UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 10-Q/A-1
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1998
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 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)
____________________________________________________________________________
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 [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 February 8, 1999: 7,645,742 -- 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 October 31, 1998 and
July 31, 1998
Condensed consolidated statements of operations for the three
months ended October 31, 1998 and 1997
Condensed consolidated statements of cash flows for the three
months ended October 31, 1998 and 1997
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 1: Legal Proceedings
Item 2: Changes in Securities and Use of Proceeds
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
Blue Rhino Corporation
Condensed Consolidated Balance Sheets
As of October 31, 1998 and July 31, 1998,
(In thousands)
------------
October 31, July 31,
1998 1998
----------- --------
(Unaudited)
ASSETS
------
Cash and cash equivalents $ 4,122 $ 5,908
Trade accounts receivable, net 5,349 7,901
Cylinder inventories -- 2,377
Notes receivable 254 540
Prepaid expenses & other current assets 1,576 487
-------- --------
Total current assets 11,301 17,213
Cylinders held under operating leases 7,338 --
Property & equipment, net 9,740 8,505
Notes receivable 207 789
Intangibles, net 6,605 3,532
Other assets 186 431
-------- --------
Total assets $ 35,377 $ 30,470
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Trade accounts payable $ 2,555 $ 4,421
Acquisition notes payable 476 212
Current portion of long-term debt and capital lease obligations 329 286
Accrued liabilities 414 475
-------- --------
Total current liabilities 3,774 5,394
Notes payable to Bank 6,500 --
Long-term debt, less current maturities 86 104
Capital lease obligations, less current maturities 197 156
-------- --------
Total liabilities 10,557 5,654
-------- --------
Stockholders' equity:
Common stock 8 8
Additional paid-in capital 46,320 46,320
Accumulated deficit (21,508) (21,512)
-------- --------
Total stockholders' equity 24,820 24,816
-------- --------
Total liabilities and stockholders' equity $ 35,377 $ 30,470
======== ========
See accompanying notes to condensed consolidated financial statements.
Blue Rhino Corporation
Condensed Consolidated Statements of Operations
For the Three Months Ended October 31, 1998 and 1997
(In thousands)
Three Months Ended
October 31,
------------------
1998 1997
---- ----
(Unaudited)
Net sales $9,222 $ 4,140
Cost of sales 6,934 3,155
------ -------
Gross profit 2,288 985
------ -------
Operating expenses (income):
Sales and marketing 669 564
General and administrative 1,104 844
Lease income, net (212) 8
Depreciation and amortization 524 245
Nonrecurring charges - 281
------ -------
Total operating expenses, net 2,085 1,942
------ -------
Income (loss) from operations 203 (957)
Other expenses (income):
Interest expense 32 434
Loss on investee 311 -
Other income, net (70) (51)
------ -------
Loss before taxes $ (70) $(1,340)
====== =======
Income taxes - -
------ -------
Net loss $ (70) $(1,340)
====== =======
Loss available to common
stockholders $ (70) $(1,447)
====== =======
Loss per common share:
Basic and diluted $(0.01) $ (0.81)
====== =======
Weighted average common shares
used in computing loss per
common share:
Basic and diluted 7,631 1,779
====== =======
See accompanying notes to condensed consolidated financial statements
Blue Rhino Corporation
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended October 31, 1998 and 1997
(In thousands)
-----------
Three Months Ended
October 31,
-------------------
1998 1997
------- -------
(Unaudited)
Cash flows from operating activities:
Net loss $ (70) $(1,340)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 524 245
Loss on disposal of property and equipment - 240
Loss on investee 311 -
Accreted interest on senior discount notes - 390
Compensation expense related to stock option plan 74 -
Changes in operating assets and liabilities, net
of business acquisitions:
Accounts receivable 2,552 1,021
Cylinder inventories - -
Other current assets (1,201) 39
Accounts payable (1,866) (670)
Other accrued liabilities (62) (384)
------- -------
Net cash provided by (used in) operating activities 262 (459)
------- -------
Cash flows from investing activities:
Purchases of property and equipment (1,099) (151)
Proceeds from disposals of property and equipment - 3
Purchases of cylinders (3,654) -
Business acquisitions (3,614) (40)
Collections on notes receivable 104 116
------- -------
Net cash used in investing activities (8,263) (72)
------- -------
Cash flows from financing activities:
Payments on notes payable to bank (3,433) -
Proceeds from notes payable to bank 9,933 566
Payments on acquisition notes payable (175) -
Payments on long-term debt and capital lease obligations (110) (47)
------- -------
Net cash provided by (used in) financing activities 6,215 519
------- -------
Net decrease in cash and cash equivalents (1,786) (12)
Cash and cash equivalents at beginning of period 5,908 325
------- -------
Cash and cash equivalents at end of period $ 4,122 $ 313
======= =======
See accompanying notes to condensed consolidated financial statements.
Blue Rhino Corporation
Notes to Condensed Consolidated Financial Statements
October 31, 1998
Note 1 -- Basis of Presentation
The condensed consolidated financial statements of Blue Rhino Corporation
(the "Company") include the accounts of its wholly owned subsidiaries, Rhino
Services, L.L.C., formed in March 1997 and CPD Associates, Inc., formed in March
1998 and its affiliate, USA Leasing, L.L.C. ("USA Leasing") formed in October
1998. All intercompany transactions and balances have been eliminated in
consolidation. USA Leasing is owned by four individuals affiliated with the
Company as officers, directors and/or stockholders. Under the terms of USA
Leasing's credit facility each of the owners of USA Leasing provided a
guarantee for 5% of the total amount outstanding under the credit facility with
the remaining 80% being guaranteed by the Company.
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 months ended October 31, 1998 are not
necessarily indicative of the results that may be expected for the year ending
July 31, 1999.
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, 1998.
Note 2 -- Cylinder Inventories
Cylinder inventories were approximately $0 and $2.4 million as of October
31, 1998 and July 31, 1998, respectively. Inventory is valued at the lower of
cost or market.
Note 3 -- Intangibles, net
During the first quarter of fiscal 1999, the Company completed five
acquisitions of assets including cylinders, cylinder displays and other
equipment and the rights to sellers' retail propane cylinder exchange accounts
and locations for an aggregate purchase price of approximately $4.0 million. The
Company paid the aggregate purchase price with approximately $3.6 million in
cash from the proceeds of its initial public offering and approximately $439,000
in seller financing. These acquisitions have been accounted for under the
purchase method and, accordingly, the operating results from these acquisitions
have been included in the Company's consolidated financial statements since the
dates of the acquisitions.
Intangibles consist of the following at:
October 31, July 31,
1998 1998
----------- --------
(dollars in thousands)
(Unaudited)
Goodwill $6,550 $3,518
Noncompete agreements 199 102
Accumulated amortization (144) (88)
------ ------
$6,605 $3,532
====== ======
Amortization expense was $56,000 and $68,000 for the three months ended
October 31, 1998 and for the fiscal year ended July 31, 1998, respectively.
Note 4 -- Income Taxes
No provision for income taxes was recorded for the three months ended
October 31, 1998 due to the reversal of deferred tax assets for which the
benefit was fully reserved in prior years.
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 Statement of
Financial Accounting Standards No. 128.
Three Months Ended
October 31,
------------------
1998 1997
------ -------
(dollars in thousands,
except per share data)
(unaudited)
Basic and diluted loss per common share:
Net loss $ (70) $(1,340)
Less: Redeemable preferred stock dividend - 107
------ -------
Loss available to common stockholders $ (70) $(1,447)
====== =======
Weighted average common shares used in computing the
basic and diluted loss per common share:
Basic and diluted 7,631 1,779
====== =======
Basic and diluted loss per common share $(0.01) $ (0.81)
====== =======
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. For the period ended October 31, 1997, the assumed conversion
of preferred shares would have been anti-dilutive.
Note 6 -- Other Matters
On October 30, 1998, the Company sold approximately $6.5 million of
cylinder inventories to USA Leasing at book value which was funded from
borrowings under USA Leasing's credit facility with NationsBank, N.A.
("NationsBank"). Under the terms of this credit facility, each of the owners of
USA Leasing provided a guarantee for 5% of the total amount outstanding under
the credit facility with the remaining 80% being guaranteed by the Company. As
of October 31, 1998, USA Leasing's 60 day credit facility of $6.5 million bore
interest at prime rate plus 1.0% and was subsequently converted to a two year
credit facility on December 31, 1998 to borrow up to $13.0 million which bears
interest at LIBOR plus 2.25%. The credit facility is collateralized by a blanket
lien on all of the assets of USA Leasing (primarily cylinders held under
operating lease agreements with a carrying value of approximately $6.5 million
as of October 31, 1998). In addition, the Company has received a subordinate
security interest in all of USA Leasing's assets as consideration for the
Company's guarantee. Approximately $1.0 million of cylinders owned by the
Company at October 31, 1998 were sold to USA Leasing in December 1998 at book
value. In addition, during November and December 1998, the Company acquired and
sold approximately $3.4 million of cylinders to USA Leasing at no gain or loss.
USA Leasing has entered into operating lease agreements with the Company's
independent distributors to lease the cylinders at 1% of the initial cylinder
value monthly.
During the three months ended October 31, 1998, the Company recognized
under the equity method of accounting, a loss of $311,000 representing the
remaining balance of the Company's loan to Bison Valve, L.L.C. ("Bison Valve").
This charge reflects the Company's funding of certain losses incurred by this
entity primarily related to researching, developing, marketing and producing
certain propane products. In December 1998, the Company signed a letter of
intent to purchase certain assets of Bison Valve related to its overfill
prevention device (primarily patent rights and manufacturing equipment) for $1.1
million in common stock and warrants to purchase 100,000 shares of common stock
of the Company at the market price as defined in the agreement. These assets,
once acquired, will be amortized over their respective useful lives. The
revisions discussed in this Note 6 resulted in a decrease in the results of
operations for the three months ended October 31, 1998 of $492,000 ($0.06 per
common share).
Note 7 -- Subsequent Events
(Unaudited)
In December 1998, the Company entered into a $12.0 million credit facility,
which includes a $7.0 million revolving line of credit and a $5.0 million
acquisition facility (the "New Bank Credit Facility"). The New Bank Credit
Facility replaced the $4.0 million bank credit facility previously extended to
the Company and is collateralized by a lien on substantially all of the assets
of the Company. Additionally, the New Bank Credit Facility requires the Company
to meet certain covenants, including minimum net worth and cash flow. The loans
under the New Bank Credit Facility bear interest at a maximum rate of LIBOR plus
2.25%.
The Company consummated three acquisitions, for an aggregate purchase price
of approximately $2.2 million for assets including cylinder displays and
cylinder exchange accounts and locations. These acquisitions were funded with
cash provided by operations and the remaining proceeds of the Company's initial
public offering.
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., and with our audited consolidated financial
statements as of and for the fiscal year ended July 31, 1998, on file with the
Securities and Exchange Commission. Beginning in the quarter ended October 31,
1998, we have included the financial information of USA Leasing, L.L.C. ("USA
Leasing"), an affiliated company which offers cylinder financing to our
distributors, in our financial statements on a consolidated basis. The results
of operations for the three months ended October 31, 1998 are not necessarily
indicative of results that may be expected for the year ending July 31, 1999, in
part due to the seasonality of our business. The terms "we," "our," "us" and
"the Company" refer to Blue Rhino Corporation, its wholly owned subsidiaries and
USA Leasing.
Results of Operations
Comparison of the Three Months Ended October 31, 1998 as Compared to the Three
Months Ended October 31, 1997
Net sales. Net sales increased 122.8% from approximately $4.1 million for
the first quarter of fiscal 1998 to approximately $9.2 million for the first
quarter of fiscal 1999. The increase in net sales was due primarily to the
increase in the number of retail locations placed in service and increased sales
volume at existing locations, with a corresponding increase in cylinder
transactions during the period. The installed base of retail locations increased
130% from 5,228 locations at October 31, 1997 to approximately 12,000 locations
at October 31, 1998. The number of cylinder transactions increased 88% from
approximately 375,000 units in the first quarter of fiscal 1998 to approximately
705,000 units in the first quarter of fiscal 1999. Net sales during the first
quarter of fiscal 1999 did not include the $6.5 million in proceeds from our
sale of cylinder inventories to USA Leasing, an entity owned by certain of our
officers, directors and stockholders. See "--Liquidity and Capital Resources."
Under our business model, the distributors, not Blue Rhino, invest in and own
the majority of the capital assets required to operate a cylinder exchange
business. In anticipation of the sale of cylinders to USA Leasing, or another
entity which would lease the cylinders to our distributors, we acquired the
cylinders primarily from distributors and, to a lesser extent, through our
acquisition of competing cylinder exchange providers. The sale of cylinders to
USA Leasing resulted in an increase to cash and notes payable and the transfer
of cylinders to long-term assets held under lease.
Gross margin. Gross margin increased from 23.8% in the first quarter of
fiscal 1998 to 24.8% in the first quarter of fiscal 1999. This improvement was
primarily due to a price increase on all cylinder transactions which became
effective in April 1998 and to a lesser extent due to a shift in sales to
accounts with higher margins. A change in the transaction mix of exchanges,
upgrades and sales also had a positive impact on gross margin. Our gross margin
for the first quarter of fiscal 1999 did not include any effect from our
purchase of cylinder inventories from distributors and competing cylinder
exchange providers or the sale of cylinder inventories to USA Leasing. Our net
sales consisted solely of revenues from cylinder transactions and our cost of
sales consisted primarily of the per transaction payments we made to our
distributors for servicing our accounts and to a lesser extent, non-cash charges
associated with options under our Distributor Option Plan.
Sales and marketing expenses. Sales and marketing expenses increased 18.6%
from approximately $564,000 in the first quarter of fiscal 1998 to approximately
$669,000 in the first quarter of fiscal 1999, but decreased as a percentage of
net sales from approximately 13.6% in the first quarter of fiscal 1998 to
approximately 7.3% in the first quarter of fiscal 1999. The increase in sales
and marketing expenses was due primarily to approximately $130,000 of additional
compensation and travel related costs for additional internal sales persons
offset by approximately $30,000 in reduced commissions to external sales
representatives. This increase in our internal sales force converted a
portion of our variable sales and marketing expenses to fixed costs. The
decrease in sales and marketing expenses as a percentage of net sales was due
primarily to the fact that a significant portion of the compensation of our
sales and marketing staff is fixed and, as a result, sales and marketing
expenses increased at a slower rate than net sales.
General and administrative expenses. General and administrative expenses
increased 30.8% from approximately $844,000 in the first quarter of fiscal 1998
to approximately $1.1 million in the first quarter of fiscal 1999, but decreased
as a percentage of net sales from 20.4% in the first quarter of fiscal 1998 to
12.0% in the first quarter of fiscal 1999. The increase in general and
administrative expenses was due primarily to additional compensation costs,
incremental costs associated with being a public company, including investor
relations and other professional fees, and, to a lesser extent, other variable
operating costs. The decrease in general and administrative expenses as a
percentage of net sales was due primarily to the fact that a significant portion
of our general and administrative expenses are fixed and, as a result, general
and administrative expenses increased at a slower rate than net sales.
Lease income, net. Gross lease income increased from approximately $116,000
for the first quarter of fiscal 1998 to approximately $212,000, for the first
quarter of fiscal 1999, while gross rent expense for the same periods decreased
from approximately $124,000 to $0. The increase in lease income was due to the
addition of new retail locations resulting in an increase in the number of
cylinder displays leased to our distributors. The decrease in rent expense was a
result of our purchase of cylinder displays that we previously leased under an
operating lease facility.
Depreciation and amortization. Depreciation and amortization increased from
approximately $245,000 in the first quarter of fiscal 1998 to approximately
$524,000 in the first quarter of fiscal 1999. Depreciation expense increased by
approximately $206,000 from approximately $225,000 in the first quarter of
fiscal 1998 to approximately $431,000 in the first quarter of fiscal 1999
primarily due to the increase in the number of cylinder displays. This increase
was due to our purchase of cylinder displays which we previously leased under an
operating lease facility and our ongoing purchase of additional cylinder
displays to support growth in our installed base of retail locations. Our
acquisition of computer technology under capital leases also impacted
depreciation expense to a lesser extent. Amortization expense increased by
approximately $73,000 from approximately $20,000 in the first quarter of fiscal
1998 to approximately $93,000 in the first quarter of fiscal 1999 primarily due
to the increased amortization of intangibles associated with a number of
acquisitions.
Nonrecurring charges. We had no nonrecurring charges for the first quarter
of fiscal 1999 and do not expect to incur any additional expenses related to our
transition to an independent distributor business model from a vertically
integrated business model. In the first quarter of fiscal 1998, nonrecurring
charges were approximately $281,000, consisting primarily of the write-down of
facilities and equipment purchased to support the vertically integrated business
model.
Interest expense. Interest expense decreased from approximately $434,000 in
the first quarter of fiscal 1998 to approximately $32,000 in the first quarter
of fiscal 1999. The decrease in interest expense resulted from our repayment of
substantially all of our outstanding indebtedness in May 1998 with
proceeds from our initial public offering. The interest expense in the first
quarter of fiscal 1999 was a result of capital lease obligations incurred
primarily to acquire computer technology.
Loss on Investee. Loss on investee was $311,000 for the first quarter of
fiscal 1999, which reflects the application of the equity method of accounting
to our convertible loan to Bison Valve, L.L.C. ("Bison Valve"). A loss was
recorded because Bison Valve used the proceeds of our convertible loan to fund
losses incurred primarily in researching developing, marketing and producing an
overfill prevention device and other propane related products. As of October 31,
1998 we have recognized charges for the entire principal balance of our
convertible loan. We have signed a letter of intent to acquire all intellectual
property and other assets of Bison Valve related to its overfill prevention
device. The purchase price for these assets includes $1.1 million of common
stock, warrants to purchase 100,000 shares of common stock and cancellation of
our $635,000 convertible loan to Bison Valve. Substantially all of the $1.1
million will be accounted for as a patent on our books and amortized over the
remaining life of the patent. We did not incur any loss on investee in the first
quarter of fiscal 1998.
Other income, net. Other income, net increased from approximately $51,000
in the first quarter of fiscal 1998 to approximately $70,000 in the first
quarter of fiscal 1999. The increase was primarily due to increased interest
income from excess cash balances and various notes receivable.
Liquidity and Capital Resources
Our primary sources of funds have been the issuance of stock,
most recently through our initial public offering in May 1998, and the
incurrence of debt. We had working capital of approximately $7.5 million as of
October 31, 1998, which is primarily the result of available proceeds from our
initial public offering and cash provided by operations.
Net cash provided by operations was approximately $262,000 for the first
quarter of fiscal 1999, while net cash used in operations for the first quarter
of fiscal 1998 was approximately $459,000. Cash provided by operations for both
periods resulted primarily from the decrease in accounts receivable due to the
seasonal nature of our business. Cash used in operations during the first
quarter of fiscal 1999 included approximately $522,000 of advances on certain
products and services and approximately $420,000 of equipment acquired through
acquisitions and held for resale. Cash used in operations during the first
quarter of fiscal 1998 resulted primarily from a net loss. In addition, cash
used in operations for both periods resulted from the decreases in accounts
payable due to the seasonal nature of our business.
Net cash used in investing activities was approximately $8.3 million in the
first quarter of fiscal 1999 and approximately $72,000 for the first quarter of
fiscal 1998. The primary components of cash used in investing activities in both
periods included acquisitions of cylinders from distributors, acquisitions of
cylinder exchange accounts and related assets as well as investments in property
and equipment including cylinder displays and computer technology. The primary
components of cash provided by investing activities included collections on
notes receivable.
Net cash provided by financing activities was approximately $6.2 million
for the first quarter of fiscal 1999 and approximately $519,000 for the first
quarter of fiscal 1998. In both quarters cash provided by financing activities
resulted from bank borrowings including $6.5 million in proceeds from USA
Leasing's loan from NationsBank, N.A. ("NationsBank") in October 1998. In both
periods, the cash used in financing activities included payments on various
notes payable and capital lease obligations.
We used the net proceeds from our initial public offering of approximately
$36.4 million to repay approximately $29.1 million of principal and interest on
indebtedness and to fund acquisitions of approximately $4.2 million of assets
from twelve local and regional cylinder exchange providers, adding approximately
1,350 new accounts through these acquisitions. We also used approximately $1.1
million to purchase property and equipment and approximately $2.4 million for
general corporate purposes.
On October 30, 1998, we sold substantially all of our grill cylinder
inventories to USA Leasing for $6.5 million. In anticipation of establishing a
cylinder financing facility for our distributors, we had acquired approximately
$4.6 million of these cylinders from them during our first quarter of fiscal
1999. We believed that a prospective financing source would prefer to acquire
the cylinders in a single transaction, rather than from our distributors in
multiple transactions. After discussing the proposed facility with a leasing
company, NationsBank agreed to provide USA Leasing with a $6.5 million credit
facility (the "USA Leasing Credit Facility"), the proceeds of which were used to
purchase the cylinders from Blue Rhino. Under the terms of the USA Leasing
Credit Facility, we were required to guarantee of 80% of the facility and each
of the owners of USA Leasing were required to guarantee 5% of the facility. USA
Leasing is owned 24% each by Messrs. Prim and Filipowski and 26% each by Mr.
Craig Duchossois, a director and stockholder of the Company, and Mr. Peer
Pedersen, a stockholder of the Company and a partner of Pedersen & Houpt, P.C.,
our legal counsel. NationsBank has a first priority lien and we have a
subordinate lien on all of the assets of USA Leasing. The sale of cylinders to
USA Leasing was approved unanimously by our directors who had no financial
interest in the transaction.
In addition, during November and December 1998, the Company acquired and
sold approximately $3.4 million of cylinders to USA Leasing at no gain or loss.
USA Leasing has entered into operating lease agreements with the Company's
independent distributors to lease the cylinders at 1% of the initial cylinder
value monthly.
In December 1998, we entered into a $12 million credit facility with
NationsBank, which includes a $7.0 million revolving line of credit and a $5.0
million acquisition facility (the "New Bank Credit Facility"). Our ability to
borrow under the New Bank Credit Facility is reduced by an amount equal to our
contingent liability pursuant to our guarantee of USA Leasing's credit facility
with NationsBank. As we achieve certain performance measures, our availability
under the New Bank Credit Facility will increase. The New Bank Credit Facility
replaces a prior facility we had with NationsBank and is collateralized by a
lien on substantially all of our assets. The New Bank Credit Facility requires
us to meet certain covenants, including minimum net worth and cash flow
requirements. The loans under the New Bank Credit Facility bear interest at
a maximum of LIBOR plus 2.25%.
Concurrently with the extension of our New Bank Credit Facility,
NationsBank also increased its credit facility with USA Leasing to $13 million.
We have guaranteed 80% of USA Leasing's obligations under this credit facility.
Currently, we are not aware of any defaults under USA Leasing's credit facility
with NationsBank or under any cylinder lease between USA Leasing and our
distributors. However, we could be required to fund up to 80% of USA Leasing's
obligations to NationsBank in the event of a default under its credit facility.
We currently lease our offices under a lease from an entity affiliated with
two of our directors. Pursuant to the terms of the lease, we pay annual rent of
$82,000, plus our allocable share of all taxes, utilities, and maintenance. In
December 1999, we renewed this lease to include additional office space with
annual rent of $212,700 for an additional three-year term with an option to
renew for one three-year term.
We anticipate that our total capital expenditures (excluding acquisitions)
for 1998 will be approximately $5.5 million, and will relate primarily to
cylinder displays, 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 existing borrowing capacity under lines of
credit, together with cash provided by operations, will be sufficient to meet
our working capital requirements in the near term. 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.
Inflation
We do not believe that inflation has had a material adverse effect on our
net sales or the results of operations. However, there can be no assurance that
our business will not be affected by inflation in the future.
Impact of New Accounting Pronouncements
Statement of Financial Accounting Standards No. 130 ("SFAS No. 130")
establishes standards for reporting and display of comprehensive income and its
components (revenues, gains, expenses, losses) in a full set of general purpose
financial statements and is effective for fiscal years beginning after December
15, 1997. We do not expect SFAS No. 130 to have any impact on our consolidated
financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS No.
131"). 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. We do not expect SFAS No. 131 to have any impact on our
consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133").
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. It also requires entities to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. We do not expect SFAS No.
133 to have any impact on our consolidated financial statements as we do not
invest in any derivative instruments or engage in any hedging activities.
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
defines such costs and requires that they be expensed as incurred. This
pronouncement is effective for financial statements for fiscal years beginning
after December 15, 1998 although earlier application is encouraged. We have
chosen to adopt this pronouncement effective January 1, 1999 and do not believe
that it will materially affect our reported results of operations or financial
condition upon adoption.
Year 2000 Compliance
Year 2000 issues are the result of computer programs that were written
using two digits rather than four to define the applicable year. For example,
date sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations
causing disruptions of operations, including, among other material adverse
consequences, a temporary inability to process transactions or engage in similar
normal business activities. We depend on our management information systems
("MIS") to process orders, manage inventory and accounts receivable, maintain
distributor and customer information, assist distributors in delivering products
on a timely basis and in maintaining cost-efficient operations.
Our State of Readiness for Year 2000. We began evaluating our MIS for Year
2000 compliance in January 1997. Since that time we have developed a Year 2000
compliance policy encompassing employee education, testing, progress reporting,
external impact plans and contingency plans. Our Chief Information Officer
directs our Year 2000 compliance policy and oversees the remediation and testing
of MIS. As of December 15, 1998, we believe that we are approximately 70% Year
2000 compliant. Based on our current assessment, we believe that we will be 100%
Year 2000 compliant by March 31, 1999. However, if our modifications, testing
and solicitations of third party compliance are not made on a timely basis or do
not resolve our Year 2000 issues, these issues could have a negative effect on
our business.
We have assessed the Year 2000 readiness of each of our core MIS and
remediated these systems as necessary. Our core MIS include Online Sales Account
Information System ("OASIS"), Platinum for Windows, Electronic Data Interchange
("EDI") and Blue Rhino Electronic Accounting System ("BREAS"). OASIS was already
compliant when it was implemented in February 1998, Platinum for Windows was
updated in March 1998 to be Year 2000 compliant, EDI was upgraded in December
1998 to be Year 2000 compliant and BREAS was upgraded in October 1998 to be Year
2000 compliant. We have engaged Integrated Solutions International, L.L.C. to
among other things, assist us in implementing our distributors' use of Year 2000
compliant handheld computer units of BREAS. We expect to have all of our
distributors using Year 2000 compliant handheld units by March 31, 1999. We are
developing integrated test procedures in which all of our MIS are simultaneously
tested for Year 2000 compliance. We expect these integrated tests to continue
throughout 1999.
Historical and Estimated Costs. We have not established a separate Year
2000 compliance budget and do not expect to do so. To date, we have incurred
approximately $8,000 in Year 2000 compliance costs. We currently anticipate that
the implementation of our Year 2000 compliance policy will cost approximately
$35,000, all of which will be expensed. Although we can give no assurances, we
do not expect future costs related to Year 2000 compliance to negatively affect
our business in any material way. Costs are based on current estimates and
actual results may vary significantly from such estimates.
Most Reasonably Likely Worst Case Scenario. The most reasonably likely
worst case Year 2000 scenario we face is an interruption of our business
operations caused by the failure of third parties with which we have a material
relationship to achieve Year 2000 compliance. The consequences of a third party
failure are unknown, but could have a negative effect on our business. We are
considering several contingency plans to address possible business interruptions
caused by a non-compliant third party. Possible contingency plans include using
alternate service providers and using a manual payment and collection system. We
expect that our contingency plans will be developed by May 31, 1999. In
addition, in an effort to protect ourselves and increase the awareness of third
parties whose failure to comply could have a material effect on our business, we
are seeking to obtain certifications from them that they are Year 2000
compliant.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk related to changes in interest rates on our
borrowings under our Bank Credit Facility and will be exposed to similar market
risk under our New Bank Credit Facility. Our current Bank Credit Facility bears
interest based on the Prime Rate and we expect our New Bank Credit Facility to
bear interest based on LIBOR. However, because we have no balance on our Bank
Credit Facility, and do not expect to borrow extensively under our New Bank
Credit Facility, we do not believe these risks will be material.
We have no derivative financial instruments or derivative commodity
instruments in our cash and cash equivalents and investments. We invest our cash
and cash equivalents and investments 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
United States Dollars and as such we do not currently have exposure to foreign
currency risk. Furthermore, we do not have any direct exposure to commodity
price risk.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not presently involved in any material litigation nor, to
our 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 net proceeds from our initial public offering of $36.4 million has been
used primarily to pay indebtedness of approximately $29.1 million, fund
acquisitions of $4.2 million, purchase property and equipment of $1.1 million
and for general working capital of $2.4 million resulting in $0.7 million
remaining from our initial public offering as of October 31, 1998. The remaining
proceeds are available 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: None
Item 5. Other Information: None
Item 6. Exhibits and Reports on Form 8-K: Exhibit 27.1 Financial data
Signatures
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this amended report to be signed on its behalf by the
undersigned hereunto duly authorized.
Blue Rhino Corporation
Date: February 9, 1999 By: /s/ Billy D. Prim
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Chairman, President and Chief Executive Officer
Date: February 9, 1999 By: /s/ Mark Castaneda
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Chief Financial Officer