1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 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 or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
104 CAMBRIDGE PLAZA DRIVE
WINSTON-SALEM, NORTH CAROLINA 27104
(Address of principal executive offices)
(336) 659-6900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 31, 2001
- -------------------------------------- ---------------------------
Common stock, par value $.001 per share 9,256,142 Shares
1
2
BLUE RHINO CORPORATION
INDEX
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements (unaudited):
Condensed consolidated balance
sheets as of April 30, 2001 and July
31, 2000.
Condensed consolidated statements of
operations for the three and nine
month periods ended April 30, 2001
and 2000.
Condensed consolidated statements of
cash flows for the nine month
periods ended April 30, 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 3: Defaults Upon Senior Securities.
Item 6: Exhibits and Reports on Form 8-K.
SIGNATURES
2
3
PART I
FINANCIAL INFORMATION
ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BLUE RHINO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF APRIL 30, 2001 AND JULY 31, 2000
(IN THOUSANDS)
APRIL 30, JULY 31,
2001 2000
--------- ---------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 1,321 $ 1,079
Accounts receivable, net 13,099 19,254
Inventories 3,215 5,415
Prepaid expenses and other current assets 8,781 3,746
--------- ---------
Total current assets 26,416 29,494
Cylinders leased under operating lease agreements, net 29,564 27,277
Property, plant, and equipment, net 27,797 20,332
Intangibles, net 28,345 27,347
Investment in joint venture 1,205 3,027
Other assets 921 698
--------- ---------
Total assets $ 114,248 $ 108,175
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,255 $ 16,565
Current portion of long-term debt and capital lease obligations 1,529 1,786
Accrued liabilities 2,054 1,476
--------- ---------
Current liabilities exclusive of credit facility 13,838 19,827
Credit facility 45,050 4,000
--------- ---------
Total current liabilities 58,888 23,827
Long-term debt and capital lease obligations, less current maturities 2,061 42,396
--------- ---------
Total liabilities 60,949 66,223
Stockholders' equity:
Common stock, $0.001 par value; 100,000,000 shares authorized, 9 9
9,256,142 and 9,221,703 shares issued and outstanding at
April 30, 2001 and July 31, 2000, respectively
Preferred stock, $0.001 par value; 20,000,000 shares authorized, 3 --
2,850,000 and no shares issued and outstanding at April
30, 2001 and July 31, 2000, respectively
Capital in excess of par 78,690 62,010
Other stockholders' equity (25,403) (20,067)
--------- ---------
Total stockholders' equity 53,299 41,952
--------- ---------
Total liabilities and stockholders' equity $ 114,248 $ 108,175
========= =========
The accompanying notes are an integral part of these financial statements.
3
4
BLUE RHINO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED APRIL 30, 2001 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
------------------------- -------------------------
2001 2000 2001 2000
-------- -------- -------- --------
(Unaudited) (Unaudited)
Net revenues $ 31,575 $ 17,036 $ 97,064 $ 46,458
Operating costs and expenses:
Cost of sales 24,936 11,612 76,299 32,642
Selling, general, and administrative 4,663 2,780 14,051 7,826
Depreciation and amortization 2,282 1,241 6,096 3,134
-------- -------- -------- --------
Total operating costs and expenses 31,881 15,633 96,446 43,602
-------- -------- -------- --------
Income (loss) from operations (306) 1,403 618 2,856
Other expenses (income):
Interest expense 1,357 524 3,671 1,276
Other, net (96) (41) (169) (32)
-------- -------- -------- --------
Income (loss) before other non-operating expenses (1,567) 920 (2,884) 1,612
Other non-operating expenses:
Loss on investee 526 95 1,823 95
-------- -------- -------- --------
Income (loss) before income taxes (2,093) 825 (4,707) 1,517
Income taxes 38 80 73 80
-------- -------- -------- --------
Net income (loss) $ (2,131) $ 745 $ (4,780) $ 1,437
Preferred dividends 214 -- 556 --
-------- -------- -------- --------
Income (loss) available to common stockholders $ (2,345) $ 745 $ (5,336) $ 1,437
======== ======== ======== ========
Earnings (loss) per common share
Basic $ (0.19) $ 0.08 $ (0.46) $ 0.17
======== ======== ======== ========
Diluted $ (0.19) $ 0.08 $ (0.46) $ 0.16
======== ======== ======== ========
Shares used in per share calculations:
Basic 12,092 8,837 11,481 8,574
======== ======== ======== ========
Diluted 12,092 9,266 11,481 8,750
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
4
5
BLUE RHINO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED APRIL 30, 2001 AND 2000
(IN THOUSANDS)
NINE MONTHS ENDED
APRIL 30,
-------------------------
2001 2000
-------- --------
(unaudited)
Cash flows from operating activities:
Net income (loss) $ (4,780) $ 1,437
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization 6,096 3,134
Loss on investee 1,823 95
Other non-cash expenses 264 646
Changes in operating assets and liabilities, net of
business acquisitions:
Accounts receivable 6,156 341
Inventories 2,030 (813)
Other current assets (2,240) 814
Accounts payable and accrued liabilities (6,807) 934
-------- --------
Net cash provided by operating activities 2,542 6,588
-------- --------
Cash flows from investing activities:
Business acquisitions (1,351) (10,148)
Purchases of property, plant, and equipment (3,934) (4,533)
Net advances to and investment in joint venture (3,395) (1,592)
Purchases of cylinders held under operating leases, net (2,925) (5,520)
Collections on notes receivable 361 66
-------- --------
Net cash used in investing activities (11,244) (21,727)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of equity, net of expenses 9,662 6,384
Proceeds from notes payable to bank 20,586 36,220
Payments on notes payable to bank (19,811) (23,305)
Proceeds from issuance of convertible notes -- 7,000
Payment on cylinder financing -- (7,000)
Payments of debt issuance costs -- (399)
Payments on long-term debt and capital lease obligations (1,493) (1,196)
-------- --------
Net cash provided by financing activities 8,944 17,704
-------- --------
Net increase in cash and cash equivalents 242 2,565
Cash and cash equivalents at beginning of period 1,079 913
-------- --------
Cash and cash equivalents at end of period $ 1,321 $ 3,478
======== ========
The accompanying notes are an integral part of these financial statements.
5
6
BLUE RHINO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 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 nine month periods ended April 30,
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 accounting principles generally
accepted in the United States for complete financial statements.
These financial statements should be read in conjunction with the
audited consolidated financial statements of Blue Rhino Corporation as of and
for the year ended July 31, 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 fluctuations and wholesale propane price volatility. The Company's
objective for holding derivatives is to minimize risks by using the most
effective methods to eliminate or reduce the impacts of these exposures.
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 London Interbank Offered Rate ("LIBOR"). There was no material
adjustment to interest expense during the three and nine month periods ended
April 30, 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.
However, for the three month period ending April 30, 2001, the interest rate
swap was still an effective cash flow hedge.
Effective March 1, 2001, the Company restructured its payment
obligations to distributors such that each payment will include a fixed
component and a variable component based on the price of propane. In March 2001,
the Company entered into a derivative instrument to hedge against fluctuations
in the propane price component of the distributor payments. The Company entered
into a series of monthly option contracts designed to fix the propane price
component within a specified range during the period from April 2001 to
September 2001. The contracts hedge approximately 25% of the Company's
anticipated cylinder exchange volume
6
7
during the same period. In May and June 2001, the Company entered into other
derivative instruments to hedge additional propane price exposure on a portion
of its anticipated cylinder exchange volume through the third quarter of fiscal
2002. In the aggregate, the derivative instruments hedge from approximately 50%
to 75% of the Company's anticipated monthly cylinder exchange volume during the
period from June 2001 through March 2002.
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 an increase in OCI in connection with its propane price
hedge of $11 for each of the three and nine months ended April 30, 2001. Hedge
ineffectiveness, determined in accordance with SFAS 133, had no material impact
on earnings for the three or nine month periods ended April 30, 2001.
The Company had a reduction in OCI in connection with its cash flow
hedge for the three and nine months ended April 30, 2001 of $53 and $437,
respectively. Hedge ineffectiveness, determined in accordance with SFAS 133, had
no material impact on earnings for the three or nine month periods ended April
30, 2001.
Total comprehensive loss was ($2,173) and ($5,337) for the three and
nine months ended April 30, 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 nine months ended April 30, 2001
of $526 and $1,823, respectively. The Company's portion of the loss in the joint
venture for each of the three and nine months ended April 30, 2000 was $95.
During the nine months ended April 30, 2001, the Company advanced $3,395 to R4
Tech. At April 30, 2001, the Company had cumulative advances outstanding of
$4,479 to R4 Tech.
Summary financial information for R4 Tech for the three and nine month
periods ended April 30, 2001 is as follows:
For the Three For the Nine
Months Ended Months Ended
April 30, 2001 April 30, 2001
-------------- --------------
Net revenues............. $2,349 $6,417
Gross profit............. (804) (2,900)
Net loss................ (1,073) (3,720)
4. ACQUISITIONS AND INTANGIBLE ASSETS
On October 26, 2000, the Company completed the acquisition of QuickShip,
a retail shipping service company previously 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.
7
8
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 Nine Months Ended
April 30,
-------------------------
2001 2000
-------- --------
Net revenues $ 97,108 $ 46,711
======== ========
Net loss $ (5,590) $ (962)
======== ========
Net loss available to common stockholders $ (6,180) $ (1,217)
======== ========
Basic and diluted loss per common share $ (0.52) $ (0.13)
======== ========
Intangibles consisted of the following at the dates indicated:
April 30, July 31,
2001 2000
-------- --------
(Unaudited)
Goodwill $ 28,681 $ 26,302
Patents and trademarks 1,406 1,399
Noncompete and workforce 994 983
-------- --------
31,081 28,684
Accumulated amortization (2,736) (1,337)
-------- --------
$ 28,345 $ 27,347
======== ========
Amortization expense for the three and nine months ended April 30, 2001
was $520 and $1,399, respectively. Amortization expense for the three and nine
months ended April 30, 2000 was $279 and $605, 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. The Credit Facility requires the Company to meet
certain covenants, including minimum net worth and cash flow requirements. At
April 30, 2001, the balance on the Credit Facility was $45,050. The Credit
Facility is collateralized by a lien on substantially all of the Company's
assets.
As of and for the three months ended April 30, 2001, the Company was
not in compliance with certain financial covenants of the Credit Facility and
was in default on the $10 million seasonal overline, which constituted events of
default. Pursuant to a forbearance agreement entered into as of May 1, 2001, the
lender agreed to forbear through June 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 continues the increased interest rates on the Credit
Facility previously agreed upon from a maximum rate of LIBOR plus 2.75% to the
prime rate plus 3.0%.
8
9
The Company intends to refinance the Credit Facility prior to the
forbearance expiration date of June 30, 2001. The Company is currently
negotiating with its primary bank lender and another prospective lender to amend
the Credit Facility and to increase its borrowing availability. In connection
with this refinancing, the Company expects to incur refinancing costs of
approximately $500 that will be expensed in the fourth quarter of fiscal 2001.
In the event that the Company's efforts to refinance are unsuccessful and if the
forbearance agreement is not extended, 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. Messrs. 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 April 30, 2001, the
Company had accrued dividends on the outstanding shares of Series A Convertible
Preferred Stock of $556.
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 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).
9
10
Three Months Ended Nine Months Ended
April 30, April 30,
------------------------- -------------------------
2001 2000 2001 2000
-------- -------- -------- --------
(unaudited) (unaudited)
Basic and diluted earnings (loss) per share:
Net income (loss) $ (2,131) $ 745 $ (4,780) $ 1,437
Less: Preferred stock dividends (214) -- (556) --
-------- -------- -------- --------
Income (loss) applicable to common stockholders $ (2,345) $ 745 $ (5,336) $ 1,437
Weighted average common shares used in
computing the earnings (loss) per common
share (in thousands):
Basic 12,092 8,837 11,481 8,574
-------- -------- -------- --------
Diluted 12,092 9,266 11,481 8,750
-------- -------- -------- --------
Earnings (loss) per common share:
Basic $ (0.19) $ 0.08 $ (0.46) $ 0.17
======== ======== ======== ========
Diluted $ (0.19) $ 0.08 $ (0.46) $ 0.16
======== ======== ======== ========
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 nine months ended April 30, 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
QuickShip, a retail shipping services company acquired in October 2000, is
included within the products segment as it is not currently material on a stand
alone basis (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. The
Company's selected segment information as of and for the three and nine months
ended April 30, 2001, and April 30, 2000 is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
---------------------------------------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net revenues:
Cylinder exchange $ 19,178 $ 15,226 $ 52,897 $ 43,268
Products and other 12,397 1,810 44,167 3,190
-------- -------- -------- --------
$ 31,575 $ 17,036 $ 97,064 $ 46,458
======== ======== ======== ========
Segment EBITDA:
Cylinder exchange $ 2,075 $ 2,449 $ 3,563 $ 5,551
Products and other (99) 195 3,151 439
-------- -------- -------- --------
$ 1,976 $ 2,644 $ 6,714 $ 5,990
======== ======== ======== ========
AS OF APRIL 30,
2001 2000
-------- --------
Total assets:
Cylinder exchange $ 84,545 $ 74,346
Products and other 29,703 20,616
-------- --------
$114,248 $ 94,962
======== ========
10
11
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 nine month
periods ended April 30, 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 more than 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, Wal-Mart, 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 45 independent distributors make the investments
in the vehicles and refilling and refurbishing equipment necessary to operate
cylinder exchange businesses. We concluded the third quarter of fiscal 2001 with
approximately 26,400 locations, a net increase of approximately 3,050 locations
over April 30, 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, or competitive,
regulatory or other factors.
We have strategically expanded our business 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 shipping 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.
11
12
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED APRIL 30, 2001 WITH THE THREE MONTHS ENDED
APRIL 30, 2000
Net revenues. Net revenues increased 85.3% to $31.6 million for the
three months ended April 30, 2001 from $17.0 million for the three months ended
April 30, 2000. Net revenues consisted of $18.1 million from cylinder
transactions, $12.3 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. 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 26.0% over the same period in the prior year. The increase in cylinder
exchange revenues was due primarily to an approximately 17% increase in same
store cylinder exchange transactions, an approximately 7% increase in pricing to
retailers and an approximately 13% increase in the number of cylinder exchange
locations. The number of cylinders transacted increased 24.7% to 1.3 million
units in the three months ended April 30, 2001 from 1.1 million units during the
same period in the prior year.
Gross margin. Our overall gross margin decreased to 21.0% in the third
quarter of fiscal 2001 from 31.8% in the third quarter of fiscal 2000. This
decrease was due primarily to the increase in product sales as a percentage of
net revenues. Product sales carry a lower gross margin than cylinder
transactions. In addition, cylinder exchange margins in the third quarter of
2001 were lower than in the same period of the prior year, due primarily to the
impact of voluntary payments made to our distributors to partially offset
unusually high wholesale propane prices. The voluntary payments were
discontinued effective March 1, 2001. As expected, the changes in the method in
which we pay our distributors and the implementation of our propane hedging
strategy on March 1, 2001, combined with price increases to retailers, began to
favorably impact cylinder exchange gross margins during the quarter. For the
months of March and April 2001, cylinder exchange margins returned to historical
levels in excess of 25 percent.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 67.7% to $4.7 million for the three months
ended April 30, 2001 from $2.8 million for the three months ended April 30,
2000. Selling, general, and administrative expenses decreased as a percentage of
net revenues to 14.8% for the three months ended April 30, 2001 from 16.3% for
the three months ended April 30, 2000. The increase in selling, general and
administrative expenses was due primarily to the additional costs for Uniflame
and QuickShip, which were acquired in April 2000 and October 2000, respectively,
and to increased 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 $2.3 million for the third quarter of fiscal 2001 from $1.2 million for the
third quarter of fiscal 2000. Depreciation expense increased to $1.8 million for
the third quarter of fiscal 2001 from $1.0 million for the third quarter of
fiscal 2000 primarily due to the increase in the number of installed cylinder
displays, the increase in the 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 $520,000 in the second quarter of
fiscal 2001 from $279,000 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 remaining asset base.
Interest expense. Interest expense increased to $1.4 million in the
third quarter of fiscal 2001 from $524,000 in the third quarter of fiscal 2000.
The increase in interest expense resulted primarily from the additional
borrowings outstanding under our credit facility combined with an increase in
interest rates on the 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. We are currently
negotiating with our primary bank lender and another prospective lender to amend
our credit facility and to increase our borrowing availability. If we are
successful in increasing our borrowing availability, our interest expense may
increase in future periods.
12
13
Loss on investee. Loss on investee increased to $526,000 in the third
quarter of fiscal 2001 from $95,000 in the third quarter of fiscal 2000. This
charge represents our share of the loss related to our 49% ownership interest in
R4 Tech, which began operations in April 2000. 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 in
the 2002 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 $96,000 of income in the third
quarter of fiscal 2001 from $41,000 of income in the third quarter of fiscal
2000. The increase in other income resulted primarily from an increase in
interest income on advances to R4 Tech and distributors.
COMPARISON OF THE NINE MONTHS ENDED APRIL 30, 2001 WITH THE NINE MONTHS ENDED
APRIL 30, 2000
Net revenues. Net revenues increased 108.9% to $97.1 million for the
nine months ended April 30, 2001 from $46.5 million for the nine months ended
April 30, 2000. Net revenues consisted of $49.4 million from cylinder
transactions, $44.0 million from product sales and $3.7 million from lease and
other income. Product sales consist of patio heaters, fireplace accessories,
barbecue grills, and garden products. 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.
In addition, cylinder exchange revenues increased 22.3% over the same period in
the prior year. The increase in cylinder exchange revenue was due primarily to
an approximately 16% increase in same store cylinder exchange transactions and
an approximately 13% increase in the number of cylinder exchange locations. The
number of cylinder transactions increased 26.1% to 3.7 million units in the nine
months ended April 30, 2001 from 3.0 million units during the same period last
year. Cylinder exchange transaction revenues per unit for the period, however,
decreased slightly 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 21.4% for the first
nine months of fiscal 2001 from 29.7% for the first nine months of fiscal 2000.
This decrease was due primarily to two factors. The first factor was the growth
of product sales as a percentage of net revenues. Product sales carry lower
gross margins than cylinder exchange transactions. The second factor was the
impact of voluntary payments made to our distributors to partially offset
unusually high wholesale propane costs. The voluntary payments were discontinued
effective March 1, 2001 and replaced by a restructured payment plan that
includes a fixed component and a variable component based on the price of
propane. As expected, the restructured distributor payment plan and the
implementation of the new hedging strategy on March 1, 2001, combined with price
increases to retailers, began to favorably impact cylinder exchange gross
margins. For the months of March and April 2001, cylinder exchange margins
returned to historical levels in excess of 25 percent.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 79.6% to $14.1 million for the nine months
ended April 30, 2001 from $7.8 million for the nine months ended April 30, 2000.
Selling, general, and administrative expenses decreased as a percentage of net
revenues to 14.5% for the nine months ended April 30, 2001 from 16.8% for the
nine months ended April 30, 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 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 $6.1 million in the nine months ended April 30, 2001 from $3.1 million in the
nine months ended April 30, 2000. Depreciation expense increased to $4.7 million
in the nine months ended April 30, 2001 from $2.5 million for the nine months
ended April 30, 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 $1.4 million in the nine months
ended April 30, 2001 from $605,000 in the nine months ended April 30, 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 remaining asset base.
13
14
Interest expense. Interest expense increased to $3.7 million in the
nine months ended April 30, 2001 from $1.3 million in the nine months ended
April 30, 2000. The increase in interest expense resulted primarily from
additional borrowings under our credit facility combined with an increase in
interest rates on the 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. We are currently negotiating with our primary bank lender
and another prospective lender to amend our credit facility and to increase our
borrowing availability. If we are successful in increasing our borrowing
availability, our interest expense may increase in future periods.
Loss on investee. Loss on investee increased to $1.8 million in the
first nine months of fiscal 2001 from $95,000 in first nine months of fiscal
2000. This charge 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 in the 2002 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 $169,000 of income in the nine
months ended April 30, 2001 from $32,000 of income in the nine months ended
April 30, 2000. The increase in other income in the first nine months of fiscal
2001 resulted primarily from an increase in interest income on notes receivable
and advances to R4 Tech and distributors.
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 $2.1 million for the nine months
ended April 30, 2001 while cash provided by operations was $6.6 million for the
nine months ended April 30, 2000. Net loss for the nine months ended April 30,
2001 was more than offset by non-cash depreciation and amortization and loss on
investee, creating positive cash flow. For the nine months ended April 30, 2000,
net income and non-cash depreciation and amortization provided cash from
operations.
Net cash used in investing activities was $10.8 million for the nine
months ended April 30, 2001 and $21.7 million for the nine months ended April
30, 2000. The primary components of cash used in investing activities in both
periods included acquisitions, purchases of cylinders leased to our
distributors, advances to R4 Tech, and investments in property, plant and
equipment. For the nine months ended April 30, 2000, cash used in investing
activities also included our net investment in the joint venture.
Net cash provided by financing activities was $8.9 million for the nine
months ended April 30, 2001 and $17.7 million for the nine months ended April
30, 2000. Cash provided by financing activities for the nine months ended April
30, 2001 included net proceeds of approximately $9.6 million from a private
placement of preferred stock and approximately $.8 million of net borrowings
from our credit facility. Cash provided by financing activities for the nine
months ended April 30, 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. Net borrowings under the
credit facility were $12.9 million for the nine months ended April 30, 2000. 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 April 2000. We received a 49%
ownership interest in the joint venture in exchange for our net contribution of
approximately $3.4 million. The joint venture is being accounted for using the
equity method of accounting. During the nine months ended April 30, 2001, we
advanced $3.6 million to R4 Tech. At April 30, 2001, we had cumulative advances
outstanding of approximately $4.5 million to R4 Tech. We 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 July 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
14
15
Convertible Preferred Stock we have agreed to pay William Blair & Co. a
placement fee of $500,000 in cash and have issued 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 April 30,
2001, we had accrued dividends on the outstanding shares of Series A Convertible
Preferred Stock of $556,000.
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 previously 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 be dilutive to earnings before interest, taxes, depreciation, and
amortization (EBITDA) by approximately $.6 million in fiscal 2001 and will be
further dilutive to earnings as a result of the expected depreciation and
amortization expense. For fiscal 2002, we currently project QuickShip to be
accretive to EBITDA.
In June 2000, we amended and increased our existing bank Credit
Facility. The amended Credit Facility consists of three separate facilities -- a
$38 million revolving line of credit for general corporate purposes; a $7
million term facility that was paid in full in October 2000; and a $10 million
seasonal line for general corporate purposes available from July through
November 2000. The Credit Facility requires us to meet certain covenants,
including minimum net worth and cash flow requirements. At April 30, 2001, the
balance on the Credit Facility was $45.1 million. The Credit Facility is
collateralized by a lien on substantially all of our assets.
As of and for the three months ended April 30, 2001, we were not in
compliance with certain financial covenants under the Credit Facility and were
in default on the $10 million seasonal overline, which constituted events of
default. Pursuant to a forbearance agreement entered into as of May 1, 2001, the
lender will forbear through June 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 continues the increased interest rates on the Credit
Facility previously agreed upon from a maximum rate of LIBOR plus 2.75% to the
prime rate plus 3.0%.
We intend to refinance the Credit Facility prior to the forbearance
expiration date of June 30, 2001. We are currently negotiating with our primary
bank lender and another prospective lender to amend the Credit Facility and to
increase our borrowing availability. In connection with this refinancing, we
expect to incur refinancing costs of approximately $500,000 that will be
expensed in the fourth quarter of fiscal 2001. In the event that the Company's
efforts to refinance are unsuccessful and if the forbearance agreement is not
extended, the Company would likely experience a material adverse impact on its
financial condition, liquidity, and results of operations.
We anticipate that our total capital expenditures for fiscal 2001,
excluding acquisitions, will be approximately $10.0 million, and will relate
primarily to cylinders, cylinder displays and computer technology. Our capital
expenditure and working capital
15
16
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 expected additional borrowing capacity currently being
negotiated 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
experienced increased revenues during our first and second quarters in fiscal
2001 as a result of our acquisition of Uniflame in April 2000 and currently
expect the increased revenues in those quarters to continue, as they 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
Over the twelve months ended April 30, 2001 there have been dramatic
increases in fuel costs and propane has reached unusually high levels. If fuel
costs 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. On March 1, 2001,
we initiated a propane price hedging strategy that we believe will reduce our
gross margin risk resulting from fluctuations in the price of propane. Our
strategy is designed to reduce exposure to the fuel cost component of a
significant portion of our total cylinder exchange volume.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC") 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
increased interest expense for the nine months ended April 30, 2001 and 2000 by
approximately $266,000 and $123,000, 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
16
17
a contract to exchange a floating rate for a fixed rate without the exchange of
the underlying notional amount. In fiscal 2000, we entered into an interest rate
swap agreement with a notional amount of $10 million as a hedge of our variable
interest rate debt represented by the Credit Facility. Under the swap agreement,
which expires in July 2003, we pay a fixed rate of 7.36% and receive a rate
equivalent to the one-month LIBOR. In February 2001, the interest rate on the
Credit Facility was changed to a rate based on the prime rate and is no longer
based on the benchmark interest rate of LIBOR. However, for the three month
period ending April 30, 2001, the interest rate swap was still an effective cash
flow hedge.
We are exposed to commodity price risk related to changes in the price
of propane. If propane prices rise for an extended period, our gross margins and
results of operations could be negatively affected due to additional costs that
may not be fully recovered through an increase in our price to our customers.
Assuming that propane prices are not hedged and any increase cannot be recovered
through an increase in our price, a $.01 increase in the price per gallon of
propane would reduce the gross margin in our cylinder exchange segment by
approximately .2% or 20 basis points. Actual changes in margins may differ
materially from the hypothetical assumptions used in computing this exposure. We
have restructured our payment obligations to distributors and entered into a
series of monthly option contracts that are designed to reduce exposure to the
propane cost component of a significant portion of our total cylinder exchange
volume.
We invest our cash and cash equivalents in investment grade, highly
liquid investments consisting of money market instruments, bank certificates of
deposit and overnight investments in commercial paper. All of our transactions
are conducted and accounts are denominated in U.S. dollars and as such we do not
currently have exposure to foreign currency risk.
PART II -- OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES:
As of and for the three months ended April 30, 2001, we were not in
compliance with certain financial covenants under our Credit Facility and were
in default on the $10 million seasonal overline, which constituted events of
default. At April 30, 2001, the balance on the Credit Facility, which is
collateralized by a lien on substantially all of our assets, was $45.1 million.
Pursuant to a forbearance agreement entered into as of May 1, 2001, the lender
will forbear through June 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 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.
10.1 -- Third Forbearance and Modification Agreement entered
into as of May 1, 2001 by and among the Company, each
of its subsidiaries and Bank of America, N.A.
17
18
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the three
months ended April 30, 2001.
18
19
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: June 13, 2001 By: /s/ Billy D. Prim
-----------------------------------------------
Chairman, President and Chief Executive Officer
Date: June 13, 2001 By: /s/ Mark Castaneda
-----------------------------------------------
Chief Financial Officer
19