increase at a greater rate than selling, general
and administrative expenses for the remainder of fiscal 2002 and, therefore,
that such expenses will decrease as a percentage of revenues for fiscal 2002 as
compared to fiscal 2001.
Depreciation and amortization. Depreciation and amortization
increased to $1.8 million for the first quarter of fiscal 2002 from $1.6 million
for the first quarter of fiscal 2001 primarily due to the increase in the number
of installed cylinder displays, the increase in cylinders held under operating
lease agreements, and the depreciation of software acquired in the QuickShip
acquisition. The increase in cylinders and cylinder displays was due to our
ongoing purchase of assets to support the growth in our installed base of retail
locations. Amortization expense decreased to $84,000 in the first quarter of
fiscal 2002 from $378,000 in the first quarter of fiscal 2001. The decrease in
amortization expense was primarily due to the elimination of goodwill
amortization related to the implementation of SFAS No. 142, Goodwill and Other
Intangible Assets.
Interest expense. Interest expense increased to $1.5 million in the
first quarter of fiscal 2002 from $1.2 million in the first quarter of fiscal
2001. The increase in interest expense is primarily due to $15 million of
subordinated debt that we obtained on June 15, 2001.
Loss on investee. Loss on investee decreased to $338,000 in the
first quarter of fiscal 2002 from $570,000 in the first quarter of fiscal 2001.
This charge represents our share of the loss related to our 49% ownership
interest in R4 Tech, which began operations in May 2000. We currently expect
this venture to continue to experience losses, which we believe are typical in a
start-up manufacturing operation, until volumes increase and revenue from
converting cylinders without an overfill protection device (OPD) into OPD
cylinders is realized, which we believe will occur in the 2002 grilling season.
We cannot, however, predict with certainty when R4 Tech will become profitable,
if ever. R4 Tech is subject to significant seasonal fluctuations in revenues and
net income (loss). We expect R4 Tech's revenues to be the highest in our third
and fourth quarters, which include the majority of the grilling season, and
lowest in our first and second quarters.
11
Other, net. Other, net increased to $186,000 of income in the first
quarter of fiscal 2002 from $20,000 of loss in the first quarter of fiscal 2001.
The increase in other income resulted primarily from interest income on advances
made to R4 Tech and distributors.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of funds have been the incurrence of debt, the
issuance of stock, and cash flow from operations.
Net cash provided by operations was $2.8 million for the three
months ended October 31, 2001 while cash used in operations was $4.8 million for
the three months ended October 31, 2000. Net income for the three months ended
October 31, 2001 was primarily augmented by non-cash depreciation and
amortization and loss on investee, increasing positive cash flow. For the three
months ended October 31, 2000, seasonal working capital needs related to the
products segment was the primary cause for the cash used in operations.
Net cash used in investing activities was $2.1 million for the three
months ended October 31, 2001 and $4.5 million for the three months ended
October 31, 2000. The primary components of cash used in investing activities
for both periods included investments in property, plant and equipment and
advances to R4 Tech. For the three months ended October 31, 2000, cash used in
investing activities also included, to a greater extent than in the first
quarter of fiscal 2002, acquisitions and purchases of cylinders held under
operating leases.
Net cash used in financing activities was $227,000 for the three
months ended October 31, 2001 while cash provided by financing activities was
$10.0 million for the three months ended October 31, 2000. Cash used in
financing activities for the three months ended October 31, 2001 included
payments on long-term debt and capital lease obligations that were partially
offset by net proceeds from our credit facility. Cash provided by financing
activities for the three months ended October 31, 2000 included net proceeds of
$9.6 million from a preferred stock private placement.
On April 28, 2000, we entered into a joint venture agreement to
operate and manage the automated propane bottling and cylinder refurbishing
plant in North Carolina then owned by R4 Tech, which began operations in May
2000. We received a 49% ownership interest in the joint venture in exchange for
our net contribution of approximately $3.4 million. The joint venture is being
accounted for using the equity method of accounting. Effective September 30,
2001, we entered into a sale and leaseback transaction with R4 Tech. We
purchased all of the land, buildings and equipment associated with the propane
bottling and cylinder refurbishing operation for $7.6 million. The purchase
price was used by R4 Tech to repay outstanding advances made by us.
Contemporaneously with the sale, R4 Tech leased back the land, buildings and
equipment from us under the terms of a three-year operating lease agreement. The
sale and leaseback transaction is not expected to have a material impact on our
consolidated results of operations or financial position. During the three
months ended October 31, 2001 and October 31, 2000, we advanced $775,000 and
$1,011,000 respectively, to R4 Tech.
On September 7, 2000, we completed a private placement of 1,716,667
shares of our Series A Convertible Preferred Stock to two institutional
investors under common management and three individuals, including Billy D.
Prim, our Chairman, Chief Executive Officer and President, and Andrew J.
Filipowski, our Vice Chairman, for an aggregate purchase price of approximately
$10.3 million. The Series A Convertible Preferred Stock accrues a cumulative
dividend on the 20th day of December, March, June, and September of each year
based on an annual rate of 5% through September 7, 2003; 12% from September 8,
2003 through September 7, 2004; and 15% thereafter. Effective September 7, 2001,
the annual dividend rate increased to 15% because a registration statement
covering the shares of common stock into which the Series A Convertible
Preferred Stock is convertible was not yet effective. The 15% rate will continue
until the registration statement becomes effective, which we currently expect to
occur in the second quarter of this fiscal year. At our election, the dividend
may be paid in cash, in shares of common stock, or a combination of cash and
shares of common stock. If we elect to pay the dividend in shares of common
stock, the shares will be valued based on a 30-day trailing average ending three
business days prior to the date the shares are authorized to be issued. As of
October 31, 2001, we had accrued dividends on the outstanding shares of Series A
Convertible Preferred Stock of $1,235,000. We currently intend to pay the
accrued dividends in shares of common stock.
Each share of Series A Convertible Preferred Stock is currently
convertible into common stock at the option of the holder. We may convert the
Series A Convertible Preferred Stock into common stock at any time after
September 7, 2002 if the average of the closing prices of our common stock over
a ten trading day period ending shortly before we give notice of conversion
exceeds 160% of the then-existing conversion price for the Series A Convertible
Preferred Stock. Each share of Series A Convertible Preferred Stock is
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initially convertible into one share of common stock. The Series A Convertible
Preferred Stock has a liquidation preference over our common stock.
In June 2001, we amended and extended our existing bank credit
facility (the "Credit Facility"). The amended Credit Facility consists of two
separate facilities --a $38 million revolving line of credit for general
corporate purposes, inclusive of payments made under letters of credit issued
for the benefit of the Company, and a $3.247 million seasonal line for general
corporate purposes. No further borrowings may be made against the seasonal line.
The Credit Facility requires us to meet certain covenants, including minimum net
worth and cash flow requirements. The Credit Facility is collateralized by a
lien on substantially all of our assets. The Credit Facility bears interest at
the prime rate plus 2% per annum. We expect the total borrowings under the
credit facility to exceed $28 million as of December 31, 2001, which will cause
the interest rate to increase to the prime rate plus 3% per annum thereafter.
The Credit Facility matures on December 31, 2002. At October 31, 2001 the
interest rate on both the revolving line of credit and seasonal line was 7.5%.
At October 31, 2001, the balance on the Credit Facility was $38.3 million, and
we were in compliance with all covenants.
On June 15, 2001, we completed a $15 million private placement of
subordinated debt to an institutional investor. The agreement requires us to
meet certain cash flow and other covenants and contains restrictions on capital
expenditures and the payment of cash dividends. The debenture bears interest at
the annual rate of 13%, payable quarterly. The principal balance matures on
August 31, 2006.
We currently project that QuickShip, our wholly owned shipping
services subsidiary, will be dilutive to earnings before interest, taxes,
depreciation, and amortization (EBITDA) by approximately $500,000 in fiscal 2002
and will be further dilutive to earnings as a result of expected depreciation
and amortization expense. For fiscal 2003, we currently project QuickShip to be
accretive to EBITDA. QuickShip offers its service at over 300 retail locations
in 28 states, and we intend to expand the number of locations to include many of
those currently offering Blue Rhino cylinder exchange and other products.
We do not have any material capital commitments outstanding. We
currently anticipate that our total capital expenditures for fiscal 2002,
excluding acquisitions, will be approximately $8.0 million, and will relate
primarily to cylinders, cylinder displays and computer technology. Our capital
expenditure and working capital requirements in the foreseeable future will
change depending on the rate of our expansion, our operating results and any
other adjustments in our operating plan as needed in response to competition,
acquisition opportunities or unexpected events. We believe that our existing
borrowing capacity under the Credit Facility, together with cash provided by
operations, will be sufficient to meet our capital expenditure and working
capital requirements through fiscal 2002. However, there can be no assurance
that we will not seek or require additional capital in the future as a result of
expansion or otherwise, or that such additional capital will be available on
terms that are not dilutive to our stockholders or at all.
SEASONALITY
We have experienced and expect to continue to experience significant
seasonal fluctuations in our revenues and net income (loss). Historically, our
revenues have been highest in our third and fourth quarters, which include the
majority of the grilling season, and lowest in our first and second quarters,
which include the winter months. Our acquisition of Uniflame has resulted in
increased revenues for our first quarter, which includes the months in which
Uniflame historically has shipped the majority of its products to retailers.
Sustained periods of poor weather, particularly in the spring and summer
seasons, can negatively impact our revenues. Accordingly, the results of
operations in any quarter will not necessarily be indicative of the results that
we may achieve for a full fiscal year or any future quarter.
INFLATION
We do not believe that inflation has had a material adverse effect
on our revenues, cost of sales or our results of operations. There can be no
assurance that our business will not be affected by inflation in the future.
PRICE OF PROPANE
During the fiscal year ended July 31, 2001, there were dramatic
increases in fuel costs and propane reached unusually high levels. During the
fourth quarter of fiscal 2001 and continuing through the first quarter of fiscal
2002, propane prices returned to a range more consistent with historical levels.
On March 1, 2001, we initiated a propane price hedging strategy that we believe
will reduce our gross margin risk resulting from fluctuations in the price of
propane. Our strategy is designed to reduce exposure to the fuel cost component
of a significant portion of our total cylinder exchange volume. If propane costs
rise for an extended period and
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our hedging strategy is unsuccessful, our gross margins and results of
operations could be negatively affected due to additional costs that may not be
fully recovered through an increase in our price to our customers.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, Business Combinations, and
No. 142, Goodwill and Other Intangible Assets, effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill (and intangible
assets deemed to have indefinite lives) will no longer be amortized but will be
subject to annual impairment tests in accordance with the Statements. Other
intangible assets will continue to be amortized over their useful lives.
We applied the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of fiscal year 2002. As of
October 31, 2001, we have unamortized intangibles of $32.3 million that will be
subject to the transition provisions of the Statements. We have not yet
determined the impact of adopting these Statements on our earnings and financial
position, including whether we will be required to recognize any transitional
impairment losses as a cumulative effect of a change in accounting principle.
Application of the nonamortization provisions of the Statements is expected to
result in an increase in net income of approximately $2.6 million in fiscal
2002.
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 143, Accounting for Asset
Retirement Obligations. The Statement requires entities to record the fair value
of a liability for an asset retirement obligation in the period in which it is
incurred. The Statement is effective for fiscal years beginning after June 15,
2002. We do not expect the adoption of Statement No. 143 to have a material
impact on our consolidated results of operations or financial position.
In May 2000, the Emerging Issues Task Force ("EITF") issued EITF No.
00-14, Accounting for Certain Sales Incentives, which addresses the recognition,
measurement, and income statement classification for certain sales incentives
including rebates, coupons, and free products or services. In November 2000, the
EITF revised the effective date of EITF No. 00-14 to be December 15, 2001.
Cooperative advertising costs were $293,000 and $197,000 for the three months
ended October 31, 2001 and 2000, respectively. We expense cooperative
advertising costs as selling, general, and administrative expenses. We have not
yet determined the impact of adopting EITF 00-14, but we do not expect the
adoption to have a material impact on our consolidated results of operations or
financial position.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk related to changes in interest rates
on borrowings under our Credit Facility. The Credit Facility bears interest
based on the prime rate and is collateralized by cylinders held under operating
leases with our independent distributors. The operating leases currently yield
1% of the cylinder value monthly (approximately 12% annually) and continue until
either party terminates upon 60 days written notice to the other party. Upon any
significant increase in the prime rate, we would attempt to renegotiate the
operating leases with our independent distributors with the intent of mitigating
our interest rate exposure on the Credit Facility. However, there can be no
assurance that we would be successful in such renegotiations or that we would be
able to mitigate any or all of the interest rate risk. To quantify our exposure
to interest rate risk, a 100 basis point increase in interest rates would have
increased interest expense for the three months ended October 31, 2001 and 2000
by approximately $70,000 and $90,000, respectively. Actual changes in interest
rates may differ materially from the hypothetical assumptions used in computing
this exposure.
We use derivative financial instruments to manage exposure to
fluctuations in interest rates on our Credit Facility. These derivative
financial instruments, which are generally swap agreements, are not entered into
for trading purposes. A swap agreement is a contract to exchange a floating rate
for a fixed rate without the exchange of the underlying notional amount. In
fiscal 2000, we entered into an interest rate swap agreement with a notional
amount of $10 million as a hedge of our variable interest rate debt represented
by the Credit Facility. Under the swap agreement, which expires in July 2003, we
pay a fixed rate of 7.36% and receive a rate equivalent to the one-month LIBOR.
In February 2001, the interest rate on the Credit Facility was changed to a rate
based on the prime rate and is no longer based on the benchmark interest rate of
LIBOR. However, for the three-month period ending October 31, 2001, the interest
rate swap was still an effective cash flow hedge.
We are exposed to commodity price risk related to changes in the
price of propane. If propane prices rise for an extended period, our gross
margins and results of operations could be negatively affected due to additional
costs that may not be fully recovered
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through an increase in our price to our customers. Assuming that propane prices
are not hedged and any increase cannot be recovered through an increase in our
price, a $.01 increase in the price per gallon of propane would reduce the gross
margin in our cylinder exchange segment by approximately .2% or 20 basis points.
Actual changes in margins may differ materially from the hypothetical
assumptions used in computing this exposure. We have restructured our payment
obligations to distributors and entered into a series of monthly option
contracts that are designed to reduce exposure to the propane cost component of
a significant portion of our total cylinder exchange volume.
We invest our cash and cash equivalents in investment grade, highly
liquid investments consisting of money market instruments, bank certificates of
deposit and overnight investments in commercial paper. All of our transactions
are conducted and accounts are denominated in U.S. dollars and as such we do not
currently have exposure to foreign currency risk.
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibit:
10.1 -- Agreement dated September 30, 2001 by and between Blue Rhino
Corporation and R4 Technical Center - North Carolina, LLC.
10.2 -- Bill of Sale dated October 30, 2001, by R4 Technical Center -
North Carolina, LLC and Blue Rhino Corporation.
10.3 -- Master Lease Agreement dated September 30, 2001 between Blue
Rhino Corporation, Landlord, and R4 Technical Center -North
Carolina, LLC, Tenant, for premises located at 1309 Buck Shoals
Road, Yadkin County, North Carolina.
10.4 -- First Amendment to Limited Liability Company Agreement of R4
Technical Center - North Carolina, LLC, dated September 30,
2001, by and among Blue Rhino Corporation, Manchester Tank &
Equipment Co., and Platinum Propane, L.L.C.
10.5 -- Blue Rhino Corporation Amended and Restated Stock Option Plan
for Non-Employee Directors.
10.6 -- Blue Rhino Corporation 1998 Stock Incentive Plan, as amended
August 30, 2001.
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the three
months ended October 31, 2001.
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SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Blue Rhino Corporation
Date: December 17, 2001 By: /s/ Billy D. Prim
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Chairman, President and Chief Executive Officer
Date: December 17, 2001 By: /s/ Mark Castaneda
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Chief Financial Officer
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