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, 2003
OR
o
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 or 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 o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes x No o
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, 2003 | |
|
|
||
| Common stock, par value $.001 per share | 17,854,052 Shares |
BLUE RHINO CORPORATION
INDEX
PART I: FINANCIAL INFORMATION
| Item 1: | Financial Statements (unaudited): | |||
| Condensed consolidated balance sheets as of October 31, 2003 and July 31, 2003. | ||||
| Condensed consolidated statements of operations for the three months ended October 31, 2003 and 2002. | ||||
| Condensed consolidated statements of cash flows for the three months ended October 31, 2003 and 2002. | ||||
| 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 1: | Legal Proceedings. | |||
| Item 6: | Exhibits and Reports on Form 8-K. | |||
| SIGNATURES | ||||
1
PART I
FINANCIAL INFORMATION
Item 1: Condensed Consolidated Financial Statements
BLUE RHINO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
As of October 31, 2003 and July 31, 2003
(In thousands)
| October 31, | July 31, | |||||||||
| 2003 | 2003 | |||||||||
| (unaudited) | ||||||||||
| ASSETS | ||||||||||
Current assets: |
||||||||||
Cash and cash equivalents |
$ | 2,553 | $ | 2,495 | ||||||
Accounts receivable, net |
12,053 | 25,809 | ||||||||
Inventories |
19,643 | 20,372 | ||||||||
Prepaid expenses and other current assets |
5,062 | 7,055 | ||||||||
Deferred income taxes |
2,266 | 2,266 | ||||||||
Total current assets |
41,577 | 57,997 | ||||||||
Cylinders, net |
48,509 | 50,917 | ||||||||
Property, plant and equipment, net |
38,098 | 37,765 | ||||||||
Intangibles, net |
62,843 | 62,862 | ||||||||
Other assets |
1,177 | 1,264 | ||||||||
Total assets |
$ | 192,204 | $ | 210,805 | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||
Current liabilities: |
||||||||||
Accounts payable |
$ | 11,525 | $ | 19,193 | ||||||
Current portion of long-term debt and capital lease obligations |
6,144 | 6,433 | ||||||||
Accrued liabilities |
4,054 | 5,679 | ||||||||
Total current liabilities |
21,723 | 31,305 | ||||||||
Long-term debt and capital lease obligations, less current maturities |
32,262 | 42,800 | ||||||||
Deferred income taxes |
4,767 | 4,232 | ||||||||
Total liabilities |
58,752 | 78,337 | ||||||||
Stockholders’ equity: |
||||||||||
Common stock, $0.001 par value, 100,000,000 shares authorized,
17,853,652 and 17,838,027 shares issued and outstanding at
October 31, 2003 and July 31, 2003, respectively |
18 | 18 | ||||||||
Capital in excess of par |
132,812 | 132,704 | ||||||||
Retained earnings (deficit) |
427 | (1,068 | ) | |||||||
Accumulated other comprehensive
income |
195 | 814 | ||||||||
Total stockholders’ equity |
133,452 | 132,468 | ||||||||
Total liabilities and stockholders’ equity |
$ | 192,204 | $ | 210,805 | ||||||
The accompanying notes are an integral part of these financial statements.
2
BLUE RHINO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended October 31, 2003 and 2002
(In thousands, except per share data)
| Three months ended | |||||||||||||
| October 31, | |||||||||||||
| 2003 | 2002 | ||||||||||||
| (Unaudited) | |||||||||||||
| |
|||||||||||||
Net revenues |
$ | 49,269 | $ | 54,815 | |||||||||
Operating costs and expenses: |
|||||||||||||
Cost of sales |
36,120 | 41,351 | |||||||||||
Selling, general, and administrative |
7,310 | 8,393 | |||||||||||
Depreciation and amortization |
2,616 | 2,157 | |||||||||||
Total operating costs and expenses |
46,046 | 51,901 | |||||||||||
Income from operations |
3,223 | 2,914 | |||||||||||
Interest and other expenses (income): |
|||||||||||||
Interest expense |
655 | 1,256 | |||||||||||
Loss on investee |
— | 455 | |||||||||||
Other, net |
117 | (71 | ) | ||||||||||
Income before income taxes |
2,451 | 1,274 | |||||||||||
Income taxes |
956 | 15 | |||||||||||
Net income |
1,495 | 1,259 | |||||||||||
Preferred dividends |
— | 71 | |||||||||||
Income available to common stockholders |
$ | 1,495 | $ | 1,188 | |||||||||
Earnings per common share: |
|||||||||||||
Basic |
$ | 0.08 | $ | 0.08 | |||||||||
Diluted |
$ | 0.08 | $ | 0.07 | |||||||||
Shares used in per share calculations: |
|||||||||||||
Basic |
17,842 | 14,121 | |||||||||||
Diluted |
19,853 | 17,701 | |||||||||||
The accompanying notes are an integral part of these financial statements.
3
BLUE RHINO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended October 31, 2003 and 2002
(In thousands)
| Three Months Ended | ||||||||||||
| October 31, | ||||||||||||
| 2003 | 2002 | |||||||||||
| (unaudited) | ||||||||||||
Cash flows from operating activities: |
||||||||||||
Net income |
$ | 1,495 | $ | 1,259 | ||||||||
Adjustments to reconcile net income to net cash provided by
operating activities: |
||||||||||||
Depreciation and amortization |
2,616 | 2,157 | ||||||||||
Loss on investee |
— | 455 | ||||||||||
Non-cash interest expense |
113 | 268 | ||||||||||
Deferred income taxes |
941 | — | ||||||||||
Other non-cash expenses |
175 | 145 | ||||||||||
Changes in operating assets and liabilities,
net of business acquisitions: |
||||||||||||
Accounts receivable |
13,755 | 6,394 | ||||||||||
Inventories |
729 | (3,185 | ) | |||||||||
Other current assets |
949 | 309 | ||||||||||
Accounts payable and accrued liabilities |
(8,993 | ) | (6,406 | ) | ||||||||
Net cash provided by operating activities |
11,780 | 1,396 | ||||||||||
Cash flows from investing activities: |
||||||||||||
Purchases of property, plant, and equipment |
(2,630 | ) | (2,412 | ) | ||||||||
Net advances to and investment in joint venture |
— | (1,086 | ) | |||||||||
Purchases of cylinders, net |
1,710 | 107 | ||||||||||
(Issuance of) collections on notes receivable and advances
to distributors, net |
9 | (2,437 | ) | |||||||||
Net cash used in investing activities |
(911 | ) | (5,828 | ) | ||||||||
Cash flows from financing activities: |
||||||||||||
Proceeds from (payments on) revolving line of credit, net |
(9,300 | ) | 2,576 | |||||||||
Proceeds from issuance of equity, net of expenses |
108 | 2,395 | ||||||||||
Payments on long-term debt and capital lease obligations |
(1,619 | ) | (396 | ) | ||||||||
Net cash provided by (used in) financing activities |
(10,811 | ) | 4,575 | |||||||||
Net increase in cash and cash equivalents |
58 | 143 | ||||||||||
Cash and cash equivalents at beginning of period |
2,495 | 1,563 | ||||||||||
Cash and cash equivalents at end of period |
$ | 2,553 | $ | 1,706 | ||||||||
The accompanying notes are an integral part of these financial statements.
4
BLUE RHINO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 31, 2003 (Unaudited)
(In thousands, except share and per share data)
1. Basis of Presentation
The 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.; Blue Rhino Global Sourcing, LLC; Platinum Propane, L.L.C. (“Platinum”); Ark Holding Company LLC (“Ark”); and Blue Rhino Consumer Products, LLC. As a result of the Company’s acquisition of Platinum in November 2002, 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 consolidated the results of R4 Tech beginning in the second quarter of fiscal 2003 as a result of its increased ownership and financial control (Note 3). 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, 2003 are not necessarily indicative of the results that may be expected for any other period.
The balance sheet at July 31, 2003 has been derived from the audited financial statements of the Company as of July 31, 2003 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 the Company as of and for the year ended July 31, 2003.
2. Stock-Based Compensation
The Company has three stock-based compensation plans (the “Plans”) for outside directors, officers and certain employees to receive stock options and other equity-based awards: the Blue Rhino Corporation Stock Incentive Plan (the “1994 Stock Incentive Plan”), the Blue Rhino Corporation 1998 Stock Incentive Plan (the “1998 Stock Incentive Plan”) and the Blue Rhino Corporation Stock Option Plan for Non-Employee Directors (the “Director Option Plan”). Under the 1998 Stock Incentive Plan and the Director Option Plan, the Company may issue only non-qualified stock options. Under the 1994 Stock Incentive Plan, the Company was authorized to issue incentive or non-qualified stock options, stock appreciation rights, restricted stock or deferred stock, at its discretion. The Company no longer makes grants under the 1994 Stock Incentive Plan. The Company accounts for the Plans in accordance with the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”). Under APB 25, no compensation expense is recognized for stock options issued with an exercise price equivalent to the fair value of the Company’s common stock on the date of grant.
The Company also has a Distributor Stock Option Plan (the “Distributor Option Plan”) for distributors and their stockholders, partners, members, directors, general partners, managers, officers, employees and consultants. In general, stock options and other equity instruments granted or issued under the Distributor Stock Option Plan are accounted for in accordance with Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS 123”).
5
Had compensation expense for the 1994 Stock Incentive Plan, the 1998 Stock Incentive Plan or the Director Option Plan been determined for options granted since August 1, 1995 in accordance with SFAS No. 123, the Company’s pro forma net income and earnings per share for the three months ended October 31, 2003 and 2002 would have been as follows:
| Three months ended | |||||||||
| October 31, | |||||||||
| 2003 | 2002 | ||||||||
Net income available for common stockholders: |
|||||||||
As reported |
$ | 1,495 | $ | 1,188 | |||||
Less: |
|||||||||
Compensation expense determined using
Black-Scholes Option Pricing Model |
1,120 | 504 | |||||||
Pro forma net
income |
$ | 375 | $ | 684 | |||||
Earnings per common share: |
|||||||||
Basic: |
|||||||||
As reported |
$ | 0.08 | $ | 0.08 | |||||
Pro forma |
$ | 0.02 | $ | 0.05 | |||||
Diluted: |
|||||||||
As reported |
$ | 0.08 | $ | 0.07 | |||||
Pro forma |
$ | 0.02 | $ | 0.04 | |||||
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for all grants: expected lives ranging from five to six years; expected volatility ranging from 30% to 91%; expected dividends of zero and a risk-free interest rate ranging from 1.1% to 5.8%.
3. Investment in Joint Venture
As a result of the acquisition of Platinum, the Company increased its ownership interest in R4 Tech on a consolidated basis by 1% to 50%. The Company consolidated the results of R4 Tech beginning in the second quarter of fiscal 2003 as a result of its increased ownership and financial control. 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 was accounted for under the equity method of accounting through the first quarter of fiscal 2003. During the first quarter of fiscal 2003, the Company recognized 100% of the loss of R4 Tech as a result of advances made without a corresponding advance from the other joint venture partners. The Company recognized a loss in the joint venture for the three months ended October 31, 2002 of $455.
4. Income taxes
Income tax expense in fiscal 2004 primarily reflects the federal statutory tax rate and state taxes net of the federal benefit. Income tax expense in fiscal 2003 differed from the statutory federal and state tax rates due to changes in the valuation reserve for deferred tax assets.
6
5. 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, | |||||||||
| 2003 | 2002 | ||||||||
Net income |
$ | 1,495 | $ | 1,259 | |||||
Less: Preferred stock dividends |
— | 71 | |||||||
Income applicable to common stockholders |
$ | 1,495 | $ | 1,188 | |||||
Income applicable to common stockholders |
$ | 1,495 | $ | 1,188 | |||||
Weighted average number of common shares
outstanding (in thousands) |
17,842 | 14,121 | |||||||
Basic earnings per common share |
$ | 0.08 | $ | 0.08 | |||||
Income applicable to common stockholders |
$ | 1,495 | $ | 1,188 | |||||
Weighted average number of common shares
outstanding (in thousands) |
17,842 | 14,121 | |||||||
Effect of potentially dilutive securities: |
|||||||||
Common stock options |
1,399 | 1,748 | |||||||
Common stock warrants |
612 | 1,832 | |||||||
Weighted average number of common shares
outstanding assuming dilution |
19,853 | 17,701 | |||||||
Diluted earnings per common share |
$ | 0.08 | $ | 0.07 | |||||
Common stock options listed below for the three months ended October 31, 2003 and 2002 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, | ||||||||
| 2003 | 2002 | |||||||
Common stock options (in thousands) |
2,267 | 49 | ||||||
6. 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.
7
A summary of changes in OCI for the three months ended October 31, 2003 and 2002 is presented below:
| Three Months Ended | ||||||||
| October 31, | ||||||||
| 2003 | 2002 | |||||||
Beginning balance deferred in OCI |
$ | 814 | $ | (26 | ) | |||
Net change associated with current period hedge
transactions, net of tax of ($53) and $0 in the
three-month period ending October 31, 2003
and 2002, respectively |
81 | 1,074 | ||||||
Net amount reclassified into earnings during the
period, net of tax of $458 and $0, respectively |
(700 | ) | (133 | ) | ||||
Ending balance deferred in OCI |
$ | 195 | $ | 915 | ||||
Total comprehensive income for the three months ended October 31, 2003 and 2002 was $876 and $2,200, respectively.
7. Commitments and Contingencies
Patent Lawsuit and Related Proceedings
On August 8, 2003, American Biophysics Corporation (“ABC”) filed a patent infringement suit against the Company in the U.S. District Court for the District of Rhode Island. ABC alleges that the SkeeterVac® mosquito elimination product infringes certain patents of ABC. The complaint seeks treble damages and attorneys’ fees. Also on August 8, 2003, ABC filed a complaint against the Company with the United States International Trade Commission (“ITC”) pursuant to Section 337 of the Tariff Act of 1930, as amended (“Section 337”). That complaint requests that the ITC institute an investigation regarding alleged violations of Section 337 based upon the importation into the United States by the Company and/or the offer for sale and sale within the United States after importation of SkeeterVac® products that allegedly infringe certain ABC patents. ABC also requested that the ITC issue a permanent exclusion order pursuant to Section 337, which would exclude further entry into the United States of the allegedly infringing products, and a permanent cease and desist order under Section 337, which would prohibit the importation into the United States, the sale for importation, and/or sale within the United States after importation, of allegedly infringing products. The ITC has instituted an investigation and the parties are currently conducting discovery. On August 13, 2003, the Company’s subsidiary, Blue Rhino Consumer Products, LLC (“BRCP”), filed suit against ABC in the U.S. District Court for the Middle District of North Carolina seeking a declaration that BRCP’s SkeeterVac® product does not infringe ABC’s patents. On August 14, 2003, BRCP and another Company subsidiary, CPD Associates, Inc. (“CPD”), filed a lawsuit in the Superior Court of North Carolina, Forsyth County, against ABC asserting unfair and deceptive trade practices, unfair competition under North Carolina common law, tortious interference with business relations and prospective economic advantage, violations of Section 43(a) of the Lanham Act, and violation of the Anticybersquatting Consumer Protection Act. The complaint seeks, among other relief against ABC, a permanent injunction, treble damages, punitive damages, attorneys’ fees and other costs and expenses. This case has been removed to the U.S. District Court for the Middle District of North Carolina. Motions are pending to consolidate the North Carolina federal court actions and stay these actions pending the outcome of the ITC proceeding. The parties have also filed motions seeking to transfer the North Carolina and Rhode Island federal court actions to a single court, either in Rhode Island or North Carolina. The federal court action in Rhode Island has been stayed pending the outcome of the ITC proceeding; however, the federal court in Rhode Island ha