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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 JANUARY 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: 0-14133
BLUE RHINO CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 56-1870472
(State of 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 February 28, 2001
- -------------------------------------- --------------------------------
Common stock, par value $.001 per share 9,234,575 Shares
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BLUE RHINO CORPORATION
INDEX
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements (unaudited):
Condensed consolidated balance
sheets as of January 31, 2001 and
July 31, 2000.
Condensed consolidated statements of
operations for the three and six
month periods ended January 31, 2001
and 2000.
Condensed consolidated statements of
cash flows for the six month periods
ended January 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 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
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PART I
FINANCIAL INFORMATION
ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BLUE RHINO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JANUARY 31, 2001 AND JULY 31, 2000
(IN THOUSANDS)
JANUARY 31, JULY 31,
2001 2000
--------- ---------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 4,996 $ 1,079
Accounts receivable, net 11,368 19,254
Inventories 3,624 5,415
Prepaid expenses and other current assets 6,966 3,746
--------- ---------
Total current assets 26,954 29,494
Cylinders leased under operating lease agreements, net 27,959 27,277
Property, plant, and equipment, net 27,766 20,332
Intangibles, net 28,990 27,347
Investment in joint venture 1,730 3,027
Other assets 725 698
--------- ---------
Total assets $ 114,124 $ 108,175
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,040 $ 16,565
Current portion of long-term debt and capital lease obligations 1,823 1,786
Accrued liabilities 2,175 1,476
--------- ---------
Current liabilities exclusive of credit facility 11,038 19,827
Credit facility 45,500 4,000
--------- ---------
Total current liabilities 56,538 23,827
Long-term debt and capital lease obligations, less current maturities 2,203 42,396
--------- ---------
Total liabilities 58,741 66,223
Stockholders' equity:
Common stock, $0.001 par value; 100,000,000 shares authorized, 9,234,575 and 9,221,703 9 9
shares issued and outstanding at January 31, 2001 and July 31, 2000, respectively
Preferred stock, $0.001 par value; 20,000,000 shares authorized, 2,850,000 and no shares 3 --
issued and outstanding at January 31, 2001 and July 31, 2000, respectively
Capital in excess of par 78,602 62,010
Other stockholders' equity (23,231) (20,067)
--------- ---------
Total stockholders' equity 55,383 41,952
--------- ---------
Total liabilities and stockholders' equity $ 114,124 $ 108,175
========= =========
The accompanying notes are an integral part of these
financial statements.
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BLUE RHINO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JANUARY 31, 2001 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31,
------------------------ ------------------------
2001 2000 2001 2000
-------- -------- -------- --------
(Unaudited) (Unaudited)
Net revenues $ 31,668 $ 15,214 $ 65,489 $ 29,422
Operating costs and expenses:
Cost of sales 25,606 10,907 51,363 21,030
Selling, general, and administrative 4,578 2,596 9,388 5,046
Depreciation and amortization 2,177 976 3,814 1,893
-------- -------- -------- --------
Total operating costs and expenses 32,361 14,479 64,565 27,969
-------- -------- -------- --------
Income (loss) from operations (693) 735 924 1,453
Other expenses (income):
Interest expense 1,105 374 2,314 752
Other, net (93) 9 (73) 9
-------- -------- -------- --------
Income (loss) before other non-operating expenses (1,705) 352 (1,317) 692
Other non-operating expenses:
Loss on investee 727 -- 1,297 --
-------- -------- -------- --------
Income (loss) before income taxes (2,432) 352 (2,614) 692
Income taxes 33 -- 35 --
-------- -------- -------- --------
Net income (loss) $ (2,465) $ 352 $ (2,649) $ 692
Preferred dividends 214 -- 342 --
-------- -------- -------- --------
Income (loss) available to common stockholders $ (2,679) $ 352 $ (2,991) $ 692
======== ======== ======== ========
Basic and diluted earnings (loss) per common share $ (0.22) $ 0.04 $ (0.27) $ 0.08
======== ======== ======== ========
Shares used in per share calculations:
Basic 12,079 8,648 11,186 8,445
======== ======== ======== ========
Diluted 12,079 8,795 11,186 8,510
======== ======== ======== ========
The accompanying notes are an integral part of these
financial statements.
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BLUE RHINO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JANUARY 31, 2001 AND 2000
(IN THOUSANDS)
SIX MONTHS ENDED
JANUARY 31,
------------------------
2001 2000
-------- --------
(unaudited)
Cash flows from operating activities:
Net income (loss) $ (2,649) $ 692
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization 3,814 1,893
Loss on investee 1,297 --
Other non-cash expenses 146 406
Changes in operating assets and liabilities, net of business acquisitions:
Accounts receivable 7,862 1,886
Inventories 1,668 (329)
Other current assets (1,873) (162)
Accounts payable and accrued liabilities (10,053) 115
-------- --------
Net cash provided by operating activities 212 4,501
-------- --------
Cash flows from investing activities:
Business acquisitions (1,279) (2,476)
Purchases of property, plant, and equipment (2,459) (4,968)
Net advances to joint venture (1,609) --
Purchases of cylinders held under operating leases, net (1,107) (2,469)
Collections on notes receivable 350 38
-------- --------
Net cash used in investing activities (6,104) (9,875)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of equity, net of expenses 9,617 6,362
Proceeds from notes payable to bank 20,586 19,750
Payments on notes payable to bank (19,361) (20,090)
Proceeds from issuance of convertible notes -- 7,000
Payment on cylinder financing -- (7,000)
Payments of debt issuance costs -- (490)
Payments on long-term debt and capital lease obligations (1,033) (787)
-------- --------
Net cash provided by financing activities 9,809 4,745
-------- --------
Net increase (decrease) in cash and cash equivalents 3,917 (629)
Cash and cash equivalents at beginning of period 1,079 913
-------- --------
Cash and cash equivalents at end of period $ 4,996 $ 284
======== ========
The accompanying notes are an integral part of these
financial statements.
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BLUE RHINO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 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: Rhino Services, L.L.C.; CPD Associates, Inc.; USA Leasing, L.L.C.;
Uniflame Corporation ("Uniflame") and QuickShip, Inc. ("QuickShip"). 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 three and six month periods ended January
31, 2001 are not necessarily indicative of the results that may be expected for
the year ending July 31, 2001.
The balance sheet at July 31, 2000 has been derived from the audited
financial statements of the Company as of July 31, 2000 but does not include all
of the information and footnotes required by generally accepted accounting
principles 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, 2000.
2. DERIVATIVE INSTRUMENTS
Effective August 1, 2000, the Company adopted Statement of Financial
Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133) which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. All derivatives, whether designated
in hedging relationships or not, are required to be recorded on the balance
sheet at fair value. If the derivative is designated as a fair value hedge, the
changes in the fair value of the derivative and of the hedged item attributable
to the hedged risk are recognized in earnings. 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 to manage exposure to interest
rate risks. The Company's objectives for holding derivatives are to minimize the
risks using the most effective methods to eliminate or reduce the impacts of
this exposure. In July 2000, the Company entered into an interest rate swap
agreement, as required under its bank credit facility, with a notional amount of
$10,000 as a hedge of the variable interest rate debt outstanding under its
credit facility. Under the swap agreement, which expires in July 2003, the
Company pays a fixed rate of 7.36% and receives a rate equivalent to the
one-month LIBOR. There was no material adjustment to interest expense during the
three and six month periods ended January 31, 2001.
The cumulative effect of the adoption of SFAS 133 resulted in a
reduction to OCI of $131. The net derivative loss recorded in OCI will be
reclassified into earnings over the term of the underlying cash flow hedge
expiring on July 31, 2003.
The Company had a reduction in OCI in connection with its cash flow
hedge for the three and six months ended January 31, 2001 of $288 and $384,
respectively. Hedge ineffectiveness, determined in accordance with SFAS 133, had
no impact on earnings for the three or six month periods ended January 31, 2001.
In February 2001, the interest rate on the bank credit facility was
changed to a rate based on the prime rate. As a result, the interest rate risk
being hedged is no longer based on the benchmark interest rate of LIBOR. This
change may cause the interest rate
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swap to be considered an ineffective cash flow hedge. The ineffective portion of
changes in the fair value of a cash flow hedge are recognized in earnings.
Total comprehensive loss was ($2,753) and ($3,164) for the three and
six months ended January 31, 2001, 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 and six months ended January 31,
2001 of $727 and $1,297, respectively. At January 31, 2001, the Company had
advances outstanding of $3,129 to R4 Tech.
Summary financial information for R4 Tech for the three and six month
periods ended January 31, 2001 is as follows:
For the Three For the Six
Months Ended Months Ended
January 31, January 31,
2001 2001
------------- ------------
Net revenues....................... $2,457 $4,068
Gross profit....................... (1,241) (2,096)
Net loss........................... (1,485) (2,649)
4. ACQUISITIONS AND INTANGIBLE ASSETS
On October 26, 2000, the Company completed the acquisition of QuickShip,
a retail shipping service company based in Lenexa, Kansas. QuickShip, a wholly
owned subsidiary of the Company, offers its service at over 200 retail locations
in 29 states. The aggregate purchase price, including certain acquisition costs,
was approximately $9,803 of which approximately $972 was paid in cash and
deferred payments, $86 in a five-year warrant to purchase 100,000 shares of
common stock, $1,946 in liabilities assumed with the balance of $6,800 paid in
the form of Series A Convertible Preferred Stock at $6.00 per share. This
acquisition has been accounted for as a purchase. The purchase price was
allocated based on an independent valuation as follows: approximately $2,396 to
intangibles, approximately $7,238 to property, plant, and equipment consisting
primarily of software and the balance to other assets and liabilities.
The following unaudited pro forma summary financial information assumes
that the acquisition of QuickShip occurred on August 1, 1999. This pro forma
information has been prepared for comparative purposes and does not purport to
be indicative of what would have occurred had the acquisition actually occurred
on August 1, 1999, nor is it indicative of future results. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
For the Six Months Ended
January 31,
-------------------------
2001 2000
---- ----
Net revenues $ 65,533 $ 29,543
=========== ==========
Net loss $ (3,459) $ (876)
=========== =========
Net loss available to common stockholders $ (3,835) $ (1,046)
=========== =========
Basic and diluted loss per common share $ (0.33) $ (0.11)
=========== =========
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Intangibles consisted of the following at the dates indicated:
January 31, July 31,
2001 2000
----------- ---------
(Unaudited)
Goodwill $ 28,606 $ 26,302
Patents and trademarks 1,406 1,399
Noncompete and workforce 1,194 983
----------- ---------
31,206 28,684
Accumulated amortization (2,216) (1,337)
----------- --------
$ 28,990 $ 27,347
=========== =========
Amortization expense for the three and six months ended January 31,
2001 was $501 and $879, respectively. Amortization expense for the three and six
months ended January 31, 2000 was $172 and $325, respectively. Intangibles are
being amortized over estimated useful lives ranging from 3 to 30 years.
5. CREDIT FACILITY
In June 2000, the Company amended and increased its existing bank
credit facility (the "Credit Facility"). The amended Credit Facility consists of
three separate facilities: a $38,000 revolving line of credit for general
corporate purposes; a $7,000 term facility that was paid in full in October
2000; and a $10,000 seasonal line for general corporate purposes available from
July through November 2000 (subsequently extended through May 2001). The Credit
Facility requires the Company to meet certain covenants, including minimum net
worth and cash flow requirements. At January 31, 2001, the balance on the Credit
Facility was $45,500. The Credit Facility is collateralized by a lien on
substantially all of the Company's assets.
As of and for the three months ended January 31, 2001, the Company was
not in compliance with certain financial covenants of the Credit Facility, which
constituted an event of default. Pursuant to a forbearance agreement entered
into in March 2001, the lender will forbear through April 30, 2001 from
exercising any right arising from the existence of the acknowledged events of
default, including but not limited to its right to accelerate the indebtedness
under the Credit Facility. The forbearance agreement increased the interest
rates on the Credit Facility from a maximum rate of LIBOR plus 2.75% to the
prime rate plus 2.0% for the revolving line of credit and the prime rate plus
3.0% for the seasonal overline, the term of which has been extended to May 31,
2001. The Company intends to refinance the Credit Facility prior to the
expiration of the its forbearance agreement on May 31, 2001. In the event that
such efforts are unsuccessful, the Company would likely experience a material
adverse impact on its financial condition, liquidity, and results of operations.
6. PREFERRED STOCK
On September 7, 2000 (the "Closing Date") the Company completed a
private placement of 1,716,667 shares of its Series A Convertible Preferred
Stock to two institutional investors under common management and three
individuals, including Billy D. Prim, its Chairman, Chief Executive Officer and
President, and Andrew J. Filipowski, its Vice Chairman, for an aggregate
purchase price of approximately $10,300. Mssrs. Prim and Filipowski invested $50
and $250 for 8,333 and 41,667 shares of Series A Convertible Preferred Stock,
respectively. In addition, on October 26, 2000, the Company issued 1,133,333
shares of Series A Convertible Preferred Stock in connection with its
acquisition of QuickShip (Note 4). 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 the third
anniversary of the Closing Date; 12% from the third anniversary of the Closing
Date through the fourth anniversary of the Closing Date; and 15% thereafter. At
the election of the Company, the dividend may be paid in cash, in shares of
common stock, or a combination of cash and shares of common stock. If the
Company elects 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 January 31, 2001, the
Company had accrued dividends on the outstanding shares of Series A Convertible
Preferred Stock of $342.
Each share of Series A Convertible Preferred Stock is convertible into
common stock at the option of the holder at any time after the first anniversary
of the Closing Date. If the market price of the common stock exceeds a
prescribed threshold, the Series A Convertible Preferred Stock is convertible
into common stock at the option of the Company at any time after the second
anniversary of the Closing Date. Each share of Series A Convertible Preferred
Stock is initially convertible into one share of common stock. In the event that
the Company's earnings before interest, taxes, depreciation and amortization for
the year ending July 31, 2001 do not meet a prescribed target, each share of
Series A Convertible Preferred Stock may be convertible into up to 1.33 shares
of common stock. The
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Series A Convertible Preferred Stock has a liquidation preference over the
Company's common stock. The holders of the shares of Series A Convertible
Preferred Stock have certain registration rights.
Warrants to purchase 414,116 shares of the Company's common stock at
exercise prices ranging between $8.48 and $13.00 per share contained
anti-dilution provisions that were triggered as a result of the issuance of
1,716,667 shares of Series A Convertible Preferred Stock at $6.00 per share. As
a result, the exercise price of such warrants were reset at $6.00 and the number
of shares of common stock for which those warrants are exercisable was
proportionately increased, which may result in additional dilution for existing
stockholders.
In connection with the issuance of 1,716,667 shares of Series A
Convertible Preferred Stock, the Company has agreed to pay William Blair & Co. a
placement fee of $500 in cash and has issued a five-year warrant to purchase
16,667 shares of common stock at an exercise price of $6.00 per share.
7. 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 (in thousands, except per
share amounts).
Three Months Ended Six Months Ended
January 31, January 31,
------------------------ ------------------------
2001 2000 2001 2000
-------- -------- -------- --------
(unaudited) (unaudited)
Basic and diluted earnings (loss) per share:
Net income (loss) $ (2,465) $ 352 $ (2,649) $ 692
Less: Preferred stock dividends (214) -- (342) --
-------- -------- -------- --------
Income (loss) applicable to common stockholders $ (2,679) $ 352 $ (2,991) $ 692
Weighted average common shares used in
computing the earnings (loss) per common
share (in thousands):
Basic 12,079 8,648 11,186 8,445
-------- -------- -------- --------
Diluted 12,079 8,795 11,186 8,510
-------- -------- -------- --------
Basic and diluted earnings (loss) per common share $ (0.22) $ 0.04 $ (0.27) $ 0.08
======== ======== ======== ========
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. Options to purchase common stock and the assumed exercise of
warrants for the three and six months ended January 31, 2001 have been excluded
from the computation of diluted loss per common share as they were
anti-dilutive.
8. 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 the
recent acquisition of QuickShip, a retail shipping services company, is included
within the products segment as it is not currently material on a stand alone
basis (Note 4).
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.
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The Company's selected segment information as of and for the three and
six months ended January 31, 2001, and January 31, 2000 is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31,
--------------------- ---------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net revenues:
Cylinder exchange $ 16,759 $ 14,089 $ 33,719 $ 28,041
Products and other 14,909 1,125 31,770 1,381
-------- -------- -------- --------
$ 31,668 $ 15,214 $ 65,489 $ 29,422
======== ======== ======== ========
Segment EBITDA:
Cylinder exchange $ 826 $ 1,567 $ 1,487 $ 3,102
Products and other 658 144 3,251 244
-------- -------- -------- --------
$ 1,484 $ 1,711 $ 4,738 $ 3,346
======== ======== ======== ========
AS OF JANUARY 31,
Total assets: 2001 2000
-------- --------
Cylinder exchange $ 82,663 $ 67,207
Products and other 31,461 221
-------- --------
$114,124 $ 67,428
======== ========
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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 TRENDS AND
FUTURE EVENTS THAT MAY AFFECT THE COMPANY'S FUTURE FINANCIAL POSITION AND
OPERATING RESULTS 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 IMPLEMENT HEDGING
STRATEGIES DESIGNED TO REDUCE ITS EXPOSURES TO FLUCTUATIONS IN THE PRICE OF
PROPANE AND INTEREST RATES SUCCESSFULLY. SUCH STATEMENTS ARE MADE PURSUANT TO
THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. THE TERMS "EXPECT," "ANTICIPATE," "BELIEVE," "INTEND," "ESTIMATE," AND
"PROJECT" AND SIMILAR WORDS OR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. THESE STATEMENTS SPEAK ONLY AS OF THE DATE OF THIS
REPORT. THE STATEMENTS ARE BASED ON CURRENT EXPECTATIONS, ARE INHERENTLY
UNCERTAIN, ARE SUBJECT TO RISKS, AND SHOULD BE VIEWED WITH CAUTION. ACTUAL
RESULTS AND EXPERIENCE MAY DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS
AS A RESULT OF MANY FACTORS INCLUDING THOSE DETAILED IN THE COMPANY'S
REGISTRATION STATEMENT ON FORM S-3 DATED SEPTEMBER 25, 2000 AND OTHER FILINGS
WITH THE SECURITIES AND EXCHANGE COMMISSION. IT IS NOT POSSIBLE TO FORESEE OR
IDENTIFY ALL SUCH FACTORS. 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, Rhino
Services, L.L.C., CPD Associates, Inc., USA Leasing, L.L.C., Uniflame
Corporation and QuickShip, Inc. (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, 2000, on file with the Securities and
Exchange Commission. The results of operations for the three and six month
periods ended January 31, 2001 are not necessarily indicative of results that
may be expected for the fiscal year ending July 31, 2001 or any other period, in
part due to the seasonality of our business.
Blue Rhino was founded in March 1994 and has become a leading national
provider of gas grill cylinder exchange and other branded products and services
to retailers, with Blue Rhino cylinder displays at approximately 26,000 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 our cylinder exchange at many major home
improvement centers, mass merchants, hardware, grocery and convenience stores,
including Home Depot, Lowe's, WaloMart, Sears, Kmart, Kroger, Food Lion,
Winn-Dixie, SuperAmerica, Circle K and ExxonMobil. We dedicate our efforts and
capital to brand development, value-added marketing, customer service,
cylinders, displays, account growth, distributor development and management
information systems while our 46 independent distributors make the investments
in the vehicles and refilling and refurbishing equipment necessary to operate
cylinder exchange businesses. We concluded the second quarter of fiscal 2001
with approximately 26,000 locations, a net increase of 4,500 locations over
January 31, 2000. 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 have strategically expanded our business in the past year to diversify
our revenue stream, balance our seasonality and establish more products that use
our base grill cylinder exchange service. Our acquisitions of Uniflame, Inc.
("Uniflame"), International Propane Products, LLC and Bison Valve, LLC have
allowed us to expand our offerings to include an array of products including
barbecue grills, patio heaters, a proprietary overfill prevention device,
fireplace accessories and garden products that are sold primarily through home
centers, mass merchants and hearth stores throughout the United States.
Additionally, our acquisition of QuickShip, Inc. ("QuickShip") introduced a
retail package service to our offerings. QuickShip provides consumers with a
convenient, full-service, in-store postal and parcel shipping depot and provides
retailers with a new revenue source. In these acquisitions, we also acquired
proprietary technology, designs, patents and human capital to complement our
expertise in marketing, sales, and coordination with manufacturers and
distributors. Our products division is separately managed by Uniflame's
management team, which has extensive experience in the design and import of
consumer products sold through mass retailers.
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RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED JANUARY 31, 2001 WITH THE THREE MONTHS
ENDED JANUARY 31, 2000
Net revenues. Net revenues increased 108% to $31.7 million for the
three months ended January 31, 2001 from $15.2 million for the three months
ended January 31, 2000. Net revenues consisted of $15.6 million from cylinder
transactions, $14.9 million from product sales and $1.2 million from lease and
other income. Product sales consist of patio heaters, fireplace accessories,
barbecue grills, and garden products that are managed by our wholly owned
subsidiary, Uniflame. Lease and other income relates primarily to cylinders and
cylinder displays leased to our distributors. The increase in net revenues was
due primarily to the addition of products offered by Uniflame, which was
acquired in April 2000. In addition, cylinder exchange revenues increased
approximately 19% over the same period in the prior year. The increase in
cylinder exchange revenues was due primarily to an approximately 9% increase in
same store cylinder exchange transactions and an approximately 21% increase in
the number of cylinder exchange locations. The increase in same store cylinder
exchange transactions occurred notwithstanding the 60 percent same store
increase that Blue Rhino experienced last year as a result of consumer concern
over the advent of the Year 2000. The number of cylinders transacted increased
23% to 1.1 million units in the three months ended January 31, 2001 from 918,000
units during the same period in the prior year. Cylinder exchange transaction
revenues per unit for the period, however, decreased from the same period in the
prior year, primarily because cylinder exchanges, which result in less revenue
per unit than do cylinder sales, represented a greater percentage of the total
mix of cylinder transactions.
Gross margin. Our overall gross margin decreased to 19.1% in the second
quarter of fiscal 2001 from 28.3% in the second quarter of fiscal 2000. This
decrease was due primarily to the continued impact of voluntary payments made to
our distributors to partially offset unusually high wholesale propane costs and
to the growth of product sales, which carry lower gross margins as a percentage
of sales than do cylinder exchange transactions. We have initiated several
measures that we believe will improve gross margins going forward, including the
implementation of price increases to customers and temporary surcharges in
certain markets. We continued to make voluntary payments to our distributors to
offset unusually high wholesale propane prices through March 1, 2001. On that
date, we restructured our payment obligation to our distributors such that each
payment will include a fixed component and a variable component based on the
price of propane. In addition, we have developed a propane hedging strategy that
uses a variety of instruments to hedge the price of propane over the next year
and is designed to fix the fuel cost component of a significant portion of our
total cylinder exchange volume. These efforts are designed to attain cylinder
exchange gross margins in the 25 percent to 28 percent range.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 76.3% to $4.6 million for the three months
ended January 31, 2001 from $2.6 million for the three months ended January 31,
2000. Selling, general, and administrative expenses decreased as a percentage of
net revenues to 14.5% for the three months ended January 31, 2001 from 17.1% for
the three months ended January 31, 2000. The increase in selling, general and
administrative expenses was due primarily to the additional costs for Uniflame,
which was acquired in April 2000, and to increased personnel, marketing and
administrative costs to support the cylinder exchange business. The decrease in
selling, general and administrative expenses as a percentage of net revenues was
due primarily to the fact that a significant portion of such expenses are fixed
and, increased at a slower rate than did net revenues.
Depreciation and amortization. Depreciation and amortization increased
to $2.2 million for the second quarter of fiscal 2001 from $976,000 for the
second quarter of fiscal 2000. Depreciation expense increased to $1.7 million
for the second quarter of fiscal 2001 from $804,000 for the second quarter of
fiscal 2000 primarily due to the increase in the number of installed cylinder
displays, the increase in number of 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 increased to $501,000 in the second quarter of
fiscal 2001 from $172,000 in the second quarter of fiscal 2000. Amortization
increased principally due to the amortization of intangibles associated with
acquisitions. We expect that our acquisition of QuickShip will cause an increase
in depreciation and amortization expense in future periods because its assets
have an estimated five-year life, which is generally shorter than the estimated
life of our existing asset base.
Interest expense. Interest expense increased to $1.1 million in the
second quarter of fiscal 2001 from $374,000 in the second quarter of fiscal
2000. The increase in interest expense resulted primarily from the additional
borrowings outstanding under our credit facility. The additional borrowings were
used primarily to fund operations, to purchase cylinders and cylinder displays
leased to our distributors and to fund business acquisitions and our investment
in and advances to R4 Technical Center - North Carolina, L.L.C. ("R4 Tech"), the
automated propane bottling and cylinder refurbishing plant.
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Loss on investee. Loss on investee of $727,000 in the second quarter of
fiscal 2001 represents our share of the loss related to our 49% ownership
interest in R4 Tech. We expect this venture to continue to experience losses,
which we believe are typical in a start-up manufacturing operation, until
volumes increase, which we believe will occur this grilling season. We cannot,
however, predict with certainty when this will occur, 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.
Other, net. Other, net increased to $93,000 of income in the second
quarter of fiscal 2001 from $9,000 of expense in the second quarter of fiscal
2000. The income in the second quarter of fiscal 2001 resulted primarily from
interest income on notes receivable. The expense in the second quarter of fiscal
2000 resulted from a loss on the disposal of assets.
COMPARISON OF THE SIX MONTHS ENDED JANUARY 31, 2001 WITH THE SIX MONTHS ENDED
JANUARY 31, 2000
Net revenues. Net revenues increased 123% to $65.5 million for the six
months ended January 31, 2001 from $29.4 million for the six months ended
January 31, 2000. Net revenues consisted of $31.3 million from cylinder
transactions, $31.8 million from product sales and $2.4 million from lease and
other income. Product sales consist of patio heaters, fireplace accessories,
barbecue grills, and garden products that are managed by our wholly owned
subsidiary, Uniflame. Lease and other income relates primarily to cylinders and
cylinder displays leased to our distributors. The increase in net revenues was
due primarily to the addition of products offered by Uniflame, which was
acquired in April 2000. In addition, cylinder exchange revenues increased 20%
over the same period in the prior year. The increase in cylinder exchange
revenue was due primarily to an approximately 11% increase in same store
cylinder exchange transactions and an approximately 21% increase in the number
of cylinder exchange locations. The number of cylinder transactions increased
27% to 2.4 million units in the six months ended January 31, 2001 from 1.9
million units during the same period last year. Cylinder exchange transaction
revenues per unit for the period, however, decreased from the same period in the
prior year, primarily because cylinder exchanges, which result in less revenue
per unit than do cylinder sales, represented a greater percentage of the total
mix of cylinder transactions.
Gross margin. Our overall gross margin decreased to 21.6% for the first
six months of fiscal 2001 from 28.5% for the first six months of fiscal 2000.
This decrease was due primarily to the continued impact of voluntary payments
made to our distributors to partially offset unusually high wholesale propane
costs and to the growth of product sales, which carry lower gross margins as a
percentage of sales than do cylinder exchange transactions. We have initiated
several measures that we believe will improve gross margins going forward,
including the implementation of price increases to customers and temporary
surcharges in certain markets. We continued to make voluntary payments to our
distributors to offset unusually high wholesale propane prices through March 1,
2001. On that date, we restructured our payment obligation to our distributors
such that each payment will include a fixed component and a variable component
based on the price of propane. In addition, we have developed a propane hedging
strategy that uses a variety of instruments to hedge the price of propane over
the next year and is designed to fix the fuel cost component of a significant
portion of our total cylinder exchange volume. These efforts are designed to
attain cylinder exchange gross margins in the 25 percent to 28 percent range.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 86.0% to $9.4 million for the six months ended
January 31, 2001 from $5.0 million for the six months ended January 31, 2000.
Selling, general, and administrative expenses decreased as a percentage of net
revenues to 14.3% for the six months ended January 31, 2001 from 17.2% for the
six months ended January 31, 2000. The increase in selling, general and
administrative expenses was due primarily to the additional costs for Uniflame,
which was acquired in April 2000, and to increased personnel, marketing and
administrative costs to support the cylinder exchange business. The decrease in
selling, general and administrative expenses as a percentage of net revenues was
due primarily to the fact that a significant portion of such expenses are fixed
and, increased at a slower rate than did net revenues.
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Depreciation and amortization. Depreciation and amortization increased
to $3.8 million in the six months ended January 31, 2001 from $1.9 million in
the six months ended January 31, 2000. Depreciation expense increased to $2.9
million in the six months ended January 31, 2001 from $1.6 million for the six
months ended January 31, 2000 primarily due to the increase in the number of
installed cylinder displays, the increase in number of 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 increased to $879,000 in the six months
ended January 31, 2001 from $325,000 in the six months ended January 31, 2000.
Amortization increased principally due to the amortization of intangibles
associated with acquisitions. We expect that our acquisition of QuickShip will
cause an increase in depreciation and amortization expense in future periods
because its assets have an estimated five-year life, which is generally shorter
than the estimated life of our existing asset base.
Interest expense. Interest expense increased to $2.3 million in the six
months ended January 31, 2001 from $752,000 in the six months ended January 31,
2000. The increase in interest expense resulted primarily from additional
borrowings under our credit facility. The additional borrowings were used
primarily to fund operations, to purchase cylinders and cylinder displays leased
to our distributors and to fund business acquisitions and our investment in and
advances to R4 Tech.
Loss on investee. Loss on investee of $1.3 million in the six months
ended January 31, 2001 represents our share of the loss related to our 49%
ownership interest in R4 Tech. We expect this venture to continue to experience
losses, which we believe are typical in a start-up manufacturing operation,
until volumes increase, which we believe will occur next grilling season. We
cannot, however, predict with certainty when this will occur, 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.
Other, net. Other, net increased to $73,000 of income in the six months
ended January 31, 2001 from $9,000 of expense in the six months ended January
31, 2000. The income in the six months ended January 31, 2001 resulted primarily
from interest income on notes receivable. The expense in the first six months of
fiscal 2000 resulted from a loss on the disposal of assets.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of funds have been the issuance of stock and
borrowings under the bank credit facility.
Net cash provided by operations was $212,000 for the six months ended
January 31, 2001 while cash provided by operations was $4.5 million for the six
months ended January 31, 2000. For the six months ended January 31, 2001,
seasonal reductions in receivables and inventory were offset by seasonal
reductions in current liabilities. Net loss for the first six months of fiscal
2001 was more than offset by non-cash depreciation and amortization and loss on
investee, creating positive cash flow. For the six months ended January 31,
2000, seasonal reductions in receivables were supplemented by net income and
non-cash depreciation and amortization.
Net cash used in investing activities was $6.1 million for the six
months ended January 31, 2001 and $9.9 million for the six months ended January
31, 2000. The primary components of cash used in investing activities in both
periods included acquisitions, purchases of cylinders leased to our distributors
and investments in property, plant and equipment. For the six months ended
January 31, 2001, cash used in investing activities also included net advances
to the R4 Tech joint venture.
Net cash provided by financing activities was $9.8 million for the six
months ended January 31, 2001 and $4.7 million for the six months ended January
31, 2000. Cash provided by financing activities for the six months ended January
31, 2001 included net proceeds of approximately $9.6 million from a private
placement of preferred stock and approximately $1.2 million of net borrowings
from our credit facility. Cash provided by financing activities for the six
months ended January 31, 2000 included net proceeds of approximately $6.4
million from a private placement of common stock and warrants and $7.0 million
from a private placement of convertible notes and warrants. In both periods, the
cash used in financing activities included payments on various notes payable and
capital lease obligations.
On April 28, 2000, we entered into a joint venture agreement to operate
and manage 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, which is being accounted for using the equity method
of accounting. During the six months ended January 31, 2001, we advanced $1.6
million to R4 Tech. At January 31, 2001, we had advances outstanding of
approximately $3.1 million to R4 Tech. We
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anticipate providing additional advances to R4 Tech as needed until such time
that R4 Tech is able to obtain its own financing, which we currently expect to
occur by May 31, 2001.
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. Messrs. Prim and Filipowski invested $50,000 and $250,000 for
8,333 and 41,667 shares of Series A Convertible Preferred Stock, respectively.
We used the aggregate net proceeds of approximately $9.6 million from our
preferred stock private placement to repay $7.0 million of our term debt, and
the balance was used for general working capital. In connection with this
issuance of the Series A Convertible Preferred Stock we have agreed to pay
William Blair & Co. a placement fee of $500,000 in cash and have issued it a
five-year warrant to purchase 16,667 shares of common stock at $6.00 per share.
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. 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 January 31,
2001, we had accrued dividends on the outstanding shares of Series A Convertible
Preferred Stock of $342,000.
Each share of Series A Convertible Preferred Stock is convertible into
common stock at the option of the holder at any time after September 7, 2001. If
the market price of the common stock exceeds a prescribed threshold, the Series
A Convertible Preferred Stock is convertible into common stock at our option at
any time after September 7, 2002. Each share of Series A Convertible Preferred
Stock is initially convertible into one share of common stock. In the event that
our earnings before interest, taxes, depreciation, and amortization for the year
ending July 31, 2001 do not meet a prescribed target, each share of Series A
Convertible Preferred Stock may be convertible into up to 1.33 shares of common
stock. The Series A Convertible Preferred Stock has a liquidation preference
over our common stock. The holders of the shares of Series A Convertible
Preferred Stock have certain registration rights.
On October 26, 2000, we completed the acquisition of QuickShip, Inc., a
retail shipping service company based in Lenexa, Kansas. QuickShip, our wholly
owned subsidiary, provides consumers with a convenient, full-service, in-store
postal and parcel shipping depot and provides retailers with an additional
revenue source. The aggregate purchase price, including certain acquisition
costs, was approximately $9.8 million of which approximately $1.0 million was
paid in cash and deferred payments, $86,000 in a five-year warrant to purchase
100,000 shares of common stock with an exercise price of $6.00 per share, $2.0
million in liabilities assumed, with the balance of $6.8 million paid in the
form of Series A Convertible Preferred Stock at $6.00 per share. Currently,
QuickShip offers its service at over 200 retail locations in 29 states, and we
intend to expand the number of locations to include many of those currently
offering Blue Rhino cylinder exchange and other products. Since its inception
and prior to its acquisition by us, QuickShip had incurred significant costs to
develop, design and market its retail shipping and related services and the
proprietary technology necessary to provide these services. We believe that we
acquired a technologically feasible service, which we intend to enhance
internally and fully integrate with our existing systems. We estimate that
QuickShip will operate on a break-even basis with respect to earnings before
interest, taxes, depreciation, and amortization (EBITDA) and will be dilutive to
earnings in fiscal 2001 as a result of the expected depreciation and
amortization expense. For fiscal 2002, we currently project QuickShip to be
accretive to EBITDA and to earnings.
In June 2000, the Company amended and increased its existing bank
credit facility (the "Credit Facility"). The amended Credit Facility consists of
three separate facilities -- a $38,000 revolving line of credit for general
corporate purposes; a $7,000 term facility that was paid in full in October
2000; and a $10,000 seasonal line for general corporate purposes available from
July through November 2000 (subsequently extended through April 2001). The
Credit Facility requires the Company to meet certain covenants, including
minimum net worth and cash flow requirements. At January 31, 2001, the balance
on the Credit Facility was $45,500. The Credit Facility is collateralized by a
lien on substantially all of our assets.
As of and for the three months ended January 31, 2001, we were not in
compliance with certain financial covenants under the Credit Facility, which
constituted an event of default. Pursuant to a forbearance agreement entered
into in March 2001, the lender will forbear through April 30, 2001 from
exercising any right arising from the existence of the acknowledged events of
default, including but not limited to its right to accelerate the indebtedness
under the Credit Facility. The forbearance agreement increased the interest
rates on the Credit Facility from a maximum rate of London Interbank Offered
Rate ("LIBOR") plus 2.75% to the prime rate plus 2.0% for the revolving line of
credit and the prime rate plus 3.0% for the seasonal overline, the term of which
has been extended to
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May 31, 2001. We intend to refinance the Credit Facility prior to the
forbearance expiration date of May 31, 2001. In the event that such efforts are
unsuccessful, we would likely experience a material adverse impact on our
financial condition, liquidity, and results of operation.
We anticipate that our total capital expenditures for fiscal 2001,
excluding acquisitions, will be not more than approximately $10.0 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 the
remaining proceeds from the preferred stock offering and cash provided by
operations, will be sufficient to meet our working capital requirements through
fiscal 2001. 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
current 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. We
expect that, with our acquisition of Uniflame, we will continue to experience
increased revenues during our first and second quarters, which include the
months in which Uniflame historically shipped the majority of its products.
Sustained periods of poor weather, particularly in the spring and summer
seasons, can negatively impact our revenues. Our rate of establishing new retail
locations and expenses incurred in anticipation of increased sales also cause
quarterly fluctuations in our results of operations. 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
As a result of the recent and dramatic increase in fuel cost, propane
is currently at historically high levels. If fuel costs remain inflated 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 through an
increase in our price to our customers. 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
fix the fuel cost component of a significant portion of our total cylinder
exchange volume.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB No. 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. SAB No. 101 is
required to be implemented in the fourth quarter of fiscal 2001. We do not
expect the application of SAB No. 101 to have any 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
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increased interest expense for the six months ended January 31, 2001 and 2000 by
approximately $178,000 and $65,000, 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 on 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. This change may cause the swap agreement to be an ineffective hedge of
the interest rate on the Credit Facility.
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 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
intend to utilize a variety of instruments to hedge the price of propane over
the next year and to fix 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 1. LEGAL PROCEEDINGS
In our Quarterly Report on Form 10-Q for the quarter ended October 31,
2000, we reported that we had dismissed our lawsuit against
PricewaterhouseCoopers LLP without prejudice. On January 26, 2001, we refiled a
complaint against PricewaterhouseCoopers in the Superior Court of Mecklenburg
County, North Carolina alleging negligence, breach of fiduciary duty, breach of
contract, defamation and unfair and deceptive trade practices. The suit is
currently in the discovery phase and relates to the conduct of
PriceWaterhouseCoopers during its engagement as our auditors.
We are not presently involved in any material litigation nor, to our
knowledge, is any material litigation threatened against us or our subsidiaries,
other than routine litigation arising in the ordinary course of business that is
expected to be covered by insurance.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On December 15, 2000, we issued to William Blair & Co. a warrant to
purchase 16,667 shares of common stock at an exercise price of $6.00 per share
as partial consideration for services provided by it in connection with our
acquisition of QuickShip. The warrant is exercisable until September 6, 2005. In
the event our earnings for the year ending July 31, 2001 do not meet a
prescribed target: (i) the exercise price of the warrant will be the greatest of
(A) $4.50, (B) book value per share of the common stock as of September 7, 2000
as determined in good faith by the Company or (C) the closing bid price per
share of the common stock on the NASDAQ National Market on September 7, 2000
(but in no event greater than $6.00); and (ii) the number of shares of common
stock for which the warrant will be exercisable will be equal to (A) $100,000
divided by (B) the exercise price less (C) the Shares purchased pursuant to the
exercise of the warrant prior to September 29, 2001, if any.
We issued the warrant in reliance on the exemption from registration
provided in Section 4(2) of the Securities Act of 1933, as amended, based on the
nature of the purchaser and the nature of the arm's-length, negotiated
transaction.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES:
As of and for the three months ended January 31, 2001, we were not in
compliance with certain financial covenants under our Credit Facility, which
constituted an event of default. At January 31, 2001, the balance on the Credit
Facility, which is collateralized by a lien on substantially all of our assets,
was $45.5 million. Pursuant to a forbearance agreement entered into in March
2001, the lender will forbear through April 30, 2001 from exercising any right
arising from the existence of the acknowledged events of default, including but
not limited to its right to accelerate the indebtedness under the Credit
Facility. For additional information, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
On December 19, 2000, we held our 2000 annual meeting of stockholders
in Clemmons, North Carolina. The following four matters were submitted to a vote
of the stockholders:
1. The election of Steven D. Devick, Mark Castaneda, and David L.
Warnock to serve three-year terms on our board of directors;
2. The amendment to our 1998 Stock Incentive Plan to increase the
number of shares of common stock reserved for distribution
thereunder from 1,200,000 to 2,200,000 and to provide that no
participant may be granted options for more than 300,000
shares during any 12-month period.
3. The amendment to our Amended and Restated Stock Option Plan
for Non-Employee Directors to increase the number of shares of
common stock reserved for distribution thereunder from 100,000
to 400,000.
4. The ratification of the appointment of Ernst & Young LLP as
the Company's independent accountants for the fiscal year
ending July 31, 2001.
The holders of our common stock and our Series A Convertible Preferred
Stock voted together as a single voting group on all of these items with the
exception of the election of Mr. Warnock to our board of directors, on which
only the holders of the Series A Convertible Preferred Stock were entitled to
vote. All of these items were approved.
The results of the stockholder voting were as follows:
BROKER
FOR AGAINST ABSTAIN NON-VOTE TOTAL VOTES
---------- ------- ------- -------- -----------
1. Election of Directors
Steven D. Devick 10,479,679 0 658,420 0 11,138,099
Mark Castaneda 10,477,604 0 660,495 0 11,138,099
David L. Warnock 2,850,000 0 0 0 2,850,000
2. Amendment to the 1998 Stock Incentive Plan 7,833,558 947,099 10,422 2,347,020 11,138,099
3. Amendment to the Non-Employee Director Stock Option Plan 7,784,374 995,458 11,247 2,347,020 11,138,099
4. Ratification of Appointment of Accountants 11,024,369 57,130 0 56,600 11,138,099
ITEM 5. OTHER INFORMATION: NONE
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibit:
4.1 -- Form of Certificate of Series A Convertible
Preferred Stock of the Company, incorporated by
reference to Exhibit 4.1(b) of the Company's Annual
Report on Form 10-K for the year ended July 31, 2000.
4.2 -- Certificate of Designation, Rights and Preferences
of Series A Convertible Preferred Stock dated
September 7, 2000, incorporated by reference to
Exhibit 4.10 to the Company's Registration Statement
on Form S-3 dated September 25, 2000.
4.3 -- Certificate of Designation, Number of Authorized
Shares of Series A Convertible Preferred Stock dated
October 25, 2000, incorporated by reference to
Exhibit 4.11 of the Company's Annual Report on Form
10-K for the year ended July 31, 2000.
4.4 -- Amended and Restated Registration Rights Agreement
dated October 25, 2000 among the Company, the
investors listed therein and the former stockholders
of QuickShip, Inc., incorporated by reference to
Exhibit 4.12 of the Company's Annual Report on Form
10-K for the year ended July 31, 2000.
(b) Reports on Form 8-K:
On November 13, 2000, we filed a Current Report on Form 8-K to report under
Item 2 our acquisition of QuickShip, Inc. and, on January 12, 2001, we amended
that report by filing Form 8-K/A to report under Item 7 the financial statements
of QuickShip, Inc. and certain pro forma financial information.
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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: March 19, 2001 By: /s/ Billy D. Prim
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Chairman, President and Chief
Executive Officer
Date: March 19, 2001 By: /s/ Mark Castaneda
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Chief Financial Officer
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