<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 30, 1998
333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
REGISTRATION STATEMENT
ON FORM S-1
UNDER
THE SECURITIES ACT OF 1933
----------------
BLUE RHINO CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE
(STATE OR OTHER JURISDICTION
OF INCORPORATION OR ORGANIZATION)
5984
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
56-1870472
(I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
BILLY D. PRIM
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
104 CAMBRIDGE PLAZA DRIVE
WINSTON-SALEM, NORTH CAROLINA 27104
TELEPHONE (336) 659-6900
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
SUSAN M. HERMANN
PEDERSEN & HOUPT, P.C.
161 N. CLARK STREET, SUITE 3100
CHICAGO, ILLINOIS 60601
TELEPHONE (312) 641-6888
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [_]
If the Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE FEE
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$0.001 per Share...... 1,000,000 Shares(2) $11.6875 $11,687,500 $3,447.81
- ----------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
(1) Calculated in accordance with Rule 457(c) and based upon the average of
the high and low bid prices for Blue Rhino Corporation Common Stock on The
Nasdaq Stock Market on September 25, 1998 as reported in The Wall Street
Journal.
(2) Such number of shares are also registered hereunder for resale, with the
consent of the registrant, by persons who receive shares covered by this
Registration Statement and who may wish to sell such shares under
circumstances requiring or making desirable use of the Prospectus
contained herein.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED UNTIL THE REGISTRATION STATEMENT IS DECLARED +
+EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE +
+SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION DATED SEPTEMBER 30, 1998
PROSPECTUS
-----------
1,000,000 SHARES
BLUE RHINO CORPORATION
COMMON STOCK
The 1,000,000 shares of Common Stock covered by this Prospectus may be
offered and issued from time to time by the Company in connection with
acquisitions of other businesses, real or personal properties, or securities in
business combination transactions in accordance with Rule 415(a)(1)(viii) of
Regulation C under the Securities Act of 1933, as amended (the "Securities
Act"), or otherwise under Rule 415. This Prospectus may also be used, with the
Company's prior consent, by persons who have received or will receive shares of
Common Stock in connection with acquisitions and who wish to offer and sell
such shares under circumstances requiring or making desirable its use. See
"Securities Covered by this Prospectus" and see the inside back cover page
hereof for the identity of such persons, if any.
The Common Stock is traded on The Nasdaq Stock Market under the symbol
"RINO". On September 25, 1998, the closing sale price of the Common Stock, as
reported in The Wall Street Journal was $11.50 per share. See "Price Range of
Common Stock."
-----------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 4.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
, 1998
<PAGE>
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports, registration statements, proxy
statements and other information filed by the Company 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 Company has filed with the Commission a Registration Statement on Form S-
1 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits and schedules filed therewith. While
the material provisions of each document filed as an exhibit to the
Registration Statement have been disclosed herein, statements contained in this
Prospectus as to the contents of any contract or other document referred to are
not necessarily complete, and in each instance reference is made to the copy of
such contract or document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement and to the exhibits and
schedules thereto.
The Blue Rhino(R) name, rhino logo, RhinoTUFF(R), Tri-Safe(TM) and Fuel
Check(TM) are registered trademarks of the Company. This prospectus also
includes trademarks of companies other than the Company.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus.
THE COMPANY
Blue Rhino is a leading provider of grill cylinder exchange in the United
States with cylinder exchange displays at over 9,500 retail locations in 46
states. Cylinder exchange provides consumers with a convenient means to
exchange empty grill cylinders for clean, safer, precision-filled cylinders.
Blue Rhino cylinder exchange is offered at many of the major home
center/hardware, mass merchant, grocery and convenience stores such as Home
Depot, Lowe's, Sears Hardware, WalMMart, Kroger and SuperAmerica. Blue Rhino
partners retailers and independent distributors to provide consumers with a
nationally branded product as an alternative to traditional grill cylinder
refill. The Company is focused on promoting its Blue Rhino brand through
retailers and leveraging its network of 53 independent propane distributors.
Because the distributors make the necessary investments in distribution
infrastructure, Blue Rhino can dedicate its efforts and capital to brand
development, value-added marketing, customer service and management information
systems ("MIS"). During the fiscal year ended July 31, 1998 the Company's sales
increased approximately 93% from the prior year's comparable period to
approximately $27.4 million as a result of the growth of sales at existing
locations and the addition of over 5,000 new retail locations.
Outdoor barbecuing is increasingly one of the most popular outdoor activities
in the United States driven by consumer trends to healthier food preparation
and the desire to spend more time outside at family and social gatherings. The
popularity of propane grills has increased significantly in recent years with
Barbecue Industry Association ("BIA") statistics indicating that propane grill
sales now exceed the combined sales of charcoal, natural gas and electric
grills. According to a 1997 survey conducted on behalf of the BIA,
approximately 38.5 million United States households own a propane grill, with
the average propane grill owner using 1.8 cylinders of propane per year. Based
on this study's estimate of 69.0 million cylinder transactions per year, the
Company believes the annual retail market for grill cylinder refills is
approximately $1.0 billion.
Blue Rhino is creating a new paradigm for the grill cylinder exchange market
which provides benefits to consumers, retailers and distributors. Blue Rhino
offers consumers a new, convenient, branded product alternative to grill
cylinder refilling. Blue Rhino provides retailers with a high margin, turn-key
branded service which has the potential to increase customer traffic and
utilization of exterior retail space. Blue Rhino's cylinder exchange program
provides independent distributors with a counter-seasonal complement to their
traditional propane business as well as access to major retail accounts,
sophisticated MIS and marketing support.
Blue Rhino's business strategy is to capitalize on its leading position in
this growing market by: (i) promoting the Blue Rhino brand, driving consumer
awareness and building consumer and retailer loyalty, (ii) expanding
relationships and increasing sales with retailers by opening new locations and
generating additional sales within existing retail accounts, (iii) leveraging
its national distributor network by aggressively increasing each distributor's
market penetration and the Company's overall profitability, (iv) pursuing
strategic acquisitions of smaller regional cylinder exchange businesses with
established retail accounts and (v) expanding on its national sales and
distribution capabilities by introducing new Blue Rhino products to the
backyard living category.
Blue Rhino was incorporated in North Carolina on March 24, 1994 and
reincorporated in Delaware on December 16, 1994. The Company has two wholly
owned subsidiaries, Rhino Services, L.L.C., a Delaware limited liability
company ("Rhino Services"), and CPD Associates, Inc., a North Carolina
corporation ("CPD"). Rhino Services offers centralized purchasing services to
the Company's distributors. CPD was formed to hold the Company's intangible
assets. The Company's executive officers, directors and entities affiliated
with them beneficially own, in the aggregate, approximately 41% of the
Company's outstanding Common Stock. The Company maintains its executive offices
at 104 Cambridge Plaza Drive, Winston-Salem, North Carolina 27104. The
Company's telephone number is (336) 659-6900. The Company's web site is
www.bluerhino.com which is not and shall not be deemed to be a part of this
Prospectus.
2
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RETAIL LOCATIONS DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------
JULY JULY JULY JULY
31, 28, 31, 31,
1995 1996 1997 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales................................ $ 2,728 $ 8,216 $14,211 $27,372
Gross profit (loss)...................... (795) 316 2,567 6,847
Loss from operations (1)................. (4,398) (6,130) (4,105) (896)
Net loss (1)............................. $(4,660) $(7,431) $(5,584) $(2,369)
Loss applicable to common stockholders
(2)..................................... $(5,055) $(8,067) $(6,271) $(2,965)
Loss per common share:
Basic and diluted...................... $ (3.09) $ (4.96) $ (3.74) $ (1.01)
Pro forma diluted...................... $ (1.08) $ (1.72) $ (1.27) $ (0.47)
Weighted average shares used in computing
loss per common share:
Basic and diluted...................... 1,658 1,628 1,678 2,945
Pro forma diluted...................... 4,303 4,313 4,406 5,077
SELECTED OPERATING DATA:
Retail locations (at period end)......... 1,608 2,981 4,400 9,500
Cylinder transactions (in thousands)..... 306 769 1,239 2,201
</TABLE>
<TABLE>
<CAPTION>
JULY JULY
31, JULY 28, JULY 31, 31,
1995 1996 1997 1998
------- -------- -------- -------
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............... $ 209 $ 1,126 $ 325 $ 5,908
Working capital......................... (3,264) 1,580 737 11,689
Total assets............................ 10,424 11,897 9,974 30,577
Long-term obligations, less current
maturities............................. 1,361 14,174 16,110 260
Total stockholders' (deficit) equity.... (5,149) (13,217) (18,488) 24,923
</TABLE>
- --------
(1) Includes nonrecurring charges for fiscal 1996, 1997 and 1998 of $1,363,
$970 and $563, respectively. See Note 11 of Notes to Consolidated Financial
Statements.
(2) Includes net loss less Preferred Stock dividends of $395, $636, $687 and
$596 for fiscal years ended 1995, 1996, 1997 and 1998, respectively.
(3) The unaudited pro forma information assumes the conversion of the shares of
Series A Convertible Participating Preferred Stock ("Preferred Stock"),
Preferred Stock dividends, and the exercise of warrants outstanding (other
than the 1998 warrants) were effective as of the beginning of the first
year presented.
----------------
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements concerning the
Company's operations, economic performance and financial condition, including
in particular, the ability of the Company to place Blue Rhino cylinder exchange
at additional retail locations. When used in this Prospectus, the words
"anticipates," "believes," "estimates," "expects" and similar expressions as
they relate to the Company or its management are intended to identify such
forward-looking statements. Such statements are subject to various risks and
uncertainties. Actual results could differ materially from those expressed in
such forward-looking statements due to a number of factors, including those
identified under "Risk Factors" and elsewhere in this Prospectus.
----------------
All references to the "Company" and "Blue Rhino" mean Blue Rhino Corporation
and its subsidiaries, Rhino Services and CPD, unless the context indicates
otherwise.
3
<PAGE>
RISK FACTORS
The following risk factors should be considered carefully in addition to the
other information in this Prospectus before purchasing the shares of Common
Stock offered hereby.
History of Losses; Uncertainty of Future Profitability. The Company
commenced operations in May 1994 and has not earned a profit in any period to
date. As of July 31, 1998, the Company had an accumulated deficit of
approximately $21.4 million. The Company had a net loss of approximately $2.4
million for the fiscal year ended July 31, 1998. There can be no assurance
that the Company will be able to operate profitably in the future. See
"Selected Consolidated Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Uncertainty of Continued Growth; Ability to Manage Growth. Over the past
several years the Company has experienced significant growth in its business
activities, including an increase in the number of retail locations offering
Blue Rhino cylinder exchange and the development of an independent distributor
network. As of July 31, 1995, the Company had 1,608 retail exchange locations,
substantially all of which were in the south/southeast region of the United
States and no independent distributor network. As of July 31, 1998, the
Company had 53 independent distributors servicing approximately 9,500 retail
locations in 46 states. The Company's future growth will depend in large part
on the Company's ability to continue to expand its number of retail locations
and increase sales within existing locations. This growth has required and
will continue to require skilled management of the Company and its retailer
and distributor relationships by the Company's executive officers, who have
only limited prior experience managing a public company. The Company remains
subject to the risks and uncertainties inherent in the growth of a business in
its industry, including finding productive new retail locations, demonstrating
to consumers the benefits of cylinder exchange, maintaining relationships with
competent distributors, refining and maintaining a management infrastructure
sufficient to support growth and securing access to capital to fund growth.
The Company's failure to effectively manage any such growth, including its
ability to accurately forecast the pace of retail location and sales growth,
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Seasonal and Quarterly Fluctuations. The Company's business is subject to
seasonal fluctuations, especially in colder regions of the United States,
which have caused, and are expected to continue to cause, significant
fluctuations in its quarterly results of operations. The Company anticipates
that it will derive the majority of its operating revenues from the spring and
summer seasons when consumers are more likely to grill out, which coincide
with the Company's third and fourth fiscal quarters (ending April 30 and July
31, respectively). Sustained periods of poor weather, particularly in the
spring and summer seasons, can negatively impact sales and gross margin. The
Company's timing and rate of establishing new retail locations and expenses
incurred in anticipation of increased sales also have caused, and may continue
to cause, quarterly fluctuations in the Company's results of operations.
Accordingly, the results of operations in any quarter will not necessarily be
indicative of the results that may be achieved for a full fiscal year or any
future quarter. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Selected Quarterly Results of
Operations."
Concentration of Customer Accounts. The Company depends upon its
relationships with a limited number of major retailers for a significant
portion of its sales. Home Depot, Lowe's and WalMMart each represented in
excess of 15% of the Company's sales for fiscal 1998. These retailers, as a
group, represented approximately 58% of the Company's sales for fiscal 1998
with Home Depot representing 26% of the Company's sales for the period. As a
result, the Company's success depends, in part, upon the business success and
growth of such retailers and such retailers' willingness to offer Blue Rhino
cylinder exchange. There can be no assurance that the Company will be able to
maintain relationships with these retailers or significantly increase the
number of their stores at which Blue Rhino cylinder exchange is offered.
Failure to maintain relationships with or increase penetration with any of
these retailers or any significant downturn in the business or financial
condition of any such retailer could have a material adverse effect on the
Company's business, financial condition and results of operations.
4
<PAGE>
Lack of Contractual Relationships with Retailers. None of the Company's
retail accounts is contractually bound to offer Blue Rhino cylinder exchange.
In the absence of contracts, there can be no assurance that retailers will
continue to provide Blue Rhino cylinder exchange or that they will not offer a
competitor's cylinder exchange program. Continued relations with a retailer
depend upon various factors, including customer service, consumer demand,
competition and cost. Termination of the Company's business relations with any
retailer representing a significant number of the Company's locations or the
unwillingness of any such retailer to expand its relationship with the Company
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "--Volatile Product; Potential
Product Liability."
Dependence on Consumer Acceptance of a New Retailing Concept. The
availability of cylinder exchange at major retailers is a relatively new
retailing concept and there can be no assurance that this concept will be
widely accepted by consumers or retailers. According to a 1997 survey (the
"1997 BIA Study") conducted on behalf of the Barbecue Industry Association
("BIA"), traditional grill cylinder refilling, rather than cylinder exchange,
currently accounts for approximately 79% of consumer grill cylinder sales. The
Company's success will depend in large part on whether consumers begin to
select cylinder exchange over traditional refilling methods and whether
retailers begin to and continue to offer cylinder exchange.
Dependence on Distributor Relationships. The Company relies exclusively on
independent distributors to deliver its products to retailers. The Company's
success will depend, in part, on its ability to successfully maintain existing
distributor relationships and on the ability of the distributors to set up and
adequately service Blue Rhino's retail accounts. There can be no assurance
that the Company will be successful in maintaining such relationships or that
such relationships will ultimately result in the sales anticipated by the
Company. While the Company establishes performance goals with its
distributors, it exercises only limited influence over the resources that any
particular distributor devotes to cylinder exchange. The Company could suffer
a loss of consumer or retailer goodwill if its distributors do not adhere to
the Company's quality control and service guidelines or fail to ensure an
adequate and timely supply of cylinders. If any distributor were to
discontinue servicing one or more retailers or terminate its distributor
agreement with the Company, the Company's business in that distributor's
territory would be adversely affected until the Company retained and developed
a replacement distributor. In addition, failure of a distributor to adequately
service locations of national retailers also may result in the loss of
affiliated locations served by other distributors. In the event the Company is
not successful in attracting, developing and maintaining successful
distributors, the Company's business, financial condition and results of
operations could be materially adversely affected. See "Business--Distributor
Network."
Concentration of Accounts with Certain Distributors. Approximately 48% of
the Company's retail locations are serviced by five of the Company's 53
distributors. Sales by these key distributors resulted in approximately 63% of
the Company's revenues for fiscal 1998. Platinum Propane Holding, L.L.C. and
its subsidiaries (collectively, "Platinum Propane") accounted for
approximately 38% and Ceramic Industries, Inc. accounted for approximately 10%
of the Company's revenues, for fiscal 1998. The other three key distributors
for the fiscal year ended July 31, 1998, were North Star Exchange, Inc., Aero
Oil Company and RenovEx, Inc. A disruption in service by one or more of these
key distributors would adversely affect the Company's results of operations.
The inability of one or more of these key distributors to adequately service
designated retail accounts also could have a material adverse effect on the
Company's business, financial condition and results of operations.
Potential Conflicts of Interest in Enforcing Remedies Against Affiliated
Distributors. Billy D. Prim and Andrew J. Filipowski, the Chairman and Chief
Executive Officer and the Vice Chairman of the Company, respectively,
indirectly own approximately 40% of Platinum Propane, the Company's largest
distributor measured by locations served and net sales generated. In addition,
Messrs. Filipowski and Prim own in the aggregate approximately 45% of each of
Caribou Cylinder Exchange, L.L.C. ("Caribou Propane"), Javelina Cylinder
Exchange, L.L.C. ("Javelina Propane") and Raven Propane, L.L.C. ("Raven
Propane"), three more of the Company's distributors. In the event any of
Platinum Propane, Caribou Propane, Javelina Propane or Raven Propane fail to
meet performance goals, the cross-ownership of these distributors and Blue
Rhino could reduce the Company's incentive to terminate distribution
agreements or take other actions against any of them. See "Business--
Distributor Network--Dedicated Distributors" and "Certain Transactions."
5
<PAGE>
Varying Local Permitting Processes. The storage and sale of propane
cylinders is subject to local permitting of each retailer location depending
on local ordinance. Such ordinances have had and can be expected to have an
increasing influence on the acceptance of cylinder exchange by retailers,
distribution methods, cylinder packaging and storage. The ability to obtain
and timing of obtaining necessary permits varies from jurisdiction to
jurisdiction and delays in obtaining permits have from time to time delayed
installation of new retail locations. In addition, some jurisdictions have
refused to issue the necessary permits and thereby prevented a limited number
of installations. There can be no assurance that certain jurisdictions in
which the Company operates will not impose additional restrictions on the
Company's ability to market and the distributors' ability to maintain the
cylinder exchange program. Revisions to these regulations or the failure of
the Company or its distributors to adhere to terms of current and future
regulations could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Governmental
Regulation."
Competition. The grill cylinder refilling industry is highly fragmented and
intensely competitive. The Company competes primarily on the basis of quality
of product, service, perceived safety and price. The 1997 BIA Study results
indicated that approximately 79% of the retail demand for grill cylinders was
provided by traditional propane refilling stations rather than exchange. The
Company's 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. and Suburban Propane
Partners, L.P. offer cylinder exchange in limited locations and could expand
their cylinder exchange business nationally. These major propane providers
have greater resources than the Company and may be able to undertake more
extensive marketing campaigns and adopt more aggressive pricing policies than
the Company. The Company also competes with numerous regional cylinder
exchange programs which typically have operated in one or two states. There
can be no assurance that these competitors will not expand their cylinder
exchange programs nationwide. Furthermore, there can be no assurance that the
Company will be able to compete effectively with current or future competitors
or that the competitive pressures faced by the Company will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
Uncertainty of Ability to Grow through Acquisition of Accounts. A component
of the Company's growth strategy is the acquisition of retail accounts from
competing local and regional exchange providers. The Company's ability to
expand successfully through acquisitions of retail accounts depends on many
factors, including the successful identification of quality retail accounts,
the ability of the Company's distributors to adequately service such acquired
accounts and the ability of the Company and the distributor to convert the
acquired retail accounts to Blue Rhino cylinder exchange. In addition, there
can be no assurance that acquired retail accounts will achieve anticipated
sales. The Company anticipates competition for acquisitions from regional and
national propane distributors in selected areas. The failure of the Company to
execute its acquisition strategy successfully could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Business--Business Strategy--Pursue Strategic Account
Acquisitions."
Volatile Product; Potential Product Liability. Propane is a gas which, if
exposed to flame or high pressure, may ignite or explode, potentially causing
significant property damage and/or bodily harm. No assurance can be given that
accidents will not occur during the refurbishing, refilling, transport,
storage, exchange, use or disposal of Blue Rhino cylinders. The Company
believes that, because the Blue Rhino name and rhino logo are prominently
displayed on all the Company's cylinders and cylinder displays, the Company
could be subjected to claims for damage under various legal theories,
including negligence and strict liability. In any such event, the Company
could incur substantial expense, receive adverse publicity and/or suffer a
loss of sales. A grill cylinder-related accident involving personal injury,
particularly if occurring at a retail location, could result in product
liability actions against the Company or its distributors and could affect the
willingness of retailers to offer cylinder exchange. Adverse publicity
relating to any such incident could also affect the Company's reputation and
the perceived benefits of cylinder exchange. Furthermore, there can be no
assurance that insurance will provide sufficient coverage in any particular
case or that the Company or its distributors will be able to continue to
obtain insurance coverage at acceptable levels and cost in the future.
6
<PAGE>
Product Recalls and Prior Accidents. Prior to May 1996, the Company operated
a propane refilling facility in Booneville, North Carolina. In July 1995, the
Company experienced an explosion at this facility when a filled cylinder fell
from a conveyor belt, began to leak and subsequently ignited. This explosion
resulted in significant structural damage to the plant. In September 1997, one
of the Company's distributors had a fire at its cylinder refurbishing facility
when a cylinder was left unattended on a sleeve application machine and caught
fire. In August 1997, Rotorix, Inc., the distributor of Ceodux cylinder
valves, issued a recall of Ceodux valves placed on Worthington cylinders after
July 16, 1997. The Company instructed distributors to inventory the cylinders
at their plants and retail locations and remove any cylinders with the
recalled valves. There can be no assurance that damage or injury will not
occur as a result of faulty valves or that future product failures or
accidents will not occur. Future accidents or faulty products which result in
injuries or death could have a material adverse effect on the Company's
business, financial condition and results of operations.
Geographic Concentration. As of July 31, 1998, approximately 43% of the
Company's retail locations were in, and 47% of its revenues were derived from
the south/southeast region of the United States. Should this region, or a
substantial portion of it, experience weather or other conditions which reduce
consumers' inclination to grill or use the Company's cylinder exchange
program, such geographic concentration may have an adverse effect on the
Company's business, financial condition and results of operations.
Dependence Upon a Single Product; Potential Adverse Effect of Change in
Consumer Lifestyle Trends or Buying Patterns. The Company's sole line of
business is the marketing and delivery of its cylinder exchange program.
According to the 1997 BIA Study, approximately 21% of consumers exchange their
grill cylinders while approximately 79% of consumers refill their grill
cylinders. There can be no assurance that cylinder exchange programs can
capture increased market share from refills. In addition, should electric
grills, quicker lighting charcoal, more fuel-efficient propane grills or other
products be developed and gain popularity at the expense of currently
available propane grills, lifestyle trends or consumer preferences change or
cylinder exchange fail to be accepted by consumers, the Company would
experience a material adverse effect on its business, financial condition and
results of operations.
Regulation of Propane. The transportation, handling, storage and sale of
propane is subject to regulation by authorities on a federal, state and local
level in order to protect consumers, employees, property and the environment.
The handling of propane in most regions of the United States is governed by
guidelines published by the National Fire Protection Association ("NFPA") in
Pamphlets 54 and 58. The NFPA guidelines require that all cylinders produced
or recertified after September 30, 1998 and all grill cylinders refilled after
April 2002 must be fitted with an overfill prevention device valve ("OPD
Valve"). Failure of the Company's distributors to comply with these
regulations could subject the Company to potential governmental action for
violation of such regulations which could result in fines, penalties and/or
injunctions. See "Business--Governmental Regulation."
Dependence on Key Personnel. The Company believes that its success will
depend to a significant extent upon the services of Billy D. Prim, the
Company's founder, President and Chief Executive Officer, as well as its
ability to attract and retain highly qualified personnel in the future. The
Company faces competition for such personnel from other companies and
organizations and there can be no assurance that the Company will be
successful in hiring or retaining qualified personnel. The Company does not
have a written employment agreement with Mr. Prim or any other employee and
such employees could leave the Company with little or no prior notice. The
Company's loss of Mr. Prim's services or the Company's inability to hire or
retain key personnel in the future could have a material adverse effect on the
Company's business, financial condition and results of operations.
Dependence on Vendors. The Company uses a number of third party vendors to
provide it with staffing and services in strategic areas. In particular, the
Company's staff of five management information systems professionals relies
heavily on the support of Information Management System Services ("IMSS"), a
division of R. J. Reynolds Tobacco Company, as well as five other information
systems vendors. Customer service support is handled entirely outside the
Company by Ruppman Marketing Technologies, Inc. Any disruptions in
7
<PAGE>
these relationships could affect the Company's ability to service its accounts
and could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Retailer Relationships--
Customer Service" and "--Management Information Systems."
Dependence on Management Information Systems; Year 2000 Compliance. The
Company depends on its MIS to process orders, manage inventory and accounts
receivable collections, maintain distributor and customer information, assist
distributors in delivering products on a timely basis and in maintaining cost-
efficient operations. Any disruption in the operation of the Company's MIS,
the loss of employees knowledgeable about such systems or the Company's
failure to continue to effectively modify such systems as its business expands
could have a material adverse effect upon the Company's business, financial
condition and results of operations. See "Business--Management Information
Systems." Certain of the Company's MIS use two digit data fields which
recognize dates using the assumption that the first two digits are "19" (i.e.,
the number 97 is recognized as the year 1997). Therefore, the Company's date
critical functions relating to the year 2000 and beyond, such as sales,
distribution, inventory control and financial systems, may be adversely
affected unless changes are made to these computer systems. The Company
expects that upgrades to its MIS with respect to the year 2000 problem will
require capital expenditures of approximately $35,000. In addition, the
failure of parties with whom the Company has a material relationship to
achieve year 2000 compliance could cause an interruption in the Company's
business and have a material adverse effect on its operations. However, no
assurance can be given that these issues can be resolved in a cost-effective
or timely manner or that the Company will not incur significantly greater
expense in resolving these issues. See "Management's Discussion and Analysis
of Financial Conditions and Results of Operations--Year 2000 Compliance."
Dependence on Trademarks, Proprietary Information and Copyrights. The
Company considers its trademarks, particularly the Blue Rhino brand name and
rhino logo and the design of its product packaging to be of considerable value
to its business and the establishment of its national branded cylinder
exchange program. The Company relies on a combination of copyright and
trademark laws and other arrangements to protect its proprietary rights. To
enforce its rights under copyright or trademark laws, the Company may be
required to incur substantial expense which could have a material adverse
effect on the Company's business, financial condition and results of
operations. The requirement to change any trademark, service mark or trade
name of the Company would result in the loss of any goodwill associated with
that trademark, service mark or trade name, could entail significant expense
and could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company may apply for copyrights and
additional trademarks in the future. There can be no assurance that future
applications will be granted or that any issued copyrights or trademarks will
provide competitive advantages to the Company or will not be successfully
challenged or circumvented by competitors or other third parties.
Unpredictable Propane Supplies and Costs. The Company's distributors
purchase propane from natural gas providers and oil refineries which produce
propane as a by-product of the refining process. The supply and price of
propane fluctuates depending upon underlying natural gas and oil prices and
the ability of suppliers to deliver propane. While the Company's distributors
are responsible for procuring propane, an increase in propane prices could
lead to decreased profit margins for distributors and adversely affect their
ability or desire to service the Company's retail accounts.
Dependence on Suppliers. To adequately service the Company's retail
accounts, the Company's distributors need a sufficient supply of cylinders and
valves. To facilitate the supply of cylinders, the Company provides its
distributors the option to enter into supply agreements with Manchester Tank
and Equipment Co., Inc. There can be no assurance that sufficient quantities
of cylinders will be available in the future. In addition, the Company has
loaned $635,000 to Bison Valve, L.L.C. ("Bison Valve"), an entity formed to
market, produce and sell OPD Valves to Blue Rhino distributors and third
parties. There can be no assurance that Bison Valve will be able to produce a
sufficient number of OPD Valves to fulfill the needs of the Company's
distributors. If the distributors were unable to obtain sufficient quantities
of cylinders, valves or propane, delays or reductions in cylinder availability
could occur which would have a material adverse effect on the Company's
business, financial condition and results of operations.
8
<PAGE>
Laws Governing Sales of Franchises or Business Opportunities. Various state
and federal laws define and govern the sale of franchises and business
opportunities. These laws require, among other things, that sellers of
franchises and business opportunities register such offerings with
governmental authorities and provide prescribed disclosure documents to
potential purchasers. The Company believes that its relationships with
distributors are not subject to such laws. If the Company's activities were
considered to involve the sale of franchises or business opportunities,
distributors could have recourse against the Company, including the ability to
rescind their distribution agreements and recover monetary damages. In
addition, the Company could be subject to potential governmental action for
violation of such laws which could result in fines, penalties, injunctions or
a combination thereof.
Control by Existing Stockholders. As of August 31, 1998, current executive
officers, directors and entities affiliated with them beneficially owned, in
the aggregate, approximately 41.0% of the Company's outstanding Common Stock.
As a result, these stockholders can exert considerable voting control in
connection with matters requiring stockholder approval, including approval of
significant corporate transactions, provided that they vote together on such
matters. Such a concentration of ownership may have the effect of delaying or
preventing a change in control of the Company, and also may impede or preclude
transactions in which stockholders might otherwise receive a premium for their
shares over then current market prices.
Future Capital Requirements. The Company anticipates that continuing
operations and the expansion of the Company's business will require
substantial expenditures. The Company may need to borrow funds or issue debt
or equity securities to sustain continuing operations and growth if cash flow
from operations is not sufficient. There can be no assurance that the Company
will be able to obtain additional capital resources on terms acceptable to the
Company. Any additional equity financing, if available, would be dilutive to
the Company's stockholders, and any debt financing, if available, may involve
restrictive covenants which limit the Company's operations and/or ability to
issue dividends. The Company's inability to fund its capital requirements
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Volatility of the Company's Stock Price. Prior to the initial public
offering of the Company's Common Stock in May 1998 ("Initial Public
Offering"), no public market existed for the Company's Common Stock. From the
date of the Initial Public Offering, for which the shares were priced at
$13.00, through September 25, 1998, the Company's stock price has fluctuated
between $8.75 and $21.00. The Company believes factors such as quarterly
fluctuations in results of operations, announcements of new products and
acquisitions by the Company or by its competitors, changes in earnings
estimates by analysts, changes in accounting treatments or principles, general
market conditions, or other events and factors, some of which may be beyond
the Company's control, may cause the market price of the Common Stock to
fluctuate, perhaps substantially. In addition, the equity markets have from
time to time experienced extreme price and volume fluctuations that often have
been unrelated or disproportionate to the performance of a particular company.
Immediate and Substantial Dilution. The number of shares issued to any
recipient in a transaction covered by this Prospectus may be at a price per
share which is substantially higher than the net tangible book value per share
of Common Stock. New investors acquiring Common Stock covered by this
Prospectus accordingly may incur immediate dilution.
Shares Eligible for Future Sale; Registration Rights. Sales of substantial
amounts of the Common Stock in the public market (including shares issued upon
the exercise of stock options, warrants and from time to time hereunder) or
the perception that such sales might occur could adversely affect the market
price of the Common Stock and the Company's ability to raise additional equity
capital. The Company had 7,630,873 shares of Common Stock outstanding as of
September 30, 1998. Of these outstanding shares, 4,056,543 shares of Common
Stock are freely tradeable without restriction or further registration under
the Securities Act of 1933, as amended (the "Securities Act"), unless held by
an "affiliate" of the Company, as that term is defined under Rule 144 of the
Securities Act, which shares will be subject to certain resale limitations of
Rule 144. Certain stockholders of
9
<PAGE>
the Company, including the executive officers and directors, who own in the
aggregate 3,577,438 shares of Common Stock have agreed that they will not,
without the prior written consent of Hambrecht & Quist LLC, the managing
underwriter of the Initial Public Offering, directly or indirectly sell,
offer, contract to sell, transfer the economic risk of ownership in, make any
short sale, pledge or otherwise dispose of any shares of Common Stock or any
securities convertible or exchangeable for or any other rights to purchase or
acquire Common Stock owned by them prior to November 16, 1998. The Company has
agreed that it will not, without the prior written consent of Hambrecht &
Quist LLC, directly or indirectly sell, offer, contract to sell, transfer the
economic risk of ownership in, make any short sale, pledge or otherwise
dispose of any shares of Common Stock or any securities convertible or
exchangeable for or any other rights to purchase or acquire Common Stock prior
to November 16, 1998, except that the Company may issue shares upon the
exercise of options granted prior to May 18, 1998, and may grant additional
options under its stock option plans, provided, that, without the prior
written consent of Hambrecht & Quist LLC, such additional options shall not be
exercisable during such period. On November 16, 1998, all of the shares of
Common Stock subject to such agreements will be eligible for sale subject, in
certain cases, to certain volume and other limitations of Rule 144 under the
Securities Act applicable to affiliates of the Company. The Company intends to
file registration statements under the Securities Act to register the sale of
181,853 shares of Common Stock reserved for issuance under the 1994 Stock
Incentive Plan (the "1994 Stock Incentive Plan"), 300,000 shares of Common
Stock reserved for issuance under the 1998 Stock Incentive Plan (the "1998
Stock Incentive Plan"), 100,000 shares of Common Stock reserved for issuance
pursuant to the Company's Non-Employee Director Stock Option Plan (the
"Director Option Plan") and 400,000 shares reserved for issuance under the
Distributor Incentive Stock Option Plan (the "Distributor Option Plan").
Holders of approximately 2,758,000 shares of Common Stock are entitled to
certain registration rights, at the Company's expense, with respect to such
shares. The sale of a substantial number of shares, whether pursuant to a
subsequent public offering, the exercise of registration rights, through
private resales under Rule 144, or otherwise, or the perception that such
sales could occur, could adversely affect the market price of the Common Stock
and could materially impair the Company's future ability to raise capital
through an offering of equity securities.
10
<PAGE>
SECURITIES OFFERED BY THIS PROSPECTUS
The shares of Common Stock covered by this Prospectus are available for use
in future acquisitions of other businesses, real or personal properties, or
securities in business combination transactions in accordance with Rule
415(a)(1)(viii) of Regulation C under the Securities Act or otherwise under
Rule 415. Such acquisitions may be made directly by the Company or indirectly
through a subsidiary and may relate to assets or securities of businesses
similar or dissimilar to the Company's propane cylinder exchange business. The
consideration offered by the Company in such acquisitions, in addition to the
shares of Common Stock offered by this Prospectus, may include cash, debt or
other securities (which may be convertible into shares of Common Stock covered
by this Prospectus), or assumption by the Company of liabilities of the
business, properties or securities being acquired or of their owners, or a
combination thereof. It is contemplated that the terms of acquisitions,
including the party that will bear the expense of the registration of the
shares issued in connection therewith, will be determined by negotiations
between the Company and the owners of the businesses, properties or securities
to be acquired, with the Company taking into account such factors as the
quality of management, the past and potential earning power, growth and
appreciation of the businesses, properties or securities acquired, and other
relevant factors, and it is anticipated that shares of Common Stock issued in
acquisitions will be valued at a price reasonably related to the market value
of the Common Stock either at the time the terms of the acquisition are
tentatively agreed upon or at or about the time or times of delivery of the
shares.
The Company may from time to time, in an effort to maintain an orderly
market in the Common Stock, negotiate agreements with persons receiving Common
Stock covered by this Prospectus that will limit the number of shares that may
be sold by such persons at specified intervals. Such agreements may be more
restrictive than restrictions on sales made pursuant to the exemption from
registration requirements of the Securities Act, including the requirements
under Rule 144 or Rule 145(d), and certain persons party to such agreements
may not otherwise be subject to such Securities Act requirements. The Company
anticipates that, in general, such negotiated agreements will be of limited
duration and will permit the recipients of Common Stock issued in connection
with acquisitions to sell up to a specified number of shares per business day
or days.
With the consent of the Company, this Prospectus may also be used by persons
who have received or will receive from the Company Common Stock covered by
this Prospectus and who may wish to sell such stock under circumstances
requiring or making desirable its use. This Prospectus may also be used, with
the Company's consent, by pledgees, donees or assignees of such persons. The
Company's consent to any such use may be conditioned upon such persons'
agreeing not to offer more than a specified number of shares following
supplements or amendments to this Prospectus, which the Company may agree to
use its best efforts to prepare and file at certain intervals. The Company may
require that any such offering be effected in an organized manner through
securities dealers.
Sales by means of this Prospectus may be made from time to time privately at
prices to be individually negotiated with the purchasers, or publicly through
transactions in the over-the-counter market (which may involve block
transactions), at prices reasonably related to market prices at the time of
sale or at negotiated prices. Broker-dealers participating in such
transactions may act as agent or as principal and, when acting as agent, may
receive commissions from the purchasers as well as from the sellers (if also
acting as agent for the purchasers). The Company may indemnify any broker-
dealer participating in such transactions against certain liabilities,
including liabilities under the Securities Act. Profits, commissions and
discounts on sales by persons who may be deemed to be underwriters within the
meaning of the Securities Act may be deemed underwriting compensation under
the Securities Act.
Stockholders may also offer shares of stock covered by this Prospectus by
means of prospectuses under other registration statements or pursuant to
exemptions from the registration requirements of the Securities Act, including
sales which meet the requirements of Rule 144 or Rule 145(d) under the
Securities Act, and stockholders should seek the advice of their own counsel
with respect to the legal requirements for such sales.
11
<PAGE>
This Prospectus may be supplemented or amended from time to time to reflect
its use for resales by persons who have received shares of Common Stock for
whom the Company has consented to the use of this Prospectus in connection
with resales of such shares. See the inside back cover page of this Prospectus
for the identity of any such persons.
PRICE RANGE OF COMMON STOCK
The Company's 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 closing sale prices for the Common Stock on the Nasdaq
National Market. Trading of the Common Stock commenced on May 19, 1998. On
September 25, 1998, the last reported sale price of the Common Stock on The
Nasdaq Stock Market was $11.50 per share.
<TABLE>
<CAPTION>
PRICE RANGE
OF COMMON
STOCK
-------------
YEAR ENDED JULY 31, 1998 HIGH LOW
------------------------ ------ ------
<S> <C> <C>
Fourth Quarter............................................ $21.00 $13.25
</TABLE>
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on shares of its
Common Stock. The Company currently intends to retain its earnings for future
growth and, therefore, does 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 and may be prohibited under any then
existing financing agreements. There can be no assurance that the Company will
pay any dividends in the future. As of July 31, 1998, the Company had an
accumulated deficit of approximately $21.4 million.
12
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's Consolidated Financial
Statements, including the Notes thereto, appearing elsewhere in this
Prospectus. The selected consolidated financial data for the fiscal years
ended July 28, 1996, July 31, 1997 and July 31, 1998 are derived from the
Consolidated Financial Statements of the Company included elsewhere in this
Prospectus that have been audited by PricewaterhouseCoopers LLP, independent
accountants. The selected consolidated financial data as of and for the fiscal
year ended July 31, 1995 are derived from the consolidated financial
statements of the Company not included in this Prospectus that have been
audited by PricewaterhouseCoopers LLP, independent accountants. The selected
financial data for the period from the commencement of operations on July 1,
1994 through July 31, 1994 are derived from the financial statements of the
Company not included in this Prospectus that have been audited by The Daniel
Professional Group, Inc., independent accountants. The operating results for
the periods presented are not necessarily indicative of the results to be
expected for any other interim period or any other future fiscal year.
The statement of operations data for the fiscal year ended June 30, 1994 was
derived from unaudited financial statements of the Predecessor Company
(defined below) which, in the opinion of management of the Company, reflect
all adjustments, consisting only of normal recurring adjustments, that the
Company considers necessary for a fair presentation of the financial position
and results of operations for such period.
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY(1) FISCAL YEAR
----------- -----------------------------------------------
JUNE 30, JULY 31, JULY 31, JULY 28, JULY 31, JULY 31,
1994 1994 1995 1996 1997 1998
----------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND SELECTED OPERATING
DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Net sales--
distributors.......... $-- $ -- $ -- $ 2,386 $13,060 $27,372
Net sales--direct...... 393 56 2,728 5,830 1,151 --
---- ------ ------- ------- ------- -------
Total net sales........ 393 56 2,728 8,216 14,211 27,372
---- ------ ------- ------- ------- -------
Cost of sales--
distributors.......... -- -- -- 1,811 9,873 20,525
Cost of sales--direct.. 126 59 3,523 6,089 1,771 --
---- ------ ------- ------- ------- -------
Total cost of sales.... 126 59 3,523 7,900 11,644 20,525
---- ------ ------- ------- ------- -------
Gross profit (loss).... 267 (3) (795) 316 2,567 6,847
---- ------ ------- ------- ------- -------
Operating expenses
(income):
Sales and marketing.... -- -- 532 1,112 1,950 2,392
General and
administrative........ 228 374 2,787 3,192 3,022 3,591
Lease income, net...... -- -- -- (89) (143) (81)
Depreciation and
amortization.......... 25 3 284 868 873 1,278
Nonrecurring charges
(2)................... -- -- -- 1,363 970 563
---- ------ ------- ------- ------- -------
Total operating
expenses............ 253 377 3,603 6,446 6,672 7,743
---- ------ ------- ------- ------- -------
Income (loss) from
operations............ 14 (380) (4,398) (6,130) (4,105) (896)
Other expense (income):
Interest expense....... 5 -- 287 1,469 1,665 1,707
Other (income)
expense, net.......... (2) -- (25) (168) (186) (234)
---- ------ ------- ------- ------- -------
Net income (loss).... $ 11 $ (380) $(4,660) $(7,431) $(5,584) $(2,369)
==== ====== ======= ======= ======= =======
Loss applicable to
common stockholders
(3)................. -- $ (380) $(5,055) $(8,067) $(6,271) $(2,965)
==== ====== ======= ======= ======= =======
Loss per common share:
Basic and diluted...... -- $(0.25) $ (3.09) $ (4.96) $ (3.74) $ (1.01)
Pro forma diluted (4).. -- -- $ (1.08) $ (1.72) $ (1.27) $ (0.47)
Weighted average common
shares used in
computing loss per
common share:
Basic and diluted...... -- 1,517 1,638 1,628 1,678 2,945
Pro forma diluted (4).. -- -- 4,303 4,313 4,406 5,077
SELECTED OPERATING DATA:
Retail locations (at
period end)........... -- 331 1,608 2,981 4,400 9,500
Cylinder transactions
(000's)............... -- 5 306 769 1,239 2,201
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
JULY 31, JULY 31, JULY 28, JULY 31, JULY 31,
1994 1995 1996 1997 1998
-------- -------- --------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA:
Cash and cash equivalents..... $ 150 $ 209 $ 1,126 $ 325 $ 5,908
Working capital............... 109 (3,264) 1,580 737 11,689
Total assets.................. 631 10,424 11,897 9,974 30,577
Long-term obligations, less
current maturities........... 518 1,361 14,174 16,110 260
Total stockholders' (deficit)
equity....................... (179) (5,149) (13,217) (18,488) 24,923
</TABLE>
- --------
(1) Effective June 30, 1994, the assets of American Cylinder Exchange (the
"Predecessor Company") were contributed to the Company in exchange for
approximately 98,000 shares of Common Stock which were distributed to the
Predecessor Company's shareholders.
(2) See Note 11 of Notes to Consolidated Financial Statements for an
explanation of the nonrecurring charges.
(3) Includes net loss less redeemable preferred stock dividends of $395, $636,
$687 and $596 for fiscal 1995, 1996, 1997 and 1998, respectively.
(4) The unaudited pro forma information assumes the conversion of Preferred
Stock, Preferred Stock dividends and the exercise of warrants outstanding
(other than the 1998 Warrants) were effective as of the beginning of the
first year presented.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the Company's Consolidated
Financial Statements and Notes thereto included elsewhere in this Prospectus.
Except for the historical information contained herein, the discussion in this
Prospectus contains certain 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 Prospectus
should be read as being applicable to all related forward-looking statements
wherever they may appear in this Prospectus. 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 well as those discussed elsewhere herein.
Unless otherwise indicated, all references to years in this section of the
Prospectus refer to the Company's fiscal years, which ran as follows: from
August 1, 1995 through July 28, 1996, July 29, 1996 through July 31, 1997 and
August 1, 1997 through July 31, 1998.
OVERVIEW
Blue Rhino was founded in March 1994 and has become the leading provider of
grill cylinder exchange in the United States offering consumers a convenient
means to obtain fuel for their barbecue grills. The Company originally focused
on serving markets in the southeastern United States and has since developed a
network of 53 independent distributors which deliver Blue Rhino grill cylinder
exchange to approximately 9,500 retail locations in 46 states as of July 31,
1998. During the fiscal year ended July 31, 1998, the Company's sales
increased approximately 93% from the prior year's comparable period to
approximately $27.4 million as a result of the growth of sales at existing
locations and the addition of over 5,000 new retail locations.
Since its formation, the Company has focused on creating an infrastructure
to support its nationwide cylinder exchange program. Initially, the Company
developed a vertically integrated operation, purchasing and leasing grill
cylinders, cylinder displays, filling sites, refurbishing equipment and
delivery trucks while at the same time developing a sales, marketing and MIS
infrastructure. In March 1996, the Company began to transition from a
vertically integrated business model to an independent distributor business
model in order to implement its cylinder exchange program in a more capital
efficient manner and to accelerate development of its program. At this time,
the Company began to dispose of distribution assets and to enter into
exclusive agreements with independent distributors to refurbish and refill
cylinders and service Blue Rhino's retail accounts. As a result, the Company
has significantly accelerated the growth of its nationwide service, pursued
additional retailer relationships and invested in the sales, marketing and MIS
infrastructure to support its growing cylinder exchange program. The Company
expects to focus future capital investments on cylinders, cylinder displays
and continued enhancement of its MIS. The transition to a 100% independent
distributor business model was completed in the third quarter of fiscal 1997
although some expenses related to the prior business model were incurred in
1998.
The Company currently offers three types of grill cylinder transactions: (i)
like for like cylinder exchanges; (ii) cylinders with valve upgrades offering
additional safety features; and (iii) outright cylinder sales. The Company's
net sales from cylinder exchanges, cylinder upgrades and cylinder sales
comprised approximately 81%, 10% and 9%, respectively, of the Company's net
sales for fiscal 1998. The Company's suggested retail prices for cylinder
exchanges, cylinder upgrades and cylinder sales are currently $14.99, $24.99
and $39.99, respectively, although the actual prices for these transactions
may vary from retailer to retailer. The Company recognizes net sales at the
time its distributor makes a delivery at a retail location. The Company
invoices its retailers, receives payment and remits a fixed portion of this
payment to its distributors for their services. The Company's net sales growth
depends on increasing sales at existing locations and increasing the number of
new retail locations that it serves. Other factors which influence net sales
include seasonality, consumer awareness, weather conditions, new grill sales,
alternative uses for grill cylinders, promotional activities and advertising.
The Company's cost of sales are comprised of a fixed charge per cylinder
transacted which is paid to distributors based upon the type of transaction
and determined on a contractual basis. Cylinder sales have the
15
<PAGE>
highest cost of sales per unit while cylinder exchanges have the lowest cost
of sales. Selling and marketing expenses are primarily comprised of
compensation, commissions and promotional and travel costs. General and
administrative expenses are primarily comprised of compensation, professional
fees, rent, software development and travel costs. Lease income, net is
comprised of revenue from cylinder displays and certain plant facilities and
equipment leased to distributors offset by rent expense paid by the Company to
lease the cylinder displays under an operating lease. Depreciation and
amortization consist primarily of depreciation of cylinder displays and to a
lesser extent, depreciation on equipment, buildings, computer hardware and
software and amortization of intangibles. Operating expenses also include non-
recurring charges of approximately $1.4 million, $1.0 million and $563,000
incurred during fiscal 1996, 1997 and 1998, respectively, as the Company
transitioned from a vertically integrated business model to its present
independent distributor business model. The Company does not anticipate
incurring any additional charges in connection with this transition.
While the Company believes that it has created the infrastructure necessary
to support a nationwide cylinder exchange program, development of this
infrastructure has resulted in an accumulated deficit of approximately $21.4
million as of July 31, 1998. This has resulted in a net operating loss
carryforward for federal income tax purposes of approximately $19.9 million
which is available to be used to offset future taxable income, if any. Based
on the Company's history of operating losses, the Company has recorded a
valuation allowance to the full extent of its net deferred tax assets.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship of certain items from the Company's statement of operations to
net sales. Due to the Company's change in its business model and its rapid
sales growth, any trends reflected by the following table may not be
indicative of future results.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL NET
SALES
----------------------------
FISCAL YEAR ENDED
----------------------------
JULY 28, JULY 31, JULY 31,
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Total net sales............................... 100.0% 100.0% 100.0%
Total cost of sales........................... 96.2 81.9 75.0
----- ----- -----
Gross margin.................................. 3.8 18.1 25.0
----- ----- -----
Operating expenses (income):
Sales and marketing......................... 13.5 13.7 8.7
General and administrative.................. 38.9 21.3 13.2
Lease income, net........................... (1.1) (1.0) (0.3)
Depreciation and amortization............... 10.6 6.1 4.7
Nonrecurring charges........................ 16.5 6.8 2.1
----- ----- -----
Total operating expenses.................. 78.4 46.9 28.4
----- ----- -----
Loss from operations.......................... (74.6) (28.8) (3.4)
Other expense (income):
Interest expense............................ 17.8 11.7 6.2
Other income, net........................... (2.0) (1.3) (0.9)
----- ----- -----
Net loss...................................... (90.4)% (39.2)% (8.7)%
===== ===== =====
As a percentage of total net sales
Net sales--distributors..................... 29.0% 91.9% 100.0%
Net sales--direct........................... 71.0% 8.1% --
Total gross margin............................ 3.8% 18.1% 25.0%
Gross margin of net sales--distributors..... 24.1% 24.4% 25.0%
Gross loss of net sales--direct............. (4.4)% (53.9)% --
</TABLE>
16
<PAGE>
COMPARISON OF YEARS ENDED JULY 31, 1997 AND 1998
Net sales. Net sales consist of net sales from the Company's current
independent distributor network ("net sales--distributors") and to a lesser
extent to the Company's previous vertically integrated distribution operations
("net sales--direct"). During the third quarter of fiscal 1997, the Company
completed its transition to the independent distributor business model and, as
a result, all of the Company's net sales during fiscal 1998 were, and for the
forseeable future will be, net sales--distributors. Total net sales increased
92.6% from approximately $14.2 million for fiscal 1997 to approximately $27.4
million for fiscal 1998. 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 net sales--distributors 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% from
approximately 4,400 locations at July 31, 1997 to approximately 9,500
locations at July 31, 1998. The number of cylinders transacted increased 77.6%
from approximately 1.2 million units in fiscal 1997 to approximately 2.2
million units in fiscal 1998.
Gross margin. Gross margin increased from 18.1% in fiscal 1997 to 25.0% in
fiscal 1998. This increase was due to the shift in net sales from a vertically
integrated business model to an independent distributor business model. With
respect to net sales--distributors, gross margin increased from 24.4% in
fiscal 1997 to 25.0% in fiscal 1998. This increase was due to a shift in the
mix of cylinders transacted, with lower margin cylinder sales accounting for a
smaller percentage of total net sales than in previous quarters as well as a
price increase, which became effective April 1, 1998 on all cylinder
transactions.
Sales and marketing expenses. Sales and marketing expenses increased 22.7%
from approximately $2.0 million in fiscal 1997 to approximately $2.4 million
in fiscal 1998 but decreased as a percentage of total net sales from 13.7% in
fiscal 1997 to 8.7% in fiscal 1998. The increase in absolute sales and
marketing expense was due primarily to additional commissions to outside
brokers, which are based on a percentage of net sales. The decrease in sales
and marketing expenses as a percentage of net sales was due primarily to the
fact that a significant portion of the compensation of the Company's sales and
marketing staff is fixed and, as a result, sales and marketing expenses
increased at a slower rate than net sales.
General and administrative expenses. General and administrative expenses
increased 18.8% from approximately $3.0 million in fiscal 1997 to
approximately $3.6 million in fiscal 1998 but decreased as a percentage of
total net sales from 21.3% in fiscal 1997 to 13.2% in fiscal 1998. The
increase in absolute general and administrative expenses was due primarily to
additional compensation costs. The decrease in general and administrative
expense as a percentage of net sales was due primarily to the fact that a
significant portion of compensation is fixed and, as a result, general and
administrative expenses increased at a slower rate than net sales.
Lease income, net. Gross lease income for fiscal 1997 and 1998 increased
from approximately $295,000 to $566,000, respectively, while gross rent
expense for the same period increased from approximately $152,000 to $485,000.
The increase in lease income was due to the implementation of a plant facility
and equipment lease with a distributor during the second quarter of fiscal
1997 and the addition of new retail locations resulting in an increase in the
number of cylinder displays under lease. The increase in rent expense was due
primarily to the increase in the number of cylinder displays purchased under
an operating lease facility was initiated in the first quarter of fiscal 1997.
The Company purchased all of the assets leased pursuant to the lease facility
and terminated the lease facility in May 1998 with proceeds of the Initial
Public Offering.
Depreciation and amortization. Depreciation and amortization increased from
approximately $873,000 in fiscal 1997 to approximately $1.3 million in fiscal
1998. Depreciation expense increased by $337,000 from $764,000 in fiscal 1997
to $1.1 million in fiscal 1998 principally due to the purchase of additional
cylinder display panels and the acquisition of computer technology under
capital leases. Amortization expense increased by approximately $68,000 from
approximately $109,000 in fiscal 1997 to approximately $177,000 in fiscal 1998
principally due to increased goodwill amortization associated with the
acquisitions of retail locations from local and regional cylinder exchange
providers.
17
<PAGE>
Nonrecurring charges. Nonrecurring charges decreased from approximately $1.0
million in fiscal 1997 to approximately $563,000 for fiscal 1998. Nonrecurring
charges are associated with the Company's transition from a vertically
integrated business model to an independent distributor business model and
consist primarily of the write-down of facilities and equipment purchased to
support the vertically integrated business model. The Company does not expect
to incur any additional nonrecurring charges related to the transition to the
independent distributor business model. During fiscal 1998, the Company made a
commitment to acquire new handheld terminal technology and recorded a $202,000
impairment adjustment to reduce the carrying value of existing handheld
terminals as the future benefit of these assets could not be fully recoverable
over their original estimated lives.
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 proceeds
from the Initial Public Offering, eliminating the incurrence of additional
interest expense.
Other income, net. Other income, net increased from approximately $186,000
in fiscal 1997 to approximately $234,000 in fiscal 1998. Other income, net
consists primarily of interest income from various notes receivable and excess
cash balances.
COMPARISON OF YEARS ENDED JULY 28, 1996 AND JULY 31, 1997
Net sales. Total net sales increased 72.9% from approximately $8.2 million
for fiscal 1996 to approximately $14.2 million for fiscal 1997. Net sales--
distributors increased from approximately $2.4 million for fiscal 1996 to
approximately $13.1 million for fiscal 1997. The increase in net sales--
distributors was due primarily to the Company's transition from a vertically
integrated business model to an independent distributor business model, as
well as an increase in the number of retail locations placed in service and an
increase in the number of cylinder transactions during the period. The
installed base of retail locations increased 47.6% from approximately 3,000
locations at the end of fiscal 1996 to approximately 4,400 locations at the
end of fiscal 1997. The number of cylinders transacted increased 61.1% from
approximately 769,000 units for fiscal 1996 to approximately 1.2 million units
for fiscal 1997.
Gross margin. Gross margin increased from 3.8% for fiscal 1996 to 18.1% for
fiscal 1997. This increase was due to the shift in net sales from a vertically
integrated business model to an independent distributor business model. With
respect to net sales--distributors, gross margin increased from 24.1% for
fiscal year 1996 to 24.4% for fiscal 1997.
Sales and marketing expenses. Sales and marketing expenses increased 75.4%
from approximately $1.1 million for fiscal 1996 to approximately $2.0 million
for fiscal 1997 and as a percentage of total net sales increased from 13.5%
for fiscal 1996 to 13.7% for fiscal 1997. The increase in absolute sales and
marketing expenses was due primarily to additional compensation, promotional
and advertising expenditures.
General and administrative expenses. General and administrative expenses
decreased 5.3% from approximately $3.2 million for fiscal 1996 to
approximately $3.0 million for fiscal 1997, and decreased as a percentage of
total net sales from 38.9% for fiscal 1996 to 21.3% for fiscal 1997. The
decrease in absolute general and administrative expenses was due to the
transition to the independent distributor business model.
Lease income, net. Lease income, net increased 60.7% from $89,000 for fiscal
1996 to approximately $143,000 for fiscal 1997. The increase in lease income,
net was due to the implementation of certain plant facilities and equipment
leases with distributors during the fourth quarter of fiscal 1996 and the
second quarter of fiscal 1997 and the addition of new retail locations
resulting in an increase in the number of cylinder displays under lease.
Depreciation and amortization. Depreciation and amortization increased from
approximately $868,000 for fiscal 1996 to approximately $873,000 for fiscal
1997.
Nonrecurring charges. Nonrecurring charges are associated with the
transition to the independent distributor model and decreased from
approximately $1.4 million during fiscal 1996 the first year of the transition
to approximately $1.0 million during fiscal 1997.
18
<PAGE>
Interest expense. Interest expense increased from approximately $1.5 million
for fiscal 1996 to approximately $1.7 million for fiscal 1997 due to accretion
of interest on Senior Discount Notes and additional borrowings under the
Company's Bank Credit Facility.
Other income--net. Other income--net increased from approximately $168,000
for fiscal 1996 to approximately $186,000 for fiscal 1997.
SELECTED QUARTERLY RESULTS OF OPERATIONS
The Company has experienced and is expected to continue to experience
significant seasonal fluctuations in net sales and net income (loss). The
Company's net sales 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. The Company's rate of establishing new
retail locations and expenses incurred in anticipation of increased sales also
cause quarterly fluctuations in the Company's results of operations.
Accordingly, the results of operations in any quarter will not necessarily be
indicative of the results that may be achieved for a full fiscal year or any
future quarter. See "Risk Factors--Seasonal and Quarterly Fluctuations" and
"--Uncertainty of Continued Growth; Ability to Manage Growth."
The following table sets forth selected unaudited quarterly financial
information and operating data for the last five quarters. This information
has been prepared on the same basis as the Consolidated Financial Statements
and includes, in the opinion of management, all normal and recurring
adjustments that management considers necessary for a fair statement of the
quarterly results for the periods. Given the Company's limited operating
history, seasonal demand for its product and market acceptance of cylinder
exchange by retailers and consumers, there may be significant variation in the
Company's operating results for any quarter. The operating results and data
for any quarter are not necessarily indicative of the results for future
periods.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------
JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, JULY 31,
1997 1997 1998 1998 1998
-------- ----------- ----------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Total net sales.......... $ 6,702 $ 4,139 $ 4,175 $ 5,694 $13,364
Total cost of sales...... 5,160 3,154 3,217 4,322 9,832
------- ------- ------- ------- -------
Gross profit......... 1,542 985 958 1,372 3,532
------- ------- ------- ------- -------
Operating expenses
(income):
Sales and marketing.... 666 564 463 563 802
General and
administrative........ 900 844 862 906 978
Lease income, net...... (19) 8 15 18 (122)
Depreciation and
amortization.......... 251 245 271 331 432
Nonrecurring charges... 224 281 127 99 56
------- ------- ------- ------- -------
Total operating
expenses............ 2,022 1,942 1,738 1,917 2,146
------- ------- ------- ------- -------
Income (loss) from
operations.............. (480) (957) (780) (545) 1,386
Other expense (income):
Interest expense....... 415 434 495 566 211
Other income, net...... (63) (51) (51) (44) (86)
------- ------- ------- ------- -------
Net income (loss)........ $ (832) $(1,340) $(1,224) $(1,067) $ 1,261
======= ======= ======= ======= =======
Income (loss) applicable
to common stockholders.. $(1,010) $(1,447) $(1,485) $(1,280) $ 1,247
======= ======= ======= ======= =======
Income (loss) per common
share:
Basic.................. $ (0.57) $ (0.81) $ (0.83) $ (0.72) $ 0.20
Diluted................ $ (0.57) $ (0.81) $ (0.83) $ (0.72) $ 0.19
Pro forma diluted...... $ (0.19) $ (0.30) $ (0.27) $ (0.24) $ 0.19
Weighted average common
shares used in computing
income (loss) per common
share:
Basic.................. 1,779 1,779 1,779 1,779 6,407
Diluted (1)............ 1,779 1,779 1,779 1,779 6,611
Pro forma diluted (2).. 4,464 4,464 4,464 4,464 6,611
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL NET SALES
----------------------------------------------------
QUARTER ENDED
----------------------------------------------------
JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, JULY 31,
1997 1997 1998 1998 1998
-------- ----------- ----------- --------- --------
<S> <C> <C> <C> <C> <C>
Total net sales............ 100.0% 100.0% 100.0% 100.0% 100.0%
Total cost of sales........ 77.0 76.2 77.1 75.9 73.6
----- ----- ----- ----- -----
Gross margin........... 23.0 23.8 22.9 24.1 26.4
Operating expenses
(income):
Sales and marketing...... 9.9 13.6 11.1 9.9 6.0
General and
administrative.......... 13.4 20.4 20.6 15.9 7.3
Lease income, net........ (0.3) 0.2 0.4 0.3 (0.9)
Depreciation and
amortization............ 3.7 5.9 6.5 5.8 3.2
Nonrecurring charges..... 3.5 6.8 3.0 1.8 0.4
----- ----- ----- ----- -----
Total operating
expenses.............. 30.2 46.9 41.6 33.7 16.0
----- ----- ----- ----- -----
Income (loss) from
operations................ (7.2) (23.1) (18.7) (9.6) 10.4
Other expense (income):
Interest expense......... 6.1 10.5 11.8 9.9 1.6
Other income, net........ (0.9) (1.2) (1.2) (0.8) (0.6)
----- ----- ----- ----- -----
Net income (loss).......... (12.4)% (32.4)% (29.3)% (18.7)% 9.4%
===== ===== ===== ===== =====
</TABLE>
- --------
(1) The unaudited pro forma information assumes the conversion of Preferred
Stock, Preferred Stock dividends and the exercise of Warrants outstanding
(other than the 1998 Warrants) were effective as of the beginning of the
first period presented.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds have been the issuance of stock and
the incurrence of debt. The Company had positive working capital of
approximately $11.7 million as of July 31, 1998 resulting primarily from the
available proceeds from the Initial Public Offering, seasonal increase in
accounts receivable and the purchases of cylinders from distributors.
Net cash used in operations was approximately $4.9 million, $2.2 million and
$5.2 million for fiscal 1998, 1997 and 1996, respectively. For all periods net
cash used in operations resulted primarily from net losses from operations as
well as increases in accounts receivable due to the seasonal nature of the
business and significant growth in sales year over year. Also, during fiscal
1998, the Company paid approximately $1.7 million to purchase cylinders from
distributors.
Net cash used in investing activities was approximately $6.0 million for
fiscal 1998. Net cash provided by investing activities was approximately
$342,000 for fiscal 1997 and net cash used in investing activities was
approximately $1.4 million for fiscal 1996. Investments in property and
equipment represented the primary component of cash used in investing
activities with the exception of fiscal 1998 when cash used in acquisitions
aggregated approximately $3.6 million and the Company loaned $635,000 to Bison
Valve. The primary components of cash provided from investing activities
included collections on notes receivable and proceeds from the sale of
property and equipment.
Net cash provided by financing activities was approximately $16.5 million
for fiscal 1998, $1.0 million for fiscal 1997 and $7.5 million for fiscal
1996. The primary components of cash provided by financing activities included
net proceeds from the Initial Public Offering, the issuance of Senior Discount
Notes, 1998 Stockholder Loans and bank borrowings. The primary components of
cash used in financing activities included repayment of the Senior Discount
Notes, 1998 Stockholder Loans the purchase of previously leased display racks
and payments on various notes payable, long-term debt and capital lease
obligations.
20
<PAGE>
In connection with the Initial Public Offering, the Company issued a total
of 3,105,000 shares of Common Stock and received proceeds, net of underwriters
discounts and commissions and other offering expenses, of approximately $36.4
million. The Company utilized the net proceeds from the Initial Public
Offering to repay approximately $29.1 million of principal and interest on
indebtedness including approximately $16.5 million on the Company's 10.5%
Senior Discount Notes, approximately $7.0 million outstanding under the Bank
Credit Facility, approximately $3.4 million on the 1998 Stockholder Loans and
approximately $2.1 million for the purchase of cylinder displays previously
financed under an operating lease facility. The remaining net proceeds of
approximately $7.6 million will be used for general corporate purposes,
including working capital and future acquisitions.
In January 1998, four stockholders collectively loaned the Company $3.25
million (the "1998 Stockholder Loans") which bore interest at 10.5% per annum.
In connection with the Stockholder Loans, the stockholders also received
warrants (the "1998 Warrants") to purchase 81,913 shares of the Company's
Common Stock. The 1998 Warrants may be exercised prior to December 31, 2008 at
an exercise price of $13.00 per share. The 1998 Stockholder Loans were repaid
in full in May 1998 with approximately $3.4 million of the proceeds of the
Initial Public Offering.
In December 1997, the Company entered into a loan agreement with
NationsBank, N.A. (the "Bank Credit Facility") which allows for maximum
borrowing of $9.0 million, including (i) a $3.0 million revolving line of
credit with a $1.0 million overadvance provision, (ii) a $1.0 million capital
expenditure line of credit and (iii) a $4.0 million acquisition line of
credit. The Bank Credit Facility is collateralized by a lien on substantially
all of the assets of the Company. The Bank Credit Facility requires the
Company to meet certain covenants, including minimum net worth and cash flow
ratios. The Bank Credit Facility was amended at July 30, 1998 to remove
certain covenants, release the guarantees of a principal stockholder and an
entity affiliated with certain principal stockholders and to waive a violation
of the cash flow ratio as of April 30, 1998. The Company was in compliance
with the amended covenants, and had no amounts outstanding under the Bank
Credit Facility, as of July 31, 1998. The loans under the Bank Credit Facility
bear interest at the prime rate plus 0.5% per annum. Any amounts outstanding
under the Bank Credit Facility are due on November 30, 1998. The Company is
presently in discussions with the lender to replace this line of credit.
The Company currently leases 200 handheld computers from three lessors under
the terms of three master leases. Pursuant to a master lease agreement with
Leasing Innovations, Incorporated, the Company leases 150 handheld computers
for a term of 30 months under which the Company pays approximately $222,000 in
total annual rents. At the end of the term of the lease term, the Company may
purchase the equipment for its fair market value. Pursuant to a master lease
agreement with Nelco, Ltd., the Company leases 25 handheld computers for a
term of 42 months under which the Company pays approximately $45,000 in total
annual rents. At the end of the lease term, the Company may purchase the
equipment for $1.00 per handheld unit. The Company leases 25 handheld
computers for a term of 36 months pursuant to a master lease agreement with
Green Tree Vendor Services Corporation under which the Company pays
approximately $37,000 in total annual rents. The Company may purchase the
equipment for $1.00 per hand held unit at the end of the lease term. Under
each of the three handheld computer leases, the Company is responsible for
insurance, maintenance and taxes on the leased equipment.
The Company currently leases its offices under a lease from Platinum
Services Corporation, an entity affiliated with the Company by common
ownership and control. Pursuant to the terms of the lease, the Company pays
annual rent of $82,000, plus its allocable share of all taxes, utilities, and
maintenance. Although the lease terminates on December 31, 1998, the Company
expects to renew the lease on substantially similar terms for an additional
three year term.
In September 1996, the Company entered into a $3.0 million operating lease
facility with Forsythe/McArthur Associates, Inc. to finance cylinder displays
(the "Cylinder Display Lease Facility"). Under the Cylinder Display Lease
Facility, the Company leased cylinder display racks for a minimum term of 48
21
<PAGE>
months. The Company purchased the display racks leased under and terminated
the Cylinder Display Lease Facility with approximately $2.1 million of the
proceeds of the Initial Public Offering in May 1998.
In October 1995, the Company sold 12,575 units (the "Units") for $1,000 per
Unit, each Unit being comprised of a 10.5% Senior Discount Note due October
11, 2000 with a face value of $1,364.93 and a warrant to purchase
approximately 40 shares of Common Stock at an exercise price of approximately
$4.59 per share. The gross proceeds of the Unit offering was approximately
$12.6 million. See "Certain Transactions." The Senior Discount Notes were
repaid in full with approximately $16.5 million of the proceeds of, and the
warrants were converted in a cashless exercise into Common Stock in connection
with, the Initial Public Offering in May 1998.
In December 1994, the Company raised approximately $6.7 million pursuant to
an offering of its Series A Convertible Participating Preferred Stock
("Preferred Stock") and warrants to purchase 318,650 shares of Common Stock at
an exercise price of $0.45 per share. The Company used the proceeds primarily
to fund development of cylinder refurbishing and distribution plants and to
establish the infrastructure for its national cylinder exchange program. The
Preferred Stock and accrued preferred dividend were converted to Common Stock
in connection with the Initial Public Offering.
The Company anticipates that the total capital expenditures excluding
acquisitions for fiscal 1999 will be approximately $5.5 million, and will
relate primarily to cylinder displays, computer hardware and software
development. The Company's capital expenditure and working capital
requirements in the foreseeable future will change depending on the rate of
the Company's expansion, the Company's operating results and any other
adjustments in its operating plan as needed in response to competition,
acquisition opportunities or unexpected events. The Company believes that the
existing borrowing capacity under the Bank Credit Facility, together with the
remaining proceeds from the Initial Public Offering and cash provided by
operations, will be sufficient to meet the Company's working capital
requirements through fiscal 1999. There can be no assurance that the Company
will not seek or require additional capital in the future as a result of
future acquisitions, expansion or otherwise.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 130 ("SFAS No. 130")
establishes standards for reporting and display of comprehensive income and
its components (revenues, gains, expenses, losses) in a full set of general
purpose financial statements and is effective for fiscal years beginning after
December 15, 1997. Management of the Company does not expect SFAS No. 130 to
have any impact on the Company's consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
No. 131"). SFAS No. 131 requires public business enterprises to adopt its
provisions for periods beginning after December 15, 1997, and to report
certain information about operating segments in complete sets of financial
statements of the enterprise and in condensed financial statements of interim
periods issued to shareholders. Management of the Company does not expect SFAS
No. 131 to have any impact on the Company's consolidated financial statements.
In February 1998, the Financial Accounting Standards Board issued SFAS No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits"
("SFAS No. 132"). This statement standardizes the disclosure requirements for
pensions and postretirement benefits and will require changes in disclosures
of benefit obligations and fair values of plan assets. The Company believes
SFAS No. 132 will have no effect on its consolidated financial statements as
the Company has no pension or postretirement benefit plans.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and hedging activities. It also requires entities to
recognize all derivatives as
22
<PAGE>
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. Management of the Company does not
expect SFAS No. 133 to have any impact on the Company's consolidated financial
statements as the Company does not invest in any derivative instruments or
engage in any hedging activities.
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. The Company depends on its MIS to process
orders, manage inventory and accounts receivable collections, maintain
distributor and customer information, assist distributors in delivering
products on a timely basis and in maintaining cost-efficient operations. See
"Business--Management Information Systems."
The Company's State of Readiness for Year 2000. The Company began the
process of evaluating its MIS for Year 2000 compliance in January 1997. The
Company is developing a Year 2000 compliance policy encompassing employee
education, testing, progress reporting, funding requirements, external impact
plans and contingency plans. The Company has assigned its Chief Information
Officer ("CIO") to implement its Year 2000 compliance policy and oversee the
remediation and testing of MIS. The Company's non-information technology
systems are also being evaluated to determine whether such systems are Year
2000 compliant. Final test procedures for Year 2000 compliance are being
developed by the CIO. Currently, the Company believes that it is approximately
50% ready for the Year 2000. By March 31, 1999, management believes the
Company itself will be 100% Year 2000 compliant. In addition, the Company
intends to have solicited Year 2000 compliance certificates from all material
third parties by such date. However, if the Company's modifications, testing
and solicitations of third party compliance are not made on a timely basis or
do not resolve Year 2000 issues facing the Company, such issues could have a
material adverse effect on the Company's operations.
Historical and Estimated Costs. The Company has not established a separate
Year 2000 compliance budget and does not expect to do so in the immediate
future. To date, the Company has incurred approximately $8,000 in Year 2000
compliance costs. The Company currently anticipates that the implementation of
its Year 2000 compliance policy will cost approximately $35,000, all of which
will be expensed. Although no assurances can be given, management does not
expect future costs related to Year 2000 compliance to have a material adverse
effect on the Company's results of operations or financial condition. 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 facing the Company is an interruption of the Company's
business operations caused by the inadvertent failure of third parties with
which it has a material relationship to achieve Year 2000 compliance. The
consequences of such a third party failure are unknown, but could have a
material adverse effect on the Company's business. The Company is considering
several contingency plans to address possible business interruptions caused by
a non-compliant third party. Possible contingency plans include using
alternate service providers, increasing the inventory of critical raw
materials and using a manual payment and collection system. In addition, in an
effort to protect itself and increase the awareness of third parties with
which it has a material relationship, the Company is seeking to obtain
certifications from such third parties that they are Year 2000 compliant.
23
<PAGE>
BUSINESS
OVERVIEW
Blue Rhino is a leading provider of grill cylinder exchange in the United
States with Blue Rhino branded cylinder exchange displays at over 9,500 retail
locations in 46 states. Cylinder exchange provides consumers with a convenient
means to exchange empty grill cylinders for clean, safer, precision-filled
cylinders. Blue Rhino cylinder exchange is offered at leading home
center/hardware, mass merchant, grocery and convenience stores, including Home
Depot, Lowe's, Sears Hardware, WalMMart, Kroger and SuperAmerica. Blue Rhino
brand grill cylinders are delivered to retailers through a national network of
53 independent distributors. These independent distributors make the capital
investment in grill cylinders, refilling and refurbishing equipment and
vehicles necessary to operate a cylinder exchange business. This allows the
Company to focus on promoting brand identity, developing additional retail
relationships and supporting its distributor network by providing value-added
marketing, customer service and MIS.
Cylinder exchange is a relatively new retail concept and the Company
believes that consumer awareness of the benefits of cylinder exchange will
increase as the service becomes more widely available. During fiscal 1998,
Blue Rhino cylinder exchange displays were installed at over 5,000 additional
retail locations. The Company believes that there are approximately 225,000
potential grill cylinder exchange locations in the Company's target markets.
The Company's growth strategy includes increasing consumer awareness of
cylinder exchange, further promoting the Blue Rhino brand, increasing
penetration in both new and existing retail accounts and selectively pursuing
strategic acquisitions.
INDUSTRY BACKGROUND
Barbecue Grill Market. Outdoor barbecuing is increasingly one of the most
popular outdoor activities in the United States driven by consumer trends to
healthier food preparation, as well as the desire to spend more time outside
at family and social gatherings. The popularity of propane grills has
increased significantly in recent years with Barbecue Industry Association
("BIA") statistics indicating that propane grill sales now exceed the combined
sales of charcoal, natural gas and electric grills. According to a 1997 survey
("1997 BIA Study") conducted on behalf of the BIA, consumers enjoy the
convenience of propane grills over charcoal grills as they light easier, heat
up faster and require less preparation and clean up time. Furthermore, the
1997 BIA Study indicates that approximately 68% of propane grill owners use
their grills throughout the year.
According to the 1997 BIA Study, approximately 38.5 million United States
households own a propane grill, with the number of propane grill purchases
growing at a rate of 8% per year from 3.2 million in 1990 to more than 6.0
million in 1997. The 1997 BIA Study also indicates that the average propane
grill owner uses 1.8 cylinders of propane per year, creating an estimated
market for grill cylinder fills of approximately 69.0 million per year. Based
on these estimates, the Company believes the annual retail market for grill
cylinder refills is approximately $1.0 billion. There can be no assurance that
such growth rates will continue or be sustained or that the Company will
benefit from any such growth.
Grill Cylinder Exchange. In recent years, cylinder exchange has emerged as a
convenient alternative to refilling cylinders at traditional propane filling
stations. Cylinder exchange, in which the consumer exchanges an empty grill
cylinder for one which is full, is available at retail locations such as home
center/hardware, mass merchant, grocery and convenience stores. These
retailers typically have longer business hours and are more convenient for
consumers than filling stations. The Company believes that as cylinder
exchange becomes more widely available consumers will embrace it in place of
refilling, which often involves traveling to a remote location and waiting for
a refill. Growing consumer acceptance of cylinder exchange is indicated by BIA
estimates that cylinder exchange increased from less than 10% of grill
cylinder transactions in 1995 to 21% in 1997.
24
<PAGE>
The Company believes that the grill cylinder exchange industry is highly
fragmented with numerous regional distributors typically serving less than 500
locations each. The Company believes this fragmentation results in part from
the relative newness of cylinder exchange and the unique set of challenges
cylinder exchange poses to commercially focused traditional propane
distributors. To build critical mass at the consumer level, propane
distributors must establish and maintain relationships with major retailers,
many of which prefer to stock quality, branded products supplied by reliable,
sophisticated vendors. To service retail cylinder exchange accounts, propane
distributors must make capital investments in cylinder displays, grill
cylinders, refurbishing equipment and vehicles not used in their traditional
propane business. Finally, to properly account for complex exchange, upgrade
and sale transactions, propane distributors must invest in sophisticated
management information and accounting systems tailored to servicing retailers.
THE BLUE RHINO SOLUTION
Blue Rhino is creating a new paradigm for the cylinder exchange market which
provides benefits to consumers, retailers and distributors. Blue Rhino offers
consumers a new, convenient, branded product alternative to grill cylinder
refilling. Blue Rhino provides retailers with a high margin, turn-key branded
service which has the potential to increase customer traffic and utilization
of exterior retail space. In addition, Blue Rhino offers retailers a full
service program, including direct delivery, regular inventory maintenance,
centralized billing, electronic data interchange ("EDI") and detailed
reporting typically unavailable from traditional propane distributors. For
Blue Rhino's independent distributors, this cylinder exchange program provides
a counter-seasonal complement to their traditional propane business as well as
access to major retail accounts, sophisticated MIS and marketing support.
BUSINESS STRATEGY
Blue Rhino's strategy is to continue to build its national brand and
capitalize on its position as the leading grill cylinder exchange provider
through the following initiatives:
Promote the Blue Rhino Brand and Drive Consumer Awareness. The Company's
branding efforts focus on developing and maintaining a brand identity
synonymous with a convenient, clean and safer product. Blue Rhino has created
a distinctive Blue Rhino brand name and rhino logo which are prominently
displayed on cylinder sleeves and displays. The Company also plans to
undertake brand marketing and promotional initiatives, including point of
purchase displays, cross marketing promotions with other barbecue-related
products, print media and cooperative advertising. The Company's recognized
brand also provides a platform to introduce new Blue Rhino products to the
backyard living category.
Deliver Clean, Safer Cylinders at Convenient Locations. The Company believes
that convenience and safety are critical factors in achieving consumer
acceptance of cylinder exchange. Blue Rhino cylinder exchange allows consumers
to exchange empty cylinders for clean, precision-filled, cylinders at a
variety of well known, convenient retail locations. Blue Rhino distributors
refill and resleeve cylinders according to prescribed standards designed to
prevent overfills or refills of unsafe cylinders. Each Blue Rhino cylinder has
a consistent, like-new appearance, which the Company believes enhances retail
sales and consumer loyalty.
Expand Relationships and Increase Sales with Retailers. The Company's
relationships with major retailers such as Home Depot, Lowe's, Sears Hardware,
WalMMart, Kroger and SuperAmerica, allow it to place cylinders in a large
number of convenient, high traffic locations. The Company believes that its
ability to provide national and regional retailers with a single vendor for
branded grill cylinder exchange supported by value-added customer service,
marketing and MIS gives it a competitive advantage over traditional propane
distributors. The Company believes there are approximately 225,000 potential
grill cylinder exchange locations in its targeted markets of which it
currently services approximately 9,500. The Company plans to continue to
increase the number of new retail locations by driving sales within existing
retail accounts. In fiscal 1998, the Company added over 5,000 retail
locations. Historically, the Company's locations have experienced substantial
sales growth in the first year of operations. As a result, the Company
believes that as these locations mature they will experience higher sales
volumes.
25
<PAGE>
Leverage National Distributor Network. Over the past two years the Company
has established a network of 53 independent distributors serving 46 states.
The Company believes that this distribution network strategically positions it
to cover approximately 90% of the grilling markets in the United States. The
Company plans to leverage this network by aggressively increasing each
distributor's market penetration by adding new retail locations. Additionally,
five of these distributors are dedicated exclusively to developing and
providing Blue Rhino cylinder exchange in certain of the Company's key
geographic markets.
Pursue Strategic Account Acquisitions. The Company believes that in the
highly fragmented and regionally focused cylinder exchange industry,
opportunities exist to expand through selective acquisitions of smaller
cylinder exchange businesses with established retail accounts. The Company has
added over 2,200 retail locations in fiscal 1998 via a number of acquisitions
for a total purchase price of approximately $4.7 million, including
approximately $3.6 million in cash, seller financing of $318,000 and $750,000
worth of Common Stock. Subsequent to July 31, 1998, the Company has completed
three acquisitions representing approximately 450 retail locations and has
signed six letters of intent to acquire approximately 1,150 locations. The
Company intends to use the Common Stock offered hereby to make additional
strategic acquisitions. See "Risk Factors--Uncertainty of Ability to Grow
through Acquisitions."
BLUE RHINO CYLINDER EXCHANGE PROGRAM
A typical cylinder exchange transaction begins when a Blue Rhino distributor
visits a retail location to replenish the grill cylinder display. The
distributor enters an inventory of the cylinders in the display rack into a
handheld computer which, utilizing an advanced algorithm in the Company's
proprietary Blue Rhino Electronic Accounting System ("BREAS") software,
automatically calculates the number and type of cylinder exchanges, upgrades
and sales for the location and creates a delivery ticket for the retailer.
Distributors electronically transfer their delivery and inventory information
to Blue Rhino routinely. Blue Rhino then prepares a centralized bill for each
retailer which typically is transmitted in a customized electronic format
compatible with their existing systems. Blue Rhino collects invoiced amounts
directly from the retailers and in turn remits a fixed amount per cylinder
transaction to its distributors. The Company negotiates terms of payment with
retailers which are generally 30 days from the date of invoice, as is standard
for consumable retail products. The Company in turn remits payment to its
distributors on the fifteenth of each month for transactions occurring during
the previous month.
BLUE RHINO BRAND MARKETING
The Company's marketing efforts focus primarily on developing and
maintaining a brand identity synonymous with a convenient, clean and safer
product which enhances consumer loyalty and builds retailer and distributor
relationships. The Company's brand marketing efforts include the following
Company initiatives:
Blue Rhino Cylinder Packaging. Blue Rhino cylinders are covered with a
distinctive and colorful RhinoTUFF cylinder sleeve. The RhinoTUFF cylinder
sleeve contains safety and use information along with a prominent display of
the Blue Rhino name and rhino logo. The RhinoTUFF sleeve also protects the
cylinders from damage during shipping and handling and from exposure to the
elements. The Company believes that this unique branded packaging increases
consumer recognition and loyalty.
Blue Rhino Cylinder Displays. Blue Rhino cylinder displays, which
prominently feature the Blue Rhino name and logo, are typically located near a
retailer's main entrance or in their lawn and garden department providing
"billboard" advertising for the Company's products. The Company believes these
cylinder displays enhance consumer awareness of the Blue Rhino brand and
reinforce the association of Blue Rhino with convenient, clean and safer
grilling.
Promotions. Blue Rhino has selectively placed targeted broadcast and print
media advertising campaigns that focus on raising consumer awareness of the
Blue Rhino name and service. Such advertising may also include certain special
promotions to encourage purchases of spare filled cylinders before the
grilling season. Blue Rhino is actively involved with consumer, trade and
regulatory associations in an effort to promote the growth of cylinder
exchange. Ongoing Blue Rhino promotions include development of the Company's
web site
26
<PAGE>
(www.bluerhino.com), co-operative advertising programs, cooking and safety
demonstrations and direct mail initiatives.
RETAILER RELATIONSHIPS
The Company targets the following four categories of retailers:
<TABLE>
<CAPTION>
RETAIL CATEGORY MAJOR ACCOUNTS
--------------- --------------
<S> <C>
Home Centers/Hardware Stores Home Depot, Lowe's, Sears Hardware
Mass Merchants WalMMart, Kmart, Meijer
Grocery Stores Kroger, Food Lion, Winn Dixie
Convenience Stores SuperAmerica, Kwik Shop, Conoco
</TABLE>
Retailer Opportunity. Blue Rhino offers retailers the opportunity to
increase sales and profits with minimal time and financial investment. Blue
Rhino cylinder exchange is available to retailers nationally, providing
retailers with attractive sales margins while utilizing exterior retail space.
In addition, Blue Rhino has the potential to increase retailers' sales of
ancillary products through increased traffic from repeat cylinder exchange
customers and cross-marketing initiatives with other barbecue-related
products.
Account Set-Up. Blue Rhino actively assists distributors and retailers in
obtaining local permits to set up cylinder exchange program and developing a
site plan for cylinder displays. The permitting process is generally completed
within sixty days. Typically, within two weeks of obtaining the necessary
permits or other approvals, the distributor installs the cylinder displays at
the retail location. During the set-up process, Blue Rhino's customer service
and training personnel conduct in-store training and provide safety manuals to
store employees. See "Risk Factors--Varying Local Permitting Processes."
Account Service. Blue Rhino cylinder exchange is a turn-key program in which
the Company and its distributors set up new accounts, train store employees,
deliver the cylinders directly to retail locations, maintain the display racks
and cylinder inventory and provide ongoing marketing and sales support. In
addition, through its nationwide distributor network, the Company can install
and service the Blue Rhino program at almost any domestic location of the
retailer.
Sales Support. The Company's retail sales organization is divided into four
regions and includes seven corporate sales executives supported by a network
of approximately 500 independent sales representatives and grocery brokers.
This sales force is responsible for selling the Blue Rhino program to targeted
retailers and developing value-added relationships with manufacturers of
grills and other barbecue-related products. Blue Rhino's sales managers
analyze sales volume by location and coordinate promotions to maximize sales
opportunities.
Systems Support. Through the use of its electronic accounting software
BREAS, the Company provides accurate, timely customized invoices and can
provide EDI to relieve store managers of processing invoices generated by a
local propane distributor. The Company, through the use of its Online Account
Sales Information System ("OASIS"), is capable of providing retailers with
detailed information regarding sales trends at each of its Blue Rhino
locations.
Customer Service. The Company places a high priority on customer service and
as a result has hired a telemarketing service company, Ruppman Marketing
Technologies, Inc. ("Ruppman"), to provide customer and retailer assistance.
Ruppman is an experienced customer service organization which has provided
similar services to a variety of major consumer product companies, including
Saturn, Motorola Inc. and Sony Corp. By staffing this function through an
experienced outside vendor, the Company believes it provides a vital service
to its end-users while taking advantage of the cost savings associated with a
dedicated third party provider.
DISTRIBUTOR NETWORK
In an effort to build a strong national cylinder exchange program, Blue
Rhino has sought to attract experienced, well-capitalized, safety conscious
propane distributors to service its target gas grilling markets nationwide.
27
<PAGE>
Distributor Opportunity. Propane distributors have traditionally generated a
large part of their sales during cold weather months. Blue Rhino provides
distributors with an attractive counter-seasonal propane business and access
to major retail accounts in a growing market. The Company continually pursues
new relationships and additional locations with existing retail partners to
increase the density of each distributor's territory. Blue Rhino personnel are
experienced in regulatory matters and assist distributors in completing the
permitting and set-up process. The Company established the Distributor Option
Plan pursuant to which it has reserved 400,000 shares of its Common Stock for
issuance upon the exercise of options granted to distributors. The Company has
granted existing distributors options to purchase 240,887 shares under the
Distribution Option Plan. The Company, through its Rhino Services, L.L.C.
subsidiary, also offers distributors a cooperative propane buying program and
cylinder financing program. The Company leases cylinder display racks and
subleases handheld computers to its distributors. The cylinder display racks
are subject to leases pursuant to which the distributors pay the Company
monthly rental payments equal to 1% of the initial purchase price of the
display racks for the term of the lease. The distributors are also responsible
for maintenance, insurance and risk of loss with respect to the subleased
cylinder display racks. The cylinder display rack leases may be terminated by
either party on 60 days notice. The distributors pay $1.00 per month for each
handheld computer which they sublease from the Company, which is approximately
$155 less than the average monthly rents the Company pays on its leases for
the handheld computers. Either party may terminate the handheld computer
subleases on 60 days notice.
Distributor Standards. The Company sets standards for and continually
monitors its distributors to ensure a high level of account service.
Distributors are encouraged to develop an infrastructure sufficient to: (i)
complete customer installations within two weeks of receipt of all necessary
permits and governmental approvals; (ii) resolve stock-outs within 48 hours;
(iii) respond to emergency requests within 30 minutes; and (iv) refurbish and,
when necessary, recertify cylinders according to prescribed standards. The
Company helps ensure product quality by regularly checking on distributor
compliance with Blue Rhino refilling, packaging, safety and delivery
standards.
Distributor Selection Process. Blue Rhino has selectively identified and
pursued high quality distributors through direct contacts and industry trade
forums. The Company screens all distributor candidates by reviewing credit
reports and safety records and conducting management reference checks. As a
result of this thorough selection process, Blue Rhino has replaced only two
distributors to date.
Distributor Services. Blue Rhino employs business development managers to
cultivate and manage ongoing distributor relationships, address set-up and
servicing problems and provide distributors with marketing feedback and
industry updates. Blue Rhino also employs safety and training personnel who
provide set-up seminars and safety training. This continuing support allows
distributors to concentrate their efforts on opening and servicing retail
locations.
Dedicated Distributors. In order to establish a presence in and rapidly
develop certain key markets, the Company has entered into distribution
agreements with five distributors dedicated solely to providing Blue Rhino
cylinder exchange. Platinum Propane, the Company's largest distributor by
locations served and sales revenues generated, covers the Company's
south/southeast, Chicago and Los Angeles markets and Ceramic Industries Inc.
serves the Houston and Dallas markets. Three recently formed distributors,
Caribou Propane, Javelina Propane and Raven Propane service the Pacific
northwest, Phoenix and New Jersey/Philadelphia markets, respectively. See
"Risk Factors--Potential Conflicts of Interest in Enforcing Remedies Against
Distributors Owned by Affiliates."
Distribution Agreements. The Company has entered into distribution
agreements with each of its 53 distributors on substantially similar terms.
Pursuant to these agreements, each distributor must meet prescribed service
standards and maintain designated amounts of liability insurance naming the
Company as an additional insured party. The agreements typically run for a
term of five years and may be terminated by the Company if, among other
things, the distributor does not meet certain required service levels. Each
agreement also includes a two-year non-compete clause in the event an
agreement is terminated.
28
<PAGE>
In connection with the Company's transition from a vertically integrated
business model to an independent distributor business model, the Company sold
most of its distribution assets to its independent distributors. In most of
these sales the purchase price was represented by a promissory note from the
distributor to the Company payable monthly over 60 months and bearing 10.5%
interest. The Company has a lien on the assets which it sold to the
distributors pursuant to security agreements which contain standard
representations and covenants intended to protect the Company's security
interest. Currently seven distributors owe the Company in the aggregate
approximately $1.3 million for the purchase of distribution assets from the
Company.
MANAGEMENT INFORMATION SYSTEMS
The Company has made a substantial investment in MIS which enhances its
ability to serve retailers and helps to differentiate the Company from other
providers of cylinder exchange and cylinder refill services. Blue Rhino's
technology utilizes highly integrated, scalable software applications which
cost-effectively support the Company's growing retail location base. The
Company's systems also allow the Company to use historical data to further
enhance the execution, service and identification of new markets and marketing
opportunities. The primary components of the Company's systems include the
following:
Sales and Marketing Support System. In partnership with Information
Management System Services ("IMSS"), a subsidiary of R.J. Reynolds Tobacco
Company, the Company has developed and implemented a custom relational
database and information repository known as OASIS (Online Account Sales
Information System). This system facilitates the exchange of information
between distributors and the Company and allows the Company to develop a
database to track delivery and transaction statistics.
Distributor Level Technology. Each distributor is electronically linked to
the Company's accounting and database systems which allow drivers to provide
delivery, inventory and invoicing information through handheld computers. This
technology provides retailers with accurate and timely inventory and invoices
and assists the distributor in avoiding location stock-outs.
Financial Systems. The Company uses BREAS, a custom software module which
bridges the handheld computers used by the distributors to the Company's
accounting and financial reporting system. All delivery transaction
information entered into the handheld computers is uploaded routinely into
BREAS where it is validated and transmitted to the Company's accounting system
for invoice processing. Many retailers are invoiced via EDI, eliminating paper
processing of those transactions. The Company pays distributors via electronic
deposits to further minimize administrative costs. In connection with a
planned enhancement of BREAS, the system will be upgraded to address year 2000
compliance issues. The Company has engaged Integrated Solutions International,
L.L.C. to upgrade BREAS and believes that it will be fully operational and in
year 2000 compliance within the next six months, however any failure to
complete this upgrade by January 1, 2000 could lead to a significant
disruption in the Company's ability to account for sales and deliveries,
having a material adverse affect on the Company's business, financial
condition and results of operations. See "Risk Factors--Dependence on
Management Information Systems; Year 2000 Compliance" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Year
2000 Compliance."
COMPETITION
The grill cylinder refilling industry is highly fragmented and intensely
competitive. The Company competes primarily on the basis of quality of
product, service, perceived safety and price. The 1997 BIA Study results
indicated that approximately 79% of the retail demand for grill cylinders was
provided by traditional propane refilling stations rather than exchange. The
Company's 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. and Suburban Propane
Partners, L.P. offer cylinder exchange in limited locations and could expand
their cylinder exchange business nationally. These major propane providers
have greater resources than the Company and may be able to undertake more
extensive marketing campaigns and adopt more aggressive pricing policies than
the Company. The Company also competes with numerous regional cylinder
exchange programs which typically have operated in one or two states. There
can be no assurance that these competitors will not expand
29
<PAGE>
their cylinder exchange programs nationwide. Furthermore, there can be no
assurance that the Company will be able to compete effectively with current or
future competitors or that the competitive pressures faced by the Company will
not have a material adverse effect on the Company's business, financial
condition and results of operations. See "Risk Factors--Competition."
GOVERNMENTAL REGULATION
The storing and dispensing of propane is governed by guidelines published by
the NFPA in Pamphlets 54 and 58. Recent NFPA initiatives include a requirement
that all grill cylinders placed in use or recertified after September 30, 1998
be fitted with an overfill prevention device valve ("OPD Valve") and all grill
cylinders refilled after April 2002 have an OPD Valve. The distributor is also
governed by local laws and regulations which vary by municipality and state.
Typically, a distributor is required to obtain permits from a local fire
marshal for each location at which propane is sold. The Company's regional and
corporate staffs attempt to assist the distributors in this process whenever
feasible. The Company plays an active role in drafting model state legislation
through the National Propane Gas Association ("NPGA"), an industry
association, which attempts to make state and local legislation uniform to
provide consumers, retailers and distributors with up to date and appropriate
regulations and safety. See "Risk Factors--Regulation of Propane" and "--
Volatile Product; Potential Product Liability."
PROPRIETARY RIGHTS
The Company has invested substantial time, effort and capital in
establishing the Blue Rhino brand name and believes that its trademarks are an
important part of its business strategy. The Company has a trademark for the
use of the Blue Rhino name and logo and the RhinoTUFF name and trademark
applications pending for Tri-Safe and Fuel Check names. While the Company may
apply for additional trademarks or copyrights in the future, no assurance can
be given that any trademarks or copyrights will be issued, that any of the
Company's trademarks or patents will be held valid if subsequently challenged
or that others will not claim rights in or ownership of the trademarks or
copyrights and other proprietary rights held by the Company. See "Risk
Factors--Dependence on Trademarks, Proprietary Information and Copyrights."
LITIGATION
In the ordinary course of its business, the Company is 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 the financial position or results of operations
of the Company. See "Risk Factors--Volatile Product; Potential Product
Liability."
EMPLOYEES
As of July 31, 1998, the Company had 56 employees, of whom 17 were engaged
in sales and marketing, 11 in distributor services, five in information
systems and 23 in administration and finance. The Company has not experienced
any work stoppages and considers its relations with its employees to be good.
See "Risk Factors--Dependence on Key Personnel."
FACILITIES
The Company's headquarters are located in Winston-Salem, North Carolina in
facilities leased by the Company from Platinum Services Corporation, an entity
affiliated with the Corporation by common ownership and control. Pursuant to
the terms of the lease, the Company pays annual rent of $82,000, plus its
allocable share of all taxes, utilities and maintenance. Although the lease
terminates, on December 31, 1998, the Company expects to renew the lease on
substantially similar terms for an additional three-year term.
30
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Executive officers and directors of the Company, and their ages as of the
date hereof are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Billy D. Prim (1)....... 42 Chairman of the Board, President
and Chief Executive Officer
Andrew J. Filipowski 47
(1).................... Vice Chairman
Mark Castaneda.......... 34 Director, Secretary and Chief Financial Officer
Kay B. Martin........... 45 Vice President, Chief Information Officer
Richard E. Belmont...... 38 Vice President, Sales and Marketing
Joseph T. Culp.......... 41 Vice President, Partner Development
Steven D. Devick (2)(3). 46 Director
Craig J. Duchossois 53
(1)(2)................. Director
Richard A. Brenner 35
(2)(3)................. Director
John H. Muehlstein (3).. 43 Director
</TABLE>
- --------
(1) Member of the Executive Committee.
(2)Member of the Compensation Committee.
(3)Member of the Audit Committee.
Billy D. Prim co-founded the Company in March 1994 and has served as its
Chief Executive Officer and Chairman of the Board 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
Company, Inc., a North Carolina based holding company which until April 1995
was also a distributor of propane gas, home heating oil, diesel fuel and
kerosene. Mr. Prim is a director and part owner of several privately-held
companies, including Platinum Propane, Caribou Propane, Javelina Propane and
Raven Propane which act as distributors for the Company, and Bison Valve,
L.L.C. which borrowed $635,000 from the Company pursuant to a convertible
loan. Mr. Prim is also a director of Southern Community Bank & Trust and the
NPGA.
Andrew J. Filipowski co-founded the Company in March 1994 and has served as
Vice Chairman of the Board since May 1994. Mr. Filipowski is a co-founder of
Platinum Technology, Inc. and has been its Chairman of the Board, President
and Chief Executive Officer since its formation in April 1987. Mr. Filipowski
is also a director of Platinum Entertainment, Inc., Eagle River Interactive,
System Software Associates, Inc. and several privately-held companies
including Platinum Propane, Caribou Propane, Javelina Propane and Raven
Propane which act as distributors for the Company.
Mark Castaneda has served as Chief Financial Officer since October 1997 as
Secretary since February 1998 and as a director since August 1998. Prior to
joining the Company, 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.
Kay B. Martin has served as Vice President and Chief Information Officer
since March 1997. Prior to joining the Company, Ms. Martin served as the
Director of Information Resources for R.J. Reynolds Tobacco Company from March
1988 to March 1997.
31
<PAGE>
Richard E. Belmont has served as Vice President of Sales and Marketing since
March 1995. Prior to joining the Company, Mr. Belmont was the product planning
manager and parts and product manager with the Char-Broil Division of W.C.
Bradley Co. from January 1990 to March 1995. Mr. Belmont is currently a
director of the BIA.
Joseph T. Culp has served as Vice President of Partner Development since
November 1995. Prior to joining the Company, Mr. Culp was the general manager
of Skelgas Propane, Inc. from February 1994 to November 1995, and as a
regional manager for Suburban Propane Partners, L.P. from January 1981 to
February 1994.
Steven D. Devick has served as a director since May 1994. Mr. Devick is the
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 a director of Platinum Technology, Inc., as
well as serving as an officer and director of several privately-held
companies.
Craig J. Duchossois has served as a director since May 1994. Mr. Duchossois
has been the Chief Executive Officer of Duchossois Industries, Inc., a
privately-held diversified manufacturing and service company since 1995, and
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 National Bank as well as several privately-held
companies, including Bison Valve, L.L.C.
Richard A. Brenner, has served as a director since August 1998. Mr. Brenner
has served as President of Amarr Company since July 1993. Mr. Brenner has
served on the Board of Advisors of Wachovia Bank since 1993 and also acts as a
board member for several privately-held companies.
John H. Muehlstein has served as a director since September 1995. Since
1986, Mr. Muehlstein has been a partner of the law firm of Pedersen & Houpt,
P.C., legal counsel to the Company. Mr. Muehlstein also serves as a director
of Einstein/Noah Bagel Corp., SpinCycle, Inc. and several privately-held
companies.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has an Executive Committee, a Compensation Committee
and an Audit Committee. The Executive Committee makes recommendations to the
Board of Directors concerning matters of strategic planning and operational
management of the Company and has the power to address matters on behalf of
the Board of Directors which require attention between meetings of the Board
of Directors. The Compensation Committee makes recommendations to the Board of
Directors concerning salaries and incentive compensation for the Company's
officers and employees, administers the 1994 Stock Incentive Plan ("1994 Stock
Incentive Plan"), the Company's 1998 Stock Incentive Plan ("1998 Stock
Incentive Plan"), Distributor Incentive Stock Option Plan ("Distributor Option
Plan") and Non-Employee Director Stock Option Plan ("Director Option Plan").
Prior to September 1997, decisions concerning the compensation of officers
were made by the Board of Directors as a whole. The Audit Committee makes
recommendations to the Board of Directors regarding the selection of
independent accountants, reviews the results and scope of the audit and other
accounting related services and reviews and evaluates the Company's internal
control functions.
DIRECTOR COMPENSATION
Directors currently receive no cash compensation for their service on the
Board of Directors, although they are reimbursed for all reasonable expenses
incurred in connection with the performance of their duties as directors.
Prior to the consummation of the Initial Public Offering, the directors were
eligible to receive stock options under the 1994 Stock Incentive Plan. After
the consummation, Directors are currently eligible to receive options under
the Director Option Plan. In April 1995, the Company issued to each of six
directors an option to purchase 3,781 shares of Common Stock at a purchase
price of $4.59 per share and in August 1996 identical grants were made to two
additional directors. The Board of Directors has approved an annual grant
under the Director Option Plan to each director of an option to purchase 1,000
shares of Common Stock at a price per share equal to the fair market value per
share of Common Stock as of the grant date for each quarterly director's
meeting which such director attended during the previous year (aggregating a
maximum grant of 4,000 options per year). See "--Director Option Plan."
32
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
paid by the Company for the fiscal year ended July 31, 1998 and 1997 to the
Company's Chief Executive Officer and its other executive officers whose total
salary plus bonus exceeded $100,000 for such fiscal year ("Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
------------------- -----------------
SHARES UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY STOCK OPTIONS
--------------------------- ---- -------- -----------------
<S> <C> <C> <C>
Billy D. Prim, 1998 $218,538 43,312
Chief Executive Officer 1997 $125,250 57,088
Richard E. Belmont, 1998 $112,708 26,890
Vice President Sales and Market-
ing 1997 $106,727 1,890
Joseph T. Culp 1998 $109,710 26,890
Vice President of Partner Devel-
opment 1997 $104,242 1,890
Mark Castaneda (1) 1998 $ 78,846 32,561
Secretary and Chief Financial Of-
ficer 1997 $ -- --
Kay B. Martin 1998 $102,288 26,890
Vice President and Chief Informa- 1997 $ 38,712(2) 5,671
tion Officer
</TABLE>
- --------
(1) Mr. Castaneda's salary reflects amounts earned from the commencement of
his employment in October 1997 through July 1998.
(2) Ms. Martin's salary reflects amounts earned from the commencement of new
employment in February 1997 through July 1997.
OPTION GRANTS
The following table sets forth information on grants of stock options to the
Named Officers pursuant to the 1994 Stock Incentive Plan and the 1998 Stock
Incentive Plan during fiscal 1998.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES
NUMBER OF % OF OF STOCK PRICE
SECURITIES TOTAL OPTIONS EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO PRICE OPTION TERM(2)
OPTIONS EMPLOYEES IN PER EXPIRATION ---------------------
NAME GRANTED(1) FISCAL YEAR SHARE DATE 5% 10%
---- ---------- ------------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Billy D. Prim........... 40,000 13.6% $13.00 5/18/08 $ 327,025 $ 828,746
3,312(3) 1.1% $ 6.61 8/1/07 13,759 34,882
Richard E. Belmont...... 25,000 8.5% $13.00 5/18/08 204,391 517,966
1,890(3) 0.6% $ 6.61 8/1/07 7,852 19,906
Joseph T. Culp.......... 25,000 8.5% $13.00 5/18/08 204,391 517,966
1,890(3) 0.6% $ 6.61 8/1/07 7,852 19,906
Mark Castaneda.......... 25,000 8.5% $13.00 5/18/08 204,391 517,966
7,561(3) 2.6% $ 6.61 8/1/07 31,411 79,633
Kay B. Martin........... 25,000 8.5% $13.00 5/18/08 204,391 517,966
1,890(3) 0.6% $ 6.61 8/1/07 7,852 19,906
</TABLE>
- --------
(1) Except as described in note 3 below, Options are granted pursuant to the
1998 Stock Incentive Plan. These options have a term of ten years, are
nonqualified stock options and have an exercise price equal to the fair
value of the Common Stock on the date of grant. Options vest 25% on each
anniversary of the grant date until fully vested and are exercisable upon
vesting. In determining the fair market value of the Common Stock for
options issued prior to the establishment of a public market for the
Common Stock, the Compensation Committee relied on the estimate of the mid
point of the estimated range of the offering price for the Common Stock
per the Initial Public Offering.
33
<PAGE>
(2) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Commission and do not represent the Company's
estimate or projection of the Company's future Common Stock prices.
(3) Options were granted pursuant to the 1994 Stock Incentive Plan. These
options have a term of ten years, are nonqualified stock options and have
an exercise price equal to the actual or estimated fair value of the
Common Stock on the date of grant. All options issued under the 1994 Stock
Incentive Plan are fully vested and exercisable. In determining the fair
market value of the Common Stock, for options issued prior to the
establishment of a public market for the Common Stock, the Board of
Directors considered various factors, including the Company's financial
condition and business prospects, its operating results and the absence of
a market for its Common Stock.
The following table sets forth information with respect to unexercised stock
options granted under the 1994 Stock Incentive Plan as of the end of fiscal
1998. The Named Officers did not exercise any stock options during fiscal
1998.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS AT
HELD AT JULY 31, 1998 JULY 31, 1998(1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Billy D. Prim............... 64,180 40,000 $585,144 $120,000
Richard E. Belmont.......... 15,122 25,000 $164,901 $ 75,000
Joseph T. Culp.............. 15,122 25,000 $164,901 $ 75,000
Mark Castaneda.............. 7,561 25,000 $ 70,978 $ 75,000
Kay B. Martin............... 7,561 25,000 $ 70,978 $ 75,000
</TABLE>
- --------
(1) Calculated by determining the difference between the fair market value of
the securities underlying the options at July 31, 1998 of $16.00 per share
and the exercise price of the Named Officer's options.
1994 STOCK INCENTIVE PLAN
The 1994 Stock Incentive Plan was adopted by the Board of Directors and
approved by the stockholders in December 1994 and has 181,853 shares of Common
Stock reserved for issuance upon the exercise of Options granted thereunder.
As of July 31, 1998, Options to purchase 181,853 shares of Common Stock at a
weighted average exercise price of $6.03 per share were outstanding under the
1994 Stock Incentive Plan. Upon consummation of the Initial Public Offering,
the Company accelerated the vesting of all outstanding Options under its 1994
Stock Incentive Plan. No additional options, stock appreciation rights,
restricted stock or deferred stock will be granted under the 1994 Stock
Incentive Plan.
1998 STOCK INCENTIVE PLAN
The Board of Directors has adopted and the stockholders have approved the
1998 Stock Incentive Plan effective as of May 18, 1998. The Company has
reserved 300,000 shares of Common Stock for issuance upon the exercise of
options to be granted under the 1998 Stock Incentive Plan. As of April 30,
1998 no options were outstanding under this Plan. In May 1998 the Company
granted options to purchase 275,300 Common Shares at an exercise price of
$13.00 per share. Pursuant to the 1998 Stock Incentive Plan, the Company may
make grants of options to officers, employees, consultants and advisors of the
Company to encourage them to acquire a proprietary interest in the Company and
to generate an increased incentive to contribute to the Company's future
success and prosperity. Options granted under the 1998 Stock Incentive Plan
are not "qualified stock options," as that term is defined in Section 422(b)
of the Internal Revenue Code of 1986, as amended (the "Code"). The
Compensation Committee of the Board of Directors is the administrator for the
1998 Stock Incentive Plan and has the power to select officers, employees,
consultants and advisors for participation, determine the number of shares of
Common Stock subject to each grant and the vesting, price and terms of
exercise for each option granted thereunder. The Compensation Committee also
may adjust the number of shares of Common Stock subject to option grants in
case of stock dividends, stock splits, recapitalizations and other similar
events. Options
34
<PAGE>
may not be assigned or transferred except by will or operation of the laws of
descent and distribution. Subject to vesting requirements, options granted
under the 1998 Stock Incentive Plan may be exercised only by the participant,
with certain exceptions in the event of death during his or her employment
with or engagement by the Company.
DIRECTOR OPTION PLAN
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.
The Board of Directors has approved an annual grant to each Director under the
Director Option Plan of options to purchase 4,000 shares of Common Stock at a
price per share equal to the fair market value per share of the Common Stock
as of the grant date consisting of 1,000 shares for each quarterly board
meeting such director attended during the previous year. One third of these
options will vest on each of the first three anniversaries of the grant date.
Currently no options are outstanding under this plan. See "--Director
Compensation."
Options granted under the Director Option Plan are not "qualified stock
options," as that term is defined in Section 422(b) of the Code. The
Compensation Committee of the Board of Directors administers the Director
Option Plan and has the power to adjust the number of shares of Common Stock
subject to option grants in case of stock dividends, stock splits,
recapitalizations and other similar events. Each option granted under the
Director Option Plan is exercisable for a period not to exceed ten years from
the date of grant and shall lapse upon expiration of such period. Options may
not be assigned or transferred except by will or operation of the laws of
descent and distribution and each option is exercisable during the lifetime of
the optionee only by such optionee.
DISTRIBUTOR OPTION PLAN
In November 1997, the Board of Directors adopted and the stockholders
approved the Distributor Incentive 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. In May 1998, the Company granted
Options to purchase 240,887 shares of Common Stock to existing Blue Rhino
distributors at an exercise price equal to $13.00 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.
Blue Rhino adopted the Distributor Option Plan to assist in attracting and
retaining distributors, provide distributors an incentive to offer quality
service to and increase the number of Blue Rhino customer accounts and to
promote the identification of the distributor's interests with those of the
Company's stockholders. Options issued under the Distributor Option Plan will
not be "qualified stock options" as that term is defined in Section 422(b) of
the Code, nor is the Distributor Option Plan an "employee benefit plan" as
that term is defined under Rule 405 promulgated under the Securities Act. The
Compensation Committee of the Board of Directors administers the Distributor
Option Plan and has the power to select distributors for participation and to
determine the number of shares of Common Stock subject to each grant. The
exercise price for options granted to distributors under the Distributor
Option Plan will be the market price of the Company's Common Stock on the date
of the option grant. Options granted under the Distributor Option Plan will
typically have a term of ten years and vest over four years with 25% vesting
on the first anniversary of the end of the quarter during which the options
were granted and on each subsequent end of quarter anniversary thereafter
until fully vested. The Company intends to register the shares of Common Stock
reserved for sale to distributors upon the exercise of vested options granted
under the Distributor Option Plan. In the event the Company does not or is
unable to register shares in a sufficient number to issue to distributors upon
their exercise of vested options issued under the Distributor Option Plan, the
options shall be exercisable only in the event exemptions from registration
under the Securities Act and state "blue sky" laws exist for the issuance of
shares upon the exercise of the option.
35
<PAGE>
401(K) PLAN
The Company's employees participate in the Platinum Service Corporation
401(k) plan, a multi-employer plan established in July 1994 to serve employees
of Blue Rhino and its subsidiaries, Platinum Propane and its subsidiaries and
Platinum Rotisserie, Inc., and its subsidiaries. All employees of the Company
who have been employed for one year or more are eligible to participate in the
plan beginning on the first day of the first fiscal quarter following the
completion of 1,000 hours of service. Participants in the 401(k) plan may
contribute up to 10% of their total base compensation to the plan. Each
employee's interest in contributions of the Company, if any, vests 20% per
year of service with the Company. Contributions by the Company are at the
Company's discretion and no such contributions have been made to date.
CERTAIN TRANSACTIONS
TRANSACTIONS WITH STOCKHOLDERS AND DIRECTORS
Billy D. Prim and Andrew J. Filipowski founded the Company in March 1994
contributing the assets of American Cylinder Exchange, Inc. in consideration
for 746,692 and 589,792 shares of the Company's Common Stock, respectively.
In December 1994, the Company sold 1,570,221 shares of Preferred Stock and
warrants to purchase 318,650 shares of Common Stock at an exercise price of
approximately $0.45 per share for an aggregate purchase price of approximately
$6.7 million. The exercise price for the warrants, which were granted as an
added incentive to invest in the Company's first round of capital raising, was
based upon 1/10 of the then estimated fair market value of the Company's
Common Stock. Mr. Prim purchased 3,268 shares of Preferred Stock for $15,000
and Mr. Filipowski purchased 444,630 shares of Preferred Stock and warrants to
purchase 127,037 shares of Common Stock for an aggregate purchase price of
approximately $2.0 million.
In May 1995, Messrs. Filipowski and Duchossois, each a director and
stockholder of the Company, along with Messrs. Robert S. Steel and Peter H.
Huizenga, former directors of the Company, loaned $800,000 in aggregate to
Blue Rhino at 7.84% per annum. Each also received a warrant to purchase 2,179
shares of Common Stock at an exercise price of $4.59 per share. The Company
has repaid this loan in full. At the same time, Platinum Venture Partners I,
L.P. ("PVP"), a stockholder of the Company, loaned the Company $600,000 at
7.84% per annum and received a warrant to purchase 6,537 shares of Common
Stock at an exercise price of $4.59 per share. Messrs. Devick, Liautaud,
Filipowski, Prim and Duchossois, each a director of the Company, hold a
limited partnership interest in PVP. The Company has repaid this loan in full.
In June 1995, the Company entered into a $6.0 million credit facility with
Bank of America, Illinois. Messrs. Prim, Filipowski, Duchossois, Steel and
Huizenga executed limited guarantees of this indebtedness and received a
warrant to purchase Common Stock at an exercise price of $4.59 per share in
consideration therefor. Messrs. Prim, Filipowski and Duchossois each received
a warrant to purchase 39,219 shares; Mr. Huizenga received a warrant to
purchase 52,293 shares; and Mr. Steel received a warrant to purchase 26,146
shares. In addition, PVP received a warrant to purchase 19,610 shares of
Common Stock in connection with this credit facility. The Company has repaid
and terminated the credit facility and the obligations of the aforementioned
stockholders under the guarantees have lapsed.
In October 1995, the Company sold 12,575 Units for $1,000 per Unit, each
Unit consisting of a 10.5% Senior Discount Note with a face value of $1,364.93
and a warrant to purchase approximately 40 shares of Common Stock at an
exercise price of approximately $4.59 per share. Mr. Prim, individually and
through affiliates, purchased 25 Units, Mr. Filipowski purchased 200 Units and
Mr. Duchossois and his affiliates purchased 1,000 Units. In consideration for
their assistance in securing financing, certain individuals received in the
aggregate 72,589 warrants to purchase Common Stock at an exercise price of
$4.59 per share which included 7,561 warrants issued to Mr. Huizenga and
27,095 warrants issued to Mr. Duchossois and his affiliates. All outstanding
Senior Discount Notes were repaid in full with a portion of the proceeds from
Initial Public Offering and the warrants were exercised concurrently with the
consummation of the Initial Public Offering.
36
<PAGE>
In June 1996, the Company awarded distributorships for North Carolina, South
Carolina, Georgia, Florida and parts of Virginia and Tennessee to Platinum
Propane Corporation ("PPC"), an entity indirectly owned and managed by Messrs.
Prim and Filipowski. The terms of the distribution agreements are
substantially the same as those negotiated with other Blue Rhino distributors.
In March 1997, Messrs. Prim and Filipowski contributed the assets and certain
liabilities of PPC to Platinum Propane Holding, L.L.C. ("Platinum Propane") in
exchange for approximately 40% of the membership interests in Platinum
Propane. In March 1997, Platinum Propane raised approximately $4.8 million in
a private placement of membership interests pursuant to which Mr. Duchossois
and his affiliates invested $375,000. On March 1, 1997, the Company sold
151,229 shares of Common Stock and a warrant to purchase 113,422 shares of
Common Stock at an exercise price of $6.61 per share to Platinum Propane for
an aggregate purchase price of $1.0 million. At the same time, the Company
entered into distributor agreements with subsidiaries of Platinum Propane
covering the Chicago, Illinois and Los Angeles, California territories, in
addition to the territories previously served by PPC. Messrs. Prim and
Filipowski have the ability to select, and currently occupy, two of the seven
director positions at Platinum Propane. In fiscal 1996 PPC received
approximately $1.6 million, and in fiscal 1997 and 1998, Platinum Propane
received approximately $5.3 million and $7.9 million, respectively, from the
Company on behalf of cylinder distribution services performed by them. The
Company has also entered into display rack financing leases with Platinum
Propane requiring lease payments of $12,116 per month as of July 31, 1998.
From March 1994 until June 1996, the Company leased a 13,000 square foot
warehouse and refurbishing facility in Booneville, North Carolina from Mr.
Prim. The lease provided for $1,000 rent per month on a triple net basis. The
Company also leased equipment at this facility from American Oil and Gas, Inc.
of which Messrs. Prim and Filipowski own approximately 91% of the outstanding
stock. These leases were assigned to PPC in June 1996.
Since March 1994, the Company has leased its offices in Winston-Salem, North
Carolina from Platinum Services Corporation, an entity owned 65% by Mr.
Filipowski, 30% by Mr. Prim and 5% by Mr. S. H. Fogleman III, a former
director. Pursuant to the terms of the lease, the Company pays annual rent of
$82,000, plus its allocable share of all taxes, utilities and maintenance.
Although the lease terminates on December 31, 1998, the Company expects to
renew the lease on substantially similar terms for an additional three year
term.
In January 1998, Messrs. Filipowski, Duchossois along with James Liautaud, a
stockholder and former director, and Lennard Carlson, a stockholder,
collectively loaned the Company $3.25 million (the "1998 Stockholder Loans")
which accrued interest at 10.5% per annum until May 1998 when they were repaid
in full with a portion of the proceeds from the Initial Public Offering.
Messrs. Filipowski, Duchossois, Liautaud and Carlson also received warrants to
purchase approximately 0.08 shares of Common Stock for every $3.00 they loaned
to the Company for a total of 81,913 shares (the "1998 Warrants"). The 1998
Warrants may be exercised prior to December 31, 2008 at a price per share of
$13.00.
The Company entered into distribution agreements in February 1998 with
Caribou Propane and Javelina Propane to service its Pacific northwest and
Phoenix markets respectively and in May 1998 with Raven Propane to service its
Philadelphia/New Jersey markets. Messrs. Prim and Filipowski own 45% of the
membership interests in Caribou Propane, Javelina Propane and Raven Propane.
The terms of the distribution agreements are substantially the same as those
negotiated with other Blue Rhino distributors. In fiscal 1998, Caribou
Propane, Javelina Propane and Raven Propane received approximately $31,000,
$118,000 and $381,000, respectively from the Company on behalf of cylinder
distribution services performed by them.
In May 1998, the Company granted Caribou Propane, Javelina Propane, Platinum
Propane and Raven Propane options to purchase 4,600, 5,282, 74,461 and 10,051
shares of Common Stock respectively under the Distributor Option Plan. These
options vest 25% on July 31, 1999 and each July 31st thereafter until fully
vested and may be exercised at a price of $13.00 per share on or before May
18, 2008.
Mr. Muehlstein, a director of the Company, is also a stockholder in the firm
of Pedersen & Houpt, P.C., legal counsel to the Company.
37
<PAGE>
The Company believes that the foregoing transactions with directors,
officers, stockholders and other affiliates were completed on terms as
favorable to the Company as could have been obtained from unaffiliated third
parties. The Company has adopted a policy that it will not enter into any
material transaction in which a Company director, officer or stockholder has a
direct or indirect financial interest, unless the transaction is determined by
the Company's Board of Directors to be fair as to the Company or is approved
by a majority of the Company's disinterested directors or by the Company's
stockholders.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of August 31, 1998 and as adjusted to reflect
the sale of the Common Stock offered hereby by (i) each person known by the
Company to own beneficially more than 5% of the Common Stock; (ii) each
director of the Company; (iii) each Named Officer; and (iv) all executive
officers and directors as a group.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY SHARES
OWNED PRIOR TO BENEFICIALLY
THE OWNED AFTER THE
OFFERING(1)(2) OFFERING(1)(3)
----------------- -----------------
NAME AND ADDRESS NUMBER PERCENT NUMBER PERCENT
- ---------------- --------- ------- --------- -------
<S> <C> <C> <C> <C>
DIRECTORS AND OFFICERS:
Andrew J. Filipowski(4)
1815 S. Meyers Road
Oakbrook Terrace, IL 60181 .............. 1,851,869 23.4% 1,851,869 20.8%
Billy D. Prim(5)
104 Cambridge Plaza Drive
Winston-Salem, NC 27104.................. 1,344,497 17.0% 1,344,497 15.1%
Craig J. Duchossois(6)
845 Larch Avenue
Elmhurst, IL 60126....................... 404,078 5.1% 404,078 4.5%
Richard E. Belmont(7)
104 Cambridge Plaza Drive
Winston-Salem, NC 27104.................. 15,122 * 15,122 *
Richard A. Brenner
464 Sheffield Drive
Winston-Salem, NC 27104.................. 8,665 * 8,665 *
Joseph T. Culp(8)
104 Cambridge Plaza Drive
Winston-Salem, NC 27104.................. 15,422 * 15,422 *
Mark Castaneda(9)
104 Cambridge Plaza Drive
Winston-Salem, NC 27104.................. 8,061 * 8,061 *
John H. Muehlstein(7)
161 N. Clark Street, Suite 3100
Chicago, IL 60601........................ 3,781 * 3,781 *
Steven D. Devick(10)
2001 Butterfield Road, Suite 1400
Downers Grove, IL 60515.................. 332,119 4.2% 332,119 3.7%
Kay B. Martin(11)
104 Cambridge Plaza Drive
Winston-Salem, NC 27104.................. 8,561 * 8,561 *
Directors and executive officers as a group
(10 individuals).......................... 3,240,755 41.0% 3,240,755 36.4%
</TABLE>
- --------
* Less than 1%.
38
<PAGE>
(1) Beneficial ownership is determined in accordance with the rules of the
Commission. In computing the number of shares beneficially owned by a
person and the percentage ownership of that person, shares of Common
Stock subject to options or warrants held by that person that are
currently exercisable or exercisable within 60 days of the date hereof
are deemed outstanding. Except as indicated in the footnotes to this
table and as provided pursuant to applicable community property laws, the
stockholders named in the table have sole voting and investment power
with respect to the shares set forth opposite each stockholder's name.
(2) The Shares Beneficially Owned Prior to the Offering reflects 7,630,873
shares outstanding, 81,913 shares issuable upon the exercise of the 1998
Warrants and 181,853 shares issuable upon the exercise of vested options
as of September 30, 1998.
(3) The Shares Beneficially Owned After the Offering reflects the issuance of
up to 1,000,000 shares of Common Stock pursuant to the offering.
(4) Includes 1,029,879 shares of Common Stock owned by Mr. Filipowski, 18,903
shares of Common Stock issuable upon the exercise of vested Options under
the 1994 Stock Incentive Plan held by Mr. Filipowski, 36,546 shares of
Common Stock to be issued upon exercise of the 1998 Warrants, 216,127
shares of Common Stock owned by American Oil and Gas, Inc., of which Mr.
Filipowski owns 40% of the issued and outstanding shares, 206,955 shares
owned by Platinum Propane, of which Mr. Filipowski acts as a director and
indirectly owns 16% of the membership interests, 328,338 shares of Common
Stock owned by Platinum Venture Partners I, L.P. ("PVP"), the general
partner of which is Platinum Venture Partners, Inc. ("PVP, Inc."), a
corporation of which Mr. Filipowski owns 22.5% of the shares and serves
as a director, 1,890 shares of Common Stock beneficially owned by
Jennifer R. Filipowski, 1,890 shares of Common Stock beneficially owned
by Mr. Filipowski as trustee on behalf of the Andrew E. Filipowski Trust,
1,890 shares of Common Stock beneficially owned by Veronica Champney as
trustee on behalf of the Alexandra Filipowski Trust, 1,890 shares of
Common Stock beneficially owned by Veronica Champney as trustee on behalf
of the James Meadows Trust and 7,561 shares of Common Stock beneficially
owned by Veronica Champney.
(5) Includes 845,894 shares of Common Stock held by Mr. Prim, 64,180 shares
of Common Stock issuable upon the exercise of vested Options under the
1994 Stock Incentive Plan held by Mr. Prim, 216,127 shares of Common
Stock owned by American Oil and Gas, Inc., of which Mr. Prim owns 51% of
the issued and outstanding shares and has voting control, 206,955 shares
owned by Platinum Propane, of which Mr. Prim acts as a director and
indirectly owns 20.4% of the membership interests, 7,561 shares of Common
Stock beneficially owned by Debbie W. Prim, 1,890 shares of Common Stock
beneficially owned by Debbie W. Prim as trustee on behalf of Sarcanda
Westmoreland and 1,890 shares of Common Stock beneficially owned by
Debbie W. Prim as trustee on behalf of Anthony G. Westmoreland.
(6) Includes 285,446 shares of Common Stock beneficially owned by the Craig
Duchossois Revocable Trust of which Mr. Duchossois is the trustee, 36,546
shares of Common Stock to be issued upon exercise of the 1998 Warrants,
includes 2,500 shares of Common Stock beneficially owned by R. Bruce
Duchossois over which Mr. Duchossois has voting and investment control
includes 3,781 shares of Common Stock issuable upon the exercise of
vested options held by Mr. Duchossois, and 75,805 shares of Common Stock
beneficially owned by the Kimberly Family Discretionary Trust over which
Mr. Duchossois has voting and investment control.
(7) Represents the number of shares issuable upon the exercise of vested
Options.
(8) Includes 300 shares of Common Stock owned by Mr. Culp and 15,122 shares
of Common Stock issuable upon the exercise of vested Options held by Mr.
Culp.
(9) Includes 500 shares of Common Stock owned by Mr. Castaneda and 8,061
shares of Common Stock issuable upon the exercise of vested Options held
by Mr. Castaneda.
(10) Includes 3,781 shares issuable upon the exercise of vested Options held
by Mr. Devick and 328,338 shares owned beneficially by PVP, the general
partner of which is PVP, Inc.
(11) Includes 1,000 shares of Common Stock owned by Ms. Martin and 8,561
shares of Common Stock issuable upon the exercise of vested Options held
by Ms. Martin.
39
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 100,000,000 shares
of Common Stock having a par value of $0.001 per share and 20,000,000 shares
of "blank check" preferred stock having a par value of $0.001 per share.
The following description of the Company's capital stock and certain
provisions of Company's Second Amended and Restated Certificate of
Incorporation (the "Charter") and the Company's By-laws is qualified in its
entirety by the provisions of the Charter and By-laws (which are included as
exhibits to the Registration Statement of which this Prospectus is a part) and
the General Corporation Law of the State of Delaware (the "DGCL").
COMMON STOCK
All outstanding shares of Common Stock are fully paid and nonassessable. The
holders of Common Stock are entitled to one vote for each share held of record
on all matters voted upon by stockholders and may not cumulate votes. Thus,
the owners of a majority of the Common Stock outstanding may elect all of the
directors if they choose to do so, and the owners of the balance of such
shares would not be able to elect any directors. Subject to the rights of
holders of any future series of Preferred Stock that may be designated, each
share of outstanding Common Stock is entitled to participate equally in any
distribution of net assets made to the stockholders in a liquidation,
dissolution or winding up of the Company and is entitled to participate
equally in dividends if, as and when declared by the Board. There are no
redemption, sinking fund, conversion or preemptive rights with respect to the
shares of Common Stock. All shares of Common Stock have equal rights and
preferences. See "Risk Factors--Control by Existing Stockholders."
1998 WARRANTS
The 1998 Warrants represent the rights of the holders to purchase in the
aggregate 81,913 shares of Common Stock at an exercise price of $13.00 per
share. The 1998 Warrants are exercisable until December 31, 2008.
REGISTRATION RIGHTS
Pursuant to the terms of an Amended and Restated Registration Rights
Agreement dated March 1, 1997 among the Company and certain of its
stockholders and the Asset Purchase Agreement dated December 9, 1997 between
the Company and Bison Propane Bottle Exchange, L.L.C., stockholders who held
approximately 2,758,000 shares of Common Stock are entitled to certain
registration rights, at the Company's expense, with respect to such shares.
All such rights have been waived in connection with the registration of shares
covered by this Prospectus.
PREFERRED STOCK
The Board of Directors is authorized, subject to certain limitations
prescribed by law, without further stockholder approval, to issue from time to
time up to 20,000,000 shares of preferred stock and to determine the price,
rights, preferences and privileges of those shares. In addition, the terms of
the preferred stock and the rights of the holders of Preferred Stock may
adversely affect the rights of the holders of Common Stock. While the Company
has no present intention to issue shares of preferred stock, such issuance
could have the effect of making it more difficult for a third party to acquire
a majority of the outstanding voting stock of the Company. In addition, such
preferred stock may have other rights, including economic rights senior to the
Common Stock, and, as a result, the issuance thereof could have a material
adverse effect on the market value of the Common Stock.
40
<PAGE>
LOCK UP AGREEMENTS
Certain stockholders of the Company, including the executive officers and
directors, who own in the aggregate 3,577,438 shares of Common Stock have
agreed that they will not, without the prior written consent of Hambrecht &
Quist LLC, the managing underwriter of the Initial Public Offering, directly
or indirectly sell, offer, contract to sell, transfer the economic risk of
ownership in, make any short sale, pledge or otherwise dispose of any shares
of Common Stock or any securities convertible or exchangeable for or any other
rights to purchase or acquire Common Stock owned by them prior to November 16,
1998. The Company has agreed that it will not, without the prior written
consent of Hambrecht & Quist LLC, directly or indirectly sell, offer, contract
to sell, transfer the economic risk of ownership in, make any short sale,
pledge or otherwise dispose of any shares of Common Stock or any securities
convertible or exchangeable for or any other rights to purchase or acquire
Common Stock prior to November 16, 1998, except that the Company may issue
shares upon the exercise of options granted prior to May 18, 1998, and may
grant additional options under its stock option plans, provided, that, without
the prior written consent of Hambrecht & Quist LLC, such additional options
shall not be exercisable during such period. On November 16, 1998, all of the
shares of Common Stock subject to such agreements will be eligible for sale
subject, in certain cases, to certain volume and other limitations of Rule 144
under the Securities Act applicable to affiliates of the Company. The Company
has obtained the consent of Hambrecht & Quist LLC to offer the shares covered
by this Prospectus.
In addition, the Company may from time to time, in an effort to maintain an
orderly market in the Common Stock, negotiate agreements with persons
receiving Common Stock covered by this Prospectus that will limit the number
of shares that may be sold by such persons at specified intervals. Such
agreements may be more restrictive than restrictions on sales made pursuant to
the exemption from registration requirements of the Securities Act, including
the requirements under Rule 144 or Rule 145(d), and certain persons party to
such agreements may not otherwise be subject to such Securities Act
requirements. The Company anticipates that, in general, such negotiated
agreements will be of limited duration and will permit the recipients of
Common Stock issued in connection with acquisitions to sell up to a specified
number of shares per business day or days.
CERTAIN PROVISIONS OF DELAWARE LAW
Business Combination Provision. The Company is subject to the provisions of
Section 203 of the DGCL. Subject to certain exceptions, Section 203 prohibits
a publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless
the interested stockholder attained such status with the approval of the Board
or unless the business combination is approved in a prescribed manner. A
"business combination" includes mergers, assets sales and other transactions
resulting in a financial benefit to the interested stockholder. Subject to
certain exceptions, an "interested stockholder" is a person who, together with
affiliates and associates, owns, or within three years did own, 15% or more of
the corporation's voting stock.
Limitation on Liability. As permitted by the provisions of the DGCL, the
Charter eliminates, in certain circumstances, the monetary liability of
directors of the Company for a breach of their fiduciary duty as directors.
These provisions do not eliminate the liability of a director: (i) for a
breach of a director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions by a director not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) for liability
arising under Section 174 of the DGCL (relating to the declaration of
dividends and purchase or redemption of shares in violation of the DGCL), or
(iv) for any transaction from which the director derived an improper personal
benefit. In addition, these provisions do not eliminate the liability of a
director for violations of federal securities laws, nor do they limit the
rights of the Company or its stockholders, in appropriate circumstances, to
seek equitable remedies such as injunctive or other forms of non-monetary
relief. Such remedies may not be effective in all cases.
If the DGCL is amended to authorize a further limitation or elimination of
the liability of directors or officers, then the liability of a director or
officer of the Company shall, in addition to the limitation of personal
41
<PAGE>
liability provided in the Charter, be limited or eliminated to the fullest
extent permitted by the DGCL, as from time to time amended.
ANTI-TAKEOVER EFFECT OF PROVISIONS OF CHARTER AND BY-LAWS
Certain provisions of the Company's Charter and By-laws could discourage
potential acquisition proposals and could delay or prevent a change in control
of the Company. These provisions are intended to enhance the likelihood of
continuity and stability in the composition of the Board and in the policies
formulated by the Board and to discourage certain types of transactions that
may involve an actual or threatened change of control of the Company, such as
an unsolicited acquisition proposal. Because these provisions could have the
effect of discouraging a third party from acquiring control of the Company,
they may inhibit fluctuations in the market price of shares of Common Stock
that could otherwise result from actual or rumored takeover attempts and,
therefore could deprive stockholders of an opportunity to realize a takeover
premium. These provisions also may have the effect of limiting the price that
certain investors might be willing to pay in the future for shares of the
Company's Common Stock and of preventing changes in the management of the
Company.
Election and Removal of Directors. The Company's Board of Directors is
divided into three classes of directors serving staggered three year terms,
thereby preventing a change in a majority of the Board in any single year.
Ordinary vacancies in the Board may be filled by the affirmative vote of the
Board members then in office.
Stockholder Consent. The Charter provides that stockholder action can be
taken only at an annual or special meeting of stockholders and cannot be taken
by written consent in lieu of a meeting. In addition, the Charter provides
that, except as otherwise required by law, special meetings of the
stockholders can be called only pursuant to a resolution adopted by a majority
of the Board, the Chairman of the Board or the President. Stockholders
desiring to nominate persons for the election of directors or to have other
business placed on the agenda of a meeting of the stockholders must give
written notice to the Board of Directors of such request 90 days in advance of
the date that notice of such meeting will be sent to all stockholders.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is LaSalle National
Bank, Chicago, Illinois.
LEGAL MATTERS
The legality of the Common Stock being offered hereby will be passed upon
for the Company by Pedersen & Houpt, P.C., Chicago, Illinois ("Pedersen &
Houpt"). John H. Muehlstein, a director of the Company, is also a stockholder
of Pedersen & Houpt.
EXPERTS
The consolidated financial statements of the Company as of July 31, 1997 and
1998 and for each of the three fiscal years in the period ended July 31, 1998
included in this Prospectus have been audited by PricewaterhouseCoopers LLP,
independent accountants as stated in their report appearing herein and are
included in reliance upon such report given upon the authority of that firm as
experts in accounting and auditing. The financial information appearing in
this Prospectus as of July 31, 1995 and July 28, 1996 and for the fiscal year
ended July 31, 1995 have been audited by PricewaterhouseCoopers, LLP,
independent accountants and are included in reliance upon the authority of
that firm as experts in accounting and auditing.
The financial information appearing in this Prospectus for the period July
1, 1994 (date of commencement of operations) through July 31, 1994 has been
audited by The Daniel Professional Group, Inc., independent auditors, and is
included in reliance upon the authority of that firm as experts in accounting
and auditing.
42
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
BLUE RHINO CORPORATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants......................................... F-2
Consolidated Balance Sheets as of July 31, 1997 and 1998.................. F-3
Consolidated Statements of Operations for the Fiscal Years Ended July 28,
1996, and July 31, 1997 and 1998......................................... F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for
the Fiscal Years Ended July 28, 1996, and July 31, 1997 and 1998......... F-5
Consolidated Statements of Cash Flows for the Fiscal Years Ended July 28,
1996, and July 31, 1997 and 1998......................................... F-6
Notes to Consolidated Financial Statements................................ F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of and Stockholders of
Blue Rhino Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in stockholders' equity
(deficit) and cash flows present fairly, in all material respects, the
financial position of Blue Rhino Corporation and its subsidiaries at July 31,
1998 and 1997, and the results of their operations and their cash flows for
each of the three fiscal years in the period ended July 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits 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 our audits provide a reasonable basis for the opinion
expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Greensboro, North Carolina
September 22, 1998
F-2
<PAGE>
BLUE RHINO CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF JULY 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
ASSETS 1997 1998
------ -------- --------
<S> <C> <C>
Cash and cash equivalents.................................. $ 325 $ 5,908
Trade accounts receivable, net............................. 3,110 7,771
Cylinder inventories....................................... 220 2,377
Notes receivable........................................... 417 540
Prepaid expenses and other current assets.................. 81 487
-------- --------
Total current assets................................... 4,153 17,083
Property and equipment, net................................ 4,438 8,418
Notes receivable........................................... 1,196 1,424
Intangibles, net........................................... 104 3,532
Other assets............................................... 83 120
-------- --------
Total assets........................................... $ 9,974 $ 30,577
======== ========
<CAPTION>
LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
---------------------------------------------
<S> <C> <C>
Trade accounts payable..................................... $ 2,407 $ 4,421
Acquisition notes payable.................................. 81 212
Current portion of long-term debt and capital lease
obligations............................................... 165 286
Accrued liabilities........................................ 763 475
-------- --------
Total current liabilities.............................. 3,416 5,394
Long-term debt, less current maturities.................... 15,142 104
Notes payable to bank...................................... 840 --
Capital lease obligations, less current maturities......... 128 156
-------- --------
Total liabilities...................................... 19,526 5,654
-------- --------
Commitments
Convertible redeemable preferred stock..................... 8,936 --
-------- --------
Stockholders' equity (deficit):
Common stock, $0.001 par value, 100,000,000 shares
authorized, 1,778,921 and 7,630,873 shares issued and
outstanding at July 31, 1997 and 1998, respectively..... 2 8
Additional paid-in capital............................... 332 46,320
Accumulated deficit...................................... (18,822) (21,405)
-------- --------
Total stockholders' equity (deficit)................... (18,488) 24,923
-------- --------
Total liabilities, convertible redeemable preferred
stock and stockholders'
equity (deficit)...................................... $ 9,974 $ 30,577
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
BLUE RHINO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED JULY 28, 1996, AND JULY 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Net sales--distributors............................. $ 2,386 $13,060 $27,372
Net sales--direct................................... 5,830 1,151 --
------- ------- -------
Total net sales................................. 8,216 14,211 27,372
------- ------- -------
Cost of sales:
Cost of sales--distributors....................... 1,811 9,873 20,525
Cost of sales--direct............................. 6,089 1,771 --
------- ------- -------
Total cost of sales............................. 7,900 11,644 20,525
------- ------- -------
Gross profit.................................... 316 2,567 6,847
------- ------- -------
Operating expenses (income):
Sales and marketing............................... 1,112 1,950 2,392
General and administrative........................ 3,192 3,022 3,591
Lease income, net................................. (89) (143) (81)
Depreciation and amortization..................... 868 873 1,278
Nonrecurring charges.............................. 1,363 970 563
------- ------- -------
Total operating expenses........................ 6,446 6,672 7,743
------- ------- -------
Loss from operations............................ (6,130) (4,105) (896)
Other expenses (income):
Interest expense.................................. 1,469 1,665 1,707
Other income, net................................. (168) (186) (234)
------- ------- -------
Net loss........................................ $(7,431) $(5,584) $(2,369)
======= ======= =======
Basic and diluted loss per common share............. $ (4.96) $ (3.74) $ (1.01)
======= ======= =======
Weighted average common shares used in computing
basic
and diluted loss per common share.................. 1,628 1,678 2,945
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
BLUE RHINO CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
FOR THE FISCAL YEARS ENDED JULY 28, 1996 AND, JULY 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
COMMON ADDITIONAL
----------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ------ ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
Balances, July 31, 1995.... 1,687,428 $ 2 $ 20 $ (5,171) $ (5,149)
Cancellation of restricted
stock for nonvested
terminations.............. (59,735) -- (1) -- (1)
Preferred dividends........ -- -- -- (636) (636)
Net loss................... -- -- -- (7,431) (7,431)
--------- --- ------- -------- --------
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
Compensation expense
related to 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................... -- -- -- (2,369) (2,369)
--------- --- ------- -------- --------
Balances, July 31, 1998.... 7,630,873 $ 8 $46,320 $(21,405) $ 24,923
========= === ======= ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
BLUE RHINO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED JULY 28, 1996, JULY 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $(7,431) $(5,584) $(2,369)
Adjustments to reconcile net loss to net cash used
in operating activities:
Accretion on senior discount notes.............. 1,049 1,489 1,378
Depreciation and amortization................... 868 873 1,278
Nonrecurring charges............................ 1,268 963 285
Compensation expense related to Distributor
Option Plan.................................... -- -- 50
Changes in operating assets and liabilities, net
of business
acquisitions:
Trade accounts receivable..................... (990) (1,186) (4,661)
Cylinder inventories.......................... (473) 127 (1,726)
Other current assets.......................... 35 166 (389)
Accounts payable.............................. 624 1,045 1,516
Accrued liabilities........................... (120) (85) (261)
------- ------- -------
Net cash used in operating activities....... (5,170) (2,192) (4,899)
------- ------- -------
Cash flows from investing activities:
Business acquisitions............................. -- -- (3,640)
Payment of organizational costs................... -- -- (25)
Proceeds from disposal of cylinders............... 29 340 --
Purchases of property and equipment............... (1,840) (537) (2,283)
Proceeds from disposal of property and equipment.. 360 159 65
Issuance of note receivable....................... -- -- (635)
Collections on notes receivable................... 58 380 496
------- ------- -------
Net cash (used in) provided by investing
activities................................. (1,393) 342 (6,022)
------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of
expenses paid of $3,947 in 1998.................. -- 1,000 36,418
Proceeds from issuance of preferred stock......... 100 400 --
Proceeds from issuance of senior discount notes... 12,575 -- --
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............... 2,700 3,995 8,411
Payments on notes payable to bank................. (4,900) (3,155) (9,251)
Payment on cylinder display lease facility........ -- -- (2,119)
Payments on acquisition notes payable............. (669) (90) (108)
Payment of debt issuance costs.................... (57) (58) (108)
Repayment of note payable to vendor............... (948) (752) --
Payments on long-term debt and capital lease
obligations...................................... (1,321) (291) (248)
------- ------- -------
Net cash provided by financing activities... 7,480 1,049 16,504
------- ------- -------
Increase (decrease) in cash and cash equivalents.. 917 (801) 5,583
Cash and cash equivalents at beginning of period.. 209 1,126 325
------- ------- -------
Cash and cash equivalents at end of period........ $ 1,126 $ 325 $ 5,908
======= ======= =======
Supplemental disclosure of cash paid for:
Interest.......................................... $ 428 $ 176 $ 342
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
BLUE RHINO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
FOR THE FISCAL YEARS ENDED JULY 28, 1996, JULY 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Supplemental schedule of non-cash investing and financing activities:
During the fiscal years ended July 28, 1996, and July 31, 1997 and 1998, the
Company entered into capital lease obligations in the amounts of approximately
$541, $243, and $306, respectively, for computers, vehicles and certain
equipment.
In connection with the conversion to an independent distributor network, as
further discussed in Note 1, the Company consummated the following
transactions:
. During the fiscal year ended July 31, 1997, the Company transferred
capital leases to distributors for vehicles with remaining book values of
$351 and remaining obligations of approximately $344.
. In the fiscal years ended July 31, 1997 and 1998, the Company sold
cylinders and certain equipment aggregating approximately $310 and $224,
respectively, in exchange for notes receivable from distributors (Notes 4
and 15).
. In the fiscal year ended July 31, 1997, certain assets approximating $70
were reclassified as notes receivable.
During the fiscal year ended July 31, 1998, the Company purchased certain
assets from existing cylinder exchange companies under various agreements
which have been recorded as follows (Note 5):
<TABLE>
<S> <C>
Property and equipment........... $ 774
Cylinders........................ 439
Intangibles...................... 3,495
-------
$ 4,708
=======
Cash paid........................ $ 3,640
Common stock issued.............. 750
Acquisition notes payable........ 318
-------
$ 4,708
=======
</TABLE>
The Company accreted preferred dividends from paid in capital and
accumulated deficit of $636, $687 and $596 for the fiscal years ended July 28,
1996, and July 31, 1997 and 1998, respectively.
The Company has unpaid costs associated with its Initial Public Offering of
$373 outstanding at July 31, 1998.
The Company financed the premiums on certain insurance policies in the
amount of $164.
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE>
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 (the "Company" or "Blue Rhino") was founded in March
1994 and commenced operations on July 1, 1994. The Company has become the
leading provider of grill cylinder exchange in the United States offering
consumers a convenient means to obtain fuel for their barbecue grills. The
Company currently offers three types of grill cylinder transactions: (i) like
for like cylinder exchanges; (ii) cylinders with valve upgrades offering
additional safety features; and (iii) outright cylinder sales. The Company
originally focused on serving markets in the southeastern United States and
has since developed a network of independent distributors which deliver Blue
Rhino grill cylinder exchange to retail locations across the United States.
Since its formation, the Company has focused on creating an infrastructure
to support its nationwide cylinder exchange program. Initially, the Company
developed a vertically integrated operation, purchasing and leasing grill
cylinders, cylinder displays, filling sites, refurbishing equipment and
delivery trucks while at the same time developing a sales, marketing and
management information systems ("MIS") infrastructure. In March 1996, the
Company began to transition from a vertically integrated business model to an
independent distributor business model in order to implement its cylinder
exchange program in a more capital efficient manner and to accelerate
development of its program. At this time, the Company began to dispose of
distribution assets and began to enter into exclusive agreements with
independent distributors to refurbish and refill cylinders and service Blue
Rhino's retail accounts. As a result, the Company has significantly
accelerated the growth of its nationwide service, pursued additional retailer
relationships and invested in the sales, marketing and MIS infrastructure to
support its growing cylinder exchange program. The Company expects to focus
future capital investments on cylinders, cylinder displays and continued
enhancement of its MIS. The transition to a 100% independent distributor
network was completed in the fourth quarter of fiscal 1997.
While the Company believes that it has created the infrastructure necessary
to support a nationwide cylinder exchange program, development of this
infrastructure has resulted in an accumulated deficit of approximately $21.4
million as of July 31, 1998. Management believes that by leveraging the
distributors' existing infrastructure the Company has eliminated significant
capital requirements necessary to support the geographic expansion and further
penetration throughout the nation's significant demographic markets.
Management believes that the existing infrastructure and independent
distribution business model will improve future cash flows.
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. All intercompany transactions
and balances have been eliminated in consolidation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Revenue Recognition--Revenues are recognized upon delivery of cylinders to
customer locations. Sales returns, which are immaterial, occur principally
upon removal of cylinders and deinstallation of cylinder displays from
customer locations.
Cash and Cash Equivalents--The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents. Cash equivalents consisting of certificates of deposit totaled
$115 and $1,126 at July 31, 1997 and 1998, respectively.
Trade Accounts Receivable, Net--Trade accounts receivable, net include
allowances for doubtful accounts of approximately $154, and $264 at July 31,
1997 and 1998, respectively.
F-8
<PAGE>
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Cylinder Inventories--Cylinder inventories are valued at the lower of cost
or market determined on a first-in, first-out (FIFO) basis and represent
cylinders held for sale.
Property and Equipment, Net--Property and equipment are stated at cost and
depreciated over the estimated useful lives of the related assets using the
straight-line method. The estimated useful lives are principally 30 years for
buildings and leasehold improvements, 10 years for machinery and equipment,
vehicles and cylinder displays, 5 years for computer hardware and 3 years for
computer 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
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 (Note 11), impairments to property and equipment
recorded in 1997 and 1998 were $736 and $283, respectively.
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 of intangible assets is periodically reviewed by the Company, as well
as, the amortization period 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 sales and marketing
expenses. Advertising and promotion costs for the fiscal years ended July 28,
1996, and July 31, 1997 and 1998 were $16, $36 and $114, 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.
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, 1997 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 trade
accounts receivable. The Company continually monitors the credit quality of
the domestic financial institutions in which temporary investments are
maintained. 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
F-9
<PAGE>
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
trade accounts receivable is limited. The Company's three largest customers
accounted for approximately 46%, 58% and 58%, of sales in the fiscal years
ended July 28, 1996, and July 31, 1997 and 1998 as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Customer A....................... 30% 29% 26%
Customer B....................... 16 16 16
Customer C....................... -- 13 16
--- --- ---
46% 58% 58%
=== === ===
</TABLE>
Approximately 32% and 53% of trade accounts receivable at July 31, 1997 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.
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.
Statement of Accounting Standards not yet Adopted--Statement of Financial
Accounting Standards ("SFAS") No. 130 ("SFAS No. 130") establishes standards
for reporting and display of comprehensive income and its components
(revenues, gains, expenses, losses) in a full set of general purpose financial
statements and is effective in Fiscal 1999 for the Company. Management of the
Company does not expect SFAS No. 130 to have any impact on the Company's
Consolidated Financial Statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
No. 131"). Statement 131 requires public business enterprises to adopt its
provisions for periods beginning after December 15, 1997, and to report
certain information about operating segments in complete sets of financial
statements of the enterprise and in condensed financial statements of interim
periods issued to shareholders. Management of the Company does not expect SFAS
No. 131 to have any impact on the Company's consolidated financial statements.
In February 1998, the Financial Accounting Standards Board issued SFAS No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits"
("SFAS No. 132"). This statement standardizes the disclosure requirements for
pensions and postretirement benefits and will require changes in disclosures
of benefit obligations and fair values of plan assets. The Company believes
SFAS No. 132 will have no effect on its financial statements as the Company
has no pension or postretirement benefit plans.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and hedging activities. It also requires entities to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. Management of
the Company does not expect SFAS No. 133 to have any impact on the Company's
consolidated financial statements as the Company does not invest in any
derivative instruments or engage in any hedging activities.
Reclassification--Certain prior year amounts have been reclassified to
conform to the presentation adopted in fiscal 1998.
F-10
<PAGE>
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3. PROPERTY AND EQUIPMENT, NET:
Property and equipment consists of the following at July 31:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Land................................................... $ 20 $ 20
Building and leasehold improvements.................... 661 661
Cylinder displays, including panel graphics............ 3,188 7,688
Machinery and equipment................................ 1,361 1,235
Computer hardware and software......................... 175 654
Equipment leased under capital leases.................. 346 492
------- -------
5,751 10,750
Less accumulated depreciation and amortization
(including $65 and $144, respectively, for equipment
under capital leases)................................. (1,313) (2,332)
------- -------
$4,438 $ 8,418
======= =======
</TABLE>
Depreciation and amortization expense for the fiscal years ended July 28,
1996, and July 31, 1997 and 1998 was $683, $764 and $1,101, respectively.
4. NOTES RECEIVABLE:
In connection with the conversion to the distributor program discussed in
Note 1, the Company has financed the sale of cylinders and certain equipment
principally to distributors, including Platinum Propane Holding, L.L.C.
("PPH") (Note 15), who now service territories previously serviced by the
Company. These notes receivable are due at various times through 2002 and are
payable monthly with interest ranging from 9.25% to 12.5%.
On February 12, 1998, the Company loaned $635 to Bison Valve, L.L.C. ("Bison
Valve"), an entity formed to market, produce and sell a specialty valve to the
Company's distributors and third parties. The loan is convertible into 65% of
the membership units of Bison Valve, at $1 per unit, at the option of the
Company. In the event of non-conversion the loan accrues interest at 9.5% for
four (4) years after which the principal and accrued interest will be
amortized over two (2) years.
The aggregate maturities of these notes receivable at July 31, 1998 are as
follows:
<TABLE>
<S> <C>
1999.............................. $ 540
2000.............................. 350
2001.............................. 432
2002.............................. 510
2003 and after.................... 132
------
$1,964
======
</TABLE>
Interest income related to these notes for the fiscal years ended July 31,
1997 and 1998 was approximately $182 and $159, respectively. The notes
receivable from the sale of cylinders are collateralized by the cylinders.
5. INTANGIBLES, NET:
During fiscal 1998, the Company completed a number of acquisitions (the
"Acquisitions") for approximately $4.7 million in the aggregate related to
assets including cylinders, cylinder display racks and other equipment and the
right, title and interest in and to sellers' retail propane cylinder exchange
accounts and locations.
F-11
<PAGE>
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The aggregate purchase price was paid approximately $3.6 million in cash,
initially financed with borrowings under the Bank Credit Facility and
subsequently repaid with proceeds from the Initial Public Offering, $750 in
common stock and $318 in seller financing. 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.
Intangibles consist of the following at July 31:
<TABLE>
<CAPTION>
1997 1998
---- ------
<S> <C> <C>
Goodwill.................................................... $124 $3,518
Noncompete agreements....................................... -- 102
Accumulated amortization.................................... (20) (88)
---- ------
$104 $3,532
==== ======
</TABLE>
Amortization expense for the fiscal years ended July 28, 1996, July 31, 1997
and 1998 was $8, $14 and $68, respectively.
The following unaudited pro forma summary presents the financial information
as if the acquisitions had occurred on August 1, 1996. 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, 1996, nor it is indicative of future results.
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Net sales.............................................. $17,611 $28,717
======= =======
Net loss............................................... $(5,459) $(2,320)
======= =======
Net loss per common share.............................. $ (3.66) $ (0.99)
======= =======
</TABLE>
6. NOTES PAYABLE TO BANK:
On December 18, 1997, the Company entered into a short-term loan Agreement
(the "Bank Credit Facility") which allows for maximum borrowings up to $9.0
million including a $3.0 million revolving line of credit based on 80% of
eligible receivables with a $1.0 million overadvance provision, a $1.0 million
capital expenditures line of credit and a $4.0 million acquisition line of
credit. These lines of credit mature on November 30, 1998 and bear interest at
the prime rate (8.50% at July 31, 1998) plus 0.5%. As of July 31, 1998, the
Company had no outstanding borrowings under the Bank Credit Facility.
The agreement requires payment of a fee of 0.25 percent of the average
unused portion of the revolving line of credit, and requires the Company to
meet certain covenants, including minimum net worth and earnings before
interest, taxes, depreciation and amortization and restricts the level of
capital expenditures, as defined. The Company was in compliance with these
covenants as of July 31, 1998.
The Bank Credit Facility was amended at July 30, 1998 to remove certain
covenants, release the guarantees of a principal stockholder and an entity
affiliated with certain principal stockholders and to waive a violation of the
cash flow ratio as of April 30, 1998.
7. NOTES PAYABLE TO VENDOR AND STOCKHOLDER LOANS:
In January 1998, several stockholders collectively loaned the Company $3.25
million (the "1998 Stockholder Loans"). The 1998 Stockholder Loans were repaid
in full in May 1998, including accrued interest
F- 12
<PAGE>
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
at 10.5% with $3.4 million of the proceeds from the 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.
Prior to the conversion to the distributor program, the Company financed the
acquisition of certain cylinders with its primary cylinder vendor. The
original line of credit was for purchases up to approximately $1.9 million and
was to be repaid in various installments including interest at prime plus 1%.
The balance due on this note was paid in full during fiscal year ended July
31, 1997.
8. LONG-TERM DEBT:
Long-term debt consists of the following at July 31:
<TABLE>
<CAPTION>
1997 1998
------- ----
<S> <C> <C>
Senior discount notes due October 2000...................... $15,113 $--
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............. 65 174
------- ----
15,178 174
Less amounts due within one year............................ 36 70
------- ----
$15,142 $104
======= ====
</TABLE>
The aggregate maturities of long-term debt at July 31, 1998 are $70, $66 and
$38 for 1999, 2000 and 2001, respectively.
In October 1995, the Company issued 12,575 units, each consisting of
approximately $1 principal amount (approximately $17.2 million aggregate) of
senior discount notes due in October 2000 and warrants to purchase 39.764
shares of common stock. The gross proceeds were $12,575. The notes accreted in
value at an effective rate of 10.5% through May 1998 until they were repaid
with proceeds from the Initial Public Offering in the amount of $16,491. Each
warrant entitled the holders to acquire one share of common stock for $4.5896
per share. At the time of issuance, the warrants represented approximately 10%
of the common stock outstanding on a fully diluted basis The warrants were
converted into 938,789 shares of common stock in May 1998.
9. CAPITAL LEASE OBLIGATIONS:
Capital lease obligations for computer equipment as of July 31, 1998 are as
follows:
<TABLE>
<S> <C>
1999................................................................. $254
2000................................................................. 157
2001................................................................. 10
----
Total minimum lease payments......................................... 421
Less imputed interest at varying rates ranging from 11.75% to 19%.... 49
----
Present value of minimum lease payments.............................. 372
Less current maturities.............................................. 216
----
$156
====
</TABLE>
10. OPERATING LEASES AND OTHER COMMITMENTS:
The Company leases certain office and vehicle 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.
F-13
<PAGE>
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Rent expense on these facilities and equipment for the fiscal years ended
July 28, 1996 and July 31, 1997 and 1998 was $435, $44 and $21, respectively.
In addition, the Company leases certain plant facilities and equipment to
distributors including PPH (Note 15). Lease income under these leases was $62,
$118 and $118 for the fiscal years ending 1996, 1997 and 1998, respectively.
In September 1996, the Company entered into a $3.0 million operating lease
facility to finance cylinder displays. In May 1998, the Company repaid the
lease facility, aggregating $2,119, with proceeds from the initial public
offering. Rental expense under this lease for the fiscal years ended July 31,
1997 and 1998 was approximately $152 and $485, respectively.
Lease income, net on the consolidated statements of operations is made up of
the following for the fiscal years ended:
<TABLE>
<CAPTION>
1996 1997 1998
---- ----- -----
<S> <C> <C> <C>
Lease income.......................................... $(89) $(295) $(566)
Lease expense......................................... -- 152 485
---- ----- -----
Net (income) expense.................................. $(89) $(143) $ (81)
==== ===== =====
</TABLE>
Future minimum lease payments at July 31, 1998 from non-cancelable operating
leases with both affiliates (Note 15) and non-affiliates with initial or
remaining terms of one year or more are $109, $41, $33, $27 and $1 for 1999,
2000, 2001, 2002 and 2003, respectively.
The Company also executes operating lease agreements with its distributors
including PPH (Note 15) for cylinder displays (both leased and owned) 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 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 cylinder displays. Lease income for the fiscal years ended
July 28, 1996 and July 31, 1997 and 1998 was approximately $27, $177 and $448,
respectively. As of July 31, 1998, estimated future minimum rental payments to
be received are approximately $664 per year through the year 2003.
In December 1997, the Company entered into a service agreement with
Information Management System Services ("IMSS") whereby IMSS will provide
certain electronic data processing and telecommunications services including
the provision of customized software and hardware. Fees under the service
agreement for fiscal year ended July 31, 1998 were $306.
11. NONRECURRING CHARGES:
As described in Note 1, 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 in fiscal years ended July
28, 1996 and July 31, 1997 and 1998 as summarized below:
<TABLE>
<CAPTION>
1996 1997 1998
------ ---- ----
<S> <C> <C> <C>
Adjust equipment, including leasehold improvements of
$160, $447 and $0, respectively, to net realizable
value.................................................. $ 814 $736 $283
Impairment of goodwill.................................. 355 -- --
Severance, professional fees and other.................. 194 234 280
------ ---- ----
$1,363 $970 $563
====== ==== ====
</TABLE>
F-14
<PAGE>
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
In the fiscal years ended July 28, 1996 and July 31, 1997, equipment
including vehicles, display racks, leasehold improvements of two distribution
centers, cylinders, computer equipment and filling station equipment were
written down to estimated net realizable value. Substantially all the
equipment has either been sold or physically scrapped. In the fiscal year
ended July 28, 1996, as part of the changes in business strategy it was
determined not to focus on the smaller convenience store locations due to
lower profit margins. As a result, the Company recorded an impairment of
goodwill ascribed to the convenience store locations of $355. In the fiscal
year ended July 31, 1998, the Company made a commitment to acquire new
handheld terminal technology. As a result, the Company recorded a $202
impairment adjustment to reduce the carrying value of existing handheld
terminals as the future benefit of these assets could not be fully recoverable
over their original estimated lives.
12. CONVERTIBLE REDEEMABLE PREFERRED STOCK:
On December 21, 1994, the Company issued 1,572,474 shares of Series A
cumulative preferred stock and warrants to purchase 318,650 shares of common
stock to investors through a private placement offering. The exercise price
for these warrants was $0.45896 per share. These warrants were exercised upon
consummation of the initial public offering (Note 13).
Holders of Series A preferred stock could convert any portion of the
preferred shares into common shares at any time. Each share of Series A
preferred was convertible to one share of common stock. The preferred shares
had a liquidation preference equal to the liquidation value of $4.5896 as
defined in the Certificate of Incorporation. The preferred shares ranked
senior to the common stock in respect to dividend rights and had full voting
rights.
The Company was required to redeem the outstanding Series A preferred shares
in equal increments semiannually between October 31, 2000 and April 30, 2002.
The redemption price was $4.5896 per share plus undeclared, accrued dividends
at a rate of 8% compounded daily of $1,031, $1,718 and $596 at July 28, 1996,
and July 31, 1997 and the period August 1, 1997 through May 18, 1998 (the date
amounts were funded through issuance of common stock in conjunction with the
initial public offering), respectively. Dividends are cumulative until
declared by the Board.
In May 1998, contemporaneous with the closing of the initial public
offering, all outstanding shares of preferred stock were converted on a one
for one basis into common stock and common stock was issued in payment of
accrued preferred dividends of $2,314.
13. STOCKHOLDERS' EQUITY (DEFICIT):
On November 17, 1997, the Board approved the following matters for which
stockholder consent was received effective December 31, 1997 that were
executed contemporaneously with the closing of the IPO:
.A reverse stock split of 1 share of common stock for 13.225130 shares of
the Company's common shares outstanding. The reverse stock split has been
reflected in the average shares outstanding, shares outstanding and loss
per share amounts in the balance sheets, statements of operations and
changes in shareholders deficit.
.The authorized shares of the Capital Stock were increased to 120,000,000
comprised of 100,000,000 shares of Common Stock par value $0.001 per share
and 20,000,000 shares of preferred, with terms to be determined by the
Board.
.Issue shares of common stock to the holders of outstanding warrants to
satisfy their right to receive common stock (assuming a cashless exercise
of their warrants).
F-15
<PAGE>
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
.Accelerate the vesting of all outstanding options under the 1994 Stock
Incentive Plan.
Common Stock Options and Restricted Stock--The Company has four active stock
option plans (the "Plans") and has reserved 982,609 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 181,853 shares of Common
Stock reserved for issuance upon the exercise of Options granted thereunder.
As of July 31, 1998, Options to purchase 181,853 shares of Common Stock at a
weighted average exercise price of $6.03 per share were outstanding under the
1994 Stock Incentive Plan. All Options are vested and exercisable, however, no
Options have been exercised. These options expire 10 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 under which 300,000 shares of Common
Stock have been reserved for issuance upon the exercise of Options granted
thereunder. As of July 31, 1998, the Company had 275,300 Options outstanding,
none of the Options are vested or exercisable. The exercise price for
outstanding Common Stock options is $13.00 per share. 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 5 years and expire 10 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, 1998, the Company has not granted any options under this plan. The
Board of Directors has approved an annual grant to each Director under the
Director Option Plan of options to purchase 4,000 shares of Common Stock at a
price per share equal to the fair market value per share of the Common Stock
as of the grant date consisting of 1,000 shares for each quarterly board
meeting such director attended during the previous year. One third of these
options will vest on each of the first three anniversaries of the grant date
and expire 10 years from their date of grant.
In November 1997, the Board of Directors adopted and the stockholders
approved the Distributor Incentive 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. In May 1998, the Company granted
Options to purchase 240,887 shares of Common Stock to existing Blue Rhino
distributors at an exercise price equal to $13.00 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, 1998 the
Company had 240,887 options outstanding, none of the Options are vested or
exercisable. Options issued under the Distributor Option Plan vest ratably
over 4 years and expire 10 years from their date of grant. For the fiscal year
ended 1997, the Company recognized compensation expense of $50 related to the
issuance of stock options under the Distributor Option Plan.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting For Stock-Based Compensation." Accordingly, since options were
granted at fair value, no compensation cost has been
F-16
<PAGE>
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
recognized for stock options granted to date. Had compensation cost for these
plans been determined for options granted since August 1, 1995 consistent with
SFAS No. 123, the Company's net loss and loss per share would have increased
to the following pro forma amounts.
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS
ENDED
-------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Net loss:
As reported................................. $(7,431) $(5,584) $(2,369)
======= ======= =======
Pro forma................................... $(7,454) $(5,649) $(2,694)
======= ======= =======
Basic and diluted loss per common share:
As reported................................. $ (4.96) $ (3.74) $ (1.01)
======= ======= =======
Pro forma................................... $ (4.97) $ (3.78) $ (1.12)
======= ======= =======
</TABLE>
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 5 years; expected
volatility 0.30%; expected dividends of $0 and a risk-free interest rate of
5.5%.
F-17
<PAGE>
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
A summary of the status of the Company's Plans at July 31, 1996, July 31,
1997 and 1998 and changes during the periods then ended is presented in the
table and narrative below:
<TABLE>
<CAPTION>
1994 STOCK 1998 STOCK DISTRIBUTOR DIRECTOR
INCENTIVE PLAN INCENTIVE PLAN OPTION PLAN OPTION PLAN
---------------- ---------------- ----------------- ----------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares under option:
Outstanding at August
1, 1995............... 43,478 $4.59 -- $ -- -- $ -- -- $--
Granted.............. 37,731 4.79 -- -- -- -- -- --
Exercised............ -- -- -- -- -- -- -- --
Forfeited............ 9,149 4.59 -- -- -- -- -- --
Exercisable.......... 7,183 4.59 -- -- -- -- -- --
Weighted average fair
value of options
granted............... -- 1.53 -- -- -- -- -- --
Outstanding at July
28, 1996.............. 72,060 4.70 -- -- -- -- -- --
Granted.............. 104,044 6.69 -- -- -- -- -- --
Exercised............ -- -- -- -- -- -- -- --
Forfeited............ 12,159 4.85 -- -- -- -- -- --
Exercisable.......... 21,399 4.67 -- -- -- -- -- --
Weighted average fair
value of options
granted............... -- 2.21 -- -- -- -- -- --
Outstanding at July
31, 1997.............. 163,945 5.94 -- -- -- -- -- --
Granted.............. 18,887 6.61 275,300 13.00 240,887 13.00 -- --
Exercised............ -- -- -- -- -- -- -- --
Forfeited............ 979 6.15 -- --
Exercisable.......... 181,853 6.01 -- -- -- -- -- --
Weighted average fair
value of options
granted............... -- 2.69 -- 5.29 -- 4.77 -- --
Outstanding at July
31, 1998.............. 181,853 6.01 275,300 13.00 240,887 13.00 -- --
Options available for
grant at July 31,
1998.................. -- -- 24,700 -- 159,113 -- 100,000 --
</TABLE>
Warrants--During fiscal 1998, the Company issued 81,913 warrants ("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 10), and the
issuance of the common stock to PPH (Note 15). In addition, during fiscal
years ended July 28, 1996 and July 31, 1995, the Company issued approximately
303,513 warrants to individuals to purchase common stock for their assistance
in connection with various debt placements. 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 initial public
offering.
F-18
<PAGE>
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
14. LOSS PER SHARE:
The Company has retroactively adopted SFAS No. 128, "Earnings Per Share." The
impact of adopting this statement had no effect on loss per share for fiscal
years 1998, 1997 and 1996. The basic and diluted loss per share was determined
as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-------------------------
JULY JULY JULY
28, 31, 31,
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Basic and diluted loss per common share:
Net loss................................... $(7,431) $(5,584) $(2,369)
Less: Redeemable preferred stock dividends. 636 687 596
------- ------- -------
Loss applicable to common stockholders....... $(8,067) $(6,271) $(2,965)
Weighted average common shares used in
computing the basic and diluted loss per
common share (in thousands)................. 1,628 1,678 2,945
------- ------- -------
Basic and diluted loss per common share.. $ (4.96) $ (3.74) $ (1.01)
======= ======= =======
</TABLE>
Options to purchase common stock and the assumed exercise of warrants during
the fiscal years ended 1998, 1997 and 1996 have been excluded from the
computation of diluted earnings per common share as they were anti-dilutive.
15. RELATED PARTY TRANSACTIONS:
PPH, Caribou Cylinder Exchange, L.L.C. ("Caribou"), Javelina Cylinder
Exchange, L.L.C. ("Javelina") and Raven Propane, L.L.C. ("Raven Propane"), are
affiliates and operate as distributors for the Company. PPH began operations as
a distributor during fiscal 1996, while Caribou, Javelina and Raven Propane
began operations as distributors during fiscal 1998. The following represents
related party balances with these affiliates outstanding at July 28, 1996 and
July 31, 1997 and 1998, and transactions for the fiscal years then ended,
respectively:
<TABLE>
<CAPTION>
PPH JAVELINA RAVEN CARIBOU
-------------------- -------- ----- -------
1996 1997 1998 1998 1998 1998
------ ------ ------ -------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Notes receivable.............. $1,399 $1,191 $1,072 $-- $-- $--
Trade accounts payable........ 407 648 903 33 130 33
Cost of sales--distributors... 1,561 5,319 7,889 118 381 31
Interest income............... 43 142 117 -- -- --
Lease income.................. 25 160 160 2 3 1
Issuance of common stock...... -- 1,000 -- -- -- --
Cylinder usage fee............ -- -- 51 -- 3 --
Cylinder purchases............ -- -- 1,397 7 89 22
</TABLE>
Certain operational and financial management services were provided to the
Company by an affiliate through common ownership. Fees for these services for
the fiscal years ended July 28, 1996 and July 31, 1997 were approximately $519,
and $154, respectively.
The Company leases a facility from an affiliate under a noncancelable
operating lease which expires in December 1998. Future minimum lease payments
for the lease are $34 for the fiscal year ending 1999. Rent expense under this
lease was $22, $76, and $82 for the fiscal years ended July 28, 1996, and July
31, 1997 and 1998, respectively.
F-19
<PAGE>
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The Company leases a facility and certain equipment to PPH. Lease income from
PPH for the fiscal years ended July 28, 1996, July 31, 1997, and 1998 was $62,
$56, and $55, respectively.
During fiscal 1998, the Company paid professional fees to Pedersen & Houpt,
P.C. ("P & H") in the amount of $401. A stockholder of P & H is also a director
of the Company.
16. INCOME TAXES:
Due to the Company's operating losses, there is no current or deferred tax
expense for the fiscal years ended July 28, 1996, and July 31, 1997 and 1998.
A reconciliation of the differences between the statutory federal income tax
rate of 34% and the effective rate of income tax expense is as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
--------------------------
JULY 28, JULY 31, JULY 31,
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Federal statutory tax rate.................... 34.0% 34.0% 34.0%
Operating losses having no current tax
benefit.................................... (33.8) (33.9) (33.1)
Permanent differences and other............. (0.2) (0.1) (0.9)
----- ----- -----
Effective tax rate............................ 0.0% 0.0% 0.0%
===== ===== =====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liability are as follows at:
<TABLE>
<CAPTION>
JULY 28, JULY 31, JULY 31,
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Assets:
Net operating loss carry forward.......... $ 4,842 $ 6,981 $ 7,745
Allowance for doubtful accounts........... 32 60 242
Inventory capitalization.................. 19 4 105
Organization costs........................ 37 24 12
Other..................................... 34 78 23
Depreciation and amortization............. -- 1 --
------- ------- -------
Total gross deferred tax assets......... 4,964 7,148 8,127
Valuation allowance....................... (4,960) (7,148) (8,059)
------- ------- -------
Net deferred tax assets................. $ 4 $ -- $ 68
======= ======= =======
Liability:
Depreciation and amortization............. $ 4 $ -- $ 68
======= ======= =======
</TABLE>
At July 31, 1998, the Company had a net operating loss carryforward for
federal income tax purposes of approximately $19.9 million which is available
to offset future federal taxable income, if any, in varying amounts through
2013.
17. DEFINED CONTRIBUTION PLAN:
The Company has a 401(k) plan, sponsored by an affiliate, which allows
participants to make voluntary pretax contributions, through payroll
deductions, up to 10% of total compensation, subject to Internal Revenue
Service limitations. All employees who have at least one year of service and
1,000 hours within that year of
F-20
<PAGE>
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
service are eligible to participate in this plan. The plan provides for
discretionary profit sharing contributions by the Company. The Company made no
contributions to the plan during fiscal 1996, 1997 and 1998.
18. CHANGE IN FISCAL YEAR END:
In 1997, the Company changed from a 52-53 week year end, to a July 31 fiscal
year end. The effect of this change was not material.
19. SUBSEQUENT EVENTS:
The Company completed three acquisitions in August and September 1998 for
approximately $1.1 million in the aggregate related to assets including
cylinders, cylinder display racks, and right, title and interest in and to
sellers' retail propane cylinder exchange accounts and locations. These
acquisitions were funded with proceeds received from the Initial Public
Offering.
F-21
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SE-
CURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR
DOES IT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY TO
ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UN-
LAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COM-
PANY OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSE-
QUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Additional Information.................................................... 1
Prospectus Summary........................................................ 2
Risk Factors.............................................................. 4
Securities Offered by this Prospectus..................................... 11
Price Range of Common Stock............................................... 12
Dividend Policy........................................................... 12
Selected Consolidated Financial Data...................................... 13
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 15
Business.................................................................. 24
Management................................................................ 31
Certain Transactions...................................................... 36
Principal Stockholders.................................................... 38
Description of Capital Stock.............................................. 40
Legal Matters............................................................. 42
Experts................................................................... 42
Index to Consolidated Financial Statements................................ F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1,000,000 SHARES
BLUE RHINO CORPORATION
COMMON STOCK
---------------
PROSPECTUS
---------------
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses to be borne by the
Company in connection with the registration, issuance, and distribution of the
securities be registered hereby, other than underwriting discounts and
commissions. All amounts are estimates except the SEC registration fee, the
NASD filing fee, and the Nasdaq listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............ $3,447.81
Nasdaq listing fee............................................. *
Blue Sky fees and expenses..................................... *
Printing and engraving expenses................................ *
Legal fees and expenses........................................ *
Accounting fees and expenses................................... *
Miscellaneous.................................................. *
---------
Total...................................................... $ *
=========
</TABLE>
- --------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law (the "DGCL") authorizes
indemnification of directors, officers, employees and agents of the Company;
allows the advancement of costs of defending against litigation; and permits
companies incorporated in Delaware to purchase insurance on behalf of
directors, officers, employees and agents against liabilities whether or not
in the circumstances such companies would have the power to indemnify against
such liabilities under the provisions of the statute. The Company's Second
Amended and Restated Certificate of Incorporation ("Charter") provides that
the Company will indemnify its directors and officers to the fullest extent
permitted by law.
Under the provisions of the Company's Charter, any director or officer who,
in his or her capacity as such, is made or threatened to be made a party to
any suit or proceeding shall be indemnified if the Board of Directors
determines such director or officer acted in good faith and in a manner he or
she reasonably believed to be in or not opposed to the best interests of the
Company or, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. The Company will
not however indemnify any director or officer where such director or officer:
(a) breaches his or her duty of loyalty to the Company or its stockholders;
(b) fails to act in good faith or engages in intentional misconduct or knowing
violation of law; (c) authorizes payment of an unlawful dividend or stock
repurchase or redemption; or (d) obtains an improper personal benefit. While
liability for monetary damages has been eliminated, equitable remedies such as
injunctive relief or rescission remain available. In addition, a director is
not relieved of his or her responsibilities under any other law, including the
federal securities laws.
Indemnification under the Company's Charter and Amended and Restated By-laws
("By-laws") includes payment by the Company of expenses in defending an
action, suit or proceeding in advance of the final disposition of such action,
suit or proceeding upon receipt of an undertaking by the indemnified party to
repay such advance if it is ultimately determined that such person is not
entitled to indemnification under the Charter, which undertaking may be
accepted without reference to the financial ability of such person that makes
such repayments. The Company is not responsible for the indemnification of any
person seeking indemnification in connection with a proceeding initiated by
such person unless the initiation was approved by the Board of Directors of
the Company. The Charter and the DGCL further provide that such
indemnification is not exclusive of any other rights to which such individuals
may be entitled under the Charter, the Bylaws, any agreement, any
II-1
<PAGE>
vote of stockholders or disinterested directors, or otherwise. The Company
intends to obtain directors and officers insurance covering its executive
officers and directors.
Insofar as indemnification by the Company for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"), may be permitted to
directors, officers and controlling persons of the Company pursuant to the
foregoing provisions, the Company has been advised that in the opinion of the
Securities and Exchange Commission (the "Commission"), such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In October 1995, the Company issued units (the "Units"), each comprised of a
10.5% Senior Discount Note due October 2000 with a face value of $1,364.93 per
Unit and a warrant to purchase approximately 40 shares of Common Stock at an
exercise price of approximately $4.59 per share for $1,000 per Unit (the "1995
Unit Offering"). The Company sold 12,575 Units representing a face value of
$17.2 million of Senior Discount Notes and warrants to purchase an aggregate
of 500,028 shares of Common Stock. The gross proceeds from the sale of the
Units were approximately $12.6 million. The discounted portion of the Senior
Discount Notes represent a yield of 10.5% compounded semi-annually from the
date of issuance until October 11, 1998. Thereafter, interest is payable semi-
annually at a rate of 10.5% per annum. The Senior Discount Notes are
redeemable by the Company in whole or part at any time at their face value
less unearned interest. The warrants may be exercised at any time before
October 2005. The Senior Discount Notes were issued without registration under
the Securities Act in reliance on Section 4(2) of the Securities Act. The
following persons and entities purchased the Units in the 1995 Unit Offering:
Michael Arrington, Richard Brenner, Dean Buntrock, Conant Family Partnership,
Cornelius & Lothian, L.P., Joseph Cusimano, Peter Desnoes, Doerge-Blue Rhino,
L.P., The Craig Duchossois Revocable Trust, The Richard L. Duchossois
Revocable Trust, Andrew J. Filipowski, Donald Flynn, Kevin F. Flynn June 1992
Non-Exempt Trust, Bryan J. Flynn June 1992 Non-Exempt Trust, Richard Forsythe
Trust, Douglass Gray, William Hulligan, The Kimberly Family Discretionary
Trust, David Meltzer, Peer Pedersen, Billy D. Prim, Charles Reeder,
Christopher Reyes, Jude Reyes, Ryan Holding Corporation, Howard Warren and
Arthur Watson.
On September 24, 1996, the Company issued a warrant to purchase 227,048
shares of its Common Stock at an exercise price of $6.61 per share to
Forsythe/Lunn Technology Partners, L.P. in connection with the execution of a
master lease agreement between the Company and Forsythe/McArthur & Associates,
Inc. The warrants may be exercised at any time before September 24, 2006.
These warrants were issued without registration under the Securities Act in
reliance on Section 4(2) of the Securities Act.
On April 30, 1997, the Company sold 151,227 shares of its Common Stock and
warrants to purchase an additional 113,420 shares of its Common Stock with an
exercise price of $6.61 per share to Platinum Propane Holding, L.L.C.
("Platinum Propane") for total consideration of $1,000,000 in cash. The
warrants may be exercised at any time prior to April 30, 2007. The shares and
warrants sold to Platinum Propane were issued without registration under the
Securities Act in reliance on Section 4(2) of the Securities Act and Rule 506
of Regulation D promulgated thereunder.
On January 1, 1998, the Company issued $3,250,000 of 10.5% Subordinated
Notes and warrants to purchase in the aggregate 81,913 shares of Common Stock
with an exercise price equal to the initial public offering price of the
Common Stock offered hereby (the "1998 Warrants") to Lennard Carlson, Craig J.
Duchossois, Andrew J. Filipowski, and James P. Liautaud, four stockholders of
the Company for total consideration of $3,250,000 in cash. The Subordinated
Promissory Notes bear interest at 10.5% per annum and are due on the earlier
of a qualified public offering of the Company's Common Stock or December 31,
2000. The warrants may be exercised at any time before December 31, 2008. The
Subordinated Promissory Notes and warrants purchased by the stockholders were
offered and sold without registration under the Securities Act in reliance on
Section 4(2) of the Securities Act and Rule 505 of Regulation D promulgated
thereunder.
II-2
<PAGE>
On May 18, 1998, the Company issued 57,692 shares of Common Stock to Bison
Propane Bottle Exchange, L.L.C. ("Bison Propane") in satisfaction of a portion
of the purchase price of assets acquired from Bison Propane pursuant to an
Asset Purchase Agreement dated December 10, 1997. These shares were issued in
reliance upon Section 4(2) of the Securities Act and Regulation D promulgated
thereunder.
Since formation, the Company has granted options to its employees for
181,853 shares of Common Stock pursuant to its 1994 Stock Incentive Plan at a
weighted average exercise price of $6.03 per share, of which no options have
been exercised and options to purchase 181,853 shares are currently
exercisable. The options were issued without registration under the Securities
Act in reliance on Section 4(2) and Rule 701 promulgated thereunder.
Since May 18, 1998, the Company has granted options to its employees for
275,300 shares of its Common Stock pursuant to its 1998 Stock Incentive Plan
at an exercise price of $13.00 per share, none of which have been exercised or
are currently exercisable.
Since May 18, 1998 the Company has granted its Distributors options to
purchase 240,887 shares of Common Stock pursuant to its Distributor Option
Plan at an exercise price of $13.00 per share, none of which have been
exercised or are currently exercisable.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The exhibits to the Registration Statement are listed in the Exhibit Index
which appears elsewhere in this Registration Statement and is hereby
incorporated herein by reference.
All other schedules are omitted because of the absence of the condition
under which they are required or because the information is included in the
consolidated financial statements or notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933.
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in the volume of securities offered (if the total dollar value
of securities offered would not exceed that which was registered) and
any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with
the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN WINSTON-SALEM, NORTH
CAROLINA, ON SEPTEMBER 30, 1998.
Blue Rhino Corporation
/s/ Billy D. Prim
By:__________________________________
Billy D. Prim
President and Chairman of the
Board
II-4
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Billy D. Prim, as his or her true and lawful
attorney-in-fact and agent, with full power of substitution and
resubstitution, to act, without the other, for him or her and in his or her
name, place and stead, in any and all capacities, to sign any or all
amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or any of them, or their
substitutes may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON SEPTEMBER 30, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ Billy D. Prim President and Chairman of the Board
___________________________________________ (Principal Executive Officer)
Billy D. Prim
/s/ Mark Castaneda Secretary, Chief Financial Officer and
___________________________________________ Director (Principal Financial and
Mark Castaneda Accounting Officer)
/s/ Andrew J. Filipowski Vice Chairman of the Board
___________________________________________
Andrew J. Filipowski
/s/ Craig J. Duchossois Director
___________________________________________
Craig J. Duchossois
/s/ Steven D. Devick Director
___________________________________________
Steven D. Devick
/s/ John H. Muehlstein Director
___________________________________________
John H. Muehlstein
/s/ Richard A. Brenner Director
___________________________________________
Richard A. Brenner
</TABLE>
II-5
<PAGE>
EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S> <C>
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 State-
ment on Form S-1 dated May 18, 1998.
4.1 Form of Certificate of Common Stock of the Company, incorpo-
rated by reference to Exhibit 4.1 to the Company's Registra-
tion Statement on Form S-1 dated May 18, 1998.
5.1 Legal Opinion of Pedersen & Houpt, P.C.*
10.1(a) Loan Agreement, dated as of December 18, 1997, between the
Company and NationsBank, N.A., incorporated by reference to
Exhibit 10.1(a) to the Company's Registration Statement on
Form S-1 dated May 18, 1998.
10.1(b) Security Agreement, dated as of November 26, 1997 between the
Company and NationsBank, N.A., incorporated by reference to
Exhibit 10.1(b) to the Company's Registration Statement on
Form S-1 dated May 18, 1998.
10.1(c) Amendment to Loan Agreement dated July 30, 1998 between the
Company and NationsBank, N.A.
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 Ex-
hibit 10.2 to the Company's Registration Statement on Form S-1
dated May 18, 1998.
10.4(a) Asset Purchase Agreement, dated as of December 9, 1997, be-
tween the Company and Bison Propane Bottle Exchange, LLC, in-
corporated 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 Bot-
tle 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, in-
corporated by reference to Exhibit 10.5 to the Company's Reg-
istration Statement on Form S-1 dated May 18, 1998.
10.6 Collateral Assignment of License Agreement, dated as of Febru-
ary 12, 1998, by Bison Valve, L.L.C. to the Company, incorpo-
rated by reference to Exhibit 10.6 to the Company's Registra-
tion Statement on For S-1 dated May 18, 1998.
10.7(a) Form of Distribution Agreement of the Company and Its Distrib-
utors, 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 be-
tween the Company and Its Distributors, incorporated by refer-
ence to Exhibit 10.8(a) to the Company's Registration State-
ment on Form S-1 dated May 18, 1998.
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S> <C>
10.8(b) Form of Promissory Note Evidencing the Sale of Cylinders be-
tween the Company and Its Distributors, incorporated by refer-
ence to Exhibit 10.8(b) to the Company's Registration State-
ment on Form S-1 dated May 18, 1998.
10.9 Director Option Plan of the Company, incorporated by reference
to Exhibit 10.12 to the Company's Registration Statement on
Form S-1 dated May 18, 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 ref-
erence to Exhibit 10.14 to the Company's Registration State-
ment 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 Pur-
chasers 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 ref-
erence to Exhibit 10.18 to the Company's Registration State-
ment on Form S-1 dated May 18, 1998.
10.14 Real Estate Lease between the Company and Platinum Services
Corporation dated as of January 1, 1996, incorporated by ref-
erence to Exhibit 10.19 to the Company's Registration State-
ment on Form S-1 dated May 18, 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.
10.15(b) Lease Agreement dated July 30, 1996 between the Company and
Leasing Innovations, Incorporated incorporated by reference to
Exhibit 10.20(b) to the Company's Registration Statement as
Form S-1 dated May 18, 1998.
10.15(c) Lease Agreement dated June 26, 1997 between the Company and
Green Tree Vendor Services Corporation, incorporated by refer-
ence to Exhibit 10.20(c) to the Company's Registration State-
ment on Form S-1 dated May 18, 1998.
10.16 Services Agreement dated June 1, 1997 between the Company and
Information Management Services.*
10.17 Asset Purchase Agreement dated April 10, 1998 among the Compa-
ny, Gas to Go, Inc. and Walker Milnor.*
10.18 Underwriting Agreement dated May 22, 1998 among the Company,
Hambrecht & Quist, L.L.C., NationsBanc Montgomery Securities
LLC and Dain Raucher Wessels Incorporated incorporated by ref-
erence to Exhibit 1.1 to the Company's Registration Statement
on Form S-1 dated May 18, 1998.
21.1 Subsidiaries of the Company incorporated by reference to Ex-
hibit 21.1 to the Company's Registration Statement on Form S-1
dated May 10, 1998.
23.1 Consent of Pedersen & Houpt, P.C.
23.2 Consent of PricewaterhouseCoopers LLP
23.3 Consent of The Daniel Professional Group
24.1 Power of Attorney
27.1 Financial Data Schedule
</TABLE>
- --------
* To be filed by Amendment
II-7
<PAGE>
Exhibit 10.1(c)
AMENDMENT TO LOAN AGREEMENT
THIS AMENDMENT TO LOAN AGREEMENT ("Amendment"), made this 30th day of July,
1998, by and between BLUE RHINO CORPORATION, a Delaware corporation ("Borrower")
and NATIONSBANK, N.A., a national banking association ("Bank").
WITNESSETH:
-----------
WHEREAS, Borrower and Bank are parties to that certain Loan Agreement dated
as of December 18, 1997 (the "Loan Agreement"), pursuant to which Bank extended
certain loans to the Borrower, including a Revolving Line of Credit in the
original principal amount of $3,000,000, a Working Capital Line of Credit in the
amount of $1,000,000, and a Capital Expenditures Line of Credit in the amount of
$1,000,000 (collectively, the "Loans"); and
WHEREAS, payment of the Loans was guaranteed by Billy D. Prim and American
Oil and Gas Company, pursuant to limited guaranties executed and delivered by
such guarantors (the "Guaranties"); and
WHEREAS, the Loan Agreement contained certain financial covenants requiring
the Borrower, among other things, to meet certain ratios concerning its net
worth and its earnings before interest expense, taxes, depreciation and
amortization; and
WHEREAS, the Loan Agreement also required certain notes payable by the
Borrower to be subordinated to the prior payment of the Loans; and
WHEREAS, the Borrower has now requested the Bank to modify the Loan
Agreement to delete the Guaranties and the subordination requirements, to modify
certain financial covenants, and to waive a covenant violation; and
WHEREAS, the Bank has agreed to such deletions, modifications and waivers,
subject to the terms and conditions set forth herein; and
WHEREAS, the parties hereto wish to set forth their agreement with respect
to the foregoing matters;
NOW, THEREFORE, in consideration of the premises, the amendments to the
Loan Agreement, the mutual promises set forth hereinbelow and other valuable
consideration, the parties hereto agree as follows:
1. Amendments to Loan Agreement. The Loan Agreement is hereby amended as
follows:
(a) The work "Subordinations" in the heading of Section 3 is deleted.
Also, subsection (ii) of Section 3 is deleted in its entirety.
<PAGE>
(b) Section 4 is deleted in its entirety. Bank further agrees to return
the original Guaranties to the Guarantors.
(c) The Affirmative Covenants in section 7 are modified as follows:
(i) Subsection A (i) is rewritten as follows:
(i) Achieve a Tangible Net Worth, plus subordinated debt, of not
less than $10,000,000 as of October 31, 1998.
(ii) Subsection A (ii) (b) and (c) are rewritten as follows:
(c) $1,350,000 for the three months ending July 31, 1998; and
(d) $580,000 for the three months ending October 31, 1998.
2. Waiver. Bank further agrees to waive the Borrower's non-compliance
with the EBITDA covenant contained in Section 7 (A) (ii) (b), as of April 30,
1998.
3. Conditions Precedent to Amendment. The Bank's agreement to amend the
Loan Agreement and grant the waiver set forth herein is subject to the
fulfillment, to the Bank's satisfaction, of all of the following conditions:
(a) Borrower has executed and delivered all documentation for the
Amendment requested by the Bank, which shall be in form and content reasonably
acceptable to the Bank.
(b) Borrower shall have provided to the Bank, in form satisfactory to the
Bank, all financial and other information concerning its business and affairs,
as requested by the Bank.
(c) The Borrower shall have certified that the execution of the Amendment
shall not cause any default under any other contract or agreement to which the
Borrower is subject.
(d) No Material Adverse Change in the financial condition of the Borrower
from that set forth in its most recent audited annual financial statement and
internally-prepared quarterly financial statements shall have occurred.
(e) Borrower shall have paid or provided for payment or reimbursement of
the Bank's expenses incurred in connection with this Amendment, including,
without limitation, the Bank's reasonable attorneys' fees.
2
<PAGE>
4. Representations and Warranties. The Borrower represents and warrants
to the Bank as follows:
(a) Power and Authority; Enforceability. The Borrower has the power
and authority to execute and deliver this Amendment and to perform the
terms and conditions of the Loan Agreement, as amended and modified by this
Amendment. The execution and delivery of this Amendment by the Borrower and
the performance of the Loan Agreement and the other Loan Documents, as
amended and modified by this Amendment, do not and will not violate any
law, rule or regulation, or constitute a breach of the articles of
incorporation, bylaws or corporate resolutions of the Borrower or any
agreement to which the Borrower is a party or by which its assets are
bound. The Loan Agreement and the other Loan Documents, as amended and
modified by this Amendment, constitute legal, valid and binding obligations
of the Borrower, enforceable in accordance with their respective terms.
(b) No Default. Upon the execution and delivery of this Amendment by
the Borrower, the Borrower will not be in default in the performance,
observance or fulfillment of any of the obligations, covenants or conditions
contained in the Loan Agreement or the other Loan Documents, as amended and
modified by this Amendment, or any other agreement or instrument to which
Borrower is a party.
(c) Representations. The representations and the information
furnished by the Borrower to the Bank with regard to this Amendment are and
shall continue to be true and not misleading in all material respects. In
addition, the representations and warranties of the Borrower to the Bank
contained herein, in the Loan Agreement, in the other Loan Documents and in
any other document or instrument executed or delivered by the Borrower in
connection therewith, are and shall continue to be true and not misleading
in all material respects, except as otherwise disclosed in writing to the
Bank and approved by the Bank prior to the date hereof.
(d) Year 2000 Compliance. Borrower has (i) initiated a review and
assessment of all areas within its and each of its subsidiaries' businesses
and operations (including those affected by suppliers and vendors) that
could be adversely affected by the "Year 2000 Problem" (that is, the risk
that computer applications used by such Borrower or any of its subsidiaries
(or their suppliers and vendors) may be unable to recognize and perform
properly date-sensitive functions involving certain dates prior to and any
date after December 31, 1999), (ii) developed a plan and timeline for
addressing the Year 2000 Problem on a timely basis and (iii) to date,
implemented that plan in accordance with that timetable.
3
<PAGE>
Borrower reasonably believes that all computer applications (including
those of its suppliers and vendors) that are material to its or any of its
subsidiaries' business and operations will on a timely basis be able to
perform properly date-sensitive functions for all dates before and after
January 1, 2000 (that is, be "Year 2000 compliant"), except to the extent
that a failure to do so could not reasonably be expected to have a material
adverse effect on its business, financial condition, or ability to repay
the Loans.
5. Covenants. The Borrower covenants and agrees that, unless the Bank
shall otherwise consent in writing, the Borrower shall:
(a) Compliance with Covenants. Continue to comply with all of the
terms, covenants and agreements contained in the Loan Agreement and the
other Loan Documents, as amended and modified by this Agreement.
(b) Further Assurances. Execute and deliver such further
instruments, and take such further action as the Bank may reasonably
request, in each case to further effect the purposes of the Loan Agreement
and the other Loan Documents, as modified by this Agreement.
(c) Year 2000 Compliance. Borrower shall promptly notify the Bank in
the event Borrower discovers or determines that any computer application
(including those of its suppliers and vendors) that is material to its or
any of its subsidiaries' businesses and operations will not be Year 2000
compliant on a timely basis, except to the extent that such failure could
not reasonably be expected to have a material adverse effect on its
business, financial conditions or ability to repay the Loans.
6. Ratification. Except as expressly amended hereby, the Loan Agreement
shall be and remain in full force and effect in accordance with its terms.
Borrower stipulates and agrees that there exists no defense, claim of setoff, or
claim in avoidance of any of its liabilites or obligations under or pursuant to
the Loan Agreement, as so amended.
7. Miscellaneous.
(a) All references to the "Agreement" in the Loan Agreement shall hereafter
mean and refer to the Loan Agreement, as amended hereby.
(b) All references to the "Loan Agreement" in the order Loan Documents
shall hereafter mean and refer to the Loan Agreement, as amended hereby.
4
<PAGE>
(c) All capitalized terms appearing herein that are not otherwise defined
shall have the meanings attributed to such terms in the Loan Agreement.
(d) In the event of any conflict between the terms of this Amendment and
the Loan Documents, the terms of this Amendment shall control and govern.
8. Counterparts. This Amendment may be executed in separate counterparts,
and said counterparts taken together shall be deemed to constitute one and the
same instrument. An executed copy of this Amendment delivered by telecopier
shall be intended to have the same effect as an originally executed copy of this
Amendment.
9. Miscellaneous. This Amendment constitutes the complete agreement of
the parties with respect to the subject matter hereof, and all prior or
contemporaneous statements, communications, agreements or understanding are
hereby superceded, and the same are merged and integrated herein. This Amendment
shall be governed by and interpreted in accordance with the internal laws and
judicial decisions of the State of North Carolina and federal law, to the extent
such federal law might be applicable.
10. No Waiver. Any failure by the Bank prior to the date of this
Amendment to exercise its rights or enforce its remedies under the Loan
Agreement shall not be construed as a waiver thereof, or to create a custom or
course of dealing that is contrary to or in derogation of the specific
provisions of the Loan Agreement, as amended by this Amendment.
[Signatures appear on following page.]
5
<PAGE>
IN WITNESS WHEREOF, the Borrower and the Bank have caused this Amendment to
be executed by their duly authorized officers, all as of the date first above
written.
BORROWER:
BLUE RHINO CORPORATION
ATTEST:
By: /s/ Billy D. Prim
-------------------------
Title:
----------------------
Mark Castaneda
- --------------------------
SECRETARY
[Corporate Seal]
BANK:
NATIONSBANK, N.A.
By: /s/
-------------------------
Title: SVP
----------------------
6
<PAGE>
Exhibit 23.1
Consent of Pedersen & Houpt, P.C.
Pedersen & Houpt, P.C. hereby consents to all references made to it in the
Registration Statement on Form S-1 of Blue Rhino Corporation, as filed with the
Securities and Exchange Commission on September 30, 1998.
/s/ Pedersen & Houpt, P.C.
--------------------------------------
Pedersen & Houpt, P.C.
Chicago, Illinois
September 30, 1998
<PAGE>
Exhibit 23.2
Consent of Independent Accountants
We consent to the inclusion in this registration statement on Form S-1 of
our report dated September 22, 1998 on our audits of the consolidated financial
statements of Blue Rhino Corporation. We also consent to the references to our
firm under the captions "Experts" and "Selected Consolidated Financial Data".
PricewaterhouseCoopers LLP
Greensboro, North Carolina
September 30, 1998
<PAGE>
Exhibit 23.3
Consent of The Daniel Professional Group, Inc.
As independent public accountants, we hereby consent to the use of our
audit of the financial statements of Blue Rhino Corporation as of July 31, 1994,
and for the initial period beginning July 1, 1994 and ending July 31, 1994 and
to the reference to us under the heading "Experts" in Blue Rhino Corporation's
Registration Statement on Form S-1, as filed with the Securities and Exchange
Commission on September 30, 1998.
/s/ The Daniel Professional Group, Inc.
-------------------------------------------
The Daniel Professional Group, Inc.
Winston-Salem, North Carolina
September ___, 1998
<PAGE>
Exhibit 23.4
Consent of the Barbecue Industry Association of America
The Barbecue Industry Association of America hereby consents to all
references made to it and to all facts and figures in the 1997 Barbecue
Lifestyle Usage and Attitude Study performed on behalf of the Barbecue Industry
Association in the Registration Statement on Form S-1 of Blue Rhino Corporation,
as filed with the Securities and Exchange Commission on September 30, 1998.
Barbecue Industry Association of America
By: /s/ David Kearsley
------------------------------
Name: David Kearsley
----------------------------
Title: Chairman
---------------------------
Barbecue Industry Association of America
Naperville, Illinois
September 28, 1998
<PAGE>
Exhibit 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Billy D. Prim, as his or her true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
to act, without the other, for him or her and in his or her name, place and
stead, in any and all capacities, to sign any or all amendments (including post-
effective amendments) to this Registration Statement, and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agent, or any of them, or
their substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement, has been signed below by the following persons in
the capacities indicated on September 30, 1998.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Billy D. Prim President and Chairman of the Board
- ------------------------------ (Principal Executive Officer)
Billy D. Prim
/s/ Mark Castaneda Director, Secretary and Chief Financial Officer
- ------------------------------ (Principal Financial and Accounting Officer)
Mark Casteneda
/s/ Andrew J. Filipowski Vice Chairman of the Board
- ------------------------------
Andrew J. Filipowski
/s/ Craig J. Duchossois Director
- ------------------------------
Craig J. Duchossois
/s/ Steven D. Devick Director
- ------------------------------
Steven D. Devick
/s/ Richard A. Brenner Director
- ------------------------------
Richard A. Brenner
/s/ John H. Muehlstein Director
- ------------------------------
John H. Muehlstein
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> JUL-31-1998 JUL-31-1997
<PERIOD-START> AUG-01-1997 AUG-01-1996
<PERIOD-END> JUL-31-1998 JUL-31-1997
<CASH> 5,908 325
<SECURITIES> 0 0
<RECEIVABLES> 8,035 3,264
<ALLOWANCES> 264 154
<INVENTORY> 2,377 220
<CURRENT-ASSETS> 17,083 4,153
<PP&E> 10,750 5,751
<DEPRECIATION> 2,322 1,313
<TOTAL-ASSETS> 30,577 9,974
<CURRENT-LIABILITIES> 5,394 3,416
<BONDS> 0 0
0 8,936
0 0
<COMMON> 8 2
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 30,577 9,974
<SALES> 27,372 14,211
<TOTAL-REVENUES> 27,372 14,211
<CGS> 20,525 11,644
<TOTAL-COSTS> 20,525 11,644
<OTHER-EXPENSES> 7,743 6,672
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,707 1,665
<INCOME-PRETAX> (2,369) (5,584)
<INCOME-TAX> (2,369) (5,584)
<INCOME-CONTINUING> (2,369) (5,584)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,369) (5,584)
<EPS-PRIMARY> (1.01) (3.74)
<EPS-DILUTED> (1.01) (3.74)
</TABLE>
