Exhibit 99.2
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
BLUE RHINO CORPORATION
Page
--------
Report of Independent Accountants..................................... 1
Consolidated Balance Sheets as of July 31, 2003 and 2002.............. 2
Consolidated Statements of Operations for the years ended
July 31, 2003, 2002 and 2001........................................ 3
Consolidated Statements of Stockholders' Equity for the
years ended July 31, 2003, 2002 and 2001............................ 4
Consolidated Statements of Cash Flows for the years ended
July 31, 2003, 2002 and 2001........................................ 5
Notes to Consolidated Financial Statements............................ 6
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Blue Rhino Corporation:
We have audited the accompanying consolidated balance sheets of Blue Rhino
Corporation and subsidiaries as of July 31, 2003, and 2002 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended July 31, 2003. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Blue Rhino Corporation at July 31, 2003, and 2002, and the consolidated results
of their operations and cash flows for each of the three years in the period
ended July 31, 2003, in conformity with accounting principles generally accepted
in the United States.
As discussed in Note 7 to the financial statements the Company adopted
Statement of Financial Accounting Standard No. 142, requiring the Company to
cease the amortization of goodwill and instead review goodwill for impairment on
adoption and annually thereafter.
/s/ Ernst & Young LLP
Greensboro, North Carolina
September 16, 2003, except for the last paragraph of Note 2 as to which the date
is October 8, 2003
1
BLUE RHINO CORPORATION
CONSOLIDATED BALANCE SHEETS
As of July 31, 2003 and 2002
(In thousands, except share and per share data)
2003 2002
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 2,495 $ 1,563
Accounts receivable, net 25,809 25,329
Inventories 20,372 11,035
Prepaid expenses and other current assets 7,055 3,081
Deferred income taxes 2,266 -
-------- --------
Total current assets 57,997 41,008
Cylinders, net 50,917 37,004
Property, plant and equipment, net 37,765 30,477
Goodwill and other intangibles, net 62,862 31,988
Other assets 1,264 2,896
-------- --------
Total assets $210,805 $143,373
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 19,193 $ 19,969
Current portion of long-term debt and capital lease 6,433 2,013
obligations
Accrued liabilities 5,679 3,770
-------- --------
Total current liabilities 31,305 25,752
Long-term debt and capital lease obligations, less
current maturities 42,800 39,259
Deferred income taxes 4,232 -
-------- --------
Total liabilities 78,337 65,011
Stockholders' equity:
Preferred stock, $0.001 par value, 20,000,000 shares
authorized, 1,850,000 shares issued and outstanding
at July 31, 2002 - 2
Common stock, $0.001 par value, 100,000,000 shares
authorized, 17,838,027 and 12,058,542 shares issued
and outstanding at July 31, 2003 and 2002, respectively 18 12
Capital in excess of par 132,704 95,901
Accumulated deficit (1,068) (17,527)
Accumulated other comprehensive income (loss) 814 (26)
-------- --------
Total stockholders' equity 132,468 78,362
-------- --------
Total liabilities and stockholders' equity $210,805 $143,373
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
2
BLUE RHINO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended July 31, 2003, 2002 and 2001
(In thousands, except per share data)
2003 2002 2001
-------- -------- --------
Net revenues $258,222 $205,585 $137,957
Operating costs and expenses:
Cost of sales 196,084 159,440 106,783
Selling, general and administrative 28,404 21,886 18,688
Depreciation and amortization 9,261 7,888 8,461
-------- -------- --------
Total operating costs and expenses 233,749 189,214 133,932
-------- -------- --------
Income from operations 24,473 16,371 4,025
Interest and other expenses (income):
Interest expense 7,784 6,217 5,134
Loss on investee 455 714 2,572
Nonrecurring item -- -- 449
Other, net (2,513) (422) (301)
-------- -------- --------
Income (loss) before income taxes 18,747 9,862 (3,829)
Income taxes 2,217 47 123
-------- -------- --------
Net income (loss) 16,530 9,815 (3,952)
Preferred dividends 71 1,789 770
-------- -------- --------
Income (loss) available to common stockholders $16,459 $ 8,026 $ (4,722)
======== ======== ========
Earnings per common share:
Basic $ 1.00 $ 0.63 $ (0.41)
======== ======== ========
Diluted $ 0.86 $ 0.55 $ (0.41)
======== ======== ========
Shares used in per share calculations:
Basic 16,430 12,658 11,641
======== ======== ========
Diluted 19,239 14,701 11,641
======== ======== ========
The accompanying notes are an integral
part of the consolidated financial statements.
3
BLUE RHINO CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended July 31, 2003, 2002 and 2001
(In thousands, except share data)
Accumulated Total
Pre- Capital Common Other Total Comprehensive
Common Stock ferred Stock in Excess Stock Accumulated Comprehensive Stockholders' Income
Shares Amount Shares Amount of Par Warrants Deficit Income (Loss) Equity (Loss)
--------------- --------------- --------- -------- ----------- ------------- ------------- -------------
Balances, July 31, 2000 9,221,703 $ 9 $ 59,897 $2,877 $(20,831) $ 41,952
Issuance of Series
A Convertible
Preferred stock $1,716,667 $ 2 9,659 9,661
Issuance of common
stock warrants 3,526 3,526
Issuance of preferred
stock in connection
with acquisitions 1,133,333 1 6,799 6,800
Issuance of common
stock under employee
stock purchase and
option plans 57,449 84 84
Accretion of preferred
dividend 770 (770) --
Expense related to
distributor stock
option plan 180 180
Loss on derivative
instruments $(1,102) (1,102) $(1,102)
Net loss (3,952) (3,952) (3,952)
-------------
Total comprehensive
loss $(5,054)
--------------------------------------------------------------------------------------------------------------------=============
Balances, July 31, 2001 9,279,152 9 2,850,000 3 77,389 6,403 (25,553) (1,102) 57,149
Issuance of Series
A Convertible
Preferred stock (168) (168)
Issuance of common
stock in private
placement 1,500,000 2 9,861 9,863
Conversion of
preferred stock to
common stock 1,000,000 1 (1,000,000) (1) --
Common stock
issued for
preferred dividend 96,532 --
Accretion of preferred
dividend 1,789 (1,789) --
Proceeds from exercise
of stock options
and warrants 105,277 481 (202) 279
Issuance of common
stock under
employee stock
purchase plan 77,581 237 237
Expense related to
distributor stock
option plan 111 111
Income on derivative
instruments 1,076 1,076 $ 1,076
Net income
9,815 9,815 9,815
-------------
Total comprehensive income $10,891
-------------------------------------------------------------------------------------------------------------------=============
Balances, July 31, 2002 12,058,542 12 1,850,000 2 89,700 6,201 (17,527) (26) 78,362
Issuance of common
stock in private
placement 1,000,000 1 13,497 843 14,341
Conversion of
preferred stock
to common stock 1,850,002 2 (1,850,000)(2) --
Common stock
issued for
preferred
dividend 137,079 --
Accretion of
preferred
dividend 71 (71) --
Issuance of common
stock in connection
with acquisitions 1,104,196 1 18,549 18,550
Proceeds from exercise
of stock options
and warrants 1,635,436 2 7,353 (4,485) 2,870
Issuance of common
stock under employee
stock purchase plan 52,774 356 356
Expense related to
distributor stock
option Plan 125 125
Tax effect of
non-qualified
stock options
exercised 494 494
Income on derivative
instruments, net of
income taxes of $533 840 840 $ 840
Net income 16,530 16,530 16,530
-------------
Total comprehensive income $17,370
----------------------------------------------------------------------------------------------------------------------============
Balances, July 31, 2003 17,838,027 $18 -- $-- $130,145 $2,559 $ (1,068) $ 814 $132,468
============== =============== ========= ======== =========== ============= ============= ============
The accompanying notes are an integral part
of the consolidated financial statements.
4
BLUE RHINO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended July 31, 2003, 2002 and 2001
(In thousands)
2003 2002 2001
-------- -------- --------
Cash flows from operating activities:
Net income (loss) $16,530 $ 9,815 $(3,952)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 9,261 7,888 8,461
Loss on investee 455 714 2,572
Expense related to distributor stock option plan 125 111 180
Non-cash interest expenses 3,446 1,048 210
Deferred income taxes 2,157 -- --
Nonrecurring item -- -- 449
Other 363 105 38
Changes in operating assets and liabilities, net of
business acquisitions:
Accounts receivable 250 (5,710) (485)
Inventories (15,035) (3,126) (2,477)
Other current assets (295) 140 (1,540)
Accounts payable and accrued liabilities (5,693) 5,764 (2,159)
-------- -------- --------
Net cash provided by operating activities 11,564 16,749 1,297
-------- -------- --------
Cash flows from investing activities:
Business acquisitions (6,746) (218) (1,334)
Purchases of property, plant and equipment (11,400) (4,683) (5,582)
Purchase of cylinders, net (7,720) (7,381) (5,414)
Net investment in and advances to joint venture (1,086) (1,049) (4,152)
(Issuance of) collections on notes receivable and
advances to distributors, net (2,372) 205 217
-------- -------- --------
Net cash used in investing activities (29,324) (13,126) (16,265)
-------- -------- --------
Cash flows from financing activities:
Proceeds from (payments on) revolving
line of credit, net 9,357 (10,977) (6,654)
Proceeds from term loan 10,900 -- --
Proceeds from issuance of common stock, net 18,066 10,210 84
Payment of debt issuance and common stock
registration costs (1,320) -- (932)
Payments of long-term debt and capital lease
obligations (18,311) (2,337) (2,226)
Proceeds from issuance of preferred stock, net -- -- 9,661
Proceeds from debt issuance -- -- 15,000
-------- -------- --------
Net cash provided by (used in)
financing activities 18,692 (3,104) 14,933
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 932 519 (35)
Cash and cash equivalents at beginning of period 1,563 1,044 1,079
-------- -------- --------
Cash and cash equivalents at end of period $ 2,495 $ 1,563 $ 1,044
======== ======== ========
The accompanying notes are an integral
part of the consolidated financial statements.
5
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
1. Description of Business and Basis of Presentation
Blue Rhino Corporation ("Blue Rhino" or the "Company") believes it is the
leading provider of propane cylinder exchange as well as a leading provider of
complementary propane and non-propane products to consumers. Blue Rhino cylinder
exchange provides consumers with a convenient means to exchange empty cylinders
for clean, safe, precision-filled cylinders. The Company has branded cylinder
displays at over 28,000 retail locations in 48 states plus Puerto Rico. Blue
Rhino cylinder exchange is offered at leading home improvement centers, mass
merchants, hardware, grocery and convenience stores. Cylinders are delivered to
retailers through a national network of 51 independent and company-owned
distributors. The Blue Rhino products group designs and imports patio heaters,
barbecue grills, mosquito elimination devices and various garden and fireplace
products primarily from Asia. These products are marketed primarily to home
improvement centers, mass merchants, and hearth stores. A subsidiary, QuickShip,
Inc., provides consumers with a convenient, full-service, in-store postal and
parcel shipping depot and provides retailers with another revenue source.
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 11). All material intercompany transactions and balances have been
eliminated in consolidation.
2. Summary of Significant Accounting Policies
Revenue Recognition -- Blue Rhino recognizes: (i) cylinder transaction
revenues upon delivery of the cylinders to retailers by our distributors; (ii)
products revenues upon shipment to retailers; and (iii) shipping services
revenues at the time consumers ship packages at the in-store retail depot. The
Company estimates returns and allowances against the revenues and records the
estimated returns and allowances in the same period in which the revenue is
recorded. These estimates are based upon historical analysis, customer
agreements and/or currently known factors that arise in the normal course of
business.
Accounts Receivable, Net -- Accounts receivable, net include allowances for
doubtful accounts of $917 and $841 at July 31, 2003 and 2002, respectively.
Allowances for doubtful accounts are estimated at the segment level based on
estimates of losses related to customer receivable balances. Quantitative
estimates are developed from accounts receivable agings based on expected
losses. Qualitative estimates are based on evaluations of specific customer
accounts in light of current economic conditions. Balances due from customers in
bankruptcy are considered uncollectible.
Inventories -- Inventories are valued at the lower of cost or market on a
first-in, first-out (FIFO) basis and consist primarily of finished goods
including cylinders, cylinder valves, grills, patio heaters, mosquito
eliminators, fireplace accessories, and garden products. The Company maintains
reserves for obsolete inventories. Specific reserves are established based on an
evaluation of the inventory to determine if cost exceeds market value. General
reserves are established based on markdowns applied to excess or aged
inventories.
Cylinders, Net -- Cylinders are stated at cost and depreciated on a
straight-line basis over their estimated useful lives of twenty-five years.
Cylinders include the cost of proprietary valves. The proprietary valves are
depreciated on a straight-line basis over their estimated useful lives of twelve
years. Depreciation expense for the years ended July 31, 2003, 2002, and 2001
was $2,618, $2,126 and $1,434, respectively.
Capitalized Software Development Costs -- Certain development costs for
internal use software are capitalized when incurred. Capitalization of software
development costs begins upon the establishment of technological feasibility and
ceases when the product is ready for release. Software development costs are
amortized on a straight-line basis over the expected life of the product
estimated at three years. Capitalized software development costs were $1,785,
$560 and $583 for the years ended July 31, 2003, 2002 and 2001, respectively. At
July 31, 2003 and 2002, total capitalized costs were $4,144 and $2,359 and
accumulated amortization was $2,308 and $1,419, respectively.
6
Property, Plant and Equipment, Net -- Property, plant and equipment are
stated at cost. Depreciation and amortization are provided for using the
straight-line method over estimated useful lives ranging from 3 to 10 years for
cylinder displays, 3 to 5 years for computer hardware and software, and 5 to 30
years for building and equipment.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. For
assets held and used, an impairment charge is recognized if projected
undiscounted cash flows are not adequate to cover the carrying value of the
assets. For assets held for disposal, an impairment charge is recognized if the
carrying value of the assets exceeds the fair value less costs to sell.
Goodwill and other Intangibles, Net -- In June 2001, the Financial
Accounting Standards Board issued Statements of Financial Accounting Standards
No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible
Assets, effective for fiscal years beginning after December 15, 2001. Under the
new rules, goodwill (and intangible assets deemed to have indefinite lives) will
no longer be amortized but will be subject to annual impairment tests in
accordance with the Statements. Our annual measurement date is February 1. The
Company applied the new rules on accounting for goodwill and other intangible
assets beginning in the first quarter of fiscal year 2002. There was no
impairment of goodwill upon adoption of SFAS 142. The Company is required to
perform goodwill impairment tests on an annual basis and between annual tests in
certain circumstances. The Company cannot be sure that future goodwill
impairment tests will not result in a charge to earnings. Patents and other
intellectual property are amortized over their estimated useful lives.
Non-compete agreements are amortized using the straight-line method over the
life of the agreements, which is generally three years.
Financial Instruments -- Financial instruments consist of cash and cash
equivalents, accounts receivable, advances, notes receivable, short-term and
long-term debt and derivatives. The Company considers all highly liquid
investments with an original maturity of three months or less at the date of
purchase to be cash equivalents. At July 31, 2003 and 2002 the carrying amounts
of the Company's financial instruments approximated their fair values.
The Company uses derivative financial instruments to manage exposure to
fluctuations in interest rates on its variable rate debt (Note 14). An interest
rate swap agreement is a contract to exchange floating rate for fixed interest
payments periodically over the life of the agreement without the exchange of the
underlying notional amount. The notional amount of the swap agreement is used to
measure interest to be paid or received and does not represent the amount of
exposure to credit loss. The differential paid or received under the interest
rate swap agreement is recognized as an adjustment to interest expense.
The Company uses derivative financial instruments in the form of swaps and
collars to hedge against fluctuations in the propane price component of its
distributor payments and in the price of propane purchases at company-owned
distributors (Note 14). The differential paid or received under the agreements
is recognized as an adjustment to cost of sales.
Comprehensive income -- Comprehensive income includes net income and
certain financial statement components, such as net unrealized holding gains or
losses, cumulative translation adjustments, and income or loss on derivative
instruments. The Company reports accumulated other comprehensive income in the
Consolidated Statement of Stockholders' Equity.
Advertising and Promotion -- The Company expenses advertising and promotion
costs as incurred and these costs are included as selling, general and
administrative expenses. Advertising and promotion costs for the years ended
July 31, 2003, 2002 and 2001 were $145, $262 and $392, respectively. Cooperative
advertising expenses are classified as a reduction of revenue.
Self-Insurance -- The Company is self-insured for a portion of losses
relating to worker's compensation, automobile, and product liability claims.
Claims filed and claims incurred but not reported are accrued based upon
management's estimates of the aggregate liability for claims using insurance
data and historical experience.
Income Taxes -- Deferred tax assets and liabilities are determined based on
the difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. A valuation allowance is recorded when it
is more likely than not that some portion or all of the deferred tax asset will
not be realized.
7
Stock-Based Compensation -- The Company accounts for the 1994 Stock
Incentive Plan, the 1998 Stock Incentive Plan and the Director Option Plan in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25") (Note 15). 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. 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"). For companies that continue to account for
stock-based compensation arrangements under APB 25, SFAS 123 requires disclosure
of the pro forma effect on net income (loss) as if the fair value based method
prescribed by SFAS 123 had been applied. The Company has adopted the pro forma
disclosure requirements of SFAS 123.
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/(loss) and earnings/(loss) per share for the years ended July 31,
2003, 2002 and 2001 would have been as follows:
2003 2002 2001
-------- -------- --------
Net income (loss) available for common stockholders:
As reported $ 16,459 $ 8,026 $ (4,722)
======== ======== =========
Pro forma $ 13,212 $ 6,636 $ (5,952)
======== ======== =========
Earnings (loss) per common share:
Basic:
As reported $ 1.00 $ 0.63 $ (0.41)
======== ======== =========
Pro forma $ 0.80 $ 0.52 $ (0.51)
======== ======== =========
Diluted:
As reported $ 0.86 $ 0.55 $ (0.41)
======== ======== =========
Pro forma $ 0.69 $ 0.45 $ (0.51)
======== ======== =========
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%.
Use of Estimates -- The preparation of the consolidated financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the dates of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ materially from these estimates.
Reclassification -- Certain prior year amounts have been reclassified to
conform to the presentation adopted in fiscal 2003.
Recent Accounting Pronouncements -- In August 2001, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standard ("SFAS") No. 143, Accounting for Asset Retirement Obligations. The
Statement requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. As required by SFAS
No. 143, the Company adopted this new accounting standard for fiscal year 2003.
The adoption of SFAS No. 143 did not have a material impact on the Company's
consolidated results of operations or financial position.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This Statement establishes a single
accounting model for the impairment or disposal of long-lived assets. As
required by SFAS No. 144, the Company adopted this new accounting standard for
fiscal year 2003. The adoption of SFAS No. 144 did not have a material impact on
the Company's consolidated results of operations or financial position.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. This Statement eliminates an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions and establishes that gains and losses from
extinguishment of debt should be classified as extraordinary items only if they
meet the criteria for treatment as extraordinary. The Company adopted this
standard for fiscal year 2003. The adoption of SFAS No. 145 did not have a
material impact on the Company's consolidated results of operations or financial
position.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This Statement requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred. SFAS No. 146 also establishes that fair value is the
objective for initial measurement of the liability. The Company adopted this
standard for fiscal year 2003. The adoption of SFAS No. 146 did not have a
material impact on the Company's consolidated results of operations or financial
position.
8
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure. SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition to SFAS No. 123's fair value method of accounting for stock-based
employee compensation. SFAS No. 148 also amends the disclosure provisions in
SFAS No. 123 and Accounting Principles Board Opinion No. 28, Interim Financial
Reporting, to require disclosure in the summary of significant accounting
policies of the effects of an entity's accounting policy with respect to
stock-based employee compensation on reported net income and earnings per share
in annual and interim financial statements. The Company adopted the interim
financial reporting for interim periods beginning after December 15, 2002. The
adoption of SFAS No. 148 did not have a significant impact on the Company's
consolidated results of operations or financial position.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS No. 133. In
particular, this Statement clarifies under what circumstances a contract with an
initial net investment meets the characteristic of a derivative and when a
derivative contains a financing component that warrants special reporting in the
statement of cash flows. The Company adopted this standard for contracts entered
into or modified after June 30, 2003. The adoption of SFAS No. 149 did not have
a significant impact on the Company's consolidated results of operations or
financial position.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This Statement
requires certain financial instruments that embody obligations of the issuer and
have characteristics of both liabilities and equity to be classified as
liabilities. The Company adopted this standard for financial instruments entered
into or modified after May 31, 2003. The adoption of SFAS No. 150 did not have a
significant impact on the Company's consolidated results of operations or
financial position.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities, which addresses the consolidation
of business enterprises (variable interest entities), to which the usual
condition of consolidation, a controlling financial interest, does not apply.
FIN 46 requires an entity to assess its business relationships to determine if
they are variable interest entities. As defined in FIN 46, variable interests
are contractual, ownership or other interests in an entity that change with
changes in the entity's net asset value. Variable interests in an entity may
arise from financial instruments, service contracts, guarantees, leases or other
arrangements with the variable interest entity. An entity that will absorb a
majority of the variable interest entity's expected losses or expected residual
returns, as defined in FIN 46, is considered the primary beneficiary of the
variable interest entity. The primary beneficiary must include the variable
interest entity's assets, liabilities and results of operations in its
consolidated financial statements. FIN 46 is immediately effective for all
variable interest entities created after January 31, 2003. For variable interest
entities created prior to this date, the provisions of FIN 46 were originally
required to be applied no later than the Company's first quarter of Fiscal 2004.
On October 8, 2003, the FASB issued FASB Staff Position (FSP) FIN 46-6,
Effective Date of FASB Interpretation No. 46, Consolidation of Variable Interest
Entities. The FSP provides a limited deferral (until the end of the Company's
second quarter of 2004) of the effective date of FIN 46 for certain interests of
a public entity in a variable interest entity or a potential variable interest
entity. The Company will continue to evaluate FIN 46, but due to the complex
nature of the analysis required by FIN 46 has not determined the impact on its
consolidated results of operations or financial position.
3. Concentration of Credit Risk
The Company's cash and cash equivalents are held by high-quality financial
institutions, thereby reducing credit risk concentrations. Due to the geographic
dispersion and the high credit quality of the Company's significant customers,
credit risk relating to accounts receivable is limited. The Company performs
ongoing credit evaluations of its customers' financial condition and, generally,
does not require collateral on accounts receivable. The Company's three largest
customers accounted for a total of approximately 65%, 59%, and 54% of net
revenues in the years ended July 31, 2003, 2002 and 2001, respectively, as
follows:
2003 2002 2001
------ ------ ------
Wal-Mart 36% 32% 26%
Home Depot 18 18 19
Lowe's Companies 11 9 9
------ ------ ------
Total 65% 59% 54%
====== ====== ======
9
The Company's revenues with Home Depot and Lowe's are predominantly in the
cylinder exchange segment while revenues with Wal Mart occur in both the
cylinder exchange and products segments. Approximately 58% and 47% of the
Company's aggregate accounts receivable at July 31, 2003 and 2002, respectively,
were from these customers. If the financial condition or operations of these
customers deteriorate, the Company's operating results could be adversely
affected.
4. Cylinders, net
The Company owns propane cylinders and cylinder displays. The Company is
responsible for the cost of refurbishing cylinders obtained from consumers in
exchange transactions. The Company currently offers three types of cylinder
transactions: (i) like-for-like cylinder exchanges; (ii) cylinder exchanges with
valve upgrades offering additional safety features; and (iii) filled cylinder
sales. The refurbishment cost of all three types of cylinder transactions, the
valve cost associated with upgrade transactions, and the cylinder cost
associated with sale transactions are expensed as part of cost of goods sold. As
cylinder inventories are depleted by sale transactions, they are generally
replaced by purchasing new cylinders.
Cylinder cost as of July 31, 2003 and 2002 was $47,318 and $30,781,
respectively, with accumulated depreciation of $5,175 and $3,474, respectively.
As of July 31, 2003 and 2002, cylinder cost included the cost of proprietary
valves of $11,008 and $11,008, respectively, with accumulated depreciation of
$2,234 and $1,317, respectively.
Significant portions of cylinders and displays are leased to independent
distributors under operating lease agreements for use within each distributor's
territory (Note 6). Under these lease agreements, independent distributors are
obligated to refurbish cylinders into like-new condition and, in the event of
loss or damage, to repair or replace the cylinders. In addition, the distributor
(lessee) is obligated to pay for all maintenance, installation, deinstallation,
taxes and insurance related to the cylinders. The leases continue until either
party terminates upon 60 days written notice the other party.
As of July 31, 2003 and 2002, the costs of cylinders under lease were
$22,236 and $30,781, respectively, with accumulated depreciation of $2,400 and
$3,474, respectively. Lease income for cylinders for the years ended July 31,
2003, 2002 and 2001 was $1,785, $2,865 and $2,957, respectively. As of July 31,
2003, estimated future minimum rental payments to be received are approximately
$1,205 per year through the year 2008.
5. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consists of the following at
July 31:
2003 2002
------ ------
Advances $ 1 $ 991
Prepaid expenses and other receivables 5,561 1,782
Propane derivative 1,365 307
Notes receivable 128 1
------ ------
$7,055 $3,081
====== ======
6. Property, Plant and Equipment, Net
Property, plant and equipment consists of the following at July 31:
2003 2002
-------- --------
Land $ 178 $ 178
Building and leasehold improvements 4,442 3,526
Cylinder displays, including panel graphics 31,429 26,894
Vehicles 1,843 589
Machinery and equipment 8,083 6,578
Furniture & fixtures 432 283
Computer hardware and software 11,063 8,337
Equipment leased under capital leases 750 411
Construction in progress 1,945 -
-------- --------
60,165 46,796
Less accumulated depreciation and amortization
(including $174 and $135 as of July 31, 2003
and 2002, respectively, for equipment under
capital leases) (22,400) (16,319)
-------- --------
$37,765 $30,477
======== ========
10
Depreciation and amortization expense for the years ended July 31, 2003,
2002 and 2001 was $6,495, $5,453 and $4,384, respectively.
The Company enters into operating lease agreements with its independent
distributors for cylinder displays for use within each distributor's territory.
Under these leases, the distributor (lessee) is obligated to pay for all
maintenance, installation, deinstallation, taxes and insurance related to the
cylinder displays. The lessee bears all risk of loss and damage to the displays
and, in the event of loss or damage, is required to repair or replace the
displays. The leases continue until either party terminates upon 60 days written
notice to the other party. As of July 31, 2003 and 2002, the costs of cylinder
displays under lease were $15,957 and $24,573, respectively, with accumulated
depreciation of $5,578 and $7,538, respectively. Lease income for cylinder
displays for the years ended July 31, 2003, 2002 and 2001 was $1,050, $1,646 and
$1,685, respectively. As of July 31, 2003, estimated future minimum rental
payments to be received are approximately $882 per year through the year 2008.
Effective September 30, 2001, the Company entered into a sale and leaseback
transaction with R4 Tech. The Company purchased all of the land, buildings and
equipment associated with the propane bottling and cylinder refurbishing
operation. The assets were purchased for $7,599. The purchase price was used to
repay outstanding advances to R4 Tech. Simultaneously, R4 Tech leased the land,
buildings, and equipment from the Company under the terms of a three-year
operating lease agreement. Under this agreement, R4 Tech pays Blue Rhino a ten
percent annual rate based on the value of all leased equipment. Lease income for
the years ended July 31, 2003 and 2002 was $196 and $640, respectively. As a
result of the acquisition of Platinum, the Company increased its ownership
interest in R4 Tech (Note 11) 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, therefore the
lease payments are eliminated in consolidation.
Land, buildings and equipment leased to R4 Tech consisted of the following
at July 31, 2003 and 2002:
2003 2002
------ ------
Land $ 158 $ 158
Buildings 2,921 2,775
Equipment 5,173 4,837
------ ------
8,252 7,770
Accumulated depreciation (939) (418)
------ ------
$7,313 $7,352
====== ======
7. Goodwill and other intangibles, Net
Intangibles consist of the following at July 31:
2003 2002
-------- --------
Goodwill $64,852 $33,867
Patents and trademarks 1,421 1,409
Non-compete agreements 1,029 1,002
-------- --------
67,302 36,278
Accumulated amortization (4,440) (4,290)
-------- --------
$62,862 $31,988
======== =======
Amortization expense for the years ended July 31, 2003, 2002 and 2001 was
$148, $309, and $2,644, respectively. As of July 31, 2003, the estimated
aggregate amortization expense for each of the five succeeding fiscal years is
$114 in 2004, $81 in 2005, $71 in 2006, $71 in 2007 and $67 in 2008.
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill (and intangible assets deemed
to have indefinite lives) will no longer be amortized but will be subject to
impairment tests on at least an annual basis (and more often in certain
circumstances) in accordance with the Statements. Other intangible assets will
continue to be amortized over their useful lives.
The Company applied the new rules for accounting for goodwill and other
intangible assets beginning in the first quarter of fiscal 2002. In accordance
with the requirements of SFAS 142, the Company has identified three reporting
units: the cylinder exchange segment, the products group and QuickShip. The
forecasts, valuations and impairment analyses under the Statement were made at
these reporting unit levels. The fair values of the cylinder exchange segment
and the products group were based on discounted cash flow projections over ten
fiscal years. The Company projected positive cash flows for cylinder exchange
and the products group in all periods. The valuations indicated that the fair
value of the reporting units exceeded the carrying value of the reporting units
by a substantial margin.
11
Negative indicators have existed for QuickShip, including operating losses
and negative cash flows. As a result, management deemed it appropriate to obtain
an independent valuation of QuickShip to determine if goodwill impairment
existed as of August 1, 2001. The valuation was based on projected cash flows
over ten fiscal years with significant growth in the number of locations and
revenue assumed in years three through seven. Capital expenditures range from
$100 to $750 each year. The valuation uses a discount rate of 25%. The
independent valuation concluded that the fair value of QuickShip exceeded its
carrying value at August 1, 2001. Since that date, the Company has updated the
valuation on a quarterly basis using revised assumptions of cash flow in the
future years based upon the Company's most recent business plan, which shows
near breakeven cash flows in year three with steadily increasing cash flows in
years four through ten. Each of the revised valuations also concluded that there
was no impairment of the $6.3 million in goodwill for QuickShip.
Based on the foregoing, the Company determined there to be no impairment of
goodwill. Future goodwill impairment tests may, however, result in a charge to
earnings.
The following table presents the impact of SFAS 142 on net income (loss)
and net income (loss) per share for the years ended July 31, 2003 and 2002 and,
assuming SFAS 142 had then been in effect, for the year ended July 31, 2001 (in
thousands, except per share amounts):
2003 2002 2001
-------- -------- --------
Reported income (loss) available to common stockholders $16,459 $ 8,026 $(4,722)
Adjustments:
Amortization of goodwill - - 2,268
-------- -------- --------
Adjusted income (loss) available to common stockholders $16,459 $ 8,026 $(2,454)
======== ======== ========
Reported basic income (loss) per common share $ 1.00 $ 0.63 $ (0.41)
======== ======== ========
Reported diluted income (loss) per common share $ 0.86 $ 0.55 $ (0.41)
======== ======== ========
Adjusted basic income (loss) per common share $ 1.00 $ 0.63 $ (0.21)
======== ======== ========
Adjusted diluted income (loss) per common share $ 0.86 $ 0.55 $ (0.21)
======== ======== ========
8. Long-Term Debt and Capital Lease Obligations
Long-term debt and capital leases consist of the following at July 31:
2003 2002
-------- --------
Bank credit facility
Revolving line of credit $36,000 $26,643
Term loan 10,900 -
Subordinated debt - 15,000
Discount on subordinated debt - (2,666)
Acquisition notes payable 158 655
Capital lease obligations bearing interest at various
rates from 3.2% to 12.6% 655 113
Other 1,520 1,527
-------- --------
49,233 41,272
Less amounts due within one year 6,433 2,013
-------- --------
$42,800 $39,259
======== ========
12
The aggregate maturities of long-term debt and capital lease obligations
at July 31, 2003 are as follows:
Long-Term Capital Lease
Debt Obligations Total
--------- ------------- -------
2004 $ 6,214 $263 $ 6,477
2005 5,792 277 6,069
2006 36,429 132 36,561
2007 24 19 43
2008 9 15 24
Thereafter 110 9 119
--------- ------------- -------
48,578 715 49,293
Less imputed interest - (60) (60)
--------- ------------- -------
$48,578 $655 $49,233
========= ============= =======
On November 20, 2002, the Company completed the syndication of a new and
expanded bank credit facility (the "Credit Facility"). The Credit Facility
consists of a $45,000 revolving line of credit and a $15,000 term loan, both for
general corporate purposes, inclusive of payments made under letters of credit.
The Company has outstanding letters of credit of $605 and $1,093 as of July 31,
2003 and 2002, respectively. The Credit Facility has a maturity date of November
30, 2005 and, as amended, requires the Company to utilize the approximately
$14,900 in net proceeds from a private placement of common stock completed
December 20, 2002 to repay the term loan or its subordinated debt, in such
proportion as the Company elects, by July 31, 2003. In the third and fourth
quarters of fiscal 2003, the Company repaid the entire $15,000 of the
subordinated debt and incurred a $2,589 non-cash charge that was reflected in
interest expense. Advances under the Credit Facility are collateralized by a
lien on substantially all of the Company's assets.
Advances under the Credit Facility may be made as either base rate ("prime
rate") loans or London Interbank Offered Rate ("LIBOR") loans at the Company's
election. Interest rates are based upon either the LIBOR or prime rate plus an
applicable margin dependent upon a total leverage ratio. The applicable LIBOR
margins range from 200 to 300 basis points, and the applicable prime rate
margins range from 50 to 150 basis points. The Company incurred fees of $1,320
in connection with the Credit Facility. The fees will be amortized over the life
of the Credit Facility, through November 30, 2005. The Company incurred a charge
of $96 in November 2002 resulting from unamortized fees related to its prior
credit facility. On July 31, 2003 the Company had $46,400 (including a $10,900
balance on the term loan) in LIBOR loans outstanding at a weighted-average
interest rate of 3.85% and $500 in prime rate loans outstanding at a
weighted-average interest rate of 5.25%.
Principal payments on the outstanding term loan began on December 31, 2002
and continue quarterly until September 30, 2005. The initial principal payments
are $1,000 per calendar quarter beginning December 31, 2002, will increase to
$1,250 per calendar quarter beginning December 31, 2003 and will further
increase to $1,500 per calendar quarter beginning December 31, 2004. In
accordance with the terms of the Credit Facility, $1,100 of the net proceeds of
the March 2003 litigation settlement (Note 20) were applied against the term
loan as a reduction. The Credit Facility includes a .50% commitment fee on the
average daily unused amount for each fiscal quarter. The Credit Facility
requires the Company to meet certain covenants, including minimum net worth and
cash flow requirements, restricts the payment of cash dividends and permits
early extinguishment of up to $15,000 of the Company's subordinated debt.
The Company was party to an interest rate swap agreement with a notional
amount of $10,000 that expired in July 2003. Under that agreement, the Company
paid a fixed rate of 7.36% and received a rate equivalent to the thirty-day
LIBOR, adjusted quarterly. In May 2003, the Company entered into a new swap
agreement with an effective date of August 1, 2003 and an expiration date of
October 3, 2005. The initial notional amount is $20,000 beginning August 1,
2003, will decrease to $15,000 on June 1, 2004, will decrease to $10,000 on
March 1, 2005 and will further decrease to $5,000 on September 1, 2005. Under
the new swap agreement, the Company will pay a fixed rate of 1.85% and receive a
rate equivalent to the thirty-day LIBOR, adjusted monthly.
On June 15, 2001, the Company completed a $15,000 private placement of
subordinated debt to an institutional investor. The debenture carried interest
at the annual rate of 13%, payable quarterly. The principal balance was
scheduled to mature on August 31, 2006, but was prepaid in full during the third
and fourth quarters of fiscal 2003. In addition, the Company issued a warrant to
the investor to purchase 1,372,071 shares of common stock, with an exercise
price of $3.8685 per share (subject to adjustment for organic changes in its
common stock and for certain future issuances below the then-existing exercise
price) valued at $3,440. The warrant was converted by the investor into 1,070
shares of common stock effective January 6, 2003.
13
Interest expense included the non-cash amortization of debt issuance costs
for the years ended July 31, 2003, 2002 and 2001 of $780, $304 and $192,
respectively.
Other includes obligations bearing interest at various rates between 3.50%
and 11.50%.
9. Other, net
The Company had certain non-operating income and expenses classified as
other, net during the years ended July 31, 2003, 2002 and 2001 as follows:
2003 2002 2001
-------- -------- --------
Interest income $ (141) $(512) $(553)
Miscellaneous (income) expense (165) (15) 201
Loss on disposal of assets 258 105 51
Litigation proceeds, net (2,465) -- --
-------- -------- --------
$(2,513) $(422) $(301)
========= ========= =========
10. Income Taxes
The components of the provision for income taxes for the years ended July
31, 2003, 2002 and 2001 are as follows:
2003 2002 2001
-------- -------- --------
Current:
State $ 60 $ 47 $ 123
-------- -------- --------
Total current 60 47 123
Deferred:
Federal $1,801 - -
State 356 - -
------- -------- --------
Total deferred 2,157 - -
Total income tax provision ------- -------- --------
$2,217 $ 47 $ 123
======= ======== ========
A reconciliation of the differences between the statutory federal income
tax rate and the effective tax rate for the years ended July 31, 2003, 2002 and
2001 is as follows:
2003 2002 2001
-------- -------- --------
Federal statutory tax rate 35.0% 34.0% (34.0)%
Change in valuation allowance (27.7) (34.4) 32.5
Permanent differences and other .2 .4 2.5
State taxes net of federal
benefit 4.3 .5 2.2
-------- -------- --------
Effective tax rate 11.8% .5% 3.2%
======== ======== ========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liability are as follows:
2003 2002 2001
-------- -------- --------
Assets:
Net operating loss carryforward $16,489 $11,583 $13,884
Allowance for doubtful accounts 370 1,540 1,042
Distributor option plan 346 289 205
Deferred loss on joint venture 30 (430) 529
Accrued expenses 765 327 531
Reserves and other 1,255 661 591
-------- -------- --------
Total gross deferred tax assets 19,255 13,970 16,782
Valuation allowance (149) (5,606) (8,616)
-------- -------- --------
Net deferred tax assets $19,106 $ 8,364 $ 8,166
======== ======== ========
Liability:
Depreciation and amortization 21,072 8,364 8,166
-------- -------- --------
Total gross deferred tax liabilities $21,072 $8,364 $ 8,166
======== ======== ========
As of July 31, 2003, the Company has recorded a valuation reserve for
deferred tax assets of $149 related to state operating losses. This reserve was
established in accordance with Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes, as it is management's opinion that it is more
likely than not that some portion of these benefits may not be realized. The net
change in the valuation allowance for the year ended July 31, 2003 was a
decrease of $5,457. At July 31, 2003, federal net operating losses of
approximately $42,000 may expire beginning in year 2010 and state net operating
losses of approximately $33,000 may expire beginning in year 2010 if unused. The
utilization of the net operating losses will be subject to certain limitations
as prescribed by Section 382 of the Internal Revenue Code.
14
11. Investment in Joint Venture
As a result of the acquisition of Platinum, the Company increased its
ownership interest in R4 Technical Center - North Carolina, LLC ("R4 Tech") on a
consolidated basis by 1% to 50%. The Company 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 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 its
portion of the loss in the joint venture for the period ended July 31, 2003,
2002 and 2001 of $455, $714 and $2,572, respectively. At July 31, 2002, the
Company had advances outstanding to R4 Tech of $141 and payables to R4 Tech of
$1,755.
Summary financial information for R4 Tech as of and for the periods ended
July 31, 2002 and 2001 is as follows:
2002 2001
-------- --------
Current assets $ 2,323 $ 1,496
Property, plant, and equipment and other assets 1 7,617
Current liabilities 2,895 8,162
Long-term debt -- 22
Net sales 12,697 9,910
Gross loss (260) (3,802)
Net loss (1,449) (5,250)
12. Nonrecurring Item
During the year ended July 31, 2001, the Company incurred a charge of $449
related to costs incurred in connection with refinancing its bank credit
facility.
13. Earnings (Loss) Per Share:
The following table sets forth a reconciliation of the numerators and
denominators in computing earnings (loss) per common share in accordance with
Statement of Financial Accounting Standards No. 128.
2003 2002 2001
-------- -------- --------
Net income (loss) $16,530 $ 9,815 $ (3,952)
Less: Preferred stock dividends 71 1,789 770
-------- -------- --------
Income (loss) available to common stockholders $16,459 $ 8,026 $ (4,722)
======== ======== ========
Income (loss) available to common stockholders $16,459 $ 8,026 $ (4,722)
Weighted average number of common shares
outstanding (in thousands) 16,430 12,658 11,641
-------- -------- --------
Basic earnings (loss) per common share $ 1.00 $ 0.63 $ (0.41)
======== ======== ========
Income (loss) available to common stockholders $16,459 $ 8,026 $ (4,722)
Weighted average number of common shares
outstanding (in thousands) 16,430 12,658 11,641
Effect of potentially dilutive securities (in thousands):
Common stock options 1,671 890 --
Common stock warrants 1,138 1,153 --
-------- -------- --------
Weighted average number of common shares
outstanding assuming dilution 19,239 14,701 11,641
-------- -------- --------
Diluted earnings (loss) per common share $ 0.86 $ 0.55 $ (0.41)
======== ======== ========
15
Common stock options and common stock warrants listed below for the years
ended July 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 and the effect would be
anti-dilutive. Common stock options and common stock warrants listed below for
the year ended July 31, 2001 have been excluded from the computation of diluted
loss per share because they were anti-dilutive.
2003 2002 2001
---------- ---------- ----------
Common stock options 990,750 1,023,047 2,467,893
========== ========== ==========
Common stock warrants 330,000 284,063 2,935,704
========== ========== ==========
14. Derivative Instruments
Effective August 1, 2000, the Company adopted Statement of Financial
Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS 133") which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. All derivatives, whether designated
in hedging relationships or not, are required to be recorded on the balance
sheet at fair value. If the derivative is designated as a fair value hedge, the
changes in the fair value of the derivative and of the hedged item attributable
to the hedged risk are recognized in earnings. If the derivative is designated
as a cash flow hedge, the effective portions of changes in the fair value of the
derivative are recorded in other comprehensive income ("OCI") and are recognized
in the income statement when the hedged item affects earnings. Ineffective
portions of changes in the fair value of cash flow hedges are recognized in
earnings. The cumulative effect of the adoption of SFAS 133 resulted in a
reduction to OCI of $131 for fiscal 2001.
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.
In July 2000, the Company entered into an interest rate swap agreement
("2000 Swap"), as required under its former bank credit facility, with a
notional amount of $10,000 as a cash flow hedge of the variable interest rate
debt outstanding under its credit facility. Under the 2000 Swap agreement, which
expired in July 2003, the Company paid a fixed rate of 7.36% and received a rate
equivalent to the thirty-day London Interbank Offered Rate ("LIBOR"), adjusted
quarterly. The 2000 Swap was designated as a hedge of the benchmark interest
rate. In November 2002, the Company completed the syndication of a new and
expanded bank credit facility (the "Credit Facility"). Advances under the Credit
Facility may be made as either base rate ("prime rate") loans or LIBOR loans at
the Company's election. Applicable interest rates are based upon either the
LIBOR or prime rate plus an applicable margin dependent upon a total leverage
ratio. As a result of the 2000 Swap, there was a $588, $498 and a $154 charge to
interest expense for the effective portion of the hedge during the years ended
July 31, 2003, 2002 and 2001, respectively. Hedge ineffectiveness, determined in
accordance with SFAS 133, resulted in a ($27) and a ($1) credit to other income
during the years ended July 31, 2003 and 2002, respectively, and a $12 charge to
other expense during the year ended July 31, 2001. The fair value of the 2000
Swap at July 31, 2002 was ($551).
In May 2003, the Company entered into a new swap agreement ("2003 Swap"),
as required under the Credit Facility, with an effective date of August 1, 2003
and an expiration date of October 3, 2005. The initial notional amount is
$20,000 beginning August 1, 2003, will decrease to $15,000 on June 1, 2004, will
decrease to $10,000 on March 1, 2005 and will further decrease to $5,000 on
September 1, 2005. Under the 2003 Swap agreement, the Company will pay a fixed
rate of 1.85% and receive a rate equivalent to the thirty-day LIBOR, adjusted
monthly. On July 31, 2003 the Company had $46,400 in thirty-day LIBOR loans
outstanding.
16
Effective March 1, 2001, the Company restructured its payment obligations
to independent distributors such that each payment includes a fixed component
and a variable component based on the price of propane. Beginning in March 2001,
the Company entered into various derivative instruments as cash flow hedges
against fluctuations in the propane price component of the distributor payments.
The Company acquired the Platinum and Ark distributor entities in November 2002
(Note 17). As a result of the acquisition, approximately 45% of the payments
made each month for the variable propane price component were eliminated.
However, Platinum and Ark purchase a significant amount of propane based on the
Mt. Belvieu underlying (the same basis used for the Company's propane swaps).
Therefore, the propane swaps effectively hedge the variable propane price
component to independent distributors and the purchases made based on Mt.
Belvieu prices by company-owned distributors. The Company currently expects that
the derivative instruments will hedge, in the aggregate, approximately 65% to
75% of the Company's anticipated monthly cylinder exchange volume during fiscal
year 2004. At this level, substantially all of the Company's fixed prices with
its major retailers will be hedged. As a result of the propane derivative
instruments, there was a ($3,996) credit to cost of sales for the effective
portion of the hedge during the year ended July 31, 2003 and a $2,064 and a $235
charge to cost of sales for the effective portion of the hedge during the years
ended July 31, 2002 and 2001, respectively. Hedge ineffectiveness, determined in
accordance with SFAS 133, had no impact on earnings for the twelve-month periods
ended July 31, 2003, 2002 and 2001, respectively. The fair value of the
derivative at July 31, 2003 and 2002 was $1,365 and $515, respectively, and it
is reflected on the balance sheet at July 31, 2003 as a $1,365 current asset in
prepaid expenses and other current assets.
The net derivative 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.
The following is a rollforward of the components of OCI for the years ended
July 31, 2003, 2002 and 2001:
2003 2002 2001
-------- -------- --------
Beginning balance deferred in OCI $ (26) $(1,102) $ --
Transition adjustment from adoption of SFAS 133 -- -- (131)
Net change associated with current period hedge
transactions, net of tax of ($533), $0 and $0
in fiscal 2003, 2002 and 2001, respectively 4,275 (1,485) (1,372)
Net amount reclassified into earnings during the year (3,435) 2,561 401
-------- -------- --------
Ending balance deferred in OCI $ 814 $ (26) $(1,102)
======== ======== ========
Total comprehensive income (loss) was $17,370, $10,891 and ($5,054) for the
years ended July 31, 2003, 2002 and 2001, respectively.
15. Stockholders' Equity
Common Stock Placements
On December 20, 2002, the Company completed a private placement of 1.0
million shares of its common stock at a purchase price of $15.79 per share to
two institutional investors for gross proceeds of $15,800. In conjunction with
the private placement, the Company issued Additional Investment Rights to the
investors exercisable for, collectively, up to an additional 330,000 shares of
its common stock at an exercise price of $15.79 per share. The Additional
Investment Rights were never exercised and expired on October 1, 2003. The net
proceeds from the financing were used to pay down long-term debt.
On April 19, 2002, the Company completed the sale of 1.5 million shares of
common stock for $10.875 million in a private placement through SunTrust
Robinson Humphrey Capital Markets, as Placement Agent, to selected institutional
and individual investors at a price of $7.25 per share. The net proceeds from
the financing were used to pay down the Credit Facility.
Preferred Stock
On September 7, 2000 (the "Closing Date") the Company completed a private
placement of 1,716,667 shares of its Series A Convertible Preferred Stock to two
institutional investors under common management and three individuals, including
Billy D. Prim, its Chairman, Chief Executive Officer and President, and Andrew
J. Filipowski, its Vice Chairman, for an aggregate purchase price of
approximately $10,300. Messrs. Prim and Filipowski invested $50 and $250 for
8,333 and 41,667 shares of Series A Convertible Preferred Stock, respectively.
In addition, on October 26, 2000, the Company issued 1,133,333 shares of Series
A Convertible Preferred Stock for an aggregate purchase price of $6,800 in
connection with its acquisition of QuickShip (Note 17).
In connection with the issuance of 1,716,667 shares of Series A Convertible
Preferred Stock, the Company paid William Blair & Co. a placement fee of $500 in
cash and issued a five-year warrant to purchase 16,667 shares of common stock at
an exercise price of $6.00 per share.
The Series A Convertible Preferred Stock accrued a cumulative dividend on
the 20th day of December, March, June, and September of each year based on an
annual rate of 5% through September 7, 2003; 12% from September 8, 2003 through
September 7, 2004; and 15% thereafter. Effective September 7, 2001, the annual
dividend rate increased to 15% because a registration statement covering the
shares of common stock into which the Series A Convertible Preferred Stock is
convertible was not yet effective. The 15% rate continued until the registration
statement became effective on April 8, 2002. As of July 31, 2003 and 2002, the
Company had accrued dividends on the outstanding shares of Series A Convertible
Preferred Stock of $0 and $1.7 million, respectively. During March, April, May
and September 2002, the holders of all 2,850,000 shares of Series A Convertible
Preferred Stock converted such shares into 2,850,000 shares of common stock.
Prior to conversion, the shares of Series A Convertible Preferred Stock accrued
a cumulative dividend that the Company satisfied, as permitted by the terms of
the Series A Convertible Preferred Stock, by issuing an aggregate of 233,611
shares of common stock to the holders of the Series A Convertible Preferred
Stock upon conversion.
17
Stock Compensation Plans
The Company has three active stock-based compensation plans (the "Plans")
for outside directors, officers and certain employees to receive stock options
and other equity-based awards. Under the Plans, the Company may, at its
discretion, issue incentive or non-qualified stock options, stock appreciation
rights, restricted stock or deferred stock.
Stock options generally are granted with an exercise price equal to 100% of
the market value per share of the common stock on the date of grant. The options
vest over one to five years and expire ten years from the date of grant. The
terms and conditions of the awards made under the plans vary but, in general,
are at the discretion of the board of directors or its appointed committee.
Under the Plans the Company has reserved 5,017,709 shares of common stock for
use and distribution under the terms of the Plans.
The Company also has a Distributor Stock Option Plan (the "Distributor
Option Plan") for Blue Rhino distributors and their stockholders, partners,
members, directors, general partners, managers, officers, employees and
consultants. The Company has reserved 400,000 shares of common stock for
issuance upon the exercise of options granted under the Distributor Option Plan.
Options issued under the Distributor Option Plan vest ratably over four years
and expire ten years from the date of grant. For the years ended July 31, 2003,
2002 and 2001, the Company recognized compensation expense included in cost of
sales of approximately $125, $111 and $180, respectively, related to stock
options outstanding under the Distributor Option Plan.
A consolidated summary of the Company's Plans and Distributor Option Plan
at July 31, 2003, 2002 and 2001 and changes during the periods then ended is
presented in the table below:
2003 2002 2001
------------------------- ------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- -------- ---------- -------- ---------- --------
Shares under option:
Outstanding, beginning of year 3,297,304 $ 6.61 2,467,893 $ 6.93 1,535,307 $10.58
Granted.................. 1,763,000 14.80 1,110,000 5.94 1,148,360 2.61
Exercised................ 150,060 5.96 58,433 3.09 -- --
Cancelled................ 423,425 9.60 222,156 7.75 215,774 9.63
---------- ---------- ----------
Outstanding, end of year.... 4,486,819 9.56 3,297,304 6.61 2,467,893 6.93
---------- ---------- ----------
Exercisable, end of year.... 1,239,648 8.38 1,063,216 9.48 688,173 11.23
========== ========== ==========
Weighted average fair value of
options granted $ 5.80 $ 2.37 $ 1.18
========== ========== ==========
Options available for grant, end of year 930,890 770,465 671,982
========== ========== ==========
For various price ranges, weighted average characteristics of outstanding
stock options at July 31, 2003 were as follows:
Outstanding Options Exercisable Options
------------------------------------ -----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Exercise Prices Shares Life (Years) Price Shares Price
------------------------ ---------- ------------ --------- ---------- ---------
$ 2.13-- $ 4.60 888,777 7.35 $ 2.50 354,208 $ 2.54
$ 5.06-- $ 7.50 1,118,834 7.72 5.98 240,275 6.53
$ 7.90-- $12.75 813,559 8.37 10.08 200,582 8.62
$12.86-- $14.99 736,399 6.98 13.22 397,783 13.04
$15.09-- $18.57 878,250 9.38 17.00 -- --
$19.13-- $24.25 51,000 5.72 21.45 46,800 21.63
---------- ------------ --------- ---------- ---------
4,486,819 7.95 $ 9.56 1,239,648 $ 8.38
========== ============ ========= ========== =========
18
Employee Stock Purchase Plan
The Company established an Employee Stock Purchase Plan (the "ESPP")
effective January 1, 2000, for all eligible employees. Under the ESPP, shares of
the Company's common stock are purchased during annual offerings commencing on
January 1 of each year. Shares are purchased at three-month intervals at 85% of
the lower of the fair market value on the first day of the offering or the last
day of each three-month purchase period. Employees may purchase shares having a
value not exceeding 15% of their annual compensation, or $25,000, whichever is
less. During the years ended July 31, 2003, 2002 and 2001, employees purchased
52,774, 77,581 and 57,449 shares, respectively, at an average price of $6.75 per
share, $3.06 per share and $2.13 per share, respectively. At July 31, 2003,
107,316 shares were reserved for future issuance under the ESPP.
Common Stock Warrants
Warrants to purchase 414,116 shares of the Company's common stock at an
exercise price of $8.48 per share contained anti-dilution provisions that were
triggered as a result of the issuance of 1,716,667 shares of Series A
Convertible Preferred Stock at $6.00 per share and the issuance of warrants to
purchase 1,372,071 shares of common stock at $3.8685 per share in connection
with the private placement of subordinated debt. As a result, the exercise price
of such warrants were reset at $3.8685 and the number of shares of common stock
for which those warrants are exercisable was increased by 589,467 shares to
1,003,583 shares, which, if the warrants are exercised, will result in
additional dilution for existing stockholders.
The Company has issued common stock warrants in connection with various
debt, equity and acquisition transactions. At July 31, 2003, warrants to
purchase a total of 1,299,093 shares of common stock were outstanding, fully
vested and exercisable for various periods extending as long as through December
31, 2008, with exercise prices ranging from $3.87 to $15.79 per share. Interest
expense related to the outstanding warrants was $2,666, $744 and $30
respectively, for the years ended July 31, 2003, 2002 and 2001. The fair value
of each warrant is estimated on the date of grant using an option pricing model
with the following weighted average assumptions used for all grants: expected
lives of five to ten years; expected volatility ranging from 30% to 91%;
expected dividends of zero and a risk-free interest rate ranging from 3.5% to
5.8%.
For all applicable warrant prices, weighted average characteristics of
outstanding stock warrants at July 31, 2003 were as follows:
Outstanding Options Exercisable Options
------------------------------------ -----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Prices Shares Life (Years) Price Shares Price
------------------------ ---------- ------------ --------- ---------- ---------
$ 3.87 851,128 1.76 $ 3.87 851,128 $ 3.87
$ 8.48 117,965 1.10 8.48 117,965 8.48
$15.79 330,000 0.17 15.79 330,000 15.79
---------- ------------ --------- ---------- ---------
1,299,093 1.30 $ 7.32 1,299,093 $ 7.32
========== ============ ========= ========== =========
Shares reserved for future issuance
The Company has reserved 6,824,118 authorized shares of common stock for
future issuance as of July 31, 2003.
16. Supplemental Information to Consolidated Statements of Cash Flows
The Company had certain non-cash investing and financing activities during
the years ended July 31, 2003, 2002 and 2001 as follows:
2003 2002 2001
-------- -------- --------
Property, plant and equipment acquired under capital lease obligations $ 753 $ -- $ --
Stock issued and liabilities assumed in connection with
acquisition transactions 29,368 8,831
Notes receivable exchanged for the purchase of assets -- 129 157
Warrants issued in connection with debt, equity and
acquisition transactions 843 -- 3,526
Advances to R4 Tech exchanged for the purchase of
property, plant and equipment -- 7,599 --
Accreted preferred dividends 71 1,789 770
Interest paid during the years ended July 31, 2003, 2002 and 2001 was
$4,079, $5,382 and $4,339, respectively.
17. Acquisitions
QuickShip, Inc.
On October 26, 2000, the Company completed the acquisition of QuickShip,
Inc. a retail shipping service company previously based in Lenexa, Kansas.
QuickShip, a wholly owned subsidiary of the Company, offers its service at over
250 retail locations in 26 states. The aggregate purchase price, including
certain acquisition costs, was approximately $9,803, comprised of approximately
$972 in cash and deferred payments, $86 in a five-year warrant to purchase
100,000 shares of common stock, $1,945 in liabilities assumed and $6,800 paid in
the form of shares of Series A Convertible Preferred Stock at $6.00 per share.
This acquisition was accounted for as a purchase. The purchase price was
allocated based on an independent valuation as follows: approximately $7,433 to
intangibles, approximately $2,201 to property, plant, and equipment consisting
primarily of software and the balance to other assets and liabilities. The
goodwill is not deductible for income tax purposes.
Distributors
In November 2002, the Company acquired Platinum Propane, L.L.C.
("Platinum") and Ark Holding Company LLC ("Ark") and their respective
subsidiaries (collectively "Company-owned distributors"), representing ten of
the Company's 51 distributors. Platinum's five subsidiary distributors operate
in Southern California, including Los Angeles and San Diego, Chicago, the
Carolinas, Georgia and Florida. Ark's five subsidiary distributors operate in
New Jersey, Seattle, Kansas City, Denver and Salt Lake City. Collectively, the
territories served by the acquired distributors have historically represented
approximately 45% of the Company's cylinder exchange revenues. The consolidated
statements of operations include the results of Platinum and Ark effective
November 1, 2002.
The aggregate purchase price for the two acquisitions was approximately
$32,000. The consideration paid by the Company in the two acquisitions consisted
of approximately 1.1 million restricted shares of common stock valued, based on
the closing price of the Company's common stock on the Nasdaq National Market on
November 22, 2002, at approximately $19,000, $3,100 in assumed debt satisfied at
closing, $4,900 in advances, and $5,000 in liabilities assumed. On a preliminary
basis, approximately $28,200 of the purchase price was allocated to goodwill,
$2,800 was allocated to current assets and $1,200 was allocated to equipment,
vehicles and other assets. The goodwill is not deductible for income tax
purposes.
Cylinder Exchange Businesses
During fiscal 2003, 2002 and 2001, the Company completed two, three, and
four, respectively, cylinder exchange acquisitions for an aggregate cash
purchase price of $3,700, $218 and $362, respectively, related to assets
including cylinders, cylinder displays and other equipment and the right, title
and interest in and to sellers' retail propane cylinder exchange accounts and
locations.
Summary
During the years ended July 31, 2003, 2002 and 2001, the Company acquired
cylinder exchange, Company-owned distributors and QuickShip assets described
above under various agreements. These acquisitions are summarized as follows:
2003 2002 2001
-------- -------- --------
Net assets acquired including intangibles $ 35,434 $ 218 $ 10,165
Assumed liabilities (10,138) -- (1,945)
Common stock and warrants issued (18,550) -- (6,886)
-------- -------- --------
Cash paid for acquisitions $ 6,746 $ 218 $ 1,334
======== ======== ========
The acquisitions were accounted for under the purchase method and,
accordingly, the operating results from these acquisitions have been included in
the Company's consolidated financial statements since the dates of acquisition.
The following unaudited pro forma summary presents financial information for the
Company for the years ended July 31, 2003 and 2002 as if the acquisitions had
occurred on August 1, 2001. These pro forma results have been prepared for
comparative purposes and do not purport to be indicative of what would have
occurred had the acquisitions been made on August 1, 2001 or of future results.
2003 2002
-------- --------
(Unaudited)
Net revenues $257,900 $205,313
Net income $ 13,666 $ 7,267
Basic income per common share $ 0.83 $ 0.57
20
18. Related Party Transactions
On September 7, 2000 the Company completed a private placement of 1,716,667
shares of its Series A Convertible Preferred Stock to two institutional
investors under common management and three individuals, including Billy D.
Prim, its Chairman, Chief Executive Officer and President, and Andrew J.
Filipowski, its Vice Chairman, for an aggregate purchase price of approximately
$10,300. Messrs. Prim and Filipowski invested $50 and $250 for 8,333 and 41,667
shares of Series A Convertible Preferred Stock, respectively (Note 15).
The Company leases some of its facilities from Billy D. Prim, the Company's
Chairman and Chief Executive Officer, and from Rhino Real Estate, LLC, a company
affiliated with Billy D. Prim and Andrew J. Filipowski, the Company's Vice
Chairman. The leases expire on December 31, 2003, April 30, 2004 and October 31,
2007, respectively. The Company's rent expense for the years ended July 31,
2003, 2002 and 2001 was $433, $272 and $259. The Company has received an
independent third-party determination to the effect that its leases are fair and
within typical market conditions and believes that the terms of all of these
leases are comparable to those that could have been obtained from unrelated
third parties.
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 years ended July
31, 2003, 2002 and 2001 was $317, $316 and $308, respectively. The Company's
management believes that the terms of this lease are comparable to those that
could have been obtained from unrelated third parties.
Blue Rhino has paid fees for software development and Internet hosting
services provided by divine, inc. Andrew J. Filipowski was the Chairman of
divine, inc. and is the Company's Vice Chairman. During the years ended July 31,
2003 and 2002, the Company paid fees to divine, inc. in the amount of $376 and
$31, respectively. The Company's management believes that the terms of these
services were comparable to those that could have been obtained from an
unrelated third party.
Both Messrs. Prim and Filipowski served as directors for Platinum Propane
Holding, LLC ("PPH") and Ark Holding Company, LLC ("Ark"). On November 30, 2001,
Messrs. Prim and Filipowski unconditionally guaranteed and secured the payment
of certain PPH obligations to its primary bank in a principal amount of up to
$3,500. In November 2002, the Company acquired Platinum, a subsidiary of PPH,
and Ark (Note 17). The consolidated statements of operations include the results
of Platinum and Ark effective November 1, 2002.
The following represents transactions with PPH as of October 31, 2002, and
July 31, 2002 and 2001, respectively, and for the three-month period ended
October 31, 2002, and years ended July 31, 2002 and 2001, respectively:
2003 2002 2001
-------- -------- --------
Advances $4,837 $ 2,586 $ 2,637
Cost of sales 6,949 22,947 16,439
Interest income 94 303 162
Lease income 397 1,592 1,494
19. Defined Contribution Plan
The Company maintains a defined contribution employee benefit plan ("401(k)
plan"), which covers all employees over 21 years of age who have completed a
minimum of six months of employment. Employee contributions are matched by the
Company up to a specific amount under the provisions of the 401(k) plan. Company
contributions during the years ended July 31, 2003, 2002 and 2001 were
approximately $234, $161 and $135, respectively.
20. Commitments and Contingencies
The Company leases certain facilities, vehicles and equipment under
non-cancelable operating leases with original terms ranging from 36 to 60 months
(Note 18). Additionally, the Company has certain computer hardware and software
maintenance and support agreements. Rent expense and fees on these
non-cancelable operating leases and service agreements from both affiliates and
non-affiliates for the years ended July 31, 2003, 2002 and 2001 was $2,714,
$1,427 and $1,034, respectively.
21
Future minimum payments at July 31, 2003 under non-cancelable operating
leases and service agreements with initial or remaining terms of one year or
more to both affiliates and non-affiliates are $1,422 in 2004, $715 in 2005,
$344 in 2006, $223 in 2007, and $53 in 2008.
The Company currently has capital commitments outstanding of approximately
$2.5 million relating to machinery and equipment associated with three new
cylinder refilling and refurbishing facilities in Los Angeles, Chicago and
Denver and two mobile filling and refurbishing facilities. The Company expects
these commitments will be satisfied by the spring of 2004.
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(R) mosquito
elimination(TM) 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(R) 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. 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(R) 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. The Company
believes that ABC's claims against it are without merit and intends to
vigorously defend itself.
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. The plaintiff seeks to represent a class of investors who
purchased the Company's publicly-traded securities between August 2002 and
February 2003. The plaintiff alleges 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 plaintiff
has alleged that the Company and the individual defendants violated the federal
securities laws by, among other things, making materially false and misleading
statements and/or failing to disclose material facts related to the financial
performance of the Company, the impact of overfill prevention device regulations
on the Company's business, the financial position of distributors Ark and
Platinum, and the Company's acquisition of Ark and Platinum. The complaint seeks
unspecified damages, plus reasonable costs and expenses, including attorneys'
fees and experts' fees. 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. 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 motions are pending to dismiss or stay that matter.
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 Company
believes that all of the foregoing securities class actions and derivative
actions are without merit and intends to vigorously defend against these
actions.
22
Settlement of Lawsuit with Former Independent Auditor
On March 7, 2003, pursuant to a negotiated settlement agreement, the
Company dismissed its lawsuit against PricewaterhouseCoopers ("PwC") by filing a
Voluntary Dismissal with Prejudice in the Superior Court of Forsyth County,
North Carolina. This lawsuit had alleged violations of professional standards by
PwC and failure to comply with contractual obligations during PwC's engagement
as the Company's auditor. The net proceeds in the settlement were recognized in
the Company's fiscal third quarter and, after attorneys' fees and other third
quarter litigation expenses, were approximately $2.5 million. The specific terms
of the settlement are confidential.
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.
21. Segment Information
The Company has two reportable segments: cylinder exchange and products and
other. The cylinder exchange segment relates to cylinder exchange transactions
and lease income from cylinders and cylinder displays. The products and other
segment includes the activities required to sell patio heaters, grills, mosquito
eliminators, fireplace accessories and garden products. In addition, the
financial information related to QuickShip, a retail shipping services company
acquired in October 2000, is included within the products and other segment as
it is not currently significant on a stand-alone basis (Note 17). For the years
ended July 31, 2003, 2002 and 2001, QuickShip had a loss from operations of
($1,406), ($2,020) and ($2,126), 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 non-cash depreciation of
tangible assets and amortization of certain intangible assets. In addition,
management currently 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 accounting policies of the segments are the same as those
described in the summary of significant accounting policies (Note 2). There are
no significant inter-segment revenues.
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 information as of and for the years ended July 31, 2003, 2002,
and 2001 is as follows:
2003 2002 2001
-------- -------- --------
Net revenues:
Cylinder exchange $170,954 $127,944 $ 85,666
Products and other 87,268 77,641 52,291
-------- -------- --------
$258,222 $205,585 $137,957
======== ======== ========
Segment EBITDA:
Cylinder exchange $ 31,252 $ 20,691 $ 10,219
Products and other 2,482 3,568 2,267
-------- -------- --------
Total segment EBITDA 33,734 24,259 12,486
Depreciation and amortization 9,261 7,888 8,461
Interest expense 7,784 6,217 5,134
Loss on investee 455 714 2,572
Nonrecurring items - - 449
Other, net (2,513) (422) (301)
Income taxes 2,217 47 123
-------- -------- --------
Net income $16,530 $9,815 $(3,952)
======== ======== ========
Total assets:
Cylinder exchange $164,280 $110,870 $ 93,594
Products and other 46,525 32,503 33,750
-------- -------- --------
$210,805 $143,373 $127,344
======== ======== ========
23
The following items are included in income (loss) before income taxes:
2003 2002 2001
-------- -------- --------
Equity in loss of equity method investees:
Cylinder exchange $ 455 $ 714 $2,572
Products and other -- -- --
-------- -------- --------
$ 455 $ 714 $2,572
======== ======== ========
Depreciation and amortization:
Cylinder exchange $8,401 $7,132 $5,965
Products and other 860 756 2,496
-------- -------- --------
$9,261 $7,888 $8,461
======== ======== ========
The following items are included in the determination of identifiable
assets:
2003 2002 2001
-------- -------- --------
Investments in equity method investees:
Cylinder exchange $ -- $ -- $ 455
Products and other -- -- --
-------- -------- --------
$ -- $ -- $ 455
======== ======== ========
Capital expenditures:
Cylinder exchange $18,885 $19,519 $10,844
Products and other 988 273 152
-------- -------- --------
$19,873 $19,792 $10,996
Goodwill:
Cylinder exchange $40,543 $ 9,558 $ 9,519
Products and other 21,083 21,083 21,144
-------- -------- --------
$61,626 $30,641 $30,663
======== ======== ========
22. Quarterly Financial Data (unaudited)
Fiscal 2003 Quarter Ended
-------------------------------------------
October 31 January 31 April 30 July 31
---------- ---------- -------- -------
(In thousands, except per share data)
Net revenues $54,815 $58,054 $59,900 $85,452
Total operating costs and expenses 51,901 55,768 55,731 70,348
---------- ---------- -------- -------
Income from operations 2,914 2,286 4,169 15,104
Net income $1,259 $ 916 $4,290 $10,064
Preferred dividends 71 - - -
---------- ---------- -------- -------
Income available to common stockholders $1,188 $ 916 $4,290 $10,064
========== ========== ======== ========
Per share data:
Basic earnings per common share $ 0.08 $ 0.06 $ 0.24 $ 0.57
========== ========== ======== ========
Diluted earnings per common share $ 0.07 $ 0.05 $ 0.22 $ 0.50
========== ========== ======== ========
Fiscal 2002 Quarter Ended
-------------------------------------------
October 31 January 31 April 30 July 31
---------- ---------- -------- -------
(In thousands, except per share data)
Net revenues $36,546 $38,759 $58,933 $71,347
Total operating costs and expenses 34,155 37,064 55,087 62,907
---------- ---------- -------- -------
Income from operations 2,391 1,695 3,846 8,440
Net income (loss) $ 573 $ (91) 2,354 $ 6,979
Preferred dividends 466 641 537 145
---------- ---------- -------- -------
Income (loss) available to common
stockholders $ 107 $ (732) $ 1,817 $ 6,834
========== ========== ======== =======
Per share data:
Basic earnings (loss) per common share... $ 0.01 $ (0.06) $ 0.15 $ 0.49
========== ========== ======== =======
Diluted earnings (loss) per common share. $ 0.01 $ (0.06) $ 0.12 $ 0.40
========== ========== ======== =======
Note: Quarterly amounts may not add to annual amounts due to the effect of
rounding on a quarterly basis.
24