<PAGE>
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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____to ______
_____________________________________________________________________
Commission file number: 0-24287
BLUE RHINO CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 56-1870472
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
104 CAMBRIDGE PLAZA DRIVE
Winston-Salem, North Carolina 27104
(Address of principal executive offices)
(336) 659-6900
(Registrant's telephone number, including area code)
____________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of March 16, 1999: 7,650,657 common shares.
1
<PAGE>
BLUE RHINO CORPORATION
INDEX
-----
PART 1: FINANCIAL INFORMATION
Item 1: Financial Statements (unaudited):
Condensed consolidated balance sheets as of January 31, 1999
and July 31, 1998.
Condensed consolidated statements of operations for the
three and six month periods ended January 31, 1999 and 1998.
Condensed consolidated statements of cash flows for the six
month periods ended January 31, 1999 and 1998.
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
2
<PAGE>
PART I. FINANCIAL INFORMATION
- -----------------------------
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Blue Rhino Corporation
Condensed Consolidated Balance Sheets
As of January 31, 1999 and July 31, 1998
(in thousands)
<TABLE>
<CAPTION>
January 31, July 31,
1998 1998
---------- ----------
(unaudited)
<S> <C> <C>
ASSETS
------
Cash and cash equivalents $ 1,681 $ 5,908
Trade accounts receivable, net 6,541 7,901
Inventories 35 2,377
Notes receivable 200 540
Prepaid expenses and other current assets 2,180 487
---------- ----------
Total current assets 10,637 17,213
Cylinders held under operating leases, net 11,468 -
Property and equipment, net 11,620 8,505
Notes receivable 119 789
Intangibles, net 9,129 3,532
Other assets 518 431
---------- ----------
Total assets $ 43,491 $ 30,470
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Trade accounts payable $ 3,929 $ 4,421
Acquisition notes payable 953 212
Current portion of long-term debt and capital lease obligations 621 286
Accrued liabilites 464 475
---------- ----------
Total current liabilities 5,967 5,394
Note payable to bank 11,765 -
Long-term debt, less current maturities 69 104
Capital lease obligations, less current maturities 622 156
---------- ----------
Total liabilities 18,423 5,654
Minority interest 28 -
Common stock 8 8
Additional paid in capital 46,546 46,320
Accumulated deficit (21,514) (21,512)
---------- ----------
Total stockholders' equity 25,040 24,816
---------- ----------
Total liabilities and stockholder's equity $ 43,491 $ 30,470
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Blue Rhino Corporation
Condensed Consolidated Statements of Operations
For The Three and Six Months Ended January 31, 1999 and 1998
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31, January 31,
------------------------ -------------------------
1999 1998 1999 1998
---------- ---------- ----------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Cylinder transactions $ 8,328 $ 4,175 $ 17,462 $ 8,314
Other products 348 - 436 -
Lease income - cylinders 239 - 239 -
---------- ---------- ----------- ----------
Total revenues 8,915 4,175 18,137 8,314
Cost of sales:
Cylinder transactions 6,337 3,217 13,191 6,371
Other products 257 - 337 -
Leased cylinders 239 - 239 -
---------- ---------- ----------- ----------
Cost of sales 6,833 3,217 13,767 6,371
---------- ---------- ----------- ----------
Gross profit 2,082 958 4,370 1,943
Operating expenses (income):
Sales and marketing 620 463 1,289 1,027
General and administrative 1,192 862 2,295 1,706
Lease income, net (313) 15 (525) 23
Depreciation and amortization 561 271 1,085 516
Nonrecurring charges - 127 - 408
---------- ---------- ----------- ----------
Total operating expenses, net 2,060 1,738 4,144 3,680
---------- ---------- ----------- ----------
Income (loss) from operations 22 (780) 226 (1,737)
Other expenses (income):
Interest expense 34 495 67 929
Loss on investee - - 311 -
Other income, net (80) (51) (150) (102)
---------- ---------- ----------- ----------
Income (loss) before taxes 68 (1,224) (2) (2,564)
Income taxes - - - -
---------- ---------- ----------- ----------
Net income (loss) $ 68 $ (1,224) $ (2) $ (2,564)
========== ========== =========== ==========
Income (loss) available to common stockholders $ 68 $ (1,485) $ (2) $ (2,932)
========== ========== =========== ==========
Earnings (loss) per common share:
Basic and diluted $ 0.01 $ (0.83) $ 0.00 $ (1.65)
========== ========== =========== ==========
Weighted average common shares used in
computing earnings (loss) per common share:
Basic 7,642 1,779 7,637 1,779
========== ========== =========== ==========
Diluted 7,935 1,779 7,929 1,779
========== ========== =========== ==========
</TABLE>
<PAGE>
Blue Rhino Corporation
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended January 31, 1999 and 1998
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
January 31,
-----------------------
1999 1998
-------- --------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2) $ (2,564)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,177 516
Loss on disposal of assets - 261
Loss on investee 311 -
Compensation expense related to stock option plan 145 -
Minority interest in net loss of affiliate 28 -
Accreted interest on senior discount notes - 815
Changes in operating assets and liabilities, net
of business acquisitions:
Accounts receivable 1,360 623
Inventories (35) (491)
Other current assets (1,726) (247)
Accounts payable (497) (696)
Other accrued liabilities (15) (293)
-------- --------
Net cash provided by (used in) operating activities 746 (2,076)
-------- --------
Cash flows from investing activities:
Business acquisitions (5,577) (790)
Purchases of property and equipment (2,437) (286)
Proceeds from disposals of property and equipment - 39
Purchases of cylinders held under operating leases (7,547) -
Collections on notes receivable 124 261
-------- --------
Net cash used in investing activities (15,437) (776)
-------- --------
Cash flows from financing activities:
Proceeds from notes payable to bank 15,198 5,044
Payments on notes payable to bank (3,433) (4,416)
Payment of debt issuance costs (149) -
Proceeds from stockholder loans - 3,250
Proceeds from issuance of common stock 81 -
Payment of common stock offering and registration costs (305) -
Payments on acquisition notes payable (656) (20)
Payments of long-term debt and capital lease obligations (272) (124)
-------- --------
Net cash provided by financing activities 10,464 3,734
-------- --------
Net (decrease) increase in cash and cash equivalents (4,227) 882
Cash and cash equivalents at beginning of period 5,908 325
-------- --------
Cash and cash equivalents at end of period $ 1,681 $ 1,207
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Blue Rhino Corporation
Notes to Condensed Consolidated Financial Statements
January 31, 1999
Note 1 - Basis of Presentation
The condensed consolidated financial statements of Blue Rhino
Corporation (the "Company") include the accounts of its wholly owned
subsidiaries, Rhino Services, L.L.C., formed in March 1997 and CPD Associates,
Inc., formed in March 1998 and its affiliate, USA Leasing, L.L.C. ("USA
Leasing") formed in October 1998. All intercompany transactions and balances
have been eliminated in consolidation. USA Leasing is owned by four individuals
affiliated with the Company as officers, directors and/or stockholders. Under
the terms of USA Leasing's credit facility each of the four owners of USA
Leasing guarantee 5% and the Company guarantees 80% of the total amount
outstanding under the credit facility.
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 six months ended January 31, 1999 are not
necessarily indicative of the results that may be expected for the fiscal year
ending July 31, 1999.
These financial statements should be read in conjunction with the
audited consolidated financial statements of Blue Rhino Corporation as of and
for the year ended July 31, 1998.
Note 2 - Inventories
Inventories were approximately $35,000 and $2.4 million as of January
31, 1999 and July 31, 1998, respectively. Inventory is valued at the lower of
cost or market .
Note 3 - Cylinders Held Under Operating Leases
During the six months ended January 31, 1999, the Company sold cylinder
inventories to USA Leasing at book value for approximately $11.5 million. USA
Leasing has entered into operating lease agreements with the Company's
independent distributors to lease the cylinders at 1% of the cylinder value
monthly. The cylinders are stated at cost net of depreciation of approximately
$76,000. Cylinders are depreciated over their estimated useful lives of 25
years using the straight-line method.
Note 4 - Intangibles, net
During the six months ended January 31, 1999, the Company completed ten
acquisitions of assets including cylinders, cylinder displays and other
equipment and the rights to sellers' retail propane cylinder exchange accounts
and locations for an aggregate purchase price of approximately $6.9 million.
The Company paid the aggregate purchase price with approximately $5.6 million in
cash from the proceeds of its initial public offering and approximately $1.3
million in seller financing. These acquisitions have been accounted for under
the purchase method and, accordingly, the operating results from these
acquisitions have been included in the Company's consolidated financial
statements since the dates of the acquisitions. The Company periodically
assesses the net realizable value of its long-lived assets and evaluates such
<PAGE>
assets for impairment whenever events or changes in circumstances indicate the
carrying amount of an asset may not be recoverable.
Intangibles consist of the following at:
<TABLE>
<CAPTION>
January 31, July 31,
1999 1998
-------- -------
(in thousands)
(unaudited)
<S> <C> <C>
Goodwill $9,153 $3,518
Noncompete agreements 215 102
Accumulated amortization (239) (88)
------ ------
$9,129 $3,532
====== ======
</TABLE>
Amortization expense was $151,000 and $68,000 for the six months ended
January 31, 1999 and for the fiscal year ended July 31, 1998, respectively.
Note 5-Notes Payable to Bank
In December 1998, USA Leasing entered into a two year, $13.0 million
credit facility (the "USA Leasing Credit Facility") with NationsBank, N.A.
("NationsBank") to fund the purchase of cylinders. Each of the four owners of
USA Leasing guarantees 5% and the Company guarantees 80% of the loan balance
under the credit facility. As of January 31, 1999, USA Leasing had borrowings
under this credit facility of approximately $11.8 million, which bear interest
at LIBOR, plus 2.25%. The credit facility is collateralized by a blanket lien on
all of the assets of USA Leasing (cylinders held under operating leases with a
carrying value of approximately $11.5 million as of January 31, 1999). In
addition, the Company has received a subordinate security interest in all of USA
Leasing's assets as consideration for the Company's guarantee.
In December 1998, the Company entered into a $12.0 million credit
facility with NationsBank, which includes a $7.0 million revolving line of
credit and a $5.0 million acquisition facility (the "New Bank Credit Facility").
The Company's ability to borrow under the New Bank Credit Facility is reduced by
an amount equal to its contingent liability pursuant to its guarantee of the USA
Leasing Credit Facility. If the Company achieves certain performance measures,
its availability under the New Bank Credit Facility will increase. The New Bank
Credit Facility replaced a prior facility the Company had with NationsBank and
is collateralized by a lien on substantially all of its assets. The New Bank
Credit Facility requires the Company to meet certain covenants, including
minimum net worth and cash flow. The loans under the New Bank Credit Facility
bear interest at a maximum rate of LIBOR plus 2.25%. As of January 31, 1999, the
Company had not borrowed under the New Bank Credit Facility.
Note 6-Income Taxes
No provision for income taxes was recorded for the six months ended
January 31, 1999 due to the reversal of deferred tax assets for which the
benefit was fully reserved.
<PAGE>
Note 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).
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31, January 31,
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Basic and diluted earnings (loss) per share:
Net income (loss) $ 68 $(1,224) $ ( 2) $(2,564)
Less: Redeemable preferred stock dividend - 261 - 368
---- ------- ----- -------
Income (loss) available to common stockholders $ 68 $(1,485) $ ( 2) $(2,932)
---- ------- ----- -------
Weighted average common shares used in
computing the basic and diluted earnings
(loss) per common share:
Basic 7,642 1,779 7,637 1,779
----- ----- ----- -----
Diluted 7,935 1,779 7,929 1,779
===== ===== ===== =====
Basic and diluted earnings (loss) per common share $ 0.01 $( 0.83) $ 0.00 $( 1.65)
======= ======= ====== =======
</TABLE>
The weighted average common shares outstanding include the effects of all
shares, stock options and stock warrants where the effect of their inclusion
would be dilutive. For the three and six months ended January 31, 1998, the
assumed conversion of preferred shares would have been anti-dilutive.
Note 8 - Other Matters
During the three months ended October 31, 1998, the Company recognized
under the equity method of accounting, a loss of $311,000 representing the
remaining balance of the Company's loan to Bison Valve, L.L.C. ("Bison Valve").
This charge reflects the Company's funding of certain losses incurred by this
entity primarily related to researching, developing, marketing and producing
certain propane products. In December 1998, the Company signed a letter of
intent to purchase certain assets of Bison Valve related to its overfill
prevention device (primarily patent rights and manufacturing equipment) for the
cancellation of the $635,000 note from Bison Valve to the Company, $1.1 million
in common stock and warrants to purchase 100,000 shares of common stock of the
Company at the market price as defined in the agreement. These assets, once
acquired, will be amortized over their respective useful lives.
Through March 1999, the Company has executed two letters of intent for
an aggregate purchase price of approximately $1.2 million for assets including
cylinders, cylinder displays and the rights to sellers' retail propane cylinder
exchange accounts and locations. These acquisitions will be financed with cash
provided by operations and borrowing under the New Bank Credit Facility.
Note 9 - Subsequent Events
On February 11, 1999 the Company withdrew from registration with the
Securities and Exchange Commission 2,300,000 shares of its Common Stock and
canceled its proposed public offering of such shares. On February 19, 1999, the
Company terminated PricewaterhouseCoopers, LLP as its independent accountants.
The Company is currently in the process of selecting a new accounting firm.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with
the accompanying Condensed Consolidated Financial Statements and related notes
of Blue Rhino Corporation and its wholly owned subsidiaries, Rhino Services,
L.L.C. and CPD Associates, Inc. and with our audited consolidated financial
statements as of and for the fiscal year ended July 31, 1998, on file with the
Securities and Exchange Commission. Beginning in the quarter ended October 31,
1998, we have included the financial information of USA Leasing, L.L.C. ("USA
Leasing"), an affiliated company which offers cylinder lease financing to our
distributors, in our financial statements on a consolidated basis. The results
of operations for the three and six months ended January 31, 1999 are not
necessarily indicative of results that may be expected for the fiscal year
ending July 31, 1999, in part due to the seasonality of the Company's business.
The terms "we," "our," "us" and "the Company" refer to Blue Rhino Corporation,
its wholly owned subsidiaries and USA Leasing.
Results of Operations
Comparison of the Three Months Ended January 31, 1999 with the Three Months
Ended January 31, 1998
Net sales. Net sales for the three months ended January 31, 1999 of
approximately $8.9 million included $8.3 million from cylinder transactions,
$348,000 from product sales and $239,000 from lease income - cylinders. The
lease income - cylinders relates to cylinder lease income of USA Leasing, which
began leasing cylinders to our independent distributors in October 1998. Net
sales excluding lease income - cylinders increased 107.8% from approximately
$4.1 million for the three months ended January 31, 1998 to approximately $8.7
million for the three months ended January 31, 1999. The increase in net sales
was due primarily to the increase in the number of retail locations placed in
service, increased sales volume at existing locations and, to a lesser extent,
the introduction of a patio heater as a new product beginning in fiscal 1999.
The installed base of retail locations increased 106% from approximately 6,600
locations at January 31, 1998 to approximately 13,600 locations at January 31,
1999. The number of cylinders transacted increased 68.5% from approximately
340,000 units in the three months ended January 31, 1998 to approximately
573,000 units in the three months ended January 31, 1999.
Gross margin. Gross margin, excluding the impact from leased cylinders,
increased from 22.9% in the three months ended January 31, 1998 to 24.0% in the
three months ended January 31, 1999. This improvement was primarily due to a
price increase on cylinder transactions, which became effective during the third
quarter of fiscal 1998 and, to a lesser extent, the addition of higher margin
accounts to the customer base as well an increase as a percenage of net sales of
cylinder upgrades, which have higher margins than cylinder exchanges. The
condensed consolidated statement of operations contains no gross margin from
leased cylinders as the lease income from cylinders was offset in full by the
cost of leased cylinders. The cost of leased cylinders includes related interest
of $173,000, depreciation of $76,000, other expenses of $18,000 and the minority
interest due to USA Leasing of $28,000.
Sales and marketing expenses. Sales and marketing expenses increased
33.9% from approximately $463,000 in the three months ended January 31, 1998 to
approximately $620,000 in the three months ended January 31,1999 but decreased
as a percentage of total net sales from 11.1% in the three months ended January
31, 1998 to 7.1% in the three months ended January 31, 1999. The increase in
sales and marketing expenses was due primarily to additional compensation and
related travel costs for an increased internal sales force partially offset by
reduced commissions to external sales representatives. Our transition away from
commission based outside sales representatives to an internal sales force has
fixed a higher proportion of our sales and marketing expenses. The decrease in
sales and marketing expenses as a percentage of net sales reflects the fact that
a significant portion of the
<PAGE>
compensation of our sales and marketing staff is fixed resulting in a slower
increase in the rate of sales and marketing expenses compared with the increase
in net sales.
General and administrative expenses. General and administrative expenses
increased 38.3% from approximately $862,000 in the three months ended January
31, 1998 to approximately $1.2 million in the three months ended January 31,
1999 but decreased as a percentage of total net sales from 20.6% in the three
months ended January 31, 1998 to 13.7% in the three months ended January 31,
1999. The increase in general and administrative expenses was due primarily to
additional compensation costs, costs related to launching the patio heater
product and additional costs associated with operating a public company
including investor relations and other professional fees. The decrease in
general and administrative expenses as a percentage of net sales was due
primarily to the fact that a significant portion of our general and
administrative expenses are fixed and, as a result, general and administrative
expenses increased at a slower rate than net sales.
Lease income, net. Gross lease income increased from approximately
$127,000 for the three months ended January 31, 1998 to approximately $313,000
for the three months ended January 31, 1999, while gross rent expense for the
same periods decreased from approximately $142,000 to $0. The increase in lease
income was due to the addition of new retail locations resulting in an increase
in the number of cylinder displays under lease. The decrease in rent expense
was a result of the purchase of cylinder displays in May 1998 that were
previously leased under an operating lease facility. Lease income, net does not
include any cylinder lease income of USA Leasing as it is recognized under lease
income -cylinders.
Depreciation and amortization. Depreciation and amortization expense
increased from approximately $271,000 in the three months ended January 31, 1998
to approximately $561,000 in the three months ended January 31, 1999.
Depreciation expense increased by $208,000 from approximately $246,000 in the
three months ended January 31, 1998 to approximately $454,000 in the three
months ended January 31, 1999. This increase was due to our purchase of
cylinder displays which we previously leased under an operating lease facility
and our ongoing purchase of additional cylinder displays to support growth in
our installed base of retail locations. Our acquisition of computer technology
under capital leases also impacted depreciation expense to a lesser extent.
Amortization expense increased by $82,000 from approximately $25,000 in the
three months ended January 31, 1998 to approximately $107,000 in the three
months ended January 31, 1999 principally due to the increased amortization of
intangibles associated with a number of acquisitions. Depreciation and
amortization does not include any depreciation of cylinders owned by USA Leasing
as it is recognized under cost of sales--leased cylinders.
Nonrecurring charges. We had no nonrecurring charges for the three months
ended January 31, 1999 and do not expect to incur any additional nonrecurring
charges related to our transition to an independent distributor business model
from a vertically integrated business model. In the three months ended January
31, 1998, nonrecurring charges were approximately $127,000, consisting primarily
of the write-down of facilities and equipment purchased to support the
vertically integrated business model.
Interest expense. Interest expense decreased from approximately $495,000
in the three months ended January 31, 1998 to approximately $34,000 in the three
months ended January 31, 1999. The decrease in interest expense resulted from
the repayment of substantially all of our outstanding indebtedness in May 1998
with proceeds from our initial public offering. The interest expense in the
three months ended January 31, 1999 is a result of capital lease obligations
incurred primarily to acquire computer technology.
<PAGE>
Other income, net. Other income, net increased slightly from $51,000 in
the three months ended January 31, 1998 to $80,000 in the three months ended
January 31, 1999. The increase was primarily due to increased interest income
from excess cash balances and various notes receivable.
Comparison of the Six Months Ended January 31, 1999 with the Six Months Ended
January 31, 1998
Net sales. Net sales for the six months ended January 31, 1999 of
approximately $18.1 million included $17.5 million from cylinder transactions,
$436,000 from product sales and $239,000 from lease income - cylinders. Lease
income - cylinders relates to USA Leasing which began leasing cylinders to our
independent distributors in October 1998. Net sales excluding lease income -
cylinders increased 115.3% from approximately $8.3 million for the six months
ended January 31, 1998 to approximately $17.9 million for the six months ended
January 31, 1999. The increase in net sales was due primarily to the increase
in the number of retail locations placed in service, increased sales volume at
existing locations and, to a lesser extent, the introduction of a patio heater
as a new product beginning in fiscal 1999. The number of cylinders transacted
increased 78.7% from approximately 715,000 units during the six months ended
January 31, 1998 to approximately 1.3 million units during the six months ended
January 31, 1999.
Gross margin. Gross margin, excluding the impact from leased cylinders,
increased from 23.4% for the six months ended January 31, 1998 to 24.4% for the
six months ended January 31, 1999. This improvement was due to a price increase
on cylinder transactions, which became effective during the third quarter of
fiscal 1998, the addition of higher margin accounts to the customer base as well
as an increase as a percentage of net sales of cylinder upgrades, which have
higher margins than cylinder exchanges. The condensed consolidated statement of
operations contains no gross margin from leased cylinders as the lease income
from cylinders was offset in full from the cost of leased cylinders. The cost of
leased cylinders includes related interest of $173,000, depreciation of $76,000,
other expenses of $18,000 and the minority interest due to USA Leasing of
$28,000.
Sales and marketing expenses. Sales and marketing expenses increased 11.1%
from approximately $1.0 million for the six months ended January 31, 1998 to
approximately $1.2 million in the six months ended January 31, 1999 but
decreased as a percentage of total net sales from 12.4% for the six months ended
January 31, 1998 to 7.2% for the six months ended January 31, 1999. Our
transition away from commission based outside sales representatives to an
internal sales force has fixed a higher proportion of our sales and marketing
expenses. The decrease in sales and marketing expenses as a percentage of net
sales reflects the fact that a significant portion of the compensation of our
sales and marketing staff is fixed resulting in a slower increase in the rate of
sales and marketing expenses compared with the increase in net sales.
General and administrative expenses. General and administrative expenses
increased 34.5% from approximately $1.7 million for the six months ended January
31, 1998 to approximately $2.2 million for the six months ended January 31, 1999
but decreased as a percentage of total net sales from 20.5% for the six months
ended January 31, 1998 to 12.8% for the six months ended January 31, 1999. The
increase in general and administrative expenses was due primarily to additional
compensation costs, costs related to the introduction of a patio heater product
and additional costs associated with operating a public company including
investor relations and other professional fees. The decrease in general and
administrative expenses as a percentage of net sales was due primarily to the
fact that a significant portion of our general and administrative expenses are
fixed and, as a result, general and administrative expenses increased at a
slower rate than net sales.
Lease income, net. Gross lease income increased from approximately
$243,000 for the six months ended January 31, 1998 to approximately $525,000 for
the six months ended January 31, 1999, while gross rent expense for the same
periods decreased from approximately $266,000 to $0. The increase in lease
income was due to the addition of new retail locations resulting in an increase
in the number of
<PAGE>
cylinder displays under lease. The decrease in rent expense was a result of the
purchase of cylinder displays in May 1998 that were previously leased under an
operating lease facility. Lease income, net does not include any cylinder lease
income of USA Leasing as it is recognized under lease income - cylinders.
Depreciation and amortization. Depreciation and amortization increased
from approximately $516,000 for the six months ended January 31, 1998 to
approximately $1.1 million for the six months ended January 31, 1999.
Depreciation expense increased by $414,000 from approximately $471,000 for the
six months ended January 31, 1998 to approximately $885,000 for the six months
ended January 31, 1999. This increase was due to our purchase of cylinder
displays which we previously leased under an operating lease facility and our
ongoing purchase of additional cylinder displays to support growth in our
installed base of retail locations. Our acquisition of computer technology
under capital leases also impacted depreciation expense to a lesser extent.
Amortization expense increased by $155,000 from approximately $45,000 in the six
months ended January 31, 1998 to approximately $200,000 in the six months ended
January 31, 1999 principally due to the increased amortization of intangibles
associated with a number of acquisitions. Depreciation and amortization does
not include any depreciation of cylinders owned by USA Leasing as it is
recognized under cost of sales - leased cylinders.
Nonrecurring charges. We had no nonrecurring charges for the six months
ended January 31, 1999 and do not expect to incur any additional nonrecurring
charges related to our transition to an independent distributor business model
from a vertically integrated business model. In the six months ended January
31, 1998, nonrecurring charges were approximately $408,000, consisting primarily
of the write-down of facilities and equipment purchased to support the
vertically integrated business model.
Interest expense. Interest expense decreased from approximately $929,000
for the six months ended January 31, 1998 to approximately $67,000 for the six
months ended January 31, 1999. The decrease in interest expense resulted from
the repayment of substantially all of our outstanding indebtedness in May 1998
with proceeds from our initial public offering. The interest expense for the
six months ended January 31, 1999 is a result of capital lease obligations
incurred primarily to acquire computer technology.
Loss on investee. Loss on investee was $311,000 for the six months ended
January 31, 1999, which reflects the application of the equity method of
accounting to our convertible loan to Bison Valve, L.L.C. ("Bison Valve"). A
loss was recorded because Bison Valve used the proceeds of our loan to fund
losses incurred primarily in researching, developing, marketing and producing an
overfill prevention device and other propane related products. As of October
31, 1998, we had recognized charges for the entire principal balance of our
convertible loan. In December 1998, we signed a letter of intent to acquire all
intellectual property and other assets of Bison Valve related to its overfill
prevention device for the cancellation of a $635,000 note from Bison Valve to
us, $1.1 million of our common stock and warrants to purchase 100,000 shares of
our common stock. We will account for substantially all of the purchase price
as a patent to be amortized over its remaining life.
Other income, net. Other income, net increased from approximately $102,000
for the six months ended January 31, 1998 to approximately $150,000 for the six
months ended January 31, 1999. The increase was primarily due to increased
interest income from excess cash balances and various notes receivable.
<PAGE>
Liquidity and Capital Resources
Our primary sources of funds have been the issuance of stock, most recently
through our initial public offering in May 1998, and the incurrence of debt. We
had positive working capital of approximately $4.7 million as of January 31,
1999, which is primarily the result of cash provided by our initial public
offering and to a lesser extent cash provided by operations.
Net cash provided by operations was approximately $791,000 for the six
months ended January 31, 1999, while cash used in operations was approximately
$2.1 million for the six months ended January 31, 1998. Cash provided by
operations for both periods resulted primarily from the decrease in accounts
receivable associated with the seasonal reduction in our sales volume in our
fall and winter quarters. Additionally, in both periods, the net loss was
positively adjusted for non-cash expenses, primarily depreciation and
amortization. Cash used in operations during the six months ended January 31,
1999 included approximately $1.6 million of advances on certain products and
services while during the six months ended January 31, 1998 cash used in
operations resulted primarily from a net loss. In addition, cash used in
operations for both periods resulted from the decreases in accounts payable and
accrued expenses due to the seasonal nature of our business.
Net cash used in investing activities was approximately $15.5 million for
the six months ended January 31, 1999 and approximately $776,000 for the six
months ended January 31, 1998. The primary components of cash used in investing
activities in both periods included acquisitions and investments in property and
equipment and in the six months ended January 31, 1999 also included
approximately $7.6 million for the purchase of cylinders by USA Leasing. The
primary component of cash provided from investing activities was collections on
notes receivable.
Net cash provided by financing activities was approximately $10.5 million
for the six months ended January 31, 1999 and approximately $3.7 million for the
six months ended January 31, 1998. In both periods, cash provided by financing
activities resulted from bank borrowings including $11.8 million in proceeds
from USA Leasing's loan from NationsBank, N.A. ("NationsBank") in the six months
ended January 31, 1999. In both periods, the cash used in financing activities
included payments on various notes payable and capital lease obligations. Also,
during the six months ended January 31, 1999, cash used in financing activities
included approximately $305,000 in offering and registration costs in connection
with a secondary offering of common stock and a shelf registration of common
stock and $149,000 in debt issuance costs associated with the USA Leasing Credit
Facility.
We used the net proceeds from our initial public offering of approximately
$36.4 million to repay approximately $29.1 million of principal and interest on
indebtedness and to fund acquisitions of approximately $6.2 million of assets
from 17 local and regional cylinder exchange providers and approximately
$1.1 million to purchase property and equipment. We used $3.1 million of these
proceeds in the three months ended January 31, 1999.
In October 1998, USA Leasing was formed to provide a cylinder financing
facility for our distributors. In December 1998, USA Leasing entered into a two
year $13.0 million credit facility (the "USA Leasing Credit Facility") with
NationsBank, N.A. ("NationsBank") which replaced an interim credit facility for
$6.5 million established in October 1998. Under the terms of the USA Leasing
Credit Facility, we guarantee 80% and each of the four owners of USA Leasing
guarantees 5% of the outstanding balance of the facility. Currently, we are not
aware of any defaults under USA Leasing's credit facility with NationsBank or
under any cylinder lease between USA Leasing and our distributors. However, we
could be required to fund up to 80% of USA Leasing's obligations to NationsBank
in the event of a default under its credit facility. As of March 16, 1999 USA
Leasing had an outstanding balance of $13 million on this credit facility.
<PAGE>
USA Leasing has used the proceeds of the USA Leasing Credit Facility to
purchase cylinders from Blue Rhino. USA Leasing is owned 24% each by Mr. Billy
D. Prim one of our officers, directors and stockholders, and Mr. Andrew J.
Filipowski, one of our directors and stockholders, and 26% each by Mr. Craig
Duchossois, one of our directors and stockholders, and Mr. Peer Pedersen, one of
our stockholders and a partner of Pedersen & Houpt, P.C., our legal counsel.
NationsBank has a first priority lien and we have a subordinate lien on all of
the assets of USA Leasing. The sale of cylinders to USA Leasing was approved
unanimously by our directors who had no financial interest in the transaction.
USA Leasing has entered into operating lease agreements with our independent
distributors to lease the cylinders at 1% of the initial cylinder value monthly.
In December 1998, we entered into a $12.0 million credit facility with
NationsBank, which includes a $7.0 million revolving line of credit and a $5.0
million acquisition facility (the "New Bank Credit Facility"). Our ability to
borrow under the New Bank Credit Facility is reduced by an amount equal to our
contingent liability pursuant to our guarantee of USA Leasing's credit facility
with NationsBank. If we achieve certain performance measures, our availability
under the New Bank Credit Facility will increase. The New Bank Credit Facility
replaces a prior facility we had with NationsBank and is collateralized by a
lien on substantially all of our assets. The New Bank Credit Facility requires
us to meet certain covenants, including minimum net worth and cash flow
requirements. The loans under the New Bank Credit Facility bear interest at a
maximum of LIBOR plus 2.25%. As of March 16, 1999 we had approximately $1
million outstanding under the New Bank Credit Facility.
We currently lease our offices under a lease from an entity affiliated with
two of our directors. Pursuant to the terms of the lease, we pay annual rent of
$212,700, plus our allocable share of all taxes, utilities and maintenance.
We anticipate that our total capital expenditures (excluding acquisitions)
for fiscal 1999 will be approximately $5.5 million, and will relate primarily to
cylinder displays and computer technology. Our capital expenditures 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 the borrowing capacity under our lines of
credit, together with cash provided by operations, will be sufficient to meet
our working capital requirements in the near term. However, there can be no
assurance that we will not seek or require additional capital in the future as a
result of expansion or otherwise.
Inflation
We do not believe that inflation has had a material adverse effect on our
net sales or results of operations. However, there can be no assurance that our
business will not be affected by inflation in the future.
Impact of New Accounting Pronouncements
Statement of Financial Accounting Standards No. 130 ("SFAS No. 130")
establishes standards for reporting and display of comprehensive income and its
components (revenues, gains, expenses, losses) in a full set of general purpose
financial statements and is effective for fiscal years beginning after December
15, 1997. We do not expect SFAS No. 130 to have any impact on our consolidated
financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS No.
131"). SFAS No. 131 requires public business enterprises to adopt its provisions
for periods beginning after December 15, 1997, and to report certain information
about operating segments in complete sets of financial statements of the
<PAGE>
enterprise and in condensed financial statements of interim periods issued to
shareholders. We do not expect SFAS No. 131 to have any impact on our
consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133").
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. It also requires entities to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. We do not expect SFAS No.
133 to have any impact on our consolidated financial statements as we do not
invest in any derivative instruments or engage in any hedging activities.
Year 2000 Compliance
Year 2000 issues are the result of computer programs that were written
using two digits rather than four to define the applicable year. For example,
date sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations
causing disruptions of operations, including, among other material adverse
consequences, a temporary inability to process transactions or engage in similar
normal business activities. We depend on our management information systems
("MIS") to process orders, manage inventory and accounts receivable, maintain
distributor and customer information, assist distributors in delivering products
on a timely basis and in maintaining cost-efficient operations.
Our State of Readiness for Year 2000. We began evaluating our MIS for Year
2000 compliance in January 1997. Since that time we have developed a Year 2000
compliance policy encompassing employee education, testing, progress reporting,
external impact plans and contingency plans. Our Chief Information Officer
directs our Year 2000 compliance policy and oversees the remediation and testing
of MIS. As of January 31, 1999, we believe that we are approximately 80% Year
2000 compliant. Based on our current assessment, we believe that we will be 100%
Year 2000 compliant by March 31, 1999. However, if our modifications, testing
and solicitations of third party compliance are not made on a timely basis or do
not resolve our Year 2000 issues, these issues could have a negative effect on
our business.
We have assessed the Year 2000 readiness of each of our core MIS and
remediated these systems as necessary. Our core MIS include Online Sales Account
Information System ("OASIS"), Platinum for Windows, Electronic Data Interchange
("EDI") and Blue Rhino Electronic Accounting System ("BREAS"). OASIS was Year
2000 compliant when it was implemented in February 1998, Platinum for Windows
was updated in March 1998 to be Year 2000 compliant, EDI was upgraded in
December 1998 to be Year 2000 compliant and BREAS was upgraded in October 1998
to be Year 2000 compliant. We have engaged Integrated Solutions International,
L.L.C. to, among other things, assist us in implementing our distributors' use
of Year 2000 compliant handheld computer units of BREAS. We expect to have all
of our distributors using Year 2000 compliant handheld units by March 31, 1999.
We are developing integrated test procedures in which all of our MIS are
simultaneously tested for Year 2000 compliance. We expect these integrated tests
to continue throughout 1999.
Historical and Estimated Costs. We have not established a separate Year
2000 compliance budget and do not expect to do so. To date, we have incurred
approximately $12,000 in Year 2000 compliance costs. We currently anticipate
that the implementation of our Year 2000 compliance policy will cost
<PAGE>
approximately $35,000, all of which will be expensed. Although we can give no
assurances, we do not expect future costs related to Year 2000 compliance to
negatively affect our business in any material way. Costs are based on current
estimates and actual results may vary significantly from such estimates.
Most Reasonably Likely Worst Case Scenario. The most reasonably likely
worst case Year 2000 scenario we face is an interruption of our business
operations caused by the failure of third parties with which we have a material
relationship to achieve Year 2000 compliance. The consequences of a third party
failure are unknown, but could have a negative effect on our business. We are
considering several contingency plans to address possible business interruptions
caused by a non-compliant third party. Possible contingency plans include using
alternate service providers and using a manual payment and collection system. We
expect that our contingency plans will be developed by May 31, 1999. In
addition, in an effort to protect ourselves and increase the awareness of third
parties whose failure to comply could have a material effect on our business, we
are seeking to obtain certifications from them that they are Year 2000
compliant.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk related to changes in interest rates on our
borrowings under our New Bank Credit Facility. Our New Bank Credit Facility
bears interest based on LIBOR. However, because we have only $ 1 million
outstanding on our Bank Credit Facility, we do not believe these risks will be
material.
We have no derivative financial instruments or derivative commodity
instruments in our cash and cash equivalents and investments. We invest our cash
and cash equivalents and investments in investment grade, highly liquid
investments consisting of money market instruments, bank certificates of deposit
and overnight investments in commercial paper.
All of our transactions are conducted and accounts are denominated in
United States Dollars and as such we do not currently have exposure to foreign
currency risk. Furthermore, we do not have any direct exposure to commodity
price risk.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
We are not presently involved in any material litigation nor, to our
knowledge, is any material litigation threatened against us or any of our
subsidiaries, other than routine litigation arising in the ordinary course of
business and which is expected to be covered by insurance.
Item 2. Changes in Securities and Use of Proceeds
We have used the $36.4 million of the net proceeds from our initial public
offering primarily to pay indebtedness of approximately $29.1 million, fund
acquisitions of $6.2 million and purchase property and equipment of $1.1
million. We used $3.1 million of these proceeds in the three months ended
January 31, 1999.
Item 3. Defaults Upon Senior Securities:
None
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders:
On December 22, 1998, the Company held the annual meeting of its
stockholders in Winston-Salem, North Carolina. The following three matters were
submitted to a vote of the stockholders:
1. The election of Billy D. Prim, Andrew J. Filipowski and Craig J. Duchossois
to serve three year terms as directors of the Company;
2. The amendment of the 1998 Stock Incentive Plan to increase the number of
shares eligible to be issued pursuant to options granted thereunder from 300,000
to 1,200,000; and
3. The ratification of the appointment of PricewaterhouseCoopers, LLP as the
Company's independent auditors.
<PAGE>
The results of the stockholder voting were as follows:
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-vote Total Votes
--------- ------- ------- -------- -----------
<S> <C> <C> <C> <C> <C>
1. Election of Directors
Craig J. Duchossois 5,807,315 0 0 2,750 5,810,065
Andrew J. Filipowski 5,807,215 0 0 2,850 5,810,065
Billy D. Prim 5,807,315 0 0 2,750 5,810,065
2. Amendment of 1998 Stock 3,174,831 520,020 7,550 2,107,664 5,810,065
Incentive Plan
3. Ratification of Accountants 5,801,665 1,415 6,985 0 5,810,065
</TABLE>
Item 5. Other Information: None
Item 6. Exhibits and Reports on Form 8-K:
A. Exhibits;
Exhibit 27.1 Financial data
B. Reports of Form 8-K;
Form 8-K filed on February 26, 1999 to report the change of
accountants.
Form 8-K/A filed on March 4, 1999 to report accountants'
response.
<PAGE>
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 17, 1999 By: /s/Billy D. Prim
-------------------------------
Billy D. Prim
Chairman, President and Chief Executive
Officer
Date: March 17, 1999 By: /s/Mark Castaneda
-------------------------------
Mark Castaneda
Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Financial Statements of Blue Rhino Corporation and its
subsidiaries and affiliates as of and for the six months ended January 31, 1999
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 1,681
<SECURITIES> 0
<RECEIVABLES> 6,795
<ALLOWANCES> 254
<INVENTORY> 35
<CURRENT-ASSETS> 10,637
<PP&E> 14,810
<DEPRECIATION> 3,190
<TOTAL-ASSETS> 43,491
<CURRENT-LIABILITIES> 5,967
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 25,032
<TOTAL-LIABILITY-AND-EQUITY> 43,491
<SALES> 17,898
<TOTAL-REVENUES> 18,137
<CGS> 13,767
<TOTAL-COSTS> 17,911
<OTHER-EXPENSES> (150)
<LOSS-PROVISION> 311
<INTEREST-EXPENSE> 67
<INCOME-PRETAX> (2)
<INCOME-TAX> 0
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2)
<EPS-PRIMARY> (0.00)
<EPS-DILUTED> (0.00)
</TABLE>
