BLUE RHINO CORP - 10-Q Quarterly Report

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 OCTOBER 31, 2002


[ ]		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 (State of other jurisdiction of incorporation or organization)		56-1870472 (I.R.S. Employer 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 November 30, 2002

Common stock, par value $.001 per share		15,617,071 Shares

BLUE RHINO CORPORATION

INDEX

PART I: FINANCIAL INFORMATION


Item 1:		Financial Statements (unaudited):

		Condensed consolidated balance sheets as of October 31, 2002 and July 31, 2002.

		Condensed consolidated statements of operations for the three months ended October 31, 2002 and 2001.

		Condensed consolidated statements of cash flows for the three months ended October 31, 2002 and 2001.

		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.

Item 4:		Controls and Procedures

PART II: OTHER INFORMATION

Item 2:		Changes in Securities and Use of Proceeds

Item 6:		Exhibits and Reports on Form 8-K.

SIGNATURES

CERTIFICATIONS

PART I

FINANCIAL INFORMATION

Item 1: Condensed Consolidated Financial Statements

BLUE RHINO CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

As of October 31, 2002 and July 31, 2002
(In thousands)


			October 31,			July 31,
			2002			2002

ASSETS			(unaudited)

Current assets:
	Cash and cash equivalents		$	1,706		$	1,563
	Accounts receivable, net			18,935			25,329
	Inventories			15,365			11,035
	Prepaid expenses and other current assets			4,454			3,081

		Total current assets		40,460			41,008
Cylinders leased under operating lease agreements, net				35,132			37,004
Property, plant and equipment, net				31,313			30,477
Intangibles, net				31,921			31,988
Other assets				5,035			2,896

		Total assets	$	143,861		$	143,373


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
	Accounts payable		$	13,830		$	19,969
	Current portion of long-term debt and capital lease obligations			1,504			2,013
	Accrued liabilities			3,464			3,770

		Total current liabilities		18,798			25,752
Long-term debt and capital lease obligations, less current maturities				42,016			39,259

		Total liabilities		60,814			65,011
Stockholders’ equity:
	Preferred stock, $0.001 par value, 20,000,000 shares authorized, no and 1,850,000 shares issued and outstanding at October 31, 2002 and July 31, 2002, respectively			—			2
	Common stock, $0.001 par value, 100,000,000 shares authorized, 14,505,965 and 12,058,542 shares issued and outstanding at October 31, 2002 and July 31, 2002, respectively			15			12
	Capital in excess of par			93,090			89,700
	Common stock warrants			5,366			6,201
	Accumulated deficit			(16,339	)		(17,527	)
	Accumulated other comprehensive income (loss)			915			(26	)

		Total stockholders’ equity		83,047			78,362

		Total liabilities and stockholders’ equity	$	143,861		$	143,373

The accompanying notes are an integral part of these financial statements.

BLUE RHINO CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended October 31, 2002 and 2001
(In thousands, except per share data)


			Three months ended
			October 31,

			2002			2001

			(Unaudited)

Net revenues			$	54,815		$	36,546

Operating costs and expenses:
	Cost of sales			41,351			26,803
	Selling, general, and administrative			8,393			5,516
	Depreciation and amortization			2,157			1,836

		Total operating costs and expenses		51,901			34,155

		Income from operations		2,914			2,391

Interest and other expenses (income):
	Interest expense			1,256			1,653
	Loss on investee			455			338
	Other, net			(71	)		(186	)

		Income before income taxes		1,274			586

Income taxes				15			13

		Net income		1,259			573

Preferred dividends				71			466

		Income available to common stockholders	$	1,188		$	107


Earnings per common share:
	Basic		$	0.08		$	0.01

	Diluted		$	0.07		$	0.01


Shares used in per share calculations:
	Basic			14,121			12,137

	Diluted			17,701			12,556

The accompanying notes are an integral part of the consolidated financial statements.

BLUE RHINO CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended October 31, 2002 and 2001
(In thousands)


					Three Months Ended
					October 31,

					2002			2001

					(unaudited)
Cash flows from operating activities:
	Net income				$	1,259		$	573
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization				2,157			1,836
		Loss on investee				455			338
		Accretion of the discount on notes				172			172
		Other non-cash expenses				241			89
		Changes in operating assets and liabilities, net of business acquisitions:
			Accounts receivable			6,394			5,945
			Inventories			(3,185	)		844
			Other current assets			309			(201	)
			Accounts payable and accrued liabilities			(6,406	)		(6,815	)

				Net cash provided by operating activities		1,396			2,781


Cash flows from investing activities:
	Business acquisitions					—			(197	)
	Purchases of property, plant, and equipment					(2,412	)		(810	)
	Net advances to and investment in joint venture					(1,086	)		(775	)
	Purchases of cylinders held under operating leases, net					107			(293	)
	(Issuance of) collections on notes receivable and advances to distributors					(2,437	)		19

				Net cash used in investing activities		(5,828	)		(2,056	)


Cash flows from financing activities:
	Proceeds from credit facility, net					2,576			700
	Proceeds from issuance of equity, net of expenses					2,395			36
	Payments on long-term debt and capital lease obligations					(396	)		(963	)

				Net cash provided by (used in) financing activities		4,575			(227	)


Net increase in cash and cash equivalents						143			498
Cash and cash equivalents at beginning of period						1,563			1,044

				Cash and cash equivalents at end of period	$	1,706		$	1,542

The accompanying notes are an integral part of these financial statements.

BLUE RHINO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2002 (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: Uniflame Corporation (“Uniflame”); QuickShip, Inc. (“QuickShip”); Rhino Services, L.L.C., CPD Associates, Inc.; USA Leasing, L.L.C.; Uniflame, L.L.C.; and Blue Rhino Consumer Products, L.L.C. Investments in affiliates in which the Company owns less than 50% of the voting stock and has significant influence are accounted for using the equity method. All material 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-month period ended October 31, 2002 are not necessarily indicative of the results that may be expected for the year ending July 31, 2003 or for any other period.

The balance sheet at July 31, 2002 has been derived from the audited financial statements of the Company as of July 31, 2002 but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

These financial statements should be read in conjunction with the audited consolidated financial statements of Blue Rhino Corporation as of and for the year ended July 31, 2002.

2. Derivative Instruments

The Company accounts for derivative instruments in accordance with Statement of Financial Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement specifies that 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 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, which are designated as cash flow hedges, 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.

The net derivative income (loss) recorded in OCI will be reclassified into earnings over the term of the underlying cash flow hedges. The amount that will be reclassified into earnings will vary depending upon the movement of the underlying interest rates and propane prices. As interest rates and propane prices decrease, the charge to earnings will increase. Conversely, as interest rates and propane prices increase, the charge to earnings will decrease.

A summary of changes in OCI for the three months ended October 31, 2002 and 2001 is presented below:


	Three Months Ended
	October 31,

	2002			2001

Beginning balance deferred in OCI	$	(26	)	$	(1,102	)
Net change associated with current period hedge transactions		1,074			(1,659	)
Net amount reclassified into earnings during the year		(133	)		442

Ending balance deferred in OCI	$	915		$	(2,319	)

Total comprehensive income (loss) for the three months ended October 31, 2002 and 2001 was $2,200 and ($644), respectively.

3. Earnings Per Share

The following table sets forth a reconciliation of the numerators and denominators in computing earnings per common share in accordance with Statement of Financial Accounting Standards No. 128.


		Three Months Ended
		October 31,

		2002		2001

Net income		$	1,259	$	573
Less: Preferred stock dividends			71		466

Income applicable to common stockholders		$	1,188	$	107


Income applicable to common stockholders		$	1,188	$	107
Weighted average number of common shares outstanding (in thousands)			14,121		12,137

Basic earnings per common share		$	0.08	$	0.01


Income applicable to common stockholders		$	1,188	$	107
Weighted average number of common shares outstanding (in thousands)			14,121		12,137
Effect of potentially dilutive securities:
	Common stock options		1,748		419
	Common stock warrants		1,832		—

Weighted average number of common shares outstanding assuming dilution			17,701		12,556

Diluted earnings per common share		$	0.07	$	0.01

Common stock options and common stock warrants listed below for the three months ended October 31, 2002 and 2001 were not included in the computation of diluted earnings per share because the exercise prices are greater than the average market price of the Company’s common stock during those periods such that the effect would be anti-dilutive.


	Three months ended
	October 31,

	2002		2001

Common stock options		48,500		1,441,845
Common stock warrants		—		2,935,704

4. Subsequent Event – New Credit Facility

On November 20, 2002, the Company completed the syndication of a new and expanded bank credit facility (the “Credit Facility”). The Credit Facility consists of a $45,000 revolving line of credit and a $15,000 term loan, both for general corporate purposes, inclusive of payments made under letters of credit. The Credit Facility has a maturity date of November 30, 2005. Advances under the Credit Facility are collateralized by a lien on substantially all of the Company’s assets.

Advances under the Credit Facility may be made as either base rate (“prime rate”) loans or London Interbank Offered Rate (“LIBOR”) loans at the Company’s election. Applicable interest rates are based upon either the LIBOR or prime rate plus an applicable margin dependent upon a total leverage ratio. The applicable LIBOR margins range from 200 to 300 basis points, and the applicable prime rate margins range from 50 to 150 basis points. On November 20, 2002, interest rates payable upon advances were based upon either an initial rate of LIBOR plus 275 basis points or the prime rate plus 125 basis points. On November 20, 2002 the Company borrowed $30,000 (including the full $15,000 term loan) at an interest rate of 4.13% and borrowed $1,900 at an interest rate of 5.50%. The Company incurred fees of approximately $1,000 in connection with the Credit Facility. The fees will be amortized over the life of the Credit Facility, through November 30, 2005. The Company incurred a charge of $96 in November 2002 resulting from unamortized fees related to its prior credit facility.

Principal payments on the outstanding term loan begin on December 31, 2002 and continue quarterly until September 30, 2005. The initial principal payments will be $1,000 per calendar quarter beginning December 31, 2002, will increase to $1,250 per calendar quarter beginning December 31, 2003 and will further increase to $1,500 per calendar quarter beginning December 31, 2004. The Credit Facility includes a .50% commitment fee on the average daily unused amount for each fiscal quarter. The Credit Facility requires the Company to meet certain covenants, including minimum net worth and cash flow requirements, restricts the payment of cash dividends and permits early extinguishment of up to $15,000 in subordinated debt.

The Credit Facility stipulates that, by May 31, 2003, the Company must enter into swap agreements with respect to interest rate exposure under the Credit Facility with durations covering the remaining term of the Credit Facility and with an aggregate notional principal amount equal to at least two-thirds of the outstanding principal amount of the term loan. The Company is currently party to an interest rate swap agreement with a notional amount of $10,000. Under the existing swap agreement, which expires in July 2003, the Company pays a fixed rate of 7.36% and receives a rate equivalent to the thirty-day LIBOR, adjusted quarterly.

5. Subsequent Event – Platinum Propane and Ark Acquisitions

On November 22, 2002, the Company acquired Platinum Propane, L.L.C. (“Platinum”) and Ark Holding Company LLC (“Ark”) and their respective subsidiaries, representing ten of the Company’s 46 distributors. Platinum’s five subsidiary distributors operate in Southern California, including Los Angeles and San Diego, Chicago, the Carolinas, Georgia and Florida. Ark’s five subsidiary distributors operate in New Jersey, Seattle, Kansas City, Denver and Salt Lake City. Collectively, the territories served by the acquired distributors represent approximately 45% of the Company’s cylinder exchange revenues.

The aggregate purchase price for the two acquisitions was preliminarily determined to be approximately $32,000. The consideration paid by the Company in the two acquisitions consisted of approximately 1.1 million restricted shares of common stock valued, based on the closing price of the Company’s common stock on the Nasdaq National Market on November 22, 2002, at approximately $19,000, $3,300 in assumed debt satisfied at closing, $4,900 in advances, and $4,800 in liabilities assumed. On a preliminary basis, approximately $28,000 of the purchase price was allocated to goodwill, with the balance allocated to equipment, vehicles and other assets.

As a result of the acquisition of Platinum, the Company increased its ownership interest in R4 Technical Center North Carolina, LLC (“R4 Tech”) on a consolidated basis by 1% to 50%. The Company will consolidate the results of R4 Tech beginning in the second quarter of fiscal 2003 (Note 6).

The following unaudited pro forma summary presents the financial information as if the acquisition of Platinum and Ark had occurred on August 1, 2001. These pro forma results have been prepared for comparative purposes and do not purport to be indicative of what would have occurred had the acquisition been made on August 1, 2001, nor are they indicative of future results. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”