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 April 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____to ______
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Commission file number: 0-242847
BLUE RHINO CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 56-1870472
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
104 Cambridge Plaza Drive
Winston-Salem, North Carolina 27104
(Address of principal executive offices)
(336) 659-6900
(Registrant's telephone number, including area code)
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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 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 [_] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of June 30, 1998: 7,630,873 - common shares
BLUE RHINO CORPORATION
INDEX
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PART 1: FINANCIAL INFORMATION
Item 1: Financial Statements (unaudited):
Condensed consolidated balance sheets as of April 30,
1998 and July 31, 1997
Condensed consolidated statements of operations for the
three and nine month periods ended April 30, 1998 and
1997
Condensed consolidated statements of cash flows for
the nine month periods ended April 30, 1998 and 1997
Notes to condensed consolidated financial statements
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II: OTHER INFORMATION
Item 1: Legal Proceedings
Item 2: Changes in Securities
Item 3: Defaults Upon Senior Securities
Item 4: Submission of Matters to a Vote of Security Holders
Item 5: Other Information
Item 6: Exhibits and Reports on Form 8-K
SIGNATURES
PART I. FINANCIAL INFORMATION
- -----------------------------
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BLUE RHINO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended April 30, 1998 and 1997 (Unaudited)
(In thousands, except per share and cylinder transaction data)
Three Months Ended Nine Months Ended
April 30, April 30,
--------------------------- ---------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Net sales $ 5,694 $ 3,000 $ 14,008 $ 7,509
Cost of sales 4,322 2,478 10,693 6,484
--------- --------- --------- ---------
Gross profit 1,372 522 3,315 1,025
Operating expenses (income):
Sales and marketing 563 489 1,590 1,142
General and administrative 906 751 2,614 2,148
Lease expense (income), net 18 (31) 41 (124)
Depreciation and amortization 331 223 846 623
Restructuring/nonrecurring charges 99 672 506 860
--------- --------- --------- ---------
Total operating expenses 1,917 2,104 5,597 4,649
--------- --------- --------- ---------
Loss from operations (545) (1,582) (2,282) (3,624)
Other expenses (income):
Interest expense 566 432 1,496 1,249
Other income, net (44) (43) (147) (122)
--------- --------- --------- ---------
Net loss $ (1,067) $ (1,971) $ (3,631) $ (4,751)
========= ========= ========= =========
Loss available to common stockholders $ (1,250) $ (2,140) $ (4,182) $ (5,259)
========= ========= ========= =========
Basic and diluted loss per common share $ (0.44) $ (1.12) $ (1.71) $ (2.83)
========= ========= ========= =========
Weighted average common shares
used in computing net loss per share 2,813 1,908 2,441 1,858
========= ========= ========= =========
Pro forma basic and diluted loss per common share* $ (0.23) $ (0.54) $ (0.86) $ (1.34)
========= ========= ========= =========
Pro forma weighted average common shares
used in computing net loss per share* 4,618 3,655 4,213 3,548
========= ========= ========= =========
Selected Operating Data:
Retail locations (at period end) 8,000 3,800 8,000 3,800
Cylinder transactions 491 265 1,206 651
*Proforma amounts reflect the recapitalization of the Company immediately prior
to the consummation of the initial public offering of the Company's common stock
in May 1998.
The accompanying notes are an integral part of these financial statements.
BLUE RHINO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
As of April 30, 1998 (Unaudited) and July 31, 1997
(In thousands)
ASSETS April 30, 1998 July 31, 1997
------ --------------- --------------
(Unaudited)
Cash and cash equivalents $ 440 $ 325
Trade accounts receivable, net 4,118 3,110
Inventories 1,354 240
Notes receivable 445 417
Prepaid expenses & other current assets 251 61
--------------- --------------
Total current assets 6,608 4,153
Property and equipment, net 5,461 4,438
Notes receivable 1,504 1,196
Goodwill, net 2,725 104
Other assets 280 83
--------------- --------------
Total assets $ 16,578 $ 9,974
=============== ==============
LIABILITIES, REDEEMABLE PREFERRED
---------------------------------
STOCK AND STOCKHOLDERS' DEFICIT
---------------------------------
Trade accounts payable $ 3,370 $ 2,407
Notes payable to bank 5,013 840
Acquisition notes payable 922 108
Current portion of long term debt and capital lease obligations 236 166
Accrued liabilities 412 736
--------------- --------------
Total current liabilities 9,953 4,257
Long-term debt, less current maturities 19,627 15,142
Capital lease obligations, less current maturities 182 128
--------------- --------------
Total liabilities 29,762 19,527
--------------- --------------
Redeemable Series A Preferred Stock 9,485 8,934
---------------- --------------
Stockholders' deficit:
Common stock 23 23
Additional paid-in capital 0 311
Accumulated deficit (22,692) (18,821)
---------------- --------------
Total stockholders' deficit (22,669) (18,487)
---------------- --------------
Total liabilities, redeemable preferred stock and
stockholders' deficit $ 16,578 $ 9,974
=============== ==============
The accompanying notes are an integral part of these financial statements.
BLUE RHINO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended April 30, 1998 and 1997 (Unaudited)
(In thousands)
Nine months ended
April 30,
-----------------------
1998 1997
-------- --------
Cash flows from operating activities:
Net cash used in operating activities $ (2,824) $ (1,292)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (1,027) (253)
Proceeds from disposals of property and equipment 39 81
Note receivable (635) 0
Business acquisitions (3,050) (90)
Collections on notes receivable 374 120
-------- --------
Net cash used in investing activities (4,299) (142)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 0 1,000
Proceeds from issuance of preferred stock 0 400
Net borrowings under notes payable to bank 4,173 125
Net borrowings under notes payable to stockholders 3,250 0
Payments of long-term debt and capital lease obligations (185) (602)
-------- --------
Net cash provided by financing activities 7,238 923
-------- --------
Net increase (decrease) in cash and cash equivalents 115 (511)
Cash and cash equivalents at beginning of period 325 1,126
-------- --------
Cash and cash equivalents at end of period $ 440 $ 615
======== ========
The accompanying notes are an integral part of these financial statements.
Blue Rhino Corporation
Notes to Condensed Consolidated Financial Statements
April 30, 1998 (Unaudited)
Note 1 - Basis of Presentation
The condensed consolidated financial statements of Blue Rhino Corporation
include the accounts of its wholly owned subsidiaries, Rhino Services, L.L.C., a
Delaware limited liability company formed in March 1997 and CPD Associates,
Inc., a North Carolina corporation formed in March 1998 (together Blue Rhino
Corporation and its subsidiaries are referred to herein as the "Company"). All
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 nine months ended April 30, 1998 are not
necessarily indicative of the results that may be expected for the year ended
July 31, 1998 due to the seasonality of the Company's business.
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, 1997 on file with the Securities and Exchange Commission in
the Company's Registration Statement on Form S-1 (SEC File No. 333-47669)
declared effective on May 18, 1998.
Note 2 - Inventories
Inventories consist of the following (dollars in thousands) at:
April 30, July 31,
1998 1997
--------- --------
(Unaudited)
Cylinders $ 1,213 $ 220
Other supplies 141 20
--------- --------
Total $ 1,354 $ 240
========= ========
Note 3 - Goodwill
Excess costs over fair value of net assets acquired (goodwill) consist of
the following (dollars in thousands) at:
April 30, July 31,
1998 1997
--------- --------
(Unaudited)
Goodwill $ 2,772 $ 124
Accumulated amortization (47) (20)
--------- --------
$ 2,725 $ 104
========= ========
Amortization expense was $27 and $14 for the nine months ended April 30,
1998 and for the
fiscal year ended July 31, 1997, respectively.
Note 4 - Recent Accounting Developments
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 requires public business
enterprises to adopt its provisions for periods beginning after December 15,
1997, and to report certain information about operating segments in complete
sets of financial statements of the enterprise and in condensed financial
statements of interim periods issued to shareholders. This statement does not
require application to interim financial statements in the initial year. The
Company is evaluating the provisions of SFAS No. 131, but has not yet determined
if additional disclosures will be required.
Note 5 - Loss Per Share
The following table sets forth a reconciliation of the numerators and
denominators in computing loss per common share in accordance with SFAS No. 128
(dollars in thousands, except per share data).
Three Months Ended Nine Months Ended
April 30, April 30,
------------------ -----------------
1998 1997 1998 1997
------- ------- ------- -------
Basic and diluted loss per share:
Net loss $(1,067) $(1,971) $(3,631) $(4,751)
Less: Redeemable preferred stock dividend 183 169 551 508
------- ------- ------- -------
Loss available to common stockholders $(1,250) $(2,140) $(4,182) $(5,259)
------- ------- ------- -------
Weighted average common shares 2,813 1,908 2,441 1,858
------- ------- ------- -------
Basic and diluted loss per common share $ (0.44) $ (1.12) $ (1.71) $ (2.83)
======= ======= ======= =======
The weighted average common shares outstanding include the effects of all
shares, stock options and stock warrants where the effect of their inclusion
would be dilutive. In addition, the assumed conversion of preferred shares would
have been anti-dilutive.
Note 6 - Debt
On December 18, 1997, the Company entered into a loan agreement (the "Bank
Credit Facility") which allows for maximum borrowings of $9.0 million including
(i) a $3.0 million revolving line of credit based on 80% of eligible receivables
with a $1.0 million overadvance provision, (ii) $1.0 million capital
expenditures line of credit and (iii) a $4.0 million acquisition line of credit.
These lines of credit mature on November 30, 1998 and bear interest at the prime
rate (8.5% at April 30, 1998) plus 0.5%. The Bank Credit Facility also includes
an unused line fee equal to 0.25 percent of the average unused portion of the
$3.0 million revolving line of credit. As of April 30, 1998, the Company had
$5.0 million outstanding under the Bank Credit Facility. The Company repaid the
entire outstanding balance of $7.0 million in May 1998 with a portion of the
proceeds of the Company's initial public offering of 3,105,000 shares of Common
Stock (the "IPO") which closed on May 22, 1998 and June 2, 1998.
The Bank Credit Facility requires the Company to meet certain covenants,
including minimum net worth, minimum earnings before interest, taxes,
depreciation and amortization and maximum capital
expenditures covenants. The Company was in violation of the minimum earnings
before interest, taxes, depreciation and amortization covenant at April 30, 1998
and has received a waiver from the bank for this violation.
The Bank Credit Facility is jointly and severally guaranteed by a principal
shareholder and an affiliated company up to a maximum amount of $6.0 million
each. Also, the Company has granted a lien on substantially all of the Company's
assets as collateral security for its obligations under the Bank Credit
Facility.
In January 1998, four stockholders collectively loaned the Company $3.25
million (the "Stockholder Loans") which bore interest at 10.5% per annum. In
connection with the Stockholder Loans, the stockholders also received warrants
(the "1998 Warrants") to purchase 81,915 shares (on a post-recapitalization
basis) of the Company's common stock ("Common Stock"). The 1998 Warrants may be
exercised prior to December 31, 2008 at an exercise price of $13.00 per share.
The Stockholder Loans were repaid in full in May 1998 with approximately $3.4
million of the proceeds of the IPO.
Note 7 - Acquisitions
During the first nine months of 1998, the Company completed acquisitions of
assets from regional and local cylinder exchange providers which included
cylinder displays, propane cylinder exchange accounts and locations (the
"Acquisitions"). The Company paid an aggregate purchase price of approximately
$3.8 million made up of approximately $3.1 million in cash and 57,692 shares of
unregistered Common Stock. Each asset purchase agreement entered into in
connection with the Acquisitions includes a purchase price adjustment based on
the number of locations transferred to the Company.
The Acquisitions were accounted for by the purchase method of accounting
and accordingly the purchase prices and direct costs of the Acquisitions have
been allocated to the respective assets acquired based upon their estimated fair
market values at the dates of acquisition. The excess costs over fair value of
net assets acquired in the Acquisitions was approximately $2.8 million, which is
being amortized on a straight-line basis over 30 years.
Through June 30, 1998, the Company has executed eight additional letters of
intent to purchase assets including cylinder displays and retail propane
cylinder exchange accounts and locations for an estimated aggregate purchase
price of approximately $809,000. These acquisitions will be financed with a
portion of the proceeds of the IPO.
Note 8 - Other Transactions
On February 12, 1998, the Company loaned $635,000 to Bison Valve, L.L.C.
("Bison Valve"), an entity formed to market, produce and sell a specialty valve
to the Company's distributors and third parties. The loan is convertible into up
to 65% of the membership units of Bison Valve at the option of the Company. The
loan accrues interest at 9.5% per annual for four (4) years after which the
principal and accrued interest will be amortized over two (2) years.
In February 1998, Caribou Cylinder Exchange, L.L.C. and Javilina Cylinder
Exchange, L.L.C., affiliates through common ownership, began operations as
distributors.
On May 1, 1998, Raven Propane, L.L.C., an affiliate through common
ownership began operations as a distributor.
On March 9, 1998, the Board of Directors increased the authorized shares of
Common Stock from
65,000,000 to 68,000,000 shares.
The Company's Board of Directors, at meetings on November 17, 1997 and
February 24, 1998, approved the following matters all of which were effected
contemporaneously with the IPO:
. All outstanding shares of the Company's Series A Convertible Participating
Preferred Stock ("Old Preferred Stock") were converted on a one for one
basis into Common Stock and Common Stock was issued in satisfaction of the
accrued dividends on the Old Preferred Stock.
. All outstanding warrants to purchase Common Stock, except for the 1998
Warrants, were exercised in a cashless exercise.
. The Company filed its Second Amended and Restated Certificate of
Incorporation which, among other changes, increased the authorized shares
of the capital stock to 120,000,000 comprised of 100,000,000 shares of
Common Stock, par value $0.001 per share, and 20,000,000 shares of "blank
check" preferred stock, with rights and preferences to be determined at the
discretion of the Board of Directors.
. The Company's Common Stock underwent a 1 for 13.22513 reverse stock split.
. The vesting of all outstanding options and restricted stock issued under
the Company's 1994 Stock Incentive Plan was accelerated to the IPO closing
date.
. The Company adopted the 1998 Employee Stock Incentive Plan and reserved
300,000 shares of Common Stock for issuance to the Company's officers,
employees, consultants and agents.
. The Company adopted the Non-Employee Director Stock Option Plan and
reserved 100,000 shares of Common Stock for issuance to the Company's non-
employee directors.
. The Company adopted the Distributor Stock Incentive Plan and reserved
400,000 shares of Common Stock for issuance to the Company's distributors
and their directors, managers, partners, officers, employees, consultants
and agents.
On May 18, 1998, the Securities and Exchange Commission declared effective
the Company's Registration Statement on Form S-1 (File No. 333-47669)(the
"Registration Statement") relating to its initial public offering of up to
3,105,000 shares of Common Stock. The Company closed the sale of 2,700,000
shares of Common Stock at a price of $13.00 per share on May 22, 1998. The
Company closed the sale of an additional 405,000 shares of Common Stock upon the
exercise of the underwriters' overallotment option on June 2, 1998.
The outstanding shares on a pro forma basis included on the statement of
operations include shares issuable upon the cashless exercise of all outstanding
warrants to purchase Common Stock as of April 30, 1998 (except the 1998
Warrants), the conversion of all shares and accrued dividends on the Old
Preferred Stock to Common Stock and the issuance of 57,692 shares of Common
Stock to Bison Propane Bottle Exchange, L.L.C. as partial payment for assets
acquired in one of the Acquisitions, all of which were effected immediately
prior to the consummation of the IPO.
The net proceeds to the Company from the sale of stock in the IPO, after
deducting underwriting discounts and commissions and offering expenses, were
approximately $36.7 million. The Company utilized the net proceeds from the IPO
to repay principal and interest on indebtedness of approximately $29.1 million
including $16.5 million on the Company's 10.5% Senior Discount Notes, $7.0
million outstanding under the Bank Credit Facility, $3.4 million on the
Stockholder Loans and $2.2 million for the
purchase of cylinder displays previously financed under an operating lease
facility.
On May 18, 1998 the Company issued options to purchase 275,310 shares of
its Common Stock to its officers and employees under the 1998 Stock Incentive
Plan. The options vest 20% per year over five years and are exercisable at
$13.00 per share.
On May 18, 1998 the Company issued options to purchase 240,887 shares of
its Common Stock to its distributors under the Distributor Stock Incentive Plan.
The options vest 25% on July 31, 1999 and 25% each July 31st thereafter until
fully vested. The options issued under the Distributor Stock Incentive Plan are
exercisable at $13.00 per share.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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, Rhino Services,
L.L.C. and CPD Associates, Inc., (together Blue Rhino Corporation, Rhino
Services, L.L.C. and CPD Associates, Inc. are referred to herein as the
"Company"), and with the Company's audited consolidated financial statements as
of and for the fiscal year ended July 31, 1997, set forth in the Company's
Registration Statement on Form S-1 (SEC File No. 333-47669) declared effective
on May 18, 1998.
The Company's business is subject to seasonal fluctuations, especially in
colder regions of the United States, which have caused and are expected to
continue to cause, significant fluctuations in its quarterly results of
operations. The Company anticipates that it will derive the majority of its
operating revenues from the spring and summer seasons when consumers are more
likely to grill outdoors, which coincide with the Company's third and fourth
fiscal quarters. Accordingly the results of operations for the three and nine
months ended April 30, 1998 are not necessarily indicative of results that may
be expected for the year ended July 31, 1998 and results of operations in any
quarter will not necessarily be indicative of the results that may be achieved
for a full fiscal year or any future quarter.
The statements contained in this report which are not historical facts are
forward-looking statements that are subject to risks and uncertainties. The
Company's actual results could differ materially from those set forth in or
implied by such forward-looking statements including those risks which are
discussed in the Company's filings with the Securities and Exchange Commission.
Readers should refer to the discussion under "Risk Factors" contained in the
Company's Registration Statement on Form S-1 (SEC File No. 333-47669) concerning
certain factors which could cause the Company's actual results to differ
materially from the results anticipated in the forward-looking statements
contained herein.
Results of Operations
Comparison of the Three Months Ended April 30, 1998 to the Three Months Ended
April 30, 1997
Net sales. Net sales increased 89.8% from $3.0 million for the third
quarter of fiscal 1997 ended April 30, 1997 to approximately $5.7 million for
the third quarter of fiscal 1998 ended April 30, 1998. The increase in net sales
was due primarily to the increase in the number of retail locations placed in
service and the corresponding increase in the number of cylinder transactions
during the third quarter of fiscal 1998. The installed base of retail locations
increased 111% from approximately 3,800 locations at April 30, 1997 to
approximately 8,000 locations at April 30, 1998, which included over 1,800
locations acquired through the Acquisitions. The number of cylinders transacted
increased 85% from approximately 265,000 units in the third quarter of fiscal
1997 to approximately 491,000 units in the third quarter of fiscal 1998.
Gross margin. Gross margin increased from 17.4% in the third quarter of
fiscal 1997 to 24.1% in
the third quarter of fiscal 1998. This increase was primarily due to the
transition from a vertically integrated business model to an independent
distributor business model which allowed the Company to dispose of underutilized
production and delivery assets certain costs of which were previously allocated
to cost of goods sold. The transition to an independent distributor business
model was completed in the fourth quarter of fiscal 1997.
Sales and marketing expenses. Sales and marketing expenses increased 15.1%
from approximately $489,000 in the third quarter of fiscal 1997 to approximately
$563,000 in the third quarter of fiscal 1998 but decreased as a percentage of
net sales from 16.3% in the third quarter of fiscal 1997 to 9.9% in the third
quarter of fiscal 1998. The increase in sales and marketing expense was due
primarily to additional commissions associated with increased sales. However,
the fixed nature of the majority of the compensation expense for the Company's
sales and marketing staff is primarily responsible for sales and marketing
expenses increasing at a slower rate than net sales and led to a decrease in
sales and marketing expenses as a percentage of net sales.
General and administrative expenses. General and administrative expenses
increased 20.9% from approximately $751,000 in the third quarter of fiscal 1997
to approximately $906,000 in the third quarter of fiscal 1998 but decreased as a
percentage of total net sales from 25.0% in the third quarter of fiscal 1997 to
15.9% in the third quarter of fiscal 1998. The increase in general and
administrative expenses was due primarily to the addition of administrative
personnel and infrastructure necessary to support the independent distributor
network. However, the fixed nature of the compensation expense for the Company's
administrative staff and the leveraging of the Company's administrative
infrastructure through the addition of new locations serviced by independent
distributors are primarily responsible for general and administrative expenses
increasing at a slower rate than net sales which led to a decrease in general
and administrative expenses as a percentage of net sales.
Lease expense (income)-net. Gross lease income increased from $82,000 for
the third quarter of fiscal 1997 to $150,000 for the third quarter of fiscal
1998, while gross rent expense for the same periods increased from $51,000 in
fiscal 1997 to $168,000 in fiscal 1998. The increase in lease income and rent
expense was due to the addition of new retail locations resulting in an increase
in the number of cylinder displays under lease. The Company expects rent expense
to drop in future periods as a result of the purchase of cylinder displays which
were previously leased under an operating lease facility.
Depreciation and amortization. Depreciation and amortization increased from
approximately $223,000 in the third quarter of fiscal 1997 to approximately
$331,000 in the third quarter of fiscal 1998. Depreciation expense increased by
$100,000 from $175,000 in the third quarter of fiscal 1997 to $275,000 in the
third quarter of fiscal 1998 principally due to the purchase of additional
cylinder displays and the acquisition of computer technology under capital
leases. Amortization expense increased by $8,000 from $48,000 in the third
quarter of fiscal 1997 to $56,000 in the third quarter of fiscal 1998
principally due to the additional goodwill amortization related to the
Acquisitions.
Nonrecurring charges. Nonrecurring charges decreased from approximately
$672,000 in the third quarter of fiscal 1997 to approximately $99,000 for the
third quarter of fiscal 1998. Nonrecurring charges are associated with the
Company's transition from a vertically integrated business model to an
independent distributor model and consist primarily of the write-down of
facilities and equipment used in the filling, refurbishment and delivery of
propane cylinders under the vertically integrated business model.
Interest expense. Interest expense increased from approximately $432,000 in
the third quarter of fiscal 1997 to approximately $566,000 in the third quarter
of fiscal 1998. The increase in interest expense was principally due to the
compounding of interest on the Company's 10.5% Senior Discount Notes, additional
borrowings under the Bank Credit Facility and the Stockholder Loans.
Other income-net. Other income-net remained relatively unchanged at $43,000
in the third quarter of fiscal 1997 compared to approximately $44,000 in the
third quarter of fiscal 1998. Other income-net consists primarily of interest
income from various notes receivable from distributors and excess cash balances.
Comparison of the Nine Months Ended April 30, 1998 to the Nine Months Ended
April 30, 1997
Net sales. Net sales increased 86.5% from approximately $7.5 million for
the first nine months of fiscal year 1997 to approximately $14.0 million for the
first nine months of fiscal 1998. The increase in net sales was due primarily to
an increase in the number of retail locations placed in service and an increase
in the number of cylinder transactions during the period. The installed base of
retail locations increased 111% from approximately 3,800 locations at April 30,
1997 to approximately 8,000 locations at April 30, 1998, which included over
1,800 locations acquired through the Acquisitions. The number of cylinders
transacted increased 85.3% from approximately $651,000 units for the first nine
months of fiscal 1997 to approximately 1.2 million units for the first nine
months of fiscal 1998.
Gross margin. Gross margin increased from 13.7% for the first nine months
of fiscal 1997 to 23.7% for the first nine months of fiscal 1998. This increase
was primarily due to the transition from a vertically integrated business model
to an independent distributor business model which allowed the Company to
dispose of underutilized production and delivery assets certain costs of which
were previously allocated to cost of goods sold. The transition to an
independent distributor business model was completed in the fourth quarter of
fiscal 1997.
Sales and marketing expenses. Sales and marketing expenses increased 39.2%
from approximately $1.1 million for the first nine months of fiscal 1997 to
approximately $1.6 million for the first nine months of fiscal 1998 and as a
percentage of total net sales decreased from 15.2% for the first nine months of
fiscal 1997 to 11.3% for the first nine months of fiscal 1998. The increase in
sales and marketing expense was due primarily to the increase in sales and in
the coverage of the Company's distribution network in fiscal 1998. However, the
fixed nature of the majority of the compensation expense for the Company's sales
and marketing staff is primarily responsible for sales and marketing expenses
increasing at a slower rate than net sales which led to a decrease in sales and
marketing expenses as a percentage of net sales.
General and administrative expenses. General and administrative expenses
increased 21.6% from approximately $2.1 million for the first nine months of
fiscal 1997 to approximately $2.6 million for the first nine months of fiscal
1998, and decreased as a percentage of total net sales from 28.6% for the first
nine months of fiscal 1997 to 18.7% for the first nine months of fiscal 1998.
The increase in general and administrative expenses was due primarily to the
addition of administrative personnel and infrastructure necessary to support the
independent distributor network. However, the fixed nature of the compensation
expense for the Company's administrative staff and the leveraging of the
Company's administrative infrastructure through the addition of new locations
serviced by independent distributors are primarily responsible for general and
administrative expenses increasing at a slower rate than net sales which led to
a decrease in general and administrative expenses as a percentage of net sales.
Lease expense (income)-net. Gross lease income increased by $204,000 from
$189,000 for the first nine months of fiscal 1997 to $393,000 for the first nine
months of fiscal 1998, while gross rent expense for the same periods increased
by $369,000 from $65,000 in fiscal 1997 to $434,000 in fiscal 1998. The increase
in lease income and rent expense was due primarily to the addition of new retail
locations resulting in an increase in the number of cylinder displays under
lease to, and subleased to distributors by the Company. The Company expects rent
expense to drop in future periods as a result of the purchase of cylinder
displays which were previously leased under an operating lease facility.
Depreciation and amortization. Depreciation and amortization increased from
approximately $623,000 for the first nine months of fiscal 1997 to approximately
$846,000 for the first nine months of fiscal 1998. Depreciation expense
increased by $260,000 from $486,000 in the for the first nine months of fiscal
1997 to $746,000 in the for the first nine months of fiscal 1998 principally due
to the purchase of additional cylinder displays and the acquisition of computer
technology under capital leases. Amortization expense decreased by $37,000 from
$137,000 in the first nine months of fiscal 1997 to $100,000 in the first nine
months of fiscal 1998 principally due to a decrease in deferred financing costs
being amortized in fiscal 1998.
Nonrecurring charges. Nonrecurring charges are associated with the
transition to the independent distributor model and decreased from approximately
$860,000 for the first nine months of fiscal 1997 to approximately $506,000 for
the first nine months of fiscal 1998.
Interest expense. Interest expense increased from approximately $1.2
million for the first nine months of fiscal 1997 to approximately $1.5 million
for the first nine months of fiscal 1998. The increase in interest expense was
principally due to the compounding of interest on the Company's 10.5% Senior
Discount Notes, additional borrowings under the Bank Credit Facility and the
Stockholder Loans.
Other income-net. Other income-net increased from approximately $122,000
for the first nine months of fiscal 1997 to approximately $147,000 for the first
nine months of fiscal 1998.
Liquidity and Capital Resources
The Company's primary sources of funds have been the issuance of stock and
the incurrence of debt. The Company had a negative working capital of
approximately $3.3 million as of April 30, 1998 which is primarily the result of
short term borrowings on the Bank Credit Facility and Stockholder Loans incurred
to fund the Acquisitions.
Net cash used in operations was approximately $2.8 million in the first
nine months of fiscal 1998 and approximately $1.5 million in the first nine
months of fiscal 1997. For all periods net cash used in operations resulted
primarily from net losses from operations offset by noncash charges of accrued
interest, depreciation and amortization.
Net cash used in investing activities was approximately $4.3 million in the
first nine months of fiscal 1998 and approximately $142,000 in the first nine
months of fiscal 1997. The primary components of cash used in investing
activities in both periods included acquisitions and investments in property and
equipment and in fiscal 1998 included a $635,000 note receivable from Bison
Valve, L.L.C. offset partially by collections on notes receivable and proceeds
from the sale of property and equipment.
Net cash provided by financing activities was approximately $7.2 million
for the first nine months of fiscal 1998 and approximately $923,000 for the
first nine months of fiscal 1997. For the first nine months of fiscal 1998, cash
provided by financing activities included proceeds of $3.25 million from the
Stockholder Loans and borrowings under the Bank Credit Facility of $4.2 million.
For the first nine months of fiscal 1997, cash provided by financing activities
resulted primarily from the issuance of stock for $1.4 million. In both periods,
cash provided by financing activities was offset, in part by payments on various
notes payable and capital lease obligations.
In connection with the IPO, the Company issued a total of 3,105,000 shares
of common stock and received proceeds, net of underwriters discounts and
commissions and other offering expenses, of approximately $36.7 million. The
Company utilized the net proceeds from the IPO to repay $29.1 million of
principal and interest on indebtedness including $16.5 million on the Company's
10.5% Senior Discount Notes, $7.0 million outstanding under the Bank Credit
Facility, $3.4 million on the Stockholder Loans and
$2.2 million for the purchase of cylinder displays previously financed under an
operating lease facility. The remaining net proceeds of approximately $7.6
million will be used for general corporate purposes, including working capital
and future acquisitions.
In December 1997, the Company entered into a Loan Agreement with
NationsBank, N.A. (the "Bank Credit Facility") which allows for maximum
borrowing of $9.0 million, including (i) a $3.0 million revolving line of credit
with a $1.0 million overadvance provision, (ii) a $1.0 million capital
expenditure line of credit and (iii) a $4.0 million acquisition line of credit.
The amounts outstanding under the Bank Credit Facility are due on November 30,
1998. The Bank Credit Facility is collateralized by a lien on substantially all
of the assets of the Company. The Bank Credit Facility requires the Company to
meet certain covenants, including minimum current, net worth and cash flow
ratios and restricts the level of capital expenditures. The Company was not in
compliance with these covenants as of April 30, 1998, however the Company has
obtained a waiver and subsequently paid off the balance of the indebtedness
under the Bank Credit Facility with a portion of the proceeds of the IPO. Billy
D. Prim and American Oil and Gas, Inc., a stockholder of the Company controlled
by Mr. Prim, have jointly and severally guaranteed this facility up to $6.0
million. The loans under the Bank Credit Facility bear interest at the prime
rate plus 0.5% per annum.
In January 1998, four stockholders collectively loaned the Company $3.25
million (the "Stockholder Loans") which bore interest at 10.5% per annum. In
connection with the Stockholder Loans, the stockholders also received warrants
(the "1998 Warrants") to purchase 81,915 shares (on a post recapitalization
basis) of the Company's common stock ("Common Stock"). The 1998 Warrants may be
exercised prior to December 31, 2008 at an exercise price of $13.00 per share.
The Stockholder Loans were repaid in full in May 1998 with approximately $3.4
million of the proceeds of the IPO.
The Company anticipates that the total capital expenditures excluding
acquisitions for 1998 will be approximately $2.0 million, and will relate
primarily to cylinder displays, computer hardware and software development. The
Company's capital expenditure and working capital requirements in the
foreseeable future will change depending on the rate of the Company's expansion,
the Company's operating results and any other adjustments in its operating plan
as needed in response to competition, acquisition opportunities or unexpected
events. The Company believes that the existing borrowing capacity under lines of
credit, together with the remaining proceeds from the IPO and cash provided by
operations, will be sufficient to meet the Company's working capital
requirements through fiscal 1999. However, there can be no assurance that the
Company will not seek or require additional capital in the future as a result of
future acquisitions, expansion or otherwise.
Inflation
The Company does not believe that inflation has had a material adverse
effect on net sales or the results of operations. However, there can be no
assurance that the Company's business will not be affected by inflation in the
future.
Impact of New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
("Statement 131"). Statement 131 requires public business enterprises to adopt
its provisions for periods beginning after December 15, 1997, and to report
certain information about operating segments in complete sets of financial
statements of the enterprise and in condensed financial statements of interim
periods to shareholders. The Company is evaluating the provisions of Statement
131, but has not yet determined if additional disclosures will be required.
Year 2000 Compliance
Certain of the Company's MIS use two digit data fields which recognize
dates using the assumption that the first two digits are "19" (i.e., the number
97 is recognized as the year 1997). Therefore, the Company's date critical
functions relating to the year 2000 and beyond, such as sales, distribution,
inventory control and financial systems, may be adversely affected unless
changes are made to these computer systems. The Company expects that upgrades to
its MIS with respect to the year 2000 problem will require expenditures of
approximately $35,000. However, no assurance can be given that these issues can
be resolved in a cost-effective or timely manner or that the Company will not
incur significantly greater expense in resolving these issues.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not presently involved in any material litigation nor, to
their knowledge, is any material litigation threatened against the Company or
its subsidiaries, other than routine litigation arising in the ordinary course
of business and which is expected to be covered by insurance.
Item 2. Changes in Securities and Use of Proceeds
The Company's Registration Statement (the "Registration Statement") on
Form S-1 (File No. 333-47669) relating to the IPO was declared effective by the
Securities and Exchange Commission on May 18, 1998. The offering by the Company
of 3,105,000 shares of Common Stock (the "Shares") registered under the
Registration Statement commenced on May 19, 1998 and the sale of the Shares
closed on May 22, 1998 and June 2, 1998. All of the Shares registered were sold
in the IPO at an aggregate price of $40,365,000 (before deducting underwriting
discounts and commissions and offering expenses). The managing underwriters of
the IPO were Hambrecht & Quist, LLC. After deducting total expenses comprising
of $2,825,550 in underwriting discounts and commissions and $844,000 in offering
expenses incurred through May 31, 1998, the Company received net proceeds from
the IPO of $36,695,450. The Company paid $363,669.25 to Pedersen & Houpt, P.C.
for legal services rendered in connection with the IPO through May 22, 1998.
John Muehlstein, a director of the Company, is a partner in Pedersen & Houpt,
P.C. No offering expenses or underwriting discounts and commissions were paid to
any other directors, officers or their associates, or to any affiliate of the
Company or any person(s) owning 10% or more of the Company's Common Stock.
The Company used the net proceeds from the IPO to repay $29.1 million of
principal and interest on indebtedness including $16.5 million on the Company's
10.5% Senior Discount Notes, $7.0 million outstanding under the Bank Credit
Facility, $3.4 million on the Stockholder Loans and $2.2 million related to the
purchase of cylinder displays previously financed under an operating lease
facility. The remaining net proceeds of approximately $7.6 million will be used
for general corporate purposes, including working capital and future
acquisitions.
Item 3. Defaults Upon Senior Securities: None
Item 4. Submission of Matters to a Vote of Security Holders:
On April 15, 1998, the Board of Directors submitted the following matters
for the written consent of the holders of the Company's then outstanding Common
Stock, Series A Convertible Participating Preferred Stock ("Old Preferred
Stock") and 10.5% Senior Discount Notes:
A. The sale and issuance of Common Stock in the IPO equal to up to 45% of the
issued and outstanding of the Common Stock of the Company after the IPO
based on a pre-IPO valuation of the Company equal to or in excess of
$50,000,000.
B. The acceleration of vesting of all outstanding options and restricted stock
under the 1994 Stock Incentive Plan and the maintenance of the 1994 Stock
Incentive Plan so long as any options issued thereunder remain outstanding
and exercisable.
C. The adoption of the 1998 Stock Incentive Plan and reservation of
approximately 3.75% of the Common Stock on a fully diluted, post-IPO, post-
recapitalization basis for the grant of options
thereunder and the adoption of the Non-employee Director Stock Option Plan
and reservation of approximately 1.25% of the Common Stock on a fully
diluted, post-IPO, post-recapitalization basis for the grant of options
thereunder.
D. The repricing of the warrants issued in connection with the Stockholders'
Loans at the price per share of the Common Stock sold in the IPO.
E. The filing of a Second Amended and Restated Certificate of Incorporation of
the Company immediately prior to the closing of the IPO which includes a
capitalization of 120,000,000 shares made up of 100,000,000 shares of
Common Stock and 20,000,000 shares of blank check preferred stock.
F. The ratification of the filing of an Amendment to the Amended and
Restated Certificate of Incorporation of the Company on March 9, 1998 which
amendment increased the number of authorized shares of Common Stock from
65,000,000 shares to 68,000,000 shares.
G. The ratification of the corrective issuance of 216,115 shares of Common
Stock pursuant to a consulting agreement with a former consultant of the
Company.
The Company's Amended and Restated Certificate of Incorporation allowed
written consent of stockholders in lieu of a meeting. Pursuant to the Amended
and Restated Certificate of Incorporation, Stockholder's Agreement and Unit
Purchase Agreement (Each of which has been either superseded by the Company's
Second Amended and Restated Articles of Incorporation or terminated), the
following approval levels were necessary to consent to the aforementioned
proposals:
Common Stock: Consent of stockholders entitled to vote a majority of the
outstanding shares. As of April 15, 1998, 23,526,456 shares of
Common Stock were outstanding.
Old Preferred Stock: Consent of stockholders entitled to vote in excess of 2/3
of the outstanding shares. As of April 15, 1998,
20,796,174 shares of Old Preferred Stock were outstanding.
10.5% Senior Discount Notes: Consent of noteholders holding notes representing
a majority of the outstanding principal balance on
the 10.5% Senior Discount Notes. As of April 15,
1998, the principal balance of all outstanding
10.5% Senior Discount Notes was $12,575,000.
Following is a tabulation of the consents received by class for the proposals of
the Board of Directors on April 15, 1998:
A. The sale and issuance of up to 45% of the Common Stock in the IPO.
For Against/Withheld
Common Stock 22,612,641 913,815
Old Preferred Stock 20,048,926 747,248
10.5% Senior Discount Notes $10,259,161.98 $2,315,838.02
B. The acceleration of vesting of all outstanding options and restricted stock
under the 1994 Stock Incentive Plan.
For Against/Withheld
Common Stock 22,612,641 913,815
Old Preferred Stock 20,048,926 747,248
10.5% Senior Discount Notes $10,259,161.98 $2,315,838.02
C. The adoption and reservation of shares for issuance under the 1998 Stock
Incentive Plan and the Non-employee Director Stock Option Plan.
For Against/Withheld
Common Stock 22,612,641 913,815
Old Preferred Stock 20,048,926 747,248
10.5% Senior Discount Notes $10,259,161.98 $2,315,838.02
D. The repricing of the warrants issued in connection with the Stockholders'
Loans.
For Against/Withheld
Common Stock 22,612,641 913,815
Old Preferred Stock 20,048,926 747,248
10.5% Senior Discount Notes $10,259,161.98 $2,315,838.02
E. The filing of a Second Amended and Restated Certificate of Incorporation.
For Against/Withheld
Common Stock 22,612,641 913,815
Old Preferred Stock 20,048,926 747,248
10.5% Senior Discount Notes $10,259,161.98 $2,315,838.02
F. The ratification of the filing of the Amendment to the Amended and Restated
Certificate of Incorporation of the Company.
For Against/Withheld
Common Stock 22,612,641 913,815
Old Preferred Stock 20,048,926 747,248
10.5% Senior Discount Notes $10,259,161.98 $2,315,838.02
G. The ratification of the issuance of 216,115 shares of Common Stock.
For Against/Withheld
Common Stock 22,612,641 913,815
Old Preferred Stock 20,048,926 747,248
10.5% Senior Discount Notes $10,259,161.98 $2,315,838.02
Item 5. Other Information: None
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
3.1(a) Second Amended and Restated Certificate of Incorporation of the
Company.
27.2 Financial Data Schedule.
(b) The Company has filed no reports on Form 8-K during the reporting
period.
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: July 2, 1998 By: /s/ Billy D. Prim
--------------------------------------
Billy D. Prim, Chairman, President and
Chief Executive Officer
Date: July 2, 1998 By: /s/ Mark Castaneda
----------------------------------------
Mark Castaneda, Secretary and Chief
Financial Officer