##### 



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, 2004 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  DELAWARE
    
    56-1870472(State of other jurisdiction of
    
    (I.R.S. Employerincorporation 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 [  ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X]
   No [  ] APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date. Class
    
    Outstanding at February 29, 2004Common stock, par value $.001 per share
    
    18,047,713 Shares




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##### 



BLUE RHINO CORPORATION INDEX PART I: FINANCIAL INFORMATIONItem 1:
    
    Financial Statements (unaudited):Condensed consolidated balance sheets as of
January 31, 2004 and July 31, 2003.Condensed consolidated statements of operations for
the three- and six-month periods ended January 31, 2004
and 2003.Condensed consolidated statements of cash flows for
the six-month periods ended January 31, 2004 and 2003.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 INFORMATIONItem 1:
    
    Legal Proceedings.Item 4:
    
    Submission of Matters to a Vote of Security Holders.Item 6:
    
    Exhibits and Reports on Form 8-K.SIGNATURES
 1




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##### 



PART I FINANCIAL INFORMATION Item 1:Condensed Consolidated Financial Statements BLUE RHINO CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS
As of January 31, 2004 and July 31, 2003
(In thousands) January 31,
    
    July 31,2004
    
    2003(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2,351
    
    
    $
    2,495Accounts receivable, net
    
    
    14,351
    
    
    
    25,809Inventories
    
    
    26,561
    
    
    
    20,372Prepaid expenses and other current assets
    
    
    7,096
    
    
    
    7,055Deferred income taxes
    
    
    2,266
    
    
    
    2,266Total current assets
    
    
    52,625
    
    
    
    57,997Tanks, net
    
    
    45,461
    
    
    
    50,917Property, plant and equipment, net
    
    
    40,038
    
    
    
    37,765Intangibles, net
    
    
    63,121
    
    
    
    62,862Other assets
    
    
    1,064
    
    
    
    1,264Total assets
    
    $
    202,309
    
    
    $
    210,805LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    17,689
    
    
    $
    19,193Current portion of long-term debt and capital lease obligations
    
    
    6,590
    
    
    
    6,433Accrued liabilities
    
    
    5,405
    
    
    
    5,679Total current liabilities
    
    
    29,684
    
    
    
    31,305Long-term debt and capital lease obligations, less current maturities
    
    
    33,357
    
    
    
    42,800Deferred income taxes
    
    
    5,042
    
    
    
    4,232Total liabilities
    
    
    68,083
    
    
    
    78,337Stockholders equity:Common stock, $0.001 par value, 100,000,000 shares authorized,
17,887,440 and 17,838,027 shares issued and outstanding at
January 31, 2004 and July 31, 2003, respectively
    
    
    18
    
    
    
    18Capital in excess of par
    
    
    133,062
    
    
    
    132,704Retained earnings (deficit)
    
    
    538
    
    
    
    (1,068
    )Accumulated other comprehensive
income
    
    
    608
    
    
    
    814Total stockholders equity
    
    
    134,226
    
    
    
    132,468Total liabilities and stockholders equity
    
    $
    202,309
    
    
    $
    210,805
 The accompanying notes are an integral part of these financial statements. 2




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##### 



BLUE RHINO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended January 31, 2004 and 2003
(In thousands, except per share data) Three months ended
    
    Six months endedJanuary 31,
    
    January 31,2004
    
    2003
    
    2004
    
    2003(Unaudited)
    
    (Unaudited)Net revenues
    
    $
    59,242
    
    
    $
    58,054
    
    
    $
    108,512
    
    
    $
    112,870Operating costs and expenses:Cost of sales
    
    
    48,386
    
    
    
    47,102
    
    
    
    84,507
    
    
    
    88,453Selling, general, and
administrative
    
    
    7,535
    
    
    
    6,399
    
    
    
    14,846
    
    
    
    14,792Depreciation and
amortization
    
    
    2,517
    
    
    
    2,267
    
    
    
    5,132
    
    
    
    4,425Total operating costs and
expenses
    
    
    58,438
    
    
    
    55,768
    
    
    
    104,485
    
    
    
    107,670Income from
operations
    
    
    804
    
    
    
    2,286
    
    
    
    4,027
    
    
    
    5,200Interest and other expenses (income):Interest expense
    
    
    605
    
    
    
    1,380
    
    
    
    1,261
    
    
    
    2,636Loss on investee
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    455Other, net
    
    
    15
    
    
    
    (25
    )
    
    
    132
    
    
    
    (96
    )Income before income
taxes
    
    
    184
    
    
    
    931
    
    
    
    2,634
    
    
    
    2,205Income
taxes
    
    
    73
    
    
    
    15
    
    
    
    1,028
    
    
    
    30Net income
    
    $
    111
    
    
    $
    916
    
    
    $
    1,606
    
    
    $
    2,175Preferred
dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    71Income available to common
stockholders
    
    $
    111
    
    
    $
    916
    
    
    $
    1,606
    
    
    $
    2,104Earnings per common share:Basic
    
    $
    0.01
    
    
    $
    0.06
    
    
    $
    0.09
    
    
    $
    0.14Diluted
    
    $
    0.01
    
    
    $
    0.05
    
    
    $
    0.08
    
    
    $
    0.11Shares used in per share calculations:Basic
    
    
    17,870
    
    
    
    16,114
    
    
    
    17,856
    
    
    
    15,123Diluted
    
    
    19,999
    
    
    
    19,587
    
    
    
    19,922
    
    
    
    18,676
 The accompanying notes are an integral part of these financial statements. 3




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BLUE RHINO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended January 31, 2004 and 2003
(In thousands) Six Months EndedJanuary 31,2004
    
    2003(unaudited)Cash flows from operating activities:Net income
    
    $
    1,606
    
    
    $
    2,175Adjustments to reconcile net income to net cash provided by
(used in) operating activities:Depreciation and
amortization
    
    
    5,132
    
    
    
    4,425Loss on
investee
    
    
    
    
    
    
    455Non-cash interest
expense
    
    
    226
    
    
    
    624Deferred income taxes
    
    
    945
    
    
    
    Other non-cash expenses
    
    
    320
    
    
    
    231Changes in operating assets and liabilities, net of business
acquisitions:Accounts
receivable
    
    
    11,458
    
    
    
    2,858Inventories
    
    
    (6,189
    )
    
    
    (14,125
    )Other current
assets
    
    
    573
    
    
    
    (2,861
    )Accounts payable and accrued
liabilities
    
    
    (1,683
    )
    
    
    302Net cash provided by (used in) operating
activities
    
    
    12,388
    
    
    
    (5,916
    )Cash flows from investing activities:Business
acquisitions
    
    
    (482
    )
    
    
    (5,867
    )Purchases of property, plant, and
equipment
    
    
    (6,261
    )
    
    
    (4,650
    )Net advances to and investment in joint
venture
    
    
    
    
    
    
    (1,086
    )Purchases of tanks,
net
    
    
    4,268
    
    
    
    (370
    )(Issuance of) collections on notes receivable and advances
to
distributors
    
    
    4
    
    
    
    (2,376
    )Net cash used in investing
activities
    
    
    (2,471
    )
    
    
    (14,349
    )Cash flows from financing activities:Proceeds from (payments on) revolving line of credit,
net
    
    
    (6,750
    )
    
    
    6,207Proceeds from issuance of equity, net of
expenses
    
    
    329
    
    
    
    17,435Payments on long-term debt and capital lease
obligations
    
    
    (3,640
    )
    
    
    (1,646
    )Debt issuance
costs
    
    
    
    
    
    
    (940
    )Net cash provided by (used in) financing
activities
    
    
    (10,061
    )
    
    
    21,056Net increase (decrease) in cash and cash
equivalents
    
    
    (144
    )
    
    
    791Cash and cash equivalents at beginning of
period
    
    
    2,495
    
    
    
    1,563Cash and cash equivalents at end of
period
    
    $
    2,351
    
    
    $
    2,354
 The accompanying notes are an integral part of these financial statements. 4




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BLUE RHINO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2004 (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- and six-month periods ended January
31, 2004 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




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Had compensation expense for the 1994 Stock Incentive Plan, the 1998 Stock
Incentive Plan and 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 and six months ended January
31, 2004 and 2003 would have been as follows: Three Months Ended
    
    Six Months EndedJanuary 31,
    
    January 31,2004
    
    2003
    
    2004
    
    2003(Unaudited)
    
    (Unaudited)Net income available for common stockholders:As reported
    
    $
    111
    
    
    $
    916
    
    
    $
    1,606
    
    
    $
    2,104Less:Compensation expense determined using Black-Scholes option pricing model
    
    
    1,209
    
    
    
    800
    
    
    
    2,339
    
    
    
    1,315Pro forma net income (loss)
    
    $
    (1,098
    )
    
    $
    116
    
    
    $
    (733
    )
    
    $
    789Earnings per common share:Basic:As reported
    
    $
    0.01
    
    
    $
    0.06
    
    
    $
    0.09
    
    
    $
    0.14Pro forma
    
    $
    (0.06
    )
    
    $
    0.01
    
    
    $
    (0.04
    )
    
    $
    0.05Diluted:As reported
    
    $
    0.01
    
    
    $
    0.05
    
    
    $
    0.08
    
    
    $
    0.11Pro forma
    
    $
    (0.06
    )
    
    $
    0.01
    
    
    $
    (0.04
    )
    
    $
    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 tank 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 six months ended January 31,
2003 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 primarily
due to changes in the valuation reserve for deferred tax assets. 6




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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
    
    Six months endedJanuary 31,
    
    January 31,2004
    
    2003
    
    2004
    
    2003(Unaudited)
    
    (Unaudited)Net income
    
    $
    111
    
    
    $
    916
    
    
    $
    1,606
    
    
    $
    2,175Less: Preferred stock
dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    71Income applicable to common
stockholders
    
    $
    111
    
    
    $
    916
    
    
    $
    1,606
    
    
    $
    2,104Income applicable to common
stockholders
    
    $
    111
    
    
    $
    916
    
    
    $
    1,606
    
    
    $
    2,104Weighted average number of common shares
outstanding (in thousands)
    
    
    17,870
    
    
    
    16,114
    
    
    
    17,856
    
    
    
    15,123Basic earnings per common
share
    
    $
    0.01
    
    
    $
    0.06
    
    
    $
    0.09
    
    
    $
    0.14Income applicable to common
stockholders
    
    $
    111
    
    
    $
    916
    
    
    $
    1,606
    
    
    $
    2,104Weighted average number of common shares
outstanding (in thousands)
    
    
    17,870
    
    
    
    16,114
    
    
    
    17,856
    
    
    
    15,123Effect of potentially dilutive securities:Common stock
options
    
    
    1,494
    
    
    
    1,972
    
    
    
    1,442
    
    
    
    1,873Common stock
warrants
    
    
    635
    
    
    
    1,501
    
    
    
    624
    
    
    
    1,680Weighted average number of common shares
outstanding assuming
dilution
    
    
    19,999
    
    
    
    19,587
    
    
    
    19,922
    
    
    
    18,676Diluted earnings per common
share
    
    $
    0.01
    
    
    $
    0.05
    
    
    $
    0.08
    
    
    $
    0.11
 Common stock options and common stock warrants listed below for the three
and six months ended January 31, 2004 and 2003 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
    
    Six months endedJanuary 31,
    
    January 31,2004
    
    2003
    
    2004
    
    2003(Unaudited)
    
    (Unaudited)Common stock options
    
    
    1,920,847
    
    
    
    953,250
    
    
    
    2,532,322
    
    
    
    979,750Common stock warrants
    
    
    
    
    

    
    330,000
    
    
    
    
    
    
    
    
 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. A summary of changes in OCI for the three and six months ended January 31,
2004 and 2003 is presented below: 7




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##### 



Three months ended
    
    Six months endedJanuary 31,
    
    January 31,2004
    
    2003
    
    2004
    
    2003Beginning balance deferred in
OCI
    
    $
    195
    
    
    $
    915
    
    
    $
    814
    
    
    $
    (26
    )Net change associated with current period hedge
transactions, net of tax
    
    
    1,040
    
    
    
    3,008
    
    
    
    1,121
    
    
    
    4,082Net amount reclassified into earnings during the
period, net of tax
    
    
    (627
    )
    
    
    (386
    )
    
    
    (1,327
    )
    
    
    (519
    )Ending balance deferred in
OCI
    
    $
    608
    
    
    $
    3,537
    
    
    $
    608
    
    
    $
    3,537
 Total comprehensive income for the three and six months ended January 31,
2004 was $524 and $1,400, respectively. Total comprehensive income for the
three and six months ended January 31, 2003 was $3,538 and $5,738,
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. A hearing before an Administrative Law Judge in the ITC proceeding
is currently scheduled for the week of April 5, 2004. The Company continues to
believe that it and its affiliates have meritorious defenses to ABCs
allegations and meritorious claims against ABC, and intends to vigorously
pursue those defenses and claims in these actions. Securities Class Actions and Shareholder Derivative Actions On May 19, 2003, George Schober filed a shareholder securities class
action lawsuit in the United States District Court for the Central District of
California, naming the Company, along with four of its officers and directors,
as defendants. Six tag-along securities class actions arising out of the same
alleged facts and circumstances as the original action were subsequently filed
in the same court. The cases have been consolidated into a single action and
Andy Lee, Charles Anderberg and Steven Lendeman have been designated as lead
plaintiffs. Plaintiffs filed a consolidated complaint on December 3, 2003.
The plaintiffs seek to represent a class of investors who purchased the
Companys publicly-traded securities between August 2002 and February 2003.
The plaintiffs allege violations of Section 10(b) of the Securities Exchange
Act of 1934 (the Exchange Act) and Rule 10b-5 promulgated thereunder, and
Section 20(a) of the Exchange Act. In particular, the plaintiffs have alleged
that the Company and the individual defendants violated the federal securities
laws by, among other things, improperly failing to consolidate distributors Ark
and Platinum for financial reporting purposes prior to the date of their being
acquired by the Company, making materially false and misleading statements
and/or failing to disclose material facts related to the financial performance
and prospects of the Company and distributors Ark and Platinum, and making
materially false and misleading statements and/or failing to disclose material
facts relating to the Companys acquisition of Ark and Platinum. The complaint
seeks unspecified damages, plus reasonable costs and expenses, including
attorneys fees and experts fees. On May 22, 2003, Richard Marcoux filed a
shareholder derivative action in the Superior Court of California, Los Angeles
County, naming all directors and certain officers of the Company as individual
defendants and the Company as a nominal defendant. On June 19, 2003, Randy
Gish filed a substantially similar derivative action in the same court. Both
the Marcoux and 8




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Gish actions were removed to the U.S. District Court for the Central District
of California. The Marcoux case was subsequently remanded to Los Angeles
Superior Court, but has been stayed pending resolution of the federal actions.
The derivative actions arise out of substantially similar facts and
circumstances as the securities class actions, and allege violations of the
California Corporations Code, breach of fiduciary duty, abuse of control, gross
mismanagement, waste of corporate assets and unjust enrichment. The defendants
have filed motions to dismiss both the securities class action lawsuit and the
Gish derivative lawsuit, and hearings on those motions are currently scheduled
for April 12 and April 26, 2004, respectively. The Company believes that all
of the foregoing securities class actions and derivative actions are without
merit and intends to vigorously defend itself against these actions. Merger Class Action On February 12, 2004, Richard Marcoux filed a purported stockholder class
action lawsuit in Forsyth County, North Carolina Superior Court against the
Companys Board of Directors. The complaint alleges that the directors
breached their fiduciary duties to the Companys stockholders in connection
with the approval of the Agreement and Plan of Merger entered into with
affiliates of Ferrellgas Partners, L.P. on February 8, 2004, and seeks to
enjoin and/or void the Agreement and Plan of Merger, among other forms of
relief. The Company believes that this action is without merit and intends to
vigorously defend its directors. Other Litigation The Company is also a party to other litigation which it considers routine
and incidental to its business. Management does not expect the results of any
of these other actions to have a material adverse effect on the Companys
business, results of operations or financial condition. 8. Subsequent Event On February 9, 2004, the Company announced that it had entered into an
Agreement and Plan of Merger dated as of February 8, 2004 with FCI Trading
Corp, Diesel Acquisition LLC and Ferrell Companies, Inc. pursuant to which all
outstanding shares of Blue Rhinos common stock will be acquired in an all-cash
transaction. Terms of the merger agreement provide for the payment of $17 in
cash for each share of the Companys stock outstanding on the date of the
closing of the transaction, with the total payments for the Companys stock
anticipated to be approximately $340 million. Subject to regulatory and Blue
Rhino stockholder approval, this transaction is currently expected to close in
May or June of 2004. The details of this transaction are discussed in Blue
Rhinos Form 8-K filed with the Securities and Exchange Commission on February
9, 2004 and its preliminary proxy statement filed with the Securities and
Exchange Commission on March 2, 2004. 9. Segment Information The Company has two reportable segments: tank exchange and products and
other. The tank exchange segment relates to tank exchange transactions and
lease income from tanks and tank displays. The products and other segment
includes the activities required to sell patio heaters, grills and other
complementary propane products, fireplace accessories and garden products. In
addition, financial information related to QuickShip, a retail shipping service
company acquired in October 2000, is included within the products and other
segment as it is not currently material on a stand-alone basis. For the three
and six months ended January 31, 2004, QuickShip had a loss from operations of
($180) and ($408), respectively. For the three and six months ended January
31, 2003, QuickShip had a loss from operations of ($327) and ($778),
respectively. 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). Management of the
Company believes that EBITDA is a useful measure of operating performance at a
segment level as it is an important indicator of the ability of each segment to
provide cash flows to service debt and fund working capital requirements and
eliminates the uneven effect between our segments of noncash depreciation of
tangible assets and amortization of certain intangible assets. In addition,
management uses EBITDA performance objectives at a segment level as the basis
for determining incentive compensation. EBITDA as presented may not be
comparable to similarly titled measures used by other entities. EBITDA should
not be considered in isolation from, or as a substitute for, net income or cash
flows from operating activities prepared in accordance with generally accepted
accounting principles as an indicator of operating performance or as a measure
of liquidity. 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
Companys selected segment 9




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information as of and for the three and six months ended January 31, 2004
and 2003 is as follows: Three Months Ended
    
    Six Months EndedJanuary 31,
    
    January 31,2004
    
    2003
    
    2004
    
    2003Net revenues:Tank exchange
    
    $
    30,175
    
    
    $
    29,816
    
    
    $
    68,971
    
    
    $
    66,765Products and other
    
    
    29,067
    
    
    
    28,238
    
    
    
    39,541
    
    
    
    46,105$
    59,242
    
    
    $
    58,054
    
    
    $
    108,512
    
    
    $
    112,870Segment EBITDA:Tank exchange
    
    $
    3,346
    
    
    $
    3,464
    
    
    $
    10,267
    
    
    $
    9,015Products and other
    
    
    (25
    )
    
    
    1,089
    
    
    
    (1,108
    )
    
    
    610$
    3,321
    
    
    $
    4,553
    
    
    $
    9,159
    
    
    $
    9,625Depreciation &
amortization
    
    
    2,517
    
    
    
    2,267
    
    
    
    5,132
    
    
    
    4,425Interest
expense
    
    
    605
    
    
    
    1,380
    
    
    
    1,261
    
    
    
    2,636Loss on
investee
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    455Other, net
    
    
    15
    
    
    
    (25
    )
    
    
    132
    
    
    
    (96
    )Income taxes
    
    
    73
    
    
    
    15
    
    
    
    1,028
    
    
    
    30Net income
    
    $
    111
    
    
    $
    916
    
    
    $
    1,606
    
    
    $
    2,175
 As of January 31,2004
    
    
    
    2003Total assets:Tank exchange
    
    $
    150,263
    
    
    $
    142,207Products and other.
    
    
    52,046
    
    
    
    56,008$
    202,309
    
    
    $
    198,215
 10




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Item 2.Managements Discussion and Analysis of Financial Condition and
Results of Operations Certain statements in this section and elsewhere in this Quarterly Report
onForm 10-Qare forward-looking in nature and relate to the Companys plans,
objectives, estimates, goals and future financial performance. The terms
should, believe, plan, expect, anticipate, estimate, intend and
project and similar words or expressions are intended to identify
forward-looking statements. These statements are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995 and
speak only as of the date of this release. The Companys business is subject
to numerous risks and uncertainties, including: that the pending merger with
affiliates of Ferrell Companies, Inc., will not be consummated and related
risks associated with any failure of the merger to be consummated; that its
significant retail relationships are generally nonexclusive and terminable at
will; that prices for its products and services may decline due to competitive
or other factors; its ability to manage growth; its ability to place Blue Rhino
tank exchange at additional retail locations; its ability to protect its
intellectual property and to strengthen its brand; risks that it will be found
to have infringed the intellectual property rights of others; its ability to
mitigate the effects of high propane commodity prices; its ability to integrate
acquisitions; its ability to manage its distributor operations; its ability to
launch new products and services; the effect of safety guidelines on consumer
demand for tank exchange; its ability to successfully defend certain lawsuits,
including without limitation contingencies associated with the shareholder
class action, shareholder derivative and patent infringement lawsuits filed
against the Company and the lawsuit filed to enjoin the merger; and consumer
confidence and spending patterns, retailer inventory policies and the price of
propane. These and other risks and uncertainties, including those detailed in
the Companys most recent Annual Report onForm 10-Kand other filings with the
Securities and Exchange Commission under Risk Factors or Business 
Additional Factors that May Affect our Business or Future Results, could cause
actual results and experience to be materially different from those expressed
or implied by any of these forward-looking statements. To the extent permitted
by law, 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, CPD Associates,
Inc., USA Leasing, L.L.C., Uniflame Corporation, QuickShip, Inc., Rhino
Services, 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 (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, 2003, on file with the Securities and Exchange Commission. As a
result of our acquisition of Platinum in November 2002, we increased our
ownership interest in R4 Technical Center  North Carolina, LLC (R4 Tech) on
a consolidated basis by 1% to 50%. We consolidated the results of R4 Tech
beginning in the second quarter of fiscal 2003 as a result of our increased
ownership and financial control. The results of operations for the three- and
six-month periods ended January 31, 2004 are not necessarily indicative of
results that may be expected for any other period, in part due to the
seasonality of our business. Blue Rhino was founded in March 1994. We believe we have become the
leading national provider of propane tank exchange and a leading provider of
complementary propane and non-propane products to consumers through many of the
worlds greatest retailers. Our branded propane tank exchange service is
offered at more than 29,000 retail locations in 49 states, Puerto Rico and the
U.S. Virgin Islands, including leading home improvement centers, mass
merchants, hardware, grocery and convenience stores. Our retail partners
include Home Depot, Lowes, Wal-Mart, Sears, Kroger, Food Lion, Winn-Dixie,
SuperAmerica, Circle K and ExxonMobil. Propane tank exchange provides
consumers with a safe and convenient alternative to traditional propane tank
refilling. Our tank exchange segment partners with retailers and distributors to
provide consumers with a nationally branded alternative to traditional tank
refill. We dedicate our efforts and capital to brand development, value-added
marketing, customer service, tanks, displays, account growth, distributor
network management and management information systems. Our distributor network
is comprised of independent and company-owned distributorships that invest in
the vehicles and other operational infrastructure necessary to operate tank
exchange businesses. In November 2002, we acquired ten distributors whose
territories have historically represented approximately 45% of our tank
exchange revenues. We believe that our distributor network affords us the
opportunity to service approximately 90% of the consumer tank exchange markets
in the United States. Our products and other segment includes the design and import of consumer
products sold through mass retailers. The segments revenues are derived from
products that use propane tanks as their fuel source, principally patio
heaters, grills and mosquito elimination devices and non-propane products such
as charcoal grills, fireplace accessories and garden products. The segments
revenues have historically been strongest in the fall and winter months, which
is counterseasonal to the strongest months for our tank 11




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exchange segment. QuickShip, Inc., a retail shipping services company
that we acquired in October 2000, is included within the products and other
segment as it is not currently significant on a stand-alone basis. On February 9, 2004, the Company announced that it had entered into an
Agreement and Plan of Merger dated as of February 8, 2004 with FCI Trading
Corp, Diesel Acquisition LLC and Ferrell Companies, Inc. pursuant to which all
outstanding shares of Blue Rhinos common stock will be acquired in an all-cash
transaction. Terms of the merger agreement provide for the payment of $17 in
cash for each share of the Companys stock outstanding on the date of the
closing of the transaction, with the total payments for the Companys stock
anticipated to be approximately $340 million. Subject to regulatory and Blue
Rhino stockholder approval, this transaction is currently expected to close in
May or June of 2004. The details of this transaction are discussed in Blue
Rhinos Form 8-K filed with the Securities and Exchange Commission on February
9, 2004 and its preliminary proxy statement filed with the Securities and
Exchange Commission on March 2, 2004. We announced on November 25, 2003 that we were changing our fiscal year
end from July 31 to January 31 and that, accordingly, fiscal 2004 would consist
of the two quarters ending on January 31, 2004, and fiscal 2005 would commence
on February 1, 2004. However, on January 31, 2004, the Companys Board of
Directors rescinded its prior approval of this change in fiscal year, thereby
reinstating a July 31 fiscal year end. The Boards rescission of its prior
approval of a change in fiscal year was reported on a Form 8-K filed with the
Securities and Exchange Commission on February 9, 2004. Results of Operations Comparison of the three months ended January 31, 2004 with the three months
ended January 31, 2003 Net revenues.Net revenues increased 2.0% to $59.2 million for the three
months ended January 31, 2004 from $58.1 million for the three months ended
January 31, 2003. Net revenues consisted of $30.2 million from the tank
exchange segment and $29.0 million from the products and other segment. Tank
exchange revenues increased 1.2% to $30.2 million from $29.8 million, primarily
due to an approximately 4% increase in the number of total tank transactions to
1.9 million units for the second quarter of fiscal 2004 from 1.8 million units
for the second quarter of fiscal 2003. The increase was partially offset by a
decrease in average unit revenues primarily caused by a decrease in the number
of upgrades in the sales mix. The increase in tank transactions reflects the
positive trend toward consumer acceptance of tank exchange versus refill and
the impact of National Fire Protection Association (NFPA) guidelines adopted
by many states that mandate that all propane tanks refilled after April 1, 2002
be fitted with an overfill prevention device (OPD). Product revenues
increased 2.9% to $29.0 million from $28.3 million principally due to an
increase in the number of grills sold. Revenues and earnings for the three
months ended January 31, 2004 were below our estimates, primarily due to a
delay in approximately $6.0 million of grill shipments. The revenues from the
grill shipments are expected to occur in the third and fourth quarters of
fiscal 2004. Gross margin. Our overall gross margin decreased 55 basis points to 18.3%
for the second quarter of fiscal 2004 from 18.9% for the second quarter of
fiscal 2003. Gross margin percentage in tank exchange increased 211 basis
points to 27.0% for the three months ended January 31, 2004 from 24.9% for the
three months ended January 31, 2003 due primarily to the decrease in the number
of upgrade transactions, the reduced cost of tanks and lower costs at
company-owned distributors. The products and other segment gross margin
decreased 319 basis points to 9.3% for the second quarter of fiscal 2004 from
12.5% for the second quarter of fiscal 2003 due primarily to a greater
percentage of lower-margin products in the mix of products sold and lower
margins garnered from fireplace accessories sold compared to the prior year. Selling, general and administrative expenses. Selling, general and
administrative (SG&A) expenses increased 17.8% to $7.5 million for the three
months ended January 31, 2004 from $6.4 million for the three months ended
January 31, 2003. As a percentage of net revenues, SG&A expenses increased to
12.7% for the second quarter of fiscal 2004 from 11.0% for the second quarter
of fiscal 2003. SG&A expenses in the tank exchange segment increased 21.4% to
$4.8 million for the second quarter of fiscal 2004 from $3.9 million for the
second quarter of fiscal 2003 due primarily to increased professional fees.
SG&A expenses in the products and other segment increased 11.9% to $2.7 million
from $2.5 million in the same period in the prior year primarily due to
increased professional fees. Depreciation and amortization. Depreciation and amortization increased
11.0% to $2.5 million for the second quarter of fiscal 2004 from $2.3 million
for the second quarter of fiscal 2003. Depreciation and amortization in the
tank exchange segment increased 11.0% to $2.3 million for the second quarter of
fiscal 2004 from $2.1 million in the same period of the prior year due
primarily to the depreciation expense resulting from an increase in the number
of tanks and displays. Depreciation and amortization in the products 12




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##### 



and other segment increased 10.6% to $210,000 for the second quarter of
fiscal 2004 from $190,000 for the second quarter of fiscal 2003 due primarily
to the increase in depreciation expense related to machinery and equipment
costs. Interest expense.Interest expense decreased to $605,000 in the second
quarter of fiscal 2004 from $1.4 million in the second quarter of fiscal 2003
due primarily to the absence of subordinated debt, which was prepaid in the
third and fourth quarters of fiscal 2003, partially offset by higher average
borrowings on our credit facility at lower interest rates. Other, net. Other expense was $15,000 in the second quarter of fiscal
2004, while other income was $25,000 in the second quarter of fiscal 2003.
Other, net consists primarily of interest income from advances made to
independent distributors and losses from the disposal of assets. Income taxes.The provision for income taxes increased to $73,000 in the
second quarter of fiscal 2004 from $15,000 for the second quarter of fiscal
2003. 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
primarily due to changes in the valuation reserve for deferred tax assets. We
currently expect to report income taxes at a fully taxed rate of approximately
39% going forward. Comparison of the six months ended January 31, 2004 with the six months ended
January 31, 2003 Net revenues.Net revenues decreased 3.9% to $108.5 million for the six
months ended January 31, 2004 from $112.9 million for the six months ended
January 31, 2003. Net revenues consisted of $69.0 million from the tank
exchange segment and $39.5 million from the products and other segment. Tank
exchange revenues increased 3.3% to $69.0 million from $66.8 million primarily
due to an approximately 6% increase in the number of total tank transactions to
4.3 million units for the first half of fiscal 2004 from 4.1 million units for
the first half of fiscal 2003. The increase was partially offset by a decrease
in average unit revenues primarily caused by a decrease in the number of
upgrades in the sales mix. The increase in tank transactions reflects the
positive trend toward consumer acceptance of tank exchange versus refill and
the impact of National Fire Protection Association (NFPA) guidelines adopted
by many states that mandate that all propane tanks refilled after April 1, 2002
be fitted with an overfill prevention device (OPD). Product revenues
decreased 14.2% to $39.5 million from $46.1 million due principally to a
decrease in fireplace accessory revenue and a decrease in the number of OPD
valves sold to independent distributors. Gross margin.Our overall gross margin increased 49 basis points to 22.1%
for the first six months of fiscal 2004 from 21.6% for the first six months of
fiscal 2003. Gross margin percentage increased 222 basis points in tank
exchange to 29.0% from 26.8% in the same period of the prior year due primarily
to the decrease in the number of upgrade transactions and the reduced cost of
tanks. The products segment gross margin decreased 404 basis points to 10.2%
for the six months ended January 31, 2004 from 14.2% for the six months ended
January 31, 2003 due primarily to a greater percentage of lower-margin products
in the mix of products sold. Selling, general and administrative expenses. Selling, general and
administrative (SG&A) expenses remained virtually constant at $14.8 million
for the six months ended January 31, 2004 and for the six months ended January
31, 2003. As a percentage of net revenues, SG&A expenses increased to 13.7%
for the first half of fiscal 2004 from 13.1% for the first half of fiscal 2003.
SG&A expenses in the tank exchange segment increased 9.8% to $9.7 million for
the first six months of fiscal 2004 from $8.9 million for the first six months
of fiscal 2003 due primarily to increased professional fees. SG&A expenses in
the products and other segment decreased 13.7% to $5.1 million from $5.9
million in the same period in the prior year. The decrease primarily results
from special charges incurred in the prior year, which consisted primarily of
relocation expenses associated with the consolidation of many products segment
employees based in Zion, Illinois with the tank exchange employee base in
Winston-Salem, North Carolina. Depreciation and amortization.Depreciation and amortization increased
16.0% to $5.1 million in the six months ended January 31, 2004 from $4.4
million in the six months ended January 31, 2003. Depreciation and
amortization in the tank exchange segment increased 15.2% to $4.7 million for
the first six months of fiscal 2004 from $4.0 million in the same period of the
prior year due primarily to the increase in depreciation expense resulting from
assets acquired in the Platinum and Ark acquisitions in November 2002 and an
increase in the number of tanks and displays. Depreciation and amortization in
the products and other segment increased 24.1% to $468,000 for the first half
of fiscal 2004 from $377,000 for the first half of fiscal 2003 due primarily to
the increase in depreciation expense related to machinery and equipment and
computer software costs. Interest expense.Interest expense decreased to $1.3 million in the six
months ended January 31, 2004 from $2.6 million in the six months ended January
31, 2003 due primarily to the absence of subordinated debt, which was prepaid
in the third and fourth quarters of fiscal 2003, partially offset by higher
average borrowings on our credit facility at lower interest rates. 13




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Loss on investee.There was no loss on investee for the six months ended
January 31, 2004. Loss on investee was $455,000 for the six months ended
January 31, 2003. We recognized 100% of the loss of R4 Tech in the first
quarter of fiscal 2003 as a result of advances made without a corresponding
advance from the other joint venture partners. This charge represented the
loss related to our 49% ownership interest in R4 Tech, which has since
increased to 50% as a result of our acquisition of Platinum. The increased
ownership interest and financial control resulted in the consolidation of the
financial statements of R4 Tech beginning in the second quarter of fiscal 2003. Other, net. Other expense was $132,000 in the first half of fiscal 2004,
while other income was $96,000 in the first half of fiscal 2003. Other, net
consists primarily of interest income from advances made to independent
distributors and losses from the disposal of assets. Income taxes.The provision for income taxes increased to $1.0 million in
the first six months of fiscal 2004 from $30,000 for the first six months of
fiscal 2003. 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
primarily due to changes in the valuation reserve for deferred tax assets. We
currently expect to report income taxes at a fully taxed rate of approximately
39% going forward. Preferred dividends.Preferred dividends accrued on outstanding Series A
Preferred Stock was $71,000 for the six months ended January 31, 2003. The
remaining outstanding shares of Series A Convertible preferred stock were
converted to shares of common stock in September 2002. Liquidity and Capital Resources Our primary sources of funds have been the incurrence of debt, the
issuance of stock, and cash flow from operations. The primary source of cash
for the first half of fiscal 2004 was cash provided by operations. The primary
sources of cash for the first half of fiscal 2003 were cash provided by the
issuance of stock and net proceeds from the credit facility. Net cash generated by operations was $12.4 million for the six months
ended January 31, 2004, while net cash used in operations was $5.9 million for
the six months ended January 31, 2003. The increase in cash provided by
operations was primarily due to increased accounts receivable collections and
decreased inventory purchases. Net cash used in investing activities was $2.5 million for the six months
ended January 31, 2004 and $14.3 million for the six months ended January 31,
2003. The primary components of cash used in investing activities for the six
months ended January 31, 2004 were investments in property, plant and equipment
partially offset by a decrease in net tanks. For the six months ended January
31, 2003, the primary components of cash used in investing activities included
investments in property, plant and equipment, acquisitions and advances to R4
Tech and independent distributors. During the six months ended January 31,
2003, we provided net advances of $1.1 million to R4 Tech. As a result of the
acquisitions of Platinum and Ark on November 22, 2002 and the consolidation of
R4 Tech resulting from the acquisition of Platinum (Note 3 of Notes to
Condensed Consolidated Financial Statements), advances to R4 Tech, Platinum and
Ark beginning with the second quarter of fiscal 2003 are eliminated in
consolidation. Net cash used in financing activities was $10.1 million for the six months
ended January 31, 2004, compared to net cash provided by financing activities
of $21.1 million for the six months ended January 31, 2003. Cash used in
financing activities for the six-month period ended January 31, 2004 included
net payments on our credit facility and payments on long-term debt and capital
lease obligations. Cash provided by financing activities for the six-month
period ended January 31, 2003 included $14.9 million in net proceeds from the
sale of common stock, net proceeds from our credit facility and net proceeds
from exercises of warrants and stock options. In November 2002, we completed the syndication of a new and expanded bank
credit facility (the Credit Facility). The Credit Facility consists of a $45
million revolving line of credit and a $15 million 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 and advances under the
Credit Facility are collateralized by a lien on substantially all of our
assets. Advances under the Credit Facility may be made as either base rate (prime
rate) loans or London Interbank Offered Rate (LIBOR) loans at our 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 14




---



##### 



rate margins range from 50 to 150 basis points. On January 31, 2004 we
had $36.15 million (including a $8.65 million balance on the term loan) in
LIBOR loans outstanding at a weighted-average interest rate of 3.35% and $1.75
million in prime rate loans outstanding at a weighted-average interest rate of
4.75%. Principal payments on the outstanding term loan began on December 31, 2002
and are scheduled to continue quarterly until September 30, 2005. The initial
principal payments were $1 million per calendar quarter beginning December 31,
2002, increased to $1.25 million per calendar quarter beginning December 31,
2003 and are scheduled to further increase to $1.5 million 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 us to meet certain covenants, including minimum net worth and
cash flow requirements and restricts the payment of cash dividends. At January
31, 2004, we were in compliance with all covenants. In May 2003, we entered into an interest-rate swap agreement with an
effective date of August 1, 2003 and an expiration date of October 3, 2005.
The initial notional amount was $20.0 million beginning August 1, 2003, is
scheduled to decrease to $15.0 million on June 1, 2004, is scheduled to
decrease to $10.0 million on March 1, 2005 and is scheduled to further decrease
to $5.0 million on September 1, 2005. Under the swap agreement, we pay a fixed
rate of 1.85% and receive a rate equivalent to the thirty-day LIBOR, adjusted
monthly. We currently have capital purchase commitments outstanding of
approximately $3.5 million primarily relating to machinery and equipment associated with
two new tank refilling and refurbishing facilities that are being constructed
in Los Angeles and Orlando. We expect that these commitments will be satisfied
by the fall of 2004. We currently anticipate that our total capital
expenditures for our fiscal year ending July 31, 2004, excluding acquisitions,
will be approximately $14.0 million, and will relate primarily to tanks, tank
displays, computer technology and distribution infrastructure. We believe that
our existing borrowing capacity under the Credit Facility, together with cash
provided by operations, would be sufficient to meet our expected capital
expenditure and working capital requirements for the next four fiscal quarters. Related Party Transactions We lease some of our facilities from Billy D. Prim, our Chairman and Chief
Executive Officer, and from Rhino Real Estate, LLC, a company affiliated with
Billy D. Prim and Andrew J. Filipowski, our Vice Chairman. The leases expire
on April 30, 2004 and December 31, 2004, respectively. Our rent expense under
these leases for the three months and six months ended January 31, 2004 was
$118,000 and $244,000, respectively. Our rent expense under these leases for
the three months and six months ended January 31, 2003 was $111,000 and
$198,000, respectively. Management has received independent third-party
determinations from Lincoln Harris, LLC to the effect that these leases were
fair and within typical market conditions for comparable properties and that
the terms of all of these leases were within the range of terms that could have
been obtained from unrelated third parties for comparable properties. Uniflame Corporation leases its facility from H & M Enterprises, LLC, a
company affiliated with Mac McQuilkin, the president of Uniflame. The lease
terminates on March 31, 2005. Uniflames rent expense for the three and six
months ended January 31, 2004 was $81,000 and $162,000, respectively.
Uniflames rent expense for the three and six months ended January 31, 2003 was
$79,000 and $157,000, respectively. Management believes that the terms of this
lease are comparable to those that could have been obtained from unrelated
third parties. We have paid fees for information technology maintenance and support
services provided by Silkroad Technology, Inc. Andrew J. Filipowski, our Vice
Chairman, is the Chairman of Silkroad Technology, Inc. For the three and six
months ended January 31, 2004, we paid fees to Silkroad Technology, Inc. in the
amount of $0 and $28,000, respectively. Management believes that the terms of
these services were comparable to those that could have been obtained from an
unrelated third party. We have paid fees for software development and Internet hosting services
provided by divine, inc. Andrew J. Filipowski, our Vice Chairman, was the
chairman and chief executive officer of divine, inc. prior to February 2003.
For the three and six months ended January 31, 2003, we paid fees to divine,
inc. in the amount of $99,000 and $236,000, respectively. Management believes
that the terms of these services were comparable to those that could have been
obtained from an unrelated third party. 15




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Seasonality We have experienced and currently expect to continue to experience
seasonal fluctuations in our revenues and operating income. Our revenues and
operating income have been highest in the spring and summer, which includes the
majority of the grilling season, and lowest in the fall and winter. Our tank
exchange segment, which generally enjoys higher margins than our products and
other segment, experiences higher revenues and operating income in the spring
and summer. Conversely, our products and other segment experiences higher
revenues and operating income in the fall and winter. Sustained periods of
poor weather, particularly in the spring and summer, can negatively impact our
revenues. Accordingly, our 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 materially adversely affected by inflation in the
future. Price of Propane Beginning with the third quarter of fiscal 2000 and continuing through the
third quarter of fiscal 2001, there were dramatic increases in fuel costs and
propane prices reached unusually high levels. During the fourth quarter of
fiscal 2001 and continuing through the first quarter of fiscal 2003, propane
prices returned to a range more consistent with historical levels, but during
the balance of fiscal 2003 and the first half of fiscal 2004, again reached
unusually high levels. On March 1, 2001, we initiated a propane price hedging
strategy that reduced, and we currently believe will continue to 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 expected total tank exchange volume. If propane
costs rise, our gross margins and results of operations would be negatively
affected due to additional costs on unhedged volumes (both within and, if
applicable, in excess of our expected volumes) that we may not be able to
recover fully through an increase in our price to retailers. Off-Balance Sheet Arrangements We do not have any transactions, obligations or relationships that we
consider to be off-balance sheet arrangements. Impact of New Accounting Pronouncements In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,
which addresses consolidation by business enterprises of variable interest
entities (VIEs) either: (1) that do not have sufficient equity investment at
risk to permit the entity to finance its activities without additional
subordinated financial support, or (2) in which the equity investors lack an
essential characteristic of a controlling financial interest. In December
2003, the FASB issued modifications to FIN 46 (Revised Interpretations)
resulting in multiple effective dates based on the nature as well as the
creation date of the VIE. VIEs created after January 31, 2003, but prior to
January 1, 2004, may be accounted for either based on the original
interpretation or the Revised Interpretations. However, the Revised
Interpretations must be applied no later than the third quarter of our fiscal
2004. VIEs created after January 1, 2004 must be accounted for under the
Revised Interpretations. Non-Special Purpose Entities created prior to
February 1, 2003, should be accounted for under the revised interpretations
provisions no later than the third quarter of our fiscal 2004. We will
continue to evaluate FIN 46, but due to the complex nature of the analysis
required by FIN 46, we have not determined the 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 LIBOR and the prime rate, plus an applicable margin dependent upon a total
leverage ratio. To quantify our exposure to interest rate risk, a 100 basis
point increase in interest rates would have increased interest expense for the
six months ended January 31, 2004 and 2003 by approximately $95,000 and
$101,000, 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 (Note 6 of Notes to Condensed
Consolidated Financial Statements). These derivative financial instruments,
which are all swap agreements, are 16




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not entered into for trading purposes. A swap agreement is a contract to
exchange a floating rate for a fixed rate without the exchange of the
underlying notional amount. In May 2003, we entered into an interest rate swap
agreement with an effective date of August 1, 2003 and an expiration date of
October 3, 2005. The initial notional amount was $20.0 million beginning
August 1, 2003, is scheduled to decrease to $15.0 million on June 1, 2004, is
scheduled to decrease to $10.0 million on March 1, 2005 and is scheduled to
further decrease to $5.0 million on September 1, 2005. Under the swap
agreement, we pay a fixed rate of 1.85% and receive a rate equivalent to the
thirty-day LIBOR, adjusted monthly. At January 31, 2004, we had $36.15 million
in LIBOR-based loans outstanding at a weighted-average interest rate of 3.35%
and the interest rate swap was an effective cash flow hedge. We are exposed to commodity price risk related to changes in the price of
propane. If propane prices rise, our gross margins and results of operations
would be negatively affected due to additional costs that may not be fully
recovered through an increase in our price to retailers. 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 tank exchange segment by approximately .3% or 30 basis
points. Actual changes in tank exchange margins may differ materially from
that based on the hypothetical assumptions used in computing this exposure. We
have 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 projected tank exchange volume (Note 6 of Notes to Condensed Consolidated
Financial Statements). These monthly option contracts are not entered into for
trading purposes. 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. Substantially all of
our transactions are conducted and accounts are denominated in U.S. dollars,
and, as such, we do not currently have material exposure to foreign currency
risk. Item 4. Controls and Procedures As of the end of the period covered by this report, our Chief Executive
Officer and Chief Financial Officer evaluated the effectiveness of our
disclosure controls and procedures in accordance with Rule 13a-15 under the
Exchange Act. The Chief Executive Officer and the Chief Financial Officer
concluded that, as of the date of evaluation, our disclosure controls and
procedures were effective to enable us to record, process, summarize and report
in a timely manner the information that we are required to disclose in our
Exchange Act reports. There were no changes in our internal control over financial reporting
that occurred during the period covered by this report that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting. PART II  OTHER INFORMATION Item 1.Legal Proceedings 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 17




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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. A hearing before an Administrative Law Judge in the ITC
proceeding is currently scheduled for the week of April 5, 2004. The Company
continues to believe that it and its affiliates have meritorious defenses to
ABCs allegations and meritorious claims against ABC, and intends to vigorously
pursue those defenses and claims in these actions. Securities Class Actions and Shareholder Derivative Actions On May 19, 2003, George Schober filed a shareholder securities class
action lawsuit in the United States District Court for the Central District of
California, naming the Company, along with four of its officers and directors,
as defendants. Six tag-along securities class actions arising out of the same
alleged facts and circumstances as the original action were subsequently filed
in the same court. The cases have been consolidated into a single action and
Andy Lee, Charles Anderberg and Steven Lendeman have been designated as lead
plaintiffs. Plaintiffs filed a consolidated complaint on December 3, 2003.
The plaintiffs seek to represent a class of investors who purchased the
Companys publicly-traded securities between August 2002 and February 2003.
The plaintiffs allege violations of Section 10(b) of the Securities Exchange
Act of 1934 (the Exchange Act) and Rule 10b-5 promulgated thereunder, and
Section 20(a) of the Exchange Act. In particular, the plaintiffs have alleged
that the Company and the individual defendants violated the federal securities
laws by, among other things, improperly failing to consolidate distributors Ark
and Platinum for financial reporting purposes prior to the date of their being
acquired by the Company, making materially false and misleading statements
and/or failing to disclose material facts related to the financial performance
and prospects of the Company and distributors Ark and Platinum, and making
materially false and misleading statements and/or failing to disclose material
facts relating to the Companys acquisition of Ark and Platinum. The complaint
seeks unspecified damages, plus reasonable costs and expenses, including
attorneys fees and experts fees. On May 22, 2003, Richard Marcoux filed a
shareholder derivative action in the Superior Court of California, Los Angeles
County, naming all directors and certain officers of the Company as individual
defendants and the Company as a nominal defendant. On June 19, 2003, Randy
Gish filed a substantially similar derivative action in the same court. Both
the Marcoux and Gish actions were removed to the U.S. District Court for the
Central District of California. The Marcoux case was subsequently remanded to
Los Angeles Superior Court, but has been stayed pending resolution of the
federal actions. The derivative actions arise out of substantially similar
facts and circumstances as the securities class actions, and allege violations
of the California Corporations Code, breach of fiduciary duty, abuse of
control, gross mismanagement, waste of corporate assets and unjust enrichment.
The defendants have filed motions to dismiss both the securities class action
lawsuit and the Gish derivative lawsuit, and hearings on those motions are
currently scheduled for April 12 and 26, 2004, respectively. The Company
believes that all of the foregoing securities class actions and derivative
actions are without merit and intends to vigorously defend itself against these
actions. Merger Class Action On February 12, 2004, Richard Marcoux filed a purported stockholder class
action lawsuit in Forsyth County, North Carolina Superior Court against the
Companys Board of Directors. The complaint alleges that the directors
breached their fiduciary duties to the Companys stockholders in connection
with the approval of the Agreement and Plan of Merger entered into with
affiliates of Ferrellgas Partners, L.P. on February 8, 2004, and seeks to
enjoin and/or void the Agreement and Plan of Merger, among other forms of
relief. The Company believes that this action is without merit and intends to
vigorously defend its directors. Other Litigation The Company is also a party to other litigation which it considers routine
and incidental to its business. Management does not expect the results of any
of these other actions to have a material adverse effect on the Companys
business, results of operations or financial condition. 18




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Item 4.Submission of Matters to a Vote of Security Holders On December 16, 2003, we held our 2003 annual meeting of stockholders in
Bermuda Run, North Carolina. The following four proposals were submitted to a
vote of the stockholders:  1.
    
    The election of Steven D. Devick, Mark Castaneda and David L.
Warnock to serve three-year terms on our board of directors;2.
    
    The amendment to our 1998 Stock Incentive Plan to increase the
number of shares of common stock reserved for distribution thereunder
from 4,700,000 to 5,700,000;3.
    
    The amendment to our Director Option Plan to (i) increase the
number of shares of common stock reserved for distribution thereunder
from 400,000 to 800,000, (ii) provide for quarterly, rather than
annual, option grants, based on Board meeting attendance, and (iii)
provide for the grant of options to eligible directors for their
attendance at Nominating/Corporate Governance Committee meetings (as
is currently provided for attendance at certain other Board committee
meetings);4.
    
    The ratification of the appointment of Ernst & Young LLP as the
Companys independent accountants for the fiscal year ending July 31,
2004. All of these proposals were approved. The results of the stockholder voting were as follows: For
    
    Withheld
    
    Total Votes1. Election of DirectorsSteven D. Devick
    
    
    15,604,503
    
    
    
    490,126
    
    
    
    16,094,629Mark Castaneda
    

    
    15,653,513
    
    
    
    441,116
    
    
    
    16,094,629David L. Warnock
    
    
    15,637,578
    
    
    
    457,051
    
    
    
    16,094,629
 Broker Non-For
    
    Against
    
    Abstain
    
    Votes
    
    Total2. Amendment to the 1998 Stock Incentive Plan
    
    
    8,735,868
    
    
    
    2,015,039
    
    
    
    18,284
    
    
    
    5,325,438
    
    
    
    16,094,6293. Amendment to the Director Option Plan
    
    
    8,745,766
    
    
    
    1,998,337
    
    
    
    25,088
    
    
    
    5,325,438
    
    
    
    16,094,6294. Ratification of Appointment of Accountants
    
    
    15,997,016
    
    
    
    82,175
    
    
    
    15,438
    
    
    
    0
    
    
    
    16,094,629
 Item 6.Exhibits And Reports On Form 8-K (a) Exhibits: 10.1
    
    
    
    Lease dated February 4, 2004 between Platinum Propane of
Florida, L.P. and BR Partners Four, LLC.10.2
    
    
    
    Guaranty dated January 30, 2004 by Blue Rhino Corporation in
favor of BR Partners Four, LLC.10.3
    
    
    
    Notice of Grant of Stock Options dated December 17, 2003 and
related Stock Option Agreement between Blue Rhino
Corporation and Timothy E. Scronce.10.4
    
    
    
    Notice of Grant of Stock Options dated December 17, 2003 and
related Stock Option Agreement between Blue Rhino
Corporation and D. Scott Coward.31.1
    
    
    
    Certification of the Chief Executive Officer pursuant to
Rule 13a-15(e) or 15d-15(e) of the Exchange Act, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 19




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31.2
    
    
    
    Certification of the Chief Financial Officer pursuant to
Rule 13a-15(e) or 15d-15(e) of the Exchange Act, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    
    
    Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
The Sarbanes-Oxley Act of 2002.32.2
    
    
    
    Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
The Sarbanes-Oxley Act of 2002.
 (b) Reports on Form 8-K: During the quarter ended January 31, 2004, the Company filed the following
reports on Form 8-K: On November 25, 2003, a Form 8-K was filed pursuant to Item 12 to disclose
that on November 25, 2003, the Company issued a press release regarding its
financial results for the fiscal first quarter ended October 31, 2003. On November 25, 2003, a Form 8-K was filed pursuant to Item 8 to disclose
that the Companys Board of Directors has approved a change of fiscal year end
from July 31 to January 31, and that the new fiscal year end would begin on
February 1 and end on January 31 of the following year, effective with the year
beginning February 1, 2004. On January 31, 2004, the Companys Board of
Directors rescinded its prior approval of this change in fiscal year, thereby
reinstating a July 31 fiscal year end. The Boards rescission of its prior
approval of a change in fiscal year was reported pursuant to Item 8 on a Form
8-K filed with the Securities and Exchange Commission on February 9, 2004. 20




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SIGNATURES Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. Blue Rhino CorporationDate: March 11, 2004
    
    By:
    
    /s/ Billy D. PrimChairman and Chief Executive OfficerDate: March 11, 2004
    
    By:
    
    /s/ Mark CastanedaChief Financial Officer
 21