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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File Number
July 31, 1999 0-24287
BLUE RHINO CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 56-1870472
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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104 Cambridge Plaza Drive
Winston-Salem, North Carolina 27104
(336) 659-6900
(Address of principal executive offices)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [_]
At September 30, 1999, the aggregate market value of the registrant's
Common Stock held by non-affiliates of the registrant was approximately
$34,189,000.
At September 30, 1999, the number of shares outstanding of registrant's
Common Stock was 8,647,654.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the annual
meeting of Stockholders which will be filed within 120 days after the fiscal
year end covered by this report on Form 10-K are incorporated by reference in
Parts II and III of this Form 10-K.
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FORWARD LOOKING STATEMENTS
Certain statements in Item 1--Business and Item 7--Management's Discussion
and Analysis of Financial Condition and Results of Operations contain forward-
looking statements that involve risks and uncertainties, such as statements of
the Company's plans, objectives, expectations and intentions. The cautionary
statements made in this Form 10-K should be read as being applicable to all
related forward-looking statements wherever they may appear in this Form 10-K.
The Company's actual results could differ materially from those discussed
herein. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed in "Risk Factors" as described in the
Company's Registration Statements on Form S-1 as filed with the SEC on May 18,
1998 and July 21, 1999 as well as those discussed elsewhere herein.
ADDITIONAL INFORMATION
We are subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and in accordance therewith we
file reports and other information with the Securities and Exchange Commission
(the "Commission"). Reports, registration statements, proxy statements and
other information filed by us with the Commission may be inspected without
charge at the principal office of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, the New York Regional Office located at 7 World Trade
Center, Suite 1300, New York, New York 10048, and the Chicago Regional Office
located at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and
copies of all or any part thereof may be obtained at prescribed rates from the
Commission's Public Reference Room at its principal office. Information
regarding the operation of the Public Reference Room may be obtained by
calling 1-800-SEC-0330. The Commission maintains a World Wide Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The
address of the Commission's World Wide Web site is http://www.sec.gov.
The Blue Rhino(R) name, rhino logo, RhinoTUFF(R) and Tri-Safe(R) are
registered trademarks of the Company. The Company has trademark applications
pending for Endless Summer(TM) and Endless Summer Comfort(TM). This Form 10-K
also includes trademarks of companies other than the Company.
2
BLUE RHINO CORPORATION
INDEX
PART I:
Item 1: Business........................................................ 4
Item 2: Properties...................................................... 7
Item 3: Legal Proceedings............................................... 7
Item 4: Submission of Matters to a Vote of Security Holders............. 7
PART II:
Item 5: Market for the Registrant's Common Equity and Related
Stockholder Matters............................................. 8
Item 6: Selected Consolidated Financial Data............................ 9
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 10
Item 7A: Quantitative and Qualitative Disclosures About Market Risk...... 18
Item 8: Financial Statements and Supplementary Data..................... 19
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................ 40
PART III:
Item 10: Executive Officers and Directors................................ 41
Item 11: Executive Compensation.......................................... 42
Item 12: Security Ownership of Certain Beneficial Owners and Management.. 43
Item 13: Certain Relationships and Related Transactions.................. 43
PART IV:
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K. 43
3
PART I
Item 1--Business
General
We are the leading national provider of propane grill cylinder exchange in
the United States with Blue Rhino cylinder exchange displays at over 18,500
retail locations in 46 states and Puerto Rico. Cylinder exchange provides
consumers with a convenient means to exchange empty grill cylinders for clean,
safer, precision-filled cylinders. We offer our cylinder exchange at many
major home center/hardware, mass merchant, grocery and convenience stores
including Home Depot, Lowe's, Sears, WalMMart, Kroger and Kwik Shop. We
partner with retailers and independent distributors to provide consumers with
a nationally branded alternative to traditional grill cylinder refill. We
dedicate our efforts and capital to brand development, value-added marketing,
customer service, account growth, distributor development and management
information systems while our 51 independent distributors make the investments
in the vehicles and refilling and refurbishing equipment necessary to operate
cylinder exchange businesses.
The cylinder exchange process typically begins with a Blue Rhino
distributor establishing or restocking a grill cylinder display at a retail
customer. Upon delivery, the distributor records the cylinder inventory into a
handheld computer which calculates the number and type of cylinder exchanges,
upgrades and sales for the location and creates a delivery ticket for the
retailer. Distributors routinely transfer this delivery and inventory
information to Blue Rhino electronically. We then prepare an invoice for each
retailer which we typically transmit in a customized electronic format
compatible with the retailer's existing systems. We collect invoiced amounts
directly from the retailers and in turn remit a fixed amount per cylinder
transaction to our distributors. We negotiate terms of payment with retailers
which are generally 30 to 60 days from the date of invoice. We in turn remit
payment to our distributors on the fifteenth of each month for transactions
occurring during the previous month.
Our objective is to further strengthen our position as the leading national
provider of cylinder exchange. The key elements of our strategy to achieve
this objective are:
. Promoting the Blue Rhino brand and driving consumer awareness of cylinder
exchange;
. Expanding existing retailer relationships by opening new locations and
increasing sales at existing locations;
. Adding new retailer relationships;
. Leveraging distributors' infrastructure by adding new retail locations
within their territories;
. Leveraging our corporate infrastructure to increase profitability;
. Pursuing strategic account acquisitions from other cylinder exchange
providers; and
. Developing new products and services related to propane use and backyard
living, such as patio heaters and the related cylinder exchange service.
During fiscal 1999 we significantly increased the number of Blue Rhino
cylinder exchange locations, continued developing and began marketing and
selling our commercial and residential patio heaters and began construction of
a propane bottling and cylinder refurbishing plant in North Carolina to
facilitate service by our distributors in the Southeastern United States.
Business Strategy
Promoting the Blue Rhino Brand and Driving Consumer Awareness of Cylinder
Exchange. We have created a distinctive Blue Rhino brand name and logo which
we prominently display on cylinder sleeves and displays. We also undertake
brand marketing and promotional initiatives, including point of purchase
displays and plan to engage in cross marketing promotions with other barbecue-
related products, print media and cooperative advertising. Our recognized
brand also provides a platform to introduce new Blue Rhino products to the
backyard living category such as our Endless Summer patio heater.
Delivering Cleaner, Safer Cylinders at Convenient Locations. We believe
that convenience and safety are critical factors in achieving consumer
acceptance of cylinder exchange. During fiscal 1999, we added our Fuelcheck
indicator to our cylinder sleeves to help consumers determine when to exchange
their cylinders.
4
Expanding Relationships with and Increasing Sales at Retailers. We target
the following four categories of retailers for cylinder exchange:
home centers/hardware stores, mass merchants, grocery stores and convenience
stores. Our relationships with major retailers such as Home Depot, Lowe's,
Sears, WalMMart, Kroger and Kwik Shop allow us to place cylinders in a large
number of convenient, high traffic locations. Home Depot represented
approximately 23% of our net sales for the fiscal year ended July 31, 1999 and
approximately 26% of our net sales for the fiscal year ended July 31, 1998.
Lowe's and WalMMart each represented approximately 13% of our net sales for
the fiscal year ended July 31, 1999 and approximately 16% of our net sales for
the fiscal year ended July 31, 1998. The loss of one or more of these retail
relationships would have a material adverse effect on our business and results
of operations. We believe there are approximately 225,000 potential grill
cylinder exchange locations in our targeted markets. We currently service more
than 18,500 locations, approximately 9,000 of which we added during the fiscal
year ended July 31, 1999. Approximately 75% of our new locations in fiscal
1999 were added through increased penetration of existing retail partners and
the addition of new retail relationships. We plan to continue to increase the
number of new retail locations.
Leveraging National Distributor Network. Within the last four years, we
have established a network of 51 independent distributors serving 46 states
and Puerto Rico. Thirteen of these distributors are dedicated exclusively to
developing and providing Blue Rhino cylinder exchange in some of our key
geographic markets. We believe that our distributor network affords us the
opportunity to service approximately 90% of the cylinder exchange markets in
the United States. We plan to leverage this network by aggressively increasing
each distributor's market penetration through the addition of new retail
locations and continuing to assist our distributors in their ability to
service our accounts.
jIn order to assist our distributors with the acquisition of assets, we
lease cylinders, cylinder displays and sublease handheld computers to them.
During fiscal 1999 we undertook two major initiatives to further reduce
capital barriers and to help our distributors service our rapidly growing
customer base. First, we established USA Leasing, L.L.C. to acquire and lease
grill cylinders to our distributors. Second, we purchased approximately 17
acres in Hamptonville, North Carolina to develop and construct an automated
propane bottling and cylinder refurbishing plant. When completed this facility
will employ new technologies to improve processing efficiencies and enhance
product quality. We expect operations to commence in the third or fourth
quarter of fiscal 2000.
Leveraging Corporate Infrastructure to Increase Profitability. We have
assembled a management, sales and administrative team and have developed
sophisticated MIS which we believe can support substantial growth in retail
locations and the introduction of new products and services without
significant expenditures on additional personnel or systems. We were able to
reduce our selling, general and administrative expenses as a percentage of
total revenues for the fiscal year ended July 31, 1999 to 15.9% from 22.7% in
the preceding fiscal year.
Pursuing Strategic Account Acquisitions. The cylinder exchange industry is
highly fragmented. All participants, other than Blue Rhino, are either
regionally or locally focused. We believe that opportunities exist to expand
through selective acquisitions of smaller cylinder exchange businesses with
established retail accounts. In the fiscal year ended July 31, 1999 we
acquired approximately 2,350 new locations through 16 acquisitions for an
aggregate purchase price of approximately $8.2 million. The acquired accounts
represent approximately 25% of one new locations for fiscal 1999.
Developing and Marketing New Products and Services Related to Propane Use
and Backyard Living. We are seeking additional product opportunities which
drive cylinder exchange or are otherwise associated with backyard living.
. Patio Heater Cylinder Exchange Service. In November 1998, we acquired the
patio heater accounts of Mr. Propane, located in Southern California. Mr.
Propane's business included placing cylinder displays and patio heaters
in restaurants, resorts, bars and other outdoor commercial
establishments. Our distributors in Southern California have continued
this service and we intend to introduce our Endless Summer Comfort patio
heater cylinder exchange service nationwide with our distributors
servicing
5
commercial heater accounts in the same manner as they service retail
locations in their area. We believe that the patio heater cylinder
exchange service will increase the counterseasonal demand for cylinder
exchange and further leverage Blue Rhino's and our distributors' existing
infrastructure.
. Patio Heaters. During fiscal 1999, we began to market and sell Blue Rhino
branded Endless Summer patio heaters for commercial and backyard use
through our retail partners and distributors. We have developed the patio
heaters in conjunction with a heater manufacturer and have contracted
with manufacturers to produce both commercial and consumer grade heaters.
In addition to increasing demand for cylinder exchange, we expect this
product to further associate Blue Rhino with backyard living in the minds
of consumers.
. Empty Cylinders. In January 1999, we entered into a strategic alliance
with Manchester Tank and Equipment Company ("Manchester") to manufacture
Blue Rhino branded cylinders. We also serve as a sales representative for
empty Manchester grill cylinders to be sold to our retail partners.
. Overfill Prevention Device Valves. National Fire Protection Association
guidelines require that all grill cylinders produced or recertified after
September 30, 1998 and all grill cylinders refilled after April 2002 must
be fitted with a device which automatically cuts the flow of liquid
propane gas into the cylinder when the cylinder is full with an overfill
prevention device ("OPD"). In September 1999, we purchased from Bison
Valve, LLC ("Bison Valve") the intellectual property, inventory and
certain other assets related to its Underwriters Laboratories approved
OPD. We have also entered into an agreement with Manchester to supply
OPD's for their cylinders. We believe our acquisition of OPD assets of
Bison Valve will help insure a supply of OPD valves for our distributors
while allowing us to share in the unique market opportunity created by
new regulatory requirements.
Affiliated Distributors
In August 1999, our Chairman and Chief Executive Officer, Billy D. Prim,
and Vice Chairman, Andrew J. Filipowski sold all of their interests in Blue
Rhino distributors to an existing investor in Platinum Propane Holding, L.L.C.
("PPH"). This investor is not affiliated with Blue Rhino Corporation. Messrs.
Prim and Filipowski together owned approximately 42% of PPH, a holding company
for five Blue Rhino distributors. Sales from PPH's distributors represented
approximately 32% of Blue Rhino's net sales for the fiscal year ended
July 31, 1999. In addition, Messrs. Prim and Filipowski together owned
approximately 47% of Ark Holdings ("Ark"), a holding company for three Blue
Rhino distributors. Sales from Ark distributors represented approximately 6%
of Blue Rhino's net sales for the fiscal year ended July 31, 1999. Messrs.
Prim and Filipowski continue as directors of PPH and Ark.
Competition
The grill cylinder refilling industry is highly fragmented and competitive.
Competition in our industry is based primarily upon convenience, quality of
product, service, historical relationships, perceived safety and price. A 1997
Barbecue Industry Association study states that 79% of the consumers who use
propane grills refill rather than exchange their cylinders. Accordingly, our
primary competition comes from the approximately 20,000 bulk refilling
stations owned and operated by propane dealers, as well as certain rental
outlets, recreational vehicle centers and hardware stores. Major propane
providers, such as AmeriGas Propane Partners, L.P., Cornerstone Propane
Partners, L.P., Ferrellgas Propane Partners, L.P., Heritage Propane Partners,
L.P. and Suburban Propane Partners, L.P., could establish new or expand their
existing cylinder exchange businesses nationally. These major propane
providers have greater resources than we do and may be able to undertake more
extensive marketing campaigns and adopt more aggressive pricing policies than
we can. We also compete with numerous regional cylinder exchange providers,
which typically have operations in a few states, and with local cylinder
exchange providers. If these competitors expand their cylinder exchange
programs or new competitors enter the market or grow to compete with us on a
national scale, our market share and gross margins could decrease.
6
Governmental Regulation
The storing and dispensing of propane is governed by guidelines published
by the National Fire Protection Association in Pamphlets 54 and 58. Recent
National Fire Protection Association initiatives include a requirement that
all grill cylinders placed in use or recertified after September 30, 1998 and
all grill cylinders refilled after April 2002 must be fitted with an overfill
prevention device valve. Our distributors are also governed by local laws and
regulations which vary by municipality and state. Typically, a distributor
must obtain permits from a local fire marshal for each propane sales location.
Our regional and corporate staffs assist the distributors in this process
whenever feasible. We play an active role in drafting model state legislation
through the National Propane Gas Association, an industry association, which
attempts to create uniform state and local legislation to provide consumers,
retailers and distributors with up to date safety regulations.
Proprietary Rights
We have invested substantial time, effort and capital in establishing the
Blue Rhino brand and believe that our trademarks are an important part of our
business strategy. We have a registered trademark for the use of the Blue
Rhino logo, including the name, the RhinoTUFF name and TriSafe and have
trademark applications pending for Endless Summer and Endless Summer Comfort.
Our acquisition of certain assets from Bison Valve in September 1999 included
two patent applications on an OPD. While we may apply for additional
trademarks, patents or copyrights in the future, no assurance can be given
that any trademark, patent or copyright will be issued, that any of our
trademarks, patents or copyrights will be held valid if subsequently
challenged or that others will not claim rights in or ownership of our
trademarks, patents or copyrights and other proprietary rights.
Employees
As of September 30, 1999, we had 68 employees, of whom 25 were engaged in
sales and marketing, 12 in distributor services, six in information systems
and 25 in administration and finance. We have not experienced any work
stoppages and believe we have good relations with our employees.
Item 2--Properties
Our headquarters are located in Winston-Salem, North Carolina in facilities
we lease from Rhino Real Estate, L.L.C., a company affiliated with two of our
directors. Pursuant to the terms of the lease, we pay annual rent of
approximately $213,000, plus our allocable share of all taxes, utilities and
maintenance. The lease terminates on December 31, 2001 and includes an option
to renew for one three-year term.
In February 1999 we purchased a fee simple interest in approximately 17
acres of unimproved real property in Hamptonville, North Carolina to develop
and construct a propane bottling and cylinder refurbishing plant. The
construction of this facility is in progress.
Item 3--Legal Proceedings
In the ordinary course of business, we are involved in certain pending or
threatened legal proceedings from time to time. In the opinion of management,
none of such legal proceedings currently pending or threatened will have a
material effect on our financial position or results of operations.
Item 4--Submission of Matters to a Vote of Security Holders
We did not submit any matters to a vote of our security holders during the
fourth quarter of the fiscal year covered in this report.
7
PART II
Item 5--Market for the Registrant's Common Equity and Related Stockholder
Matters
Our common stock is traded on The Nasdaq Stock Market under the symbol
"RINO." The following table sets forth, for the quarters indicated, the range
of high and low sale prices for our common stock on The Nasdaq Stock Market.
Trading of our common stock commenced on May 19, 1998. On October 28, 1999,
the last reported sale price of our common stock on The Nasdaq Stock Market
was $8 per share. We estimate there were approximately 138 record holders of
our common stock as of September 30, 1999.
Price Range of
Common Stock
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High Low
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Fiscal Year Ended July 31, 1999
First Quarter.................................. $ 16 $ 7
Second Quarter................................. $ 25 5/8 $ 12 1/4
Third Quarter.................................. $ 19 1/2 $ 10 3/4
Fourth Quarter................................. $ 14 1/16 $ 8 9/16
Fiscal Year Ended July 31, 1998
Fourth Quarter (from May 19, 1998)............. $ 21 $ 13 3/8
We have never declared or paid any cash dividends on shares of our Common
Stock. We currently intend to retain all earnings for future growth and,
therefore, do not anticipate paying any cash dividends in the foreseeable
future. The payment of cash dividends in the future will be at the discretion
of the Board of Directors. Payments of cash dividends are prohibited by
certain of our existing financing arrangements and may be prohibited in the
future under any then existing financing agreements. There can be no assurance
that we will pay any dividends in the future.
8
Item 6--Selected Consolidated Financial Data
The following selected consolidated statement of operations and balance
sheet data of the Company as of and for the fiscal years ended July 31, 1999,
July 31, 1998, July 31, 1997, July 28, 1996 and July 31, 1995 have been
derived from our audited consolidated financial statements. The financial data
set forth below should be read in conjunction with "Item 7--Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Item 8--Financial Statements and Supplementary Data--Consolidated Financial
Statements of the Company and Related Notes Thereto" included elsewhere
herein.
Fiscal Year Ended
------------------------------------------------
July 31, July 31, July 31, July 28, July 31,
1999 1998 1997 1996 1995
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(in thousands, except per share and retail
locations data)
Consolidated Statement of
Operations Data:
Net sales--distributors........... $51,704 $27,372 $13,060 $ 2,386 $ --
Net sales--direct................. -- -- 1,151 5,830 2,728
Lease income...................... 2,116 566 295 89 --
------- ------- ------- ------- -------
Total revenues................. 53,820 27,938 14,506 8,305 2,728
------- ------- ------- ------- -------
Operating costs and expenses:
Cost of sales--distributors...... 38,661 20,525 9,873 1,811 --
Cost of sales--direct............ -- -- 1,771 6,089 3,523
Selling, general and
administrative.................. 8,539 6,338 5,124 4,304 3,319
Depreciation and amortization.... 2,872 1,278 873 868 284
Nonrecurring items (1)........... -- 476 970 1,363 --
------- ------- ------- ------- -------
Total operating costs and
expenses...................... 50,072 28,617 18,611 14,435 7,126
------- ------- ------- ------- -------
Income (loss) from operations..... 3,748 (679) (4,105) (6,130) (4,398)
Other expenses (income):
Interest expense................. 837 1,707 1,665 1,469 287
Loss on investee (1)............. 311 324 -- -- --
Follow-on offering (1)........... 551 -- -- -- --
Other, net....................... (48) (234) (186) (168) (25)
------- ------- ------- ------- -------
Income (loss) before provision
for income taxes.............. 2,097 (2,476) (5,584) (7,431) (4,660)
Provision for income taxes....... 30 -- -- -- --
------- ------- ------- ------- -------
Net income (loss).............. $ 2,067 $(2,476) $(5,584) $(7,431) $(4,660)
======= ======= ======= ======= =======
Income (loss) applicable to
common stockholders (2)......... $ 2,067 $(3,072) $(6,271) $(8,067) $(5,055)
======= ======= ======= ======= =======
Earnings (loss) per common share:
Basic and diluted................ $ 0.27 $ (1.04) $ (3.74) $ (4.96) $ (3.09)
======= ======= ======= ======= =======
Pro forma diluted................ $ 0.27 $ (0.61) $ (1.27) $ (1.72) $ (1.08)
======= ======= ======= ======= =======
Shares used in per share
calculations:
Basic............................ 7,645 2,945 1,678 1,628 1,638
======= ======= ======= ======= =======
Diluted (3)...................... 7,787 2,945 1,678 1,628 1,638
======= ======= ======= ======= =======
Pro forma diluted (4)............ 7,787 5,077 4,406 4,313 4,303
======= ======= ======= ======= =======
Selected Operating Data:
Retail locations (at period end).. 18,500 9,500 4,400 2,981 1,608
Cylinder transactions............. 3,710 2,201 1,239 769 306
Consolidated Balance Sheet Data:
Cash and cash equivalents......... $ 913 $ 5,908 $ 325 $ 1,126 $ 209
Working capital................... 7,442 9,442 737 1,580 (3,264)
Total assets...................... 59,899 30,470 9,974 11,897 10,424
Long-term obligations, less
current maturities............... 24,111 260 16,110 14,174 1,361
Convertible redeemable preferred
stock............................ -- -- 8,936 7,849 7,613
Total stockholders' equity
(deficit)........................ 27,338 24,816 (18,488) (13,217) (5,149)
- --------
(1) See Note 10 of Notes to Consolidated Financial Statements for an
explanation of these items.
(2) Equals net loss less dividends payable on our redeemable preferred stock
(the "Old Preferred Stock") of $596 for fiscal 1998, $687 for fiscal 1997,
$636 for fiscal 1996 and $395 for fiscal 1995. The Old Preferred Stock was
converted into shares of common stock in May 1998.
(3) For fiscal years 1998, 1997, 1996 and 1995, the weighted average number of
shares outstanding excludes the effect of the exercise of all outstanding
stock options and warrants and the conversion of the Old Preferred Stock
into shares of common stock because such exercise or conversion would be
anti-dilutive.
(4) The unaudited pro forma information assumes the conversion of Old
Preferred Stock, Old Preferred Stock dividends and the exercise of
outstanding warrants (other than the 81,913 warrants issued in January
1998) were effective as of the beginning of the first year presented.
9
Item 7--Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis should be read in conjunction with
"Item 6--Selected Consolidated Financial Data" and our Consolidated Financial
Statements and Notes thereto included in Item 8 of this Form 10-K.
Overview
Blue Rhino was founded in March 1994 and has become the leading national
provider of grill cylinder exchange in the United States offering consumers a
convenient means to obtain propane for their barbecue grills and other propane
fueled appliances. We originally focused on serving markets in the
Southeastern United States and have since developed a network of 51
independent distributors which, as of July 31, 1999, serviced more than 18,500
Blue Rhino grill cylinder exchange locations in 46 states and Puerto Rico.
During fiscal 1999, our total revenues increased approximately 92.6% to
approximately $53.8 million from the prior year's comparable period primarily
as a result of the growth of sales at existing locations and the addition of
over 9,000 new retail locations.
Since formation, we have focused on creating an infrastructure to support
our nationwide cylinder exchange program. Initially, we developed a vertically
integrated operation, purchasing and leasing grill cylinders, cylinder
displays, filling sites, refurbishing equipment and delivery vehicles while at
the same time developing a sales, marketing and management information systems
("MIS") infrastructure. In March 1996, we began to transition from a
vertically integrated business model to an independent distributor business
model in order to accelerate the development and implementation of our
cylinder exchange program in a more capital efficient manner. At that time, we
began to dispose of distribution assets and to enter into exclusive agreements
with independent distributors to refurbish and refill cylinders and service
our retail accounts. We completed our transition to an independent distributor
business model in the third quarter of fiscal 1997 although we incurred some
expenses related to the prior business model in fiscal 1998. As of the end of
fiscal 1999 seven of our distributors owed us $311,000 under five year notes
receivable related to the sale of our assets to the distributors. We believe
that as a result of this transition, we have successfully accelerated the
growth of our nationwide cylinder exchange service.
While we are committed to our independent distributor model, we recognize
that our rapid and substantial growth imposes significant capital demands on
our distributors. We believe that it is in our best interest to facilitate the
business development of our distributors. Accordingly, we sought to establish
a financing facility which would enable our distributors to acquire cylinders
sufficient to service our rapid growth. In October 1998, four individuals
associated with us as directors, officers and/or stockholders formed USA
Leasing, L.L.C. ("USA Leasing") to provide the necessary cylinder lease
financing to our distributors. USA Leasing used debt financing to purchase
cylinders that it leased to Blue Rhino distributors. On July 30, 1999, we
acquired 100% of the membership interests of USA Leasing. As the sole
consideration for the purchase, we increased our guarantee of USA Leasing's
debt from 80% to 100%. USA Leasing's financial information has been
consolidated with Blue Rhino as a result of the common ownership and control
of USA Leasing and Blue Rhino and our guarantee of their credit facility.
To better position our company for future growth, in February 1999 we
purchased approximately 17 acres in Hamptonville, North Carolina to develop
and construct an automated propane bottling and cylinder refurbishing plant.
This facility will employ new filling and refurbishing technologies to improve
processing efficiency and enhance product quality. As of July 31, 1999, we had
invested approximately $1.8 million in the land and the initial stages of
construction of this automated propane bottling and in February refurbishing
plant. We expect to complete this plant in the third or fourth quarter of
fiscal 2000 with an aggregate investment of approximately $6.0 million. On
October 21, 1999, we entered into a letter of intent with Manchester Tank and
Equipment Company ("Manchester") to establish a joint venture to develop, own
and operate this plant. Under this arrangement Blue Rhino and Manchester are
expected to share the cost to develop the plant.
We currently offer three types of grill cylinder transactions: (i) like-
for-like cylinder exchanges; (ii) cylinder exchanges with valve upgrades
offering additional safety features; and (iii) filled cylinder sales. Our net
sales from cylinder exchanges, cylinder upgrades and cylinder sales comprised
approximately 79%, 13% and 8%,
10
respectively, of our net sales for fiscal 1999. In addition to grill cylinder
transactions, our revenues consist of product sales principally from patio
heaters and lease income on cylinders and cylinder displays leased to our
distributors. We recognize revenues on patio heaters which are sold to
distributors and to retailers at the time of shipment. We derive our lease
income primarily from monthly rental amounts based on 1% of the original fair
market value of the cylinders and cylinder displays. Other factors which
influence our revenues include seasonality, consumer awareness, weather
conditions, new grill sales, alternative uses for grill cylinders, promotional
activities and advertising.
Our cost of sales is primarily comprised of a contractually determined
fixed charge which we pay to distributors based upon the type of cylinder
transaction, the cost of patio heaters and a non-cash charge associated with
options granted under our Distributor Stock Option Plan ("Distributor Option
Plan"). Based upon prior grants of options under the Distributor Option Plan,
we estimate that we will incur annual non-cash charges of approximately
$300,000 through fiscal 2002 related to these prior grants. In fiscal 1999,
the related charge was approximately $272,000.
While we believe that we have created the infrastructure necessary to
support a nationwide cylinder exchange program, development of this
infrastructure has resulted in an accumulated deficit of approximately $19.5
million as of July 31, 1999. This has resulted in net operating loss
carryforwards of approximately $18.3 million for federal income tax purposes
which we can use to offset future taxable income, if any. Based on our history
of operating losses, we have recorded a valuation allowance to the full extent
of our net deferred tax assets.
Results of Operations
The following table sets forth, for the periods indicated, the percentage
relationship of certain items from our statements of operations to total
revenues. Due to the change in our business model and our rapid sales growth,
any trends reflected by the following table may not be indicative of future
results.
July 31, July 31, July 31,
1999 1998 1997
-------- -------- --------
Total revenues................................ 100.0% 100.0% 100.0%
Operating costs and expenses:
Cost of sales............................... 71.8 73.5 80.3
Selling, general and administrative......... 15.9 22.7 35.3
Depreciation and amortization............... 5.3 4.6 6.0
Nonrecurring items.......................... -- 1.7 6.7
----- ----- -----
Total operating costs and expenses........ 93.0 102.4 128.3
----- ----- -----
Income (loss) from operations............. 7.0 (2.4) (28.3)
Other expense (income):
Interest expense............................ 1.6 6.1 11.5
Loss on investee............................ 0.6 1.2 --
Follow-on offering.......................... 1.0 -- --
Other, net.................................. (0.1) (0.8) (1.3)
----- ----- -----
Income (loss) before provision for income
taxes.................................... 3.9 (8.9) (38.5)
Provision for income taxes.................... 0.1 -- --
----- ----- -----
Net income (loss)......................... 3.8% (8.9)% (38.5)%
===== ===== =====
As a percentage of total revenues:
Net sales--distributors..................... 96.1% 98.0% 90.0%
Net sales--direct........................... -- % -- % 7.9%
Gross margin:
Gross margin of net sales--distributors..... 25.2% 25.0% 24.4%
Gross margin of net sales--direct........... -- % -- % (53.9)%
11
Comparison of Years Ended July 31, 1999 and 1998
Total revenues. Total revenues increased 92.6% to approximately $53.8
million for fiscal 1999 from approximately $27.9 million for fiscal 1998. The
total revenues of $53.8 million for fiscal 1999 consisted of approximately
$50.4 million from cylinder transactions, $1.3 million from product sales
(combined cylinder transactions and product sales are reflected on the
statement of operations as net sales--distributors) and $2.1 million from
lease income. Product sales, substantially all of which were made to our
distributors, consist of patio heaters and cylinders. Lease income relates
primarily to cylinders and cylinder displays leased to our distributors. The
increase in total revenues was due primarily to the 95% increase in the number
of retail locations placed in service and increased sales volume at existing
locations. The increase in lease income was due primarily to the growth in the
number of cylinder displays placed in service and to the leasing of cylinders
to distributors under operating leases which commenced in fiscal 1999. The
number of cylinders transacted increased 68.6% to approximately 3.7 million
units during fiscal 1999 from approximately 2.2 million units during fiscal
1998.
Gross margin. Gross margin increased to approximately 28.2% for fiscal 1999
from approximately 26.5% for fiscal 1998. The improvement in gross margin was
primarily due to increased lease income which is not offset by cost of sales.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 34.7% to approximately $8.5 million for
fiscal 1999 from approximately $6.3 million for fiscal 1998 but decreased as a
percentage of total revenues to 15.9% for fiscal 1999 from 22.7% for fiscal
1998. The increase in selling, general and administrative expenses was due
primarily to additional compensation costs stemming primarily from the growth
of our internal sales force, costs related to introducing our Endless Summer
patio heater product and additional costs associated with operating a public
company including investor relations and other professional fees. The decrease
in selling, general and administrative expenses as a percentage of total
revenues was due primarily to the fact that a significant portion of our
selling, general and administrative expenses are fixed and, as a result,
selling, general and administrative expenses increased at a slower rate than
total revenues.
Depreciation and amortization. Depreciation and amortization increased to
approximately $2.9 million for fiscal 1999 from approximately $1.3 million for
fiscal 1998. Depreciation expense increased by $1.3 million to approximately
$2.4 million for fiscal 1999 from approximately $1.1 million for fiscal 1998
primarily due to the increase in the number of cylinder displays and the
commencement of depreciation on cylinders held under operating lease
agreements. The increase in cylinder displays was due to our purchase of
approximately $2.1 million of cylinder displays in May 1998 which we
previously leased under an operating lease and our ongoing purchase of
additional cylinders and cylinder displays to support growth in our installed
base of retail locations. Our purchase of computer technology also impacted
depreciation expense to a lesser extent. Amortization expense increased by
$305,000 to approximately $482,000 in fiscal 1999 from approximately $177,000
in fiscal 1998 principally due to the increased amortization of intangibles
associated with the acquisition of propane cylinder exchange locations.
Nonrecurring charges. In fiscal 1998, nonrecurring charges were
approximately $476,000, consisting primarily of the write-down of facilities
and equipment purchased to support the vertically integrated business model.
There were no nonrecurring charges in fiscal 1999.
Interest expense. Interest expense decreased to approximately $837,000 for
fiscal 1999 from approximately $1.7 million for fiscal 1998. The decrease in
interest expense resulted from the repayment of substantially all of our
outstanding indebtedness in May 1998 with proceeds from our initial public
offering. The interest expense for fiscal 1999 is a result of borrowings under
our credit facility and USA Leasing's credit facility and capital lease
obligations incurred primarily to acquire computer technology.
Follow-on offering. For fiscal 1999, we incurred a one-time charge of
approximately $551,000 for expenses incurred in connection with an offering of
common stock which we terminated in February 1999 due to unfavorable market
conditions.
12
Loss on investee. Loss on investee decreased to $311,000 for fiscal 1999
from $324,000 for fiscal 1998, which reflects the application of the equity
method of accounting to our convertible loan to Bison Valve, L.L.C. ("Bison
Valve"). We recorded these losses as Bison Valve used the proceeds of our loan
to fund losses incurred primarily in researching, developing, marketing and
producing an overfill prevention device ("OPD") and other propane related
products. As of October 31, 1998, we had recognized charges for the entire
principal balance of our convertible loan. In September 1999, we purchased
from Bison Valve the intellectual property, inventory and certain other assets
related to its Underwriters Laboratories-approved OPD. See "--Subsequent
Events."
Other, net. Other, net decreased to approximately $48,000 for the fiscal
year ended July 31, 1999 from approximately $234,000 for fiscal 1998. The
decrease was primarily due to the loss on disposal of property and equipment
of approximately $151,000 recorded in fiscal 1999 which was offset by
increased interest income from excess cash balances and various notes
receivable.
Provision for income taxes. The provision for income taxes for the fiscal
year ended July 31, 1999, consisted of approximately $30,000 of current state
income tax expense.
Comparison of Years Ended July 31, 1998 and 1997
Total revenues. Total revenues consist of sales from our independent
distributor network ("net sales--distributors"), sales from our previous
vertically integrated distribution operations ("net sales--direct"), and to a
lesser extent, from other revenues. During the third quarter of fiscal 1997,
we completed our transition to our independent distributor business model and,
as a result, all of our net sales during fiscal 1998 were net sales--
distributors. Other revenues consist of cylinder display lease income and
lease income from certain plant facilities and equipment leased to our
distributors. Total revenues increased 92.6% to approximately $27.9 million
for fiscal 1998 from approximately $14.5 million for fiscal 1997. Net sales--
distributors increased 109.6% from approximately $13.1 million in fiscal 1997
to approximately $27.4 million in fiscal 1998. The increase in total revenues
was due primarily to the increase in the number of retail locations placed in
service and the corresponding increase in the number of cylinder transactions
during the period. The installed base of retail locations increased 116.0% to
approximately 9,500 locations at the end of fiscal 1998 from approximately
4,400 locations at the end of fiscal 1997. The number of cylinder transactions
increased 77.6% to approximately 2.2 million units in fiscal 1998 from
approximately 1.2 million units in fiscal 1997.
Gross margin. Gross margin, excluding the impact from other revenues,
increased to 25.0% in fiscal 1998 from 18.1% in fiscal 1997. This increase was
due to the shift from a vertically integrated business model to an independent
distributor business model and the subsequent increase in net sales--
distributors and decrease in net sales--direct. With respect to net sales--
distributors, gross margin increased to 25.0% in fiscal 1998 from 24.4% in
fiscal 1997. This increase was due to a shift in the mix of cylinder
transactions with lower margin cylinder sales accounting for a smaller
percentage of net sales--distributors in fiscal 1998 than in fiscal 1997, as
well as a price increase which became effective in April 1998 on all cylinder
transactions.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 23.7% to approximately $6.3 million in
fiscal 1998 from approximately $5.1 million in fiscal 1997, but decreased as a
percentage of total revenues to 22.7% in fiscal 1998 from 35.3% in fiscal
1997. The increase in selling, general and administrative expenses was due
primarily to additional commissions to outside brokers, which were based on a
percentage of total revenues, additional compensation costs and increased
cylinder display rent expense. The decrease in selling, general and
administrative expenses as a percentage of total revenues was due primarily to
the fact that a significant portion of our selling, general and administrative
expenses are fixed and, as a result, selling, general and administrative
expenses increased at a slower rate than total revenues.
Depreciation and amortization. Depreciation and amortization increased to
approximately $1.3 million in fiscal 1998 from approximately $873,000 in
fiscal 1997. Depreciation expense increased by approximately $337,000 to
approximately $1.1 million in fiscal 1998 from approximately $764,000 in
fiscal 1997 principally due to the purchase of additional cylinder display
panels and the acquisition of computer technology under
13
capital leases. Amortization expense increased by approximately $68,000 to
approximately $177,000 in fiscal 1998 from approximately $109,000 in fiscal
1997 primarily due to increased goodwill amortization associated with the
acquisitions of retail locations from local and regional cylinder exchange
providers.
Nonrecurring charges. Nonrecurring charges decreased to approximately
$476,000 in fiscal 1998 from approximately $970,000 in fiscal 1997. The
nonrecurring charges were associated with our transition from a vertically
integrated business model to an independent distributor business model and
consisted primarily of the write-down of facilities and equipment purchased to
support the vertically integrated business model.
Interest expense. Interest expense remained relatively constant at
approximately $1.7 million for fiscal 1997 and 1998. Interest expense was
attributed to accretion of interest on senior discount notes, additional
borrowings under lines of credit and, to a lesser extent, borrowings from
stockholders. However, these debts were paid in full in May 1998 with a
portion of the proceeds from our initial public offering, eliminating
additional interest expense with respect to these obligations.
Loss on investee. Loss on investee was $324,000 in fiscal 1998 which
reflects the application of the equity method of accounting to our convertible
loan to Bison Valve. A loss was recorded because Bison Valve used the proceeds
of our loan to fund losses incurred primarily in researching, developing,
marketing and producing an OPD and other propane related products.
Other, net. Other, net increased to approximately $234,000 in fiscal 1998
from approximately $186,000 in fiscal 1997. Other, net consisted primarily of
interest income from various notes receivable and excess cash balances.
Liquidity and Capital Resources
Our primary sources of funds have been the issuance of stock and the
incurrence of debt. We had working capital of approximately $7.4 million as of
July 31, 1999, which was primarily the result of cash provided by borrowing
under our bank credit facilities and to a lesser extent cash provided by
operations.
Net cash provided by operations was approximately $1.5 million for fiscal
1999. Net cash used in operations was approximately $4.9 million and $2.2
million for fiscal 1998 and fiscal 1997, respectively. For fiscal 1999, cash
provided by operations included approximately $2.1 million of net income. Cash
used and provided by operations is affected by changes in accounts receivable
and accounts payable due to the seasonality of our business.
Net cash used in investing activities was approximately $21.4 million in
fiscal 1999 and approximately $6.0 million for fiscal 1998, while net cash
provided by investing activities was approximately $342,000 for fiscal 1997.
The primary components of cash used in investing activities has included
acquisitions of cylinder exchange accounts and related assets, purchase of
cylinders held under operating leases as well as the investments in property
and equipment including cylinder displays, construction of a production
facility and computer technology. Additionally, in fiscal 1998 we loaned
$635,000 to Bison Valve (see "--Subsequent Events"). The primary components of
cash provided by investing activities has included collections on notes
receivable and proceeds from the sale of property, equipment and cylinders as
part of our transition to an independent distributor business model.
Net cash provided by financing activities was approximately $14.9 million
for fiscal 1999, $16.5 million for fiscal 1998 and $1.0 million for fiscal
1997. The primary components of cash provided by financing activities included
the net proceeds of our initial public offering in May 1998, loans from four
stockholders in January 1998, and bank borrowings, including $13.0 million in
proceeds from USA Leasing's bank loan during fiscal 1999 and approximately
$2.5 million in net proceeds from our New Bank Credit Facility during fiscal
1999. The cash used in financing activities included payments on various
loans, notes payable and capital lease obligations and for fiscal 1999
included approximately $836,000 in common stock offering and registration
costs in connection with an offering of common stock which we terminated in
February 1999 and a shelf registration completed in July 1999.
14
In October 1998, USA Leasing was formed to provide a cylinder financing
facility for our distributors. In December 1998, USA Leasing entered into a
two year $13.0 million credit facility (the "USA Leasing Credit Facility")
with its bank which replaced an interim credit facility for $6.5 million
extended in October 1998. USA Leasing used the proceeds of their facility to
purchase cylinders that it leases to Blue Rhino distributors at 1% per month
of the initial cylinder value. In July 1999, we acquired 100% of the
membership interests in USA Leasing. As the sole consideration for the
purchase, we increased our guarantee of USA Leasing's debt from 80% to 100%.
Upon the repayment of $2.6 million of USA Leasing's indebtedness, the bank has
agreed to release Messrs. Billy D. Prim, Andrew J. Filipowski, Craig J.
Duchossois and Peer Pedersen, the former members of USA Leasing, from their
several $650,000 guarantees of the USA Leasing indebtedness. USA Leasing's
financial information has been consolidated with Blue Rhino's since its
inception as a result of the common ownership and control of USA Leasing and
Blue Rhino and our guarantee of their credit facility. During fiscal 1999, we
had net cash purchases of approximately $6.1 million of cylinders which
consisted of approximately $10.8 million of cylinders purchased offset by $4.7
million of cylinders sold to consumers.
In December 1998, we entered into a $12.0 million credit facility with our
bank, which includes a $7.0 million revolving line of credit and a $5.0
million acquisition facility (the "New Bank Credit Facility"). At July 31,
1999, we had approximately $3.6 million outstanding under the New Bank Credit
Facility. The New Bank Credit Facility requires us to meet certain covenants,
including minimum net worth and cash flow requirements. Our ability to borrow
under the New Bank Credit Facility was initially reduced by an amount equal to
our contingent liability pursuant to our guarantee of USA Leasing's credit
facility. In June 1999, the New Bank Credit Facility was amended to provide
approximately $7.4 million of credit availability. This amended agreement
provides up to $3.4 million of working capital financing, $2.9 million of
documentary letters of credit to support the purchase of patio heaters and
equipment for the bottling and cylinder refurbishing plant and $1.1 million to
finance acquisitions. In September 1999, the New Bank Credit Facility was
amended to waive our non-compliance with our net worth, debt coverage and cash
flow coverage covenants as of and for the fiscal quarter and year ended July
31, 1999. The loans under the New Bank Credit Facility and USA Leasing Credit
Facility bear interest at a maximum of LIBOR plus 2.25% and are collateralized
by a lien on substantially all of our assets.
To better position our company for future growth, during fiscal 1999 we
purchased approximately 17 acres located in Hamptonville, North Carolina and
began construction of an automated propane bottling and cylinder refurbishing
plant. This facility will employ new filling and refurbishing technologies to
improve processing efficiency and enhance product quality. As of July 31,
1999, we had invested approximately $1.8 million into the land and the initial
stages of construction of this plant which we expect to be complete in third
or fourth quarter of fiscal 2000 with an aggregate investment of approximately
$6.0 million (see "--Subsequent Events").
In connection with our initial public offering, we issued a total of
3,105,000 shares of common stock and received net proceeds of approximately
$36.4 million. We used approximately $29.1 million of the net proceeds from
our initial public offering to repay principal and interest on indebtedness.
We used approximately $6.2 million of the net proceeds to acquire assets,
including approximately 1,350 new accounts, from twelve local and regional
cylinder exchange providers. In addition, we used approximately $1.1 million
of the net proceeds to purchase property and equipment.
We currently lease handheld computers and various other computer equipment
from three lessors under the terms of three master leases for an aggregate
annual rent of approximately $699,000. We have an option to purchase the
handheld computers for $1.00 per handheld unit at the end of each lease term.
Under each of the leases, we are responsible for insurance, maintenance and
taxes on the leased equipment.
We currently lease our offices under a lease from Rhino Real Estate, LLC,
an entity affiliated with two of our directors. Pursuant to the terms of the
lease, we pay annual rent of approximately $213,000, plus our
15
allocable share of all taxes, utilities and maintenance. The lease terminates
on December 31, 2001 with an option to renew for one three-year term.
Subsequent Events:
In September 1999, we purchased from Bison Valve the intellectual property,
inventory and certain other assets related to its Underwriters Laboratories-
approved OPD. The purchase price for all intellectual property and other
assets related to Bison Valve's OPD included approximately $1.1 million in
cash, the offset of approximately $732,000 in principal and interest under our
convertible note, $50,000 in assumed liabilities and a ten year warrant to
purchase 100,000 shares of our common stock at an exercise price equal to
$7.40 per share. Also included in the purchase price is a provision to pay the
seller between 2.5% and 12% of future sales of OPD's based upon gross margins
for the life of the OPD patents. We will account for substantially all of the
purchase price as intangible assets (patents) to be amortized over their
estimated useful lives.
In September 1999, we entered into an agreement with two institutional
investors (the "Investors") to issue $7.0 million of 5% Convertible Notes (the
"Convertible Notes") and 332,203 warrants to purchase common stock in a
private placement. The Convertible Notes have a two year term and bear
interest at 5% per annum, payable in full in cash or in shares of common stock
at maturity. We may require the holders of the Convertible Notes to convert
the principal and interest on the Convertible Notes into common stock over a
company-chosen conversion period, which may be from 20 to 60 days and must be
in amounts of at least $300,000 subject to certain conditions. Upon the
occurrence of certain events, the holder may convert the principal and
interest on the Convertible Notes into common stock. The Convertible Notes
convert at the lesser of a fixed conversion price or 95% of the weighted
average price of the common stock at the time of conversion. The warrants are
exercisable for five years at an exercise price of $8.48 per share. In the
future, we may also require the Investors to purchase, in up to two additional
transactions, Convertible Notes in an aggregate amount equal to at least
$1,000,000 but not more than $4,900,000 if certain conditions are met. The
Convertible Notes are subordinate, subject to certain exceptions, to up to
$25.0 million of our indebtedness to our bank.
Also in September 1999, we completed a $7.2 million private placement of
981,119 units, each unit consisting of one share of our common stock and a
warrant to purchase 0.35 shares of common stock. The offering was made only to
"accredited investors", as defined in Rule 501(a) of Regulation D. The
investors included the following officers and directors of the Company:
Messrs. Billy D. Prim, Craig J. Duchossois, Andrew J. Filipowski, Mark
Castaneda, Steven D. Devick, Richard A. Brenner and Jerald D. Shadley, who in
the aggregate purchased 438,747 of the 981,119 units sold. The price per unit
was $7.375, which was the closing price of our common stock on September 3,
1999, the final trading day prior to the consummation of the offering. The
warrants may be exercised at a price equal to $8.48 per share at any time
prior to September 7, 2004. We used the aggregate proceeds of the two
September 1999 offerings to pay certain expenses associated with the
offerings, repay our primary cylinder vendor who financed our purchase of
cylinders during fiscal 1999, repay other indebtedness and acquire assets. The
balance will be used to acquire additional assets and for working capital and
general corporate purposes.
In October 1999, we signed a letter of intent with Manchester to establish
a joint venture to develop, own and operate the automated propane bottling and
cylinder refurbishing plant now under construction. Blue Rhino and Manchester
expect to share in the cost of developing and constructing the plant. We
expect this joint venture to leverage the expertise of Manchester and Blue
Rhino and will be owned by both parties.
Also in October 1999, we agreed to acquire a cylinder exchange provider
with approximately 700 locations in Tennessee, South Carolina and Georgia for
approximately $1.3 million in the aggregate related to assets including
cylinders, cylinder displays and the right, title and interest in and to the
seller's retail propane cylinder exchange accounts and locations.
16
Seasonality
We have experienced and expect to continue to experience significant
seasonal fluctuations in our total revenues and net income (loss). Our total
revenues generally are highest in the third and fourth quarters, which include
the majority of the grilling season, and historically have been lower in the
first and second quarters which include the winter months. Sustained periods
of poor weather, particularly in the spring and summer seasons, can negatively
impact sales. Our rate of establishing new retail locations and expenses
incurred in anticipation of increased sales also cause quarterly fluctuations
in our results of operations. Accordingly, the results of operations in any
quarter will not necessarily be indicative of the results that we may achieve
for a full fiscal year or any future quarter.
Inflation
We do not believe that inflation has had a material adverse effect on our
total revenues or the results of operations. However, there can be no
assurance that our business will not be affected by inflation in the future.
Impact of New Accounting Pronouncements
There were no items of comprehensive income for the fiscal years ended July
31, 1999, 1998 and 1997, as defined under Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income."
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which was
effective for fiscal years beginning after June 15, 1999. SFAS No. 133 was
amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of SFAS No. 133," which delayed the
effective date of implementation by one year. We are required to and will
adopt SFAS No. 133 in the first quarter of fiscal 2001. We have not completed
all of the analysis, but we do not expect adoption of this standard to have a
significant effect on our consolidated results of operations or financial
position.
Year 2000 Compliance
Year 2000 issues are the result of computer programs that were written
using two digits rather than four to define the applicable year. For example,
date sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in system failures or
miscalculations causing disruptions of operations, including, among other
material adverse consequences, a temporary inability to process transactions
or engage in similar normal business activities. We depend on our management
information systems ("MIS") to process orders, manage inventory and accounts
receivable, maintain distributor and customer information, assist distributors
in delivering products on a timely basis and in maintaining cost-efficient
operations.
Our State of Readiness for Year 2000. We began evaluating our MIS for Year
2000 compliance in January 1997. Since that time we have developed a Year 2000
compliance policy encompassing employee education, testing, progress
reporting, external impact plans and contingency plans. Our Chief Information
Officer directs our Year 2000 compliance policy and oversees the remediation
and testing of MIS. As of July 31, 1999, we believe we are 100% Year 2000
compliant. All core MIS programs are currently 100% Year 2000 compliant.
However, if our modifications, testing and solicitations of third party
compliance are not made on a timely basis or do not resolve our Year 2000
issues, these issues could have a negative effect on our business.
We have assessed the Year 2000 readiness of each of our core MIS and
remediated these systems as necessary. Our core MIS include Online Sales
Account Information System ("OASIS"), Platinum for Windows, Electronic Data
Interchange ("EDI") and Blue Rhino Electronic Accounting System ("BREAS").
OASIS was already compliant when it was implemented in February 1998, Platinum
for Windows was updated in March 1998 to be Year 2000 compliant, EDI was
upgraded in December 1998 to be Year 2000 compliant and BREAS
17
was upgraded in October 1998 to be Year 2000 compliant. We have engaged
Integrated Solutions International, L.L.C. to, among other things, assist us
in implementing our distributors' use of Year 2000 compliant handheld computer
units of BREAS. All of our distributors are currently using Year 2000
compliant handheld units. We have established integrated test procedures in
which all of our MIS are continuously tested for Year 2000 compliance.
Historical and Estimated Costs. We have not established a separate Year
2000 compliance budget and do not expect to do so. To date, we have incurred
approximately $20,000 in Year 2000 compliance costs. We currently anticipate
that the implementation of our Year 2000 compliance policy will cost
approximately $25,000, all of which will be expensed. Although we can give no
assurances, we do not expect future costs related to Year 2000 compliance to
negatively affect our business in any material way. Costs are based on current
estimates and actual results may vary significantly from such estimates.
Most Reasonably Likely Worst Case Scenario. The most reasonably likely
worst case Year 2000 scenario we face is an interruption of our business
operations caused by the failure of third parties with which we have a
material relationship to achieve Year 2000 compliance. The consequences of a
third party failure are unknown, but could have a negative effect on our
business. We are considering several contingency plans to address possible
business interruptions caused by a non-compliant third party. Possible
contingency plans include using alternate service providers and using a manual
billing, payment and collection system. Initial contingency plans have been
completed. Additional refinement and monitoring will continue throughout the
remainder of calendar 1999. In addition, in an effort to protect ourselves and
increase the awareness of third parties whose failure to comply could have a
material effect on our business, we are seeking to obtain certifications from
them that they are Year 2000 compliant.
Item 7A--Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk related to changes in interest rates on our
borrowings under the USA Leasing Credit Facility and our New Bank Credit
Facility. The USA Leasing Credit Facility and our New Bank Credit Facility
bear interest based on LIBOR. The USA Leasing Credit Facility is
collateralized by cylinders held under operating leases with our independent
distributors. The operating leases currently yield 1% of the cylinder value
monthly (approximately 12% annual) and continue until either party terminates
upon 60 day written notice to the other party. Upon any significant increase
in LIBOR, we would attempt to renegotiate the operating leases with our
independent distributors mitigating the interest rate exposure on the majority
of the notes payable to the bank. However, there can be no assurance that we
will be successful in such renegotiations or that we will be able to mitigate
any or all of the interest rate risk.
We have no derivative financial instruments or derivative commodity
instruments in our cash and cash equivalents and investments. We invest our
cash and cash equivalents and investments in investment grade, highly liquid
investments consisting of money market instruments, bank certificates of
deposit and overnight investments in commercial paper.
All of our transactions are conducted and accounts are denominated in
United States Dollars and as such we do not currently have exposure to foreign
currency risk. Furthermore, we do not have any direct exposure to commodity
price risk.
18
Item 8--Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
BLUE RHINO CORPORATION
Page
----
Reports of Independent Accountants........................................ 20
Consolidated Balance Sheets as of July 31, 1999 and 1998.................. 22
Consolidated Statements of Operations for the Fiscal Years Ended July 31,
1999, 1998 and 1997...................................................... 23
Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended
July 31, 1999, 1998 and 1997............................................. 24
Consolidated Statements of Cash Flows for the Fiscal Years Ended July 31,
1999, 1998 and 1997...................................................... 25
Notes to Consolidated Financial Statements................................ 26
19
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Blue Rhino Corporation:
We have audited the consolidated balance sheet of Blue Rhino Corporation
and subsidiaries as of July 31, 1999 and the related consolidated statements
of operations, stockholders' equity and cash flows for the year then ended.
Our audit also included the financial statement schedule listed in the index
at Item 14(a). 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 audit. The consolidated financial statements
of Blue Rhino Corporation as of and for the years ended July 31, 1997 and
1998, were audited by other independent accountants whose report dated
September 22, 1998, except for the information in Note 21 for which the date
was February 8, 1999, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis
for our opinion.
In our opinion, the 1999 consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Blue Rhino Corporation at July 31, 1999 and the consolidated
results of their operations and cash flows for the year then ended, in
conformity with generally accepted accounting principles. Also, in our
opinion, the related financial schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ Ernst & Young LLP
Winston-Salem, North Carolina
September 21, 1999, except for Note 17 as to which the date is October 25,
1999
20
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Blue Rhino Corporation:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 42 present fairly, in all material
respects, the financial position, results of operations and cash flows of Blue
Rhino Corporation and subsidiaries as of July 31, 1998 and for each of the two
years in the period ended July 31, 1998, in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule listed in the index appearing under Item 14(a)(2) on page 42 presents
fairly, in all material respects the information set forth therein when read
in conjunction with the related consolidated financial statements. These
financial statements and financial statement schedule 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 of
these statements in accordance with generally accepted auditing standards
which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above. We have
not audited the consolidated financial statements of Blue Rhino Corporation
and subsidiaries for any period subsequent to July 31, 1998.
/s/ PricewaterhouseCoopers LLP
Greensboro, North Carolina
September 22, 1998, except as to the information presented in Note 21 for
which the date is February 8, 1999.
21
BLUE RHINO CORPORATION
CONSOLIDATED BALANCE SHEETS
As of July 31, 1999 and 1998
(in thousands, except share and per share data)
ASSETS 1999 1998
------ -------- --------
Current assets:
Cash and cash equivalents................................ $ 913 $ 5,908
Accounts receivable, net................................. 12,736 7,901
Inventories.............................................. 106 --
Notes receivable, current portion........................ 128 540
Prepaid expenses and other current assets................ 2,009 487
-------- --------
Total current assets................................... 15,892 14,836
Cylinders held under operating lease agreements, net....... 17,205 2,377
Property, plant and equipment, net......................... 16,646 8,505
Notes receivable, less current portion..................... 183 789
Intangibles, net........................................... 9,420 3,532
Other assets............................................... 553 431
-------- --------
Total assets........................................... $ 59,899 $ 30,470
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable......................................... $ 6,386 $ 4,421
Acquisition notes payable................................ 684 212
Current portion of long-term debt and capital lease
obligations............................................. 739 286
Accrued liabilities...................................... 641 475
-------- --------
Total current liabilities.............................. 8,450 5,394
Long-term debt including capital lease obligations, less
current maturities........................................ 24,111 260
-------- --------
Total liabilities...................................... 32,561 5,654
Commitments and contingencies.............................. -- --
Stockholders' equity:
Preferred stock, $0.001 par value, 20,000,000 shares
authorized, no shares outstanding....................... -- --
Common stock, $0.001 par value, 100,000,000 shares
authorized, 7,666,535 and 7,630,873 shares issued and
outstanding at July 31, 1999 and 1998, respectively..... 8 8
Additional paid-in capital............................... 46,825 46,370
Accumulated deficit...................................... (19,495) (21,562)
-------- --------
Total stockholders' equity............................. 27,338 24,816
-------- --------
Total liabilities and stockholders' equity............. $ 59,899 $ 30,470
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
22
BLUE RHINO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Fiscal Years Ended July 31, 1999, 1998 and 1997
(in thousands, except per share data)
1999 1998 1997
------- ------- -------
Net sales--distributors............................. $51,704 $27,372 $13,060
Net sales--direct................................... -- -- 1,151
Lease income........................................ 2,116 566 295
------- ------- -------
Total revenues.................................. 53,820 27,938 14,506
------- ------- -------
Operating costs and expenses:
Cost of sales--distributors....................... 38,661 20,525 9,873
Cost of sales--direct............................. -- -- 1,771
Selling, general and administrative............... 8,539 6,338 5,124
Depreciation and amortization..................... 2,872 1,278 873
Nonrecurring items................................ -- 476 970
------- ------- -------
Total operating costs and expenses.............. 50,072 28,617 18,611
------- ------- -------
Income (loss) from operations....................... 3,748 (679) (4,105)
Other expenses (income):
Interest expense.................................. 837 1,707 1,665
Loss on investee.................................. 311 324 --
Follow-on offering................................ 551 -- --
Other, net........................................ (48) (234) (186)
------- ------- -------
Income (loss) before provision for income taxes. 2,097 (2,476) (5,584)
Provision for income taxes........................ 30 -- --
------- ------- -------
Net income (loss)............................... $ 2,067 $(2,476) $(5,584)
======= ======= =======
Basic and diluted earnings (loss) per common share.. $ 0.27 $ (1.04) $ (3.74)
======= ======= =======
Shares used in per share calculations:
Basic............................................. 7,645 2,945 1,678
======= ======= =======
Diluted........................................... 7,787 2,945 1,678
======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
23
BLUE RHINO CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Fiscal Years Ended July 31, 1999, 1998 and 1997
(in thousands, except share and per share data)
Common Stock Additional
---------------- paid-in Accumulated
Shares Amount capital deficit Total
--------- ------ ---------- ----------- --------
Balances, July 28, 1996...... 1,627,693 $ 2 $ 19 $(13,238) $(13,217)
Issuance of common stock... 151,227 -- 1,000 -- 1,000
Preferred dividends........ -- -- (687) -- (687)
Net loss................... -- -- -- (5,584) (5,584)
--------- --- ------- -------- --------
Balances, July 31, 1997...... 1,778,920 2 332 (18,822) (18,488)
Preferred dividends........ -- -- (332) (264) (596)
Issuance of common stock in
connection with Initial
Public Offering, net of
offering expenses of
$4,320.................... 3,105,000 3 36,042 -- 36,045
Expense related to
distributor stock option
plan...................... -- -- 50 -- 50
Conversion of preferred
stock and preferred
dividends................. 1,750,472 2 9,528 -- 9,530
Exercise of warrants....... 938,789 1 -- -- 1
Issuance of common stock as
partial consideration for
an acquisition............ 57,692 -- 750 -- 750
Net loss................... -- -- -- (2,476) (2,476)
--------- --- ------- -------- --------
Balances, July 31, 1998...... 7,630,873 8 46,370 (21,562) 24,816
Proceeds from exercise of
stock options............. 35,662 -- 183 -- 183
Expense related to
distributor stock option
plan...................... -- -- 272 -- 272
Net income................. -- -- -- 2,067 2,067
--------- --- ------- -------- --------
Balances, July 31, 1999...... 7,666,535 $ 8 $46,825 $(19,495) $ 27,338
========= === ======= ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
24
BLUE RHINO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Fiscal Years Ended July 31, 1999, 1998 and 1997
(in thousands, except per share data)
1999 1998 1997
-------- -------- -------
Cash flows from operating activities:
Net income (loss)............................... $ 2,067 $ (2,476) $(5,584)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization................. 2,872 1,278 873
Loss on disposal of assets.................... 151 -- --
Nonrecurring items............................ -- 198 963
Loss on investee.............................. 311 324 --
Expense related to distributor stock option
plan......................................... 272 50 --
Follow-on offering costs...................... 551 -- --
Accreted interest on senior discount notes.... -- 1,378 1,489
Changes in operating assets and liabilities,
net of business acquisitions:
Accounts receivable......................... (4,835) (4,791) (1,186)
Inventories................................. (106) (1,726) 127
Other current assets........................ (1,884) (389) 166
Accounts payable............................ 1,960 1,516 1,045
Other accrued liabilities................... 165 (261) (85)
-------- -------- -------
Net cash provided by (used in) operating
activities............................... 1,524 (4,899) (2,192)
-------- -------- -------
Cash flows from investing activities:
Business acquisitions........................... (7,488) (3,640) --
Payment of organizational costs................. -- (25) --
Proceeds from disposal of cylinders............. -- -- 340
Purchases of property, plant and equipment...... (8,073) (2,283) (537)
Proceeds from disposals of property and
equipment...................................... -- 65 159
Issuance of note receivable..................... -- (635) --
Purchase of cylinders held under operating
leases, net.................................... (6,076) -- --
Collections on notes receivable................. 235 496 380
-------- -------- -------
Net cash (used in) provided by investing
activities............................... (21,402) (6,022) 342
-------- -------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of
expenses paid of $3,947 in fiscal 1998......... 182 36,418 1,000
Proceeds from issuance of preferred stock....... -- -- 400
Repayment of senior discount notes.............. -- (16,491) --
Proceeds from stockholder loans................. -- 3,250 --
Payments of stockholder loans................... -- (3,250) --
Proceeds from notes payable to bank............. 29,853 8,411 3,995
Payments on notes payable to bank............... (13,273) (9,251) (3,155)
Payment on cylinder display lease facility...... -- (2,119) --
Payment of common stock offering and
registration costs............................. (836) -- --
Payments on acquisition notes payable........... (207) (108) (90)
Payment of debt issuance costs.................. (229) (108) (58)
Repayment of note payable to vendor............. -- -- (752)
Payments of long-term debt and capital lease
obligations.................................... (607) (248) (291)
-------- -------- -------
Net cash provided by financing activities. 14,883 16,504 1,049
-------- -------- -------
Net (decrease) increase in cash and cash
equivalents...................................... (4,995) 5,583 (801)
Cash and cash equivalents at beginning of period.. 5,908 325 1,126
-------- -------- -------
Cash and cash equivalents at end of
period................................... $ 913 $ 5,908 $ 325
======== ======== =======
The accompanying notes are an integral part of the consolidated financial
statements.
25
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") is the leading
nationwide provider of gas grill cylinder exchange with branded cylinder
displays at over 18,500 retail locations in 46 states plus Puerto Rico. Blue
Rhino cylinder exchange is offered at leading home center/hardware, mass
merchants, grocery and convenience stores. Cylinders are delivered to
retailers through a national network of 51 independent distributors.
These consolidated financial statements include the accounts of Blue Rhino
and its wholly owned subsidiaries Rhino Services, L.L.C., formed in March 1997
and CPD Associates, Inc., formed in March 1998 and USA Leasing, L.L.C. ("USA
Leasing") acquired in July 1999. All intercompany transactions and balances
have been eliminated in consolidation.
2. Summary of Significant Accounting Policies:
Revenue Recognition--Revenues from cylinder transactions and other products
are recognized at the time of shipment.
Cash and Cash Equivalents--The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
Accounts Receivable, Net--Accounts receivable, net include allowances for
doubtful accounts of approximately $430 and $134 at July 31, 1999 and 1998,
respectively.
Inventories--Inventories are valued at the lower of cost or market
determined on a first-in, first-out (FIFO) basis and represent cylinder valves
and adapters.
Cylinders Held Under Operating Lease Agreements, Net--Cylinders held under
operating lease agreements are stated at cost and depreciated on a straight-
line basis over their estimated useful lives of 25 years.
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 the straight-line method over the expected life of the product
ranging from three to five years. Capitalized software development costs and
related amortization for fiscal year ended July 31, 1999 were $629 and $33,
respectively.
Property, Plant and Equipment, Net--Property, plant and equipment are
stated at cost and include interest on funds borrowed to finance construction.
Depreciation and amortization are provided for on the straight-line method
over the estimated useful lives of the related assets. The estimated useful
lives are principally 30 years for buildings and leasehold improvements, ten
years for machinery and equipment, vehicles and cylinder displays and three to
five years for computer hardware and software. Equipment leased under capital
leases are amortized over their estimated useful lives.
In the event that facts and circumstances indicate that the cost of
property, plant and equipment, or other long-lived assets may not be
recoverable, the estimated future undiscounted cash flows is compared to the
asset's carrying value and if less, an impairment loss is recognized in an
amount by which the carrying amount exceeds its fair value. As a result of
changes the Company made to its business strategy, principally related to the
conversion to an independent distributor network, impairments to property,
plant and equipment recorded in 1998 and 1997 were $196 and $736, respectively
(Note 10).
26
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Intangibles, net--Excess cost over fair value of assets acquired (goodwill)
is being amortized using the straight-line method, principally over 30 years.
Noncompete agreements are being amortized using the straight-line method over
the life of the agreements ranging from three to five years. The carrying
value as well as the amortization period of intangible assets is periodically
reviewed by the Company, to determine whether the current events and
circumstances warrant adjustments to the carrying values and/or revised
estimates of useful lives. This valuation is performed using the expected
future undiscounted cash flows associated with the intangible assets compared
to the carrying value to determine if a writedown is required. To the extent
such projection indicates that the undiscounted cash flow is not expected to
be adequate to recover the carrying amounts, the assets are written down to
discounted cash flow.
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 fiscal years
ended July 31, 1999, 1998 and 1997 were $129, $114 and $36, respectively.
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 the deferred tax asset will not be realized.
Stock-Based Compensation--The Company accounts for its stock option plans
in accordance with the provisions of Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees," and complies with
the disclosure provisions of Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation." Accordingly,
since options were granted at fair value, compensation expense has not been
recognized for stock options granted to date under the 1994 Stock Incentive
Plan, the 1998 Stock Incentive Plan or the Director Stock Incentive Plan (Note
11).
Financial Instruments--Financial instruments consist of cash and cash
equivalents, accounts receivable, notes receivable, short-term debt and long-
term, variable-rate and fixed-rate debt. The Company estimates the fair value
of its long-term, fixed-rate debt using a discounted cash flow analysis based
on interest rates for similar types of debt currently available in the
marketplace. At July 31, 1999 and 1998 the carrying amounts of the Company's
financial instruments approximated their fair values.
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of temporary cash investments
and accounts receivable. The Company's cash and cash equivalents are placed in
large domestic financial institutions which limit the amount of credit
exposure. At times, such deposits may be in excess of the FDIC insurance
limit. The Company performs ongoing credit evaluations of its customers'
financial condition and, generally, requires no collateral from its customers.
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's three largest customers accounted for approximately 49%, 58% and
58%, of sales in the fiscal years ended July 31, 1999, 1998 and 1997 as
follows:
1999 1998 1997
---- ---- ----
Customer A................................................ 23% 26% 29%
Customer B................................................ 13 16 16
Customer C................................................ 13 16 13
--- --- ---
49% 58% 58%
=== === ===
Approximately 48% and 53% of accounts receivable at July 31, 1999 and 1998
were from these customers, respectively. If the financial condition and
operations of these customers deteriorate, the Company's operating results
could be adversely affected.
27
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 from these estimates.
Recent Accounting Pronouncements--There were no items of comprehensive
income for the fiscal years ended July 31, 1999, 1998 and 1997, as defined
under SFAS No. 130, "Reporting Comprehensive Income."
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which was
effective for fiscal years beginning after June 15, 1999. SFAS No. 133 was
amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of SFAS No. 133," which delayed the
effective date of implementation by one year. The Company is required to and
will adopt SFAS No. 133 in the first quarter of fiscal 2001. The Company has
not completed all of the analysis, but does not expect adoption to have a
significant effect on its consolidated results of operations or financial
position.
Reclassification--Certain prior year amounts have been reclassified to
conform to the presentation adopted in fiscal 1999.
3. Cylinders and Cylinder Displays:
The Company enters into operating lease agreements with its distributors
for cylinders and cylinder displays for use within each distributor's
territory. Under these leases, the distributor (lessee) is obligated for all
maintenance, installation, deinstallation, taxes and insurance related to the
cylinders and cylinder displays. The terms of the leases continue until either
party terminates upon 60 days written notice to the other party. The monthly
rental amounts are based on 1% of the original fair market value of the
cylinders and cylinder displays. As of July 31, 1999, approximately $27,300 of
cylinders and cylinder displays were under lease with accumulated depreciation
of approximately $2,300. Lease income for the fiscal years ended July 31,
1999, 1998 and 1997 was approximately $1,985, $448 and $177, respectively. As
of July 31, 1999, estimated future minimum rental payments to be received are
approximately $3,060 per year through the year 2004 (Note 13).
4. Property, Plant and Equipment, net:
Property, plant and equipment consists of the following at July 31:
1999 1998
------- -------
Land................................................... $ 20 $ 20
Building and leasehold improvements.................... 665 661
Cylinder displays, including panel graphics............ 13,565 7,688
Machinery and equipment................................ 1,445 1,235
Computer hardware and software......................... 1,573 654
Equipment leased under capital leases.................. 1,633 492
Construction in progress............................... 1,779 --
------- -------
20,680 10,750
Less accumulated depreciation and amortization
(including $227 and $144 as of July 31, 1999 and 1998,
respectively, for equipment under capital leases)..... (4,034) (2,245)
------- -------
$16,646 $ 8,505
======= =======
28
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During fiscal 1999, the Company purchased approximately 17 acres in
Hamptonville, North Carolina and began construction of an automated propane
bottling plant and cylinder refurbishing plant. As of July 31, 1999, capital
expenditures related to this facility aggregated approximately $1,779 which
includes capitalized interest of $92. As of July 31, 1999, the Company had
approximately $3,118 of purchase commitments for construction and equipment
related to this plant. The total anticipated investment is approximately
$6,000. Operation of this facility is estimated to commence in the third or
fourth quarter of fiscal 2000 (Note 17).
Depreciation and amortization expense for the fiscal years ended July 31,
1999, 1998 and 1997 was $1,995, $1,101 and $764, respectively.
5. Notes Receivable:
Notes receivable are due at various times through 2003 and are payable
monthly with interest ranging from 9.25% to 12.5% (Note 13).
The aggregate maturities of these notes receivable at July 31, 1999 are as
follows:
2000................................ $128
2001................................ 174
2002................................ 5
2003................................ 4
----
$311
====
Interest income related to these notes for the fiscal years ended July 31,
1999, 1998 and 1997 was approximately $48, $159 and $182, respectively.
6. Intangibles, net:
Intangibles consist of the following at July 31:
1999 1998
------ ------
Goodwill.................................................. $9,570 $3,518
Noncompete agreements..................................... 293 102
Accumulated amortization.................................. (443) (88)
------ ------
$9,420 $3,532
====== ======
During fiscal 1999, the Company completed a number of acquisitions (the
"Acquisitions") for approximately $8,167 in the aggregate 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.
The aggregate purchase price was paid approximately $7,488 in cash,
including $1,000 in borrowings under the New Bank Credit Facility (Note 8) and
$679 in seller financing. The Acquisitions have been accounted for under the
purchase method and, accordingly, the operating results from these
acquisitions have been included in the Company's consolidated financial
statements since the dates of acquisition.
29
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following unaudited pro forma summary presents the financial
information as if the acquisitions had occurred on August 1, 1998 and 1997 and
July 29, 1996, respectively. 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, 1998 and 1997 and July
29, 1996, respectively, nor is it indicative of future results.
1999 1998 1997
------- ------- -------
Total revenues................................. $58,320 $28,717 $17,611
======= ======= =======
Net income (loss).............................. $ 2,579 $(2,427) $(5,459)
======= ======= =======
Earnings (loss) per common share............... $ 0.34 $ (1.02) $ (3.66)
======= ======= =======
Amortization expense for the fiscal years ended July 31, 1999, 1998 and
1997 was $355, $68 and $14, respectively.
7. Stockholder Loans:
In January 1998, several stockholders collectively loaned the Company
$3,250 (the "1998 Stockholder Loans"). The 1998 Stockholder Loans were repaid
in full in May 1998, including accrued interest at 10.5% with approximately
$3,400 of the proceeds from the Company's initial public offering. The
stockholders also received warrants to purchase approximately .08 shares of
Common Stock for every $3.00 they loaned to the Company for a total of 81,913
shares of common stock (the "1998 Warrants"). The 1998 Warrants may be
exercised prior to December 31, 2008 at a price per share equal to $13.00.
8. Long-Term Debt Including Capital Lease Obligations:
Long-term debt consists of the following at July 31:
1999 1998
------- ----
Notes payable to bank....................................... $16,580 $--
Cylinder financing at prime rate plus 2%.................... 7,000 --
Capital lease obligations bearing interest at various rates
from 10.9% to 18.94%....................................... 1,136 372
Various equipment and vehicle notes and insurance premium
financing bearing interest at rates varying from 8% to 15%,
due in monthly installments through April 2001............. 134 174
------- ----
24,850 546
Less amounts due within one year............................ 739 286
------- ----
$24,111 $260
======= ====
The aggregate maturities of long-term debt and capital lease obligations at
July 31, 1999 are as follows:
Long-Term Capital Lease
Debt Obligations Total
--------- ------------- -------
2000...................................... $ 97 $ 742 $ 839
2001...................................... 16,617 480 17,097
2002...................................... 7,000 44 7,044
Less imputed interest..................... -- 130 130
------- ------ -------
$23,714 $1,136 $24,850
======= ====== =======
30
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In December 1998, the Company entered into a two year $12,000 credit
facility which includes a $7,000 revolving line of credit and a $5,000
acquisition facility with its bank (the "New Bank Credit Facility"). The New
Bank Credit Facility requires the Company to meet certain covenants, including
minimum net worth and cash flow requirements. In June 1999, the New Bank
Credit Facility was amended to provide approximately $7,390 of credit
availability under the existing $7,000 revolving line of credit and the $5,000
acquisition facility. This amended agreement provides up to $3,400 of working
capital financing, $2,900 of documentary letters of credit to support the
purchase of patio heaters and equipment for the propane bottling and cylinder
refurbishing plant and approximately $1,090 to finance acquisitions. The
Company has received a waiver from its bank for its non-compliance with the
net worth, debt coverage and cash flow coverage covenants as of and for the
fiscal quarter and year ended July 31, 1999. As of July 31, 1999, the Company
had $3,580 in outstanding borrowings. The loans under the New Bank Credit
Facility bear interest at a maximum rate of LIBOR plus 2.25%.
In December 1998, the Company through its wholly-owned subsidiary, USA
Leasing, also entered into a two year $13,000 credit facility with its bank to
provide cylinder lease financing to the Company's distributors. Upon the
repayment of $2,600 of this facility, the bank has agreed to release Billy D.
Prim, Andrew J. Filipowski, Craig J. Duchossois and Peer Pedersen, the former
members of USA Leasing, from their several $650 guarantees of such
indebtedness. The New Bank Credit Facility and this facility are
collateralized by a lien on substantially all of the Company's assets. As of
July 31, 1999, the Company had $13,000 outstanding borrowings. The loans under
this facility bear interest at a maximum rate of LIBOR plus 2.25%.
During fiscal year ended July 31, 1999, the Company classified $7,000
related to the acquisition of cylinders from its primary cylinder vendor as
long-term debt. The Company has both the intent and ability to refinance these
amounts on a long-term basis (Note 17).
In October 1995, the Company issued 12,575 units, each consisting of
approximately $1 principal amount (approximately $17,200 aggregate) of senior
discount notes due in October 2000 and warrants to purchase 39.764 shares of
common stock. The gross proceeds were approximately $12,575. The notes
accreted in value at an effective rate of 10.5% through May 1998 when they
were repaid with approximately $16,491 of the proceeds from the Company's
initial public offering. Each warrant entitled the holders to acquire one
share of common stock for $4.5896 per share (Note 11).
9. Commitments:
The Company leases certain office equipment under noncancelable operating
leases with original terms ranging from 36 to 51 months. Additionally, the
Company has a land lease with an original term of 5 years. This lease carries
3 renewal options for periods of 5 years each. Rent expense on these
facilities and equipment for the fiscal years ended July 31, 1999, 1998 and
1997 was $39, $21 and $44, respectively.
During fiscal 1999 and 1998, the Company entered into certain computer
hardware and software maintenance and support agreements. Fees under these
service agreements for fiscal years ended July 31, 1999 and 1998 were $353 and
$306, respectively.
In September 1996, the Company entered into a $3,000 operating lease
facility to finance cylinder displays. In May 1998, the Company repaid the
lease facility, aggregating approximately $2,119, with proceeds from the
Company's initial public offering. Rental expense under this lease for the
fiscal years ended July 31, 1998 and 1997 was approximately $485 and $152,
respectively.
31
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future minimum payments at July 31, 1999 under noncancelable operating
leases and service agreements with both affiliates (Note 13) and non-
affiliates with initial or remaining terms of one year or more are as follows:
2000............................................................... $ 454
2001............................................................... 437
2002............................................................... 285
2003............................................................... 31
------
$1,207
======
10. Nonrecurring Items and Special Charges:
During the fiscal year ended July 31, 1999, the Company incurred a charge
of $551 related to offering costs incurred in connection with an offering of
common stock which was terminated in February 1999 due to unfavorable market
conditions.
On February 12, 1998, the Company invested $635 in Bison Valve, L.L.C.
("Bison Valve") in the form of a convertible note receivable. The loan was
convertible into 65% of the membership units of Bison Valve, at $1 per unit,
at the option of the Company and accrued interest at 9.5%. Bison Valve was
formed to market, produce and sell a specialty valve to the Company's
distributors and third parties. The Company has accounted for its investment
in Bison Valve using the equity method of accounting to reflect the Company's
funding of certain losses incurred by this entity primarily related to
researching, developing, marketing and producing certain propane products. The
Company has recorded losses of $311 and $324 for the fiscal years ended July
31, 1999 and 1998, respectively, to reflect the operating results of the
investee, Bison Valve (Note 17).
During fiscal years ended July 31, 1997 and 1998, the Company made changes
to its business strategy, including the conversion to an independent
distributor network. As a result, the Company recorded certain nonrecurring
charges of $476 and $970 in fiscal 1998 and 1997, respectively.
11. Stockholders' Equity:
Common Stock Options--The Company has four active stock option plans (the
"Plans") and has reserved 1,846,947 shares of common stock for use and
distribution under terms of the Plans. Under the Plans, the Company may, at
its discretion, issue incentive or non-qualified stock options, stock
appreciation rights, restricted stock or deferred stock. 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.
The 1994 Stock Incentive Plan was adopted by the board of directors and
approved by the stockholders in December 1994 and has 146,947 shares of common
stock reserved for issuance upon the exercise of options granted thereunder.
As of July 31, 1999, options to purchase 146,947 shares of common stock at a
weighted average exercise price of $6.26 per share were outstanding under the
1994 Stock Incentive Plan. All options are vested and exercisable. As of July
31, 1999, 35,662 shares of common stock were issued upon the exercise of
options from the 1994 Stock Incentive Plan. These options expire ten years
from their date of grant. No additional options, stock appreciation rights,
restricted stock or deferred stock can be granted under the 1994 Stock
Incentive Plan.
The 1998 Stock Incentive Plan was adopted by the board of directors and
approved by the stockholders in May 1998 and has 1,200,000 shares of common
stock reserved for issuance upon the exercise of options granted thereunder.
As of July 31, 1999, options to purchase 520,309 shares of common stock at a
weighted average exercise price of $13.01 per share were outstanding under the
1998 Stock Incentive Plan. As of July 31, 1999,
32
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
options to purchase 53,060 shares of common stock were vested and exercisable
under the 1998 Stock Incentive Plan. Pursuant to the 1998 Stock Incentive
Plan, the Company may make grants of options to officers, employees,
consultants and advisors of the Company. These options vest ratably over five
years and expire ten years from their date of grant.
All non-employee directors are entitled to participate in the Non-Employee
Director Stock Option Plan (the "Director Option Plan"). The Director Option
Plan was adopted by the board of directors and approved by the stockholders in
November 1997, and became effective on May 18, 1998. The Company has reserved
100,000 shares of common stock for issuance under the Director Option Plan. As
of July 31, 1999, options to purchase 56,000 shares of common stock at a
weighted exercise price of $21.68 per share were outstanding under the
Director Option Plan. None of the options are vested or exercisable. The
Director Option Plan provides that an annual grant of an option to purchase
shares of common stock be made to each non-employee director with an exercise
price per share equal to the fair market value per share of the common stock
as of the grant date. The number of shares granted to each director each year
equal 1,000 shares for each quarterly board meeting such director attended
during the year unless the director fails to attend at least two quarterly
meetings. Failure to attend at least two meetings results in the grant being
forfeited. One third of these options will vest on each of the first three
anniversaries of the grant date and expire ten years from their date of grant.
In November 1997, the board of directors adopted and the stockholders
approved the Distributor Stock Option Plan (the "Distributor Option Plan")
which became effective on May 18, 1998. The Company has reserved 400,000
shares of common stock for issuance upon the exercise of options granted under
the Distributor Option Plan. As of July 31, 1999, the Company has granted
options to purchase 243,296 shares of common stock to Blue Rhino distributors
at a weighted average exercise price equal to $13.11 per share. Blue Rhino
distributors and their stockholders, partners, members, directors, general
partners, managers, officers, employees and consultants are eligible to
receive options under the Distributor Option Plan. As of July 31, 1999,
options to purchase 57,473 shares of common stock were vested and exercisable
under the 1998 Distributor Option Plan. options issued under the Distributor
Option Plan vest ratably over four years and expire ten years from their date
of grant. For the fiscal year ended July 31, 1999 and 1998, the Company
recognized compensation expense of approximately $272 and $50, respectively,
related to stock options outstanding under the Distributor Option Plan.
A summary of the status of the Company's Plans at July 31, 1999, July 31,
1998 and 1997 and changes during the periods then ended is presented in the
table below:
1999 1998 1997
----------------- ----------------- ----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- -------- -------- -------- ------- --------
Shares under option:
Outstanding, beginning
of year................ 698,796 $11.18 163,945 $ 5.94 72,060 $4.70
Granted............... 327,945 $14.59 535,830 $12.78 104,044 $6.69
Exercised............. 35,662 $14.89 -- -- -- --
Forfeited............. 24,527 $13.01 979 $ 6.15 12,159 $4.85
-------- -------- -------
Outstanding, end of
year................... 966,552 $12.52 698,796 $11.18 163,945 $5.94
======== ======== =======
Exercisable, end of
year................... 257,480 $ 9.15 182,609 $ 6.04 21,399 $4.67
======== ======== =======
Weighted average fair
value of options granted. $ 7.74 $ 4.25 $ 2.21
======== ======== =======
Options available for
grant, end of year....... 880,395 283,813 18,664
======== ======== =======
Options outstanding at July 31, 1999 have exercise prices between
approximately $4.59 and $24.25.
33
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company accounts for its stock option plans in accordance with the
provisions of APB No. 25, "Accounting for Stock Issued to Employees," and
complies with the disclosure provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation." Accordingly, since options were granted at fair
value, compensation expense has not been recognized for stock options granted
to date under the 1994 Stock Incentive Plan, the 1998 Stock Incentive Plan or
the Director Option Plan. Had compensation expense for all of the option plans
been determined for options granted since August 1, 1995 consistent with SFAS
No. 123, the Company's net income/(loss) and earnings/(loss) per share for the
fiscal years ended July 31, 1997, 1998 and 1999 would have decreased/increased
to the following pro forma amounts.
1999 1998 1997
------ ------- -------
Net income (loss):
As reported.................................. $2,067 $(2,476) $(5,584)
====== ======= =======
Pro forma.................................... $1,429 $(2,801) $(5,649)
====== ======= =======
Basic and diluted earnings (loss) per common
share:
As reported.................................. $ 0.27 $ (1.04) $ (3.74)
====== ======= =======
Pro forma.................................... $ 0.19 $ (1.15) $ (3.78)
====== ======= =======
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 of five years; expected
volatility ranging from 30% to 90%; expected dividends of $0 and a risk-free
interest rate ranging from 5.5% to 5.8%.
Warrants--During fiscal 1998, the Company issued 81,913 1998 Warrants to
stockholders in connection with loans made to the Company (Note 7). In fiscal
1997, the Company issued approximately 226,841 warrants in connection with the
cylinder display lease facility (Note 9) and the issuance of the common stock
(Note 13). During fiscal 1998, 938,789 shares of common stock were issued for
the exercise of all outstanding warrants, except for the 1998 Warrants, upon
consummation of the Company's initial public offering. See also Note 17.
12. Earnings (Loss) Per Share:
The basic and diluted earnings (loss) per share was determined as follows:
1999 1998 1997
------ ------- -------
Basic and diluted earnings (loss) per common
share:
Net income (loss)............................ $2,067 $(2,476) $(5,584)
Less: Redeemable preferred stock dividends... -- 596 687
------ ------- -------
Income (loss) applicable to common
stockholders.................................. $2,067 $(3,072) $(6,271)
====== ======= =======
Weighted average common shares used in
computing the
earnings (loss) per common share (in
thousands):
Basic........................................ 7,645 2,945 1,678
Effect of dilution........................... 142 -- --
------ ------- -------
Diluted...................................... 7,787 2,945 1,678
====== ======= =======
Basic and diluted earnings (loss) per common
share......................................... $ 0.27 $ (1.04) $ (3.74)
====== ======= =======
Options to purchase common stock and the assumed exercise of warrants
during the fiscal years ended 1998 and 1997 have been excluded from the
computation of diluted loss per common share as they were anti-dilutive.
34
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Related Party Transactions:
As of July 31, 1999, Platinum Propane Holding, L.L.C. ("PPH") and Ark
Holdings ("Ark") were affiliates and together operated the Company's eight
affiliated distributors (Note 17). PPH began operations as a distributor
during fiscal 1996, while Ark began operations as a distributor during fiscal
1998. The following represents related party balances with these affiliates
outstanding at July 31, 1999, 1998 and 1997, and transactions for the fiscal
years then ended, respectively:
PPH Ark
--------------------- -----------
1999 1998 1997 1999 1998
------- ------ ------ ------ ----
Accounts receivable.................... $ 308 $ -- $ -- $ 69 $--
Product sales.......................... 308 -- -- 69 --
Notes receivable....................... 133 1,072 1,191 -- --
Accounts payable....................... 945 903 648 213 196
Cost of sales.......................... 11,340 7,889 5,319 2,071 530
Interest income........................ 64 117 142 -- --
Lease income........................... 863 211 160 121 9
Cylinder purchases..................... 6,470 1,397 -- 1,337 118
Issuance of common stock............... -- -- 1,000 -- --
Certain operational and financial management services were provided to the
Company by an affiliate through common ownership. Fees for these services for
the fiscal year ended July 31, 1997 were approximately $154.
The Company leases a facility from an affiliate under a noncancelable
operating lease which expires in December 2001. Rent expense under this lease
was $76, $82 and $76 for the fiscal years ended July 31, 1999, 1998 and 1997,
respectively.
The Company leases a facility and certain equipment to PPH. Lease income
related to these leases for the fiscal years ended July 31, 1999, 1998 and
1997 was $68, $55 and $56, respectively.
During fiscal years ending July 31, 1999 and 1998, the Company paid
professional fees to Pedersen & Houpt, a Professional Corporation ("P&H") in
the amount of $344 and $401, respectively. A principal of P&H is also a
director of the Company.
14. Income Taxes:
The provision for income taxes for the fiscal year ended July 31, 1999,
consisted of $30 of current tax expense. Due to the Company's operating losses
in the prior years, there has been no current or deferred tax expense for the
fiscal years ended July 31, 1998 and 1997.
A reconciliation of the differences between the statutory federal income
tax rate of 34% and the effective tax rate for the fiscal years ended July 31,
1999, 1998 and 1997 is as follows:
1999 1998 1997
----- ----- -----
Federal statutory tax rate......................... 34.0% (34.0)% (34.0)%
Change in valuation allowance.................... (35.5) 33.1 33.9
Permanent differences and other.................. 2.0 0.9 0.1
State taxes net of federal benefit............... 0.9 -- --
----- ----- -----
Effective tax rate................................. 1.4% -- % -- %
===== ===== =====
35
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liability are as follows at:
1999 1998 1997
------- ------- -------
Assets:
Net operating loss carry forward............. $ 7,131 $ 7,745 $ 6,981
Allowance for doubtful accounts.............. 438 242 60
Inventory capitalization..................... -- 105 4
Organization costs........................... -- 12 24
Distributor option plan...................... 125 -- --
Other........................................ 82 23 79
------- ------- -------
Total gross deferred tax assets.............. 7,776 8,127 7,148
Valuation allowance.......................... (7,145) (8,059) (7,148)
------- ------- -------
Net deferred tax assets........................ $ 631 $ 68 $ --
======= ======= =======
Liability:
Depreciation and amortization................ $ 631 $ 68 $ --
======= ======= =======
At July 31, 1999, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $18,300 which are available to
offset future federal taxable income, if any, in varying amounts from 2000
through 2013.
15. Defined Contribution Plan:
The Company maintains a defined contribution employee benefit plan which
covers all employees over 21 years of age who have completed a minimum of six
months of employment. The plan allows for employees' deferrals, which,
effective in July 1999, are matched by the Company up to a specific amount
under the provisions of the plan. Company contributions during the fiscal year
ended July 31, 1999 were approximately $3.
16. Supplemental Information to Consolidated Statement of Cash Flows:
The Company had certain non-cash investing and financing activities during
the fiscal years ended July 31, 1999, 1998 and 1997 as follows:
1999 1998 1997
------ ---- ----
Capital lease obligations............................... $1,293 $306 $243
Insurance premium financing............................. 38 164 --
Assets sold in exchange for notes receivable............ 146 224 310
Notes receivable exchanged for the purchase of assets... 929 -- --
Cylinders acquired through vendor financing............. 7,000 -- --
Accreted preferred dividends............................ -- 596 687
Unpaid costs associated with initial public offering.... -- 373 --
Assets under capital leases transferred to distributors. -- -- 351
Capital lease obligations transferred to distributors... -- -- 344
Assets reclassified as notes receivable................. -- -- 70
During the fiscal years ended July 31, 1999 and 1998, the Company acquired
certain assets from existing cylinder exchange providers under various
agreements. These acquisitions can be summarized as follows:
1999 1998
------ ------
Fair value of assets acquired............................. $8,167 $4,708
Seller financing.......................................... (679) (318)
Common stock issued....................................... -- (750)
------ ------
Cash paid for acquisitions................................ $7,488 $3,640
====== ======
Interest paid during fiscal years ended July 31, 1999, 1998 and 1997 was
$778, $342 and $176, respectively.
36
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
17. Subsequent Events:
Affiliated Distributors
In August 1999, the Company's Chairman and Chief Executive Officer, Billy
D. Prim, and Vice Chairman, Andrew J. Filipowski sold all of their interests
in Blue Rhino distributors to an existing investor in PPH. This investor is
not affiliated with Blue Rhino Corporation. Messrs. Prim and Filipowski
together owned approximately 42% of PPH, a holding company for five Blue Rhino
distributors. Sales from PPH's distributors represented approximately 32% of
Blue Rhino's net sales for the fiscal year ended July 31, 1999. In addition,
Messrs. Prim and Filipowski together owned approximately 47% of Ark, a holding
company for three Blue Rhino distributors. Sales from Ark distributors
represented approximately 6% of Blue Rhino's net sales for the fiscal year
ended July 31, 1999. Both Messrs. Prim and Filipowski continue as directors
for PPH and Ark.
Convertible Note and Warrant Private Placement
On September 22, 1999, the Company entered into an agreement with two
institutional investors (the "Investors") to issue $7,000 of 5% Convertible
Notes (the "Convertible Notes") and 332,203 warrants to purchase common stock
in a private placement (the "Convertible Note Offering"). The Convertible
Notes have a two year term and bear interest at 5% per annum, payable in full
in cash or in shares of common stock. The Company may require the holders of
the Convertible Notes to convert the principal and interest on the Convertible
Notes into common stock over a company-chosen conversion period, which may be
from 20 to 60 days and must be in amounts of at least $300 subject to certain
conditions. Upon the occurrence of certain events, the holder may convert the
principal and interest on the Convertible Notes into common stock. The
Convertible Notes convert at the lesser of a fixed conversion price or 95% of
the weighted average price of the common stock at the time of conversion. The
warrants are exercisable for five years at an exercise price of $8.48 per
share. In the future, the Company may also require the Investors to purchase,
in up to two additional transactions, Convertible Notes in an aggregate amount
equal to at least $1,000 but not more than $4,900 if certain conditions are
met. The Convertible Notes are subordinate, subject to certain exceptions, to
up to $25,000 of the Company's indebtedness to its bank.
Common Stock and Warrant Private Placement
On September 7, 1999, the Company completed a $7,200 private placement of
981,119 units with each consisting of one share of the Company's common stock,
and one warrant to purchase 0.35 shares of common stock. The offering was only
made to "accredited investors", as defined in Rule 501(a) of Regulation D. The
investors included the following officers and directors of the Company:
Messrs. Billy D. Prim, Craig J. Duchossois, Andrew J. Filipowski, Mark
Castaneda, Steven D. Devick, Richard A. Brenner and Jerald D. Shadley, who in
the aggregate purchased 438,747 of the 981,119 units sold. The price per unit
was $7.375, which was the closing price of the Company's common stock on
September 3, 1999, the final trading day prior to the consummation of the
offering. The warrants may be exercised at a price equal to $8.48 per share at
any time prior to September 7, 2004. The Company is required to file a
registration statement by November 5, 1999 to register the resale of the
shares issued in the offering and any shares issued upon the exercise of the
warrants.
The Company used the proceeds of the two September 1999 offerings to pay
certain expenses associated with the offerings, repay the Company's primary
cylinder vendor who financed the purchase of cylinders during fiscal 1999 (see
Note 8), repay other indebtedness and acquire assets. The balance will be used
to acquire additional assets and for working capital and general corporate
purposes.
37
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Bison Valve Acquisition
On September 17, 1999, the Company contracted for the acquisition of
certain assets related to the OPD developed, manufactured and marketed by
Bison Valve. The acquired assets included OPD molds, dies, and all
intellectual property relating to the OPD developed by Bison Valve and its
manager, Michael A. Waters, which includes two patent applications on the OPD.
The purchase price included $1,123 in cash, the offset of approximately $732
in principal and accrued interest due to the Company under a convertible note
(Note 10), $50 in assumed liabilities and a ten year warrant to purchase
100,000 shares of the Company's Common Stock at an exercise price equal to
$7.40 per share. Also included in the purchase agreement is a provision to pay
Mr. Waters between 2 1/2% and 12% of future sales of OPDs based on gross
margins for the life of the patents This acquisition will be accounted for by
the purchase method of accounting.
Joint Venture
On October 21, 1999, the Company and Manchester Tank and Equipment Company
("Manchester") entered into a letter of intent to establish a joint venture to
operate and manage the automated propane bottling and cylinder refurbishing
plant currently under construction in North Carolina (Note 4). Blue Rhino and
Manchester will share in the cost of developing and constructing the plant.
Cylinder Exchange Acquisition
On October 25, 1999, the Company agreed to acquire a cylinder exchange
provider with approximately 700 locations in Tennessee, South Carolina and
Georgia for approximately $1,300 in the aggregate related to assets including
cylinders, cylinder displays and the right, title and interest in and to
seller's retail propane cylinder exchange accounts and locations. This
acquisition will be accounted for by the purchase method of accounting.
18. Quarterly Financial Data (unaudited):
Fiscal 1999 Quarter Ended
----------------------------------------
April July
October 31, January 31, 30, 31,
----------- ----------- ------- -------
(in thousands, except per share data)
Total revenues........................ $9,434 $9,228 $11,890 $23,268
Total operating costs and expenses.... 9,231 9,033 11,428 20,380
------ ------ ------- -------
Income from operations................ $ 203 $ 195 $ 462 $ 2,888
====== ====== ======= =======
Net income (loss)..................... $ (70) $ 68 $ (357) $ 2,426
====== ====== ======= =======
Per share data:
Basic earnings (loss) per common
share.............................. $(0.01) $ 0.01 $ (0.05) $ 0.32
====== ====== ======= =======
Diluted earnings (loss) per common
share(1)........................... $(0.01) $ 0.01 $ (0.05) $ 0.31
====== ====== ======= =======
Fiscal 1998 Quarter Ended
----------------------------------------
April July
October 31, January 31, 30, 31,
----------- ----------- ------- -------
(in thousands, except per share data)
Total revenues........................ $ 4,256 $ 4,301 $ 5,844 $13,537
Total operating costs and expenses.... 5,213 5,081 6,389 11,934
------- ------- ------- -------
Income (loss) from operations......... $ (957) $ (780) $ (545) $ 1,603
======= ======= ======= =======
Net income (loss)..................... $(1,340) $(1,223) $(1,067) $ 1,154
======= ======= ======= =======
Per share data:
Basic earnings (loss) per common
share.............................. $ (0.81) $ (0.83) $ (0.72) $ 0.18
======= ======= ======= =======
Diluted earnings (loss) per common
share.............................. $ (0.81) $ (0.83) $ (0.72) $ 0.17
======= ======= ======= =======
- --------
(1) Quarterly amounts do not add to annual amounts due to the effect of
rounding on a quarterly basis.
38
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
The total revenues for fiscal quarters ended January 31, 1999, October 31,
1998, July 31, 1998, April 30, 1998, January 31, 1998 and October 31, 1997
have been adjusted to include lease income previously reported in total
operating costs and expenses of $313, $212, $173, $150, $127, and $117,
respectively to be consistent with the presentation adopted in the fiscal
quarters ended July 31, 1999 and April 30, 1999.
Additionally, total operating costs and expenses and income from operations
for the fiscal quarters ended April 30, 1999 and January 31, 1999 were
adjusted to reflect the allocation of USA Leasing's interest and depreciation
and amortization and other expenses previously reported as a component of cost
of sales to be consistent with the presentation adopted in the fiscal quarter
and year ended July 31, 1999. The amounts reclassified are as follows:
January 31, April 30,
1999 1999
----------- ---------
Interest............................................ $173 $225
Depreciation and amortization....................... 93 132
Other............................................... 2 7
39
Item 9--Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
The information concerning changes in and disagreements with accountants on
accounting and financial disclosure contained in the section titled Independent
Public Accountants in the definitive proxy statement for the annual meeting of
stockholders which will be filed within 120 days after the fiscal year end
covered by this report are incorporated by reference.
40
PART III
Item 10--Executive Officers and Directors
Our executive officers and directors and their ages as of the date hereof
are as follows:
Name Age Position
---- --- --------
Billy D. Prim (1)....... 44 Chairman of the Board, President
and Chief Executive Officer
Andrew J. Filipowski 48 Vice Chairman
(1)....................
Mark Castaneda.......... 35 Chief Financial Officer, Secretary and Director
Kay B. Martin........... 46 Vice President, Chief Information Officer
Richard E. Belmont...... 39 Vice President, Marketing
Joseph T. Culp.......... 42 Vice President, Partner Development
Jerald D. Shadley....... 51 Vice President, Sales
Thomas W. Ferrell....... 47 Vice President, Products
Richard A. Brenner 36 Director
(2)(3).................
Steven D. Devick (2)(3). 48 Director
Craig J. Duchossois (1). 54 Director
John H. Muehlstein (3).. 44 Director
- --------
(1) Member of the Executive Committee.
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.
Billy D. Prim co-founded Blue Rhino Corporation in March 1994 and has
served as its Chief Executive Officer and Chairman since its incorporation and
as its President since January 1996. Mr. Prim also serves as president and
chief executive officer and is a 51% stockholder of American Oil and Gas,
Inc., a North Carolina based holding company. Until April 1995, American Oil
and Gas, Inc. was a distributor of propane gas, home heating oil, diesel fuel
and kerosene. Mr. Prim is a director of several privately-held companies,
including PPH and Ark, which represent eight of our distributors in which he
previously had an ownership interest. He is also a director of Southern
Community Bank & Trust and the National Propane Gas Association.
Andrew J. Filipowski co-founded Blue Rhino Corporation in March 1994 and
has served as its Vice Chairman since May 1994. Mr. Filipowski is the founder
and chairman of divine interVentures, Inc. (formerly Platinum Venture
Partners, Inc.), a venture capital firm with interests in information
technology, software and software services and media related enterprises. Mr.
Filipowski was a co-founder of Platinum technology, Inc. and served as its
chairman of the board, president and chief executive officer from its
formation in April 1987 until its sale to Computer Associates, Inc. in March
1999. Mr. Filipowski is also a director of Platinum Entertainment, Inc.,
System Software Associates, Inc. and several privately-held companies
including PPH and Ark, which represent eight of our distributors in which he
previously had an ownership interest.
Mark Castaneda has served as our Chief Financial Officer since October
1997, our Secretary since February 1998 and one of our directors since August
1998. Prior to joining us, Mr. Castaneda served as the vice president of
finance and the chief financial officer for All Star Gas Corporation from July
1995 until October 1997, served as a director of planning and controller of
Skelgas Propane, Inc. from May 1991 to July 1995, and as a certified public
accountant with Deloitte & Touche LLP from June 1986 to May 1991.
41
Kay B. Martin has served as our Vice President and Chief Information
Officer since March 1997. Prior to joining us, Ms. Martin served as the
director of information resources for R.J. Reynolds Tobacco Company from March
1988 to March 1997.
Richard E. Belmont has served as our Vice President of Marketing since
August 1998 and served as our Vice President of Sales and Marketing from March
1995 to August 1998. Prior to joining us, Mr. Belmont was a product planning
manager and a product manager with the Char-Broil Division of W.C. Bradley Co.
from January 1991 to March 1995. Mr. Belmont is currently a director of the
Barbecue Industry Association of America.
Joseph T. Culp has served as our Vice President of Partner Development
since November 1995. Prior to joining us, Mr. Culp was the general manager of
Skelgas Propane, Inc. from February 1994 to November 1995, and a regional
manager for Suburban Propane Partners, L.P. from January 1981 to February
1994.
Jerald D. Shadley has served as our Vice President of Sales since August
1998. Prior to joining us, Mr. Shadley served as vice president of sales and
marketing for McCulloch Corp. from January 1996 to May 1998. Previously, Mr.
Shadley was executive vice president, sales and marketing from July 1994 to
January 1996 and vice president, sales and marketing from April 1991 to July
1994 for Homelite, Inc.
Thomas W. Ferrell has served as our Vice President of Products since
November 1998. Mr. Ferrell previously served as manager of our Rhino Services
subsidiary from March 1997 to November 1998. Prior to joining us, Mr. Ferrell
served as president of Total Operations Management, Inc. from November 1993 to
March 1997.
Richard A. Brenner has served as a director since August 1998. Mr. Brenner
has served as president of Amarr Company since July 1993 and has served on the
Board of Advisors of Wachovia Bank since 1993.
Steven D. Devick has served as one of our directors since May 1994. Mr.
Devick is a co-founder of Platinum Entertainment, Inc. and has served as its
chairman of the board and chief executive officer since January 1992 and as
its president since January 1996. Mr. Devick is an officer and director of
several privately-held companies.
Craig J. Duchossois has served as one of our directors since May 1994. Mr.
Duchossois has been the chief executive officer of Duchossois Industries, Inc.
since 1995 and served as its president from 1986 to 1995. Mr. Duchossois has
also served as a director of Platinum Entertainment, Inc., and currently
serves as a director of Bissell, Inc. and LaSalle Bank, National Association
as well as several privately-held companies.
John H. Muehlstein has served as one of our directors since September 1995.
Since 1986, Mr. Muehlstein has been a principal of the law firm of Pedersen &
Houpt, a Professional Corporation, our legal counsel. Mr. Muehlstein also
serves as a director of Einstein/Noah Bagel Corp., SpinCycle, Inc. and several
privately-held companies.
Section 16(a) Beneficial Ownership Reporting Compliance
The information concerning Section 16(a) beneficial ownership reporting
compliance contained in the section titled Directors and Executive Officers in
the definitive proxy statement for the annual meeting of stockholders which
will be filed within 120 days after the fiscal year end covered by this report
are incorporated herein by reference.
Item 11--Executive Compensation
The information concerning the compensation of our executive officers and
directors, contained in the sections titled Director Compensation and
Executive Compensation in our definitive proxy statement for the annual
meeting of stockholders which will be filed within 120 days after the fiscal
year end covered by this report are incorporated herein by reference.
42
Item 12--Security Ownership of Certain Beneficial Owners and Management
The information concerning our principal stockholders, contained in the
section titled Common Stock Ownership of Directors, Executive Officers and
Certain Beneficial Owners in our definitive proxy statement for the annual
meeting of stockholders which will be filed within 120 days after the fiscal
year end covered by this report are incorporated herein by reference.
Item 13--Certain Relationships and Related Transactions
The information concerning certain transactions to be disclosed pursuant to
Rule 404, contained in the section titled Certain Transactions in our
definitive proxy statement for the annual meeting of stockholders which will
be filed within 120 days after the fiscal year end covered by this report are
incorporated herein by reference.
PART IV
Item 14--Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements of the Company are included in
Part II, Item 8:
Reports of Independent Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Schedule II-Valuation and Qualifying Accounts
(3) Exhibits
See the Exhibit Index following the Signature Page, which is
incorporated herein by reference.
(b) Reports on Form 8-K
Current Report on Form 8-K dated May 3, 1999, Item 4 to Report a Change
in Certifying Accountants.
43
Schedule II
Blue Rhino Corporation
Valuation and Qualifying Accounts
Fiscal Years Ended July 31, 1999, 1998 and 1997
(in thousands)
Column A Column B Column C Column D Column E
-------- ---------- ---------- ---------- --------
Balance at Charged to Balance
Beginning Costs and End of
Description of Period Expenses Deductions Period
----------- ---------- ---------- ---------- --------
Year ended July 31, 1997
Allowance for doubtful accounts...... $ 82 $ 72 $-- $154
Year ended July 31, 1998
Allowance for doubtful accounts...... 154 -- 20 134
Year ended July 31, 1999
Allowance for doubtful accounts...... 134 296 -- 430
44
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Blue Rhino Corporation
/s/ Billy D. Prim
Date: October 28, 1999 By: _________________________________
Billy D. Prim
Chairman of the Board, President
and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated.
Signature Title Date
--------- ----- ----
/s/ Billy D. Prim Chairman of the Board, October 28, 1999
____________________________________ President and Chief
Billy D. Prim Executive Officer
(Principal Executive
Officer)
/s/ Mark Castaneda Secretary, Chief Financial October 28, 1999
____________________________________ Officer and Director
Mark Castaneda (Principal Financial and
Accounting Officer)
/s/ Andrew J. Filipowski Vice Chairman of the Board October 28, 1999
____________________________________
Andrew J. Filipowski
Director October 28, 1999
____________________________________
Craig J. Duchossois
/s/ Steven D. Devick Director October 28, 1999
____________________________________
Steven D. Devick
/s/ John H. Muehlstein Director October 28, 1999
____________________________________
John H. Muehlstein
/s/ Richard A. Brenner Director October 28, 1999
____________________________________
Richard A. Brenner
45
EXHIBITS
Exhibit
Number Description of Exhibit
------- ----------------------
3.1 Second Amended and Restated Certificate of Incorporation of
the Company, incorporated by reference to Exhibit 3.1 to the
Company's Report on Form 10-Q dated July 2, 1998.
3.2 Amended and Restated Bylaws of the Company, incorporated by
reference to Exhibit 3.2 to the Company's Registration
Statement on Form S-1 dated May 18, 1998.
4.1 Form of Certificate of Common Stock of the Company,
incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-1 dated May 18, 1998.
4.2 Registration Rights Agreement among the Company and the
purchasers of Common Stock and Warrants dated September 7,
1999 incorporated by reference to Exhibit 4.1 to the Company's
Current Report on Form 8-K dated September 23, 1999.
4.3 Registration Rights Agreement among the Company and the Buyers
of its Convertible Notes dated September 20, 1999 incorporated
by reference to Exhibit 4.2 to the Company's Current Report on
Form 8-K dated September 23, 1999.
4.4 Amendment to Amended and Restated Registration Rights
Agreement among the Company and certain holders of its common
stock dated September 7, 1999 incorporated by reference to
Exhibit 4.4 to the Company's Current Report on Form 8-K dated
September 23, 1999.
4.5 Form of Warrant to Purchase Common Stock of the Company issued
to purchasers of the Company's Common Stock in its private
offering dated September 7, 1999 incorporated by reference to
Exhibit 4.4 to the Company's Current Report on Form 8-K dated
September 23, 1999.
4.6 Form of Warrant to Purchase Common Stock of the Company issued
to purchasers of the Company's Convertible Notes on September
20, 1999 incorporated by reference to Exhibit 4.5 to the
Company's Current Report on Form 8-K dated September 23, 1999.
4.7 Form of Warrant issued to Michael A. Waters dated September
17, 1999 incorporated by reference to Exhibit 4.6 to the
Company's Current Report on Form 8-K dated September 23, 1999.
10.1(a) Loan Agreement, dated as of December 31, 1998, between the
Company and NationsBank, N.A. incorporated by reference to
Exhibit 10.1(a) to Amendment No. 1 to the Company's
Registration Statement on Form S-1 dated January 15, 1999.
10.1(b) Security Agreement, dated as of December 31, 1998 between the
Company and NationsBank, N.A. incorporated by reference to
Exhibit 10.1(b) to Amendment No. 1 to the Company's
Registration Statement on Form S-1 dated January 15, 1999.
10.1(c) Promissory Note dated December 31, 1998 made by the Company in
favor of NationsBank, N.A. incorporated by reference to
Exhibit 10.1(c) to Amendment No. 1 to the Company's
Registration Statement on Form S-1 dated January 15, 1999.
10.1(d) Promissory Note dated December 31, 1998 made by the Company in
favor of NationsBank, N.A. incorporated by reference to
Exhibit 10.1(d) to Amendment No. 1 to the Company's
Registration Statement on Form S-1 dated January 15, 1999.
10.1(e) Amendment to Loan Agreement dated June 14, 1999, between the
Company and NationsBank, N.A. incorporated by reference to
Exhibit 10.1(e) to Amendment No. 1 to the Company's
Registration Statement on Form S-1 dated July 21, 1999.
10.2 Note Purchase Agreement, dated as of January 1, 1998, among
the Company and Craig J. Duchossois, Andrew Filipowski, James
Liautaud and Lennard Carlson, incorporated by reference to
Exhibit 10.2 to the Company's Registration Statement on Form
S-1 dated May 18, 1998.
46
Exhibit
Number Description of Exhibit
------- ----------------------
10.4(a) Asset Purchase Agreement, dated as of December 9, 1997,
between the Company and Bison Propane Bottle Exchange, LLC,
incorporated by reference to Exhibit 10.4(a) to the Company's
Registration Statement on Form S-1 dated May 18, 1998.
10.4(b) First Amendment to the Asset Purchase Agreement, dated as of
December 10, 1997, between the Company and Bison Propane
Bottle Exchange, LLC, incorporated by reference to Exhibit
10.4(b) to the Company's Registration Statement on Form S-1
dated May 18, 1998.
10.5 Multi-Draw Convertible Secured Promissory Note, dated as of
February 12, 1998, by Bison Valve, L.L.C. to the Company,
incorporated by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-1 dated May 18, 1998.
10.6 Collateral Assignment of License Agreement, dated as of
February 12, 1998, by Bison Valve, L.L.C. to the Company,
incorporated by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-1 dated May 18, 1998.
10.7(a) Form of Distribution Agreement of the Company and Its
Distributors, incorporated by reference to Exhibit 10.7(a) to
the Company's Registration Statement on Form S-1 dated May 18,
1998.
10.7(b) Form of Sublease of Personal Property between the Company and
Its Distributors, incorporated by reference to Exhibit 10.7(b)
to the Company's Registration Statement on Form S-1 dated May
18, 1998.
10.8(a) Form of Security Agreement to Secure the Sale of Cylinders
between the Company and Its Distributors, incorporated by
reference to Exhibit 10.8(a) to the Company's Registration
Statement on Form S-1 dated May 18, 1998.
10.8(b) Form of Promissory Note Evidencing the Sale of Cylinders
between the Company and Its Distributors, incorporated by
reference to Exhibit 10.8(b) to the Company's Registration
Statement on Form S-1 dated May 18, 1998.
10.9 Amended and Restated Stock Option Plan for Non-employee
Directors, incorporated by reference to Exhibit 10.9 to the
Company's Registration Statement on Form S-1 dated January 5,
1998.
10.10 Distributor Stock Option Plan of the Company, incorporated by
reference to Exhibit 10.13 to the Company's Registration
Statement on Form S-1 dated May 18, 1998.
10.11 1994 Stock Incentive Plan of the Company, incorporated by
reference to Exhibit 10.14 to the Company's Registration
Statement on Form S-1 dated May 18, 1998.
10.12 Amended and Restated Registration Rights Agreement, dated as
of March 1, 1997, among the Company, Forsythe/Lunn Technology
Partners, L.L.C., Platinum Propane Holding, L.L.C., the
Purchasers of Units pursuant to the Unit Purchase Agreement
dated October 11, 1995 and the Purchasers of the Company's
Series A Convertible Participating Preferred Stock,
incorporated by reference to Exhibit 10.15 to the Company's
Registration Statement on Form S-1 dated May 18, 1998.
10.13 1998 Stock Incentive Plan of the Company, incorporated by
reference to Exhibit 10.18 to the Company's Registration
Statement on Form S-1 dated May 18, 1998.
10.14 Real Estate Lease between the Company and Rhino Real Estate,
L.L.C. dated as of January 1, 1999, incorporated by reference
to Exhibit 10.14 to the Company's Registration Statement on
Form S-1 dated January 5, 1998.
10.15(a) Master Lease dated as of February 1, 1996 between the Company
and Nelco, Ltd., Incorporated by reference to Exhibit 10.20(a)
to the Company's Registration Statement as Form S-1 dated May
18, 1998.
47
Exhibit
Number Description of Exhibit
------- ----------------------
10.15(b) Lease Agreement dated August 11, 1996 between the Company and
Leasing Innovations, Incorporated, incorporated by reference
to Exhibit 10.15(b) to Amendment No. 1 to the Company's
Registration Statement as Form S-1 dated January 15, 1999.
10.15(c) Lease Agreement dated June 26, 1997 between the Company and
Green Tree Vendor Services Corporation, incorporated by
reference to Exhibit 10.20(c) to the Company's Registration
Statement on Form S-1 dated May 18, 1998.
10.16 Services Agreement dated June 1, 1997 between the Company and
Information Management Systems Services incorporated by
reference to Exhibit 10.16 to the Company's Annual Report on
Form 10-K dated October 29, 1998.
10.17(a) Limited Guarantee dated December 31, 1998 made by the Company
in favor of NationsBank, N.A. incorporated by reference to the
Company's Amendment No. 1 to Registration Statement on Form
S-1 dated January 15, 1999.
10.17(b) Subordinated Security Agreement dated December 31, 1998
between the Company and USA Leasing, L.L.C. incorporated by
reference to Amendment No. 1 to the Company's Registration
Statement on Form S-1 dated January 15, 1999.
10.17(c) Subordination Agreement dated December 31, 1998 among the
Company, USA Leasing, L.L.C. and NationsBank, N.A.
incorporated by reference to Amendment No. 1 to the Company's
Registration Statement on Form S-1 dated January 15, 1999.
10.18(a) Securities Purchase Agreement among the Company and Promethean
Investment Group, L.L.C., dated September 20, 1999
incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K dated September 23, 1999.
10.18(b) Form of Convertible Note issued to purchasers of the Company's
Convertible Notes on September 20, 1999 incorporated by
reference to Exhibit 10.2 to the Company's Current Report on
Form 8-K dated September 23, 1999.
10.19 Asset Purchase Agreement among the Company, Bison Valve,
L.L.C. and Michael A. Waters dated September 17, 1999
incorporated by reference to Exhibit 10.3 to the Company's
Current Report on Form 8-K dated September 23, 1999.
10.20 Employment Agreement between the Company and Billy D. Prim
dated May 31, 1999 effective as of January 1, 1999.
21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP
23.2 Consent of PricewaterhouseCoopers LLP
27.1 Financial Data Schedule
48