<PAGE>
As filed with the Securities and Exchange Commission on February 9, 1999
333-70127
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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Blue Rhino Corporation
(Exact name of Registrant as specified in its charter)
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Delaware 5984 56-1870472
(State or other (Primary Standard (I.R.S. Employer
jurisdiction Industrial Identification Number)
of incorporation or Classification Code
organization) 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
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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: [_]
-----------------
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>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion
Preliminary Prospectus dated February 9, 1999
PROSPECTUS
2,000,000 Shares
[BLUE RHINO LOGO]
Common Stock
-----------
Blue Rhino Corporation is offering 2,000,000 shares of common stock. Our
common stock is listed on The Nasdaq Stock Market under the symbol "RINO." The
last reported sale price for the common stock on February 9, 1999 was $14 1/2
per share.
Investing in the common stock involves risks which are described in the
"Risk Factors" section beginning on page 9 of this prospectus.
-----------
<TABLE>
<CAPTION>
Per Share Total
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<S> <C> <C>
Public Offering Price............................. $ $
Underwriting Discount............................. $ $
Proceeds, before expenses, to Blue Rhino
Corporation...................................... $ $
</TABLE>
The underwriters may also purchase from Blue Rhino Corporation up to an
additional 300,000 shares at the public offering price, less the underwriting
discount, within 30 days from the date of this prospectus to cover over-
allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The shares of common stock will be ready for delivery in New York, New York
on or about , 1999.
-----------
Merrill Lynch & Co.
NationsBanc Montgomery Securities LLC
-----------
The date of this prospectus is , 1999
<PAGE>
The Blue Rhino(R) logo, including the name, RhinoTUFF(R), Tri-Safe(TM),
Fuelcheck(TM), Endless Summer(TM) and Endless Summer Comfort(TM) are our
registered and pending trademarks. This prospectus also includes trademarks of
other companies.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Summary.................................................................. 5
Risk Factors............................................................. 9
Use of Proceeds.......................................................... 14
Price Range of Common Stock.............................................. 14
Dividend Policy.......................................................... 14
Capitalization........................................................... 15
Selected Consolidated Financial Data..................................... 16
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 17
Business................................................................. 29
Management............................................................... 38
Certain Transactions..................................................... 45
Principal Stockholders................................................... 46
Description of Capital Stock............................................. 48
Shares Eligible for Future Sale.......................................... 50
Underwriting............................................................. 52
Legal Matters............................................................ 54
Experts.................................................................. 54
Additional Information................................................... 54
Index to Financial Statements............................................ F-1
</TABLE>
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FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are not guarantees of future
performance and are subject to risks, uncertainties and assumptions, including,
among other things:
. Anticipated trends in our business, including consumer preferences
for propane grills and acceptance of cylinder exchange,
. Adequacy of our management, systems and distribution infrastructure
to manage growth in sales and locations,
. Ability of our distributors to provide adequate service to retailers,
. Placement of Blue Rhino cylinder exchange at new retail locations and
increasing sales at existing locations,
. Maintenance of relationships with existing retailers and
distributors,
. Securing capital for future acquisitions and growth,
. Successful identification and introduction of new products and
services, and
. Adaptation to changes in the regulatory environment.
Words such as "expect," "anticipate," "intend," "plan," "believe,"
"estimate" and variations of such words and similar expressions are intended to
identify such forward-looking statements. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise. In light of these risks,
uncertainties and assumptions, the forward-looking events discussed in this
prospectus might not occur.
-----------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate as of the date on the
front cover of this prospectus only. Our business, financial condition, results
of operations and prospects may have changed since that date.
3
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4
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SUMMARY
This summary may not contain all the information that may be important to
you. You should read the entire prospectus, including the financial data and
related notes, before making an investment decision. The terms "we," "our,"
"us," "Blue Rhino" and "the Company" as used in this prospectus refer to Blue
Rhino Corporation and its subsidiaries and predecessor as a combined entity,
except where it is made clear that such term means only Blue Rhino Corporation.
Unless otherwise indicated, the data regarding grill ownership, use and
consumer preferences contained in this prospectus is based on information
contained in the 1997 Barbecue Grill Usage and Attitude Study conducted on
behalf of the Barbecue Industry Association of America ("BIA").
The Company
We are the leading national provider of propane grill cylinder exchange in
the United States with Blue Rhino cylinder exchange displays at over 12,000
retail locations in 47 states and Puerto Rico. Cylinder exchange provides
consumers with a convenient means to exchange empty grill cylinders for clean,
safer, precision-filled cylinders. We offer our cylinder exchange at many major
home center/hardware, mass merchant, grocery and convenience stores including
Home Depot, Lowe's, Sears, WalMart, Kroger and Kwik Shop. We partner with
retailers and independent distributors to provide consumers with a nationally
branded alternative to traditional grill cylinder refill. We dedicate our
efforts and capital to brand development, value-added marketing, customer
service and management information systems while our 53 independent
distributors make the investments in the vehicles and refilling and
refurbishing equipment necessary to operate cylinder exchange businesses.
Cylinder exchange is a relatively new retail concept. We believe that
consumer awareness of the benefits of cylinder exchange will increase as it
becomes more widely available. Furthermore, we estimate there are approximately
225,000 potential cylinder exchange locations in our target markets. During the
twelve months ended October 31, 1998, our sales increased approximately 105%
compared to the twelve months ended October 31, 1997 to approximately $32.5
million, primarily as a result of the growth of sales at existing locations and
the addition of over 6,700 new retail locations.
The Industry
The grill cylinder exchange industry is highly fragmented with numerous
regional and local distributors serving less than 500 locations each. We
believe this fragmentation results in part from the relative newness of
cylinder exchange and the challenges cylinder exchange poses to commercially
focused traditional propane distributors. To build critical mass at the
consumer level, a propane distributor 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, a propane distributor must make investments in refurbishing
equipment, vehicles, cylinder displays and grill cylinders not required in its
traditional propane business. Finally, to properly account for exchange,
upgrade and sale transactions, a propane distributor must invest in
sophisticated management information systems tailored to servicing retailers.
We believe there are opportunities to expand through selective acquisitions of
smaller cylinder exchange businesses with established retail accounts.
As reported in the BIA study, the popularity of outdoor barbecuing
continues to grow driven by consumer interest in 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
propane grill sales now exceeding the combined sales of charcoal, natural gas
and electric grills. According to the BIA study, 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 the BIA study's
estimate that there are approximately 69 million cylinder transactions per
year, we estimate the annual retail market for grill cylinder refill to be
approximately $1 billion.
5
<PAGE>
Business Model
We have created a new paradigm for grill cylinder exchange which provides
the following benefits to consumers, retailers and distributors:
Consumers
. Convenient branded alternative to traditional cylinder refill
. Clean, safer product
. Access to consumer and product information (1-800-BLU-RINO and web
site)
Retailers
. High margin branded product
. Potential to increase customer traffic
. Improved use of exterior retail space
. Nationwide direct store delivery with automatic restocking
. Centralized billing and electronic inventory, invoicing and reporting
. Employee training
Distributors
. Access to major retail accounts
. Opportunity to sell a branded product in a growing market segment
. Service support such as sophisticated management information systems,
training and consolidated purchasing
. Assistance in obtaining and maintaining local permits
. Provision of cylinder displays and access to cylinder leasing programs
. Counter-seasonal complement to traditional propane business
Business Strategy
Our objective is to further strengthen our position as the leading
national provider of cylinder exchange. To achieve this objective, the key
elements of our strategy are:
. Promoting the Blue Rhino brand and driving consumer awareness of
cylinder exchange
. Expanding existing retailer relationships by opening new locations and
increasing sales at existing locations
. Adding new retailer relationships
. Leveraging distributors' infrastructure by adding new retail locations
within their territories
. Leveraging our corporate infrastructure to increase profitability
. Pursuing strategic account acquisitions from other cylinder exchange
providers
. Developing new products and services related to propane use and
backyard living, such as patio heaters and the related cylinder
exchange service
6
<PAGE>
The Offering
<TABLE>
<S> <C>
Common Stock offered by Blue
Rhino........................... 2,000,000 shares
Shares outstanding after the
offering........................ 9,645,742 shares (1)
Use of Proceeds.................. We estimate that the net proceeds we receive
from this offering (excluding the exercise
of the over-allotment option) will be
approximately $26.7 million. We intend to
use these net proceeds to acquire cylinder
exchange providers and accounts, provide
working capital, fund general corporate
purposes and develop and introduce new
products and services.
Risk Factors..................... See "Risk Factors" for a discussion of
factors you should carefully consider before
deciding to invest in shares of the common
stock.
Nasdaq Symbol.................... RINO
</TABLE>
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(1) Excludes 1,867,740 shares of common stock reserved for issuance under our
stock incentive plans, of which options to purchase up to 764,627 shares
with a weighted average exercise price of $12.14 were outstanding as of
December 31, 1998. See "Management--1998 Stock Incentive Plan." Also
excludes 81,913 shares of common stock reserved for issuance upon exercise
of outstanding warrants (the "1998 Warrants") with an exercise price of
$13.00 per share. Also excludes up to 1,000,000 shares of common stock
which are the subject of a registration statement on file with the
Securities and Exchange Commission and which we expect to issue in
connection with business acquisitions. See "Shares Eligible for Future
Sale." We have signed a letter of intent to acquire Bison Valve, L.L.C.
which contemplates the issuance of a portion of these shares. See
"Business--Business Strategy" and "Management--Compensation Committee
Interlocks and Insider Participation." Assumes that the underwriters' over-
allotment option is not exercised. If the underwriters' over-allotment
option is exercised in full, we will issue an additional 300,000 shares.
Company Background and Contact Information
Our business was incorporated in North Carolina on March 24, 1994 and
reincorporated in Delaware on December 16, 1994. We have 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 our
distributors. CPD was formed to hold our intangible assets. Our consolidated
financial information for the three months ended October 31, 1998 also includes
the financial information of USA Leasing, L.L.C. ("USA Leasing"), an affiliate
formed in October 1998 which offers cylinder leasing service to our
distributors. In May 1998, we consummated our initial public offering of
3,105,000 shares (including the over-allotment option) at an offering price of
$13.00 per share.
Our principal executive offices are at 104 Cambridge Plaza Drive, Winston-
Salem, North Carolina 27104 and our telephone number is (336) 659-6900.
7
<PAGE>
Summary Consolidated Financial Information
<TABLE>
<CAPTION>
Fiscal Year Ended Three Months Ended
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July 28, July 31, July 31, October 31, October 31,
1996 1997 1998 1997 1998(1)
-------- -------- -------- ----------- -----------
(unaudited)
(in thousands, except per share data and retail
locations data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Net sales.............. $ 8,216 $ 14,211 $ 27,372 $ 4,140 $ 9,222
Gross profit........... 316 2,567 6,847 985 2,288
Income (loss) from
operations (2)........ (6,130) (4,105) (679) (957) 203
Net loss (2) (3)....... $ (7,431) $ (5,584) $ (2,476) $ (1,340) $ (70)
Loss applicable to
common
stockholders (4)...... $ (8,067) $ (6,271) $ (3,072) $ (1,447) $ (70)
Loss per common share:
Basic and diluted ... $ (4.96) $ (3.74) $ (1.04) $ (0.81) $ (0.01)
Pro forma diluted.... $ (1.72) $ (1.27) $ (0.61) $ (0.30) $ (0.01)
Weighted average shares
used in computing loss
per common share:
Basic................ 1,628 1,678 2,945 1,779 7,631
Diluted (5).......... 1,628 1,678 2,945 1,779 7,631
Pro forma diluted
(6)................. 4,313 4,406 5,077 4,464 7,631
Selected Operating Data:
Retail locations (at
period end)........... 2,981 4,400 9,500 5,228 12,000
Cylinder transactions.. 769 1,239 2,201 375 705
Consolidated Balance
Sheet Data:
Cash and cash
equivalents .......... $ 1,126 $ 325 $ 5,908 $ 313 $ 4,122
Working capital........ 1,580 737 11,819 (715) 7,527
Total assets........... 11,897 9,974 30,470 8,555 35,377
Long-term obligations,
less current
maturities............ 14,174 16,110 260 19,448 6,783
Total stockholders'
equity (deficit)...... (13,217) (18,488) 24,816 (10,893) 24,820
</TABLE>
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(1) Includes financial information of USA Leasing, L.L.C., an affiliated
company.
(2) Includes nonrecurring charges of $1,363 for fiscal 1996, $970 for fiscal
1997, $476 for fiscal 1998, $281 for the three months ended October 31,
1997 and $0 for the three months ended October 31, 1998. See Note 11 of
Notes to Consolidated Financial Statements for an explanation of
nonrecurring charges.
(3) Includes loss on investee of $324 for fiscal 1998 and $311 for the three
months ended October 31, 1998. See Note 21 of Notes to Consolidated
Financial Statements for an explanation of loss on investee.
(4) Equals net loss less dividends on our redeemable Series A Convertible
Participating Preferred Stock ("Old Preferred Stock") of $636 for fiscal
1996, $687 for fiscal 1997, $596 for fiscal 1998, $107 for the three months
ended October 31, 1997 and $0 for the three months ended October 31, 1998.
The Old Preferred Stock was converted into shares of common stock in May
1998.
(5) For fiscal years 1996, 1997 and 1998 and for the three months ended October
31, 1997 and 1998, the weighted average number of shares outstanding
excludes the effect of the exercise of all outstanding stock options and
warrants and the conversion of the Old Preferred Stock into shares of
common stock because such exercise or conversion would be anti-dilutive.
(6) The unaudited pro forma share information assumes that the following (which
did not occur until our recapitalization was effected in connection with
our May 1998 initial public offering) had been effected as of the beginning
of the first year presented: the conversion of all outstanding shares of
Old Preferred Stock into common stock, the conversion of the accrued and
unpaid dividends on outstanding Old Preferred Stock into common stock and
the exercise of all outstanding warrants (other than the 1998 Warrants). No
shares of preferred stock are currently outstanding.
8
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RISK FACTORS
Investing in the common stock will provide you with an equity ownership
interest in Blue Rhino. As a Blue Rhino stockholder, you may be subject to
risks inherent in our business. The performance of your shares will reflect the
performance of our business relative to, among other things, competition and
general economic, market and industry conditions. The value of your investment
may increase or decline and could result in a loss. You should carefully
consider the following factors as well as other information contained in this
prospectus before deciding to invest in shares of our common stock.
Uncertainty of Continued Rapid Growth
We are a young company that has experienced a very high growth rate. In
order to continue to grow, we must be able to:
. Find productive new retail locations
. Demonstrate to consumers the benefits of cylinder exchange
. Maintain relationships with distributors who are able to expand our
business and achieve our quality and service standards
. Refine and maintain a corporate infrastructure sufficient to support
growth
. Secure capital to fund growth
. Identify and consummate acquisitions of retail accounts from existing
cylinder exchange providers
Even if we successfully implement our growth strategy, we may not be able to
sustain our recent growth rates.
Ability of Distributors and Management to Manage Growth in Sales and Number of
Retail Locations
The number of retail locations offering Blue Rhino cylinder exchange and
our corresponding sales have grown significantly over the past several years
along with the creation of our independent distributor network. As of July 31,
1995, we 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 October 31, 1998, we had 53 independent distributors
servicing in excess of 12,000 retail locations in 47 states and Puerto Rico. To
successfully grow, our distributors must be able to adequately service an
increasing number of retail accounts. Due to our recent growth, certain
distributors have experienced service problems, particularly during peak demand
periods such as holiday weekends. This growth also requires our executive
officers, who have only limited prior experience managing a public company, to
skillfully manage Blue Rhino and our retailer and distributor relationships. If
we fail to effectively manage our growth, our business may suffer.
Lack of Contractual Relationships with Retailers
None of our significant retail accounts are contractually bound to offer
Blue Rhino cylinder exchange. Therefore, those retailers can discontinue Blue
Rhino cylinder exchange at any time and offer a competitor's cylinder exchange
or no cylinder exchange program at all. Continued relations with a retailer
depend upon various factors, including customer service, consumer demand,
competition and cost. In addition, certain of our retailers have multiple
vendor policies and, therefore, may seek to offer a competitor's cylinder
exchange program at new or existing locations. If any significant retailer
terminates, reduces or is unwilling to expand its relationship with us, our
business may suffer. See "--Volatile Product; Potential Product Liability."
Concentration of Revenues with a Limited Number of Retailers
We depend upon our relationships with a limited number of major retailers
for a significant portion of our net sales. Home Depot represented
approximately 26% of our fiscal 1998 net sales and
9
<PAGE>
approximately 25% of our net sales for the three months ended October 31, 1998.
Lowe's and WalMart each represented approximately 16% and 13% of our net sales
for the same periods. Our failure to maintain or expand relationships with any
of these retailers or a significant business downturn at any of these retailers
could negatively impact our business.
Dependence on Distributor Relationships
We rely exclusively on independent distributors to deliver our products
to retailers. Our success will depend on our ability to maintain existing
distributor relationships and on the distributors' ability to set up and
adequately service an expanding base of retail accounts. We exercise only
limited influence over the resources that our independent distributors devote
to cylinder exchange. We could suffer a loss of consumer or retailer goodwill
if our distributors do not adhere to our quality control and service guidelines
or fail to ensure an adequate and timely supply of cylinders at retail
locations. Problems a national retailer may have with one distributor could
result in the loss of other locations of that retailer serviced by one or more
of our other distributors. If any major distributor were to discontinue
servicing one or more retailers or terminate its distribution agreement, our
business may suffer. See "Business--Distributor Network."
Dependence on Consumer Acceptance of Cylinder Exchange
We derive substantially all of our revenues from cylinder exchange, a
relatively new retailing concept for consumers and retailers. According to the
BIA study, 79% of the consumers who use propane grills refill rather than
exchange their cylinders. Our success will depend in large part on our ability
to successfully encourage consumers to switch from traditional refilling
methods to cylinder exchange and encourage retailers to offer cylinder
exchange.
Seasonal and Quarterly Fluctuations in Our Business
Our quarterly operating results fluctuate significantly primarily because
consumers grill most frequently in the spring and summer, especially in colder
regions of the United States. As a result, we earn most of our revenue during
our third and fourth quarters ended April 30 and July 31. In addition, as of
October 31, 1998, approximately 41% of our retail locations were in the
South/Southeast region, and during the twelve months ended October 31, 1998 we
derived approximately 47% of our revenues from this region. Sustained periods
of poor weather, particularly during the spring and summer or in the
South/Southeast region, can negatively impact our net sales and gross margin.
Our timing and rate of establishing new retail locations and expenses incurred
in anticipation of increased sales also may cause quarterly fluctuations in our
results of operations. Accordingly, the results of operations in any quarter
will not necessarily be indicative of the results that we may achieve for a
full fiscal year or any future quarter. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Selected Quarterly
Results of Operations."
Concentration of Retail Locations with a Limited Number of Distributors
As of October 31, 1998, six distributors serviced approximately 35% of
our retail locations. Sales by these key distributors resulted in approximately
47% of our net sales for the twelve months ended October 31, 1998. The five
distributors owned by Platinum Propane Holding, L.L.C. ("Platinum Propane")
accounted for approximately 37% of our net sales for the twelve months ended
October 31, 1998. Ceramic Industries, Inc. accounted for approximately 10% of
our net sales for the twelve months ended October 31, 1998. A disruption in
service by one or more of these distributors may cause our business to suffer.
Potential Conflicts of Interest in Enforcing Remedies Against Our Affiliates
Billy D. Prim, our Chairman, President and Chief Executive Officer,
Andrew J. Filipowski, our Vice Chairman and Craig Duchossois, one of our
directors, indirectly own in the aggregate approximately 45% of Platinum
Propane whose five distributors collectively serve more locations and
collectively have had higher net sales than any of our other distributors. In
addition, Messrs. Prim and Filipowski own in the aggregate approximately 45% of
each of Caribou Cylinder Exchange, L.L.C.
10
<PAGE>
("Caribou Propane"), Javelina Cylinder Exchange, L.L.C. ("Javelina Propane")
and Raven Propane, L.L.C. ("Raven Propane"), three of our distributors. Messrs.
Prim and Filipowski, along with Craig J. Duchossois, one of our directors, and
Peer Pedersen, one of our stockholders and a partner in Pedersen & Houpt, our
legal counsel, own USA Leasing, L.L.C. ("USA Leasing"), an entity which leases
grill cylinders to our distributors. We have guaranteed 80% of USA Leasing's
obligations under a $13.0 million credit facility and in return have received a
subordinated security interest in USA Leasing's assets. We believe that the
foregoing transactions with directors, officers, stockholders and other
affiliates were completed on terms as favorable to us as could have been
obtained from unaffiliated third parties. If any of Platinum Propane, Caribou
Propane, Javelina Propane or Raven Propane fail to meet performance goals, or
USA Leasing defaults on its indebtedness, the cross-ownership of these entities
and Blue Rhino could reduce our incentive to terminate distribution agreements,
enforce security agreements or subrogation rights or take other actions. See
"Business--Distributor Network--Dedicated Distributors," "Management--
Compensation Committee Interlocks and Insider Participation" and "Certain
Transactions."
Varying Local Permitting Processes Affecting Retail Locations
Local ordinances, which vary from jurisdiction to jurisdiction, generally
require retailers to obtain permits to store and sell propane cylinders. These
ordinances influence retailers' acceptance of cylinder exchange, distribution
methods, cylinder packaging and storage. The ability and time required to
obtain permits varies by jurisdiction. Delays in obtaining permits have from
time to time significantly delayed the installation of new retail locations.
Some jurisdictions have refused to issue the necessary permits and thereby have
prevented a limited number of installations. Certain jurisdictions may also
impose additional restrictions on our ability to market and our distributors'
ability to maintain the cylinder exchange program. Revisions to these
regulations or violations of current or future regulations by us or our
distributors may cause our business to suffer. See "Business--Governmental
Regulation."
Competition in Grill Cylinder Refilling Industry
The grill cylinder refilling industry is highly fragmented and
competitive. Competition in our industry is based primarily upon convenience,
quality of product, service, historical relationships, perceived safety and
price. The BIA study states that 79% of the consumers who use propane grills
refill rather than exchange their cylinders. Accordingly, our primary
competition comes from the approximately 20,000 bulk refilling stations owned
and operated by propane dealers, as well as certain rental outlets,
recreational vehicle centers and hardware stores. Major propane providers, such
as AmeriGas Propane Partners, L.P., Cornerstone Propane Partners, L.P.,
Ferrellgas Propane Partners, L.P., Heritage Propane Partners, L.P. and Suburban
Propane Partners, L.P., could establish new or expand their existing cylinder
exchange businesses nationally. These major propane providers have greater
resources than we do and may be able to undertake more extensive marketing
campaigns and adopt more aggressive pricing policies than we can. We also
compete with numerous regional cylinder exchange providers, which typically
have operations in a few states, and with local cylinder exchange providers. If
these competitors expand their cylinder exchange programs or new competitors
enter the market or grow to compete with us on a national scale, our market
share and gross margins could decrease.
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.
Accidents may occur during the refurbishing, refilling, transport, storage,
exchange, use or disposal of cylinders and other Blue Rhino products. Because
the Blue Rhino name and logo are prominently displayed on all cylinders,
cylinder displays and other Blue Rhino products, such as patio heaters, we
could be subjected to damage claims. In the event of an accident, we could
incur substantial expense, receive adverse publicity and/or suffer a loss of
sales. A grill cylinder-related accident involving personal injury could result
in product liability actions against us or our distributors and could affect
the willingness of retailers to offer or consumers to use cylinder exchange.
Adverse publicity relating to any such incident could also affect our
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 we or our distributors will be able to continue to
obtain insurance coverage at acceptable levels and cost.
11
<PAGE>
Product Recalls and Prior Accidents Affecting Blue Rhino
Prior to May 1996, we operated a propane refilling facility in
Booneville, North Carolina. In July 1995, an explosion resulting in significant
structural damage to the plant occurred at this facility when a filled cylinder
fell from a conveyor belt, began to leak and subsequently ignited. In September
1997, a fire occurred at one of our distributor's 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. We instructed our distributors to inventory the
cylinders at their plants and retail locations and remove any cylinders with
the recalled valves. However, we cannot be sure that all recalled valves have
been removed from circulation.
Regulation of Propane
Federal, state and local authorities regulate the transportation,
handling, storage and sale of propane 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 in Pamphlets 54 and 58. These guidelines require that
all cylinders produced or recertified after September 30, 1998 and all grill
cylinders refilled after April 2002 must be fitted with an overfill prevention
device valve. Failure of our distributors to comply with these regulations
could subject us to potential governmental action for violation of such
regulations which could result in fines, penalties and/or injunctions. See
"Business--Governmental Regulation."
Blue Rhino's Dependence on Management Information Systems
We depend on our management information systems ("MIS") to process
orders, manage inventory and accounts receivable, maintain distributor and
customer information, maintain cost-efficient operations and assist
distributors in delivering products on a timely basis. In addition, our staff
of four MIS professionals relies heavily on the support of Information
Management System Services ("IMSS"), a division of R. J. Reynolds Tobacco
Company. Any disruption in the operation of our MIS, the loss of employees
knowledgeable about such systems, the termination of our relationship with IMSS
or our failure to continue to effectively modify such systems as our business
expands could negatively affect our business. See "Business--Management
Information Systems."
Potential Negative Effect of Our Failure to Achieve Year 2000 Compliance
Certain of our MIS use two digit data fields which recognize dates using
the assumption that the first two digits are "19" (i.e., the number 00 is
recognized as the year 1900 rather than the year 2000). Therefore, our date
critical functions relating to the Year 2000 and beyond, such as sales,
distribution, inventory control and financial systems, may be negatively
affected unless we make changes to these computer systems. We expect that
upgrades to our MIS with respect to the Year 2000 issue will require capital
expenditures of approximately $35,000. In addition, the failure of parties with
whom we have a material relationship to achieve Year 2000 compliance could
cause an interruption in our business. It is still uncertain whether we can
resolve these issues in a cost-effective or timely manner or whether we will
incur significantly greater expense in resolving these issues. See
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations--Year 2000 Compliance."
Blue Rhino's Dependence on Trademarks, Proprietary Information and Copyrights
We consider our trademarks, particularly the Blue Rhino logo, including
the name, and the design of our product packaging, to be valuable to our
business and the establishment of our national branded cylinder exchange
program. We rely on a combination of copyright and trademark laws and other
arrangements to protect our proprietary rights and could incur substantial
expense to enforce our rights under copyright or trademark laws. The
requirement to change any of our trademarks, service marks or trade name could
entail significant expense, result in the loss of any goodwill associated with
that trademark, service mark or trade name, and impact our ability to apply for
copyrights and additional trademarks in the future.
12
<PAGE>
UNPREDICTABLE PROPANE SUPPLIES AND COSTS
Our 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. A substantial
increase in propane prices could lead to decreased profit margins for
distributors and could impact their ability or desire to service our retail
accounts.
BLUE RHINO DISTRIBUTORS' DEPENDENCE ON SUPPLIERS
To adequately service our retail accounts, our distributors need a
sufficient supply of cylinders and valves. There are only two major cylinder
suppliers and only five major valve suppliers in the U.S. market. The
implementation of National Fire Protection Association guidelines requiring the
introduction of valves with overfill prevention devices and growth in propane
grill sales and use could increase demand for cylinders and valves. If the
distributors were unable to obtain sufficient quantities of cylinders or
valves, delays or reductions in cylinder availability could occur which may
cause our business to suffer.
MANAGEMENT'S SUBSTANTIAL OWNERSHIP OF BLUE RHINO
As of December 31, 1998, current executive officers, directors and
entities controlled by them beneficially owned, in the aggregate, approximately
42.0% and, adjusted for the shares offered by us in this offering would have
owned, in the aggregate, approximately 33.5% of our outstanding common stock.
As a result, they can exert considerable voting control in connection with
matters requiring stockholder approval, including election of directors and
approval of significant corporate transactions, provided that they vote
together on such matters, and may have the effect of delaying or preventing a
change in control of Blue Rhino or impeding or precluding transactions in which
stockholders might otherwise receive a premium for their shares over then
current market prices.
FUTURE SALES OF SHARES MAY NEGATIVELY AFFECT MARKET PRICE
After this offering, 9,645,742 shares of common stock will be outstanding
(assuming the over-allotment option is not exercised). Of these shares,
approximately 6,505,000 shares will be freely tradeable without restriction
under the Securities Act of 1933, as amended (the "Securities Act") or pursuant
to Rule 144(k) under the Securities Act, except for any such shares acquired by
one of our "affiliates" as defined in Rule 144. The remaining 3,140,742 shares
then outstanding (which includes 3,068,787 shares beneficially owned by our
directors and officers) may be resold only in compliance with the registration
provisions of the Securities Act or an exemption therefrom, including the
resale provisions of Rule 144. In connection with this offering our directors
and officers and certain of our stockholders have agreed, with respect to
approximately 3,364,000 shares, not to sell such shares for a period of 120
days after the date of this prospectus without the consent of Merrill Lynch,
Pierce, Fenner & Smith Incorporated. Upon expiration or waiver of such lock-up
agreements, all such shares will be eligible for sale in the public market,
subject to compliance with the volume limitations and other restrictions of
Rule 144. In addition, options and warrants to purchase a total of 846,540
shares of common stock will be outstanding after this offering. See
"Management--1994 Stock Incentive Plan," "--1998 Stock Incentive Plan," "--
Director Option Plan," "--Distributor Option Plan" and "--Compensation
Committee Interlocks and Insider Participation." Holders of approximately
2,400,000 shares of common stock may under certain circumstances require us to
register their shares under the Securities Act at our expense. None of the
holders of these shares have elected to register their shares in connection
with this offering. Furthermore, we have filed a registration statement under
the Securities Act to register an additional 1,000,000 shares of our common
stock. These shares may be issued from time to time in connection with the
acquisition of businesses. We have signed a letter of intent to acquire Bison
Valve, L.L.C. which contemplates the issuance of a portion of these shares. See
"Business--Business Strategy" and "Management--Compensation Committee
Interlocks and Insider Participation." The sale of a substantial number of
shares, whether pursuant to a subsequent public offering, the exercise of
registration rights, through private resales under Rule 144, or otherwise, or
the perception that such sales could occur, could negatively affect the market
price of the common stock and could materially impair our future ability to
raise capital through an offering of equity securities. See "Shares Eligible
for Future Sale."
13
<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the 2,000,000 shares
of common stock offered by us will be $26.7 million (after deducting the
underwriting discount and estimated offering expenses) based upon an assumed
public offering price of $14 1/2 per share. We intend to use the net proceeds
from this offering primarily to acquire cylinder exchange providers and
accounts, provide working capital, fund general corporate purposes and develop
and introduce new products and services. During the twelve months ended October
31, 1998, we acquired approximately 3,350 retail locations in 20 transactions
for approximately $8.8 million. Pending such uses for the proceeds of this
offering, we intend to invest the proceeds in short term investment grade,
interest bearing securities. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources"
and "Business--Business Strategy."
PRICE RANGE OF COMMON STOCK
Our common stock is traded on The Nasdaq Stock Market under the symbol
"RINO." The following table sets forth, for the quarters indicated, the range
of high and low sale prices for our common stock on The Nasdaq Stock Market.
Trading of our common stock commenced on May 19, 1998. On February 9, 1999, the
last reported sale price of our common stock on The Nasdaq Stock Market was $14
1/2 per share. We estimate there were approximately 147 holders of record of
our common stock as of November 6, 1998.
<TABLE>
<CAPTION>
Price Range of
Common Stock
------------------
High Low
----- --------
<S> <C> <C>
Fiscal Year Ended July 31, 1998
Fourth Quarter (from May 19, 1998)................. $ 21 $13 1/4
Fiscal Year Ending July 31, 1999
First Quarter...................................... $ 16 $ 7
Second Quarter..................................... $25 5/8 $12 1/4
</TABLE>
DIVIDEND POLICY
We have never declared or paid any cash dividends on shares of our common
stock. We currently intend to retain any earnings for future growth and,
therefore, do not anticipate paying any cash dividends in the foreseeable
future. Our board of directors will decide if any cash dividends will be paid
in the future. Any future financing agreements we may enter into could also
contain prohibitions on the payment of cash dividends.
14
<PAGE>
CAPITALIZATION
The following table sets forth our consolidated capitalization (including
the capitalization of USA Leasing, L.L.C., an affiliated company) as of October
31, 1998 (i) on an actual basis and (ii) on an as adjusted basis to reflect our
issuance of the shares in this offering at an assumed offering price of $14 1/2
per share and the application of the estimated net proceeds therefrom. See "Use
of Proceeds." This table should be read in conjunction with our Consolidated
Financial Statements and the Notes thereto included in this prospectus.
<TABLE>
<CAPTION>
October 31, 1998
-----------------------------
Actual As Adjusted
------------ ---------------
(unaudited, in thousands)
<S> <C> <C>
Short-term obligations............................ $ 805 $ 805
------------ ------------
Long-term obligations, less current maturities.... $ 6,783 $ 6,783
------------ ------------
Stockholders' equity:
Common Stock, par value $0.001, 100,000,000
shares authorized; 7,630,873 shares issued and
outstanding (actual); and 9,630,873 shares
issued and outstanding (as adjusted)(1)........ 8 10
Additional paid-in capital...................... 46,320 73,051
Accumulated deficit............................. (21,508) (21,508)
------------ ------------
Total stockholders' equity.................... 24,820 51,553
------------ ------------
Total capitalization.......................... $ 32,408 $ 59,141
============ ============
</TABLE>
- --------
(1) Excludes: (a) 81,913 shares of common stock reserved for issuance upon
exercise of the 1998 Warrants, (b) 982,609 shares of common stock reserved
for issuance upon the exercise of options under the 1994 Stock Incentive
Plan, 1998 Stock Incentive Plan, Amended and Restated Stock Option Plan for
Non-employee Directors and Distributor Stock Option Plan as of October 31,
1998, of which options to purchase up to 694,796 shares were outstanding,
(c) 14,869 shares issued pursuant to the exercise of options after October
31, 1998 through December 31, 1998, (d) 900,000 shares of common stock
reserved for issuance upon the exercise of additional options authorized
under the 1998 Stock Incentive Plan on December 22, 1998, and (e) 1,000,000
shares which are the subject of a registration statement on file with the
Securities and Exchange Commission and which we expect to issue in
connection with business acquisitions. We have signed a letter of intent to
acquire certain assets of Bison Valve, L.L.C. which contemplates the
issuance of a portion of these shares. See "Business--Business Strategy,"
"Description of Capital Stock," "Management--1994 Stock Incentive Plan,"
"--1998 Stock Incentive Plan," "--Director Option Plan," "--Distributor
Option Plan," "--Compensation Committee Interlocks and Insider
Participation" and Note 13 of Notes to Financial Statements. Assumes that
the underwriters' overallotment-option is not exercised. If the
underwriters' overallotment is exercised in full, we will issue an
additional 300,000 shares.
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following selected consolidated financial data in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our Consolidated Financial Statements, including
the Notes thereto, appearing elsewhere in this prospectus. We derived the
selected consolidated financial data for the fiscal years ended July 28, 1996,
July 31, 1997 and July 31, 1998 from our Consolidated Financial Statements
included elsewhere in this prospectus that have been audited by
PricewaterhouseCoopers LLP, independent accountants. We derived the selected
consolidated financial data as of and for the fiscal year ended July 31, 1995
from our consolidated financial statements not included in this prospectus that
have been audited by PricewaterhouseCoopers LLP, independent accountants. We
derived the selected combined financial data for the thirteen months ended July
31, 1994 and the selected consolidated financial data for the three months
ended October 31, 1997 and 1998 from our unaudited financial statements which,
in the opinion of our management, reflect all adjustments, including normal
recurring adjustments, that we consider necessary for a fair presentation of
the combined and 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.
<TABLE>
<CAPTION>
Thirteen Month Fiscal Year Ended Three Months Ended
Period Ended -------------------------------------- -----------------------
July 31, July 31, July 28, July 31, July 31, October 31, October 31,
1994 1995 1996 1997 1998 1997 1998(1)
-------------- -------- -------- -------- -------- ----------- -----------
(unaudited) (unaudited)
(in thousands, except per share and retail locations data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Net sales--
distributors........... $ -- $ -- $ 2,386 $ 13,060 $27,372 $ 4,140 $ 9,222
Net sales--direct....... 449 2,728 5,830 1,151 -- -- --
----- ------- -------- -------- ------- -------- -------
Total net sales........ 449 2,728 8,216 14,211 27,372 4,140 9,222
----- ------- -------- -------- ------- -------- -------
Cost of sales--
distributors........... -- -- 1,811 9,873 20,525 3,155 6,934
Cost of sales--direct... 185 3,523 6,089 1,771 -- -- --
----- ------- -------- -------- ------- -------- -------
Total cost of sales.... 185 3,523 7,900 11,644 20,525 3,155 6,934
----- ------- -------- -------- ------- -------- -------
Gross profit (loss)..... 264 (795) 316 2,567 6,847 985 2,288
----- ------- -------- -------- ------- -------- -------
Operating expenses
(income):
Sales and marketing.... -- 532 1,112 1,950 2,392 564 669
General and
administrative........ 602 2,787 3,192 3,022 3,461 844 1,104
Lease income, net...... -- -- (89) (143) (81) 8 (212)
Depreciation and
amortization.......... 28 284 868 873 1,278 245 524
Nonrecurring charges
(2)................... -- -- 1,363 970 476 281 --
----- ------- -------- -------- ------- -------- -------
Total operating
expenses, net......... 630 3,603 6,446 6,672 7,526 1,942 2,085
----- ------- -------- -------- ------- -------- -------
Income (loss) from
operations............. (366) (4,398) (6,130) (4,105) (679) (957) 203
Other expense (income):
Interest expense....... 5 287 1,469 1,665 1,707 434 32
Loss on investee (3)... -- -- -- -- 324 -- 311
Other income, net...... (2) (25) (168) (186) (234) (51) (70)
----- ------- -------- -------- ------- -------- -------
Net loss............... $(369) $(4,660) $ (7,431) $ (5,584) $(2,476) $ (1,340) $ (70)
===== ======= ======== ======== ======= ======== =======
Loss applicable to
common stockholders
(4)................... $(369) $(5,055) $ (8,067) $ (6,271) $(3,072) $ (1,447) $ (70)
===== ======= ======== ======== ======= ======== =======
Loss per common share:
Basic and diluted...... $ -- $ (3.09) $ (4.96) $ (3.74) $ (1.04) $ (0.81) $ (0.01)
===== ======= ======== ======== ======= ======== =======
Pro forma diluted...... $ -- $ (1.08) $ (1.72) $ (1.27) $ (0.61) $ (0.30) $ (0.01)
===== ======= ======== ======== ======= ======== =======
Weighted average common
shares used in
computing loss per
common share:
Basic.................. -- 1,638 1,628 1,678 2,945 1,779 7,631
===== ======= ======== ======== ======= ======== =======
Diluted (5)............ -- 1,638 1,628 1,678 2,945 1,779 7,631
===== ======= ======== ======== ======= ======== =======
Pro forma diluted (6).. -- 4,303 4,313 4,406 5,077 4,464 7,631
===== ======= ======== ======== ======= ======== =======
Selected Operating Data:
Retail locations (at
period end)............ 331 1,608 2,981 4,400 9,500 5,228 12,000
Cylinder transactions... -- 306 769 1,239 2,201 375 705
Consolidated Balance
Sheet Data:
Cash and cash
equivalents............ $ 150 $ 209 $ 1,126 $ 325 $ 5,908 $ 313 $ 4,122
Working capital......... 109 (3,264) 1,580 737 11,819 (715) 7,527
Total assets............ 631 10,424 11,897 9,974 30,470 8,555 35,377
Long-term obligations,
less current
maturities............. 518 1,361 14,174 16,110 260 19,448 6,783
Convertible redeemable
preferred stock........ -- 7,613 7,849 8,936 -- 9,403 --
Total stockholders'
equity (deficit)...... (179) (5,149) (13,217) (18,488) 24,816 (10,893) 24,820
</TABLE>
- -------
(1) Includes financial data of USA Leasing, L.L.C., an affiliated company.
(2) See Note 11 of Notes to Consolidated Financial Statements for an
explanation of the nonrecurring charges.
(3) See Note 21 of Notes to Consolidated Financial Statements for an
explanation of loss on investee.
(4) Equals net loss less dividends on our redeemable Old Preferred Stock of
$395 for fiscal 1995, $636 for fiscal 1996, $687 for fiscal 1997, $596 for
fiscal 1998, $107 for the three months ended October 31, 1997 and $0 for
the three months ended October 31, 1998. The Old Preferred Stock was
converted into shares of common stock in May 1998.
(5) For fiscal years 1996, 1997 and 1998 and for the three months ended October
31, 1997 and 1998, the weighted average number of shares outstanding
excludes the effect of the exercise of all outstanding stock options and
warrants and the conversion of the Old Preferred Stock into shares of
common stock because such exercise or conversion would be anti-dilutive.
(6) The unaudited pro forma share information assumes that the following (which
did not occur until our recapitalization was effected in connection with
our May 1998 initial public offering) had been effected as of the beginning
of the first year presented: the conversion of all outstanding shares of
Old Preferred Stock into common stock, the conversion of the accrued and
unpaid dividends on outstanding Old Preferred Stock into common stock and
the exercise of all outstanding warrants (other than the 1998 Warrants). No
shares of preferred stock are currently outstanding.
16
<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 our Consolidated Financial
Statements and Notes thereto included elsewhere in this prospectus. Unless
otherwise indicated, all references to fiscal years in this section of the
prospectus refer to the Company's fiscal years, which ran as follows: from
August 1, 1995 through July 28, 1996, July 29, 1996 through July 31, 1997 and
August 1, 1997 through July 31, 1998. See "Forward-Looking Statements" and
"Risk Factors."
OVERVIEW
Blue Rhino was founded in March 1994 and has become the leading national
provider of grill cylinder exchange in the United States offering consumers a
convenient means to obtain propane for their barbecue grills. We originally
focused on serving markets in the Southeastern United States and have since
developed a network of 53 independent distributors which, as of October 31,
1998, serviced Blue Rhino grill cylinder exchange at over 12,000 retail
locations in 47 states and Puerto Rico. During the twelve months ended October
31, 1998, our net sales increased approximately 105% from our net sales for the
preceding twelve months to approximately $32.5 million primarily as a result of
the growth of sales at existing locations and the addition of over 6,700 new
retail locations.
Since formation, we have focused on creating an infrastructure to support
our nationwide cylinder exchange program. Initially, we developed a vertically
integrated operation, purchasing and leasing grill cylinders, cylinder
displays, filling sites, refurbishing equipment and delivery vehicles while at
the same time developing a sales, marketing and management information systems
("MIS") infrastructure. In March 1996, we began to transition from a vertically
integrated business model to an independent distributor business model in order
to accelerate the development and implementation of our cylinder exchange
program in a more capital efficient manner. At that time, we began to dispose
of distribution assets and to enter into exclusive agreements with independent
distributors to refurbish and refill cylinders and service our retail accounts.
We believe that as a result of this transition, we have been able to
significantly accelerate the growth of our nationwide service. We expect to
focus future capital expenditures on cylinder displays and continued
enhancement of our MIS. We completed our transition to an independent
distributor business model in the third quarter of fiscal 1997 although we
incurred some expenses related to the prior business model in fiscal 1998.
We have experienced rapid and substantial growth in cylinder transactions
and retail locations. While we are committed to our independent distributor
model, we recognize that our rapid and substantial growth imposes significant
capital demands on our distributors. Accordingly, we sought to establish a
financing facility which would enable our distributors to acquire sufficient
cylinders to service our rapid growth. Because equipment leasing is not
currently a component of our core business strategy, four individuals
associated with us as directors, officers and/or stockholders formed USA
Leasing, L.L.C. ("USA Leasing") in October 1998 to provide the necessary
cylinder lease financing to our distributors. To enable us to maintain control
over the servicing of our accounts in the event of either USA Leasing's or a
distributor's default, we agreed to guarantee 80% of USA Leasing's $13 million
credit facility and received a lien, subordinate to the lender's, on all of USA
Leasing's assets. We believe that it is in our best interest to facilitate the
business development of our distributors. As a result of the common ownership
and control of USA Leasing and Blue Rhino and our guarantee of the facility, it
is necessary to present the financial statements of USA Leasing and Blue Rhino
on a consolidated basis. It is our understanding that the owners of USA Leasing
will be attempting to transfer its leasing operations to an unaffiliated third
party.
We currently offer three types of grill cylinder transactions: (i) like-
for-like cylinder exchanges; (ii) cylinder exchanges with valve upgrades
offering additional safety features; and (iii) filled cylinder sales. Our net
sales from cylinder exchanges, cylinder upgrades and cylinder sales comprised
approximately 81%, 10% and 9%, respectively, of our net sales for fiscal 1998
and 82%, 11% and 7%, respectively, of our net sales for the three months ended
October 31, 1998. Our suggested retail prices for
17
<PAGE>
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. We recognize sales at the time
our distributors make a delivery at a retail location. We invoice retailers,
receive payment and remit a fixed portion of this payment to our distributors
for their services. Our sales growth depends on increasing sales at existing
locations and increasing the number of new retail locations that we serve.
Other factors which influence our sales include seasonality, consumer
awareness, weather conditions, new grill sales, alternative uses for grill
cylinders, promotional activities and advertising.
Our cost of sales is primarily comprised of a contractually determined
fixed charge which we pay to distributors based upon the type of cylinder
transaction. Beginning in May 1998, our cost of sales has included a non-cash
charge associated with options granted under our Distributor Stock Option Plan
("Distributor Option Plan"). Based upon prior grants of options under the
Distributor Option Plan, we estimate that we will incur annual non-cash charges
of approximately $300,000 through fiscal 2002 related to these prior grants.
Additional grants of options under the Distributor Option Plan would result in
additional non-cash charges. Sales and marketing expenses are primarily
comprised of compensation, commission, promotional and travel costs. General
and administrative expenses are primarily comprised of compensation,
professional fees, office and equipment rent and travel costs. Beginning in the
second quarter of fiscal 1999, our general and administrative expenses will
include a non-cash charge associated with options granted under our Amended and
Restated Stock Option Plan for Non-employee Directors ("Director Option Plan").
Net lease income is comprised of rental revenue from cylinders, cylinder
displays and certain plant facilities and equipment leased to distributors.
Until May 1998, lease income was offset by rent expense we paid to lease the
cylinder displays under an operating lease. In May 1998, we purchased all of
the cylinder displays we previously leased under the operating lease.
Depreciation and amortization consist primarily of depreciation of cylinder
displays and, to a lesser extent, depreciation of equipment, building and
leasehold improvements and computer technology and amortization of intangibles.
Operating expenses also included nonrecurring charges of approximately $1.4
million, $1.0 million and $476,000 during fiscal 1996, fiscal 1997 and fiscal
1998, respectively, resulting from our transition from a vertically integrated
business model to our present independent distributor business model. We do not
anticipate incurring any additional nonrecurring charges in connection with
this transition. In connection with our $635,000 convertible loan to Bison
Valve, L.L.C. ("Bison Valve") we recognized charges of $324,000 and $311,000
related to losses incurred by Bison Valve for the three months ended July 31,
1998 and October 31, 1998, respectively. These charges reflect the application
of the equity method of accounting to our convertible loan to Bison Valve.
While we believe that we have created the infrastructure necessary to
support a nationwide cylinder exchange program, development of this
infrastructure has resulted in an accumulated deficit of approximately $21.6
million as of October 31, 1998. This has resulted in a net operating loss
carryforward for federal income tax purposes of approximately $19.0 million
which we can use to offset future taxable income, if any. Based on our history
of operating losses, we have recorded a valuation allowance to the full extent
of our net deferred tax assets.
18
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, the percentage
relationship of certain items from our statement of operations to net sales.
Due to the change in our business model and our rapid sales growth, any trends
reflected by the following table may not be indicative of future results.
<TABLE>
<CAPTION>
Percentage of Net Sales
-------------------------------------------
Three
Months
Ended
Fiscal Year Ended October 31,
---------------------------- -------------
July 28, July 31, July 31,
1996 1997 1998 1997 1998
-------- -------- -------- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales........................... 100.0 % 100.0 % 100.0 % 100.0 % 100.0%
Cost of sales....................... 96.2 81.9 75.0 76.2 75.2
----- ----- ----- ----- -----
Gross margin........................ 3.8 18.1 25.0 23.8 24.8
----- ----- ----- ----- -----
Operating expenses (income):
Sales and marketing............... 13.5 13.7 8.7 13.6 7.2
General and administrative........ 38.9 21.3 12.7 20.4 12.0
Lease income, net................. (1.1) (1.0) (0.3) 0.2 (2.3)
Depreciation and amortization..... 10.6 6.1 4.7 5.9 5.7
Nonrecurring charges.............. 16.5 6.8 1.7 6.8 --
----- ----- ----- ----- -----
Total operating expenses, net... 78.4 46.9 27.5 46.9 22.6
----- ----- ----- ----- -----
Loss from operations................ (74.6) (28.8) (2.5) (23.1) 2.2
Other expense (income):
Interest expense.................. 17.8 11.7 6.2 10.5 0.4
Loss on investee.................. -- -- 1.2 -- 3.4
Other income, net................. (2.0) (1.3) (0.9) (1.2) (0.8)
----- ----- ----- ----- -----
Net loss........................ (90.4)% (39.2)% (9.0)% (32.4)% (0.8)%
===== ===== ===== ===== =====
As a percentage of net sales:
Net sales--distributors........... 29.0 % 91.9 % 100.0 % 100.0 % 100.0%
Net sales--direct................. 71.0 % 8.1 % -- % -- % -- %
Gross margin:
Gross margin of net sales--
distributors..................... 24.1 % 24.4 % 25.0 % 23.8 % 24.8%
Gross margin of net sales--
direct........................... (4.4)% (53.9)% -- % -- % -- %
</TABLE>
Comparison of Three Months Ended October 31, 1997 and 1998
Beginning in the quarter ended October 31, 1998, we have included the
financial information of USA Leasing, an affiliate of ours which offers
cylinder financing to our distributors, in our consolidated financial
statements on a consolidated basis.
Net sales. Net sales increased 122.8% from approximately $4.1 million for
the three months ended October 31, 1997 to approximately $9.2 million for the
three months ended October 31, 1998. The increase in net sales was due
primarily to the increase in the number of retail locations placed in service
and increased sales volume at existing locations, with a corresponding increase
in cylinder transactions during the period. The installed base of retail
locations increased 130% from 5,228 locations at October 31, 1997 to
approximately 12,000 locations at October 31, 1998. The number of cylinder
transactions increased 88% from approximately 375,000 units in the three months
ended October 31, 1997 to approximately 705,000 units in the three months ended
October 31, 1998. Net sales during the first quarter of fiscal 1999 did not
include the $6.5 million in proceeds from our sale of cylinder inventories to
USA Leasing. See "--Liquidity and Capital Resources." In anticipation of the
sale of cylinders to USA Leasing, or another entity which would lease the
cylinders to our distributors, we acquired the cylinders primarily from
distributors and, to a lesser extent, through our acquisition of competing
cylinder exchange providers. The sale of cylinders to USA Leasing resulted in
an increase to cash and notes payable and the transfer of cylinders to long-
term assets held under lease.
19
<PAGE>
Gross margin. Gross margin increased from 23.8% in the three months ended
October 31, 1997 to 24.8% in the three months ended October 31, 1998. This
improvement was primarily due to a price increase on all cylinder transactions
which became effective in April 1998 and to a lesser extent due to a shift in
sales to accounts with higher margins. A change in the transaction mix of
exchanges, upgrades and sales also had a positive impact on gross margin. Our
gross margin for the first quarter of fiscal 1999 did not include any effect
from our purchase of cylinder inventories from distributors and competing
cylinder exchange providers or the sale of cylinder inventories to USA Leasing.
Our net sales consisted solely of revenues from cylinder transactions and our
cost of sales consisted primarily of the per transaction payments we made to
our distributors for servicing our accounts and to a lesser extent, non-cash
charges associated with options under our Distributor Option Plan. See
"Management--Distributor Option Plan."
Sales and marketing expenses. Sales and marketing expenses increased
18.6% from approximately $564,000 in the three months ended October 31, 1997 to
approximately $669,000 in the three months ended October 31, 1998, but
decreased as a percentage of net sales from approximately 13.6% in the three
months ended October 31, 1997 to approximately 7.2% in the three months ended
October 31, 1998. The increase in sales and marketing expenses was due
primarily to approximately $130,000 of additional compensation and travel
related costs for additional sales persons offset by approximately $30,000 in
reduced commissions to external sales representatives. This increase in our
internal sales force converted a portion of our variable sales and marketing
expenses to fixed costs. 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 our 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 30.8% from approximately $844,000 in the three months ended October
31, 1997 to approximately $1.1 million in the three months ended October 31,
1998, but decreased as a percentage of net sales from 20.4% in the three months
ended October 31, 1997 to 12.0% in the three months ended October 31, 1998. The
increase in general and administrative expenses was due primarily to additional
compensation costs, incremental costs associated with being a public company,
including investor relations and other professional fees, and, to a lesser
extent, other variable operating costs. The decrease in general and
administrative expenses as a percentage of net sales was due primarily to the
fact that a significant portion of our general and administrative expenses are
fixed and, as a result, general and administrative expenses increased at a
slower rate than net sales.
Lease income, net. Gross lease income increased from approximately
$116,000 for the three months ended October 31, 1997 to approximately $212,000
for the three months ended October 31, 1998, while gross rent expense for the
same periods decreased from approximately $124,000 to $0. The increase in lease
income was due to the addition of new retail locations resulting in an increase
in the number of cylinder displays leased to our distributors. The decrease in
rent expense was a result of our purchase of cylinder displays previously
leased under an operating lease facility.
Depreciation and amortization. Depreciation and amortization increased
from approximately $245,000 in the three months ended October 31, 1997 to
approximately $524,000 in the three months ended October 31, 1998. Depreciation
expense increased by approximately $206,000 from approximately $225,000 in the
three months ended October 31, 1997 to approximately $431,000 in the three
months ended October 31, 1998 primarily due to the increase in the number of
cylinder displays. This increase was due to our purchase of cylinder displays
which we previously leased under an operating lease facility and our ongoing
purchase of additional cylinder displays to support growth in our installed
base of retail locations. Our purchase of computer technology under capital
leases also impacted depreciation expense to a lesser extent. Amortization
expense increased by approximately $73,000 from $20,000 in the three months
ended October 31, 1997 to approximately $93,000 in the three months ended
October 31, 1998 primarily due to the increased amortization of intangibles
associated with a number of acquisitions.
Nonrecurring charges. We had no nonrecurring charges for the three months
ended October 31, 1998 and do not expect to incur any additional nonrecurring
charges related to our transition to an independent distributor business model
from a vertically integrated business model. In the three
20
<PAGE>
months ended October 31, 1997, nonrecurring charges were approximately
$281,000, consisting primarily of the write-down of facilities and equipment
purchased to support the vertically integrated business model.
Interest expense. Interest expense decreased from approximately $434,000
in the three months ended October 31, 1997 to approximately $32,000 in the
three months ended October 31, 1998. The decrease in interest expense resulted
from our repayment of substantially all of our outstanding indebtedness in May
1998 with proceeds from our initial public offering. The interest expense in
the three months ended October 31, 1998 was a result of capital lease
obligations incurred primarily to acquire computer technology.
Loss on investee. Loss on investee was $311,000 for the three months
ended October 31, 1998 which reflects the application of the equity method of
accounting to our convertible loan to Bison Valve. A loss was recorded because
Bison Valve used the proceeds of our loan to fund losses incurred primarily in
researching, developing, marketing and producing an overfill prevention device
and other propane related products. As of October 31, 1998 we have recognized
charges for the entire principal balance of our convertible loan. We have
signed a letter of intent to acquire all intellectual property and other assets
of Bison Valve related to its overfill prevention device. The purchase price
for these assets is $1.1 million of common stock, warrants to purchase 100,000
shares of common stock and cancellation of Blue Rhino's $635,000 convertible
loan to Bison Valve. Substantially all of the $1.1 million will be accounted
for as a patent on Blue Rhino's books and amortized over the remaining life of
the patent.
Other income, net. Other income, net increased from approximately $51,000
in the three months ended October 31, 1997 to approximately $70,000 in the
three months ended October 31, 1998. The increase was primarily due to
increased interest income from excess cash balances and various notes
receivable.
Comparison of Years Ended July 31, 1997 and 1998
Net sales. Net sales consist of sales from our independent distributor
network ("net sales--distributors") and to a lesser extent from our previous
vertically integrated distribution operations ("net sales--direct"). During the
third quarter of fiscal 1997, we completed our transition to our independent
distributor business model and, as a result, all of our net sales during fiscal
1998 were net sales--distributors. Net sales increased 92.6% from approximately
$14.2 million for fiscal 1997 to approximately $27.4 million for fiscal 1998.
Net sales--distributors increased 109.6% from approximately $13.1 million in
fiscal 1997 to approximately $27.4 million in fiscal 1998. The increase in net
sales--distributors was due primarily to the increase in the number of retail
locations placed in service and the corresponding increase in the number of
cylinder transactions during the period. The installed base of retail locations
increased 116.0% from approximately 4,400 locations at the end of fiscal 1997
to approximately 9,500 locations at the end of fiscal 1998. The number of
cylinder transactions increased 77.6% from approximately 1.2 million units in
fiscal 1997 to approximately 2.2 million units in fiscal 1998.
Gross margin. Gross margin increased from 18.1% in fiscal 1997 to 25.0%
in fiscal 1998. This increase was due to the shift in net sales from a
vertically integrated business model to an independent distributor business
model. With respect to net sales--distributors, gross margin increased from
24.4% in fiscal 1997 to 25.0% in fiscal 1998. This increase was due to a shift
in the mix of cylinder transactions with lower margin cylinder sales accounting
for a smaller percentage of net sales in fiscal 1998 than in fiscal 1997, as
well as a price increase which became effective in April 1998 on all cylinder
transactions.
Sales and marketing expenses. Sales and marketing expenses increased
22.7% from approximately $2.0 million in fiscal 1997 to approximately $2.4
million in fiscal 1998 but decreased as a percentage of net sales from 13.7% in
fiscal 1997 to 8.7% in fiscal 1998. The increase in sales and marketing expense
was due primarily to additional commissions to outside brokers, which were
based on a percentage of net sales. The decrease in sales and marketing
expenses as a percentage of net sales was due primarily to the fact that a
significant portion of the compensation of our sales and marketing staff is
fixed and, as a result, sales and marketing expenses increased at a slower rate
than net sales.
21
<PAGE>
General and administrative expenses. General and administrative expenses
increased 18.8% from approximately $3.0 million in fiscal 1997 to approximately
$3.5 million in fiscal 1998 but decreased as a percentage of net sales from
21.3% in fiscal 1997 to 12.7% in fiscal 1998. The increase in 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 our general and
administrative expenses are fixed and, as a result, general and administrative
expenses increased at a slower rate than net sales.
Lease income, net. Gross lease income increased from approximately
$295,000 in fiscal 1997 to $566,000 in fiscal 1998, while gross rent expense
for the same periods increased from approximately $152,000 to $485,000. The
increase in lease income was due to the implementation of a plant facility and
equipment lease with a distributor during the second quarter of fiscal 1997 and
the addition of new retail locations resulting in an increase in the number of
cylinder displays under lease. The increase in rent expense was due primarily
to the increase in the number of cylinder displays purchased under an operating
lease facility which was initiated in the first quarter of fiscal 1997. We
purchased all of the assets leased pursuant to that facility with a portion of
the proceeds from our May 1998 initial public offering and concurrently
terminated the facility.
Depreciation and amortization. Depreciation and amortization increased
from approximately $873,000 in fiscal 1997 to approximately $1.3 million in
fiscal 1998. Depreciation expense increased by approximately $337,000 from
approximately $764,000 in fiscal 1997 to approximately $1.1 million in fiscal
1998 principally due to the purchase of additional cylinder display panels and
the acquisition of computer technology under capital leases. Amortization
expense increased by approximately $68,000 from approximately $109,000 in
fiscal 1997 to approximately $177,000 in fiscal 1998 primarily due to increased
goodwill amortization associated with the acquisitions of retail locations from
local and regional cylinder exchange providers.
Nonrecurring charges. Nonrecurring charges decreased from approximately
$970,000 in fiscal 1997 to approximately $476,000 for fiscal 1998. The
nonrecurring charges were associated with our transition from a vertically
integrated business model to an independent distributor business model and
consisted primarily of the write-down of facilities and equipment purchased to
support the vertically integrated business model.
Interest expense. Interest expense remained relatively constant at
approximately $1.7 million for fiscal 1997 and 1998. Interest expense was
attributed to accretion of interest on senior discount notes, additional
borrowings under lines of credit and, to a lesser extent, borrowings from
stockholders. However, these debts were paid in full in May 1998 with a portion
of the proceeds from our initial public offering, eliminating additional
interest expense with respect to these obligations.
Loss on investee. Loss on investee was $324,000 in fiscal 1998 which
reflects the application of the equity method of accounting to our convertible
loan to Bison Valve. A loss was recorded because Bison Valve used the proceeds
of our loan to fund losses incurred primarily in researching, developing,
marketing and producing an overfill prevention device and other propane related
products. We have signed a letter of intent to acquire all intellectual
property and other assets of Bison Valve related to its overfill prevention
device.
Other income, net. Other income, net increased from approximately
$186,000 in fiscal 1997 to approximately $234,000 in fiscal 1998. Other income,
net consisted 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. Net sales increased 72.9% from approximately $8.2 million for
fiscal 1996 to approximately $14.2 million for fiscal 1997. Net sales--
distributors increased from approximately $2.4 million for fiscal 1996 to
approximately $13.1 million for fiscal 1997. The increase in net sales--
distributors was due primarily to our transition from a vertically integrated
business model to an
22
<PAGE>
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 fiscal 1997. The installed base of retail locations
increased 47.6% from approximately 3,000 locations at the end of fiscal 1996 to
approximately 4,400 locations at the end of fiscal 1997. The number of cylinder
transactions increased 61.1% from approximately 769,000 units for fiscal 1996
to approximately 1.2 million units for fiscal 1997.
Gross margin. Gross margin increased from 3.8% in fiscal 1996 to 18.1% in
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 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 net sales increased from 13.5%
for fiscal 1996 to 13.7% for fiscal 1997. The increase in sales and marketing
expenses was due primarily to additional compensation, promotional and
advertising expenditures.
General and administrative expenses. General and administrative expenses
decreased 5.3% from approximately $3.2 million for fiscal 1996 to approximately
$3.0 million for fiscal 1997, and decreased as a percentage of net sales from
38.9% for fiscal 1996 to 21.3% for fiscal 1997. The decrease in general and
administrative expenses was due to the transition to the independent
distributor business model.
Lease income, net. Lease income, net increased 60.7% from $89,000 for
fiscal 1996 to approximately $143,000 for fiscal 1997. The increase in lease
income, net was due to the implementation of certain plant facilities and
equipment leases with distributors during the fourth quarter of fiscal 1996 and
the second quarter of fiscal 1997 and the addition of new retail locations
resulting in an increase in the number of cylinder displays under lease.
Depreciation and amortization. Depreciation and amortization increased
from approximately $868,000 for fiscal 1996 to approximately $873,000 for
fiscal 1997.
Nonrecurring charges. Nonrecurring charges were associated with our
transition to the independent distributor model and decreased from
approximately $1.4 million during fiscal 1996, the first year of the business
model transition, to approximately $970,000 during 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
our bank credit facility.
Other income, net. Other income, net increased from approximately
$168,000 for fiscal 1996 to approximately $186,000 for fiscal 1997.
SELECTED QUARTERLY RESULTS OF OPERATIONS
We have experienced and expect to continue to experience significant
seasonal fluctuations in our net sales and net income (loss). Our 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. Our rate of establishing new retail locations and expenses incurred in
anticipation of increased sales also cause quarterly fluctuations in our
results of operations. Accordingly, the results of operations in any quarter
will not necessarily be indicative of the results that we may achieve for a
full fiscal year or any future quarter. See "Risk Factors--Seasonal and
Quarterly Fluctuations in Our Business," "--Uncertainty of Continued Rapid
Growth" and "--Ability of Distributors and Management to Manage Growth in Sales
and Number of Retail Locations."
23
<PAGE>
The following table sets forth selected unaudited quarterly financial
information and operating data for our most recently completed five fiscal
quarters. The information for the three months ended October 31, 1998 includes
financial information of USA Leasing, an affiliated company. This information
has been prepared on the same basis as the Consolidated Financial Statements
and includes, in the opinion of our management, all normal and recurring
adjustments necessary for a fair statement of the quarterly results for the
periods. Given our limited operating history, seasonal demand for our product
and our dependence upon continuing market acceptance of cylinder exchange by
retailers and consumers, significant variation may occur between our operating
results for any quarters. The operating results and data for any quarter are
not necessarily indicative of the results for future periods.
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------
October 31, January 31, April 30, July 31, October 31,
1997 1998 1998 1998 1998
----------- ----------- --------- -------- -----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net sales............... $ 4,140 $ 4,174 $ 5,694 $13,364 $9,222
Cost of sales........... 3,155 3,216 4,322 9,832 6,934
------- ------- ------- ------- ------
Gross profit........ 985 958 1,372 3,532 2,288
------- ------- ------- ------- ------
Operating expenses
(income):
Sales and marketing... 564 463 563 802 669
General and
administrative....... 844 863 906 848 1,104
Lease income, net..... 8 15 18 (122) (212)
Depreciation and
amortization......... 245 270 331 432 524
Nonrecurring charges.. 281 127 99 (31) --
------- ------- ------- ------- ------
Total operating
expenses, net...... 1,942 1,738 1,917 1,929 2,085
------- ------- ------- ------- ------
Income (loss) from
operations............. (957) (780) (545) 1,603 203
Other expense (income):
Interest expense...... 434 496 566 211 32
Loss on investee...... -- -- -- 324 311
Other income, net..... (51) (53) (44) (86) (70)
------- ------- ------- ------- ------
Net income (loss)....... $(1,340) $(1,223) $(1,067) $ 1,154 $ (70)
======= ======= ======= ======= ======
Income (loss) applicable
to common stockholders
(1).................... $(1,447) $(1,484) $(1,280) $ 1,140 $ (70)
======= ======= ======= ======= ======
Earnings (loss) per
common share:
Basic................. $ (0.81) $ (0.83) $ (0.72) $ 0.18 $(0.01)
======= ======= ======= ======= ======
Diluted............... $ (0.81) $ (0.83) $ (0.72) $ 0.17 $(0.01)
======= ======= ======= ======= ======
Weighted average common
shares used in
computing earnings
(loss) per common
share:
Basic................. 1,779 1,779 1,779 6,407 7,631
======= ======= ======= ======= ======
Diluted (2)........... 1,779 1,779 1,779 6,611 7,631
======= ======= ======= ======= ======
<CAPTION>
Percentage of Net Sales
--------------------------------------------------------
Three Months Ended
--------------------------------------------------------
October 31, January 31, April 30, July 31, October 31,
1997 1998 1998 1998 1998
----------- ----------- --------- -------- -----------
<S> <C> <C> <C> <C> <C>
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........... 76.2 77.1 75.9 73.6 75.2
------- ------- ------- ------- ------
Gross margin........ 23.8 22.9 24.1 26.4 24.8
Operating expenses
(income):
Sales and marketing... 13.6 11.1 9.9 6.0 7.2
General and
administrative....... 20.4 20.6 15.9 6.3 12.0
Lease income, net..... 0.2 0.4 0.3 (0.9) (2.3)
Depreciation and
amortization......... 5.9 6.5 5.8 3.2 5.7
Nonrecurring charges.. 6.8 3.0 1.8 (0.2) --
------- ------- ------- ------- ------
Total operating
expenses, net...... 46.9 41.6 33.7 14.4 22.6
------- ------- ------- ------- ------
Income (loss) from
operations............. (23.1) (18.7) (9.6) 12.0 2.2
Other expense (income):
Interest expense...... 10.5 11.8 9.9 1.6 0.4
Loss on investee...... -- -- -- 2.4 3.4
Other income, net..... (1.2) (1.2) (0.8) (0.6) (0.8)
------- ------- ------- ------- ------
Net income (loss)....... (32.4)% (29.3)% (18.7)% 8.6% (0.8)%
======= ======= ======= ======= ======
</TABLE>
- --------
(1) Equals net income (loss) less dividends on our Old Preferred Stock of $636
for fiscal 1996, $687 for fiscal 1997, $596 for fiscal 1998, $107 for the
three months ended October 31, 1997 and $0 for the three months ended
October 31, 1998.
(2) For the three months ended October 31, 1997, January 31, 1998, April 30,
1998 and October 31, 1998, the weighted average number of shares
outstanding excludes the effect of the exercise of all outstanding stock
options and warrants and the conversion of the Old Preferred Stock into
common stock because such exercise and conversion would be anti-dilutive.
24
<PAGE>
Liquidity and Capital Resources
Our primary sources of funds have been the issuance of stock, most
recently through our initial public offering in May 1998, and the incurrence of
debt. We had positive working capital of approximately $7.5 million as of
October 31, 1998, which was primarily the result of available proceeds from our
initial public offering and cash provided by operations.
Net cash provided by operations was approximately $262,000 for the three
months ended October 31, 1998, while net cash used in operations was
approximately $459,000 for the three months ended October 31, 1997. Net cash
used in operations was approximately $4.9 million, $2.2 million and $5.2
million for fiscal 1998, fiscal 1997 and fiscal 1996, respectively. In the
three months ended October 31, 1998, cash provided by operations resulted
primarily from a decrease in accounts receivable due to the seasonal nature of
our business. In the three months ended October 31, 1998, cash used in
operations resulted primarily from approximately $522,000 of advances on
certain products and services, approximately $420,000 of equipment acquired
through acquisitions and held for resale and a decrease in accounts payable due
to the seasonal nature of our business. In the three months ended October 31,
1997, cash provided by operations resulted primarily from a seasonal decrease
in accounts receivable and cash used in operations resulted from a net loss and
a seasonal decrease in accounts payable. In fiscal 1998, fiscal 1997 and fiscal
1996, cash provided by operations resulted primarily from increases in accounts
payable and cash used in operations resulted primarily from net losses and
increases in accounts receivable.
Net cash used in investing activities was approximately $8.3 million in
the three months ended October 31, 1998 and approximately $72,000 for the three
months ended October 31, 1997. Net cash used in investing activities was
approximately $6.0 million for fiscal 1998 and $1.4 million for fiscal 1996
while net cash provided by investing activities was approximately $342,000 for
fiscal 1997. The primary components of cash used in investing activities has
included acquisitions of cylinders from distributors, acquisitions of cylinder
exchange accounts and related assets, as well as investments in property and
equipment including cylinder displays and computer technology. Additionally, in
fiscal 1998 we loaned $635,000 to Bison Valve. We are currently in the process
of acquiring all intellectual property and other assets of Bison Valve related
to its overfill prevention device. The primary components of cash provided by
investing activities has included collections on notes receivable and proceeds
from the sale of property, equipment and cylinders as part of our transition to
an independent distributor business model.
Net cash provided by financing activities was approximately $6.2 million
for the three months ended October 31, 1998, approximately $519,000 for the
three months ended October 31, 1997, $16.5 million for fiscal 1998, $1.0
million for fiscal 1997 and $7.5 million for fiscal 1996. The primary
components of cash provided by financing activities included the net proceeds
of our initial public offering in May 1998, loans from four stockholders in
January 1998, the issuance of 10.5% senior discount notes in October 1995 and
bank borrowings, including $6.5 million in proceeds from USA Leasing's loan
from NationsBank, N.A. ("NationsBank") in October 1998. The cash used in
financing activities included payments on various notes payable and capital
lease obligations.
In connection with our initial public offering, we issued a total of
3,105,000 shares of common stock and received net proceeds of approximately
$36.4 million. We used approximately $29.9 million of the net proceeds from our
initial public offering to repay principal and interest on indebtedness. We
used approximately $4.2 million of the net proceeds to acquire assets,
including approximately 1,350 new accounts, from twelve local and regional
cylinder exchange providers. In addition, we used approximately $1.1 million of
the net proceeds to purchase property and equipment and approximately $500,000
for general corporate purposes.
On October 30, 1998, we sold substantially all of our grill cylinder
inventories to USA Leasing for $6.5 million. In anticipation of establishing a
cylinder financing facility for our distributors, we had acquired approximately
$4.6 million of these cylinders from them during our first quarter of fiscal
1999. We believed that a prospective financing source would prefer to acquire
the cylinders in a single
25
<PAGE>
transaction, rather than from our distributors in multiple transactions. After
discussing the proposed facility with an independent leasing company,
NationsBank agreed to provide USA Leasing with a $6.5 million credit facility
(the "USA Leasing Credit Facility"), the proceeds of which were used to
purchase the cylinders from Blue Rhino. Under the terms of the USA Leasing
Credit Facility, we were required to guarantee 80% of the facility and each of
the owners of USA Leasing were required to guarantee 5% of the facility. USA
Leasing is owned 24% each by Messrs. Prim and Filipowski and 26% each by Mr.
Craig Duchossois, a director and stockholder of the Company, and Mr. Peer
Pedersen, a stockholder of the Company and a partner of Pedersen & Houpt, P.C.,
our legal counsel. NationsBank has a first priority lien and we have a
subordinate lien on all of the assets of USA Leasing. The sale of cylinders to
USA Leasing was approved unanimously by our directors who had no financial
interest in the transaction. See "Risk Factors--Potential Conflicts of Interest
in Enforcing Remedies Against Our Affiliates," "Management--Compensation
Committee Interlocks and Insider Participation" and "Certain Transactions."
In addition, during November and December 1998, the Company acquired and
sold approximately $3.4 million of cylinders to USA Leasing at no gain or loss.
USA Leasing has entered into operating lease agreements with the Company's
independent distributors to lease the cylinders at 1% per month of the initial
cylinder value.
In December 1998, we entered into a $12.0 million credit facility with
NationsBank (the "Bank Credit Facility") which includes a $7.0 million
revolving line of credit and a $5.0 million acquisition facility. Our ability
to borrow under the Bank Credit Facility is reduced by an amount equal to our
contingent liability pursuant to our guarantee of USA Leasing's credit facility
with NationsBank. Our contingent liability at December 31, 1998 was
approximately $8.7 million. As we achieve certain performance measures, our
availability under the Bank Credit Facility will increase. The Bank Credit
Facility replaces a prior facility we had with NationsBank and is
collateralized by a lien on substantially all of our assets. The Bank Credit
Facility requires us to meet certain covenants, including minimum net worth and
cash flow. The loans under the Bank Credit Facility bear interest at a maximum
rate of LIBOR plus 2.25%.
Concurrently with the extension of our Bank Credit Facility, NationsBank
also increased its credit facility with USA Leasing to $13 million. We have
guaranteed 80% of USA Leasing's obligations under this facility. Currently, we
are not aware of any defaults under USA Leasing's credit facility with
NationsBank or under any cylinder lease between USA Leasing and our
distributors. However, we could be required to fund up to 80% of USA Leasing's
obligations to NationsBank in the event of a default.
We currently lease handheld computers and various other computer
equipment from three lessors under the terms of three master leases for an
aggregate annual rent of approximately $500,000. We have an option to purchase
the handheld computers for $1.00 per handheld unit at the end of each lease
term. Under each of the three handheld computer leases, we are responsible for
insurance, maintenance and taxes on the leased equipment.
We currently lease our offices under a lease from Rhino Real Estate, LLC,
an entity affiliated with two of our directors. Pursuant to the terms of the
lease, we pay annual rent of approximately $213,000, plus our allocable share
of all taxes, utilities and maintenance. The lease terminates on December 31,
2001 with an option to renew for one three-year term.
We anticipate our total capital expenditures for fiscal 1999 (excluding
acquisitions) will be approximately $5.5 million and will relate primarily to
cylinder displays and computer technology. Our capital expenditure and working
capital requirements in the foreseeable future will change depending on our
rate of expansion, operating results and any other adjustments in our operating
plan as needed in response to competition, acquisition opportunities or
unexpected events. We believe that existing
26
<PAGE>
borrowing capacity under the Bank Credit Facility, cash provided by operations
and the net proceeds from this offering will be sufficient to meet our working
capital requirements in the near term. However, we offer no assurance that we
will not seek or require additional capital in the future as a result of
expansion or otherwise.
Impact of New Accounting Pronouncements
Statement of Financial Accounting Standards No. 130 ("SFAS No. 130")
establishes standards for reporting and display of comprehensive income and its
components (revenues, gains, expenses, losses) in a full set of general purpose
financial statements and is effective for fiscal years beginning after December
15, 1997. We do not expect SFAS No. 130 to have any impact on our consolidated
financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131"). SFAS No. 131 requires public business enterprises to adopt
its provisions for periods beginning after December 15, 1997, and to report
certain information about operating segments in complete sets of financial
statements of the enterprise and in condensed financial statements of interim
periods issued to shareholders. We do not expect SFAS No. 131 to have any
impact on our consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and hedging activities. It also requires entities to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. We do not
expect SFAS No. 133 to have any impact on our consolidated financial statements
as we do not invest in any derivative instruments or engage in any hedging
activities.
Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities" ("SOP 98-5") defines such costs and requires that they be expensed
as incurred. This pronouncement is effective for financial statements for
fiscal years beginning after December 15, 1998 although earlier application is
encouraged. We do not expect SOP 98-5 to have a significant impact on our
consolidated financial statements.
Year 2000 Compliance
Year 2000 issues are the result of computer programs that were written
using two digits rather than four to define the applicable year. For example,
date sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations
causing disruptions of operations, including, among other material adverse
consequences, a temporary inability to process transactions or engage in
similar normal business activities. We depend on our MIS to process orders,
manage inventory and accounts receivable, maintain distributor and customer
information, assist distributors in delivering products on a timely basis and
to maintain cost-efficient operations. See "Business--Management Information
Systems."
Our State of Readiness for Year 2000. We began evaluating our MIS for
Year 2000 compliance in January 1997. Since that time we have developed a Year
2000 compliance policy encompassing employee education, testing, progress
reporting, external impact plans and contingency plans. Our Chief Information
Officer directs our Year 2000 compliance policy and oversees the remediation
and testing of our MIS. As of December 31, 1998, we believe that we are
approximately 70% Year 2000 compliant. Based on our current assessment, we
believe that we will be 100% Year 2000 compliant by March 31, 1999. However, if
our modifications, testing and solicitations of third party compliance are not
made on a timely basis or we do not resolve our Year 2000 issues, these issues
could have a negative effect on our business.
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We have assessed the Year 2000 readiness of each of our core MIS and
remediated these systems as necessary. Our core MIS include Online Sales
Account Information System ("OASIS"), Platinum for Windows, Electronic Data
Interchange ("EDI") and Blue Rhino Electronic Accounting System ("BREAS").
OASIS was Year 2000 compliant when it was implemented in February 1998,
Platinum for Windows was updated in March 1998 to be Year 2000 compliant, EDI
was upgraded in December 1998 to be Year 2000 compliant and BREAS was upgraded
in October 1998 to be Year 2000 compliant. In addition, we have engaged
Integrated Solutions International, L.L.C. to, among other things, assist us in
exchanging our distributors' handheld computer units for Year 2000 compliant
units. We expect to have all of our distributors using Year 2000 compliant
handheld units by March 31, 1999. We are developing integrated test procedures
in which all of our MIS are simultaneously tested for Year 2000 compliance. We
expect these integrated tests to continue throughout 1999.
Historical and Estimated Costs. We have not established a separate Year
2000 compliance budget and do not expect to do so. As of December 31, 1998, we
had incurred approximately $8,000 in Year 2000 compliance costs. We currently
anticipate that the implementation of our Year 2000 compliance policy will cost
approximately $35,000, all of which will be expensed as incurred. Although we
can give no assurances, we do not expect future costs related to Year 2000
compliance to negatively affect our business in any material way. Costs are
based on current estimates and actual results may vary significantly from such
estimates.
Most Reasonably Likely Worst Case Scenario. The most reasonably likely
worst case Year 2000 scenario we face is an interruption of our business
operations caused by the failure of third parties with which we have a material
relationship to achieve Year 2000 compliance. The consequences of a third party
failure are unknown, but could have a negative effect on our business. We are
considering several contingency plans to address possible business
interruptions caused by a non-compliant third party. Possible contingency plans
include using alternate service providers and using a manual payment and
collection system. We expect that our contingency plans will be developed by
May 31, 1999. In addition, in an effort to protect ourselves and increase the
awareness of third parties whose failure to comply could negatively affect our
business, we are seeking to obtain certifications from them that they are Year
2000 compliant.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk related to changes in interest rates on
borrowings under our Bank Credit Facility. Our Bank Credit Facility bears
interest based on LIBOR. However, because we have no balance on our Bank Credit
Facility, we do not believe this risk will be material.
We have no derivative financial instruments or derivative commodity
instruments in our cash and cash equivalents and investments. We invest our
cash and cash equivalents and investments in investment grade, highly liquid
investments consisting of money market instruments, bank certificates of
deposit and overnight investments in commercial paper. We anticipate investing
our net proceeds from this offering in similar investment grade and highly
liquid investments pending their use as described in this prospectus. See "Use
of Proceeds."
All of our transactions are conducted and accounts are denominated in
United States Dollars and as such we do not currently have exposure to foreign
currency risk. Furthermore, we do not have any direct exposure to commodity
price risk.
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BUSINESS
Overview
We are the leading national provider of propane grill cylinder exchange
in the United States with Blue Rhino cylinder exchange displays at over 12,000
retail locations in 47 states and Puerto Rico. Cylinder exchange provides
consumers with a convenient means to exchange empty grill cylinders for clean,
safer, precision-filled cylinders. We offer our cylinder exchange at many major
home center/hardware, mass merchant, grocery and convenience stores including
Home Depot, Lowe's, Sears, WalMart, Kroger and Kwik Shop. We partner with
retailers and independent distributors to provide consumers with a nationally
branded alternative to traditional grill cylinder refill. We dedicate our
efforts and capital to brand development, value-added marketing, customer
service and management information systems ("MIS") while our 53 independent
distributors make the investments in the vehicles and refilling and
refurbishing equipment necessary to operate cylinder exchange businesses.
Cylinder exchange is a relatively new retail concept. We believe that
consumer awareness of the benefits of cylinder exchange will increase as it
becomes more widely available. Furthermore, we estimate there are approximately
225,000 potential cylinder exchange locations in our target markets. During the
twelve months ended October 31, 1998, our net sales increased approximately
105% compared to the twelve months ended October 31, 1997 to approximately
$32.5 million, primarily as a result of the growth of sales at existing
locations and the addition of over 6,700 new retail locations.
Our objective is to further strengthen our position as the leading
national provider of cylinder exchange. To achieve this objective, the key
elements of our strategy are:
. Promoting the Blue Rhino brand and driving consumer awareness of
cylinder exchange
. Expanding existing retailer relationships by opening new locations
and increasing sales at existing locations
. Adding new retailer relationships
. Leveraging distributors' infrastructure by adding new retail
locations within their territories
. Leveraging our corporate infrastructure to increase profitability
. Pursuing strategic account acquisitions from other cylinder exchange
providers
. Developing new products and services related to propane use and
backyard living, such as patio heaters and the related cylinder
exchange service
Industry Background
Barbecue Grill Market. As reported in the BIA study, the popularity of
outdoor barbecuing continues to grow driven by consumer interest in 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 propane grill sales now exceeding the combined sales of
charcoal, natural gas and electric grills. 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. Approximately 68% of backyard
propane grill owners use their grills throughout the year. According to the BIA
study, 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 the BIA study's estimate that there are 69 million cylinder
transactions per year, we estimate the annual retail market for grill cylinder
refill to be approximately $1 billion.
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 are typically more accessible and have longer business hours, making
them more convenient than propane filling stations. As cylinder exchange
becomes more widely available, we believe consumers will prefer it to
refilling, which
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often involves traveling to a remote location and waiting for a refill. Growing
consumer acceptance of cylinder exchange is reflected in estimates derived from
the BIA study that the percentage of propane grill owners using cylinder
exchange increased from less than 10% in 1995 to 21% in 1997.
The grill cylinder exchange industry is highly fragmented with numerous
regional and local distributors serving less than 500 locations each. We
believe this fragmentation results in part from the relative newness of
cylinder exchange and the 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, a propane distributor must make investments in refurbishing
equipment, vehicles, cylinder displays and grill cylinders not required in its
traditional propane business. Finally, to properly account for exchange,
upgrade and sale transactions, a propane distributor must invest in
sophisticated MIS tailored to servicing retailers. We believe that
opportunities exist to expand through selective acquisitions of smaller
cylinder exchange businesses with established retail accounts.
Business Model
We have created a new paradigm for grill cylinder exchange which provides
the following benefits to consumers, retailers and distributors:
Consumers
. Convenient branded alternative to traditional cylinder refill
. Clean, safer product
. Access to consumer and product information (1-800-BLU-RINO and web
site)
Retailers
. High margin branded product
. Potential to increase customer traffic
. Improved use of exterior retail space
. Nationwide direct store delivery with automatic restocking
. Centralized billing and electronic inventory, invoicing and reporting
. Employee training
Distributors
. Access to major retail accounts
. Opportunity to sell a branded product in a growing market segment
. Service support such as sophisticated MIS, training and consolidated
purchasing
. Assistance in obtaining and maintaining local permits
. Provision of cylinder displays and access to cylinder leasing
programs
. Counter-seasonal complement to traditional propane business
Business Strategy
Promoting the Blue Rhino Brand and Driving Consumer Awareness of Cylinder
Exchange. Our branding efforts focus on developing and maintaining a brand
identity synonymous with a convenient, clean and safer product. We have created
a distinctive Blue Rhino brand name and logo which we prominently display on
cylinder sleeves and displays. We also plan 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. Our recognized brand also provides a platform to introduce new
Blue Rhino products to the backyard living category.
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Delivering Clean, Safer Cylinders at Convenient Locations. We believe
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. Our 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 we believe enhances retail sales and
consumer loyalty. In fiscal 1999, we will be adding our Fuelcheck(TM) indicator
to our cylinder sleeves to help consumers determine when to exchange their
cylinders.
Expanding Relationships with and Increasing Sales at Retailers. Our
relationships with major retailers such as Home Depot, Lowe's, Sears, WalMart,
Kroger and Kwik Shop allow us to place cylinders in a large number of
convenient, high traffic locations. We believe that our 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 us
a competitive advantage over traditional propane distributors. We believe there
are approximately 225,000 potential grill cylinder exchange locations in our
targeted markets of which we currently service more than 12,000, approximately
6,700 of which we added during the twelve months ended October 31, 1998. We
plan to continue to increase the number of new retail locations by adding
locations with existing retailers and developing relationships with new
retailers. Furthermore, we plan to continue increasing sales at existing retail
locations.
Leveraging National Distributor Network. Within the last three years, we
have established a network of 53 independent distributors serving 47 states and
Puerto Rico. Nine of these distributors are dedicated exclusively to developing
and providing Blue Rhino cylinder exchange in some of our key geographic
markets. We believe that our distributor network affords us the opportunity to
service approximately 90% of the cylinder exchange markets in the United
States. We plan to leverage this network by aggressively increasing each
distributor's market penetration through the addition of new retail locations.
Leveraging Corporate Infrastructure to Increase Profitability. We have
assembled a management, sales and administrative team and have developed
sophisticated MIS which we believe can support substantial growth in retail
locations and the introduction of new products and services without significant
expenditures on additional personnel or systems. With this infrastructure in
place, we believe that we can achieve higher profit margins as we increase our
sales. We were able to reduce our selling, general and administrative expenses
as a percentage of net sales for the twelve months ended October 31, 1998 to
19.6% from 33.4% in the preceding twelve month period.
Pursuing Strategic Account Acquisitions. The cylinder exchange industry
is highly fragmented. All participants, other than Blue Rhino, are either
regionally or locally focused. We believe that opportunities exist to expand
through selective acquisitions of smaller cylinder exchange businesses with
established retail accounts. We added approximately 3,350 retail locations in
the twelve months ended October 31, 1998 through 20 acquisitions with an
aggregate purchase price of approximately $8.8 million. See "Risk Factors--
Ability of Distributors and Management to Manage Growth in Sales and Number of
Retail Locations."
Developing and Marketing New Products and Services Related to Propane Use
and Backyard Living. We are seeking additional product opportunities which are
associated with or use propane cylinders or are otherwise associated with
backyard living. New products include patio heaters which are fueled by grill
cylinders. We also intend to begin offering grill cylinder exchange service for
patio heaters. We expect our entry into the patio heater market to afford us
opportunities to enhance our core cylinder exchange business while building the
Blue Rhino brand as a symbol of backyard living.
. Patio Heater Cylinder Exchange Service. In November 1998, we acquired
the patio heater accounts of Mr. Propane, located in Southern
California. Mr. Propane's business included placing cylinder displays
and patio heaters in restaurants, resorts, bars and other outdoor
commercial establishments. We intend to introduce patio heater
cylinder exchange service
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nationwide with our distributors servicing commercial heater accounts
in the same manner as they service retail locations in their area. We
believe that the patio heater cylinder exchange service will increase
demand for cylinder exchange and further leverage Blue Rhino's and
our distributors' existing infrastructure.
. Patio Heaters. We intend to market and sell a Blue Rhino branded
patio heater for commercial and backyard use through our retail
partners and distributors. We have developed a prototype patio heater
in conjunction with a heater manufacturer. We are currently
negotiating with manufacturers to produce both commercial and
consumer grade patio heaters. In addition to increasing demand for
cylinder exchange, we expect this product to further associate Blue
Rhino with backyard living in the minds of consumers.
. Empty Cylinders. In January 1999, we entered into a strategic
alliance with Manchester Tank Corporation to manufacture Blue Rhino
branded cylinders. We will also serve as a sales representative for
empty Manchester grill cylinders to be sold to our existing retailers
and distributors.
. Overfill Prevention Devices. National Fire Protection Association
guidelines require that all grill cylinders produced or recertified
after September 30, 1998 and all grill cylinders refilled after April
2002 must be fitted with an overfill prevention device valve. In
December 1998, we signed a letter of intent to purchase certain
assets of Bison Valve which designed an Underwriters Laboratories
approved overfill prevention device. The purchase price for all
intellectual property and other assets related to Bison Valve's
overfill prevention device is $1.1 million of common stock, warrants
to purchase 100,000 shares of common stock and cancellation of Blue
Rhino's $635,000 convertible loan to Bison Valve. We believe our
acquisition of certain assets of Bison Valve will help insure a
supply of overfill prevention device valves for our distributors
while allowing us to share in the unique market opportunity created
by these new requirements.
Blue Rhino Cylinder Exchange Program
The cylinder exchange process typically begins with a Blue Rhino
distributor replenishing a retail grill cylinder display. Upon delivery, the
distributor records the cylinder inventory into a handheld computer which
calculates the number and type of cylinder exchanges, upgrades and sales for
the location and creates a delivery ticket for the retailer. Distributors
routinely transfer this delivery and inventory information to Blue Rhino
electronically. We then prepare an invoice for each retailer which we
typically transmit in a customized electronic format compatible with the
retailer's existing systems. We collect invoiced amounts directly from the
retailers and in turn remit a fixed amount per cylinder transaction to our
distributors. We negotiate terms of payment with retailers which are generally
30 to 60 days from the date of invoice. We in turn remit payment to our
distributors on the fifteenth of each month for transactions occurring during
the previous month. The following graph illustrates the cylinder exchange
process:
[BLUE RHINO LOGO APPEARS HERE]
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Blue Rhino Brand Marketing
Our 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.
Our brand marketing efforts include the following initiatives:
Blue Rhino Cylinder Packaging. Blue Rhino cylinders are covered with a
distinctive and colorful RhinoTUFF(R) cylinder sleeve. The RhinoTUFF(R)
cylinder sleeve provides safety and use information and prominently displays
the Blue Rhino name and logo. The RhinoTUFF(R) sleeve also protects the
cylinders from damage during shipping and handling and from exposure to the
elements. In fiscal 1999, we will be adding our Fuelcheck(TM) indicator to our
cylinder sleeves to help consumers determine when to exchange their cylinders.
We believe that our 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 its lawn and garden department providing
"billboard" advertising for our products. We believe these cylinder displays
enhance consumer awareness of the Blue Rhino brand and reinforce the
association of Blue Rhino with convenient, clean and safer grilling.
Advertising and Promotions. We have selectively placed targeted broadcast
and print media advertising campaigns that focus on raising consumer awareness
of the Blue Rhino brand and cylinder exchange program. In addition, we offer
special promotions to encourage spare filled cylinder purchases. We are also
actively involved with consumer, trade and regulatory associations in an effort
to promote the growth of cylinder exchange. Ongoing Blue Rhino promotions
include our toll free number (1-800-BLU-RINO), our web site, co-operative
advertising programs and cooking and safety demonstrations.
Retailer Relationships
We target the following four categories of retailers for cylinder
exchange:
<TABLE>
<CAPTION>
Retail Category Major Accounts
---------------------------- -------------------------------
<S> <C>
Home Centers/Hardware Stores Home Depot, Lowe's, Sears
Mass Merchants WalMart, Kmart, Meijer
Grocery Stores Kroger, Food Lion, Winn Dixie
Convenience Stores Kwik Shop, SuperAmerica, Conoco
</TABLE>
Home Depot represented approximately 26% of our fiscal 1998 net sales and
approximately 25% of our net sales for the three months ended October 31, 1998.
Lowe's and WalMart each represented approximately 16% and 13% of our net sales
for the same periods. See "Risk Factors--Concentration of Revenues with a
Limited Number of Retailers."
Retailer Opportunity. We offer 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 using exterior retail space. In addition,
we offer the potential to increase retailers' sales of ancillary products
through increased traffic from repeat cylinder exchange customers and cross-
marketing initiatives with other barbecue and outdoor living products.
Account Set-Up. We actively assist distributors and retailers in
obtaining local permits to set up cylinder exchange programs and developing a
site plan for cylinder displays. The permitting process is generally completed
within 60 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, our customer service and training
personnel conduct in-store training and provide safety manuals to store
employees. See "Risk Factors--Varying Local Permitting Processes Affecting
Retail Locations" and "--Regulation of Propane."
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Account Service. Blue Rhino cylinder exchange is a turnkey program for
retailers. Our employees and distributors work together to set up new accounts,
train store employees, deliver the cylinders directly to retail locations,
maintain the cylinder displays and cylinder inventory and provide ongoing
marketing and sales support. Through our distributor network, we can install
and service the Blue Rhino program at retail locations nationwide.
Sales Support. Our retail sales organization is divided into four regions
and includes thirteen corporate sales executives supported by a network of
approximately 500 independent sales representatives and grocery brokers. This
sales force is responsible for selling the Blue Rhino program to targeted
retailers and developing value-added relationships with manufacturers of grills
and other barbecue-related products. Our sales managers analyze sales volume by
location and coordinate promotions to maximize sales opportunities.
Systems Support. Through the use of our electronic accounting software,
we provide accurate, timely customized invoices and can provide electronic
sales and inventory information to retailer home offices to relieve local store
managers of processing invoices. We are also capable of providing retailers
with detailed information regarding sales trends at each of their Blue Rhino
locations.
Distributor Network
In an effort to build a strong national cylinder exchange program, we
have sought to attract experienced, well-capitalized, safety conscious propane
distributors to service our target cylinder exchange markets nationwide. The
following map shows the location of and the territory served by our 53
distributors:
[MAP OF INDEPENDENT DISTRIBUTOR NETWORK]
A dedicated distributor's only line of business is servicing Blue Rhino
cylinder exchange customers while a non-dedicated distributor operates a
traditional propane or industrial gas business in addition to its Blue Rhino
cylinder exchange business.
Distributor Opportunity. Propane distributors have traditionally
generated a large part of their sales during cold weather months. We offer
distributors an attractive counter-seasonal propane business with access to
major retail accounts to sell a recognizable branded product in the growing
backyard living segment. We continually pursue new relationships and additional
locations with existing retail partners to
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increase the density of each distributor's territory. Our personnel are
experienced in regulatory matters and assist distributors in completing the
permitting and set-up process. Through our Rhino Services, L.L.C. subsidiary we
offer distributors a cooperative propane buying program and cylinder financing
program. We have also arranged for a cylinder leasing program for distributors
with USA Leasing, L.L.C. ("USA Leasing"), a company controlled by some of our
affiliates. USA Leasing leases cylinders to participating distributors for a
monthly rental fee of 1% of the initial purchase price of the cylinders.
Our distributors lease cylinder displays and sublease handheld computers
from us. The distributors lease cylinder displays from us for monthly rental
payments equal to 1% of the initial purchase price of the displays for the term
of the lease. The distributors are also responsible for maintenance, insurance
and risk of loss with respect to the leased cylinder displays. The cylinder
display leases may be terminated by either party on 60 days notice. The
distributors pay $1.00 per month for each handheld computer which they sublease
from us, which is approximately $139 less than the average monthly rent we pay
to our lessors for the handheld computers. The handheld computer subleases are
terminable by either party on 60 days notice.
Distributor Standards. We set standards for and continually monitor our
distributors' performance to ensure a high level of account service. We
encourage distributors to develop an infrastructure sufficient to:
. Complete customer installations within two weeks of receipt of all
necessary permits and governmental approvals
. Avoid stock-outs at all accounts serviced
. Resolve stock-outs within 48 hours
. Respond to retailers' emergency requests within 30 minutes
. Refurbish and, when necessary, recertify cylinders according to
prescribed standards
Distributor Selection Process. We have selectively identified and pursued
high quality distributors through direct contacts and industry trade forums. We
screen all distributor candidates by reviewing credit reports and safety
records and conducting management reference checks. As a result of our thorough
selection process, we have terminated only one distributor to date.
Distributor Services. We employ 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. We also employ 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, we have entered into distribution agreements with
nine distributors dedicated solely to providing Blue Rhino cylinder exchange.
Platinum Propane Holding, L.L.C. ("Platinum Propane"), through the five
distributors that it owns, serves the largest number of locations and generates
the most sales of all distributors. Platinum Propane serves our
South/Southeast, Chicago and Los Angeles markets. Ceramic Industries Inc.,
another dedicated distributor, serves the Houston and Dallas markets. The other
three dedicated distributors, Caribou Propane, Javelina Propane and Raven
Propane, serve the Pacific Northwest, Phoenix and New Jersey/Philadelphia
markets. See "Risk Factors--Potential Conflicts of Interest in Enforcing
Remedies Against Our Affiliates."
Agreements with Distributors. We have entered into distribution
agreements with each of our 53 distributors on substantially similar terms.
Under these agreements, each distributor must meet prescribed service standards
and maintain designated amounts of liability insurance naming us as an
additional insured party. The agreements typically run for terms of between
three and twenty years. We may terminate the agreements if a distributor does
not meet certain required service levels. Each agreement also includes a two-
year non-compete clause in the event the agreement is terminated or expires.
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In connection with our transition from a vertically integrated business
model to an independent distributor business model, we sold most of our
distribution assets to our independent distributors. In most of these sales the
distributor paid for the assets by delivering to us a promissory note requiring
monthly payments of principal and interest over 60 months and bearing 10.5%
interest. We have liens on the assets pursuant to security agreements which
contain standard representations and covenants. As of October 31, 1998, eight
distributors owed us in the aggregate approximately $462,000 for the purchase
of distribution assets from us.
Management Information Systems
We have made a substantial investment in our MIS which we believe
enhances our ability to serve retailers and helps to differentiate Blue Rhino
from other providers of cylinder exchange. Our technology uses highly
integrated, scalable software applications which cost-effectively support our
growing retail location base. Our systems also allow us to use historical data
to further enhance the execution, service and identification of new markets and
marketing opportunities. The primary components of our 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, we have developed and implemented a custom database we refer to as
OASIS (Online Account Sales Information System). This system facilitates the
exchange of information with distributors and allows us to develop a database
to track delivery and transaction statistics.
Distributor Level Technology. Each distributor is electronically linked
to our accounting and database systems which allow drivers to provide delivery,
inventory and invoicing information through handheld computers. This technology
enables us to provide retailers with accurate and timely inventory and invoices
and assists the distributor in avoiding location stock-outs.
Financial Systems. We use a custom software package to link the handheld
computers used by the distributors with our accounting and financial reporting
system which we refer to as BREAS (Blue Rhino Electronic Accounting Systems).
All delivery transaction information entered into the handheld computers is
uploaded routinely via this software where it is verified and transmitted to
our accounting system for invoice processing. Many retailers are invoiced via
EDI, eliminating paper processing of those transactions. We pay distributors
via electronic deposits to further minimize administrative costs. BREAS was
upgraded to be Year 2000 compliant in October 1998. In addition, we have
engaged Integrated Solutions International, L.L.C. to, among other things,
assist us in exchanging our distributors' handheld computer units for Year 2000
compliant units. However, any failure to complete this upgrade by January 1,
2000 could lead to a significant disruption in our ability to account for sales
and deliveries. "Risk Factors--Blue Rhino's Dependence on Management
Information Systems," "--Potential Negative Effect of Our Failure to Achieve
Year 2000 Compliance" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Compliance."
Competition
The grill cylinder refilling industry is highly fragmented and
competitive. Competition in our industry is based primarily upon convenience,
quality of product, service, historical relationships, perceived safety and
price. The BIA study states that 79% of the consumers who use propane grills
refill rather than exchange their cylinders. Accordingly, our primary
competition comes from the approximately 20,000 bulk refilling stations owned
and operated by propane dealers, as well as certain rental outlets,
recreational vehicle centers and hardware stores. Major propane providers, such
as AmeriGas Propane Partners, L.P., Cornerstone Propane Partners, L.P.,
Ferrellgas Propane Partners, L.P., Heritage Propane Partners, L.P. and Suburban
Propane Partners, L.P., could establish new or expand their existing cylinder
exchange businesses nationally. These major propane providers have greater
resources than we do and may be able to undertake more extensive marketing
campaigns and adopt more aggressive pricing policies than we can. We also
compete with numerous regional cylinder exchange
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providers, which typically have operations in a few states, and with local
cylinder exchange providers. If these competitors expand their cylinder
exchange programs or new competitors enter the market or grow to compete with
us on a national scale, our market share and gross margins could decrease.
Governmental Regulation
The storing and dispensing of propane is governed by guidelines published
by the National Fire Protection Association in Pamphlets 54 and 58. Recent
National Fire Protection Association initiatives include a requirement that all
grill cylinders placed in use or recertified after September 30, 1998 and all
grill cylinders refilled after April 2002 must be fitted with an overfill
prevention device valve. Our distributors are also governed by local laws and
regulations which vary by municipality and state. Typically, a distributor must
obtain permits from a local fire marshal for each propane sales location. Our
regional and corporate staffs attempt to assist the distributors in this
process whenever feasible. We play an active role in drafting model state
legislation through the National Propane Gas Association, an industry
association, which attempts to make state and local legislation uniform to
provide consumers, retailers and distributors with up to date safety
regulations. See "Risk Factors--Regulation of Propane" and "--Volatile Product;
Potential Product Liability."
Proprietary Rights
We have invested substantial time, effort and capital in establishing the
Blue Rhino brand and believe that our trademarks are an important part of our
business strategy. We have a registered trademark for the use of the Blue Rhino
logo, including the name, and the RhinoTUFF name and have trademark
applications pending for Tri-Safe, Endless Summer and Endless Summer Comfort.
While we 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 our trademarks or patents will be held valid if subsequently challenged
or that others will not claim rights in or ownership of our trademarks or
copyrights and other proprietary rights.
Litigation
In the ordinary course of our business, we are involved in certain
pending or threatened legal proceedings from time to time. In the opinion of
management, none of the legal proceedings currently pending or threatened will
have a material effect on our financial position or results of operations. See
"Risk Factors--Volatile Product; Potential Product Liability."
Employees
As of December 31, 1998, we had 60 employees, of whom 22 were engaged in
sales and marketing, 12 in distributor services, four in information systems
and 22 in administration and finance. We have not experienced any work
stoppages and believe we have good relations with our employees.
Facilities
Our headquarters are located in Winston-Salem, North Carolina in
facilities we lease from Rhino Real Estate, L.L.C., a company affiliated with
two of our directors. Pursuant to the terms of the lease, we pay annual rent of
approximately $213,000, plus our allocable share of all taxes, utilities and
maintenance. The lease terminates on December 31, 2001 and includes an option
to renew for one three-year term.
37
<PAGE>
MANAGEMENT
Executive Officers and Directors
Our executive officers and directors and their ages as of the date of
this prospectus are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Billy D. Prim (1).......... 43 Chairman of the Board, President
and Chief Executive Officer
Andrew J. Filipowski (1)... 48 Vice Chairman
Mark Castaneda............. 34 Chief Financial Officer, Secretary and Director
Kay B. Martin.............. 46 Vice President, Chief Information Officer
Richard E. Belmont......... 39 Vice President, Marketing
Joseph T. Culp............. 41 Vice President, Partner Development
Jerald D. Shadley.......... 51 Vice President, Sales
Thomas W. Ferrell.......... 47 Vice President, Products
Richard A. Brenner (2)(3).. 35 Director
Steven D. Devick (2)(3).... 47 Director
Craig J. Duchossois (1).... 54 Director
John H. Muehlstein (3)..... 43 Director
</TABLE>
- --------
(1)Member of the Executive Committee.
(2)Member of the Compensation Committee.
(3)Member of the Audit Committee.
Billy D. Prim co-founded Blue Rhino Corporation in March 1994 and has
served as its Chief Executive Officer and Chairman since its incorporation and
as its President since January 1996. Mr. Prim also serves as president and
chief executive officer and is a 51% stockholder of American Oil and Gas, Inc.,
a North Carolina based holding company. Until April 1995, American Oil and Gas,
Inc. was a distributor of propane gas, home heating oil, diesel fuel and
kerosene. Mr. Prim is a director and part owner of several privately-held
companies, including Platinum Propane, Caribou Propane, Javelina Propane and
Raven Propane which act as our distributors. Mr. Prim is also a part owner and
the manager of USA Leasing which leases cylinders to our distributors. Mr. Prim
is also a director of Bison Valve, L.L.C. ("Bison Valve"), Southern Community
Bank & Trust and the National Propane Gas Association.
Andrew J. Filipowski co-founded Blue Rhino Corporation in March 1994 and
has served as its Vice Chairman since May 1994. Mr. Filipowski is 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., System Software Associates,
Inc. and several privately-held companies including Bison Valve and Platinum
Propane, Caribou Propane, Javelina Propane and Raven Propane, which act as our
distributors.
Mark Castaneda has served as our Chief Financial Officer since October
1997, our Secretary since February 1998 and one of our directors since August
1998. Prior to joining us, Mr. Castaneda served as the vice president of
finance and the chief financial officer for All Star Gas Corporation from July
1995 until October 1997, served as a director of planning and controller of
Skelgas Propane, Inc. from May 1991 to July 1995, and as a certified public
accountant with Deloitte & Touche LLP from June 1986 to May 1991.
38
<PAGE>
Kay B. Martin has served as our Vice President and Chief Information
Officer since March 1997. Prior to joining us, Ms. Martin served as the
director of information resources for R.J. Reynolds Tobacco Company from March
1988 to March 1997.
Richard E. Belmont has served as our Vice President of Marketing since
August 1998 and served as our Vice President of Sales and Marketing from March
1995 to August 1998. Prior to joining us, Mr. Belmont was a product planning
manager and a product manager with the Char-Broil Division of W.C. Bradley Co.
from January 1991 to March 1995. Mr. Belmont is currently a director of the
Barbecue Industry Association of America.
Joseph T. Culp has served as our Vice President of Partner Development
since November 1995. Prior to joining us, Mr. Culp was the general manager of
Skelgas Propane, Inc. from February 1994 to November 1995, and a regional
manager for Suburban Propane Partners, L.P. from January 1981 to February 1994.
Jerald D. Shadley has served as our Vice President of Sales since August
1998. Prior to joining us, Mr. Shadley served as vice president of sales and
marketing for McCulloch Corp. from January 1996 to May 1998. Mr. Shadley was
also executive vice president, sales and marketing from July 1994 to January
1996 and vice president, sales and marketing from April 1991 to July 1994 for
Homelite, Inc.
Thomas W. Ferrell has served as our Vice President of Products since
November 1998. Mr. Ferrell previously served as manager of our Rhino Services
subsidiary from March 1997 to November 1998. Prior to joining us, Mr. Ferrell
served as president of Total Operations Management, Inc. from November 1993 to
March 1997.
Richard A. Brenner has served as a director since August 1998. Mr.
Brenner has served as president of Amarr Company since July 1993 and has served
on the Board of Advisors of Wachovia Bank since 1993.
Steven D. Devick has served as one of our directors since May 1994. Mr.
Devick is a co-founder of Platinum Entertainment, Inc. and has served as its
chairman of the board and chief executive officer since January 1992 and as its
president since January 1996. Mr. Devick is a director of Platinum technology,
Inc., as well as an officer and director of several privately-held companies.
Craig J. Duchossois has served as one of our directors since May 1994.
Mr. Duchossois has been the chief executive officer of Duchossois Industries,
Inc. since 1995 and served as its president from 1986 to 1995. Mr. Duchossois
has also served as a director of Platinum Entertainment, Inc., and currently
serves as a director of Bissell, Inc. and LaSalle National Bank as well as
several privately-held companies, including Bison Valve.
John H. Muehlstein has served as one of our directors since September
1995. Since 1986, Mr. Muehlstein has been a partner of the law firm of Pedersen
& Houpt, P.C., our legal counsel. Mr. Muehlstein also serves as a director of
Einstein/Noah Bagel Corp., SpinCycle, Inc. and several privately-held
companies.
Committees of the Board of Directors
The board of directors has an executive committee, a compensation
committee and an audit committee. The executive committee makes recommendations
to the board of directors concerning matters of strategic planning and
operational management of Blue Rhino Corporation 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 our officers and employees and administers the 1994 Stock
Incentive Plan ("1994 Stock Incentive Plan"), the 1998 Stock Incentive Plan
("1998 Stock Incentive Plan"), the Distributor Incentive Stock Option Plan
("Distributor Option Plan") and the
39
<PAGE>
Amended and Restated Stock Option Plan for Non-employee Directors ("Director
Option Plan"). The audit committee makes recommendations to the board of
directors regarding the selection of independent accountants, reviews the
results and scope of the audit and other accounting related services and
reviews and evaluates our internal control functions.
Director Compensation
Directors currently receive no cash compensation for serving on the board
of directors, although they are reimbursed for their reasonable expenses
incurred in connection with the performance of their duties as directors. Prior
to our initial public offering, the directors were eligible to receive stock
options under the 1994 Stock Incentive Plan. Our directors collectively hold
101,987 options granted to them under the 1994 Stock Incentive Plan with a
weighted average exercise price of $6.48 per share. Since our initial public
offering, non-employee directors have been eligible to receive options under
the Director Option Plan. See "--Director Option Plan."
Executive Compensation
The following table sets forth certain information regarding compensation
we paid for the fiscal years ended July 31, 1998 and 1997 to our Chief
Executive Officer and our other executive officers whose total salary plus
bonus exceeded $100,000 for such fiscal year ("Named Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation
------------- -----------------
Shares Underlying
Name and Principal Position Year Salary Stock Options
------------------------------------- ---- -------- -----------------
<S> <C> <C> <C>
Billy D. Prim........................ 1998 $218,538 43,312
Chief Executive Officer............. 1997 $125,250 57,088
Richard E. Belmont................... 1998 $112,708 26,890
Vice President Sales and Marketing.. 1997 $106,727 1,890
Joseph T. Culp....................... 1998 $109,710 26,890
Vice President of Partner
Development........................ 1997 $104,242 1,890
Mark Castaneda....................... 1998 $ 78,846(1) 32,561
Secretary and Chief Financial
Officer............................ 1997 $ -- --
Kay B. Martin........................ 1998 $102,288 26,890
Vice President and Chief Information
Officer............................ 1997 $ 38,712(2) 5,671
</TABLE>
- --------
(1) Mr. Castaneda's salary for fiscal 1998 reflects amounts earned from the
commencement of his employment with us in October 1997 through July 1998.
(2) Ms. Martin's salary for fiscal 1997 reflects amounts earned from the
commencement of her employment with us in February 1997 through July 1997.
Option Grants
The following table sets forth information on grants of stock options to
the Named Officers pursuant to the 1994 Stock Incentive Plan and the 1998 Stock
Incentive Plan during fiscal 1998.
40
<PAGE>
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential
Realizable
Value at Assumed
Annual Rates
Number of % of of Stock Price
Securities Total Options Exercise Appreciation for
Underlying Granted to Price Option Term(2)
Options Employees in Per Expiration -----------------
Name Granted(1) Fiscal Year Share Date 5% 10%
- ---- ---------- ------------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Billy D. Prim........... 40,000 13.6% $13.00 5/18/08 $327,025 $828,746
3,312(3) 1.1% $ 6.61 8/1/07 13,759 34,882
Richard E. Belmont...... 25,000 8.5% $13.00 5/18/08 204,391 517,966
1,890(3) 0.6% $ 6.61 8/1/07 7,852 19,906
Joseph T. Culp.......... 25,000 8.5% $13.00 5/18/08 204,391 517,966
1,890(3) 0.6% $ 6.61 8/1/07 7,852 19,906
Mark Castaneda.......... 25,000 8.5% $13.00 5/18/08 204,391 517,966
7,561(3) 2.6% $ 6.61 8/1/07 31,411 79,633
Kay B. Martin........... 25,000 8.5% $13.00 5/18/08 204,391 517,966
1,890(3) 0.6% $ 6.61 8/1/07 7,852 19,906
</TABLE>
- --------
(1) Except as described in note 3 below, options were granted pursuant to the
1998 Stock Incentive Plan. These options have a term of ten years, are
nonqualified stock options and have an exercise price equal to the fair
value of the common stock on the date of grant. Options vest 20% on each
anniversary of the grant date until fully vested and are exercisable upon
vesting. In determining the fair market value of the common stock for
options issued prior to the establishment of a public market for the common
stock, the compensation committee relied on the estimate of the mid-point
of the estimated range of the offering price for the common stock for our
initial public offering.
(2) 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 our estimate or projection of our future common stock prices.
(3) Options were granted pursuant to the 1994 Stock Incentive Plan. These
options have a term of ten years, are nonqualified stock options and have
an exercise price equal to the actual or estimated fair value of the common
stock on the date of grant. All options issued under the 1994 Stock
Incentive Plan are fully vested and exercisable. In determining the fair
market value of the common stock for options issued prior to our initial
public offering, the board of directors considered various factors,
including our financial condition and business prospects, our operating
results and the absence of a market for our common stock.
The following table sets forth information with respect to unexercised
stock options granted under the 1994 Stock Incentive Plan and the 1998 Stock
Incentive Plan as of the end of fiscal 1998. The Named Officers did not
exercise any stock options during fiscal 1998.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Values
<TABLE>
<CAPTION>
Number of Value of Unexercised
Options In-the-Money Options at
Held at July 31, 1998 July 31, 1998(1)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Billy D. Prim............... 64,180 40,000 $585,144 $120,000
Richard E. Belmont.......... 15,122 25,000 $164,901 $ 75,000
Joseph T. Culp.............. 15,122 25,000 $164,901 $ 75,000
Mark Castaneda.............. 7,561 25,000 $ 70,978 $ 75,000
Kay B. Martin............... 7,561 25,000 $ 70,978 $ 75,000
</TABLE>
- --------
(1) Calculated by determining the difference between the fair market value of
the securities underlying the options at July 31, 1998 of $16.00 per share
and the exercise price of the Named Officer's options.
41
<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. We currently have 167,740 shares
of common stock reserved for issuance upon the exercise of options granted
under this plan. As of December 31, 1998, options to purchase 167,740 shares of
common stock at a weighted average exercise price of $6.16 per share were
outstanding under the 1994 Stock Incentive Plan. As of December 31, 1998,
options to purchase 14,869 shares of common stock at an exercise price of $4.69
per share have been exercised. Upon consummation of our initial public
offering, all outstanding options under the 1994 Stock Incentive Plan became
vested. No additional options, stock appreciation rights, restricted stock or
deferred stock will be granted under the 1994 Stock Incentive Plan.
1998 STOCK INCENTIVE PLAN
The board of directors adopted and the stockholders approved the 1998
Stock Incentive Plan in November 1997, effective as of May 18, 1998. As of
December 31, 1998, options to purchase 300,000 common shares at a weighted
average exercise price of $13.00 per share were outstanding under the plan.
While the 1998 Stock Incentive Plan provides for the issuance of up to an
additional 900,000 shares of common stock upon the exercise of options to be
granted under the plan, we have delivered a letter to the underwriters stating
that, prior to 360 days after the closing of this offering, we will not grant
options to purchase more than an additional 300,000 shares of common stock
pursuant to the plan. Pursuant to the 1998 Stock Incentive Plan, we may grant
options to officers, employees, consultants and advisors to encourage them to
acquire a proprietary interest in Blue Rhino and to generate an increased
incentive to contribute to our future success. Options granted under the 1998
Stock Incentive Plan are not "incentive stock options," as that term is defined
in Section 422(b) of the Internal Revenue Code of 1986, as amended (the
"Code"). The compensation committee of the board of directors is the
administrator for the 1998 Stock Incentive Plan and has the power to grant
options to select officers, employees, consultants and advisors, determine the
number of shares of common stock subject to each grant and the vesting, price
and terms of exercise for each option granted. However, options may not be
granted with an exercise price per share less than the fair market value per
share of the common stock as of the date of the grant. 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 Blue Rhino.
DIRECTOR OPTION PLAN
All non-employee directors may participate in the Director Option Plan.
The board of directors adopted and the stockholders approved the Director
Option Plan in November 1997, and the plan became effective on May 18, 1998.
The Director Option Plan was amended and restated on December 30, 1998. We have
reserved 100,000 shares of common stock for issuance under the Director Option
Plan. As of December 31, 1998, options to purchase 56,000 shares of common
stock, at a weighted average exercise price of $21.68 per share, were
outstanding under the plan. Of the options to purchase 56,000 shares currently
outstanding, options to purchase 16,000 shares were granted on December 21,
1998 to four non-employee directors for service in fiscal 1998. Options to
purchase the other 40,000 shares were granted on December 30, 1998 to five non-
employee directors for service in fiscal 1999. For service in fiscal 2000 and
beyond, the board of directors has approved an annual grant under the Director
Option Plan of options to purchase 4,000 shares of common stock as of the day
after the annual stockholders meeting with an exercise price equal to the fair
market value of the stock on the grant date. All grants for fiscal 1999 and
thereafter are subject to forfeiture in the event a director fails to attend at
least two quarterly board of directors meetings prior to the next annual
stockholders meeting. If the director attends at least two but less than four
meetings, the director will forfeit options to purchase one quarter of the
shares he received for that fiscal year for each meeting less than four which
he attends. One-third of the options granted under this plan vest on each of
the first three anniversaries of the grant date. See "--Director
42
<PAGE>
Compensation" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Overview."
Options granted under the Director Option Plan are not "incentive stock
options," as that term is defined in Section 422(b) of the Code. The
compensation committee of the board of directors administers the Director
Option Plan and has the power to adjust the number of shares of common stock
subject to option grants in case of stock dividends, stock splits,
recapitalizations and other similar events. Each option granted under the
Director Option Plan is exercisable for a period not to exceed ten years from
the date of grant and shall lapse upon expiration of such period. Options may
not be assigned or transferred except by will or operation of the laws of
descent and distribution and each option is exercisable during the lifetime of
the optionee only by such optionee.
Distributor Option Plan
In November 1997, the board of directors adopted and the stockholders
approved the Distributor Option Plan which became effective on May 18, 1998. We
have reserved 400,000 shares of common stock for issuance upon the exercise of
options granted under the Distributor Option Plan. In May 1998, we granted
options to purchase 240,887 shares of common stock to existing Blue Rhino
distributors at an exercise price equal to $13.00 per share. Blue Rhino
distributors and their stockholders, partners, members, directors, general
partners, managers, officers, employees and consultants are eligible to receive
options under the Distributor Option Plan. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Overview."
We adopted the Distributor Option Plan to assist in attracting and
retaining distributors, to provide distributors an incentive to offer quality
service to and increase the number of our customer accounts and to promote the
alignment of our distributors' and our stockholders' interests. Options issued
under the Distributor Option Plan will not be "incentive 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 our
common stock on the date of the option grant. Options granted under the
Distributor Option Plan will typically have a term of ten years and vest over
four years with 25% vesting on the first anniversary of the end of the quarter
during which the options were granted and on each subsequent end of quarter
anniversary thereafter until fully vested. We intend to register the shares of
common stock to be issued upon the exercise of vested options granted under the
Distributor Option Plan. In the event we do not or are 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
As of January 1, 1999, our employees may participate in our 401(k) plan.
All Blue Rhino employees who have been employed for six months 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 15% of their total base compensation to
the plan, subject to applicable Internal Revenue Code limitations. Each
employee's interest in contributions we make on their behalf, if any, vests 20%
per year of service. Any contributions we make are at our discretion and no
such contributions have been made to date.
Compensation Committee Interlocks and Insider Participation
During fiscal 1998, Messrs. Devick, Duchossois, Filipowski, S.H. Fogleman
III and Prim served on the compensation committee of our board of directors.
Mr. Fogleman resigned from our compensation committee and board of directors in
August 1998. Messrs. Filipowski and Prim resigned from our
43
<PAGE>
compensation committee in February 1998 and Mr. Duchossois resigned from our
compensation committee in November 1998. Our compensation committee is
currently comprised of Messrs. Brenner and Devick. Mr. Fogleman was our Chief
Financial Officer and Vice President, Finance from May 1994 until December
1995.
Since March 1994, we have leased our offices in Winston-Salem, North
Carolina from Rhino Real Estate, L.L.C., an entity owned 50% by Mr. Filipowski
and 50% by Mr. Prim. Pursuant to the terms of the lease, we pay annual rent of
approximately $213,000, plus our allocable share of all taxes, utilities and
maintenance. The lease terminates on December 31, 2001 and includes an option
to renew for one three-year term.
In October 1995, we sold 12,575 units for $1,000 per unit. Each unit
consisted of a 10.5% senior discount note with a face value of $1,364.93
("Senior Discount Note") and a warrant to purchase approximately 40 shares of
common stock at an exercise price of approximately $4.59 per share ("1995
Warrants"). 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 1995 Warrants to purchase in the
aggregate 72,589 shares of common stock at an exercise price of $4.59 per share
which included 1995 Warrants to purchase 27,095 shares of common stock issued
to Mr. Duchossois and his affiliates. All outstanding Senior Discount Notes
were repaid in full with a portion of the proceeds from our initial public
offering and the 1995 Warrants were exercised concurrently with the
consummation of our initial public offering.
In June 1996, we 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, L.L.C. ("Platinum Propane") in exchange for
approximately 40% of the membership interests in Platinum Propane. In March
1997, Platinum Propane raised approximately $4.8 million in a private placement
of membership interests pursuant to which Mr. Duchossois and his affiliates
invested $375,000. In March 1997, we 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, we entered into distribution agreements with
subsidiaries of Platinum Propane covering the Chicago and Los Angeles
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 we paid PPC
approximately $1.6 million, and in fiscal 1997 and 1998, we paid Platinum
Propane approximately $5.3 million and $7.9 million, respectively, for cylinder
exchange services which they performed. We have also entered into cylinder
display financing leases with Platinum Propane requiring lease payments of
$11,295 per month as of July 31, 1998. We purchased approximately $3.2 million
of grill cylinders from Platinum Propane through December 31, 1998.
We entered into distribution agreements in February 1998 with Caribou
Propane to service our Pacific Northwest market and Javelina Propane to service
our Phoenix market and in May 1998 with Raven Propane to service our
Philadelphia/New Jersey markets. Messrs. Prim and Filipowski own, in the
aggregate, 45% of the membership interests in Caribou Propane, Javelina Propane
and Raven Propane. The terms of the distribution agreements are substantially
the same as those negotiated with other Blue Rhino distributors. In fiscal
1998, we paid Caribou Propane, Javelina Propane and Raven Propane approximately
$31,000, $118,000 and $381,000, respectively, for cylinder exchange services
performed by them. We purchased approximately $200,000, $184,000 and $303,000
of grill cylinders from Caribou Propane, Javelina Propane and Raven Propane,
respectively, through December 31, 1998.
In May 1998, we granted the following options pursuant to the Distributor
Option Plan:
<TABLE>
<CAPTION>
Number of Shares
Distributor Subject to Options
----------- ------------------
<S> <C>
Caribou Propane.. 4,600
Javelina
Propane......... 5,282
Platinum
Propane......... 74,461
Raven Propane.... 10,051
</TABLE>
44
<PAGE>
These options vest 25% on July 31, 1999 and each July 31st thereafter until
fully vested and may be exercised at a price of $13.00 per share on or before
May 18, 2008.
In January 1998, Messrs. Filipowski and Duchossois along with two other
stockholders collectively loaned us $3.25 million at a rate of 10.5% per annum.
These loans were repaid in full with a portion of the proceeds from our initial
public offering. These stockholders received warrants to purchase approximately
0.08 shares of common stock for every $3.00 they loaned to us for a total of
81,913 shares (the "1998 Warrants"). Messrs. Filipowski and Duchossois each
loaned us $1.45 million and received 1998 Warrants to purchase 36,456 shares of
common stock. The 1998 Warrants may be exercised prior to December 31, 2008 at
a price per share of $13.00.
Mr. Prim executed a guarantee in favor of Blue Rhino Corporation in
connection with our outstanding loan to Bison Valve in October 1998. This
guarantee has since been replaced by a guarantee from the sole member of Bison
Valve. We have signed a letter of intent to purchase certain assets of Bison
Valve.
During the three months ended October 31, 1998, we acquired approximately
$4.6 million of cylinders from our distributors in contemplation of selling
cylinders to USA Leasing. In previous periods, we also acquired approximately
$2.9 million of cylinders in connection with the acquisition of retail accounts
and purchases from our distributors. In October 1998, we sold grill cylinders
to USA Leasing for $6.5 million. Messrs. Prim, Duchossois and Filipowski own
approximately 74% of the membership interests in USA Leasing and Mr. Prim
serves as its manager. This sale of cylinders was in contemplation of an
operating lease arrangement between USA Leasing and our distributors whereby
participating distributors pay rent of 1% per month of the initial purchase
price of the cylinders. We have guaranteed 80% of USA Leasing's $13.0 million
credit facility with NationsBank, N.A. The owners of USA Leasing expect to
profit from providing this facility solely based upon the difference between
their cost of funds under the USA Leasing Credit Facility (LIBOR plus 2.25%)
and lease revenues equal to 1% per month of the initial value of the cylinders
or 12% per annum. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Certain Transactions."
We believe that the foregoing transactions with directors, officers,
stockholders and other affiliates were completed on terms as favorable to us as
could have been obtained from unaffiliated third parties. We have adopted a
policy that we will not enter into any material transaction in which one of our
directors, officers or stockholders has a direct or indirect financial
interest, unless the transaction is determined by our board of directors to be
fair to us or is approved by a majority of our disinterested directors or by
our stockholders.
CERTAIN TRANSACTIONS
Billy D. Prim and Andrew J. Filipowski founded Blue Rhino Corporation in
March 1994, contributing the assets of American Cylinder Exchange, Inc. in
consideration for 746,692 and 589,792 shares of our common stock, respectively.
John Muehlstein, one of our directors, is a partner in the firm of
Pedersen & Houpt, P.C., our legal counsel.
Peer Pedersen, one of our stockholders and part owner of USA Leasing, is
a partner of Pedersen & Houpt, P.C. See "Risk Factors--Potential Conflicts of
Interest in Enforcing Remedies Against Our Affiliates" and "Management--
Compensation Committee Interlocks and Insider Participation."
45
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the common stock as of December 31, 1998 (and as adjusted for this
offering) by (i) each person known by us to beneficially own more than 5% of
our common stock; (ii) each of our directors; (iii) each Named Officer; and
(iv) all of our Named Officers and directors as a group.
<TABLE>
<CAPTION>
Percent of Shares
Beneficially Owned
-----------------------
Shares Prior to
Beneficially this After this
Name and Address Owned(1) Offering(2) Offering(3)
---------------- ------------ ----------- -----------
<S> <C> <C> <C>
Directors and Named Officers:
Andrew J. Filipowski(4)
1815 S. Meyers Road
Oakbrook Terrace, IL 60181............. 1,861,869 24.2% 19.2%
Billy D. Prim(5)
104 Cambridge Plaza Drive
Winston-Salem, NC 27104................ 1,344,497 17.4% 13.9%
Craig J. Duchossois(6)
845 Larch Avenue
Elmhurst, IL 60126..................... 456,994 5.9% 4.7%
Richard E. Belmont(7).................... 15,122 * *
Joseph T. Culp(7)........................ 15,122 * *
Mark Castaneda(8)........................ 8,061 * *
Kay B. Martin(9)......................... 8,561 * *
Richard A. Brenner....................... 8,665 * *
Steven D. Devick(10)..................... 332,119 4.3% 3.4%
John H. Muehlstein(7).................... 3,781 * *
Directors and Named Officers as a group
(10 individuals)(11).................... 3,303,371 42.0% 33.5%
5% Stockholders:
Gilder, Gagnon, Howe & Co.(12)
1775 Broadway, 26th Floor
New York, NY 10019..................... 1,023,675 13.4% 10.6%
Feirstein Capital Management(13)
767 Third Avenue, 28th Floor
New York, NY 10017..................... 500,000 6.5% 5.2%
Zweig-DiMenna Special Opportunities,
L.P.(14)
900 Third Avenue
New York, NY 10022..................... 385,000 5.0% 4.0%
</TABLE>
- --------
* Less than 1%.
46
<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 the
date hereof are deemed outstanding. Except as indicated in the footnotes
to this table and as provided pursuant to applicable community property
laws, the stockholders named in the table have sole voting and investment
power with respect to the shares set forth opposite each stockholder's
name.
(2) Percent of Shares Beneficially Owned--Prior to this Offering reflects
7,645,742 shares outstanding as of December 31, 1998.
(3) Percent of Shares Beneficially Owned--After this Offering reflects the
2,000,000 shares of common stock issued by Blue Rhino Corporation and do
not include any shares issued upon the exercise of the underwriters' over-
allotment.
(4) Includes 1,039,879 shares of common stock owned by Mr. Filipowski, 18,903
shares of common stock issuable upon the exercise of vested options under
the 1994 Stock Incentive Plan held by Mr. Filipowski, 36,546 shares of
common stock issuable upon exercise of the 1998 Warrants, 216,127 shares
of common stock owned by American Oil and Gas, Inc., of which Mr.
Filipowski owns 40% of the issued and outstanding shares, 206,955 shares
owned by Platinum Propane, of which Mr. Filipowski acts as a director and
indirectly owns 16% of the membership interests, 328,338 shares of common
stock owned by Platinum Venture Partners I, L.P. ("PVP"), the general
partner of which is Platinum Venture Partners, Inc. ("PVP, Inc."), a
corporation of which Mr. Filipowski owns 22.5% of the shares and serves as
a director, 1,890 shares of common stock beneficially owned by Jennifer R.
Filipowski, 1,890 shares of common stock beneficially owned by Mr.
Filipowski as trustee on behalf of the Andrew E. Filipowski Trust, 1,890
shares of common stock beneficially owned by Veronica Filipowski as
trustee on behalf of the Alexandria Filipowski Trust, 1,890 shares of
common stock beneficially owned by Veronica Filipowski as trustee on
behalf of the James Meadows Trust and 7,561 shares of common stock
beneficially owned by Veronica Filipowski.
(5) Includes 845,894 shares of common stock held by Mr. Prim, 64,180 shares of
common stock issuable upon the exercise of vested options under the 1994
Stock Incentive Plan held by Mr. Prim, 216,127 shares of common stock
owned by American Oil and Gas, Inc., of which Mr. Prim owns 51% of the
issued and outstanding shares and has voting control, 206,955 shares owned
by Platinum Propane, of which Mr. Prim acts as a director and indirectly
owns 20.4% of the membership interests, 7,561 shares of common stock
beneficially owned by Debbie W. Prim, 1,890 shares of common stock
beneficially owned by Debbie W. Prim as trustee on behalf of Sarcanda
Westmoreland and 1,890 shares of common stock beneficially owned by Debbie
W. Prim as trustee on behalf of Anthony G. Westmoreland.
(6) Includes 338,862 shares of common stock beneficially owned by the Craig J.
Duchossois Revocable Trust of which Mr. Duchossois is the trustee, 36,546
shares of common stock issuable upon exercise of the 1998 Warrants, 2,500
shares of common stock beneficially owned by R. Bruce Duchossois over
which Mr. Duchossois has voting and investment control, 3,781 shares of
common stock issuable upon the exercise of vested options held by Mr.
Duchossois, and 75,305 shares of common stock beneficially owned by the
Kimberly Family Discretionary Trust over which Mr. Duchossois has voting
and investment control.
(7) Represents the number of shares issuable upon the exercise of vested
options.
(8) Includes 500 shares of common stock owned by Mr. Castaneda and 7,561
shares of common stock issuable upon the exercise of vested options held
by Mr. Castaneda.
(9) Includes 1,000 shares of common stock owned by Ms. Martin and 7,561 shares
of common stock issuable upon the exercise of vested options held by Ms.
Martin.
(10) Includes 3,781 shares issuable upon the exercise of vested options held by
Mr. Devick and 328,338 shares owned beneficially by PVP, the general
partner of which is PVP, Inc.
(11) Includes 3,090,487 shares of common stock and options and warrants to
purchase 212,884 shares which are currently exercisable or exercisable
within 60 days of the date of this prospectus which are beneficially owned
by the directors and Named Officers as a group.
(12) Derived from a Schedule 13G dated August 11, 1998 and furnished to us by
Gilder, Gagnon, Howe and Co. ("GGH"). The Schedule 13G indicates that GGH
had shared investment control for all 1,023,675 shares of common stock and
shared voting power for 13,000 of such shares of common stock.
(13) Derived from a Schedule 13G dated November 10, 1998 and jointly furnished
to us pursuant to a joint filing agreement by Barry R. Feirstein,
Feirstein Capital Management, L.L.C. ("FCM") and Feirstein Partners, L.P.
("FP"). The Schedule 13G indicates that Mr. Feirstein had sole voting and
dispositive power over 60,100 shares of common stock and Mr. Feirstein,
FCM and FP shared voting and dispositive power over 439,900 shares of
common stock.
(14) Derived from a Schedule 13G dated June 4, 1998 and jointly furnished to us
pursuant to a joint filing agreement by Zweig-DiMenna Special
Opportunities, L.P. ("ZD Opportunities"), Zweig-DiMenna Partners, L.P.
("ZD Partners"), Zweig-DiMenna International Limited ("ZD Limited"),
Zweig-DiMenna International Managers, Inc. ("ZD Managers") and Gotham
Advisors, Inc. ("Gotham"). The Schedule 13G indicates that these entities
beneficially owned our common stock as follows: (i) ZD Opportunities--
49,100 shares, (ii) ZD Partners--82,500 shares, (iii) ZD Limited--198,700
shares, (iv) ZD Managers--35,200 shares and (v) Gotham--19,500 shares.
47
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 100,000,000 shares of common
stock having a par value of $0.001 per share and 20,000,000 shares of "blank
check" preferred stock having a par value of $0.001 per share.
The following description of our capital stock and certain provisions of
our Second Amended and Restated Certificate of Incorporation (the "Charter")
and our by-laws is qualified in its entirety by the provisions of the Charter
and by-laws (which are included as exhibits to the Registration Statement of
which this prospectus is a part) and the General Corporation Law of the State
of Delaware (the "DGCL").
Common Stock
All outstanding shares of common stock are fully paid and nonassessable.
The holders of common stock are entitled to one vote for each share held of
record on all matters voted upon by stockholders and may not cumulate votes.
Thus, the owners of a majority of the common stock outstanding may elect all of
the directors if they choose to do so, and the owners of the balance of such
shares would not be able to elect any directors. Subject to the rights of
holders of any future series of preferred stock that may be designated, each
share of outstanding common stock is entitled to participate equally in any
distribution of net assets made to the stockholders in a liquidation,
dissolution or winding up of Blue Rhino Corporation and is entitled to
participate equally in dividends if, as and when declared by our board of
directors. 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--Management's Substantial
Ownership of Blue Rhino," "--Future Sales of Shares May Negatively Affect
Market Price" and "Shares Eligible for Future Sale."
Preferred Stock
Our 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 we have 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 our outstanding voting stock. In addition, such preferred stock may have
other rights, including economic rights senior to the common stock, and, as a
result, the issuance of preferred stock could negatively impact the market
value of the common stock.
Warrants
The holders of the 1998 Warrants have the right to purchase in the
aggregate 81,913 shares of common stock at an exercise price of $13.00 per
share. The 1998 Warrants are exercisable until December 31, 2008.
Certain Provisions of Delaware Law
Business Combination Provision. We are 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
of directors 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
48
<PAGE>
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of the
corporation's voting stock.
Limitation on Liability. As permitted by the provisions of the DGCL, the
Charter eliminates, in certain circumstances, the monetary liability of our
directors 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 us or our 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 our rights or our stockholders' rights, 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 one of our
directors or officers 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.
Anti-takeover Effect of Provisions of Charter and By-laws
Certain provisions of our Charter and by-laws could discourage potential
acquisition proposals and could delay or prevent a change in control of Blue
Rhino. These provisions are intended to enhance the likelihood of continuity
and stability in the composition of our board of directors and in the policies
formulated by our board of directors and to discourage certain types of
transactions that may involve an actual or threatened change in our control,
such as an unsolicited acquisition proposal. Because these provisions could
have the effect of discouraging a third party from acquiring control of Blue
Rhino, 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 our
common stock and of preventing changes in our management.
Election and Removal of Directors. Our 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 of directors may be filled by the affirmative vote of
the directors 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 our stockholders
can be called only pursuant to a resolution adopted by a majority of our board
of directors, our Chairman of the Board or our President. Stockholders desiring
to nominate persons to be elected as our directors or to have other business
placed on the agenda of an annual meeting of our stockholders must give written
notice to the board of directors of such request 90 days in advance of the
anniversary date of the release of our proxy statement to stockholders in
connection with the preceding year's annual meeting.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our common stock is LaSalle National
Bank, Chicago, Illinois.
49
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of this offering, there will be approximately 9,645,742
shares of common stock outstanding. Of the shares outstanding, 6,505,000 shares
will be freely tradeable without restriction under the Securities Act or
pursuant to Rule 144(k) under the Securities Act, except for any such shares
acquired by one of our "affiliates" as defined in Rule 144. The remaining
3,140,742 shares (the "Restricted Shares") then outstanding (which includes
3,068,787 shares beneficially owned by our directors and officers) are
restricted securities as defined in Rule 144 and may be resold in compliance
with the registration provisions of the Securities Act or an exemption
therefrom, including the resale provisions of Rule 144.
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 us 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 Stock 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 Blue Rhino.
Shares held by our affiliates are subject to the foregoing volume
limitations, holding period and other restrictions under Rule 144. Affiliates
may sell shares only 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 Blue Rhino or
from one or more of our affiliates or the date on which they were fully paid, a
holder of such Restricted Shares who is not one of our affiliates at the time
of the sale, and has not been one of our an affiliates 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.
Sales of substantial amounts of common stock in the public market could
have a negative impact on the market price of our common stock and our ability
to raise additional equity capital.
We, our executive officers and directors and certain of our stockholders
have agreed for a period of 120 days after the date of this prospectus not to
directly or indirectly, without the prior written consent of Merrill Lynch,
Pierce, Fenner & Smith Incorporated, (i) offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant for the sale of, or otherwise dispose
of or transfer any shares of common stock or any securities convertible into or
exchangeable or exercisable for common stock, or file any registration
statement under the Securities Act with respect to any of the foregoing or (ii)
enter into any swap or any other agreement or any transaction that transfers,
in whole or in part, directly or indirectly, the economic consequence of
ownership of our common stock, whether any such swap or transaction is to be
settled by delivery of common stock or other securities, in cash or otherwise
(except for options granted under the Distributor Option Plan, the 1998 Stock
Incentive Plan and the shares of common stock sold pursuant to this offering).
However, Merrill Lynch, Pierce, Fenner & Smith Incorporated, in its sole
discretion, may release such persons from these lock-up agreements, in whole or
in part, at any time without notice. We have also agreed not to grant options
to purchase more than 300,000 additional shares pursuant to the 1998 Stock
Incentive Plan prior to 360 days after the closing of this offering.
We have a registration statement on Form S-1 on file for the offer of up
to 1,000,000 shares of our common stock on a delayed or continuous basis in
connection with the acquisition of businesses or assets. As of December 31,
1998, none of the shares which are the subject of this shelf registration had
been issued. We have signed a letter of intent to purchase Bison Valve which
contemplates the issuance
50
<PAGE>
of a portion of these shares. See "Business--Business Strategy" and
"Management--Compensation Committee Interlocks and Insider Participation."
Following consummation of this offering, we intend to file registration
statements on Form S-8 under the Securities Act to register the sale of the
167,740 shares of common stock reserved for issuance under the 1994 Stock
Incentive Plan, 1,200,000 shares of common stock reserved for issuance under
the 1998 Stock Incentive Plan and 100,000 shares of common stock reserved for
issuance under the Director Option Plan and a shelf registration on Form S-1
for the sale of 400,000 shares reserved for issuance under the Distributor
Option Plan. Upon the effectiveness of such registration statements and
expiration of the 120-day lock-up 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
applicable to our affiliates.
Blue Rhino Corporation and certain holders (the "Holders") of our common
stock entered into the Amended and Restated Registration Rights Agreement dated
as of March 1, 1997, which provides the Holders with certain registration
rights with respect to our common stock. The Holders own approximately
2,400,000 registerable shares (the "Registerable Shares") of our common stock.
If we propose to register any of our securities under the Securities Act,
either for Blue Rhino's account or for the account of others, the Holders are
entitled to notice of such registration and, subject to certain limitations, to
include Registerable Shares therein. Additionally, the Holders of 51% of the
Registerable Shares may demand that we file a registration statement under the
Securities Act with respect to their Registerable Shares, subject to certain
limitations. The Holders may demand two registrations on Form S-1 and an
unlimited number of registrations on Form S-2 or Form S-3 if the use of such
forms becomes available to us. Generally, we are required to pay all
registration and selling expenses, excluding underwriting fees, incurred in
connection with such registrations. The rights are subject to certain
conditions and limitations including the rights of the underwriters of an
offering to limit the number of shares included in such registration. The sale
of a substantial number of shares, whether pursuant to a subsequent public
offering or otherwise, or the perception that such sales could occur, could
adversely affect the market price of the common stock and could materially
impair our future ability to raise capital through an offering of equity
securities. All Holders have waived their registration rights in connection
with the offering covered by this prospectus.
51
<PAGE>
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated and NationsBanc
Montgomery Securities LLC are acting as representatives (the "Representatives")
of each of the underwriters named below (the "Underwriters"). Subject to the
terms and conditions contained in the purchase agreement among us and the
Underwriters, we have agreed to sell to the Underwriters, and each of the
Underwriters severally and not jointly has agreed to purchase from us, the
number of shares of common stock set forth opposite its name below.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................................
NationsBanc Montgomery Securities LLC...........................
---------
Total...................................................... 2,000,000
=========
</TABLE>
The offering will be underwritten on a firm commitment basis. In the
purchase agreement, the several Underwriters have agreed, subject to the terms
and conditions set forth therein, to purchase all of the shares of common stock
being sold pursuant to such agreement if any of the shares of common stock
being sold are purchased. Under certain circumstances described in the purchase
agreement, the commitments of non-defaulting Underwriters may be increased.
The Representatives have advised us that the Underwriters propose
initially to offer the common stock to the public at the 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 reallow, a discount not in excess of $
per share to certain other dealers. After this offering, the public offering
price, concession and discount may be changed.
Our common stock is traded on The Nasdaq Stock Market under the symbol
"RINO."
We have granted an option to the Underwriters, exercisable for 30 days
after the date of this prospectus, to purchase up to an aggregate of 300,000
additional shares of common stock at the public offering price set forth on the
cover page of this prospectus, less the underwriting discount. The Underwriters
may exercise this option only to cover over-allotments, if any, made on the
sale of the common stock offered by this prospectus. To the extent that the
Underwriters exercise this option, each Underwriter will be obligated, subject
to certain conditions, to purchase a number of additional shares of common
stock proportionate to such Underwriter's initial amount reflected in the
foregoing table.
The following table shows the per share and total public offering price,
underwriting discount to be paid by us to the Underwriters and the proceeds
before expenses to us. The amounts are shown assuming either no exercise or
full exercise by the Underwriters of their over-allotment option.
<TABLE>
<CAPTION>
Per Without With
Share Option Option
----- ------- ------
<S> <C> <C> <C>
Public Offering Price................................ $ $ $
Underwriting Discount................................ $ $ $
Proceeds, before expenses, to Blue Rhino............. $ $ $
</TABLE>
The expenses of this offering (exclusive of the underwriting discount)
are estimated at $600,000.
52
<PAGE>
The shares of common stock are being offered by the several Underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of certain legal matters by their counsel and certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer and reject orders in whole or in part.
Until the distribution of the shares of common stock is completed,
certain rules of the Securities and Exchange Commission may limit the ability
of the Underwriters to bid for and purchase shares of the common stock. As an
exception to these rules, the Representatives are permitted to engage in
certain transactions that stabilize the price of the common stock. Such
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of our common stock.
If the Underwriters create a short position in the common stock in
connection with this offering (i.e., if they sell more shares of common stock
than are set forth on the cover page of this prospectus), the Representatives
may reduce that short position by purchasing shares of common stock in the open
market. The Representatives may also elect to reduce any short position through
the exercise of all or part of the over-allotment option described above.
The Representatives may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of common stock in the open market to reduce the Underwriters' short
position or to stabilize the price of our common stock, they may reclaim the
amount of the selling concession from the Underwriters and selling group
members who sold those shares as part of this offering.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases.
Neither we nor the Underwriters make any representation or prediction as
to the direction or magnitude of any effect that the transactions described
above might have on the price of our common stock. In addition, neither we nor
the Underwriters make any representation that the Underwriters will engage in
such transactions or that such transactions, once commenced, will not be
discontinued without notice.
In connection with this offering, certain Underwriters and selling group
members may engage in passive market making transactions in the common stock on
The Nasdaq Stock Market in accordance with Regulation M under the Securities
Exchange Act of 1934 during a period before the commencement of offers or sales
of common stock under this prospectus.
We, our executive officers and directors and certain of our stockholders
have agreed for a period of 120 days from the date of this prospectus not to,
without the prior written consent of Merrill Lynch, Pierce, Fenner & Smith
Incorporated, directly or indirectly (i) offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant for the sale of, or otherwise dispose
of or transfer any shares of common stock or any securities convertible into or
exchangeable or exercisable for common stock, or file any registration
statement under the Securities Act with respect to any of the foregoing or (ii)
enter into any swap or any other agreement or any transaction that transfers,
in whole or in part, directly or indirectly, the economic consequence of
ownership of the common stock, whether any such swap or transaction is to be
settled by delivery of common stock or other securities, in cash or otherwise,
except for options granted under the Distributor Option Plan, the 1998 Stock
Incentive Plan and the shares of common stock sold pursuant to this offering.
See "Shares Eligible for Future Sale."
Certain of the Underwriters and their affiliates engage in transactions
with, and perform services for, us in the ordinary course of business and have
engaged, and may in the future engage, in commercial banking and investment
banking transactions with us. In connection with rendering such services in the
past, the Underwriters and their affiliates have received customary
compensation. NationsBank, N.A., an affiliate of NationsBanc Montgomery
Securities LLC, is a lender to us pursuant to our credit facility and the
lender to USA Leasing, L.L.C., an affiliated entity.
53
<PAGE>
LEGAL MATTERS
The legality of the common stock being offered hereby will be passed upon
for us by Pedersen & Houpt, P.C., Chicago, Illinois. John H. Muehlstein, one of
our directors, is also a partner of Pedersen & Houpt, P.C. Certain legal
matters will be passed upon for the underwriters by Sidley & Austin, Chicago,
Illinois.
EXPERTS
Our consolidated financial statements as of July 31, 1997 and 1998 and
for each of our three fiscal years in the period ended July 31, 1998 included
in this prospectus have been audited by PricewaterhouseCoopers LLP, independent
accountants as stated in their report appearing herein and are included in
reliance upon such report given upon the authority of that firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
We are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith we file reports and other information with the Securities and
Exchange Commission (the "Commission"). Reports, registration statements, proxy
statements and other information filed by us with the Commission may be
inspected without charge at the principal office of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, the New York Regional Office located at 7
World Trade Center, Suite 1300, New York, New York 10048, and the Chicago
Regional Office located at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661, and copies of all or any part thereof may be obtained at
prescribed rates from the Commission's Public Reference Room at its principal
office. Information regarding the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330. The Commission maintains a World Wide Web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The address of the Commission's World Wide Web site is http://www.sec.gov.
We have filed with the Commission a Registration Statement on Form S-1
under the Securities Act with respect to the common stock offered hereby. This
prospectus does not contain all the information set forth in the Registration
Statement and the exhibits and schedules filed therewith. While the material
provisions of each document filed as an exhibit to the Registration Statement
have been disclosed herein, statements contained in this prospectus as to the
contents of any contract or other document referred to are not necessarily
complete, and in each instance reference is made to the copy of such contract
or document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. For further
information with respect to us and the common stock offered hereby, reference
is made to the Registration Statement and to the exhibits and schedules
thereto.
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 31, 1997 and 1998 and October 31,
1998 (unaudited)........................................................ F-3
Consolidated Statements of Operations for the Fiscal Years Ended July 28,
1996, and July 31, 1997 and 1998 and for the Three Months Ended October
31, 1997 (unaudited) and 1998 (unaudited)............................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the Fiscal
Years Ended July 28, 1996, and July 31, 1997 and 1998 and for the Three
Months Ended October 31, 1998 (unaudited)............................... F-5
Consolidated Statements of Cash Flows for the Fiscal Years Ended July 28,
1996, and July 31, 1997 and 1998 and for the Three Months Ended October
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:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows present fairly, in all material respects, the financial position
of Blue Rhino Corporation and its subsidiaries at July 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the three
fiscal years in the period ended July 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe our audits
provide a reasonable basis for the opinion expressed above.
The accompanying consolidated financial statements as of and for the year
ended July 31, 1998 have been adjusted as discussed in Note 21.
/s/ PricewaterhouseCoopers LLP
Greensboro, North Carolina
September 22, 1998,
except for the
information in Note
21 for which the
date is February 8,
1999
F-2
<PAGE>
BLUE RHINO CORPORATION
CONSOLIDATED BALANCE SHEETS
As of July 31, 1997 and 1998 and October 31, 1998 (unaudited)
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
October 31,
ASSETS 1997 1998 1998
- ------ -------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Cash and cash equivalents........................ $ 325 $ 5,908 $ 4,122
Trade accounts receivable, net................... 3,110 7,901 5,349
Cylinder inventories............................. 220 2,377 --
Notes receivable................................. 417 540 254
Prepaid expenses and other current assets........ 81 487 1,576
-------- -------- --------
Total current assets......................... 4,153 17,213 11,301
Cylinders held under operating lease agreements.. -- -- 7,338
Property and equipment, net...................... 4,438 8,505 9,740
Notes receivable................................. 1,196 789 207
Intangibles, net................................. 104 3,532 6,605
Other assets..................................... 83 431 186
-------- -------- --------
Total assets................................. $ 9,974 $ 30,470 $ 35,377
======== ======== ========
<CAPTION>
LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
- ---------------------------------------------
<S> <C> <C> <C>
Trade accounts payable........................... $ 2,407 $ 4,421 $ 2,555
Acquisition notes payable........................ 81 212 476
Current portion of long-term debt and capital
lease obligations............................... 165 286 329
Accrued liabilities.............................. 763 475 414
-------- -------- --------
Total current liabilities.................... 3,416 5,394 3,774
Long-term debt, less current maturities.......... 15,142 104 86
Notes payable to bank............................ 840 -- 6,500
Capital lease obligations, less current
maturities...................................... 128 156 197
-------- -------- --------
Total liabilities............................ 19,526 5,654 10,557
-------- -------- --------
Commitments and contingencies
Convertible redeemable preferred stock........... 8,936 -- --
-------- -------- --------
Stockholders' equity (deficit):
Common stock, $0.001 par value, 100,000,000
shares authorized, 1,778,920, 7,630,873 and
7,630,873 shares issued and outstanding at
July 31, 1997 and 1998 and October 31, 1998,
respectively.................................. 2 8 8
Additional paid-in capital..................... 332 46,320 46,320
Accumulated deficit............................ (18,822) (21,512) (21,508)
-------- -------- --------
Total stockholders' equity (deficit)......... (18,488) 24,816 24,820
-------- -------- --------
Total liabilities, convertible redeemable
preferred stock and stockholders' equity
(deficit)................................... $ 9,974 $ 30,470 $ 35,377
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
BLUE RHINO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Fiscal Years Ended July 28, 1996, and July 31, 1997 and 1998 and
for the Three Months Ended October 31, 1997 (unaudited) and 1998 (unaudited)
(in thousands, except share data)
<TABLE>
<CAPTION>
Three Months
Fiscal Years Ended Ended October 31,
------------------------- -----------------------
1996 1997 1998 1997 1998
------- ------- ------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Net sales--distributors.... $ 2,386 $13,060 $27,372 $ 4,140 $9,222
Net sales--direct.......... 5,830 1,151 -- -- --
------- ------- ------- ------- ------
Total net sales........ 8,216 14,211 27,372 4,140 9,222
------- ------- ------- ------- ------
Cost of sales:
Cost of sales--
distributors............ 1,811 9,873 20,525 3,155 6,934
Cost of sales--direct.... 6,089 1,771 -- -- --
------- ------- ------- ------- ------
Total cost of sales.... 7,900 11,644 20,525 3,155 6,934
------- ------- ------- ------- ------
Gross profit........... 316 2,567 6,847 985 2,288
------- ------- ------- ------- ------
Operating expenses
(income):
Sales and marketing...... 1,112 1,950 2,392 564 669
General and
administrative.......... 3,192 3,022 3,461 844 1,104
Lease income, net........ (89) (143) (81) 8 (212)
Depreciation and
amortization............ 868 873 1,278 245 524
Nonrecurring charges..... 1,363 970 476 281 --
------- ------- ------- ------- ------
Total operating
expenses, net......... 6,446 6,672 7,526 1,942 2,085
------- ------- ------- ------- ------
Income (loss) from
operations............ (6,130) (4,105) (679) (957) 203
Other expenses (income):
Interest expense......... 1,469 1,665 1,707 434 32
Loss on investee......... -- -- 324 -- 311
Other income, net........ (168) (186) (234) (51) (70)
------- ------- ------- ------- ------
Loss before taxes...... (7,431) (5,584) (2,476) (1,340) (70)
Income taxes............... -- -- -- -- --
------- ------- ------- ------- ------
Net loss............... $(7,431) $(5,584) $(2,476) $(1,340) $ (70)
======= ======= ======= ======= ======
Basic and diluted loss per
common share.............. $ (4.96) $ (3.74) $ (1.04) $ (0.81) $(0.01)
======= ======= ======= ======= ======
Weighted average common
shares used in computing
loss per common share (in
thousands):
Basic.................... 1,628 1,678 2,945 1,779 7,631
======= ======= ======= ======= ======
Diluted.................. 1,628 1,678 2,945 1,779 7,631
======= ======= ======= ======= ======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
BLUE RHINO CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Fiscal Years Ended July 28, 1996 and, July 31, 1997 and 1998 and for
the Three Months Ended October 31, 1998 (unaudited)
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Common Stock Additional
----------------- paid-in Accumulated
Shares Amount capital deficit Total
--------- ------ ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
Balances, July 31, 1995.......... 1,687,428 $ 2 $ 20 $ (5,171) $ (5,149)
Cancellation of restricted
stock for nonvested
terminations.................. (59,735) -- (1) -- (1)
Preferred dividends............ -- -- -- (636) (636)
Net loss....................... -- -- -- (7,431) (7,431)
--------- ---- ------- -------- --------
Balances, July 28, 1996.......... 1,627,693 2 19 (13,238) (13,217)
Issuance of common stock....... 151,227 -- 1,000 -- 1,000
Preferred dividends............ -- -- (687) -- (687)
Net loss....................... -- -- -- (5,584) (5,584)
--------- ---- ------- -------- --------
Balances, July 31, 1997.......... 1,778,920 2 332 (18,822) (18,488)
Preferred dividends............ -- -- (332) (264) (596)
Issuance of common stock in
connection with Initial Public
Offering, net of offering
expenses of $4,320............ 3,105,000 3 36,042 -- 36,045
Compensation expense related to
distributor stock option
plan.......................... -- -- -- 50 50
Conversion of preferred stock
and preferred dividends....... 1,750,472 2 9,528 -- 9,530
Exercise of warrants........... 938,789 1 -- -- 1
Issuance of common stock as
partial consideration for an
acquisition................... 57,692 -- 750 -- 750
Net loss....................... -- -- -- (2,476) (2,476)
--------- ---- ------- -------- --------
Balances, July 31, 1998.......... 7,630,873 8 46,320 (21,512) 24,816
Compensation expense related to
distributor stock option plan.. -- -- -- 74 74
Net loss....................... -- -- -- (70) (70)
--------- ---- ------- -------- --------
Balances, October 31, 1998
(unaudited)..................... 7,630,873 $ 8 $46,320 $(21,508) $ 24,820
========= ==== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
BLUE RHINO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Fiscal Years Ended July 28, 1996, July 31, 1997 and 1998 and for the
Three Months Ended October 31, 1997 (unaudited) and 1998 (unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months
Ended October
Fiscal Years Ended 31,
------------------------- ----------------
1996 1997 1998 1997 1998
------- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss......................... $(7,431) $(5,584) $(2,476) $(1,340) $ (70)
Adjustments to reconcile net loss
to net cash provided by (used
in) operating activities:
Depreciation and amortization.. 868 873 1,278 245 524
Nonrecurring charges........... 1,268 963 198 240 --
Loss on investee............... -- -- 324 -- 311
Accreted interest on senior
discount notes................ 1,049 1,489 1,378 390 --
Compensation expense related to
stock option plan............. -- -- 50 -- 74
Changes in operating assets and
liabilities, net of business
acquisitions:
Trade accounts receivable.... (990) (1,186) (4,791) 1,021 2,552
Cylinder inventories......... (473) 127 (1,726) -- --
Other current assets......... 35 166 (389) 39 (1,201)
Accounts payable............. 624 1,045 1,516 (670) (1,866)
Accrued liabilities.......... (120) (85) (261) (384) (62)
------- ------- ------- ------- -------
Net cash provided by (used
in) operating activities.. (5,170) (2,192) (4,899) (459) 262
------- ------- ------- ------- -------
Cash flows from investing
activities:
Business acquisitions............ -- -- (3,640) (40) (3,614)
Payment of organizational costs.. -- -- (25) -- --
Proceeds from disposal of
cylinders....................... 29 340 -- -- --
Purchases of property and
equipment....................... (1,840) (537) (2,283) (151) (1,099)
Purchases of cylinders........... -- -- -- -- (3,654)
Proceeds from disposal of
property and equipment.......... 360 159 65 3 --
Investment in Bison Valve,
L.L.C........................... -- -- (635) -- --
Collections on notes receivable.. 58 380 496 116 104
------- ------- ------- ------- -------
Net cash (used in) provided
by investing activities... (1,393) 342 (6,022) (72) (8,263)
------- ------- ------- ------- -------
Cash flows from financing
activities:
Proceeds from issuance of common
stock, net of expenses paid of
$3,947 in fiscal 1998........... -- 1,000 36,418 -- --
Proceeds from issuance of
preferred stock................. 100 400 -- -- --
Proceeds from issuance of senior
discount notes.................. 12,575 -- -- -- --
Repayment of senior discount
notes........................... -- -- (16,491) -- --
Proceeds from stockholder loans.. -- -- 3,250 -- --
Payments of stockholder loans.... -- -- (3,250) -- --
Proceeds from notes payable to
bank............................ 2,700 3,995 8,411 566 9,933
Payments on notes payable to
bank............................ (4,900) (3,155) (9,251) -- (3,433)
Payment on cylinder display lease
facility........................ -- -- (2,119) -- --
Payments on acquisition notes
payable......................... (669) (90) (108) -- (175)
Payment of debt issuance costs... (57) (58) (108) -- --
Repayment of note payable to
vendor.......................... (948) (752) -- -- --
Payments on long-term debt and
capital lease obligations....... (1,321) (291) (248) (47) (110)
------- ------- ------- ------- -------
Net cash provided by (used
in) financing activities.. 7,480 1,049 16,504 519 6,215
------- ------- ------- ------- -------
Increase (decrease) in cash and
cash equivalents................ 917 (801) 5,583 (12) (1,786)
Cash and cash equivalents at
beginning of period............. 209 1,126 325 325 5,908
------- ------- ------- ------- -------
Cash and cash equivalents at end
of period....................... $ 1,126 $ 325 $ 5,908 $ 313 $ 4,122
======= ======= ======= ======= =======
Supplemental disclosure of cash
paid for:
Interest......................... $ 428 $ 176 $ 342
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
BLUE RHINO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
For the Fiscal Years Ended July 28, 1996, July 31, 1997 and 1998 and for the
Three Months Ended October 31, 1997 (unaudited) and 1998 (unaudited)
(in thousands, except share and per share data)
Supplemental schedule of non-cash investing and financing activities:
During the fiscal years ended July 28, 1996, and July 31, 1997 and 1998,
the Company entered into capital lease obligations in the amounts of
approximately $541, $243, and $306, respectively, for computers, vehicles and
certain equipment.
In connection with the conversion to an independent distributor network,
as further discussed in Note 1, the Company consummated the following
transactions:
. During the fiscal year ended July 31, 1997, the Company
transferred capital leases to distributors for vehicles with
remaining book values of $351 and remaining obligations of
approximately $344.
. In the fiscal years ended July 31, 1997 and 1998, the Company sold
cylinders and certain equipment aggregating approximately $310 and
$224, respectively, in exchange for notes receivable from
distributors (Notes 4 and 15).
. In the fiscal year ended July 31, 1997, certain assets
approximating $70 were reclassified as notes receivable.
During the fiscal year ended July 31, 1998, the Company purchased
certain assets from existing cylinder exchange companies under various
agreements which have been recorded as follows (Note 5):
<TABLE>
<S> <C>
Property and equipment...... $ 774
Cylinders................... 439
Intangibles................. 3,495
-------
$ 4,708
=======
Cash paid................... $ 3,640
Common stock issued......... 750
Acquisition notes payable... 318
-------
$ 4,708
=======
</TABLE>
The Company accreted preferred dividends from paid in capital and
accumulated deficit of $636, $687 and $596 for the fiscal years ended July 28,
1996, and July 31, 1997 and 1998, respectively.
The Company has unpaid costs associated with its Initial Public Offering
of $373 outstanding at July 31, 1998.
The Company financed the premiums on certain insurance policies in the
amount of $164.
The accompanying notes are an integral part of the consolidated financial
statements.
F- 7
<PAGE>
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
1. Description of Business and Basis of Presentation:
Blue Rhino Corporation (the "Company" or "Blue Rhino") was founded in
March 1994 and commenced operations on July 1, 1994. The Company has become the
leading provider of grill cylinder exchange in the United States offering
consumers a convenient means to obtain fuel for their barbecue grills. The
Company currently offers three types of grill cylinder transactions: (i) like
for like cylinder exchanges; (ii) cylinders with valve upgrades offering
additional safety features; and (iii) outright cylinder sales. The Company
originally focused on serving markets in the southeastern United States and has
since developed a network of independent distributors which deliver Blue Rhino
grill cylinder exchange to retail locations across the United States.
Since its formation, the Company has focused on creating an
infrastructure to support its nationwide cylinder exchange program. Initially,
the Company developed a vertically integrated operation, purchasing and leasing
grill cylinders, cylinder displays, filling sites, refurbishing equipment and
delivery vehicles while at the same time developing a sales, marketing and
management information systems ("MIS") infrastructure. In March 1996, the
Company began to transition from a vertically integrated business model to an
independent distributor business model in order to implement its cylinder
exchange program in a more capital efficient manner and to accelerate
development of its program. At this time, the Company began to dispose of
distribution assets and began to enter into exclusive agreements with
independent distributors to refurbish and refill cylinders and service Blue
Rhino's retail accounts. As a result, the Company has significantly accelerated
the growth of its nationwide service, pursued additional retailer relationships
and invested in the sales, marketing and MIS infrastructure to support its
growing cylinder exchange program. The Company expects to focus future capital
investments on cylinders, cylinder displays and continued enhancement of its
MIS. The transition to a 100% independent distributor network was completed in
the fourth quarter of fiscal 1997.
While the Company believes that it has created the infrastructure
necessary to support a nationwide cylinder exchange program, development of
this infrastructure has resulted in an accumulated deficit of approximately
$21.4 million as of July 31, 1998. Management believes that by leveraging the
distributors' existing infrastructure the Company has eliminated significant
capital requirements necessary to support the geographic expansion and further
penetration throughout the nation's significant demographic markets. Management
believes that the existing infrastructure and independent distribution business
model will improve future cash flows.
These consolidated financial statements include the accounts of Blue
Rhino and its wholly owned subsidiaries Rhino Services, L.L.C., formed in March
1997 and CPD Associates, Inc., formed in March 1998. All intercompany
transactions and balances have been eliminated in consolidation.
2. Summary of Significant Accounting Policies:
Revenue Recognition--Revenues are recognized upon delivery of cylinders
to customer locations. Sales returns, which are immaterial, occur principally
upon removal of cylinders and deinstallation of cylinder displays from customer
locations.
Cash and Cash Equivalents--The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents. Cash equivalents consisting of certificates of deposit totaled
$115 and $1,126 at July 31, 1997 and 1998, respectively.
Trade Accounts Receivable, Net--Trade accounts receivable, net include
allowances for doubtful accounts of approximately $154, and $134 at July 31,
1997 and 1998, respectively.
F-8
<PAGE>
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
Cylinder Inventories--Cylinder inventories are valued at the lower of
cost or market determined on a first-in, first-out (FIFO) basis and represent
cylinders held for sale.
Property and Equipment, Net--Property and equipment are stated at cost
and depreciated over the estimated useful lives of the related assets using the
straight-line method. The estimated useful lives are principally 30 years for
buildings and leasehold improvements, 10 years for machinery and equipment,
vehicles and cylinder displays, 5 years for computer hardware and 3 years for
computer software. Equipment leased under capital leases are amortized over
their estimated useful lives.
In the event that facts and circumstances indicate that the cost of
property and equipment, or other long-lived assets may not be recoverable, the
estimated future undiscounted cash flows is compared to the asset's carrying
value and if less, an impairment loss is recognized in an amount by which the
carrying amount exceeds its fair value. As a result of changes the Company made
to its business strategy (Note 11), impairments to property and equipment
recorded in 1997 and 1998 were $736 and $196, respectively.
Intangibles, net--Excess cost over fair value of assets acquired
(goodwill) is being amortized using the straight-line method, principally over
30 years. Noncompete agreements are being amortized using the straight-line
method over the life of the agreements ranging from three to five years. The
carrying value of intangible assets is periodically reviewed by the Company, as
well as, the amortization period to determine whether the current events and
circumstances warrant adjustments to the carrying values and/or revised
estimates of useful lives. This valuation is performed using the expected
future undiscounted cash flows associated with the intangible assets compared
to the carrying value to determine if a writedown is required. To the extent
such projection indicates that the undiscounted cash flow is not expected to be
adequate to recover the carrying amounts, the assets are written down to
discounted cash flow.
Advertising and Promotion--The Company expenses advertising and promotion
costs as incurred and these costs are included as sales and marketing expenses.
Advertising and promotion costs for the fiscal years ended July 28, 1996, and
July 31, 1997 and 1998 were $16, $36 and $114, respectively.
Income Taxes--Deferred tax assets and liabilities are determined based on
the difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. A valuation allowance is recorded when it
is more likely than not that the deferred tax asset will not be realized.
Financial Instruments--Financial instruments consist of cash and cash
equivalents, accounts receivable, notes receivable, short-term debt and long-
term, variable-rate and fixed-rate debt. The Company estimates the fair value
of its long-term, fixed-rate debt using a discounted cash flow analysis based
on interest rates for similar types of debt currently available in the
marketplace. At July 31, 1997 and 1998 the carrying amounts of the Company's
financial instruments approximated their fair values.
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of temporary cash investments
and trade accounts receivable. The Company continually monitors the credit
quality of the domestic financial institutions in which temporary investments
are maintained. At times, such deposits may be in excess of the FDIC insurance
limit. The Company performs ongoing credit evaluations of its customers'
financial condition and, generally, requires no collateral from its customers.
Due to the geographic dispersion and the high credit quality of the Company's
significant customers, credit risk relating to trade accounts receivable is
limited. The
F-9
<PAGE>
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
Company's three largest customers accounted for approximately 46%, 58% and 58%,
of sales in the fiscal years ended July 28, 1996, and July 31, 1997 and 1998 as
follows:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Customer A................................................. 30% 29% 26%
Customer B................................................. 16 16 16
Customer C................................................. -- 13 16
--- --- ---
46% 58% 58%
=== === ===
</TABLE>
Approximately 32% and 53% of trade accounts receivable at July 31, 1997 and
1998 were from these customers, respectively. If the financial condition and
operations of these customers deteriorate, the Company's operating results
could be adversely affected.
Use of Estimates--The preparation of the consolidated financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities at the dates of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from these estimates.
Statement of Accounting Standards not yet Adopted--Statement of Financial
Accounting Standards ("SFAS") No. 130 ("SFAS No. 130") establishes standards
for reporting and display of comprehensive income and its components (revenues,
gains, expenses, losses) in a full set of general purpose financial statements
and is effective in Fiscal 1999 for the Company. Management of the Company does
not expect SFAS No. 130 to have any impact on the Company's Consolidated
Financial Statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131"). Statement 131 requires public business enterprises to adopt
its provisions for periods beginning after December 15, 1997, and to report
certain information about operating segments in complete sets of financial
statements of the enterprise and in condensed financial statements of interim
periods issued to shareholders. Management of the Company does not expect SFAS
No. 131 to have any impact on the Company's consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and hedging activities. It also requires entities to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. Management of
the Company does not expect SFAS No. 133 to have any impact on the Company's
consolidated financial statements as the Company does not currently have any
derivative instruments or engage in any hedging activities.
F-10
<PAGE>
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
Reclassification--Certain prior year amounts have been reclassified to
conform to the presentation adopted in fiscal 1998.
3. Property and Equipment, net:
Property and equipment consists of the following at July 31:
<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
Land..................................................... $ 20 $ 20
Building and leasehold improvements...................... 661 661
Cylinder displays, including panel graphics.............. 3,188 7,688
Machinery and equipment.................................. 1,361 1,235
Computer hardware and software........................... 175 654
Equipment leased under capital leases.................... 346 492
------ ------
5,751 10,750
Less accumulated depreciation and amortization (including
$65 and $144, respectively, for equipment under capital
leases)................................................. (1,313) (2,245)
------ ------
$4,438 $8,505
====== ======
</TABLE>
Depreciation and amortization expense for the fiscal years ended July 28,
1996, and July 31, 1997 and 1998 was $683, $764 and $1,101, respectively.
4. Notes Receivable:
In connection with the conversion to the distributor program discussed in
Note 1, the Company has financed the sale of cylinders and certain equipment
principally to distributors, including Platinum Propane Holding, L.L.C. ("PPH")
(Note 15), who now service territories previously serviced by the Company.
These notes receivable are due at various times through 2002 and are payable
monthly with interest ranging from 9.25% to 12.5%.
The aggregate maturities of these notes receivable at July 31, 1998 are
as follows:
<TABLE>
<S> <C>
1999......................... $ 540
2000......................... 350
2001......................... 432
2002......................... 7
------
$1,329
======
</TABLE>
Interest income related to these notes for the fiscal years ended July
31, 1997 and 1998 was approximately $182 and $159, respectively. The notes
receivable from the sale of cylinders are collateralized by the cylinders.
F-11
<PAGE>
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
5. Intangibles, net:
During fiscal 1998, the Company completed a number of acquisitions (the
"Acquisitions") for approximately $4,700 in the aggregate related to assets
including cylinders, cylinder display racks and other equipment and the right,
title and interest in and to sellers' retail propane cylinder exchange accounts
and locations.
The aggregate purchase price was paid approximately $3,600 in cash,
initially financed with borrowings under the Bank Credit Facility and
subsequently repaid with proceeds from the Initial Public Offering, $750 in
common stock and $318 in seller financing. Acquisitions have been accounted for
under the purchase method and, accordingly, the operating results from these
acquisitions have been included in the Company's consolidated financial
statements since the dates of acquisition.
Intangibles consist of the following at July 31:
<TABLE>
<CAPTION>
1997 1998
---- ------
<S> <C> <C>
Goodwill.................................................... $124 $3,518
Noncompete agreements....................................... -- 102
Accumulated amortization.................................... (20) (88)
---- ------
$104 $3,532
==== ======
</TABLE>
Amortization expense for the fiscal years ended July 28, 1996, July 31,
1997 and 1998 was $8, $14 and $68, respectively.
The following unaudited pro forma summary presents the financial
information as if the acquisitions had occurred on August 1, 1996. These pro
forma results have been prepared for comparative purposes and do not purport to
be indicative of what would have occurred had the acquisitions been made on
August 1, 1996, nor is it indicative of future results.
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Net sales.............................................. $17,611 $28,717
======= =======
Net loss............................................... $(5,459) $(2,427)
======= =======
Net loss per common share.............................. $ (3.66) $ (1.02)
======= =======
</TABLE>
6. Notes Payable to Bank:
On December 18, 1997, the Company entered into a short-term loan
Agreement (the "Bank Credit Facility") which allows for maximum borrowings up
to $9,000 including a $3,000 revolving line of credit based on 80% of eligible
receivables with a $1,000 overadvance provision, a $1,000 capital expenditures
line of credit and a $4,000 acquisition line of credit. These lines of credit
mature on November 30, 1998 and bear interest at the prime rate (8.50% at July
31, 1998) plus 0.5%. As of July 31, 1998, the Company had no outstanding
borrowings under the Bank Credit Facility.
The agreement requires payment of a fee of 0.25 percent of the average
unused portion of the revolving line of credit, and requires the Company to
meet certain covenants, including minimum net worth and earnings before
interest, taxes, depreciation and amortization and restricts the level of
capital expenditures, as defined. The Company was in compliance with these
covenants as of July 31, 1998.
F-12
<PAGE>
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
The Bank Credit Facility was amended at July 30, 1998 to remove certain
covenants, release the guarantees of a principal stockholder and an entity
affiliated with certain principal stockholders and to waive a violation of the
cash flow ratio as of April 30, 1998.
7. Notes Payable to Vendor and Stockholder Loans:
In January 1998, several stockholders collectively loaned the Company
$3,250 (the "1998 Stockholder Loans"). The 1998 Stockholder Loans were repaid
in full in May 1998, including accrued interest at 10.5% with $3,400 of the
proceeds from the Initial Public Offering. The stockholders also received
Warrants to purchase approximately .08 shares of common stock for every $3.00
they loaned to the Company for a total of 81,913 shares of common stock (the
"1998 Warrants"). The 1998 Warrants may be exercised prior to December 31, 2008
at a price per share equal to $13.00.
Prior to the conversion to the distributor program, the Company financed
the acquisition of certain cylinders with its primary cylinder vendor. The
original line of credit was for purchases up to approximately $1.9 million and
was to be repaid in various installments including interest at prime plus 1%.
The balance due on this note was paid in full during fiscal year ended July 31,
1997.
8. Long-Term Debt:
Long-term debt consists of the following at July 31:
<TABLE>
<CAPTION>
1997 1998
------- ----
<S> <C> <C>
Senior discount notes due October 2000...................... $15,113 $--
Various equipment and vehicle notes and insurance premium
financing bearing interest at rates varying from 8% to 15%,
due in monthly installments through April 2001............. 65 174
------- ----
15,178 174
Less amounts due within one year............................ 36 70
------- ----
$15,142 $104
======= ====
</TABLE>
The aggregate maturities of long-term debt at July 31, 1998 are $70, $66
and $38 for 1999, 2000 and 2001, respectively.
In October 1995, the Company issued 12,575 units, each consisting of
approximately $1 principal amount (approximately $17,200 aggregate) of senior
discount notes due in October 2000 and warrants to purchase 39.764 shares of
common stock. The gross proceeds were $12,575. The notes accreted in value at
an effective rate of 10.5% through May 1998 until they were repaid with
proceeds from the Initial Public Offering in the amount of $16,491. Each
warrant entitled the holders to acquire one share of common stock for $4.5896
per share.
9. Capital Lease Obligations:
Capital lease obligations for computer equipment as of July 31, 1998 are
as follows:
<TABLE>
<S> <C>
1999................................................................ $254
2000................................................................ 157
2001................................................................ 10
----
Total minimum lease payments........................................ 421
Less imputed interest at varying rates ranging from 11.75% to 19%... 49
----
Present value of minimum lease payments............................. 372
Less current maturities............................................. 216
----
$156
====
</TABLE>
F-13
<PAGE>
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
10. Operating Leases and Other Commitments:
The Company leases certain office and vehicle equipment under
noncancelable operating leases with original terms ranging from 36 to 51
months. Additionally, the Company has a land lease with an original term of 5
years. This lease carries 3 renewal options for periods of 5 years each.
Rent expense on these facilities and equipment for the fiscal years ended
July 28, 1996 and July 31, 1997 and 1998 was $435, $44 and $21, respectively.
In addition, the Company leases certain plant facilities and equipment to
distributors including PPH (Note 15). Lease income under these leases was $62,
$118 and $118 for the fiscal years ending 1996, 1997 and 1998, respectively.
In September 1996, the Company entered into a $3.0 million operating
lease facility to finance cylinder displays. In May 1998, the Company repaid
the lease facility, aggregating $2,119, with proceeds from the initial public
offering. Rental expense under this lease for the fiscal years ended July 31,
1997 and 1998 was approximately $152 and $485, respectively.
Lease income, net on the consolidated statements of operations is made up
of the following for the fiscal years ended:
<TABLE>
<CAPTION>
1996 1997 1998
---- ----- -----
<S> <C> <C> <C>
Lease income.......................................... $(89) $(295) $(566)
Lease expense......................................... -- 152 485
---- ----- -----
Net (income) expense.................................. $(89) $(143) $ (81)
==== ===== =====
</TABLE>
Future minimum lease payments at July 31, 1998 from noncancelable
operating leases with both affiliates (Note 15) and non-affiliates with initial
or remaining terms of one year or more are $109, $41, $33, $27 and $1 for 1999,
2000, 2001, 2002 and 2003, respectively.
The Company also executes operating lease agreements with its
distributors including PPH (Note 15) for cylinder displays (both leased and
owned) for use within each distributor's territory. Under these leases, the
distributor (lessee) is obligated for all maintenance, installation,
deinstallation, taxes and insurance related to the cylinder displays. The terms
of the leases continue until either party terminates upon 60 days written
notice to the other party. The monthly rental amounts are based on 1% of the
original fair market value of the cylinder displays. Lease income for the
fiscal years ended July 28, 1996 and July 31, 1997 and 1998 was approximately
$27, $177 and $448, respectively. As of July 31, 1998, estimated future minimum
rental payments to be received are approximately $664 per year through the year
2003.
In December 1997, the Company entered into a service agreement with
Information Management System Services ("IMSS") whereby IMSS will provide
certain electronic data processing and telecommunications services including
the provision of customized software and hardware. Fees under the service
agreement for fiscal year ended July 31, 1998 were $306.
F-14
<PAGE>
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
11. Nonrecurring Charges:
As described in Note 1, the Company made changes to its business
strategy, including the conversion to an independent distributor network. As a
result, the Company recorded certain nonrecurring charges in fiscal years ended
July 28, 1996 and July 31, 1997 and 1998 as summarized below:
<TABLE>
<CAPTION>
1996 1997 1998
------ ---- ----
<S> <C> <C> <C>
Adjust equipment, including leasehold improvements of $160,
$447 and $0, respectively, to net realizable value............ $ 814 $736 $196
Impairment of goodwill......................................... 355 -- --
Severance, professional fees and other......................... 194 234 280
------ ---- ----
$1,363 $970 $476
====== ==== ====
</TABLE>
In the fiscal years ended July 28, 1996 and July 31, 1997, equipment
including vehicles, display racks, leasehold improvements of two distribution
centers, cylinders, computer equipment and filling station equipment were
written down to estimated net realizable value. Substantially all the equipment
has either been sold or physically scrapped. In the fiscal year ended July 28,
1996, as part of the changes in business strategy it was determined not to
focus on the smaller convenience store locations due to lower profit margins.
As a result, the Company recorded an impairment of goodwill ascribed to the
convenience store locations of $355. In the fiscal year ended July 31, 1998,
the Company made a commitment to acquire new handheld terminal technology. As a
result, the Company recorded a $115 impairment adjustment to reduce the
carrying value of existing handheld terminals as the future benefit of these
assets could not be fully recoverable over their original estimated lives.
12. Convertible Redeemable Preferred Stock:
On December 21, 1994, the Company issued 1,572,474 shares of Series A
cumulative preferred stock and warrants to purchase 318,650 shares of common
stock to investors through a private placement offering. The exercise price for
these warrants was $0.45896 per share. These warrants were exercised upon
consummation of the initial public offering (Note 13).
Holders of Series A preferred stock could convert any portion of the
preferred shares into common shares at any time. Each share of Series A
preferred was convertible to one share of common stock. The preferred shares
had a liquidation preference equal to the liquidation value of $4.5896 as
defined in the Certificate of Incorporation. The preferred shares ranked senior
to the common stock in respect to dividend rights and had full voting rights.
The Company was required to redeem the outstanding Series A preferred
shares in equal increments semiannually between October 31, 2000 and April 30,
2002. The redemption price was $4.5896 per share plus undeclared, accrued
dividends at a rate of 8% compounded daily of $1,031, $1,718 and $596 at July
28, 1996, and July 31, 1997 and the period August 1, 1997 through May 18, 1998
(the date amounts were funded through issuance of common stock in conjunction
with the initial public offering), respectively. Dividends are cumulative until
declared by the Board.
In May 1998, contemporaneous with the closing of the initial public
offering, all outstanding shares of preferred stock were converted on a one for
one basis into common stock and common stock was issued in payment of accrued
preferred dividends of $2,314.
F-15
<PAGE>
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
13. Stockholders' Equity (Deficit):
On November 17, 1997, the Board approved the following matters for which
stockholder consent was received effective December 31, 1997 that were executed
contemporaneously with the closing of the IPO:
. A reverse stock split of 1 share of common stock for 13.225130
shares of the Company's common shares outstanding. The reverse
stock split has been reflected in the average shares outstanding,
shares outstanding and loss per share amounts in the balance
sheets, statements of operations and changes in stockholders'
equity (deficit).
. The authorized shares of the Capital Stock were increased to
120,000,000 comprised of 100,000,000 shares of common stock par
value $0.001 per share and 20,000,000 shares of preferred, with
terms to be determined by the Board.
. Issue shares of common stock to the holders of outstanding
warrants to satisfy their right to receive common stock (assuming
a cashless exercise of their warrants).
. Accelerate the vesting of all outstanding options under the 1994
Stock Incentive Plan.
Common Stock Options and Restricted Stock--The Company has four active
stock option plans (the "Plans") and has reserved 982,609 shares of common
stock for use and distribution under terms of the Plans. Under the Plans, the
Company may, at its discretion, issue incentive or non-qualified stock options,
stock appreciation rights, restricted stock or deferred stock. The terms and
conditions of the awards made under the plans vary but, in general, are at the
discretion of the board of directors or its appointed committee.
The 1994 Stock Incentive Plan was adopted by the board of directors and
approved by the stockholders in December 1994 and has 181,853 shares of common
stock reserved for issuance upon the exercise of Options granted thereunder. As
of July 31, 1998, Options to purchase 181,853 shares of common stock at a
weighted average exercise price of $6.03 per share were outstanding under the
1994 Stock Incentive Plan. All Options are vested and exercisable, however, no
Options have been exercised. These options expire 10 years from their date of
grant. No additional options, stock appreciation rights, restricted stock or
deferred stock can be granted under the 1994 Stock Incentive Plan.
The 1998 Stock Incentive Plan was adopted by the board of directors and
approved by the stockholders in May 1998 under which 300,000 shares of common
stock have been reserved for issuance upon the exercise of Options granted
thereunder. As of July 31, 1998, the Company had 275,300 Options outstanding,
none of the Options are vested or exercisable. The exercise price for
outstanding common stock options is $13.00 per share. Pursuant to the 1998
Stock Incentive Plan, the Company may make grants of options to officers,
employees, consultants and advisors of the Company. These options vest ratably
over 5 years and expire 10 years from their date of grant.
All non-employee directors are entitled to participate in the Non-
Employee Director Stock Option Plan (the "Director Option Plan"). The Director
Option Plan was adopted by the board of directors and approved by the
stockholders in November 1997, and became effective on May 18, 1998. The
Company has reserved 100,000 shares of common stock for issuance under the
Director Option Plan. As of July 31, 1998, the Company has not granted any
options under this plan. The board of directors has approved an annual grant to
each Director under the Director Option Plan of options to purchase 4,000
shares of common stock at a price per share equal to the fair market value per
share of the common stock as of the grant date consisting of 1,000 shares for
each quarterly board meeting such director attended during the previous year.
One third of these options will vest on each of the first three anniversaries
of the grant date and expire 10 years from their date of grant.
F-16
<PAGE>
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
In November 1997, the board of directors adopted and the stockholders
approved the Distributor Incentive Stock Option Plan (the "Distributor Option
Plan") which became effective on May 18, 1998. The Company has reserved 400,000
shares of common stock for issuance upon the exercise of options granted under
the Distributor Option Plan. In May 1998, the Company granted Options to
purchase 240,887 shares of common stock to existing Blue Rhino distributors at
an exercise price equal to $13.00 per share. Blue Rhino distributors and their
stockholders, partners, members, directors, general partners, managers,
officers, employees and consultants are eligible to receive options under the
Distributor Option Plan. As of July 31, 1998 the Company had 240,887 options
outstanding, none of the Options are vested or exercisable. Options issued
under the Distributor Option Plan vest ratably over 4 years and expire 10 years
from their date of grant. For the fiscal year ended July 31, 1998, the Company
recognized compensation expense of $50 related to the issuance of stock options
under the Distributor Option Plan.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting For Stock-Based Compensation." Accordingly, since options were
granted at fair value, compensation expense has not been recognized for stock
options granted to date under the 1994 Stock Incentive Plan, the 1998 Stock
Incentive Plan and the Director Stock Incentive Plan. Had compensation expense
for all of the option plans been determined for options granted since August 1,
1995 consistent with SFAS No. 123, the Company's net loss and loss per share
would have increased to the following pro forma amounts.
<TABLE>
<CAPTION>
For the Fiscal Years
Ended
-------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Net loss:
As reported....................................... $(7,431) $(5,584) $(2,476)
======= ======= =======
Pro forma......................................... $(7,454) $(5,649) $(2,801)
======= ======= =======
Basic and diluted loss per common share:
As reported....................................... $ (4.96) $ (3.74) $ (1.04)
======= ======= =======
Pro forma......................................... $ (4.97) $ (3.78) $ (1.15)
======= ======= =======
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-
average assumptions used for all grants: expected lives of 6 years; expected
volatility 30%; expected dividends of $0 and a risk-free interest rate of 5.5%.
F-17
<PAGE>
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
A summary of the status of the Company's Plans at July 31, 1996, July 31,
1997 and 1998 and changes during the periods then ended is presented in the
table and narrative below:
<TABLE>
<CAPTION>
1994 Stock 1998 Stock Distributor Director
Incentive Plan Incentive Plan Option Plan Option Plan
---------------- ---------------- ---------------- ----------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Exercise Exercise Exercise
Shares Price Shares Price Shares Price Shares Price
------- -------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares under option:
Outstanding at August 1, 1995.. 43,478 $4.59 -- $ -- -- $ -- -- $ --
Granted........................ 37,731 4.79 -- -- -- -- -- --
Exercised...................... -- -- -- -- -- -- -- --
Forfeited...................... 9,149 4.59 -- -- -- -- -- --
Exercisable.................... 7,183 4.59 -- -- -- -- -- --
Weighted average fair value of
options granted............... -- 1.53 -- -- -- -- -- --
Outstanding at July 28, 1996... 72,060 4.70 -- -- -- -- -- --
Granted........................ 104,044 6.69 -- -- -- -- -- --
Exercised...................... -- -- -- -- -- -- -- --
Forfeited...................... 12,159 4.85 -- -- -- -- -- --
Exercisable.................... 21,399 4.67 -- -- -- -- -- --
Weighted average fair value of
options granted............... -- 2.21 -- -- -- -- -- --
Outstanding at July 31, 1997... 163,945 5.94 -- -- -- -- -- --
Granted........................ 19,643 6.86 275,300 13.00 240,887 13.00 -- --
Exercised...................... -- -- -- -- -- -- -- --
Forfeited...................... 979 6.15 -- -- -- -- -- --
Exercisable.................... 182,609 6.04 -- -- -- -- -- --
Weighted average fair value of
options granted............... -- 2.69 -- 5.29 -- 4.77 -- --
Outstanding at July 31, 1998... 182,609 6.04 275,300 13.00 240,887 13.00 -- --
Options available for grant at
July 31, 1998................. -- -- 24,700 -- 159,113 -- 100,000 --
</TABLE>
Warrants--During fiscal 1998, the Company issued 81,913 warrants ("1998
Warrants") to stockholders in connection with loans made to the Company (Note
7). In fiscal 1997, the Company issued approximately 226,841 warrants in
connection with the cylinder display lease facility (Note 10), and the issuance
of the common stock to PPH (Note 15). In addition, during fiscal years ended
July 28, 1996 and July 31, 1995, the Company issued approximately 303,513
warrants to individuals to purchase common stock for their assistance in
connection with various debt placements. During fiscal 1998, 938,789 shares of
common stock were issued for the exercise of all outstanding warrants, except
for the 1998 Warrants, upon consummation of the initial public offering.
F-18
<PAGE>
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
14. Loss per Share:
The Company has retroactively adopted SFAS No. 128, "Earnings Per Share."
The impact of adopting this statement had no effect on loss per share for
fiscal years 1998, 1997 and 1996. The basic and diluted loss per share was
determined as follows:
<TABLE>
<CAPTION>
Fiscal Years Ended Three Months Ended
------------------------- -----------------------
July July July
28, 31, 31, October 31, October 31,
1996 1997 1998 1997 1998
------- ------- ------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Basic and diluted loss per
common share:
Net loss................. $(7,431) $(5,584) $(2,476) $(1,340) $ (70)
Less: Redeemable
preferred stock
dividends............... 636 687 596 107 --
------- ------- ------- ------- ------
Loss applicable to common
stockholders.............. $(8,067) $(6,271) $(3,072) $(1,447) $ (70)
======= ======= ======= ======= ======
Weighted average common
shares used in computing
the loss per common share
(in thousands):
Basic and diluted........ 1,628 1,678 2,945 1,779 7,631
======= ======= ======= ======= ======
Basic and diluted loss per
common share.............. $ (4.96) $ (3.74) $ (1.04) $ (0.81) $(0.01)
======= ======= ======= ======= ======
</TABLE>
Options to purchase common stock and the assumed exercise of warrants
during the fiscal years ended 1998, 1997 and 1996 have been excluded from the
computation of diluted loss per common share as they were anti-dilutive. For
the three months ended October 31, 1997, the assumed conversion of preferred
shares would have been anti-dilutive.
15. Related Party Transactions:
PPH, Caribou Cylinder Exchange, L.L.C. ("Caribou"), Javelina Cylinder
Exchange, L.L.C. ("Javelina") and Raven Propane, L.L.C. ("Raven Propane"), are
affiliates and operate as distributors for the Company. PPH began operations as
a distributor during fiscal 1996, while Caribou, Javelina and Raven Propane
began operations as distributors during fiscal 1998. The following represents
related party balances with these affiliates outstanding at July 28, 1996 and
July 31, 1997 and 1998, and transactions for the fiscal years then ended,
respectively:
<TABLE>
<CAPTION>
PPH Javelina Raven Caribou
-------------------- -------- ----- -------
1996 1997 1998 1998 1998 1998
------ ------ ------ -------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Notes receivable................... $1,399 $1,191 $1,072 $-- $-- $--
Trade accounts payable............. 407 648 903 33 130 33
Cost of sales--distributors........ 1,561 5,319 7,889 118 381 31
Interest income.................... 43 142 117 -- -- --
Lease income....................... 25 160 160 2 3 1
Issuance of common stock........... -- 1,000 -- -- -- --
Cylinder usage fee................. -- -- 51 -- 3 --
Cylinder purchases................. -- -- 1,397 7 89 22
</TABLE>
Certain operational and financial management services were provided to
the Company by an affiliate through common ownership. Fees for these services
for the fiscal years ended July 28, 1996 and July 31, 1997 were approximately
$519, and $154, respectively.
The Company leases a facility from an affiliate under a noncancelable
operating lease which expires in December 1998. Future minimum lease payments
for the lease are $34 for the fiscal year ending 1999. Rent expense under this
lease was $22, $76, and $82 for the fiscal years ended July 28, 1996, and July
31, 1997 and 1998, respectively.
F-19
<PAGE>
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
The Company leases a facility and certain equipment to PPH. Lease income
from PPH for the fiscal years ended July 28, 1996, July 31, 1997, and 1998 was
$62, $56, and $55, respectively.
During fiscal 1998, the Company paid professional fees to Pedersen &
Houpt, P.C. ("P & H") in the amount of $401. A stockholder of P & H is also a
director of the Company.
16. Income Taxes:
Due to the Company's operating losses, there is no current or deferred
tax expense for the fiscal years ended July 28, 1996, and July 31, 1997 and
1998.
A reconciliation of the differences between the statutory federal income
tax rate of 34% and the effective rate of income tax expense is as follows:
<TABLE>
<CAPTION>
Fiscal Years Ended
--------------------------
July 28, July 31, July 31,
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Federal statutory tax rate........................... 34.0% 34.0% 34.0%
Operating losses having no current tax benefit..... (33.8) (33.9) (33.1)
Permanent differences and other.................... (0.2) (0.1) (0.9)
----- ----- -----
Effective tax rate................................... 0.0% 0.0% 0.0%
===== ===== =====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liability are as follows at:
<TABLE>
<CAPTION>
July July July
28, 31, 31,
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Assets:
Net operating loss carry forward .................. $ 4,842 $ 6,981 $ 7,781
Allowance for doubtful accounts ................... 32 60 242
Inventory capitalization........................... 19 4 105
Organization costs................................. 37 24 12
Other ............................................. 34 78 23
Depreciation and amortization...................... -- 1 --
------- ------- -------
Total gross deferred tax assets.................... 4,964 7,148 8,163
Valuation allowance ............................... (4,960) (7,148) (8,095)
------- ------- -------
Net deferred tax assets ............................. $ 4 $ -- $ 68
======= ======= =======
Liability:
Depreciation and amortization...................... $ 4 $ -- $ 68
======= ======= =======
</TABLE>
At July 31, 1998, the Company had a net operating loss carryforward for
federal income tax purposes of approximately $19,900 which is available to
offset future federal taxable income, if any, in varying amounts through 2013.
F-20
<PAGE>
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
17. Defined Contribution Plan:
The Company has a 401(k) plan, sponsored by an affiliate, which allows
participants to make voluntary pretax contributions, through payroll
deductions, up to 10% of total compensation, subject to Internal Revenue
Service limitations. All employees who have at least one year of service and
1,000 hours within that year of service are eligible to participate in this
plan. The plan provides for discretionary profit sharing contributions by the
Company. The Company made no contributions to the plan during fiscal 1996, 1997
and 1998.
18. Change in Fiscal Year End:
In 1997, the Company changed from a 52--53 week year end, to a July 31
fiscal year end. The effect of this change was not material.
19. Subsequent Events:
The Company completed three acquisitions in August and September 1998 for
approximately $1.1 million in the aggregate related to assets including
cylinders, cylinder display racks, and right, title and interest in and to
sellers' retail propane cylinder exchange accounts and locations. These
acquisitions were funded with proceeds received from the Initial Public
Offering.
20. Quarterly Financial Data (unaudited):
<TABLE>
<CAPTION>
Fiscal 1997 Quarter Ended
----------------------------------------
April July
October 31, January 31, 30, 31,
----------- ----------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales............................. $ 2,491 $ 2,018 $ 3,000 $ 6,702
======= ======= ======= =======
Gross profit.......................... $ 285 $ 218 $ 522 $ 1,542
======= ======= ======= =======
Net loss.............................. $(1,215) $(1,566) $(1,971) $ (832)
======= ======= ======= =======
Per share data:
Basic and diluted earnings (loss)
per common share................... $ (0.85) $ (1.07) $ (1.26) $ (0.57)
======= ======= ======= =======
<CAPTION>
Fiscal 1998 Quarter Ended
----------------------------------------
April July
October 31, January 31, 30, 31,
----------- ----------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales............................. $ 4,140 $ 4,174 $ 5,694 $13,364
======= ======= ======= =======
Gross profit.......................... $ 985 $ 958 $ 1,372 $ 3,532
======= ======= ======= =======
Net income (loss)..................... $(1,340) $(1,223) $(1,067) $ 1,154
======= ======= ======= =======
Per share data:
Basic earnings (loss) per common
share................................ $ (0.81) $ (0.83) $ (0.72) $ 0.18
======= ======= ======= =======
Diluted earnings (loss) per common
share................................ $ (0.81) $ (0.83) $ (0.72) $ 0.17
======= ======= ======= =======
</TABLE>
21. Equity Method
On February 12, 1998, the Company invested $635 in Bison Valve, L.L.C.
("Bison Valve") in the form of a convertible note receivable. The loan is
convertible into 65% of the membership units of Bison Valve, at $1 per unit, at
the option of the Company. The loan accrued interest at 9.5% for four (4)
F-21
<PAGE>
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
years after which the principal and accrued interest will be amortized over two
(2) years. Bison Valve was formed to market, produce and sell a specialty valve
to the Company's distributors and third parties. The Company has accounted for
its investment in Bison Valve using the equity method of accounting to reflect
the Company's funding of certain losses incurred by this entity primarily
related to researching, developing, marketing and producing certain propane
products.
The financial statements for the year ended July 31, 1998 have been
revised primarily to reflect the application of this equity method of
accounting to the operating results of the investee Bison Valve, L.L.C., net of
the allowance previously recorded of $130. The net effect of the revisions to
the 1998 financial statements was an increase in the net loss of $107 or $0.03
per share.
22. Events Subsequent to the Date of the Independent Auditor's Report
(Unaudited):
The interim consolidated financial data with respect to October 31, 1998
(as revised) and 1997 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
October 31, 1998 and the results of operations and cash flows for the three
months ended October 31, 1998 and 1997, have been made. The results for the
three months ended October 31, 1998 are not necessarily indicative of the
results of operations for a full year. Interim consolidated financial data
conforms to the requirements of Article 10 of Regulation S-X and, therefore,
does not include all the disclosures normally required under generally accepted
accounting principles.
The consolidated financial statements of the Company include the accounts
of its affiliate, USA Leasing L.L.C. ("USA Leasing"), formed in October 1998.
All intercompany transactions and balances between the Company and USA Leasing
have been eliminated in consolidation. USA Leasing is owned by four individuals
affiliated with the Company as officers, directors and/or stockholders. On
October 30, 1998, the Company sold approximately $6,500 of cylinder inventories
to USA Leasing at book value which was funded from borrowings under USA
Leasing's credit facility with NationsBank. Under the terms of this credit
facility, each of the owners of USA Leasing provided a guarantee for 5% of the
total amount outstanding under the credit facility with the remaining 80% being
guaranteed by the Company. As of October 31, 1998, USA Leasing's 60 day credit
facility of $6,500 bore interest at prime rate plus 1.0% and was subsequently
converted to a two year credit facility on December 31, 1998 to borrow up to
$13,000 which bears interest at LIBOR plus 2.25%. The credit facility is
collateralized by a blanket lien on all of the assets of USA Leasing (primarily
cylinders held under operating lease agreements with a carrying value of
approximately $6,500 as of October 31, 1998). In addition, the Company has
received a subordinate security interest in all of USA Leasing's assets as
consideration for the Company's guarantee. Approximately $1,000 of cylinders
owned by the Company at October 31, 1998 were sold to USA Leasing in December
1998 at book value. In addition, during November and December 1998, the Company
acquired and sold approximately $3,400 of cylinders to USA Leasing at no gain
or loss. USA Leasing has entered into operating lease agreements with the
Company's independent distributors to lease the cylinders at 1% of the initial
cylinder value monthly.
During the three months ended October 31, 1998, the Company recognized,
under the equity method of accounting, a loss of $311 representing the
remaining balance of the Company's loan to Bison Valve, L.L.C. This charge
reflects the Company's funding of certain losses incurred by this entity
primarily related to researching, developing, marketing and producing certain
propane products. In December 1998, the Company signed a letter of intent to
purchase certain assets of Bison Valve (primarily patent rights and
manufacturing equipment) for $1,100 in common stock and warrants to purchase
100,000 shares of common stock of the Company at the market price as defined in
the agreement. These assets, once acquired, will be amortized over their
respective useful lives. All adjustments described in this Note 22 resulted in
a decrease in the results of operations for the three months ended October 31,
1998 of $492 ($0.06 per common share).
F-22
<PAGE>
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
In December 1998, the Company entered into a $1,200 credit facility which
includes a $7,000 revolving line of credit and a $5,000 acquisition facility
with NationsBank, N.A. (the "Bank Credit Facility"). The Company's ability to
borrow under the Bank Credit Facility will be reduced by an amount equal to the
contingent liability under the guarantee of USA Leasing's credit facility with
NationsBank, N.A. The contingent liability at December 31, 1998 was
approximately $8,700. The Bank Credit Facility replaces a prior facility with
NationsBank, N.A. and is collateralized by a lien on substantially all of the
Company's assets. The Bank Credit Facility requires the Company to meet certain
covenants, including minimum net worth and cash flow. The loans under the Bank
Credit Facility bear interest at a maximum rate of LIBOR plus 2.25%.
The Company consummated three acquisitions, for an aggregate purchase
price of approximately $2.3 million for assets including cylinder displays and
cylinder exchange accounts and locations. These acquisitions were funded with
cash provided by operations and the remaining proceeds from the Company's
initial public offering. These acquisitions also include a purchase price
adjustment based on the number of locations transferred to the Company.
The excess cost over fair market value of the net assets acquired for the
above acquisitions was approximately $2.1 million, which is being amortized on
a straight-line basis over 30 years.
On November 24, 1998 the Board of Directors approved, and on December 22,
1998 the stockholders ratified, an increase in the number of shares reserved
and available for distribution under the Company's 1998 Stock Incentive Plan by
900,000 shares effective December 22, 1998.
F-23
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2,000,000 Shares
Blue Rhino Corporation
Common Stock
-----------------
PROSPECTUS
-----------------
Merrill Lynch & Co.
NationsBanc Montgomery Securities LLC
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 Securties and Exchange
Commission (the "Commission") registration fee, the NASD filing fee and the
Nasdaq listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............. $ 14,467
NASD filing fee................................................. 4,500
Nasdaq listing fee.............................................. 17,500
Blue Sky fees and expenses...................................... 5,000
Printing and engraving expenses................................. 200,000
Legal fees and expenses......................................... 250,000
Accounting fees and expenses.................................... 60,000
Miscellaneous................................................... 48,533
--------
Total......................................................... $600,000
========
</TABLE>
Item 14. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law (the "DGCL")
authorizes indemnification of directors, officers, employees and agents of the
Company; allows the advancement of costs of defending against litigation; and
permits companies incorporated in Delaware to purchase insurance on behalf of
directors, officers, employees and agents against liabilities whether or not in
the circumstances such companies would have the power to indemnify against such
liabilities under the provisions of the statute. The Company's Second Amended
and Restated Certificate of Incorporation ("Charter") provides that the Company
will indemnify its directors and officers to the fullest extent permitted by
law.
Under the provisions of the Company's Charter, any director or officer
who, in his or her capacity as such, is made or threatened to be made a party
to any suit or proceeding shall be indemnified if the Board of Directors
determines such director or officer acted in good faith and in a manner he or
she reasonably believed to be in or not opposed to the best interests of the
Company or, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. The Company will
not however indemnify any director or officer where such director or officer:
(a) breaches his or her duty of loyalty to the Company or its stockholders; (b)
fails to act in good faith or engages in intentional misconduct or knowing
violation of law; (c) authorizes payment of an unlawful dividend or stock
repurchase or redemption; or (d) obtains an improper personal benefit. While
liability for monetary damages has been eliminated, equitable remedies such as
injunctive relief or rescission remain available. In addition, a director is
not relieved of his or her responsibilities under any other law, including the
federal securities laws.
Indemnification under the Company's Charter and Amended and Restated By-
laws ("By-laws") includes payment by the Company of expenses in defending an
action, suit or proceeding in advance of the final disposition of such action,
suit or proceeding upon receipt of an undertaking by the indemnified party to
repay such advance if it is ultimately determined that such person is not
entitled to indemnification under the Charter, which undertaking may be
accepted without reference to the financial ability of such person that makes
such repayments. The Company is not responsible for the indemnification of any
person seeking indemnification in connection with a proceeding initiated by
such person unless the initiation was approved by the Board of Directors of the
Company. The Charter and the DGCL further provide that such indemnification is
not exclusive of any other rights to which such
II-1
<PAGE>
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
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
Item 15. Recent Sales of Unregistered Securities.
On September 24, 1996, the Company issued a warrant to purchase 227,048
shares of its common stock at an exercise price of $6.61 per share to
Forsythe/Lunn Technology Partners, L.P. in connection with the execution of a
master lease agreement between the Company and Forsythe/McArthur & Associates,
Inc. The warrants may be exercised at any time before September 24, 2006. These
warrants were issued without registration under the Securities Act in reliance
on Section 4(2) of the Securities Act.
On April 30, 1997, the Company sold 151,227 shares of its common stock
and warrants to purchase an additional 113,420 shares of its common stock with
an exercise price of $6.61 per share to Platinum Propane Holding, L.L.C.
("Platinum Propane") for total consideration of $1,000,000 in cash. The
warrants may be exercised at any time prior to April 30, 2007. The shares and
warrants sold to Platinum Propane were issued without registration under the
Securities Act in reliance on Section 4(2) of the Securities Act and Rule 506
of Regulation D promulgated thereunder.
On January 1, 1998, the Company issued $3,250,000 of 10.5% Subordinated
Notes and warrants to purchase in the aggregate 81,913 shares of common stock
with an exercise price equal to the initial public offering price of the common
stock offered hereby (the "1998 Warrants") to Lennard Carlson, Craig J.
Duchossois, Andrew J. Filipowski, and James P. Liautaud, four stockholders of
the Company for total consideration of $3,250,000 in cash. The Subordinated
Promissory Notes bear interest at 10.5% per annum and are due on the earlier of
a qualified public offering of the Company's common stock or December 31, 2000.
The warrants may be exercised at any time before December 31, 2008. The
Subordinated Promissory Notes and warrants purchased by the stockholders were
offered and sold without registration under the Securities Act in reliance on
Section 4(2) of the Securities Act and Rule 505 of Regulation D promulgated
thereunder.
On May 18, 1998, the Company issued 57,692 shares of common stock to
Bison Propane Bottle Exchange, L.L.C. ("Bison Propane") in satisfaction of a
portion of the purchase price of assets acquired from Bison Propane pursuant to
an Asset Purchase Agreement dated December 10, 1997. These shares were issued
in reliance upon Section 4(2) of the Securities Act and Regulation D
promulgated thereunder.
Since formation, the Company has granted options to its employees for
182,906 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 14,869 shares of common stock have been exercised and options to
purchase 167,740 shares are currently exercisable. The options were issued
without registration under the Securities Act in reliance on Section 4(2) and
Rule 701 promulgated thereunder.
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
Company's consolidated financial statements or notes thereto.
II-2
<PAGE>
Item 17. Undertakings.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, 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 February 9, 1999.
Blue Rhino Corporation
/s/ Billy D. Prim
By: _______________________________
Billy D. Prim
Chairman of the Board, President
and
Chief Executive Officer
II-4
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 2 to Registration Statement has been signed below by the
following persons in the capacities indicated on February 9, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Billy D. Prim Chairman of the Board, President and Chief
___________________________________________ Executive Officer (Principal Executive
Billy D. Prim Officer)
/s/ Mark Castaneda Secretary, Chief Financial Officer and
___________________________________________ Director (Principal Financial and
Mark Castaneda Accounting Officer)
/s/ Andrew J. Filipowski Vice Chairman of the Board
___________________________________________
Andrew J. Filipowski
/s/ Craig J. Duchossois Director
___________________________________________
Craig J. Duchossois
/s/ Steven D. Devick Director
___________________________________________
Steven D. Devick
/s/ John H. Muehlstein Director
___________________________________________
John H. Muehlstein
/s/ Richard A. Brenner Director
___________________________________________
Richard A. Brenner
</TABLE>
II-5
<PAGE>
EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
1.1 Form of Underwriting Agreement.+
3.1 Second Amended and Restated Certificate of Incorporation of the
Company, incorporated by reference to Exhibit 3.1 to the Company's
Report on Form 10-Q dated July 2, 1998.
3.2 Amended and Restated Bylaws of the Company, incorporated by reference
to Exhibit 3.2 to the Company's Registration Statement on Form S-1
dated May 18, 1998.
4.1 Form of Certificate of Common Stock of the Company, incorporated by
reference to Exhibit 4.1 to the Company's Registration Statement on
Form S-1 dated May 18, 1998.
5.1 Legal Opinion of Pedersen & Houpt, P.C.+
10.1(a) Loan Agreement, dated as of December 31, 1998, between the Company and
NationsBank, N.A.+
10.1(b) Security Agreement, dated as of December 31, 1998 between the Company
and NationsBank, N.A.+
10.1(c) Promissory Note dated December 31, 1998 made by the Company in favor
of NationsBank, N.A.+
10.1(d) Promissory Note dated December 31, 1998 made by the Company in favor
of NationsBank, N.A.+
10.2 Note Purchase Agreement, dated as of January 1, 1998, among the
Company and Craig J. Duchossois, Andrew Filipowski, James Liautaud and
Lennard Carlson, incorporated by reference to Exhibit 10.2 to the
Company's Registration Statement on Form S-1 dated May 18, 1998.+
10.4(a) Asset Purchase Agreement, dated as of December 9, 1997, between the
Company and Bison Propane Bottle Exchange, LLC, incorporated by
reference to Exhibit 10.4(a) to the Company's Registration Statement
on Form S-1 dated May 18, 1998.
10.4(b) First Amendment to the Asset Purchase Agreement, dated as of December
10, 1997, between the Company and Bison Propane Bottle Exchange, LLC,
incorporated by reference to Exhibit 10.4(b) to the Company's
Registration Statement on Form S-1 dated May 18, 1998.
10.5 Multi-Draw Convertible Secured Promissory Note, dated as of February
12, 1998, by Bison Valve, L.L.C. to the Company, incorporated by
reference to Exhibit 10.5 to the Company's Registration Statement on
Form S-1 dated May 18, 1998.
10.6 Collateral Assignment of License Agreement, dated as of February 12,
1998, by Bison Valve, L.L.C. to the Company, incorporated by reference
to Exhibit 10.6 to the Company's Registration Statement on Form S-1
dated May 18, 1998.
10.7(a) Form of Distribution Agreement of the Company and Its Distributors,
incorporated by reference to Exhibit 10.7(a) to the Company's
Registration Statement on Form S-1 dated May 18, 1998.
10.7(b) Form of Sublease of Personal Property between the Company and Its
Distributors, incorporated by reference to Exhibit 10.7(b) to the
Company's Registration Statement on Form S-1 dated May 18, 1998.
10.8(a) Form of Security Agreement to Secure the Sale of Cylinders between the
Company and Its Distributors, incorporated by reference to Exhibit
10.8(a) to the Company's Registration Statement on Form S-1 dated May
18, 1998.
10.8(b) Form of Promissory Note Evidencing the Sale of Cylinders between the
Company and Its Distributors, incorporated by reference to Exhibit
10.8(b) to the Company's Registration Statement on Form S-1 dated May
18, 1998.
10.9 Amended and Restated Stock Option Plan for Non-employee Directors.+
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
10.10 Distributor Stock Option Plan of the Company, incorporated by
reference to Exhibit 10.13 to the Company's Registration Statement on
Form S-1 dated May 18, 1998.
10.11 1994 Stock Incentive Plan of the Company, incorporated by reference
to Exhibit 10.14 to the Company's Registration Statement on Form S-1
dated May 18, 1998.
10.12 Amended and Restated Registration Rights Agreement, dated as of March
1, 1997, among the Company, Forsythe/Lunn Technology Partners,
L.L.C., Platinum Propane Holding, L.L.C., the Purchasers of Units
pursuant to the Unit Purchase Agreement dated October 11, 1995 and
the Purchasers of the Company's Series A Convertible Participating
Preferred Stock, incorporated by reference to Exhibit 10.15 to the
Company's Registration Statement on Form S-1 dated May 18, 1998.
10.13 1998 Stock Incentive Plan of the Company, incorporated by reference
to Exhibit 10.18 to the Company's Registration Statement on Form S-1
dated May 18, 1998.
10.14 Real Estate Lease between the Company and Rhino Real Estate, L.L.C.
dated as of January 1, 1999.+
10.15(a) Master Lease dated as of February 1, 1996 between the Company and
Nelco, Ltd., incorporated by reference to Exhibit 10.20(a) to the
Company's Registration Statement as Form S-1 dated May 18, 1998.
10.15(b) Lease Agreement dated August 11, 1996 between the Company and Leasing
Innovations, Incorporated.+
10.15(c) Lease Agreement dated June 26, 1997 between the Company and Green
Tree Vendor Services Corporation, incorporated by reference to
Exhibit 10.20(c) to the Company's Registration Statement on Form S-1
dated May 18, 1998.
10.16 Services Agreement dated June 1, 1997 between the Company and
Information Management Systems Services, incorporated by reference to
Exhibit 10.16 to the Company's Annual Report on Form 10-K dated
October 29, 1998.
10.17(a) Limited Guaranty dated December 31, 1998 made by the Company in favor
of NationsBank, N.A.+
10.17(b) Subordinated Security Agreement dated December 31, 1998 between the
Company and USA Leasing, L.L.C.+
21.1 Subsidiaries of the Company, incorporated by reference to Exhibit
21.1 to the Company's Registration Statement on Form S-1 dated May 8,
1998.
23.1 Consent of Pedersen & Houpt, P.C.
23.2 Consent of PricewaterhouseCoopers LLP
23.3 Consent of Barbecue Industry Association of America
24.1 Power of Attorney (see Signature Page)+
27.1 Financial Data Schedule
</TABLE>
- --------
+Previously filed.
<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 of Blue Rhino
Corporation, as filed with the Securities and Exchange Commission on
February 9, 1999.
/s/ Pedersen & Houpt, P.C.
Pedersen & Houpt, P.C.
Chicago, Illinois
February 9, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Amendment No. 2 to Registration
Statement on Form S-1 (File No. 333-70127) of our report dated September 22,
1998, except for the information in Note 21 for which the date is February 8,
1999, on our audits of the consolidated financial statements of Blue Rhino
Corporation. We also consent to the references to our firm under the captions
"Experts" and "Selected Consolidated Financial Data."
/s/ PricewaterhouseCoopers LLP
Greensboro, North Carolina
February 9, 1999
<PAGE>
Exhibit 23.3
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 Amendment No. 2 Attitude Study performed on behalf of the
Barbecue Industry Association in this Amendment No. 2 to the Registration
Statement on Form S-1 of Blue Rhino Corporation, as filed with the Securities
and Exchange Commission on February 9, 1999.
Barbecue Industry Association of America
By: /s/ Bill G. Neal
---------------------------
Name: Bill G. Neal
-------------------------
Title: Chairman
------------------------
Barbecue Industry Association of America
Greeneville, Tennessee
February 9, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE BLUE RHINO CORPORATION CONSOLIDATED BALANCE SHEETS AS OF JULY 31, 1998
(AUDITED) AND OCTOBER 31, 1998 (UNAUDITED) AND CONSOLIDATED STATEMENTS OF
OPERATIONS FOR THE FISCAL YEAR ENDED JULY 31, 1998 (AUDITED) AND THREE MONTHS
ENDED OCTOBER 31, 1998 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> JUL-31-1998 JUL-31-1999
<PERIOD-START> AUG-01-1997 AUG-01-1998
<PERIOD-END> JUL-31-1998 OCT-31-1998
<CASH> 5,908 4,122
<SECURITIES> 0 0
<RECEIVABLES> 8,035 5,349
<ALLOWANCES> 134 0
<INVENTORY> 2,377 0
<CURRENT-ASSETS> 17,213 11,301
<PP&E> 10,750 8,740
<DEPRECIATION> 2,245 0
<TOTAL-ASSETS> 30,470 35,377
<CURRENT-LIABILITIES> 5,394 3,774
<BONDS> 104 86
0 0
0 0
<COMMON> 8 8
<OTHER-SE> 24,808 24,812
<TOTAL-LIABILITY-AND-EQUITY> 30,470 35,377
<SALES> 27,372 9,222
<TOTAL-REVENUES> 27,372 9,222
<CGS> 20,525 6,782
<TOTAL-COSTS> 20,525 6,782
<OTHER-EXPENSES> 7,526 2,085
<LOSS-PROVISION> 324 311
<INTEREST-EXPENSE> 1,707 32
<INCOME-PRETAX> (2,476) (70)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,476) (70)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,476) (70)
<EPS-PRIMARY> (1.04) (0.01)
<EPS-DILUTED> (1.04) (0.01)
</TABLE>
