<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 13, 1998
REGISTRATION NO. 333-47669
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------
BLUE RHINO CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 5984 56-1870472
(STATE OR OTHER (PRIMARY (I.R.S.
JURISDICTION OF STANDARD EMPLOYER
INCORPORATION OR INDUSTRIAL IDENTIFICATION
ORGANIZATION) CLASSIFICATION NUMBER)
CODE 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 LARRY A. BARDEN
PEDERSEN & HOUPT, P.C. SIDLEY & AUSTIN
161 N. CLARK STREET, SUITE 3100 ONE FIRST NATIONAL PLAZA
CHICAGO, ILLINOIS 60601 CHICAGO, ILLINOIS 60603
TELEPHONE (312) 641-6888 TELEPHONE (312) 853-7000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable 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: [_]
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: [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
-----------
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.
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<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 PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES 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 LAW OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 13, 1998
PROSPECTUS
- -------
2,700,000 SHARES
COMMON STOCK
All of the 2,700,000 shares of Common Stock offered hereby are being sold by
the Company. Prior to this offering, there has been no public market for the
Common Stock of the Company. It is currently estimated that the initial public
offering price will be between $12.00 and $14.00 per share. See "Underwriting"
for a discussion of the factors to be considered in determining the initial
public offering price. The Company will use approximately $10.3 million of the
proceeds of this offering to repay principal and accrued interest on loans to
the Company made or guaranteed by certain of its affiliates. See "Use of
Proceeds" and "Certain Transactions." The Common Stock has been approved for
quotation on the Nasdaq National Market under the symbol RINO.
--------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 6.
--------
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.
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<TABLE>
<S> <C> <C> <C>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
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Per Share........................ $ $ $
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Total (3)........................ $ $ $
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</TABLE>
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company, estimated at $750,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 405,000 additional shares of Common Stock solely to cover over-
allotments, if any. If all such shares are purchased, the total Price to
Public, Underwriting Discount and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
--------
The shares of Common Stock are offered by the several Underwriters subject to
prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1998 at the office of the agent of
Hambrecht & Quist LLC in New York, New York.
HAMBRECHT & QUIST
NATIONSBANC MONTGOMERY SECURITIES LLC
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
, 1998
<PAGE>
[ON THIS PAGE WILL APPEAR (1) A PHOTOGRAPH OF A BLUE RHINO GRILL CYLINDER AND
(2) A GRAPH OF THE BLUE RHINO BUSINESS MODEL INCLUDING THE FLOW OF
TRANSACTIONS AMONG CONSUMERS, RETAILERS, DISTRIBUTORS AND BLUE RHINO]
The Company intends to distribute to its stockholders annual reports
containing financial statements audited by its independent auditors and will
make available copies of quarterly reports for the first three quarters of
each fiscal year containing unaudited financial information.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
The Blue Rhino(R) name, rhino logo, RhinoTUFF(R) and Tri-Safe(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 6,600 retail locations in 41
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, Wal Mart, Kroger and SuperAmerica. Blue Rhino
partners retailers and independent distributors to provide consumers 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 51 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 twelve months ended January 31, 1998 the Company's
sales increased approximately 78% from the prior year's comparable period to
approximately $18.0 million as a result of the growth of sales at existing
locations and the addition of over 3,000 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. Upon the completion of this offering, the Company's executive officers,
directors and entities affiliated with them will beneficially own, in the
aggregate, approximately 47.9% of the Company's outstanding Common Stock
(approximately 45.4% if the Underwriters' over-allotment option is exercised in
full). 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.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by 2,700,000 shares
the Company............
Common Stock to be
outstanding after the
offering............... 7,208,297 shares (1)
Use of proceeds......... To repay certain indebtedness and for other general
corporate purposes, including working capital and
possible future acquisitions.
Dividend policy......... The Company currently intends to retain its earnings for
future growth and, therefore, does not anticipate paying
any cash dividends in the foreseeable future. See
"Dividend Policy."
Risk factors............ An investment in the Common Stock offered hereby involves
a high degree of risk. See "Risk Factors."
Proposed Nasdaq National RINO
Market symbol..........
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA AND SELECTED OPERATING DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
---------------------------- ---------------------------
JULY 31, JULY 28, JULY 31, JANUARY 31, JANUARY 31,
1995 1996 1997 1997 1998
-------- -------- -------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Net sales............. $ 2,728 $ 8,216 $14,211 $ 4,509 $ 8,314
Gross profit.......... (795) 316 2,567 503 1,943
Loss from operations
(2).................. (4,398) (6,130) (4,105) (2,043) (1,737)
Net loss (2).......... $(4,660) $(7,431) $(5,584) $(2,781) $(2,564)
Loss available to
common stockholders
(3).................. $(5,055) $(8,067) $(6,271) $(3,120) $(2,932)
Basic and diluted loss
per share (2)........ $ (0.23) $ (0.37) $ (0.28) $ (0.14) $ (0.12)
Shares used in
calculation of net
loss per share (4)... 21,658 21,526 22,276 21,526 23,526
Pro forma basic and
diluted loss per
share (5)............ $ (1.49) $ (0.65)
Pro forma shares used
in calculation of net
loss per share (5)... 4,328 4,508
SELECTED OPERATING DATA:
Retail locations (at
period end).......... 1,608 2,981 4,400 3,116 6,600
Cylinder transactions
(000's).............. 306 769 1,239 387 715
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31, 1998
----------------------
AS
ACTUAL ADJUSTED (6)
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(UNAUDITED)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 1,207 $11,067
Working capital.................................... 296 12,374
Total assets....................................... 11,995 21,955
Notes payable to bank.............................. 1,468 --
Long-term obligations, less current portion........ 19,357 992
Total stockholders' (deficit) equity............... (21,420) 20,527
</TABLE>
4
<PAGE>
(1) Based on the number of shares outstanding as of January 31, 1998, after
giving effect to the Recapitalization (as described in Note 2 to
"Capitalization"). Excludes (a) an aggregate of 982,607 shares of Common
Stock reserved for issuance under the Company's stock option plans, of
which 182,607 shares are subject to outstanding and vested options as of
the date hereof at a weighted average exercise price of $6.03 per share,
(b) 81,916 shares reserved for issuance pending the exercise of the
warrants issued to certain stockholders in January 1998 with an exercise
price equal to the price at which the shares offered hereby are sold
(assumed to be $13.00 per share) (the "1998 Warrants") and (c)
approximately 16,923 shares of Common Stock to be issued upon the
conversion of approximately $220,000 of dividends accruing on the Company's
outstanding shares of Series A Convertible Participating Preferred Stock
("Preferred Stock") between January 31, 1998 and the estimated consummation
of the offering. See "Capitalization," "Management--1994 Stock Incentive
Plan," "--1998 Stock Incentive Plan," "--Director Option Plan" and
"--Distributor Option Plan" and Note 20 of Notes to Financial Statements.
(2) Includes nonrecurring charges for fiscal 1996 and 1997 of $1,363 and
$1,084, respectively, and for the first six months of fiscal years 1997 and
1998 of $188 and $408, respectively. See Note 12 of Notes to Consolidated
Financial Statements.
(3) Includes net loss less Preferred Stock dividends of $395, $636, $687 and
$339 and $368 for fiscal years ended 1995, 1996, 1997 and the six months
ended January 31, 1997 and 1998, respectively.
(4) Based on the number of shares outstanding as of January 31, 1998, including
shares issuable upon the exercise of all outstanding stock options and
stock warrants as of such date.
(5) Based on the number of shares outstanding, including shares issuable upon
the exercise of all outstanding stock warrants, the conversion of Preferred
Stock and Preferred Stock dividends to Common Stock, the 1 for 13.22513
reverse stock split with respect to the Common Stock and, for January 31,
1998, the issuance of shares to Bison Propane Bottle Exchange, L.L.C. as
partial consideration for accounts and other assets acquired by the Company
in January 1998, all of which will be effected immediately prior to the
consummation of this offering.
(6) As adjusted to give effect to the Recapitalization (as described in Note 2
to "Capitalization") and to reflect the issuance and sale of 2,700,000
shares of Common Stock by the Company hereby at an assumed initial public
offering price of $13.00 per share and the application of the estimated net
proceeds therefrom. See "Use of Proceeds" and "Capitalization."
--------------------
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. Except as otherwise noted, all information in this Prospectus
assumes no exercise of the Underwriters' over-allotment option and a
recapitalization to be effected immediately prior to the consummation of this
offering pursuant to which (i) all outstanding Preferred Stock will be
converted into Common Stock on a one share for one share basis, (ii) all
accrued dividends on the Preferred Stock will be converted into Common Stock,
(iii) all outstanding warrants (except for the 1998 Warrants) will be converted
into Common Stock in a cashless exercise, (iv) the vesting of all outstanding
options, (v) the issuance of shares with respect to the Bison Acquisition (as
defined herein) and (vi) a 1 for 13.22513 reverse common stock split (the
"Recapitalization").
5
<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 January 31, 1998, the Company had an accumulated deficit of
approximately $20.6 million. The Company had a net loss of approximately $5.6
million for fiscal 1997, and $2.6 million for the first six months of fiscal
1998. The Company also anticipates net losses in the quarter ending April 30,
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 January 31, 1998, the
Company had 51 independent distributors servicing approximately 6,600 retail
locations in 41 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, none of
whom have 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, displaying 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 (quarters ending in April
and July, 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 Wal Mart each represented in
excess of 10% of the Company's sales for fiscal 1997 and the first six months
of fiscal 1998. These retailers, as a group, represented approximately 58% of
the Company's sales for fiscal 1997 and 49% for the first six months of fiscal
1998 with Home Depot representing 29% and 30%, respectively, of the Company's
sales for these periods. 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
6
<PAGE>
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.
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 propane 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 66% of
the Company's retail locations are serviced by five of the Company's 51
distributors. Sales by these key distributors resulted in approximately 54.5%
and 52.3% of the Company's revenues for fiscal 1997 and the first six months
of fiscal 1998, respectively. Platinum Propane Holding, L.L.C. and its
subsidiaries (collectively, "Platinum Propane") accounted for approximately
37% and 34% and Ceramic Industries, Inc. accounted for approximately 7.5% and
10.0% of the Company's revenues, for fiscal 1997 and the first six months of
fiscal 1998, respectively. The other three key distributors for the fiscal
year ended July 31, 1997 and the six months ended January 31, 1998, were North
Star Exchange, Inc., Aero Oil Company and Liberty Fuels. 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.
7
<PAGE>
POTENTIAL CONFLICTS OF INTEREST IN ENFORCING REMEDIES AGAINST DISTRIBUTORS
OWNED BY AFFILIATES. 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 sales revenues generated. In
addition, Messrs. Filipowski and Prim own in the aggregate approximately 45%
of each of Caribou Cylinder Exchange, L.L.C. ("Caribou Propane"), Javilina
Cylinder Exchange, L.L.C. ("Javilina Propane") and Raven Propane, L.L.C.
("Raven Propane"), three of the Company's distributors. In the event any of
Platinum Propane, Caribou Propane, Javilina 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."
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 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. Within the past twelve months
the Company has acquired the rights to provide cylinder exchange at
approximately 1,800 retail locations through five acquisitions (the
"Acquisitions"), including 750 locations from Bison Propane Bottle Exchange,
L.L.C. (the "Bison Acquisition") and intends to make select acquisitions in
the future. The failure of the Company to execute its acquisition strategy
successfully could have a material adverse effect on the Company's business,
8
<PAGE>
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.
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 January 31, 1998, approximately 38% of the
Company's retail locations were in, and 57% 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 implementation 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 or more fuel-efficient propane grills 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 has also recently revised guidelines concerning
the type of valve used on grill cylinders; all cylinders produced or
9
<PAGE>
recertified after September 30, 1998 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 ("MIS") 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
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. 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.
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.
10
<PAGE>
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
develop and produce an OPD Valve with the intention of marketing its valve to
Blue Rhino distributors. There can be no assurance that the OPD Valve produced
by Bison Valve will obtain the necessary regulatory approvals or 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.
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. Upon completion of this offering, current
executive officers, directors and entities affiliated with them will
beneficially own, in the aggregate, approximately 47.9% of the Company's
outstanding Common Stock (approximately 45.4% if the Underwriters' over-
allotment option is exercised in full). As a result, these stockholders will
be able to elect the entire Board of Directors and will retain the voting
power to control all 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.
MANAGEMENT'S DISCRETION AS TO USE OF UNALLOCATED NET PROCEEDS; BENEFITS TO
EXISTING STOCKHOLDERS. The Company has designated a specific use for only a
portion of the net proceeds to the Company resulting from the sale of Common
Stock in this offering. The Company expects to use approximately $27.8 million
of such net proceeds to retire outstanding indebtedness and certain lease
obligations, of which approximately $10.3 million is owed to or guaranteed by
certain of its directors and officers, or entities affiliated with them. The
remainder of the proceeds will be used for working capital and other general
corporate purposes and possible future acquisitions. Consequently, the Board
of Directors and management of the Company will have discretion in allocating
a portion of the net proceeds to the Company from this offering. In addition
to the repayment of outstanding indebtedness of which a portion is held by
existing stockholders, existing stockholders will benefit from this offering
as a result of an increase in the market value and liquidity of their
investments in the Company. See "Use of Proceeds," "Principal Stockholders"
and "Certain Transactions."
11
<PAGE>
FUTURE CAPITAL REQUIREMENTS. The Company anticipates that continuing
operations and the expansion of the Company's business will require
substantial expenditures. After application of the net proceeds of this
offering, 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, may 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."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior to this
offering, there has been no public market for the Common Stock, and there can
be no assurance that an active public market for the Common Stock will develop
or, if one develops, that it will be sustained. The initial public offering
price for the shares of Common Stock offered hereby was determined by
negotiation between the Company and the representatives of the Underwriters
(as defined herein) based upon several factors and may not be indicative of
the market price of the Common Stock after this offering. See "Underwriting."
The market price of the Common Stock may be volatile and could be adversely
affected by fluctuations in the Company's operating results, the failure of
the Company's operating results to meet the expectations of research analysts
or investors, changes in research analysts' recommendations regarding the
Company, general market conditions, or other events and factors, some of which
may be beyond the Company's control. 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 initial public offering price per
share is substantially higher than the net tangible book value per share of
Common Stock. New investors purchasing Common Stock in this offering
accordingly will incur immediate dilution of $10.32 in the net tangible book
value per share of Common Stock purchased (at an assumed initial public
offering price of $13.00 and after the deduction of underwriting discounts and
commissions and estimated offering expenses payable by the Company). See
"Dilution."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS. Sales of substantial
amounts of the Common Stock in the public market following this offering
(including shares issued upon the exercise of stock options and warrants) 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. Upon completion of the offering, the Company will have 7,225,220
shares of Common Stock outstanding. Of these outstanding shares, the 2,700,000
shares of Common Stock sold in this offering will be 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 the Company, including the executive officers and directors,
who will own in the aggregate 3,581,027 shares of Common Stock after the
offering, have agreed that they 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
owned by them during the 180-day period following the date of this Prospectus.
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
during the 180-day period following the date of this Prospectus, except that
the Company may issue shares upon the exercise of options granted prior to the
date hereof, 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. Upon
expiration of such 180-day period, all of the shares of Common Stock subject
to
12
<PAGE>
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. Following consummation of this
offering, the Company intends to file registration statements under the
Securities Act to register the sale of 182,607 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"). Upon expiration of the lock-up agreements referred
to above, holders of approximately 2,757,526 shares of Common Stock will be
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
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. See "Shares Eligible for Future Sale."
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,700,000 shares of
Common Stock offered hereby by the Company are estimated to be $31,893,000
($36,789,450 if the Underwriters' over-allotment option is exercised in full)
at an assumed initial public offering price of $13.00 per share after
deducting the underwriting discount and estimated offering expenses. The
Company intends to use approximately $27.8 million of net proceeds from this
offering for repayment of substantially all outstanding indebtedness,
including approximately $10.3 million owed to or guaranteed by the Company's
officers, directors or entities affiliated with them, of which approximately
$3.1 million of indebtedness was incurred to fund the Acquisitions. The
Company expects to use the remaining approximately $4.1 million of net
proceeds for general corporate purposes, including working capital and
possible future acquisitions, although at this time the Company has no
agreements, understandings or commitments with respect to any such
acquisitions. The Company's outstanding indebtedness consists of: (i)
approximately $16.4 million ($15.1 million as of January 31, 1998) of senior
discount notes (the "Senior Discount Notes") due October 11, 2000 which bear
interest at 10.5% per annum, the proceeds of which were used to fund
development of the Company, (ii) approximately $5.5 million ($1.5 million as
of January 31, 1998) outstanding under a $9.0 million bank credit facility
with NationsBank, N.A. (the "Bank Credit Facility") due on November 30, 1998
which bears interest at 9.0% per annum, of which approximately $2.3 million
was used to fund three of the Acquisitions and the remainder of which was used
for working capital of the Company, (iii) approximately $2.5 million ($2.2
million as of January 31, 1998) to purchase cylinder displays which are
financed under a $3.0 million operating lease facility and (iv) approximately
$3.4 million ($3.3 million as of January 31, 1998) outstanding under
subordinated loans from four stockholders of the Company ("1998 Stockholder
Loans"). The 1998 Stockholder Loans bear interest at 10.5% per annum and are
due on the earlier of December 31, 2000 or the consummation of a public
offering of securities by the Company the net proceeds of which are at least
$30.0 million. A portion of the proceeds of the 1998 Stockholder Loans was
used to make a $635,000 convertible loan to Bison Valve and for additional
working capital. Pending such uses, the net proceeds of this offering will be
invested in short term investment grade, interest bearing securities. See
"Risk Factors--Management's Discretion as to Use of Unallocated Net Proceeds;
Benefits to Existing Stockholders," "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources," "Business--Business Strategy--Pursue Strategic Account
Acquisitions" and "Certain Transactions."
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.
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
January 31, 1998 (i) on an actual basis, (ii) on a pro forma basis after
giving effect to the Recapitalization (as defined in Note 2 below) and (iii)
on a pro forma basis as adjusted to reflect the issuance and sale by the
Company of the shares offered hereby at an assumed initial public offering
price of $13.00 per share and the application of the estimated net proceeds
therefrom. See "Use of Proceeds." This table should be read in conjunction
with the Consolidated Financial Statements and the Notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JANUARY 31, 1998
----------------------------
PRO AS
ACTUAL FORMA ADJUSTED
-------- -------- --------
(UNAUDITED, IN THOUSANDS)
<S> <C> <C> <C>
Short-term obligations........................... $ 2,490 $ 1,740 $ 272
-------- -------- --------
Long-term obligations, less current portion (1).. 19,357 19,357 992
-------- -------- --------
Series A Convertible Participating Preferred
Stock, par value $0.001, 20,796,172 shares
authorized, issued and outstanding (actual)..... 9,304 -- --
-------- -------- --------
Stockholders' deficit:
Common Stock, par value $0.001, 68,000,000
shares authorized; 23,526,456 shares issued
and outstanding (actual); 4,508,297 shares
issued and outstanding (pro forma); and
100,000,000 authorized, 7,208,297 issued and
outstanding (as adjusted) (2)................. 23 5 7
Preferred Stock, par value $0.001, 20,000,000
shares authorized; no shares issued and
outstanding................................... -- --
Additional paid-in capital..................... -- 10,072 41,963
Accumulated deficit............................ (21,443) (21,443) (21,443)
-------- -------- --------
Total stockholders' equity (deficit)......... (21,420) (11,366) 20,527
-------- -------- --------
Total capitalization....................... $ 9,731 $ 9,731 $ 21,791
======== ======== ========
</TABLE>
- ---------------------
(1) See Note 9 of Notes to Consolidated Financial Statements.
(2) Reflects the Recapitalization pursuant to which the Company will effect
(i) a 1 for 13.22513 reverse stock split (the "Reverse Stock Split") with
respect to the Common Stock, (ii) the conversion of all outstanding shares
of Series A Convertible Participating Preferred Stock ("Preferred Stock")
into 1,572,474 shares of Common Stock, (iii) the conversion of the
$2,084,918 accrued dividend on the Preferred Stock (the "Preferred
Dividend") into 160,378 shares of Common Stock, (iv) the cashless exercise
of outstanding warrants, except for the 1998 Warrants, to purchase 938,832
shares of Common Stock and (v) the issuance of 57,692 shares of Common
Stock to Bison Propane Bottle Exchange, L.L.C. as partial consideration
for accounts and other assets acquired by the Company in January 1998 (the
"Bison Acquisition"). Excludes (a) the issuance of 81,916 shares of Common
Stock reserved for issuance upon exercise of the 1998 Warrants at an
exercise price of $13.00 per share, (b) an aggregate of 982,607 shares of
Common Stock reserved for issuance under the 1994 Stock Incentive Plan,
1998 Stock Incentive Plan, Director Option Plan and the Distributor Option
Plan, of which 182,607 shares are subject to outstanding and vested
options as of the date hereof at a weighted average exercise price of
$6.03 per share and (c) approximately 16,923 shares of Common Stock to be
issued upon the conversion of approximately $220,000 of dividends accruing
on the Preferred Stock between January 31, 1998 and the estimated
consummation of the offering. See "Description of Capital Stock," "Certain
Transactions," "Management--1994 Stock Incentive Plan," "--1998 Stock
Incentive Plan," "--Director Option Plan," and "--Distributor Option
Plan."
15
<PAGE>
DILUTION
As of January 31, 1998 the Company had a pro forma negative net tangible
book value of $(12,604,000) or $(2.80) per share of Common Stock. The pro
forma negative net tangible book value per share represents the amount of the
Company's total tangible assets less its total liabilities divided by the
number of shares of Common Stock outstanding, after giving effect to the
Recapitalization. (The negative net tangible book value as of January 31, 1998
prior to giving effect to the Recapitalization was $(22,658,000) or $(0.96)
per share.) The pro forma negative net tangible book value per share does not
include the issue of 81,916 shares of Common Stock reserved for issuance upon
the exercise of the 1998 Warrants at an exercise price of $13.00 per share or
182,607 shares of Common Stock reserved for issuance upon the exercise of
vested options with a weighted average exercise price of $6.03 per share which
were granted under the 1994 Stock Incentive Plan. Without taking into account
any changes in net tangible book value after January 31, 1998, other than to
give effect to the sale by the Company of 2,700,000 shares offered hereby (at
an assumed initial public offering price of $13.00 per share, after deducting
the underwriting discount and estimated offering expenses), the Company's pro
forma net tangible book value at January 31, 1998 would have been $19,289,000,
or $2.68 per share. This represents an immediate dilution in pro forma
negative net tangible book value of $10.32 per share to investors purchasing
shares in this offering and an immediate increase in pro forma net tangible
book value of $5.48 per share to existing stockholders. The following table
illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $13.00
Pro forma net tangible book value per share before the
offering................................................... $(2.80)
Increase per share attributable to new investors............ 5.48
------
Pro forma net tangible book value per share after the
offering..................................................... 2.68
------
Dilution per share to new investors........................... $10.32
======
</TABLE>
The following table summarizes, on a pro forma basis, as of January 31,
1998, the differences between existing stockholders and the new investors with
respect to the number of shares of Common Stock purchased from the Company,
the total consideration paid and the average price per share paid:
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION
-------------------- ------------------ AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
--------- ---------- ------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 4,508,297 62.5% $ 9,327 21.0% $ 2.07
New investors........... 2,700,000 37.5 35,100 79.0 13.00
--------- ----- ------- -----
Total................. 7,208,297 100.0% $44,427 100.0%
========= ===== ======= =====
</TABLE>
16
<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 31, 1995, July 28, 1996 and July 31, 1997 are derived from the
Consolidated Financial Statements of the Company included elsewhere in this
Prospectus that have been audited by Coopers & Lybrand L.L.P., independent
auditors. 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 auditors. The
selected consolidated financial data for the six months ended January 31, 1997
and 1998 are derived from unaudited financial statements which, in the opinion
of management of the Company, reflect all adjustments, including normal
recurring adjustments, that the Company considers necessary for a fair
presentation of the consolidated financial position and results of operations
for these periods. 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 years ended June 30, 1993
and June 30, 1994 and the balance sheet data as of June 30, 1993 and June 30,
1994, are 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 SIX MONTHS
COMPANY(1) FISCAL YEAR ENDED ENDED
----------------- ------------------------------------- JANUARY 31,
JUNE 30, JUNE 30, JULY 31, JULY 31, JULY 28, JULY 31, ----------------
1993 1994 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AND (UNAUDITED)
SELECTED OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net sales--
distributors.......... $ -- $ -- $ -- $ -- $ 2,386 $13,060 $ 3,501 $ 8,314
Net sales--direct...... 233 393 56 2,728 5,830 1,151 1,008 --
----- ----- ------ ------- ------- ------- ------- -------
Total net sales........ 233 393 56 2,728 8,216 14,211 4,509 8,314
Cost of sales--
distributors.......... -- -- -- -- 1,811 9,873 2,638 6,371
Cost of sales--direct.. 82 126 59 3,523 6,089 1,771 1,368 --
----- ----- ------ ------- ------- ------- ------- -------
Total cost of sales.... 82 126 59 3,523 7,900 11,644 4,006 6,371
----- ----- ------ ------- ------- ------- ------- -------
Gross profit........... 151 267 (3) (795) 316 2,567 503 1,943
Operating expenses
(income):
Sales and marketing.... -- -- 0 532 1,112 1,950 653 1,027
General and
administrative........ 103 228 374 2,787 3,192 3,022 1,398 1,706
Lease expense
(income)--net......... -- -- -- -- (89) (143) (93) 23
Depreciation and
amortization.......... 24 25 3 284 868 873 400 516
Nonrecurring charges
(2)................... -- -- -- -- 1,363 970 188 408
----- ----- ------ ------- ------- ------- ------- -------
Total operating
expenses............ 127 253 377 3,603 6,446 6,672 2,546 3,680
----- ----- ------ ------- ------- ------- ------- -------
Income (loss) from
operations............ 24 14 (380) (4,398) (6,130) (4,105) (2,043) (1,737)
Other expense (income):
Interest expense....... 9 5 -- 287 1,469 1,665 817 929
Other (income)
expense--net.......... (2) (2) -- (25) (168) (186) (79) (102)
===== ===== ====== ======= ======= ======= ======= =======
Net income (loss).... 17 11 $ (380) $(4,660) $(7,431) $(5,584) $(2,781) $(2,564)
----- ----- ------ ------- ------- ------- ------- -------
Loss available to
common stockholders
(3)................. -- -- $ -- $(5,055) $(8,067) $(6,271) $(3,120) $(2,932)
===== ===== ====== ======= ======= ======= ======= =======
Net (loss) per share:
Basic and diluted (4).. -- -- $(0.01) $ (0.23) $ (0.37) $ (0.28) $ (0.14) $ (0.12)
===== ===== ====== ======= ======= ======= ======= =======
Shares used in per
share calculations
Basic and diluted (4).. -- -- 20,060 21,658 21,526 22,276 21,526 23,526
Pro forma basic and
diluted per share (5). -- -- -- -- -- $ (1.49) -- $ (0.65)
Pro forma shares used
in calculation of net
loss per share (5).... -- -- -- -- -- 4,328 -- 4,508
SELECTED OPERATING DATA:
Retail locations (at
period end)........... -- -- 331 1,608 2,981 4,400 3,116 6,600
Cylinder transactions
(000's)............... -- -- 5 306 769 1,239 387 715
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, JULY 31, JULY 31, JULY 28, JULY 31, JANUARY 31,
1993 1994 1994 1995 1996 1997 1998
-------- -------- -------- -------- -------- -------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Cash and cash
equivalents........... $ -- $ -- $150 $ 209 $ 1,126 $ 325 $ 1,207
Working capital........ (82) (81) 109 (3,264) 1,580 737 296
Total assets........... 87 85 631 10,424 11,897 9,974 11,995
Long-term obligations,
less current
maturities............ 20 4 518 1,361 14,174 16,110 19,357
Total stockholders'
(deficit) equity...... 5 16 (179) (5,149) (13,217) (18,488) (21,420)
</TABLE>
- ---------------------
(1) Effective June 30, 1994, the assets of American Cylinder Exchange (the
"Predecessor Company") were contributed to the Company in exchange for 1.3
million shares of Common Stock which were distributed to the Predecessor
Company's shareholders.
(2) See Note 12 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, $339 and $368 for fiscal years ended 1995, 1996, 1997 and the six
months ended January 31, 1997 and 1998, respectively.
(4) See Note 15 of Notes to Consolidated Financial Statements for an
explanation of the determination of shares used in computing basic and
diluted net loss per share.
(5) Based on the number of shares outstanding, including shares issuable upon
the exercise of all outstanding stock warrants, the conversion of
Preferred Stock and Preferred Stock dividends to Common Stock, the 1 for
13.22513 reverse stock split with respect to the Common Stock and, for
January 31, 1998, the issuance of shares as partial consideration for
accounts and other assets acquired by the Company in the Bison
Acquisition, all of which will be effected immediately prior to the
consummation of this offering.
18
<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, 1994 through July 31, 1995, August 1, 1995 through July 28, 1996 and
July 29, 1996 through July 31, 1997.
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 51 independent distributors which deliver Blue Rhino grill cylinder
exchange to over 6,600 retail locations in over 41 states as of January 31,
1998. During the twelve months ended January 31, 1998, the Company's sales
increased 78% from the prior year's comparable period to approximately $18.0
million as a result of the growth of sales at existing locations and the
addition of over 3,000 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 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 business model was completed in the third quarter of fiscal 1997.
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 82%, 10% and 8%, respectively, of the Company's net
sales for fiscal 1997 and 81%, 9% and 10%, respectively, for the first six
months of 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
19
<PAGE>
highest cost of sales 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 expense (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, $1.1 million, $188,000 and
$408,000 incurred during fiscal 1996 and 1997 and for the first six months of
fiscal 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 after the quarter ended July 31,
1998.
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 January 31, 1998. This has resulted in a net operating loss
carryforward for federal income tax purposes of approximately $20.5 million
which is available to be used to offset future taxable income, if any. In the
event of a change in ownership of the Company, the extent to which the loss-
carryforwards can be used to offset future taxable income may be limited as
provided in the Tax Reform Act of 1996. 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 recent 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
-------------------------------------------------------
SIX MONTHS
ENDED
FISCAL YEAR ENDED JANUARY 31,
----------------------------------------- -------------
JULY 31, 1995 JULY 28, 1996 JULY 31, 1997 1997 1998
------------- ------------- ------------- ----- -----------
<S> <C> <C> <C> <C> <C> <C>
Total net sales......... 100.0% 100.0% 100.0% 100.0% 100.0%
Total cost of sales..... 129.1 96.2 81.9 88.8 76.6
------ ----- ----- ----- -----
Gross margin............ (29.1) 3.8 18.1 11.2 23.4
Operating expenses
(income):
Sales and marketing... 19.5 13.5 13.7 14.5 12.4
General and
administrative....... 102.2 38.9 20.5 31.0 20.5
Lease expense
(income)--net........ -- (1.1) (1.0) (2.1) 0.3
Depreciation and
amortization......... 10.4 10.6 6.1 8.9 6.2
Nonrecurring charges.. -- 16.5 7.6 4.2 4.9
------ ----- ----- ----- -----
Total operating
expenses........... 132.1 78.4 46.9 56.5 44.3
------ ----- ----- ----- -----
Loss from operations.... (161.2) (74.6) (28.8) (45.3) (20.9)
Other expense (income):
Interest expense...... 10.5 17.8 11.7 18.1 11.2
Other income--net..... (0.9) (2.0) (1.3) (1.8) (1.2)
------ ----- ----- ----- -----
Net loss................ (170.8)% (90.4)% (39.2)% (61.6)% (30.9)%
====== ===== ===== ===== =====
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
FISCAL YEAR ENDED JANUARY 31,
----------------------------------------- -------------
JULY 31, 1995 JULY 28, 1996 JULY 31, 1997 1997 1998
------------- ------------- ------------- ----- ----------
<S> <C> <C> <C> <C> <C> <C>
As a Percentage of Total
Net Sales
Net sales--
distributors......... -- 29.0% 91.9% 77.6% 100.0%
Net sales--direct..... 100.0% 71.0% 8.1% 22.4% --
Total gross margin...... (29.1)% 3.8% 18.1% 11.2% 23.4%
Gross margin of net
sales--distributors.. -- 24.1% 24.4% 24.7% 23.4%
Gross margin of net
sales--direct........ (29.1)% (4.4)% (53.9)% (35.7)% --
</TABLE>
COMPARISON OF SIX MONTHS ENDED JANUARY 31, 1997 AND 1998
Net sales. Net sales consist of net sales from the Company's previous
vertically integrated distribution operations ("net sales--direct") and net
sales from the Company's current independent distributor network ("net sales--
distributors"). 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 for the first six months of fiscal 1998 were
and thereafter will be net sales--distributors. Total net sales increased
84.4% from approximately $4.5 million for the first six months of fiscal 1997
to approximately $8.3 million for the first six months of fiscal 1998. Net
sales--distributors increased 137.5% from approximately $3.5 million in the
first six months of fiscal 1997 to approximately $8.3 million in the first six
months of fiscal 1998. 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 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 106.3% from approximately 3,200
locations at January 31, 1997 to approximately 6,600 locations at January 31,
1998. The number of cylinders transacted increased 84.8% from approximately
387,000 units in the first six months of fiscal 1997 to approximately 715,000
units in the first six months of fiscal 1998.
Gross margin. Gross margin increased from 11.2% in the first six months of
fiscal 1997 to 23.4% in the first six months of 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 decreased from 24.7% in the first six months of
fiscal 1997 to 23.4% in the first six months of fiscal 1998. This decrease was
due to a shift in the mix of cylinders transacted, with cylinder sales
accounting for a larger percentage of total net sales than in previous
quarters.
Sales and marketing expenses. Sales and marketing expenses increased 57.3%
from approximately $653,000 in the first six months of fiscal 1997 to
approximately $1.0 million in the first six months of fiscal 1998 but
decreased as a percentage of total net sales from 14.5% in the first six
months of fiscal 1997 to 12.4% in the first six months of fiscal 1998. The
increase in absolute sales and marketing expense was due primarily to
additional compensation, promotional and advertising expenditures. 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 22.0% from approximately $1.4 million in the first six months of
fiscal 1997 to approximately $1.7 million in the first six months of fiscal
1998 but decreased as a percentage of total net sales from 31.0% in the first
six months of fiscal 1997 to 20.5% in the first six months of 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.
21
<PAGE>
Lease expense (income)--net. Gross lease income for the first six months of
fiscal 1997 and 1998 increased from $108 to $244, respectively, while gross
rent expense for the same period increased from $15 to $267. The increase in
lease income and rent expense was due to the implementation of a plant
facilities 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.
Depreciation and amortization. Depreciation and amortization increased from
approximately $400,000 in the first six months of fiscal 1997 to approximately
$516,000 in the first six months of fiscal 1998 primarily due to the
acquisition of cylinder display panels and computer equipment.
Nonrecurring charges. Nonrecurring charges increased from approximately
$188,000 in the first six months of fiscal 1997 to approximately $408,000 for
the first six months of 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.
Interest expense. Interest expense increased from approximately $817,000 in
the first six months of fiscal 1997 to approximately $929,000 in the first six
months of fiscal 1998. The increase in interest expense was due to accretion
of interest on Senior Discount Notes, additional borrowings under lines of
credit and, to a lesser extent, borrowings from stockholders.
Other income--net. Other income--net increased from approximately $79,000 in
the first six months of fiscal 1997 to approximately $102,000 in the first six
months of 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 73.0% from approximately $8.2 million
for fiscal year 1996 to approximately $14.2 million for fiscal 1997. Net
sales--distributors increased from approximately $2.4 million for fiscal year
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 46.7% 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 1,239,000 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 expense was due primarily to additional compensation, promotional
and advertising expenditures.
General and administrative expenses. General and administrative expenses
decreased 8.9% from approximately $3.2 million for fiscal 1996 to
approximately $2.9 million for fiscal 1997, and decreased as a percentage of
total net sales from 38.9% for fiscal 1996 to 20.5% for fiscal 1997. The
decrease in absolute general and administrative expenses was due to the
transition to the independent distributor business model.
22
<PAGE>
Lease expense (income)--net. Lease expense (income)--net increased 60.7%
from $89,000 for fiscal 1996 to approximately $143,000 for fiscal 1997. The
increase in lease expense (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 for fiscal 1996 to approximately $1.1 million for
fiscal 1997.
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.
COMPARISON OF YEARS ENDED JULY 31, 1995 AND JULY 28, 1996
Net sales. Total net sales increased 201.2% from approximately $2.7 million
for fiscal 1995 to approximately $8.2 million for fiscal 1996 while net
sales--direct increased 113.7% from approximately $2.7 million to
approximately $5.8 million. During fiscal 1996, the Company initiated its
transition from a vertically integrated business model to an independent
distributor business model with the addition of 12 distributors. As a result,
net sales--distributors contributed approximately $2.4 million to total net
sales in fiscal 1996. These increases are due primarily to the increases in
the number of new retail locations placed in service and a corresponding
increase in the number of cylinder transactions during the period.
Gross margin. Gross margin was negative for fiscal 1995 and 3.8% for fiscal
1996. The negative gross margin for fiscal 1995 and subsequent improvement in
fiscal 1996 was related to a limited number of retail locations in the
Company's first years of business.
Sales and marketing expenses. Sales and marketing expenses increased 109.0%
from approximately $532,000 for fiscal 1995 to approximately $1.1 million for
fiscal 1996, but decreased as a percentage of total net sales from 19.5% for
fiscal 1995 to 13.5% for fiscal 1996. The increase in sales and marketing
expense was due primarily to the development of the Blue Rhino brand and its
sales force. The decrease of sales and marketing expenses as a percentage in
net sales was due primarily to the fact that the Company's total sales
increased at a rate higher than selling and marketing expenses.
General and administrative expenses. General and administrative expenses
increased 14.5% from approximately $2.8 million for fiscal 1995 to
approximately $3.2 million for fiscal 1996, but decreased as a percentage of
total net sales from 102.2% for fiscal 1995 to 38.9% for fiscal 1996. The
increase in absolute general and administrative expenses was due to increased
compensation. The decrease in general and administrative expense as a
percentage of net sales was due primarily to the increase in total net sales.
Lease expense (income)--net. Lease expense (income)--net was approximately
$89,000 for fiscal 1996. There was no lease expense (income)--net in fiscal
1995.
Depreciation and amortization. Depreciation and amortization increased from
approximately $284,000 for fiscal 1995 to approximately $868,000 for fiscal
1996, due primarily to investments in facilities related to the Company's
previous vertically integrated business model.
Nonrecurring charges. Nonrecurring charges associated with the Company's
transition from a vertically integrated business model to an independent
distributor business model were approximately $1.4 million in fiscal 1996.
There were no nonrecurring charges in fiscal 1995.
23
<PAGE>
Interest expense. Interest expense increased from approximately $287,000 for
fiscal 1995 to approximately $1.5 million for fiscal 1996 due primarily to the
issuance of Senior Discount Notes for approximately $12.6 million with an
aggregate principal amount of approximately $17.2 million.
Other income--net. Other income--net increased from approximately $25,000
for fiscal 1995 to $168,000 for fiscal 1996. This increase was due primarily
to interest income generated from excess cash balances.
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. 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 "--Varying Local
Permitting Processes."
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
--------------------------------------------------------------------
OCTOBER 31, JANUARY 31, APRIL 30, JULY 31, OCTOBER 31, JANUARY 31,
1996 1997 1997 1997 1997 1998
----------- ----------- --------- -------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Total net sales......... $ 2,491 $ 2,018 $ 3,000 $ 6,702 $ 4,139 $ 4,175
Total cost of sales..... 2,206 1,800 2,478 5,160 3,154 3,217
------- -------- -------- -------- -------- --------
Gross profit.......... 285 218 522 1,542 985 958
------- -------- -------- -------- -------- --------
Operating expenses
(income)
Sales and marketing... 415 380 489 666 564 463
General and
administrative ...... 547 710 751 900 844 862
Lease expense
(income)--net........ (43) (50) (31) (19) 8 15
Depreciation and
amortization......... 187 212 223 251 245 271
Nonrecurring charges.. 43 145 672 224 281 127
------- -------- -------- -------- -------- --------
Total operating
expenses........... 1,149 1,397 2,104 2,022 1,942 1,738
------- -------- -------- -------- -------- --------
Loss from operations.... (864) (1,179) (1,582) (480) (957) (780)
Other expense (income)
Interest expense...... 394 424 432 415 434 495
Other income--net..... (43) (37) (43) (63) (51) (51)
------- -------- -------- -------- -------- --------
Net loss................ $(1,215) $ (1,566) $ (1,971) $ (832) $ (1,340) $ (1,224)
======= ======== ======== ======== ======== ========
Loss available to common
stockholders........... $(1,384) $ (1,737) $ (2,140) $ (1,010) $ (1,447) $ (1,485)
======= ======== ======== ======== ======== ========
Basic and diluted net
loss per share......... $ (0.06) $ (0.08) $ (0.10) $ (0.04) $ (0.06) $ (0.06)
======= ======== ======== ======== ======== ========
Shares used in
computation of net loss
per share (1).......... 21,526 21,526 22,526 23,526 23,526 23,526
======= ======== ======== ======== ======== ========
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL NET SALES
-------------------------------------------------------------------
QUARTER ENDED
-------------------------------------------------------------------
OCTOBER 31, JANUARY 31, APRIL 30, JULY 31, OCTOBER 31, JANUARY 31,
1996 1997 1997 1997 1997 1998
----------- ----------- --------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Total net sales......... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Total cost of sales..... 88.6 89.2 82.6 77.0 76.2 77.1
----- ----- ----- ----- ----- -----
Gross margin.......... 11.4 10.8 17.4 23.0 23.8 22.9
Operating expenses
(income)
Sales and marketing... 16.7 18.8 16.3 9.9 13.6 11.1
General and
administrative....... 22.0 35.2 25.0 13.4 20.4 20.6
Lease expense
(income)--net........ (1.7) (2.5) (1.0) (0.3) 0.2 0.4
Depreciation and
amortization......... 7.5 10.5 7.4 3.7 5.9 6.5
Nonrecurring charges.. 1.7 7.2 22.4 3.5 6.8 3.0
----- ----- ----- ----- ----- -----
Total operating
expenses........... 46.1 69.2 70.1 30.2 46.9 41.6
----- ----- ----- ----- ----- -----
Loss from operations.... (34.7) (58.4) (52.7) (7.2) (23.1) (18.7)
Other expense (income)
Interest expense...... 15.8 21.0 14.4 6.1 10.5 11.8
Other income--net..... (1.7) (1.8) (1.4) (0.9) (1.2) (1.2)
----- ----- ----- ----- ----- -----
Net loss................ (48.8)% (77.6)% (65.7)% (12.4)% (32.4)% (29.3)%
===== ===== ===== ===== ===== =====
</TABLE>
- ---------------------
(1) See Note 15 of Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds have been the issuance of stock and
warrants and the incurrence of debt. The Company had working capital of
approximately $296,000 as of January 31, 1998.
Net cash used in operations was approximately $2.1 million and approximately
$694,000 for the first six months of fiscal 1998 and 1997, respectively. Net
cash used in operations was approximately $2.2 million and approximately $5.2
million for fiscal 1997 and 1996, respectively. For all periods net cash used
in operations resulted primarily from net losses from operations.
Net cash used in investing activities was approximately $776,000 for the
first six months of fiscal 1998 and net cash provided by investing activities
was approximately $134,000 for the first six months of fiscal 1997. 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. The primary components of cash used in investing activities
included acquisitions and investments in property and equipment. The primary
components of cash provided from investing included collection on notes
receivable and proceeds from the sale of property and equipment.
Net cash provided by financing activities was approximately $3.7 million for
the first six months of fiscal 1998 and net cash used in financing activities
was approximately $257,000 for the first six months of fiscal 1997. Net cash
provided by financing activities was approximately $1.0 million for fiscal
1997 and approximately $7.5 million for fiscal 1996. The primary components of
cash provided by financing activities included proceeds from the issuance of
Senior Discount Notes, stockholder loans and bank borrowings. The primary
components of cash used in financing activities included payments on various
notes payable, long-term debt and capital lease obligations.
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 leases cylinder display racks for a minimum term of 48
25
<PAGE>
months. After the expiration of the minimum term of each lease, the Company
may purchase the cylinder displays and after 36 months, the Company may
terminate any lease based upon specified terms. The Company intends to use a
portion of the proceeds of this offering to purchase all equipment currently
leased under the Cylinder Display Lease Facility and to terminate the
Facility. Approximately $2.2 million of the Facility was outstanding at
January 31, 1998.
The Company currently leases 150 hand held computers from three lessors
under the terms of three master leases. Pursuant to a master lease agreement
with Leasing Innovations, Incorporated, the Company leases 100 hand held
computers for a term of 30 months under which the Company pays $221,958 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 hand held computers for a
term of 42 months under which the Company pays $45,228 in total annual rents.
At the end of the lease term, the Company may purchase the equipment for $1.00
per hand held unit. The Company leases 25 hand held computers for a term of 36
months pursuant to a master lease agreement with Green Tree Vendor Services
Corporation under which the Company pays $37,404 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 hand held computer leases, the Company
is responsible for insurance, maintenance and taxes on the leased equipment.
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 a $3.0 million revolving line of credit
with a $1.0 million overadvance provision, a $1.0 million capital expenditure
line of credit and a $4.0 million acquisition line of credit. The amounts
outstanding under the Bank Credit Facility are due on November 30, 1998. 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 current, net worth and cash flow ratios
and restricts the level of capital expenditures. The Company is in compliance
with these covenants as of the date hereof. Mr. Prim and American Oil and Gas,
Inc., a stockholder of the Company, have jointly and severally guaranteed this
facility up to $6.0 million. The loans under the Bank Credit Facility bear
interest at the prime rate plus 0.5% per annum. As of the consummation of this
offering, the Company expects to have approximately $5.5 million outstanding
under the Bank Credit Facility which will be repaid with a portion of the net
proceeds of this offering. See "Use of Proceeds."
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.
The Company anticipates that the total capital expenditures for 1998 and
1999 will be approximately $2.4 million and $5.3 million, respectively, and
will relate primarily to investments in cylinders, 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 existing borrowing capacity under lines of credit, together with
the proceeds from the offering and cash provided by operations, will be
sufficient to meet the Company's working capital requirements through fiscal
1999. However, there can be no assurance that the Company will not seek or
require additional capital in the future as a result of expansion or
otherwise.
In December 1994, the Company raised approximately $6.7 million pursuant to
an offering of its Series A Convertible Participating 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
26
<PAGE>
program. See "Certain Transactions." The Preferred Stock will be converted
into Common Stock and the warrants will be exercised upon consummation of this
offering. See "Description of Capital Stock--Recapitalization."
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 Senior Discount Notes accrete in value until October 11,
1998 and, thereafter, cash interest will be payable semi-annually. The gross
proceeds of the Unit offering was approximately $12.6 million. See "Certain
Transactions." The Senior Discount Notes will be repaid in full with a portion
of the proceeds of the offering and the warrants will be exercised on a
cashless basis upon consummation of the offering. See "Use of Proceeds" and
"Description of Capital Stock--Recapitalization."
In January 1998, the Company received $3.25 million in loans from four of
its stockholders (the "1998 Stockholder Loans"). The 1998 Stockholder Loans
bear interest at 10.5% per annum and are due on the earlier of December 31,
2000 or the successful completion of a public offering of the Company's Common
Stock with net proceeds of at least $30.0 million. There was $3.25 million
outstanding under the 1998 Stockholder Loans as of January 31, 1998
(approximately $3.4 million as of the consummation of the offering). In
addition, the Company issued warrants to purchase an aggregate 81,915 shares
at an exercise price of $13.00 per share to these stockholders in connection
with the 1998 Stockholder Loans. The 1998 Stockholder Loans will be repaid in
full with a portion of the proceeds of the offering. See "Use of Proceeds."
INFLATION
The Company does not believe that inflation has had a material adverse
effect on net sales or the results of operations. However, there can be no
assurance that the Company's business will not be affected by inflation in the
future.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 130 ("Statement
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
Statement 130 to have a significant impact, if any, 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"
("Statement 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. The Company is evaluating the provisions of
Statement 131, but has not yet determined if additional disclosures will be
required.
YEAR 2000 COMPLIANCE
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 expenditures of
approximately $35,000. 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.
27
<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 6,600 retail
locations in 41 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, Wal Mart, Kroger and SuperAmerica. Blue Rhino
brand grill cylinders are delivered to retailers through a national network of
51 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 management information systems ("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 the twelve
months ended January 31, 1998, Blue Rhino cylinder exchange displays have been
installed at over 3,000 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.
28
<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,
Wal Mart, 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 over 6,600. The Company plans to continue to increase the
number of new retail locations by driving sales within existing retail
accounts. In the twelve months ended January 31, 1998, the Company has added
over 3,000 retail locations. Historically, the Company's locations
29
<PAGE>
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.
Leverage National Distributor Network. Over the past two years the Company
has established a network of 51 independent distributors serving 41 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,
four 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 1,800 retail locations in the past twelve months as a result of the
five Acquisitions for a total purchase price of approximately $3.8 million,
including approximately $3.1 million in cash and $750,000 worth of Common
Stock. Three of these acquisitions, representing approximately 800 accounts
and an aggregate purchase price of $2.3 million in cash, were consummated in
March and April 1998. As of the date hereof, the Company has no agreements,
understandings or commitments with respect to any acquisitions. See "Risk
Factors--Uncertainty of Ability to Grow Through Acquisition of Accounts."
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. The following graph illustrates the cylinder exchange
process:
[DIAGRAM OF BLUE RHINO BUSINESS MODEL. INCLUDES FLOW OF TRANSACTIONS AMONG
CONSUMERS, RETAILERS, DISTRIBUTORS AND BLUE RHINO.]
30
<PAGE>
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 (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:
Retail Category Major Accounts
Home Centers/Hardware Stores Home Depot, Lowe's, Sears Hardware
Mass Merchants Wal Mart, Kmart, Meijer
Grocery Stores Kroger, Food Lion, Winn Dixie
Convenience Stores SuperAmerica, Emro-Speedway, Minit
Mart Foods
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.
31
<PAGE>
Sales Support. The Company's retail sales organization is divided into four
regions and includes seven corporate sales managers 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 BREAS electronic accounting
software, 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"), also has the capability to provide
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 providing similar
services for 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.
Home Depot represented 29% and 30%, respectively, of the Company's sales for
fiscal 1997 and the first six months of fiscal 1998. See "Risk Factors--
Concentration of Customer Accounts."
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.
The following map shows the location of and the territory served by the
Company's 51 distributors:
LOGO
32
<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 intends to establish the
Distributor Option Plan pursuant to which it will reserve 400,000 shares of
its Common Stock for issuance upon the exercise of options granted to
distributors. The Company, through its Rhino Services, L.L.C. subsidiary, also
offers distributors a cooperative propane buying program and cylinder
financing program. The Company subleases cylinder display racks and hand held
computers to its distributors. The cylinder display racks are subject to
subleases 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 subleases may be terminated by either party
on 60 days notice. The distributors pay $1.00 per month for each hand held
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
hand held computers. Either party may terminate the hand held 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 one
distributor 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 four 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 newly formed distributors,
Caribou Propane Javilina 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 51 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.
33
<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 eight distributors owe the Company in the aggregate
approximately $1.4 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. The BREAS system will
require upgrades to address the year 2000 problem which the Company estimates
will cost approximately $35,000. The Company has engaged Integrated Solutions
International, L.L.C. to upgrade this system and believes that it will be 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.
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
34
<PAGE>
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. 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 Company plans to
have an OPD Valve for its cylinder exchange program in April 1998. 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 a trademark
application pending for Tri-Safe name. 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 February 28, 1998, the Company had 51 employees, of whom 15 were
engaged in sales and marketing, 12 in distributor services, 5 in information
systems and 19 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.
35
<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 Vice Chairman
(1)....................
Mark Castaneda.......... 33 Chief Financial Officer
Kay B. Word............. 45 Chief Information Officer
Richard E. Belmont...... 38 Vice President, Sales and Marketing
Joseph T. Culp.......... 40 Vice President, Partner Development
Steven D. Devick (2).... 46 Director
Craig J. Duchossois 53 Director
(1)(2).................
S. H. Fogleman, III (2). 42 Director
James P. Liautaud (3)... 61 Director
John H. Muehlstein (3).. 43 Director
Robert S. Steel (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 of several privately-held companies,
including Platinum Propane, Caribou Propane and Javilina 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 and Javilina Propane which act as
distributors for the Company.
Mark Castaneda has served as Chief Financial Officer since October 1997.
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 the
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. Word has served as Chief Information Officer since March 1997. Prior
to joining the Company, Ms. Word served as the director of information
resources for R.J. Reynolds Tobacco Company from March 1988 to March 1997.
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<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.
S.H. Fogleman, III, has served as a director since May 1994. Mr. Fogleman
was the Chief Financial Officer and Vice President, Finance of the Company
from May 1994 to December 1995. Mr. Fogleman has been the chief financial
officer and vice president, finance of Platinum Rotisserie Corporation since
November 1993 and was the chief financial officer/controller of Zack's Famous
Frozen Yogurt, Inc. from July 1990 to November 1993.
James P. Liautaud has served as a director since May 1994. Since 1968, Mr.
Liautaud has been the chairman of the board of Gabriel, Inc., a private
investment company. Mr. Liautaud serves as a director and trustee for the
Entrepreneurship Institute and the University of Illinois Family Business
Council.
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. and several privately-held corporations.
Robert S. Steel has served as a director of the Company since May 1995.
Since 1977, Mr. Steel has been the president and chief executive officer of
K.A. Steel Chemicals, Inc. Mr. Steel is also the general partner and principal
of Vision Capital Partners, L.L.C., a venture capital and investment
partnership. Mr. Steel also serves as the secretary and as a director of
Whittman-Hart Inc., a director of Monterey Pasta Co., and as an officer and
director of 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") and will administer 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") when they become effective upon consummation of this
offering. Prior to September 1997, decisions concerning the compensation of
officers were made by the Board
37
<PAGE>
of Directors as a whole. The Audit Committee makes recommendations to the
Board of Directors regarding the selection of independent auditors, 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 this offering, the directors were eligible to
receive stock options under the 1994 Stock Incentive Plan. After the
consummation of this offering directors will receive options under the
Director Option Plan. In April 1995, the Company issued to each of six
directors an option to purchase 3,780 shares of Common Stock at a purchase
price of $4.50 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."
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
paid by the Company for the fiscal year ended July 31, 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 (#)(1)
--------------------------- ---- --------- --------------------
<S> <C> <C> <C>
Billy D. Prim, 1997 $125,250 57,089
Chief Executive Officer
Richard E. Belmont, 1997 $106,727 1,890
Vice President Sales and Marketing
Joseph T. Culp, 1997 $104,242 1,890
Vice President of Partner Development
</TABLE>
- ---------------------
(1) The number of shares underlying the stock options reflects the Reverse
Stock Split.
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<PAGE>
OPTION GRANTS
The following table sets forth information on grants of stock options to the
Named Officers pursuant to the Company's 1994 Stock Incentive Plan during
fiscal 1997.
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(3)
OPTIONS EMPLOYEES IN PER EXPIRATION ---------------------
NAME GRANTED(1)(2) FISCAL YEAR SHARE(2) DATE 5% 10%
- ---- ------------- ------------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Billy D. Prim (4)....... 57,089 54.8% $7.05(5) 6/15/07 $ 253,116 $ 641,445
Richard E. Belmont...... 1,890 6.6 6.61 3/20/07 7,857 19,911
Joseph T. Culp.......... 1,890 6.6 6.61 11/15/06 7,857 19,911
</TABLE>
- ---------------------
(1) The options are granted pursuant to the Company's 1994 Stock Incentive
Plan. These options have a term of ten years and, except as described in
note 4 below, are nonqualified stock options and have an exercise price
equal to the estimated fair value of the Company's Common Stock on the
date of grant. In determining the fair market value of the Company's
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.
(2) The number of securities underlying options granted and exercise price per
share have been adjusted to reflect the Reverse Stock Split.
(3) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of the Company's future
Common Stock prices.
(4) 19,282 of these options are nonqualified stock options issued at an
exercise price of $6.61 per share and 37,807 of these options are
qualified stock options issued at an exercise price of $7.27 per share
which represents the Board of Directors' estimate of fair market value
plus 10%.
(5) Weighted average exercise price.
The following table sets forth information with respect to unexercised stock
options granted under the Company's 1994 Stock Incentive Plan as of the end of
fiscal 1997. The Named Officers did not exercise any stock options during such
fiscal year.
AGGREGATE OPTION EXERCISES AND FISCAL YEAR-END VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED IN-
NUMBER OF UNEXERCISED THE-MONEY
OPTIONS OPTIONS AT JULY 31,
HELD AT JULY 31, 1997(1) 1997(3)
---------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE(2) EXERCISABLE UNEXERCISABLE
- ---- ----------- ---------------- ----------- -------------
<S> <C> <C> <C> <C>
Billy D. Prim............ 1,512 59,357 $3,190 $ 2,268
Richard E. Belmont....... 3,781 9,451 7,978 15,954
Joseph T. Culp........... 2,268 10,964 4,785 19,144
</TABLE>
- ---------------------
(1) The number of underlying options has been adjusted to reflect the Reverse
Stock Split.
(2) All unexercisable options will become exercisable upon consummation of
this offering.
(3) Calculated by determining the difference between the fair market value of
the securities underlying the options at July 31, 1997 ($0.50 per share
($6.61 per share post Reverse Stock Split) as determined by the Board of
Directors) and the exercise price of the Named Officer's option.
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<PAGE>
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 182,607 shares of Common
Stock reserved for issuance upon the exercise of Options granted thereunder.
As of January 31, 1998, Options to purchase 182,607 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 offering, the Company
intends to accelerate 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. See "Description of Capital Stock--Recapitalization."
1998 STOCK INCENTIVE PLAN
The Board of Directors has adopted and the stockholders have approved the
institution of the 1998 Stock Incentive Plan effective as of the consummation
of this offering. 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. 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 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 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, but will not become effective until the consummation of this
offering. 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. 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.
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<PAGE>
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") to be effective upon the consummation of this offering. The Company has
reserved 400,000 shares of Common Stock for issuance upon the exercise of
options granted under the Distributor Option Plan. Of this amount, the Board
of Directors has authorized and is expected to grant options to purchase
approximately 250,000 shares of Common Stock to existing Blue Rhino
distributors at an exercise price equal to the initial public offering price.
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 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.
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.
41
<PAGE>
CERTAIN TRANSACTIONS
The share numbers in this section reflect the Reverse Stock Split.
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 Series A Convertible
Participating 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, Duchossois and Steel, each a director and
stockholder of the Company, and Peter H. Huizenga, a former director 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, Duchossois and Steel,
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 will be repaid in full with a portion of the proceeds
from this offering and the warrants will be exercised upon consummation of the
offering.
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
42
<PAGE>
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 and 1997, PPC and Platinum Propane received approximately $1.6
million and $5.3 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 January 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. Fogleman. 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 and Liautaud and Lennard
Carlson, a stockholder, collectively loaned the Company $3.25 million (the
"1998 Stockholder Loans"). The 1998 Stockholder Loans are repayable in full on
the earlier of December 31, 2000 or the initial public offering of the
Company's Common Stock in which the net proceeds to the Company equal at least
$30.0 million. The 1998 Stockholder Loans bear interest at 10.5% per annum,
accruing for one year and payable quarterly thereafter until paid in full. The
1998 Stockholder Loans will be repaid in full with a portion of the proceeds
from this offering. Messrs. Filipowski, Duchossois, Liautaud and Carlson also
received warrants to purchase approximately .08 shares of Common Stock for
every $3.00 they loaned to the Company for a total of 81,916 shares (the "1998
Warrants"). The 1998 Warrants may be exercised prior to December 31, 2008 at a
price per share equal to the price at which the shares offered hereby are
sold. The 1998 Warrants will remain outstanding following the consummation of
the offering. See "Use of Proceeds" and "Risk Factors--Management's Discretion
as to Use of Unallocated Net Proceeds; Benefits to Existing Stockholders."
Mr. Muehlstein, a director of the Company, is also a stockholder in the firm
of Pedersen & Houpt, P.C., legal counsel to the Company.
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.
43
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of March 1, 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 SHARES
BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO OWNED
THE 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 ............... 1,772,795 40.8% 1,848,583 25.6%
Billy D. Prim(5)
104 Cambridge Plaza Drive
Winston-Salem, NC 27104................... 1,324,371 30.5 1,344,423 18.6
Craig J. Duchossois(6)
845 Larch Avenue
Elmhurst, IL 60126........................ 374,380 8.6 400,980 5.6
Richard G. Belmont(7)
104 Cambridge Plaza Drive
Winston-Salem, NC 27104................... 15,123 * 15,123 *
Joseph T. Culp(7)
104 Cambridge Plaza Drive
Winston-Salem, NC 27104................... 15,123 * 15,123 *
S.H. Fogleman, III(8)
100 Cambridge Plaza Drive
Winston-Salem, NC 27104................... 18,904 * 18,904 *
James P. Liautaud(9)
132 East Delaware
Chicago, IL 60611......................... 145,736 3.4 157,617 2.2
John H. Muehlstein(7)
161 N. Clark Street, Suite 3100
Chicago, IL 60601......................... 3,781 * 3,781 *
Robert F. Steel(10)
445 East 4th Street
Hinsdale, IL 60521........................ 50,406 1.1 52,907 *
Steven D. Devick(11)
2001 Butterfield Road, Suite 1400
Downers Grove, IL 60515................... 306,737 7.1 332,023 4.5
Directors and executive officers as a group
(12 individuals).......................... 3,334,055 76.7 3,453,329 47.8
5% STOCKHOLDERS:
Platinum Venture Partners I, L.P.(12)
2001 Butterfield Road, Suite 1400
Downers Grove, IL 60515................... 302,956 7.0 328,242 4.5
</TABLE>
- ---------------------
*Less than 1%.
44
<PAGE>
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange 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 March 1, 1998 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 the shares
outstanding following the Recapitalization.
(3) The Shares Beneficially Owned After the Offering reflects 2,700,000
shares of Common Stock to be issued pursuant to the offering.
(4) Includes 882,003 shares of Common Stock owned by Mr. Filipowski, 18,903
shares of Common Stock issuable upon the exercise of vested Options held
by Mr. Filipowski, 111,798 shares of Common Stock to be issued upon the
cashless exercise of warrants held by Mr. Filipowski, except the 1998
Warrants, in connection with this offering, 36,547 shares of Common Stock
to be issued upon exercise of the 1998 Warrants, 32,953 shares of Common
Stock issued in payment of the Preferred Dividend following the
consummation of the offering, 155,619 shares of Common Stock owned by
American Oil and Gas, Inc., of which Mr. Filipowski owns 42% of the
issued and outstanding shares, 42,893 shares of Common Stock to be issued
upon the cashless exercise of a warrant held by American Oil and Gas,
Inc. in connection with this offering, 17,549 shares of Common Stock
issued to American Oil and Gas, Inc. in payment of the Preferred Dividend
following the consummation of the offering, 151,227 shares owned by
Platinum Propane, of which Mr. Filipowski acts as a director and
indirectly owns 16% of the membership interests, 55,728 shares of Common
Stock to be issued upon the cashless exercise of a warrant held by
Platinum Propane in connection with this offering, 224,235 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, 78,721 shares of Common Stock to be issued upon
the cashless exercise of a warrant held by PVP in connection with this
offering, 25,286 shares of Common Stock issued to PVP in payment of the
Preferred Dividend following the consummation of the offering, 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 811,222 shares of Common Stock held by Mr. Prim, 64,181 shares
of Common Stock issuable upon the exercise of vested Options held by Mr.
Prim, 32,160 shares of Common Stock to be issued upon the cashless
exercise of warrants held by Mr. Prim in connection with this offering,
2,503 shares of Common Stock issued in payment of the Preferred Dividend
following the consummation of the offering, 155,619 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, 42,893 shares
of Common Stock to be issued upon the cashless exercise of a warrant held
by American Oil and Gas, Inc. in connection with this offering, 17,549
shares of Common Stock issued to American Oil and Gas, Inc. in payment of
the Preferred Dividend following the consummation of the offering,
151,227 shares owned by Platinum Propane, of which Mr. Prim acts as a
director and indirectly owns 20.4% of the membership interests, 55,728
shares of Common Stock to be issued upon the cashless exercise of a
warrant held by Platinum Propane in connection with this offering, 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 Sarcaneda Westmoreland and 1,890 shares of Common Stock beneficially
owned by Debbie W. Prim as trustee on behalf of Anthony G. Westmoreland.
(6) Includes 165,371 shares of Common Stock owned by Mr. Duchossois, 3,781
shares of Common Stock issuable upon the exercise of vested Options held
by Mr. Duchossois, 57,350 shares of Common Stock to be issued upon the
cashless exercise of warrants held by Mr. Duchossois in connection with
this offering, 36,547 shares of Common Stock to be issued upon exercise
of the 1998 Warrants, 18,648 shares of Common Stock issued in payment of
the Preferred Dividend following the consummation of the offering, 12,038
shares of Common Stock beneficially owned by the Craig Duchossois
Revocable Trust of which Mr. Duchossois is the trustee, 30,608 shares of
Common Stock to be issued upon the cashless exercise of a warrant held by
such Trust in connection with this offering, 1,357 shares of Common Stock
issued to such Trust in payment of the Preferred Dividend following the
consummation of the offering, 58,483 shares of Common Stock beneficially
owned by the Kimberly Family Discretionary Trust over which Mr.
Duchossois has voting and investment control, 10,202 shares of Common
Stock to be issued upon the cashless exercise of a warrant held by such
Trust in connection with this offering and 6,595 shares of Common Stock
issued to such Trust in payment of the Preferred Dividend following the
consummation of the offering.
(7) Represents the number of shares issuable upon the exercise of vested
Options.
(8) Includes 15,123 shares of Common Stock owned by Mr. Fogleman and 3,781
shares of Common Stock issuable upon the exercise of vested Options held
by Mr. Fogleman.
(9) Includes 3,781 shares of Common Stock issuable upon the exercise of
vested Options held by Mr. Liautaud, 7,561 shares of Common Stock to be
issued upon the exercise of the 1998 Warrants held by Mr. Liautaud,
29,039 shares of Common Stock issued upon the cashless exercise of
Warrants held by Mr. Liautaud in connection with the offering, 11,881
shares of Common Stock issued in payment of the Preferred Dividend
following the consummation of the offering and 105,355 shares of Common
Stock owned by Gabriel, Inc., of which Mr. Liautaud is the sole
stockholder and has sole voting and investment power.
(10) Includes 22,185 shares of Common Stock owned jointly by Mr. Steel and his
wife, Jennifer Steel, 3,781 shares of Common Stock issuable upon the
exercise of vested Options held by Mr. Steel, 2,502 shares of Common
Stock issued in payment of the Preferred
45
<PAGE>
Dividend following the consummation of the offering and 24,440 shares of
Common Stock to be issued upon the cashless exercise of a Warrant held by
Mr. Steel in connection with this offering.
(11) Includes 3,781 shares issuable upon the exercise of vested Options held
by Mr. Devick and 224,235 shares owned beneficially by PVP and 78,721
shares of Common Stock to be issued upon the cashless exercise of a
warrant held by PVP , the general partner of which is PVP, Inc., in
connection with this offering, 25,286 shares of Common Stock issued in
payment to PVP of the Preferred Dividend following the consummation of
the offering. Mr. Devick is President, serves as a director and owns
22.5% of the outstanding shares of PVP, Inc.
(12) Includes 224,235 shares owned beneficially by PVP, the general partner of
which is PVP, Inc., 78,721 shares of Common Stock to be issued in
connection with this offering upon the cashless exercise of a warrant
held by PVP and 25,286 shares of Common Stock issued to PVP in payment of
the Preferred Dividend following the consummation of the offering.
46
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of this offering, there will be approximately 7,225,220
shares of Common Stock outstanding. The 2,700,000 shares (or up to 3,105,000
shares if the Underwriters' overallotment option is exercised in full) of
Common Stock issued and sold in this offering will be freely tradeable (other
than by an "affiliate" of the Company as such term is defined in the
Securities Act) without restriction under the Securities Act. The remaining
shares of Common Stock then outstanding will be deemed "restricted securities"
within the meaning of Rule 144 under the Securities Act (the "Restricted
Shares") and may be resold only in compliance with the registration provisions
of the Securities Act or an exemption thereunder.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially
owned Restricted Shares for at least one year from the later of the date such
Restricted Shares were acquired from the Company or (if applicable) from an
affiliate or the date on which they were fully paid, is entitled to sell
within any three-month period a number of shares that does not exceed the
greater of 1% of the then-outstanding shares of Common Stock or the average
weekly trading volume in the public market as reported through the Nasdaq
National Market during the four calendar weeks preceding such sale. Sales
under Rule 144 are also subject to certain requirements as to the manner and
notice of sale and the availability of public information concerning the
Company.
Restricted Shares held by affiliates of the Company are subject to the
foregoing volume limitations, holding period and other restrictions under Rule
144. Affiliates may sell shares other than Restricted Shares in accordance
with the foregoing volume limitations and other restrictions, but without
regard to any holding period.
Further, under Rule 144(k), if a period of at least two years has elapsed
since the later of the date Restricted Shares were acquired from the Company
or from an affiliate of the Company or the date on which they were fully paid,
a holder of such Restricted Shares who is not an affiliate of the Company at
the time of the sale, and has not been an affiliate of the Company for at
least three months prior to the sale, would be entitled to sell the shares
immediately without regard to volume limitations and the other conditions
described above.
Prior to this offering, there has been no market for the Common Stock and no
prediction can be made as to the effect, if any, that market sales of shares
or the availability of such shares for sale will have on the market price of
the Common Stock from time to time. Nevertheless, sales of substantial amounts
of Common Stock in the public market could have an adverse impact on such
market price and the Company's ability to raise additional equity capital.
Certain stockholders of the Company, including the executive officers and
directors, who will own in the aggregate 3,573,329 shares of Common Stock
after the offering, have agreed that they 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 owned by them during the 180-day period following the date of
this Prospectus. 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 during the 180-day period following the date of this
Prospectus, except that the Company may issue shares upon the exercise of
options granted prior to the date hereof, and may grant additional options
under it stock option plans, provided, that, without the prior written consent
of Hambrecht & Quist LLC, such additional options shall not be exercisable
during such period. Upon expiration of such 180-day period, 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
47
<PAGE>
applicable to affiliates of the Company. Following consummation of this
offering, the Company intends to file registration statements under the
Securities Act to register the sale of 182,607 shares of Common Stock reserved
for issuance under the 1994 Stock Incentive Plan, 300,000 shares of Common
Stock reserved for issuance under the 1998 Stock Incentive Plan, 100,000
shares of Common Stock reserved for issuance under the Director Option Plan
and 400,000 shares reserved for issuance under the Distributor Option Plan.
The Company intends on granting approximately 250,000 options under the
Distributor Option Plan shortly after the consummation of the offering. Upon
expiration of the lock-up agreements referred to above, holders of
approximately 2,757,526 shares of Common Stock will be 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 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.
48
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the filing of the Second Amended and Restated Certificate of
Incorporation of the Company (the "Charter") prior to the consummation of this
offering, the authorized capital stock of the Company shall consist 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 proposed Recapitalization, the Company's
capital stock and certain provisions of 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").
RECAPITALIZATION
The Board of Directors and stockholders of the Company have approved the
Recapitalization of the Company in connection with the consummation of this
offering. Pursuant to the Recapitalization, all outstanding Preferred Stock
will be converted into Common Stock on a one share for one share basis, all
accrued dividends on the Preferred Stock will be converted into Common Stock
and all outstanding Warrants (except for the 1998 Warrants) will be converted
into Common Stock in a cashless exercise. The Company will then effect the 1
for 13.22513 Reverse Stock Split resulting in 4,525,220 shares of Common Stock
outstanding immediately prior to the sale of Common Stock offered hereby.
Pursuant to the Recapitalization, 182,607 Options (post Reverse Stock Split)
exercisable at a weighted average exercise price of $6.03 per share will be
deemed fully vested upon consummation of the offering.
The pre-offering capitalization of the Company includes 1,778,921 shares of
issued and outstanding Common Stock and 1,572,474 shares of issued and
outstanding Preferred Stock. Each share of Preferred Stock will be converted
into one share of Common Stock. In addition, each share of Preferred Stock is
entitled to an 8% cumulative preferred dividend (the "Preferred Dividend")
payable in cash or Common Stock. The Preferred Dividend is estimated to be
$2,305,209 upon consummation of this offering and will be converted into
177,301 shares of Common Stock in connection therewith. The Company has issued
Warrants to purchase (i) 318,650 shares of Common Stock at a purchase price of
$0.45 per share, (ii) 803,574 shares of Common Stock at a purchase price of
approximately $4.59 per share, (iii) 227,049 shares of Common Stock at a
purchase price of $6.61 and (iv) 81,916 shares of Common Stock at an exercise
price equal to the price at which the shares offered hereby are sold (referred
to herein as the 1998 Warrants).
Each holder of warrants (except for the holders of the 1998 Warrants) will
exercise their Warrants in a cashless exercise whereby the number of shares of
Common Stock with a value at the initial public offering price equal to the
exercise price will be deducted from the total number of shares which the
warrant holder would have been entitled to receive had they exercised their
Warrant in full. The following table summarizes the projected recapitalization
of the Company:
<TABLE>
<CAPTION>
TOTAL TOTAL SHARES
SHARES SHARES OF OF COMMON
OUTSTANDING COMMON STOCK
OR ISSUABLE WARRANT STOCK OUTSTANDING
UPON EXERCISE OUTSTANDING AFTER THE
EXERCISE OF PRICE PER POST REVERSE
CLASS OF SECURITY WARRANTS SHARE CONVERSION STOCK SPLIT
- ----------------- ----------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Common Stock................... 24,289,444 -- 24,289,444 1,836,613
Preferred Stock................ 20,796,172 -- 20,796,172 1,572,474
Preferred Stock Dividend....... -- -- 2,344,829 177,301
Warrants....................... 4,214,185 $0.034704 4,065,403 307,400
Warrants....................... 10,627,364 $0.347037 6,875,406 519,874
Warrants....................... 3,002,745 $0.500000 1,475,372 111,558
---------- ---------- ---------
Totals..................... 62,929,910 59,846,625 4,525,220(1)
========== ========== =========
</TABLE>
- ---------------------
(1) The total shares of Common Stock outstanding after the Reverse Stock Split
(a) excludes 81,916 shares issuable upon the exercise of the 1998 Warrants
which will not be exercised in connection with the offering and (b)
includes 57,692 shares of Common Stock to be issued in connection with the
Bison Acquisition.
49
<PAGE>
COMMON STOCK
All outstanding shares of Common Stock are, and the shares offered hereby
will be, 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."
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.
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
Company's 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
liability provided in the Charter, be limited or eliminated to the fullest
extent permitted by the DGCL, as from time to time amended.
50
<PAGE>
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 will be Lasalle
National Bank, Chicago, Illinois.
51
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), for whom Hambrecht & Quist LLC,
NationsBanc Montgomery Securities LLC and Dain Rauscher Wessels, a division of
Dain Rauscher Incorporated ("Dain Rauscher Wessels"), are acting as
representatives (the "Representatives"), have severally agreed to purchase
from the Company the following respective numbers of shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Hambrecht & Quist LLC...........................................
NationsBanc Montgomery Securities LLC...........................
Dain Rauscher Wessels...........................................
---------
Total........................................................... 2,700,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company, its counsel and
independent auditors. The nature of the Underwriters' obligations is such that
they are committed to purchase all shares of Common Stock offered hereby if
any of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow, and such dealers may
re-allow, a concession not in excess of $ per share to certain other
dealers. After the initial public offering of the shares, the offering price
and other selling terms may be changed by the Representatives. The
Representatives have advised the Company that the Underwriters do not intend
to confirm discretionary sales in excess of 5% of the shares of Common Stock
offered hereby.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 405,000
additional shares of Common Stock at the initial public offering price, less
the underwriting discount, set forth on the cover page of this Prospectus. To
the extent that the Underwriters exercise this option, each of the
Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased
by it shown in the above table bears to the total number of shares of Common
Stock offered hereby. The Company will be obligated, pursuant to the option,
to sell shares to the Underwriters to the extent the option is exercised. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of shares of Common Stock offered hereby.
The shares of Common Stock are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions.
52
<PAGE>
The Company has agreed to indemnify the Underwriters against certain
liabilities, including labilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.
Certain stockholders of the Company, including the executive officers and
directors, who will own in the aggregate 3,573,329 shares of Common Stock
after the offering, have agreed that they 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 owned by them during the 180-day period following the date of
this Prospectus. 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 during the 180-day period following the date of this
Prospectus, except that the Company many issue shares upon the exercise of
options granted prior to the date hereof, 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.
NationsBanc Montgomery Securities LLC ("NationsBanc Montgomery") is
affiliated with NationsBank, N.A. ("NationsBank") which is a lender to the
Company pursuant to the Bank Credit Facility (see "Use of Proceeds"). As of
the date of this Prospectus, NationsBank has advanced approximately $5.5
million to the Company pursuant to the Bank Credit Facility, all of which will
be repaid with a portion of the proceeds from the offering. The decision of
NationsBanc Montgomery to underwrite the offering was made independently of
NationsBank, which had no involvement in determining whether or when to
underwrite the offering or the terms thereof. NationsBanc Montgomery will not
receive any benefit from the offering other than its respective portion of the
underwriting commission payable by the Company. Because it is anticipated that
more than 10% of the proceeds from the offering (excluding the underwriting
commission) will be received by NationsBank pursuant to the repayment of
amounts outstanding under the Bank Credit Facility, and NationsBank is an
affiliate of NationsBanc Montgomery, a member of the National Association of
Securities Dealers, Inc. ("NASD"), the offering is being conducted pursuant to
Rule 2710(c)(8) of the NASD. In accordance with such rule, Hambrecht & Quist
LLC has agreed to act as a qualified independent underwriter ("QIU") pursuant
to the requirements of Rule 2720(c)(3) of the NASD. In connection with Rule
2720(c)(3), the initial public offering price of the Common Stock will be set
at a price which is no higher than that recommended by Hambrecht & Quist LLC,
as a QIU. Moreover, Hambrecht & Quist LLC, as a QIU, has performed due
diligence investigations and has reviewed and participated in the preparation
of this Prospectus.
Prior to the offering, there has been no public market for the Common Stock.
The initial public offering price of the Common Stock was determined by
negotiation between the Company and the Representatives. Among the factors
considered in determining the initial public offering price were prevailing
market and economic conditions, sales and earnings of the Company, market
valuations of other companies engaged in activities similar to the Company,
estimates of the business potential and prospects of the Company, the present
state of the Company's business operations, the Company's management and other
factors deemed relevant. The estimated initial public offering price range set
forth on the cover of this Prospectus is subject to change as a result of
market conditions and other factors.
Certain persons participating in the offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the
open market, including by entering stabilizing bids, effecting syndicate
covering transactions or imposing penalty bids. A stabilizing bid means the
placing of any bid or effecting of any purchase, for the purpose of pegging,
fixing or maintaining the price of the Common Stock. A syndicate covering
transaction means the placing of any bid on behalf of the underwriting
syndicate or the effecting of any purchase to reduce a short position created
in connection with the offering. A penalty bid means an arrangement that
53
<PAGE>
permits the Underwriters to reclaim a selling concession from a syndicate
member in connection with the offering when shares of Common Stock sold by the
syndicate member are purchased in syndicate covering transactions. Such
transactions may be effected on the Nasdaq National Market, in the over-the-
counter market, or otherwise. Such stabilizing, if commenced, may be
discontinued at any time.
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. Certain legal matters will be passed upon for the
Underwriters by Sidley & Austin, Chicago, Illinois.
EXPERTS
The consolidated financial statements of the Company as of July 28, 1996 and
July 31, 1997 and for each of the three years in the period ended July 31,
1997 included in this Prospectus have been audited by Coopers & Lybrand
L.L.P., independent auditors 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 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.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (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
Registration Statement, including exhibits and schedules thereto 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 Section at its
principal office. 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.
54
<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 28, 1996, July 31, 1997 and January
31, 1998 (unaudited)..................................................... F-3
Consolidated Statements of Operations for the Fiscal Years Ended July 31,
1995, July 28, 1996 and July 31, 1997 and for the Six Months Ended
January 31, 1997 (unaudited) and 1998 (unaudited)........................ F-4
Consolidated Statements of Changes in Stockholders' Deficit for the Fiscal
Years Ended July 31, 1995, July 28, 1996 and July 31, 1997 and for the
Six Months Ended January 31, 1998 (unaudited)............................ F-5
Consolidated Statements of Cash Flows for the Fiscal Years Ended July 31,
1995, July 28, 1996 and July 31, 1997 and for the Six Months Ended
January 31, 1997 (unaudited) and 1998 (unaudited)........................ F-6
Notes to Consolidated Financial Statements................................ F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Blue Rhino Corporation:
We have audited the accompanying consolidated balance sheets of Blue Rhino
Corporation as of July 28, 1996 and July 31, 1997, and the related
consolidated statements of operations, changes in stockholders' deficit and
cash flows for the fiscal years ended July 31, 1995, July 28, 1996 and July
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company
as of July 28, 1996 and July 31, 1997, and the consolidated results of their
operations and their cash flows for the fiscal years ended July 31, 1995, July
28, 1996 and July 31, 1997 in conformity with generally accepted accounting
principles.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Greensboro, North Carolina
September 5, 1997, except for Note 7
for which the date is December 18, 1997
F-2
<PAGE>
BLUE RHINO CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF JULY 28, 1996, JULY 31, 1997 AND JANUARY 31, 1998 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
JULY 28, JULY 31, JANUARY 31,
1996 1997 1998
ASSETS -------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Cash and cash equivalents..................... $ 1,126 $ 325 $ 1,207
Trade accounts receivable, net................ 1,924 3,110 2,487
Inventories................................... 1,154 240 701
Notes receivable.............................. 237 417 438
Prepaid expenses and other current assets..... 230 61 217
-------- -------- --------
Total current assets...................... 4,671 4,153 5,050
Property and equipment, net................... 5,666 4,438 4,569
Notes receivable.............................. 1,356 1,196 1,005
Goodwill, net................................. 117 104 1,238
Other assets.................................. 87 83 133
-------- -------- --------
Total assets.............................. $ 11,897 $ 9,974 $ 11,995
======== ======== ========
<CAPTION>
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' DEFICIT
-------------------------------------------
<S> <C> <C> <C>
Trade accounts payable........................ $ 1,354 $ 2,407 $ 1,791
Notes payable to bank......................... -- -- 1,468
Acquisition notes payable..................... 117 81 840
Note payable to vendor........................ 752 -- --
Current portion of long-term debt and capital
lease obligations............................ 179 165 182
Accrued liabilities........................... 689 763 473
-------- -------- --------
Total current liabilities................. 3,091 3,416 4,754
Long-term debt, less current maturities....... 13,764 15,142 19,179
Notes payable to bank......................... -- 840 --
Capital lease obligations, less current
maturities................................... 410 128 178
-------- -------- --------
Total liabilities......................... 17,265 19,526 24,111
-------- -------- --------
Redeemable Preferred Stock, Series A
convertible, participating, $0.001 par
value, 25,000,000 shares authorized,
20,796,172 shares issued and outstanding,
liquidating preference $0.347037 per share,
at redemption value........................ 7,849 8,936 9,304
-------- -------- --------
Stockholders' deficit:
Common stock, $0.001 par value, 68,000,000
shares authorized, 21,526,426, 23,526,456
and 23,526,456 shares issued and
outstanding at July 28, 1996, July 31, 1997
and January 31, 1998 (4,508,294 shares
outstanding on a pro forma basis--Note 20). 21 23 23
Additional paid-in capital.................. -- 311 --
Accumulated deficit......................... (13,238) (18,822) (21,443)
-------- -------- --------
Total stockholders' deficit............... (13,217) (18,488) (21,420)
-------- -------- --------
Total liabilities, redeemable preferred
stock and stockholders' deficit.......... $ 11,897 $ 9,974 $ 11,995
======== ======== ========
</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 31, 1995, JULY 28, 1996 AND JULY 31, 1997
AND FOR THE SIX MONTHS ENDED JANUARY 31, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEARS ENDED JANUARY 31,
------------------------- -------------------
1995 1996 1997 1997 1998
------- ------- ------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales--distributors.......... $ -- $ 2,386 $13,060 $ 3,501 $ 8,314
Net sales--direct................ 2,728 5,830 1,151 1,008 --
------- ------- ------- ------- -------
Total net sales.............. 2,728 8,216 14,211 4,509 8,314
------- ------- ------- ------- -------
Cost of sales:
Cost of sales--distributors.... -- 1,811 9,873 2,638 6,371
Cost of sales--direct.......... 3,523 6,089 1,771 1,368 --
------- ------- ------- ------- -------
Total cost of sales.......... 3,523 7,900 11,644 4,006 6,371
------- ------- ------- ------- -------
Gross profit................. (795) 316 2,567 503 1,943
------- ------- ------- ------- -------
Operating expenses (income):
Sales and marketing............ 532 1,112 1,950 653 1,027
General and administrative..... 2,787 3,192 3,022 1,398 1,706
Lease expense (income)--net.... -- (89) (143) (93) 23
Depreciation and amortization.. 284 868 873 400 516
Restructuring/nonrecurring
charges....................... -- 1,363 970 188 408
------- ------- ------- ------- -------
Total operating expenses..... 3,603 6,446 6,672 2,546 3,680
------- ------- ------- ------- -------
Loss from operations......... (4,398) (6,130) (4,105) (2,043) (1,737)
Other expense (income):
Interest expense............... 287 1,469 1,665 817 929
Other income--net.............. (25) (168) (186) (79) (102)
------- ------- ------- ------- -------
Net loss..................... $(4,660) $(7,431) $(5,584) $(2,781) $(2,564)
======= ======= ======= ======= =======
Basic and diluted loss per
common share (Note 15)........ $ (0.23) $ (0.37) $ (0.28) $ (0.14) $ (0.12)
======= ======= ======= ======= =======
</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
FOR THE FISCAL YEARS ENDED JULY 31, 1995, JULY 28, 1996 AND JULY 31, 1997
AND FOR THE SIX MONTHS ENDED JANUARY 31, 1998 (UNAUDITED)
(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, 1994.... 20,060,000 $ 20 $181 $ (380) $ (179)
Issuance of 2,256,456
shares of common stock.... 2,256,456 2 83 -- 85
Preferred dividends........ -- -- (264) (131) (395)
Net loss................... -- -- -- (4,660) (4,660)
---------- ---- ---- -------- --------
Balances, July 31, 1995.... 22,316,456 22 -- (5,171) (5,149)
Cancellation of restricted
stock for nonvested
terminations.............. (790,000) (1) -- -- (1)
Preferred dividends........ -- -- -- (636) (636)
Net loss................... -- -- -- (7,431) (7,431)
---------- ---- ---- -------- --------
Balances, July 28, 1996.... 21,526,456 21 -- (13,238) (13,217)
Issuance of 2,000,000
shares of common stock.... 2,000,000 2 998 -- 1,000
Preferred dividends........ -- -- (687) -- (687)
Net loss................... -- -- -- (5,584) (5,584)
---------- ---- ---- -------- --------
Balances, July 31, 1997.... 23,526,456 23 311 (18,822) (18,488)
Preferred dividends
(unaudited)............... -- -- (311) (57) (368)
Net loss (unaudited)....... -- -- -- (2,564) (2,564)
---------- ---- ---- -------- --------
Balances, January 31, 1998
(unaudited)............... 23,526,456 $ 23 $-- $(21,443) $(21,420)
========== ==== ==== ======== ========
</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 31, 1995, JULY 28, 1996 AND JULY 31, 1997
AND FOR THE SIX MONTHS ENDED JANUARY 31, 1997 AND 1998 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED JANUARY 31,
------------------------- -------------------
1995 1996 1997 1997 1998
------- ------- ------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss..................... $(4,660) $(7,431) $(5,584) $(2,781) $(2,564)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Accreted interest on senior
discount notes............ -- 1,049 1,489 719 815
Depreciation and
amortization.............. 284 868 873 400 516
Nonrecurring charges....... -- 1,268 963 193 --
Loss on disposal of assets. -- -- -- -- 261
Changes in operating assets
and liabilities, net of
business acquisitions:
Trade accounts
receivable.............. (886) (990) (1,186) 1,077 623
Inventories.............. (249) (473) 127 194 (491)
Other current assets..... (164) 35 166 161 (247)
Accounts payable......... 535 624 1,045 (392) (696)
Accrued liabilities...... 565 (120) (85) (265) (293)
------- ------- ------- ------- -------
Net cash used in
operating activities... (4,575) (5,170) (2,192) (694) (2,076)
------- ------- ------- ------- -------
Cash flows from investing
activities:
Business acquisitions........ (299) -- -- -- (790)
Acquisition of intangible
assets...................... (93) -- -- -- --
Proceeds from disposals of
cylinders................... -- 29 340 -- --
Purchases of property and
equipment................... (3,925) (1,840) (537) (32) (286)
Proceeds from disposals of
property and equipment...... -- 360 159 76 39
Collections on notes
receivable.................. -- 58 380 90 261
------- ------- ------- ------- -------
Net cash (used in)
provided by investing
activities............. (4,317) (1,393) 342 134 (776)
------- ------- ------- ------- -------
Cash flows from financing
activities:
Proceeds from issuance of
common stock................ 85 -- 1,000 -- --
Proceeds from issuance of
preferred stock............. 6,218 100 400 -- --
Proceeds from issuance of
senior discount notes....... -- 12,575 -- -- --
Proceeds from stockholders
loan........................ -- -- -- -- 3,250
Proceeds from note payable to
bank........................ 3,600 2,700 3,995 850 5,044
Payments on acquisition notes
payable..................... -- (669) (90) (63) (20)
Payments on note payable to
bank........................ (880) (4,900) (3,155) (524) (4,416)
Payment of debt issuance
costs....................... -- (57) (58) -- --
Repayment of note payable to
vendor...................... -- (948) (752) -- --
Payments on long-term debt
and capital lease
obligations................. (73) (1,321) (291) (520) (124)
------- ------- ------- ------- -------
Net cash provided by
(used in) financing
activities............. 8,950 7,480 1,049 (257) 3,734
------- ------- ------- ------- -------
Increase (decrease) in cash
and cash equivalents........ 58 917 (801) (817) 882
Cash and cash equivalents at
beginning of period......... 151 209 1,126 1,126 325
------- ------- ------- ------- -------
Cash and cash equivalents at
end of period............... $ 209 $ 1,126 $ 325 $ 309 $ 1,207
======= ======= ======= ======= =======
Supplemental disclosure of
cash paid for:
Interest..................... $ 156 $ 428 $ 176
======= ======= =======
</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 31, 1995, JULY 28, 1996 AND JULY 31, 1997
AND FOR THE SIX MONTHS ENDED JANUARY 31, 1997 AND 1998 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Supplemental schedule of non-cash investing activities:
During the fiscal years ended July 31, 1995, July 28, 1996, July 31, 1997,
the Company entered into capital lease obligations in the amounts of
approximately $913, $541, and $243, 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:
. In the fiscal years ended July 28, 1996 and July 31, 1997, the Company
transferred to distributors capital leases for vehicles with remaining
book values of $282 and $351 and remaining obligations of approximately
$302 and $344, respectively.
. In the fiscal years ended July 28, 1996 and July 31, 1997, the Company
sold cylinders and certain equipment aggregating approximately $1,652 and
$310, respectively in exchange for notes receivable from distributors
(Notes 5 and 16).
. In the fiscal year ended July 28, 1996, the Company transferred the
remaining book value of certain vehicles along with their related
obligations under capital leases and financing arrangements of
approximately $562 and $504, respectively, to Platinum Propane Holding,
LLC ("PPH"), an affiliate, and recorded a receivable of $37 (Note 16).
. In the fiscal year ended July 31, 1997, certain assets approximating $70
were reclassified as notes receivable.
Certain equipment amounting to $925 was acquired by the Company in fiscal
year ended July 31, 1995 through the issuance of long-term debt.
In December 1994, the Company converted $500 of notes payable into 1,441
shares of preferred stock.
During the fiscal year ended July 31, 1995, the Company purchased certain
assets from an existing cylinder exchange company of liquid propane gas under
various agreements which have been recorded as follows:
<TABLE>
<CAPTION>
1995
------
<S> <C>
Property and equipment............................................ $ 356
Cylinders......................................................... 310
Goodwill.......................................................... 501
------
$1,167
======
Cash paid......................................................... $ 299
Due to sellers.................................................... 868
------
$1,167
======
</TABLE>
The Company accreted preferred dividends from paid in capital and
accumulated deficit of $395, $636 and $687 for the fiscal years ended July 31,
1995, July 28, 1996 and July 31, 1997, respectively.
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 after the contribution of the
net assets of American Cylinder Exchange, Inc. in exchange for 1,336,484
shares of the Company's Common Stock using the carryover basis of the net
assets contributed of approximately $180. 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 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 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 $18
million as of July 31, 1997. Management believes by leveraging from the
distributor's existing infrastructure the Company has eliminated the
significant capital requirements necessary to support the geographic expansion
and further penetration throughout the nation's significant demographic
markets and consequently, will continue to positively impact cash flows.
These consolidated financial statements include the accounts of Blue Rhino
and its wholly owned subsidiary Rhino Services, L.L.C., formed in March 1997.
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. The Company's cash and cash equivalents are placed in major
domestic banks. Cash equivalents consisting of certificates of deposit totaled
$65 and $115 at July 28, 1996 and July 31, 1997, respectively.
Trade Accounts Receivable, Net--Trade accounts receivable, net include
allowances for doubtful accounts of approximately $82, and $154 at July 28,
1996 and July 31, 1997 respectively.
F-8
<PAGE>
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Inventories--Inventories are valued at the lower of cost or market
determined on a first-in, first-out (FIFO) basis.
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, recognize an impairment loss 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 12), impairments to property and equipment
recorded in 1996 and 1997 were $814 and $736, respectively.
Goodwill--Excess cost over fair value of assets acquired (goodwill) is being
amortized using the straight-line method over 10 to 30 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. In fiscal 1996, an impairment to goodwill of $355 was
recorded (Note 12).
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 31,
1995, 1996 and 1997 were $0, $16 and $36, respectively.
Income Taxes--The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes." Under this method, 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 (Note 17).
Financial Instruments--The Company values all financial instruments as
required by SFAS No. 107, "Disclosures about Fair Values of 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 28, 1996 and July 31, 1997 the carrying amounts of the
Company's financial instruments approximate 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 places its temporary cash investments with
major domestic financial institutions. 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
F-9
<PAGE>
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
quality of the Company's significant customers, credit risk relating to trade
accounts receivable is limited. The Company's largest customers accounted for
approximately 55%, 46% and 58%, of sales in the fiscal years ended July 31,
1995, July 28, 1996 and July 31, 1997 as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Customer A................................................. 30% 30% 29%
Customer B................................................. 25 16 16
Customer C................................................. -- -- 13
--- --- ---
55% 46% 58%
=== === ===
</TABLE>
Approximately 35% and 32% of trade accounts receivable at July 28, 1996 and
July 31, 1997 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 ("Statement 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 1998 for the Company. Management of the
Company does not expect Statement 130 to have a significant impact, if any, 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"
("Statement 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. The Company is evaluating the provisions of
Statement 131, but has not yet determined if additional disclosures will be
required.
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. INVENTORIES:
Inventories consist of the following at:
<TABLE>
<CAPTION>
JULY 28, JULY 31,
1996 1997
-------- --------
<S> <C> <C>
Cylinders............................................... $ 945 $220
Other supplies.......................................... 174 20
Liquid propane gas...................................... 35 --
------ ----
$1,154 $240
====== ====
</TABLE>
4. PROPERTY AND EQUIPMENT, NET:
Property and equipment consists of the following at:
<TABLE>
<CAPTION>
JULY 28, JULY 31,
1996 1997
-------- --------
<S> <C> <C>
Land................................................... $ 83 $ 20
Building and leasehold improvements.................... 896 661
Cylinder displays, including panel graphics............ 2,945 3,188
Machinery and equipment................................ 1,746 1,361
Computer hardware and software......................... 95 175
Equipment leased under capital leases.................. 592 346
------- ------
6,357 5,751
Less accumulated depreciation and amortization (includ-
ing $51 and $65, respectively, for equipment under
capital lease)........................................ (691) (1,313)
------- ------
$ 5,666 $4,438
======= ======
</TABLE>
Depreciation and amortization expense for the fiscal years ended July 31,
1995, July 28, 1996 and July 31, 1997 was $282, $683 and $764, respectively.
5. 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 PPH (Note 16), who now service
territories previously serviced by the Company. The notes receivable are
payable monthly with interest ranging from 9.25% to 12.5%. The aggregate
maturities of these notes receivable at July 31, 1997 are as follows:
<TABLE>
<S> <C>
1998............................................................... $ 417
1999............................................................... 395
2000............................................................... 350
2001............................................................... 443
2002............................................................... 8
------
$1,613
======
</TABLE>
Interest income related to these notes for the fiscal years ended July 28,
1996 and July 31, 1997 was approximately $47 and $182, respectively. The notes
receivable from the sale of cylinders are collateralized by the cylinders.
F-11
<PAGE>
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
6. GOODWILL:
Excess costs over fair value of assets acquired (goodwill) consist of the
following at:
<TABLE>
<CAPTION>
JULY 28, JULY 31,
1996 1997
-------- --------
<S> <C> <C>
Excess costs over fair value of assets acquired......... $124 $124
Accumulated amortization................................ (7) (20)
---- ----
$117 $104
==== ====
</TABLE>
Amortization expense for the fiscal years ended July 28, 1996 and July 31,
1997 was $7 and $14, respectively.
7. NOTE PAYABLE TO BANK:
In October 1996, the Company entered into an agreement with a bank to
provide up to $2 million in financing through a line of credit at an interest
rate of prime (8.50% at July 31, 1997) plus 1%. At July 31, 1997, $840 of the
line of credit was outstanding. This amount was subsequently paid in full on
December 18, 1997 (Note 20).
8. NOTE PAYABLE TO VENDOR:
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 (8.25% at
July 28, 1996) plus 1%. The balance due on this note was $752 at July 28, 1996
and was paid in full at July 31, 1997.
9. LONG-TERM DEBT:
Long-term debt consists of the following at:
<TABLE>
<CAPTION>
JULY 28, JULY 31,
1996 1997
-------- --------
<S> <C> <C>
Senior discount notes due October 2000................. $13,624 $15,113
Various equipment and vehicle notes bearing interest at
rates varying from 8% to 15%, due in monthly
installments through December 1999.................... 211 65
------- -------
13,835 15,178
Less amounts due within one year....................... 71 36
------- -------
$13,764 $15,142
======= =======
</TABLE>
The aggregate maturities of long-term debt at July 31, 1997 are as follows:
<TABLE>
<S> <C> <C> <C>
1998...................................................... $ 36
1999...................................................... 27
2000...................................................... 2
2001...................................................... 15,113
---------------
$15,178
=======
</TABLE>
F-12
<PAGE>
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 525.88 (pre
Reverse Stock Split) shares of common stock. The gross proceeds were $12,575.
The notes accrete in value until October 11, 1998 at an effective rate of
10.5%. Thereafter, cash interest will be payable semi-annually at a rate of
10.5%. The notes are redeemable in whole or in part at any time at 100% of the
accreted value plus accrued and unpaid interest, if any. Each warrant, when
exercised will entitle the holders to acquire one share of common stock
(subject to adjustment as described in the agreement) for $0.347037 per share,
which represented approximately 10% of the common stock outstanding on a fully
diluted basis at the time of issuance of the warrants. The note agreement
contains certain restrictive covenants relating to issuance of additional
debt, issuance of equity securities, and the payment of dividends without the
consent of a majority (as defined) of note holders. The Company is not in
default of any of the restrictive covenants. The Company did not assign any
value to the warrants because the valuation was not material.
The various equipment and vehicle notes are guaranteed by an affiliated
company and certain Blue Rhino shareholders.
10. CAPITAL LEASE OBLIGATIONS:
Capital lease obligations for computer equipment as of July 31, 1997 are as
follows:
<TABLE>
<S> <C>
1998................................................................. $161
1999................................................................. 108
2000................................................................. 31
----
Total minimum lease payments......................................... 300
Less imputed interest at varying rates ranging from 11.75% to 19%.... 43
----
Present value of minimum lease payments.............................. 257
Less current maturities.............................................. 129
----
$128
====
</TABLE>
11. OPERATING LEASE COMMITMENTS:
The Company leases certain office, plant facilities 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.
Rent expense on these facilities and equipment for the fiscal years ended
1995, 1996 and 1997 was $497, $511 and $120, respectively.
In addition, the Company leases certain plant facilities and equipment to
distributors including PPH (Note 16). Lease income under these leases was $62
and $118 for the fiscal years ending 1996 and 1997, respectively.
In September 1996, the Company entered into a $3 million operating lease
facility to finance cylinder displays. At July 31, 1997, approximately $1.3
million of the facility was outstanding. Rental expense under this lease for
the year ended 1997 was approximately $152.
Lease expense (income) on the consolidated statements of operations is made
up of the following:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- -----
<S> <C> <C> <C>
Lease income............................................ $-- $(89) $(295)
Lease expense........................................... -- -- 152
---- ---- -----
Net (income) expense.................................... $-- $(89) $(143)
==== ==== =====
</TABLE>
F-13
<PAGE>
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Future minimum lease payments at July 31, 1997 from non-cancelable operating
leases with both affiliates (Note 16) and non-affiliates with initial or
remaining terms of one year or more are as follows:
<TABLE>
<S> <C>
1998................................................................. $504
1999................................................................. 453
2000................................................................. 415
2001................................................................. 306
</TABLE>
The Company also executes operating lease agreements with its distributors
including PPH (Note 16) 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
1996 and 1997 was approximately $27 and $177, respectively. As of July 31,
1997, estimated future minimum rental payments to be received are
approximately $300 per year through the year 2002.
12. RESTRUCTURING/NONRECURRING CHARGES:
As described in Note 1, during fiscal 1997 and 1996 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 1996 and 1997 as summarized below:
<TABLE>
<CAPTION>
JULY 28, JULY 31,
1996 1997
-------- --------
<S> <C> <C>
Adjust equipment, including leasehold improvements of
$160 and $447, respectively, to net realizable value. $ 814 $736
Impairment of goodwill................................ 355 --
Severance, professional fees and other................ 194 234
------ ----
$1,363 $970
====== ====
</TABLE>
In 1996 and 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 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.
13. REDEEMABLE PREFERRED STOCK:
On December 21, 1994, the Company issued 20,796,172 shares of Series A
cumulative preferred stock and warrants to purchase 4,214,185 shares of common
stock to investors through a private placement offering. The warrants are
exercisable at any time prior to their expiration date of December 1, 2004.
The exercise price for these warrants is $0.0347037 per share.
Holders of Series A preferred stock may convert any portion of the preferred
shares into common shares at any time. Each share of Series A preferred is
convertible to one share of common stock. The conversion price is based on a
formula as described in the agreement. The preferred shares have a liquidation
preference equal to the liquidation value of $0.347037 as defined in the
Certificate of Incorporation. The preferred shares rank senior to the common
stock in respect to dividend rights and have full voting rights.
The Company shall offer to redeem the outstanding Series A preferred shares
in equal increments semiannually between October 31, 2000 and April 30, 2002.
After April 30, 2002, any holder of outstanding Series A preferred shares may
elect to have their shares redeemed. Upon such an election, the Company shall
offer to redeem any other outstanding shares within five (5) days. The
redemption price is $0.347037 per share
F-14
<PAGE>
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
plus undeclared, accrued dividends at a rate of 8% compounded daily of $1,031,
$1,718 and $2,086 at July 28, 1996, July 31, 1997 and January 31, 1998
(unaudited), respectively. Dividends are cumulative until declared by the
Board.
14. STOCKHOLDERS' DEFICIT:
At July 31, 1997, 41,055,467 common shares were reserved for issuance upon
conversion of Series A preferred shares, exercise of warrants and exercise of
common stock options issuable to employees, directors, or consultants of the
Company.
Common Stock Options and Restricted Stock--The Company has a stock incentive
plan (the "Plan") and has reserved 3,500,000 shares of common stock for use
and distribution under terms of the Plan. Under the Plan, 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 plan vary but, in general, are at the
discretion of the Board of Directors or its appointed committee to the Plan.
In November 1994, the Company issued 1,875,000 shares of its common stock
under the Plan, at par $0.001, to key management employees under a restricted
stock agreement. Under this agreement, the stockholders' rights to the stock
are subject to length of employment and are restricted with regard to
transferability. The employees' rights vest quarterly over periods determined
by management. After five (5) years, the employee may sell any vested shares
with a bona fide reason, the Company at its option may repurchase all unvested
shares and any vested shares, provided no public offering of the Company's
equity securities has occurred. The repurchase price may vary, depending upon
the reasons for termination, and range from market value for all vested shares
to $1 for any and all shares. During 1996, 790,000 shares were canceled due to
termination of employment.
The Company has granted 2,450,000 options through July 31, 1997, of which
281,800 options have been forfeited. Under the Plan, the option exercise price
is determined by the Stock Option Committee of the Board of Directors. Non-
qualified stock options granted expire 10 years from the date of grant and are
exercisable in five equal installments commencing one year from the date of
grant. As of July 31, 1997, the Company had 2,168,200 options outstanding, no
options have been exercised and 283,000 options are exercisable. The exercise
price for outstanding warrants and common stock options range from $0.0347037
to $0.55.
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 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
------- -------
<S> <C> <C>
Net loss: As reported.................................. $(7,431) $(5,584)
Pro forma............................................. (7,454) (5,649)
Basic and
Diluted EPS:As reported............................... $ (0.22) $ (0.17)
Pro forma............................................. $ (0.22) $ (0.17)
</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 grants since August 1, 1995: expected lives of 5 years;
expected volatility 0.0% and a risk-free interest rate of 9.25%
SFAS No. 123 method of accounting has not been applied to options granted
prior to August 1, 1995, therefore, the resulting pro forma compensation cost
may not be representative of that to be expected in future years.
F-15
<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 Plan at July 31, 1995, July 28,
1996, and July 31, 1997 and changes during the periods then ended is presented
in the table and narrative below:
<TABLE>
<CAPTION>
1995 1996 1997
----------------- ----------------- -------------------
WTD AVG WTD AVG WTD AVG
SHARES EX PRICE SHARES EX PRICE SHARES EX PRICE
------- --------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ -- $ -- 575,000 $0.347037 953,000 $0.355062
Granted................. 575,000 0.347037 499,000 0.362364 1,376,000 0.505602
Exercised............... -- -- -- -- -- --
Forfeited............... -- -- 121,000 0.347037 160,800 0.366749
------- --------- ------- --------- --------- ---------
Outstanding at end of
year................... 575,000 $0.347037 953,000 $0.355062 2,168,200 $0.449732
======= ========= ======= ========= ========= =========
Exercisable at end of
year................... -- $ -- 95,000 $0.347037 283,000 $0.353069
======= ========= ======= ========= ========= =========
Weighted average fair
value of options
granted................ $ 0.126 $ 0.116 $ 0.167
========= ========= =========
</TABLE>
Warrants--In fiscal 1997, the Company issued approximately 3,000,000
warrants in connection with the new cylinder display lease facility (Note 9),
and the issuance of the common stock to PPH (Note 16). In addition, during
fiscal years 1996 and 1995, the Company issued approximately 4,014,000
warrants to individuals to purchase common stock for their assistance in
connection with various debt placements. The exercise price for these warrants
ranges from $0.347037 to $0.50 per share. The Company did not assign any value
to the warrants because the valuation was considered immaterial.
15. 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 year 1996 and 1995. The basic and diluted loss per share was determined
as follows:
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEARS ENDED ENDED
------------------------------------- -----------
JULY 31, JULY 28, JULY 31, JANUARY 31,
1995 1996 1997 1998
----------- ----------- ----------- -----------
(UNAUDITED)
Basic and diluted loss per share:
<S> <C> <C> <C> <C>
Net loss................ $ (4,660) $ (7,431) $ (5,584) $ (2,564)
Less: Redeemable
Preferred Stock
dividends.............. 395 636 687 368
----------- ----------- ----------- -----------
Loss available to common
shareholders........... $ (5,055) $ (8,067) $ (6,271) $ (2,932)
Weighted average common
shares................. 21,658,323 21,521,456 22,276,456 23,526,426
----------- ----------- ----------- -----------
Basic and diluted loss
per share............ $ (0.23) $ (0.37) $ (0.28) $ (0.12)
=========== =========== =========== ===========
</TABLE>
The weighted average common shares outstanding includes the effect of all
shares, stock options and stock warrants issued prior to the filing date of
the Company's Form S-1 for all periods presented. In addition, the assumed
conversion of preferred shares would have been anti-dilutive. Therefore, basic
and diluted loss per share are the same.
F-16
<PAGE>
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
16. RELATED PARTY TRANSACTIONS:
Platinum Propane Holdings ("PPH"), an affiliate, began operations as a
distributor during fiscal 1996. The following represents related party
balances outstanding at July 28, 1996, and July 31, 1997 and transactions for
the fiscal years then ended, respectively:
<TABLE>
<CAPTION>
JULY 28, JULY 31,
1996 1997
-------- --------
<S> <C> <C>
Notes receivable........................................ $1,399 $1,191
Trade accounts payable.................................. 407 648
Cost of sales--distributors............................. 1,561 5,319
Interest income......................................... 43 142
Lease income............................................ 25 160
Issuance of common stock................................ -- 1,000
</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 31, 1995, July 28, 1996 and July 31, 1997 were
approximately $721, $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 $82 and $34 for the fiscal years ending 1998 and 1999,
respectively. Rent expense under this lease was $22 and $76 for the fiscal
years ended July 28, 1996 and July 31, 1997, respectively.
The Company leases a facility and certain equipment to PPH. Lease income
from PPH for the fiscal years ended July 31, 1995, July 28, 1996, and July 31,
1997, was $24, $62, and $56, respectively.
17. INCOME TAXES:
There is no current or deferred tax expense for the fiscal years ended July
31, 1995, July 28, 1996 and July 31, 1997.
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 31, JULY 28, JULY 31,
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Federal statutory tax rate.................... 34.0% 34.0% 34.0%
Operating losses having no current tax
benefit.................................... (33.7) (33.8) (33.9)
Permanent Differences and Other............. (0.3) (0.2) (0.1)
----- ----- -----
Effective tax rate............................ 0.0% 0.0% 0.0%
===== ===== =====
</TABLE>
F-17
<PAGE>
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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,
1996 1997
-------- --------
<S> <C> <C>
Assets:
Net operating loss carry forward.......................... $ 4,842 $ 6,981
Allowance for doubtful accounts........................... 32 60
Inventory capitalization.................................. 19 4
Organization costs........................................ 37 24
Other..................................................... 34 78
Depreciation and amortization............................. -- 1
------- -------
Total gross deferred tax assets......................... 4,964 7,148
Valuation allowance....................................... (4,960) (7,148)
------- -------
Net deferred tax assets................................. $ 4 $ --
======= =======
Liability:
Depreciation and amortization............................. $ 4 $ --
======= =======
</TABLE>
At July 31, 1997, the Company had a net operating loss carryforward for
federal income tax purposes of approximately $18.0 million which is available
to offset future federal taxable income, if any, in varying amounts through
2012.
18. 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 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 1995,
1996 and 1997.
19. 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.
20. EVENTS SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITOR'S REPORT
(UNAUDITED):
The interim consolidated financial data with respect to January 31, 1997 and
1998 have been prepared without audit; however, in the opinion of management,
all adjustments (which included those that are normal and recurring) necessary
to present fairly the consolidated financial position at January 31, 1998 and
the results of operations and cash flows for the six month periods ended
January 31, 1998 and 1997, have been made. The results for six months ended
January 31, 1998 are not necessarily indicative of the results of operations
for a full year. Interim financial data conforms to the requirements of
Article X of Regulation S-X and, therefore, does not include all the
disclosures normally required under generally accepted accounting principles.
F-18
<PAGE>
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
On December 18, 1997, the Company entered into a short-term loan Agreement
(the "Bank Credit Facility") which allows for maximum borrowings of $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 January 31, 1998) plus 0.5%. As of January 31, 1998,
the Company had $1,468 outstanding 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, as well as 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 January 31, 1998.
The Bank Credit Facility is personally guaranteed by a principle shareholder
and an affiliated company up to a maximum amount of $6.0 million each.
The Company has pledged receivables and inventory and all of its rights,
titles and interest to indebtedness due from shareholders, affiliates and
related companies, including the remaining balance of $1.2 million on the note
receivable due from PPH (Note 16).
In December 1997, the Company entered into a services 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.
In January 1998, several stockholders collectively loaned the Company $3.25
million (the "1998 Stockholder Loans"). The 1998 Stockholder Loans are
repayable in full on the earlier of December 31, 2000 or the successful
initial public offering of the Company's Common Stock in which the net
proceeds to the Company after deducting all offering expenses equal at least
$30.0 million. The 1998 Stockholders Loans accrue interest at 10.5% per annum,
for one year from issuance date and with principle and interest payable
quarterly thereafter until paid in full. The stockholders also received
warrants to purchase one share of Common Stock for every $3.00 they loaned to
the Company for a total of 1,083,333 warrants (the "1998 Warrants"). The 1998
Warrants may be exercised prior to December 31, 2008 at a price per warrant
equal to the initial public offering price.
The Company completed two acquisitions, the first in October 1997 and the
second in January 1998, for approximately $90 and $1.5 million, respectively,
related to assets including cylinder display racks, and rights, title and
interest in and to sellers' retail propane cylinder exchange accounts and
locations.
The Company paid a combined $790 in cash of which $750 was provided by the
Bank Credit Facility and $40 from available cash. The remaining $750
associated with the January 1998 acquisition will be completed by the transfer
and delivery of unregistered common stock to the seller valued at the same
sales price as sold to the public in the anticipated initial public offering
("IPO"). However, if the IPO is not completed within twelve months, the seller
may receive the balance in cash plus a sum equal to 8% annual interest from
the closing date. The January 1998 acquisition also includes a purchase price
adjustment based on the number of locations transferred to the Company.
The excess cost over market value of net assets acquired for the above
acquisitions was approximately $1.1 million, which is being amortized on a
straight-line basis over 30 years.
F-19
<PAGE>
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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, at $1 per unit, of
Bison Valve 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.
In February 1998, Caribou Cylinder Exchange, L.L.C. ("Caribou Propane") and
Javilina Cylinder Exchange, L.L.C. ("Javilina Propane"), affiliates through
common ownership, began operations as distributors.
On May 1, 1998, Raven Propane, L.L.C., an affiliate through common ownership
began operations as a distributor.
On March 9, 1998, the Board of Directors increased the authorized shares of
common stock from 65,000,000 to 68,000,000 shares.
On November 17, 1997, the Board approved the following matters for which
shareholder consent was received effective December 31, 1997 that will be
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 not
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. All other per share information
included in the footnotes do not reflect the affect of the reverse stock
split.
. The authorized shares of the Capital Stock shall be 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.
. Give the Company the right to convert preferred stock on a one for one
basis into common stock and to issue common stock payment for accrued
dividends payable.
. 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).
. Accelerate the vesting of all outstanding options.
. Adoption of a stock option plan for employees. Approximately 5% of the
shares of common stock (on a post offering basis) will be reserved for
issuance to the Company's directors, officers, employees, consultants and
agents.
. Adoption of a distributor option plan whereby approximately 5% of the
shares of Common Stock (on a post offering basis) will be reserved for
the issuance to the Company's distributors.
The outstanding shares on a pro forma basis included on the face of the
balance sheet include shares issuable upon the exercise of all outstanding
stock warrants as of January 31, 1998 (except the 1998 Warrants), the
conversion of preferred stock and preferred stock dividends to Common Stock,
the 1 for 13.22513 reverse stock split and the issuance of shares to Bison
Propane Bottle Exchange, L.L.C. described above, all of which will be effected
immediately prior to the consummation of the IPO.
The Company completed three additional acquisitions in March and April 1998
for an aggregate purchase price of approximately $2.3 million for assets
including cylinder display racks and rights, title and interest in and to
sellers' retail propane cylinder exchange accounts and locations. These
acquisitions were financed with the Company's line of credit.
F-20
<PAGE>
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- -------------------------------------------------------------------------------
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 OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITY 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 UNLAWFUL 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 COMPANY OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 14
Dividend Policy.......................................................... 14
Capitalization........................................................... 15
Dilution................................................................. 16
Selected Consolidated Financial Data..................................... 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 19
Business................................................................. 28
Management............................................................... 36
Certain Transactions..................................................... 42
Principal Stockholders................................................... 44
Shares Eligible for Future Sale.......................................... 47
Description of Capital Stock............................................. 49
Underwriting............................................................. 52
Legal Matters............................................................ 54
Experts.................................................................. 54
Additional Information................................................... 54
Index to Consolidated Financial Statements............................... F-1
</TABLE>
-----------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,700,000 SHARES
[LOGO OF BLUE RHINO CORPORATION]
COMMON STOCK
--------------
PROSPECTUS
--------------
HAMBRECHT & QUIST
NATIONSBANC MONTGOMERY SECURITIES LLC
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
, 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............. $ 12,824
NASD filing fee................................................. $ 4,847
Nasdaq listing fee.............................................. $ 69,375
Transfer agent and registrar's fee and expenses................. $ 25,000
Blue Sky fees and expenses...................................... $ 10,000
Printing and engraving expenses................................. $125,000
Legal fees and expenses......................................... $350,000
Accounting fees and expenses.................................... $125,000
Miscellaneous................................................... $ 27,954
--------
Total....................................................... $750,000
========
</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
II-1
<PAGE>
indemnification is not exclusive of any other rights to which such individuals
may be entitled under the Charter, the Bylaws, any agreement, any 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 81,915 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>
Since formation, the Company has granted options to its employees for
182,607 shares of Common Stock pursuant to its 1994 Stock Incentive Plan at a
weighted average exercise price of $6.03 per share, of which options to
purchase 0 shares have been exercised and options to purchase 24,559 shares
are currently exercisable. Under the proposed recapitalization in connection
with this offering, all outstanding options under the 1994 Stock Incentive
Plan will be vested upon the completion of the offering. The options were
issued without registration under the Securities Act in reliance on Section
4(2) and Rule 701 promulgated thereunder.
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) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus 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.
The undersigned registrant hereby undertakes to provide to the Underwriters,
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as the Company may be permitted to indemnify directors, officers and
controlling persons of the Company for liabilities arising under the
Securities Act pursuant to the provisions described under Item 14 above or
otherwise, the Company has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted against the Company by such director, officer, or
controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 2 TO REGISTRATION STATEMENT TO
BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN
WINSTON-SALEM, NORTH CAROLINA, ON MAY 2, 1998.
Blue Rhino Corporation
/s/ Billy D. Prim
By___________________________________
Billy D. Prim
President and Chairman of the
Board
II-4
<PAGE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT NO. 2 HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON MAY 12, 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 and Chief Financial Officer
___________________________________________ (Principal Financial and Accounting
Mark Castaneda 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/ S.H. Fogleman III* Director
___________________________________________
S.H. Fogleman III
/s/ James P. Liautaud* Director
___________________________________________
James P. Liautaud
/s/ John H. Muehlstein* Director
___________________________________________
John H. Muehlstein
/s/ Robert S. Steel* Director
___________________________________________
Robert S. Steel
</TABLE>
- ---------------------
*Signed by Billy D. Prim pursuant to power of attorney.
II-5
<PAGE>
EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S> <C>
1.1 Underwriting Agreement+
3.1 Form of Second Amended and Restated Certificate of Incorpora-
tion of the Company+
3.2 Amended and Restated Bylaws of the Company+
4.1 Form of Certificate of Common Stock of the Company
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.+
10.1(b) Security Agreement, dated as of November 26, 1997 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+
10.3(a) Cylinder Display Rack Lease Agreement, dated as of September
16, 1996, between the Company and Forsythe McArthur Associ-
ates, Inc.+
10.3(b) Master Equipment Lease Agreement, dated as of September 24,
1996, between the Company and Forsythe McArthur Associates,
Inc.+
10.4(a) Asset Purchase Agreement, dated as of December 9, 1997, be-
tween the Company and Bison Propane Bottle Exchange, LLC+
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+
10.5 Multi-Draw Convertible Secured Promissory Note, dated as of
February 12, 1998, by Bison Valve, L.L.C. to the Company+
10.6 Collateral Assignment of License Agreement, dated as of Febru-
ary 12, 1998, by Bison Valve, L.L.C. to the Company+
10.7(a) Form of Distribution Agreement of the Company and Its Distrib-
utors+
10.7(b) Form of Sublease of Personal Property between the Company and
Its Distributors+
10.8(a) Form of Security Agreement to Secure the Sale of Cylinders
between the Company and Its Distributors+
10.8(b) Form of Promissory Note Evidencing the Sale of Cylinders
between the Company and Its Distributors+
10.9 Series A Securities Purchase Agreement, dated as of December
1, 1994, among the Company and the Purchasers of the Series A
Convertible Participating Preferred Stock+
10.10 Unit Purchase Agreement of a 10.5% Senior Discount Note and a
Warrant to purchase Common Stock of the Company, dated as of
October 11, 1995, between the Company and Purchasers named
therein+
10.11 Securities Purchase Agreement, dated as of March 1, 1997, be-
tween the Company and Platinum Propane Holding, L.L.C.+
10.12 Director Option Plan of the Company+
10.13 Distributor Stock Option Plan of the Company+
10.14 1994 Stock Incentive Plan of the Company+
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S> <C>
10.15 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+
10.16 The Shareholders' Agreement, dated as of December 1, 1994,
among the Company and its Stockholders+
10.17 First Amendment to the Shareholders' Agreement, dated as of
October 11, 1995, among the Company and its Stockholders+
10.18 1998 Stock Incentive Plan of the Company+
10.19 Real Estate Lease between the Company and Platinum Services
Corporation dated as of January 1, 1996+
10.20(a) Master Lease dated as of February 1, 1996 between the Company
and Nelco, Ltd.*
10.20(b) Lease Agreement dated July 30, 1996 between the Company and
Leasing Innovations,
Incorporated*
10.20(c) Lease Agreement dated June 26, 1997 between the Company and
Green Tree Vendor Services Corporation*
21.1 Subsidiaries of the Company+
23.1 Consent of Pedersen & Houpt, P.C.
23.2 Consent of Coopers & Lybrand L.L.P.
23.3 Consent of The Daniel Professional Group, Inc.
23.4 Consent of Barbecue Industry Association
24.1 Power of Attorney+
27.1 Financial Data Schedule*
</TABLE>
- ---------------------
*To be filed by amendment.
+Previously Filed.
II-7
<PAGE>
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NUMBER SHARES
BR
Blue
Rhino(TM)
INCORPORATED UNDER THE LAWS SEE REVERSE FOR
OF THE STATE OF DELAWARE CERTAIN DEFINITIONS
CUSIP 095811 10 5
THIS CERTIFIES that
is the owner of
FULLY-PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK OF $.001 PAR VALUE OF
---------------------- ----------------------
- --------------------------- BLUE RHINO CORPORATION -----------------------------
---------------------- ----------------------
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed.
This certificate is not valid unless countersigned and registered by the
Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
BLUE RHINO CORPORATION CORPORATE SEAL 1994 DELAWARE *
/s/ Mark Castaneda [Blue Rhino Seal] /s/ Billy Prim
VICE PRESIDENT AND SECRETARY CHAIRMAN AND CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
LA SALLE NATIONAL BANK
(CHICAGO, ILLINOIS) TRANSFER AGENT
AND REGISTRAR
BY
AUTHORIZED SIGNATURE
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NOTE: LOGO IS FOR POSITION ONLY
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<PAGE>
BLUE RHINO CORPORATION
The Corporation will furnish to any shareholder upon request and without
charge a full statement of the designations, preferences, limitations, and
relative rights of the shares of each class of stock authorized to be issued
and, with respect to the classes of stock which may be issued in series, the
variations in the relative rights and preferences between the shares of each
such series, so far as the same have been fixed and determined, and the
authority of the Board of Directors to fix and determine the relative rights and
preferences of subsequent series. Such request may be made to the Secretary of
the Corporation at its principal office or to the Transfer Agent.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- _________________________ Custodian ______________________
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with the
right of survivorship and not under Uniform Gifts to Minors Act
as tenants in common
----------------------------------------------------------
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received, ______________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ---------------------------------------------
- ---------------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
shares
- -------------------------------------------------------------------------
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
Attorney
- -----------------------------------------------------------------------
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
--------------------
-----------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature Guaranteed:
- -----------------------------------------------------------
THE SIGNATURE SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION PURSUANT TO S.E.C. RULE 17Ad-15.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, MUTILATED OR
DESTROYED, THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO
THE ISSUANCE OF A REPLACEMENT CERTIFICATE.
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT 23.1
Consent of Pedersen & Houpt, P.C.
Pedersen & Houpt, P.C. hereby consents to all references made to it in
Amendment No. 2 to the Registration Statement on Form S-1 (Registration No.
333-47669) of Blue Rhino Corporation, as filed with the Securities and Exchange
Commission on May 12, 1998.
/s/ Pedersen & Houpt, P.C.
--------------------------
Pedersen & Houpt, P.C.
Pedersen & Houpt, P.C.
Chicago, Illinois
May 12, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Blue Rhino Corporation
We consent to the inclusion in this pre-effective Amendment No. 2 to the
registration statement of Form S-1 (Registration No. 333-47669) of Blue Rhino
Corporation of our report dated September 5, 1997, except for Note 7, for which
the date is December 18, 1997, on our audits of the consolidated financial
statements of Blue Rhino Corporation. We also consent to the reference of our
firm under the captions "Experts" and "Selected Consolidated Financial Data."
/s/ Coopers & Lybrand L.L.P.
- ----------------------------
Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Greensboro, North Carolina
May 12, 1998
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the reference in Amendment No. 2 to the Registration
Statement of Blue Rhino Corporation on Form S-1 (Registration No. 333-47669) 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, in the section "Selected Consolidated Financial Data" and to the reference
to us under the heading "Experts" in the Prospectus, which is a part of this
Registration statement.
/s/ The Daniel Professional Group, Inc.
- ---------------------------------------
The Daniel Professional Group, Inc.
May 12, 1998
Winston-Salem, North Carolina
<PAGE>
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 Amendment No. 2 to the Registration Statement on Form S-1
(Registration Statement No. 333-47669) of Blue Rhino Corporation, as filed with
the Securities and Exchange Commission on May 12, 1998
Barbecue Industry of America
By /s/ David Kearsley
---------------------------------
Name David Kearsley
-------------------------------
Title Chairman - BIA Board - 1998
------------------------------
Barbecue Industry Association
Naperville, Illinois
May 12, 1998
