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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 31, 2001
COMMISSION FILE NUMBER 0-24287
BLUE RHINO CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 56-1870472
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
104 CAMBRIDGE PLAZA DRIVE
WINSTON-SALEM, NORTH CAROLINA 27104
(336) 659-6900
(Address of principal executive offices)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
At September 17, 2001, the aggregate market value of the registrant's
common stock held by non-affiliates of the registrant was approximately
$15,573,517.
At September 17, 2001, the number of shares outstanding of registrant's
common stock was 9,279,152
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's proxy statement with respect to
the 2001 annual meeting of stockholders of the registrant have been incorporated
by reference in Part III of this Annual Report on Form 10-K.
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FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements
that relate to our plans, objectives, estimates, goals and future financial
performance. Words such as "may," "will," "should," "expects," "intends,"
"plans," "anticipates," "believes," "estimates," "predicts," "potential,"
"continue," and variations of such words and similar expressions, identify such
forward-looking statements. Our business is subject to numerous risks and
uncertainties, including our ability to place Blue Rhino cylinder exchange at
additional retail locations, our ability to integrate acquisitions, our ability
to mitigate the effects of high propane commodity prices successfully and our
ability to launch new products and services successfully. These and other risks
and uncertainties, many of which are addressed in the section entitled "Business
- Additional Factors that may Affect our Business or Future Results" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," could cause our actual results, performance and developments to be
materially different from those expressed or implied by any of these
forward-looking statements.
ADDITIONAL INFORMATION
The Blue Rhino name and logo, the names RhinoTUFF(R), Tri-Safe(R), Bison(R),
Uniflame(R), UniGrill(R), DuraClay(R), GardenArt(R), America's Choice For Grill
Gas(R), Endless Summer(TM), Endless Summer Comfort(TM), Grill Gas & Design,(TM)
Harmony(TM) and ShippingSpot(TM) are our registered and pending trademarks. This
Annual Report on Form 10-K also includes trademarks of companies other than the
registrant.
BLUE RHINO CORPORATION
INDEX
PART I
Item 1: Business.................................................................. 1
Item 2: Properties................................................................ 7
Item 3: Legal Proceedings......................................................... 7
Item 4: Submission of Matters to a Vote of Security Holders....................... 7
PART II
Item 5: Market for the Registrant's Common Equity and Related Stockholder Matters. 8
Item 6: Selected Consolidated Financial Data...................................... 9
Item 7: Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................. 10
Item 7A: Quantitative and Qualitative Disclosures About Market Risk................ 16
Item 8: Financial Statements and Supplementary Data............................... 18
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial 46
Disclosure................................................................
PART III
Item 10: Directors and Executive Officers.......................................... 46
Item 11: Executive Compensation.................................................... 46
Item 12: Security Ownership of Certain Beneficial Owners and Management............ 46
Item 13: Certain Relationships and Related Transactions............................ 46
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K........... 47
PART I
ITEM 1. BUSINESS
GENERAL
We believe we are the leading national provider of propane grill
cylinder exchange as well as a leading provider of complimentary propane and
non-propane products to consumers through many of the world's greatest
retailers. Our branded propane grill cylinder exchange service is offered at
more than 27,000 retail locations in 46 states and Puerto Rico at leading home
improvement centers, mass merchants, hardware, grocery and convenience stores,
including Home Depot, Lowe's, Wal-Mart, Sears, Kmart, Kroger, Food Lion,
Winn-Dixie, SuperAmerica, Circle K and ExxonMobil. Propane grill cylinder
exchange provides consumers with a safe and convenient alternative to
traditional propane tank refilling.
We are a brand marketing company focused on increasing consumer demand,
increasing market share, managing retailer and distributor relationships and
managing our proprietary management information systems to leverage our
transactional infrastructure. Our 44 independent distributors focus on the
operational infrastructure of our cylinder exchange service including refilling,
refurbishing and direct-store delivery of grill cylinders to retailers. We
believe that our distributor network affords us the opportunity to service
approximately 90% of the cylinder exchange markets in the United States.
Our products business segment is focused on propane appliances like
propane grills and patio heaters that use grill cylinders as their fuel source
in order to increase consumer demand for grill cylinder exchange. This segment
was significantly expanded with our April 2000 acquisition of Uniflame
Corporation, an import and design company. In addition, we offer non-propane
products including charcoal grills, fireplace accessories and garden products.
These products are sold through many of the same home improvement centers and
mass merchants that offer our branded cylinder exchange service, as well as
hearth and department stores throughout the United States. Also, through our
acquisition of QuickShip, Inc. in October 2000, we offer in-store retail
shipping services, primarily at major grocery chains.
OUR MARKET
The market for propane grill cylinder exchange is a large and growing
market, which we currently estimate to be a $1 billion annual market
opportunity. We believe we can increase this market opportunity by offering new
propane appliances by importing products. Based on the 1999 Barbecue Grill Usage
and Attitude Study conducted on behalf of the Barbecue Industry Association of
America (BIA), we believe that approximately 42 million United States households
own a propane grill. The BIA reports that, since 1997, sales of propane grills
have exceeded the combined annual sales of charcoal, natural gas and electric
grills.
The BIA study also estimates that the average propane grill owner uses
1.9 cylinders of propane per year, which results in an estimated 80 million
cylinder transactions per year. According to the BIA study, propane grill
cylinder exchange, as opposed to the traditional refilling of empty cylinders,
represents approximately 25% of all cylinder transactions, an increase from less
than 10% in 1995. Our growth has come from converting consumers from the
traditional refilling of empty cylinders, which we believe still represents
approximately 75% of the market, to our convenient and safe alternative of
propane grill cylinder exchange.
OUR STRATEGY
Our objective is to strengthen our position as a leading national
provider of cylinder exchange by providing the greatest value to consumers and
providing a return to our stakeholders. The key elements of our strategy to
achieve this objective are:
Increase Demand for Propane Grill Cylinder Exchange: We intend to
implement the following sub-strategies:
- Promote the Blue Rhino Brand and Consumer Awareness of
Cylinder Exchange. We have created a distinctive Blue Rhino
brand name and logo that we prominently feature on cylinder
sleeves and display racks. In addition, we undertake brand
marketing and promotional initiatives, including point of
purchase displays, print media and cooperative advertising,
and engage in cross-marketing promotions with other
barbecue-related products. We have also selectively placed
targeted broadcast and print media advertising campaigns that
focus on raising consumer awareness of our cylinder exchange
program and are actively involved with consumer, trade and
regulatory associations in an effort to promote the growth of
cylinder exchange.
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- Capitalize on New Overfill Prevention Device (OPD) Government
Regulations. The National Fire Protection Association (NFPA)
requires that all propane cylinders refilled after April 1,
2002 be fitted with an OPD valve. As a result of this new
safety standard many of the cylinders that are currently being
presented at refill centers will become obsolete and the
consumer will be forced to purchase or exchange for a new
cylinder that meets the safety standards. We plan to undertake
a consumer education campaign to encourage consumers to
upgrade their cylinders at one of our convenient 27,000
cylinder exchange locations. We estimate that there are
approximately 40 million cylinder valves that will become
obsolete in April 2002.
- Investment in Valve Changing Capacity. We have made a
significant investment in the specialized equipment
required to increase our valve changing capacity to
satisfy the expected demand to convert non-OPD
cylinders into OPD cylinders. In May 2000, R4
Technical Center - North Carolina, LLC, in which we
own a 49% interest, commenced operations of an
automated propane bottling and cylinder refurbishing
plant. Manchester Tank & Equipment Co. owns a 50%
interest in this joint venture, and Platinum Propane,
LLC owns the remaining 1% interest in this joint
venture. We believe this facility utilizes the most
advanced technology in the industry, is the only
facility of its kind in North America and has more
valve changing capacity than the rest of the industry
combined. We expect it to provide greater cost
efficiencies and quality control for refilling and
refurbishing cylinders.
- Overfill Prevention Device (OPD) Valves. We expect to
sell to our distributors our Underwriters
Laboratories-approved OPD valve, which automatically
stops the flow of liquid propane gas into the
cylinder when the cylinder is full, to capitalize on
the market created by NFPA standards.
- Market Propane Appliances that Use Grill Cylinders as Their
Fuel Source. In April 2000, we acquired substantially all of
the assets of Uniflame, Inc. (now Uniflame Corporation).
Uniflame's core competencies are designing and importing
products, which are sold through major retailers such as Home
Depot, Lowe's, Wal-Mart and Sears. Uniflame currently offers
propane grills, patio heaters and portable patio heaters, and
we expect Uniflame to seek additional propane-fueled products
where it can ensure quality manufacturing and sell through the
same major retailers that offer the branded Blue Rhino
cylinder exchange service.
- Patio Heaters. In April 2000, we acquired
substantially all of the assets of International
Propane Products, LLC, the designer and importer of
our Endless Summer patio heaters, which we began
selling in December 1998. Our patio heaters use the
same cylinders as propane grills, and we believe they
will increase the counterseasonal demand for cylinder
exchange. Uniflame manages the further development,
marketing and sales of patio heaters.
- Develop and Selectively Expand our Retailer Relationships. We
target the following four categories of retailers for cylinder
exchange: home centers/hardware stores, mass merchants,
grocery stores and convenience stores. Our relationships with
major retailers such as Home Depot, Lowe's, Wal-Mart, Sears,
Kmart, Kroger, Food Lion, Winn-Dixie, SuperAmerica, Circle K
and ExxonMobil allow us to place cylinders in a large number
of convenient, high traffic locations. We seek to develop and
selectively expand our relationships with retailers in the
following ways:
- Expand into New Locations of our Existing Retailers.
We work closely with our largest retail accounts to
coordinate the rollout of our cylinder exchange
service in conjunction with the opening of their new
locations.
- Selectively Establish Relationships with New
Retailers. We believe there are approximately 225,000
potential grill cylinder exchange locations in our
targeted markets, of which we currently service more
than 27,000. We establish new retail relationships
through direct sales and by acquisition. During
fiscal 2001, we added approximately 2,000 new
locations, net of discontinued locations. We
continually review our existing locations to ensure
they meet our criteria, de-install non-performing
locations and relocate those assets to more suitable
locations.
Continuously Improve Infrastructure to Support Growth in Cylinder
Exchange Transactions. In the last five years, we have developed what we believe
to be the most advanced and efficient direct-store delivery infrastructure
servicing retailers. We will continue to invest in processes and systems to
enhance our ability to handle significant growth while minimizing incremental
costs.
- Utilize Proprietary Management Information Systems (MIS) to
Enhance Efficiency. We have developed and intend to continue
to enhance our sophisticated data warehouse to streamline our
operations. We furnish each distributor with a Blue
Rhino-developed handheld device that serves as the data
collection point and integrates with our desktop computer
system to allow us to provide the retailer and the distributor
with a detailed on-line transaction and inventory history as
well as demand
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forecasts. This system also allows us to bill and collect from
retailers through an electronic gateway, thereby eliminating
data entry of transactions and the handling of paper
documents. The reporting system enables the distributor to
better manage inventory and forecast sales volumes and reduces
errors and administrative costs for both the retailer and the
distributor.
- Leverage National Distributor Network. We have also
established a network of 44 independent distributors that we
believe cover approximately 90% of the cylinder exchange
markets in the United States. We plan to leverage this network
by increasing each distributor's market penetration through
increased consumer demand for cylinder exchange and the
selective addition of new retail locations. We assist our
distributors' ability to service accounts by providing
cylinder and cylinder display leasing, electronic billing
systems through handheld terminals and other information
technology and by arranging for consolidated propane
purchasing, store training and retail merchandising.
Market Products and Services that Leverage our Infrastructure and
Offset our Seasonality. We expect to continue to pursue product and service
opportunities that allow us to leverage our existing corporate infrastructure
and offset the seasonality of our core propane grill cylinder exchange business.
These opportunities currently include:
- Barbecue grills, fireplace accessories and garden products.
Uniflame Corporation, our wholly owned subsidiary, currently
offers the propane-fueled products described above, as well as
non-propane products like charcoal grills, fireplace
accessories and an array of garden products, that are sold
through major retailers such as Home Depot, Lowe's, Wal-Mart
and Sears. These products provide leverage with manufacturers
and offset our fixed infrastructure costs.
- Retail Shipping Services. QuickShip, Inc., another of our
wholly owned subsidiaries, offers in-store, retail shipping
services that provide consumers with a convenient,
full-service, in-store postal and parcel shipping depot and
retailers with a new revenue source. We expect QuickShip to
leverage our existing corporate infrastructure and to generate
revenues during non-peak cylinder exchange periods.
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 1999 BIA study states that 75% of consumers refill their grill
cylinder rather than exchange their cylinders. Accordingly, our primary
competition currently 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.
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 1, 2002 must be fitted with an
overfill prevention device (OPD) valve. Our distributors are also governed by
local laws and regulations that 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 personnel assist the distributors in this
process whenever feasible. We play an active role in drafting model state
legislation through the National Propane Gas Association, an industry
association, which attempts to create uniform state and local legislation to
provide consumers, retailers and distributors with up-to-date safety
regulations.
PROPRIETARY RIGHTS
We have invested substantial time, effort and capital in establishing
the Blue Rhino brand and believe that our trademarks are an important part of
our business strategy. The Blue Rhino name and logo, the names RhinoTUFF(R),
Tri-Safe(R), Bison(R), Uniflame(R), UniGrill(R), DuraClay(R), GardenArt(R),
America's Choice For Grill Gas(R), Endless Summer(TM), Endless Summer
Comfort(TM), Grill Gas & Design,(TM) Harmony(TM) and ShippingSpot(TM) are our
registered and pending trademarks. In addition, we have patents issued for an
Overflow Protection Valve Assembly and a Method for Reconditioning a Propane Gas
Tank, which expire in 2018 and 2017, respectively, as well as certain other
applications pending. The protection afforded by our patents is critical to our
ability to provide our cylinder exchange service cost-effectively and to
maintain our competitive advantage. In particular, we expect our Overflow
Protection Valve Assembly patent to help enable us to capitalize on the NFPA
guidelines that become effective April 1, 2002.
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While we may apply for additional trademarks, patents or copyrights in
the future, we cannot be sure that any trademark, patent or copyright will be
issued, that any of our trademarks, patents or copyrights will be held valid if
subsequently challenged or that others will not claim rights in or ownership of
our trademarks, patents or copyrights and other proprietary rights.
SEASONALITY
We have experienced and expect to continue to experience significant
seasonal fluctuations in our revenues and net income (loss). Historically, our
revenues have been highest in our third and fourth fiscal quarters, which
include the majority of the grilling season, and lowest in our first and second
fiscal quarters, which include the winter months. Our acquisition of Uniflame
has, however, resulted in increased revenues in our first and second fiscal
quarters, which includes the months in which Uniflame historically has shipped
the majority of its products. Sustained periods of poor weather, particularly in
the spring and summer seasons, could negatively impact our revenues.
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.
EMPLOYEES
As of September 17, 2001, we had 137 employees, of whom 32 were engaged
in sales and marketing, 6 in distributor services, 9 in information systems, 56
in administration and finance and 34 in warehouse functions. We have not
experienced any work stoppages and believe we generally have good relations with
our employees.
FINANCIAL INFORMATION ABOUT SEGMENTS
In fiscal 2001, approximately $86.8 million, or 62.4%, of our revenues
were derived from cylinder exchange and approximately $52.3 million, or 37.6%,
of our revenues were derived from product sales. In fiscal 2000, approximately
$68.8 million, or 87.3%, of our revenues were derived from cylinder exchange and
approximately $10.0 million, or 12.7%, of our revenues were derived from product
sales. In fiscal 1999, over 99% of our revenues were derived from cylinder
exchange and less than 1% of our revenues were derived from product sales. For
additional financial information regarding our individual business segments, see
Note 20 of the Notes to Consolidated Financial Statements included in this
Annual Report on Form 10-K.
ADDITIONAL FACTORS THAT MAY AFFECT OUR BUSINESS OR FUTURE RESULTS
Our revenues are concentrated with a limited number of retailers under
nonexclusive arrangements that they may terminate at will. For fiscal 2001,
Wal-Mart, Home Depot, and Lowe's represented approximately 26%, 20% and 9% of
our net revenues, respectively. None of our significant retail accounts are
contractually bound to offer Blue Rhino cylinder exchange or Uniflame products.
Therefore, retailers can discontinue Blue Rhino cylinder exchange or sales of
Uniflame products at any time and offer a competitor's cylinder exchange or
products or none 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 may seek to
offer a competitor's cylinder exchange program or products competitive with
Uniflame's products at new or existing locations. If any significant retailer
materially reduces, terminates or is unwilling to expand its relationship with
us, our business may suffer.
Service of our cylinder exchange retail locations is concentrated with
a limited number of distributors. As of July 31, 2001, distributors controlled
by two entities serviced approximately 39% of our cylinder exchange retail
locations. Sales by these key distributors resulted in approximately 39% of our
cylinder exchange net sales for fiscal 2001. The five distributors owned by
Platinum Propane Holding, L.L.C. accounted for approximately 32% of our cylinder
exchange net sales for fiscal 2001. If any of our major distributors were to
reduce or terminate its relationship with us or suffer a disruption in service,
our cylinder exchange business may suffer.
Our retailer relationships depend heavily on our distributors'
performance. 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.
The poor performance of a single distributor to a national retailer could
jeopardize our entire relationship with that retailer and cause our business to
suffer.
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If our distributors and management are unable to manage growth
successfully, our business may suffer. 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. For us to continue to grow, our distributors
must be able to adequately service an increasing number of retail accounts.
Certain distributors have experienced service problems in the past, particularly
during peak demand periods such as holiday weekends. Our retailers impose
demanding service requirements on us, and our retail relationships will be
jeopardized if our distributors fail to meet these requirements. We must
implement and improve operational and financial systems and train and manage our
employee base in order to manage our expanding retailer and distributor
relationships. If we fail to manage our growth effectively, our business may
suffer.
We face competition from the grill cylinder refilling industry and from
other grill cylinder exchange providers. 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.
If we experience problems associated with the R4 Technical Center, our
business may suffer. In May 2000, R4 Technical Center - North Carolina, LLC, in
which we own a 49% ownership interest, commenced operations of an automated
propane bottling and cylinder refurbishing plant in North Carolina. If we are
unable to attract, retain and manage qualified production personnel for the
plant, or if for any reason we are unable to meet our production goals, achieve
our targeted production costs or satisfy our distributors' needs, the ability of
our distributors to service our retail accounts could be impacted and our
business may suffer.
As a result of our ownership interest, we recognize 49% of the R4
Technical Center's net earnings or losses. For the year ended July 31, 2001, we
recognized approximately $2.57 million as our proportionate share of the R4
Technical Center's net losses. If the R4 Technical Center is unable to generate
earnings, our business, financial condition and results of operations may
suffer.
If we are unable to manage the impact of new overfill prevention device
valve guidelines, our business may suffer. Guidelines published by the National
Fire Protection Association (NFPA) in Pamphlets 54 and 58 require that all grill
cylinders refilled after April 1, 2002 must be fitted with an overfill
prevention device valve. If our distributors or we cannot satisfy the demand for
compliant cylinders such that our retailers maintain an adequate supply, our
retailer relationships may suffer. In addition, we agree with our retailers in
advance with regard to the price to them per cylinder exchange unit. When
pricing, we make certain assumptions with regard to the number of cylinders that
will already have an overfill prevention device valve, on which our margins will
be greater, and the number of cylinders that will need an overfill prevention
device valve. If our assumptions are wrong, our margins on sales to that
retailer will be lower than expected, which may have an adverse effect on our
financial condition and results of operations.
We depend on management information systems to manage all aspects of
our business effectively. We depend on our management information systems (MIS)
to process orders, manage inventory and accounts receivable collections,
maintain distributor and customer information, maintain cost-efficient
operations and assist distributors in delivering products on a timely basis. In
addition, our staff of 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.
If we are unable to protect our intellectual property, we may lose
assets or require costly litigation to protect our rights. We consider our
trademarks, particularly the Blue Rhino logo and 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 names 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.
Our business is subject to seasonal and quarterly fluctuations. 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 cylinder exchange revenue
during our third and fourth fiscal quarters ending April 30 and July 31 and a
significant
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percentage of our product revenue during our first and second fiscal quarters
ending October 31 and January 31, coinciding with the period in which Uniflame
historically ships the majority of its products to retailers. Sustained periods
of poor weather, particularly during the spring and summer, may negatively
impact our total revenues 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.
Propane supplies and costs are unpredictable and propane price
increases could impact our profit margins. Our distributors purchase propane
from natural gas providers and oil refineries that produce propane as a
by-product of the refining process. The R4 Technical Center, which operates the
automated propane bottling and cylinder refurbishing plant in North Carolina,
also purchases propane. 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 us or our distributors and could impact our
distributors' ability or desire to service our retail accounts.
Propane is a volatile product and we face 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 bodily harm. In the
past, fires and other incidents have occurred at refurbishing and refilling
facilities operated by us and our distributors that resulted in bodily injuries
and substantial property damage. Because of the volatility of propane, 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 addition, we could be subject to additional product liability
for barbecue grills sold by Uniflame and for the failure of an overfill
prevention device (OPD) valve, regardless of whether such valve was fitted on a
Blue Rhino cylinder.
We could also be subject to claims related to manufacturing defects or
workplace accidents at the R4 Technical Center's automated propane bottling and
cylinder refurbishing plant. If an accident happens, we could incur substantial
expense, receive adverse publicity and suffer a loss of sales. A
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, we cannot be sure 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.
In August 2000, 4,700 Blue Rhino propane cylinders filled at the R4
Technical Center's automated propane bottling and cylinder refurbishing plant
were recalled after the cylinder valves were found to have missing or damaged
internal seals. We instructed our distributors to inventory the cylinders at
their plants and retail locations and to remove any cylinders with the recalled
valves. However, we cannot be sure that all the recalled valves have been
removed from circulation. We have not received any reports of injuries, but the
potential defects could cause propane leaks, which can pose the risk of fire,
explosion and burn injuries, and could lead to one or more of the adverse
consequences described above.
Propane is a heavily regulated product. 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 NFPA 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 1, 2002 must be fitted with an OPD
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.
Varying local permitting processes affect our 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, which has prevented
some installations. Certain jurisdictions may also impose additional
restrictions on our ability to market and our distributors' ability to transport
cylinders or otherwise maintain our 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.
We depend on our 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 six major valve suppliers in the U.S.
market. If our distributors are
6
unable to obtain sufficient quantities of cylinders or valves, delays or
reductions in cylinder availability could occur, which may cause our business to
suffer.
Our products segment is reliant on suppliers based in China. We rely on
the products segment of our business, conducted through Uniflame, for a
significant percentage of our net sales. Uniflame imports a substantial
percentage of its products from companies based in China. As a result, Uniflame
may be adversely affected by changes in the prevailing political or economic
climates in China. In addition, if China were to lose its "most favored nation"
trade status with the United States, there would likely be an increase in duty
for Uniflame's products, which may cause our business, financial condition and
results of operations to suffer.
Our retail shipping services require significant investment. QuickShip,
Inc. has invested substantial resources to develop, install and support its
retail shipping system prior to receipt of any revenues from those services.
QuickShip's business model generally permits the grocery store or other retailer
to offer the service to its customer and to pay QuickShip based on each time a
customer accesses the system. Accordingly, there is no assurance that QuickShip
will be able to recover its investment incurred to install its system with any
particular grocery store or other retailer, or with all such grocery stores and
other retailers.
Terrorist Attacks and Threats or Actual War Create Uncertainty.
Terrorist attacks in the United States on September 11, 2001, as well as
subsequent events occurring in response or connection to them, including,
without limitation, future terrorist attacks against United States targets,
rumors or threats of war, actual war or conflicts involving the United States or
its allies or military or trade disruptions impacting our domestic or foreign
suppliers of products, may impact our products segment, including, among other
things, causing delays or losses in the supply or delivery of products and
decreased sales of our products. More generally, any of these events could cause
consumer confidence and spending to decrease or result in increased volatility
in the U.S. and worldwide financial markets and economy. They also could result
in or lengthen economic recession in the U.S. or abroad. Any of these
occurrences may have a significant impact on our business, financial condition
and results of operations and may result in the volatility of the market price
for our common stock and on the future price of our common stock.
ITEM 2. PROPERTIES
We lease our Winston-Salem, North Carolina headquarters from Rhino Real
Estate, LLC, a company affiliated with two of our directors. Pursuant to the
terms of the lease, we pay annual rent of approximately $233,000, 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. We
currently expect to exercise our option to renew.
Uniflame Corporation, our wholly owned subsidiary, leases an
office/warehouse facility located in Zion, Illinois from H & M Enterprises, LLC,
a company affiliated with the president of Uniflame. Pursuant to the terms of
the lease, Uniflame pays annual rent of approximately $308,000, plus our
allocable share of all taxes, utilities and maintenance. The lease terminates on
March 31, 2005. This facility is used by Uniflame in the conduct of our product
sales business segment.
In the opinion of our management, our properties have been well
maintained, are in sound operating condition and contain all equipment and
facilities necessary for us to operate at present levels.
ITEM 3. LEGAL PROCEEDINGS
On January 26, 2001, we refiled a complaint against
PricewaterhouseCoopers in the Superior Court of Mecklenburg County, North
Carolina alleging negligence, breach of fiduciary duty, breach of contract,
defamation and unfair and deceptive trade practices and seeking damages. The
suit alleges that PriceWaterhouseCoopers violated professional standards and
failed to comply with its contractual obligations during its engagement as our
auditors. The suit is currently in the discovery phase.
We are not presently involved in any material litigation nor, to our
knowledge, is any material litigation threatened against us or our subsidiaries,
other than routine litigation arising in the ordinary course of business that is
expected to be covered by insurance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
7
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the
symbol "RINO." The table below shows the high and low per share sales prices of
our common stock for the periods indicated, as reported by the Nasdaq National
Market. As of September 17, 2001, there were 134 record holders of our common
stock.
PRICE RANGE OF
COMMON STOCK
-----------------------
HIGH LOW
------ ------
FISCAL YEAR ENDED JULY 31, 2001
First Quarter ........................ $ 8.00 $ 3.25
Second Quarter ....................... 4.00 2.13
Third Quarter ........................ 4.41 2.06
Fourth Quarter ....................... 6.41 3.55
PRICE RANGE OF
COMMON STOCK
-----------------------
HIGH LOW
------ ------
FISCAL YEAR ENDED JULY 31, 2000
First Quarter ........................ $10.00 $ 6.00
Second Quarter ....................... 10.44 7.63
Third Quarter ........................ 15.50 7.88
Fourth Quarter ....................... 10.06 7.81
We have never declared or paid any cash dividends on shares of our
common stock. We currently intend to retain all earnings for future growth and,
therefore, do not anticipate paying any cash dividends in the foreseeable
future. Payments of cash dividends are prohibited by certain of our existing
financing agreements and may be prohibited in the future under then existing
financing agreements. Even if not prohibited by our financing agreements, the
payment of cash dividends in the future will, subject to applicable law, be at
the discretion of the Board of Directors, and there can be no assurance that we
will pay any dividends in the future. Our outstanding Series A Convertible
Preferred Stock accrues a dividend payable in cash or shares of common stock.
Subject to obtaining any consent required under our financing agreements, we may
pay such accrued dividend in cash.
On June 15, 2001, we completed a $15 million private placement of
subordinated debt to an institutional investor. In connection with the placement
of the debenture, we issued a warrant to the investor to purchase 1,372,071
shares of our common stock, with an exercise price of $3.8685 per share (subject
to adjustment for organic changes and for certain future issuances below the
then-existing exercise price). The warrant can be exercised at the holder's
discretion in whole or in part until the later of June 15, 2011 or five years
after payment of all amounts due under the debenture. We issued the debenture
and the warrant in reliance on the exemption from registration provided by Rule
506 promulgated under Section 4(2) of the Securities Act of 1933, as amended,
based on representations received from the investor with regard to its status as
an accredited investor and the nature of the arms'-length, negotiated
transaction. The holder of the warrant has certain registration rights.
8
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated statement of operations and balance
sheet data of the Company as of and for the periods ended July 31, 2001, 2000,
1999, 1998 and 1997 have been derived from our audited consolidated financial
statements. The financial data set forth below should be read in conjunction
with "Item 7 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Item 8 -- Financial Statements and Supplementary
Data -- Consolidated Financial Statements of the Company and Related Notes
Thereto" included elsewhere herein.
FISCAL YEAR ENDED
---------------------------------------------------------------------------
RESTATED RESTATED RESTATED
JULY 31, JULY 31, JULY 31, JULY 31, JULY 31,
2001 2000 1999 1998 1997
---------- ---------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND
RETAIL LOCATIONS DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues ................................ $ 139,063 $ 78,733 $ 53,820 $ 27,938 $ 14,506
Operating costs and expenses:
Cost of sales ............................. 106,783 57,994 38,661 20,525 11,644
Selling, general and administrative ....... 19,794 13,469 8,539 6,338 5,124
Depreciation and amortization ............. 8,461 4,717 2,872 1,278 873
Nonrecurring items(1) ..................... -- -- -- 476 970
---------- ---------- --------- --------- ---------
Total operating costs and
expenses ...................... 135,038 76,180 50,072 28,617 18,611
---------- ---------- --------- --------- ---------
Income (loss) from operations ..... 4,025 2,553 3,748 (679) (4,105)
Other expenses (income):
Interest expense(5) ....................... 5,134 2,949 837 1,734 1,665
Loss on investees(2) ...................... 2,572 403 311 324 --
Nonrecurring items (1) .................... 449 -- 551 -- --
Other, net ................................ (301) 16 (48) (234) (186)
---------- ---------- --------- --------- ---------
Income (loss) before income
taxes and extraordinary
loss ........................... (3,829) (815) 2,097 (2,503) (5,584)
Income taxes ................................ 123 32 30 -- --
---------- ---------- --------- --------- ---------
Income (loss) before
extraordinary loss ............. (3,952) (847) 2067 (2,503) (5,584)
Extraordinary loss, net(5) .................. -- 158 -- 304 --
---------- ---------- --------- --------- ---------
Net income (loss) ................. $ (3,952) $ (1,005) $ 2,067 $ (2,807) $ (5,584)
Preferred dividends ......................... 770 -- -- 596 687
---------- ---------- --------- --------- ---------
Income (loss) available to
common stockholders(3) ......... $ (4,722) $ (1,005) $ 2,067 $ (3,403) $ (6,271)
========== ========== ========= ========= =========
PER SHARE DATA:
Basic and diluted income (loss) before
extraordinary loss per common
share .................................... $ (0.41) $ (0.10) $ 0.27 $ (1.06) $ (3.74)
Basic and diluted extraordinary loss
per common share ......................... -- (0.02) -- (.10) --
---------- ---------
Basic and diluted earnings (loss)
per common share ......................... $ (0.41) $ (0.12 $ 0.27 $ (1.16) $ (3.74)
========== ========== ========= ========= =========
Shares used in per share calculations:
Basic ..................................... 11,641 8,736 7,645 2,945 1,678
========== ========== ========= ========= =========
Diluted(4) ................................ 11,641 8,736 7,787 2,945 1,678
========== ========== ========= ========= =========
SELECTED OPERATING DATA:
Retail locations (at period end) ............ 27,000 25,000 18,500 9,500 4,400
Cylinder transactions ....................... 6,243 4,995 3,710 2,201 1,239
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents ................... $ 1,044 $ 1,079 $ 913 $ 5,908 $ 325
Working capital ............................. 18,761 5,667 7,442 9,442 737
Total assets ................................ 127,344 108,175 59,899 30,470 9,974
Long-term obligations, less current ......... 50,931 42,396 24,111 260 16,110
maturities
Convertible redeemable preferred stock ...... -- -- -- -- 8,936
Total stockholders' equity (deficit) ........ 57,149 41,952 27,338 24,816 (18,488)
---------------
(1) See Note 21 of Notes to Consolidated Financial Statements for an
explanation of these items in fiscal 2001 and fiscal 1999. During
fiscal 1998 and fiscal 1997, 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 both years.
(2) See Note 9 of Notes to Consolidated Financial Statements for an
explanation of these items for fiscal years 2001, 2000, and 1999.
During fiscal 1998, the Company had a loss on investee related to its
convertible loan to Bison Valve, LLC.
(3) See Note 11 for fiscal 2001 explanation. Dividends payable on our
redeemable preferred stock (the "Old Preferred Stock") were $596 for
fiscal 1998 and $687 for fiscal 1997. The Old Preferred Stock was
converted into shares of common stock in May 1998.
9
(4) For fiscal years 2001, 2000, 1998 and 1997, 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.
(5) The previously issued consolidated financial statements for fiscal
2001, 2000 and 1998 have been restated to reflect changes in the
accounting for common stock warrants and a beneficial conversion
feature issued in conjunction with a debt transaction. See Note 23 of
Notes to Consolidated Financial Statements. The non-cash changes for
fiscal 1998 increased interest expense by $27, increased extraordinary
loss by $304 and increased common stock warrants by $331. The
restatement resulted in no net change to total stockholders' equity as
of July 31, 1998.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with "Item 6 -- Selected Consolidated Financial Data" and our Consolidated
Financial Statements and Notes thereto included in Item 8 of this Annual Report
on Form 10-K.
OVERVIEW
Blue Rhino was founded in March 1994 and believes it has become the
leading national provider of propane grill cylinder exchange as well as a
leading provider of complimentary propane and non-propane products to consumers,
with Blue Rhino cylinder displays at more than 27,000 retail locations in 46
states and Puerto Rico. Cylinder exchange provides consumers with a convenient
means to exchange empty grill cylinders for clean, safe, precision-filled
cylinders. We offer cylinder exchange at many major home improvement centers,
mass merchants, hardware, grocery and convenience stores, including Home Depot,
Lowe's, Wal-Mart, Sears, Kmart, Kroger, Food Lion, Winn-Dixie, SuperAmerica,
Circle K and ExxonMobil. During fiscal 2001, our net revenues increased
approximately 76.6% to approximately $139.1 million from the prior fiscal year
due primarily to growth in product sales and cylinder exchange transactions at
existing locations and an increase in the prices charged to retailers. The
number of retail locations we report in any period is net of any retail
locations at which we have discontinued our cylinder exchange service, whether
due to closings, relocations, performance, competitive, regulatory or other
factors.
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, cylinders, displays, account growth, distributor
network development and management information systems. Our 44 independent
distributors invest in the vehicles and other operational infrastrucure
necessary to operate cylinder exchange businesses. We believe that our
distributor network affords us the opportunity to service approximately 90% of
the cylinder exchange markets in the United States.
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. Cylinder
transactions accounted for 62.4% of our net revenues in fiscal 2001.
Our products segment revenue grew dramatically in fiscal 2001 to $52.3
million from $10.0 million in fiscal 2000 primarily due to an additional eight
months of sales by Uniflame during fiscal 2001, as Uniflame was acquired in
April 2000, and growth in Uniflame's sales. Uniflame's revenues are derived from
products that use propane cylinders as their fuel source, principally patio
heaters and grills, and non-propane products such as charcoal grills, fireplace
accessories and garden products. The majority of Uniflame's sales occur in the
fall and winter months, which is counterseasonal to our cylinder exchange
segment. QuickShip, Inc., a retail shipping services company acquired in October
2000, is included within the products segment as it is not currently material on
a stand-alone basis (Note 10).
Our revenues are influenced by a number of factors, including
seasonality, consumer awareness, weather conditions, new propane appliance
sales, promotional activities, advertising and those factors described above
under "Business - Additional Factors that may Affect our Business or Future
Results." We strategically expanded our business in the past two years to
diversify our revenue stream, balance our seasonality and offer and promote more
products that use our core grill cylinder exchange service. Our acquisitions of
Uniflame and International Propane Products, LLC have allowed us to expand our
offerings to include an array of products including barbecue grills and patio
heaters. In these acquisitions, we also acquired proprietary designs, patents
and human capital to complement our expertise in marketing, sales, and
coordination with manufacturers and distributors. Our products division is
separately managed by Uniflame's management team, which has extensive experience
in the design and import of consumer products sold through mass retailers.
10
Our cost of sales for cylinder exchange is comprised of a contractually
determined fixed base amount, along with a variable component based on the price
of propane, that we pay to our distributors for each cylinder transaction. Our
cost of sales for products is comprised of the wholesale cost of products sold.
We incurred significantly higher costs for cylinder exchange in fiscal
2001 and fiscal 2000, due to wholesale propane prices reaching a 20-year high
while having fixed price agreements with major retail customers. Between March
2000 and February 2001, we made voluntary payments of $4.2 million to our
distributors to help offset the impact on our distributors of the significantly
higher propane prices, to protect our large retail customers from supply
disruptions, and to ensure continued strong distributor and customer
relationships. On March 1, 2001, we changed the method in which we pay our
distributors and implemented a propane hedging strategy. These measures,
combined with price increases to retailers, began to favorably impact cylinder
exchange gross margins during the third quarter of fiscal 2001. In the fourth
quarter of fiscal 2001, gross margins on cylinder transactions returned to
historical levels in excess of 25%.
While we believe that we have created the infrastructure necessary to
support a nationwide branded products and service company, development of this
infrastructure has resulted in an accumulated deficit of approximately $24.8
million as of July 31, 2001. This has resulted in net operating loss
carryforwards of approximately $36.0 million for federal income tax purposes
that are available to offset future taxable income, if any, in varying amounts
from 2002 through 2021. However, the utilization of the net operating losses
will be subject to certain limitations as prescribed by Section 382 of the
Internal Revenue Code. Based on our history of operating losses, we have
recorded a valuation allowance to the full extent of our net deferred tax
assets.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage
relationship of certain items from our statements of operations to net revenues.
Due to many factors, including the National Fire Protection Association (NFPA)
requirement that all propane cylinders refilled after April 1, 2002 be fitted
with an overfill prevention device, the diversification of our product offerings
and our rapid sales growth, any trends reflected by the following table may not
be indicative of future results.
RESTATED
--------------------------------------------
2001 2000 1999
------ ------ ------
Net revenues .......................................... 100.0% 100.0% 100.0%
Operating costs and expenses:
Cost of sales ....................................... 76.8 73.7 71.8
Selling, general and administrative ................. 14.2 17.1 15.9
Depreciation and amortization ....................... 6.1 6.0 5.3
------ ------ ------
Total operating costs and expenses .......... 97.1 96.8 93.0
------ ------ ------
Income from operations ...................... 2.9 3.2 7.0
Interest and other expenses (income):
Interest expense .................................... 3.7 3.8 1.6
Loss on investees ................................... 1.8 0.5 0.6
Nonrecurring items .................................. 0.3 -- 1.0
Other, net .......................................... (0.2) -- (0.1)
------ ------ ------
Income (loss) before income taxes and
extraordinary loss .......................... (2.7) (1.1) 3.9
Income taxes .......................................... (0.1) -- 0.1
------ ------ ------
Income (loss) before extraordinary loss ..... (2.8) (1.1) 3.8
Extraordinary loss, net ............................... -- 0.2 --
------ ------ ------
Net income (loss) ........................... (2.8) (1.3) 3.8
Preferred dividends ................................... 0.6 -- --
------ ------ ------
Net income (loss) available to common
stockholders ............................ (3.4)% (1.3)% 3.8%
====== ====== ======
COMPARISON OF YEARS ENDED JULY 31, 2001 AND 2000
Net revenues. Net revenues increased 76.6% to $139.1 million for fiscal
2001 from $78.7 million for fiscal 2000. Net revenues for fiscal 2001 consisted
of $86.8 million from cylinder transactions and $52.3 million from product
sales. The increase in revenues was due primarily to a four-fold increase in
product sales reflecting an additional eight months of sales by Uniflame this
fiscal year, as Uniflame was acquired in April 2000. Cylinder revenues increased
26.2% primarily due to an approximately 16% increase in same store sales, the
maturity and increased consumer awareness of cylinder exchange locations selling
less than one year and an increase in the prices charged to retailers. The
number of cylinder transactions increased 25.0% to approximately 6.2 million
units during fiscal
11
2001 from approximately 5.0 million units during fiscal 2000. We currently
expect the trend of growth in cylinder transactions to continue as consumers
switch from refill to exchange, particularly as a result of the National Fire
Protection Association (NFPA) requirement that all propane cylinders refilled
after April 1, 2002 be fitted with an overfill prevention device, and as
propane-fueled products like the patio heaters that we offer gain acceptance in
the marketplace.
Gross margin. Our overall gross margin decreased to 23.2% for fiscal
2001 from 26.3% for fiscal 2000. This decrease was due primarily to the increase
in product sales as a percentage of net revenues. Product sales carry a lower
gross margin than do cylinder transactions. Gross margin was also negatively
affected in fiscal 2001 by increased payments to distributors that we made
voluntarily from March 2000 through February 2001 to help offset an increase in
wholesale propane prices. On March 1, 2001, we changed the method in which we
pay our distributors and implemented a propane hedging strategy. These measures,
combined with price increases to retailers, began to favorably impact cylinder
exchange gross margins during the third quarter of fiscal 2001. In the fourth
quarter of fiscal 2001, gross margins on cylinder transactions returned to
historical levels in excess of 25%. For fiscal 2002, we currently expect
cylinder exchange margins to continue to be at least 25% and product sales gross
margins to continue to be between 12% and 18%.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 47.0% to $19.8 million for fiscal 2001 from
$13.5 million for fiscal 2000. Selling, general, and administrative expenses
decreased as a percentage of net revenues to 14.2% for fiscal 2001 from 17.1%
for fiscal 2000. The increase in selling, general and administrative expenses
was due primarily to overhead costs resulting from the Uniflame and Quickship
acquisitions being included in operations in fiscal 2001 and to increased
marketing and administrative costs to support the growth in the cylinder
exchange business. The decrease in selling, general and administrative expenses
as a percentage of net revenues was due primarily to the fact that a significant
portion of such expenses are fixed and increased at a slower rate than did net
revenues. We currently expect selling, general and administrative expenses for
fiscal 2002 to continue to decrease as a percentage of net revenues.
Depreciation and amortization. Depreciation and amortization increased
to $8.5 million for fiscal 2001 from $4.7 million for fiscal 2000. Depreciation
expense increased to $5.8 million for fiscal 2001 from $3.7 million for fiscal
2000 primarily due to the increase in the number of installed cylinder displays
and the increase in the number of cylinders held under operating lease
agreements. The increase in cylinders and cylinder displays was necessary to
support the growth in our installed base of retail locations. Amortization
expense increased to $2.7 million in fiscal 2001 from $1.0 million in fiscal
2000. Amortization increased principally due to the amortization of intangibles
associated with acquisitions.
Interest expense. Interest expense increased to $5.1 million for fiscal
2001 from $2.9 million for fiscal 2000. The increase in interest expense
resulted primarily from the additional borrowings outstanding under our credit
facility combined with an increase in interest rates on the credit facility and
interest expense on subordinated debt and related warrants. The additional
borrowings were used primarily to fund operations, to purchase cylinders and
cylinder displays leased to our distributors and to fund business acquisitions
and our investment in and advances to R4 Technical Center - North Carolina,
L.L.C. ("R4 Tech"), the operator of the automated propane bottling and cylinder
refurbishing plant.
Other, net. Other, net increased to income of approximately $301,000
for fiscal 2001 from a loss of approximately $16,000 for fiscal 2000. The
increase was primarily a result of additional interest income from advances to
R4 Tech and distributors.
Loss on investee. Loss on investee increased to $2.6 million for fiscal
2001 from $403,000 for fiscal 2000. This charge represents our share of the loss
related to our 49% ownership interest in R4 Tech, which began operations in May
2000. We expect this venture to continue to experience losses, which we believe
are typical in a start-up manufacturing operation, until volumes increase and
revenue from converting cylinders without an overfill prevention device (OPD)
into OPD cylinders is realized, which we believe will occur in the 2002 grilling
season. We cannot, however, predict with certainty when this will occur, if
ever. R4 Tech is subject to significant seasonal fluctuations in revenues and
net income (loss). We expect R4 Tech's revenues to be the highest in our third
and fourth quarters, which include the majority of the grilling season, and
lowest in our first and second quarters.
Nonrecurring items. There was a nonrecurring loss of approximately
$449,000 in fiscal 2001 from costs incurred in connection with refinancing our
bank credit facility.
Income taxes. The provision for income taxes increased to $123,000 in
fiscal 2001 from $32,000 for fiscal 2000, which reflects current state income
tax expense.
12
Extraordinary loss. The extraordinary loss of $158,000 in fiscal 2000
consisted of the unamortized debt discount and other debt issuance costs that
were recognized due to the early retirement of convertible notes in July 2000.
COMPARISON OF YEARS ENDED JULY 31, 2000 AND 1999
Net revenues. Net revenues increased 46.3% to approximately $78.7
million for fiscal 2000 from approximately $53.8 million for fiscal 1999. Net
revenues for fiscal 2000 consisted of approximately $68.8 million from cylinder
transactions and $10.0 million from product sales. Product sales consisted of
patio heaters, fireplace accessories, barbecue grills and garden products. The
increase in net revenues was due primarily to an approximately 20% increase in
same store cylinder transaction sales, growth in cylinder exchange locations,
product sales related to the acquisition of Uniflame in April 2000 and growth in
the sales of patio heaters to $3.6 million in fiscal 2000 from $477,000 in
fiscal 1999. The number of cylinder transactions increased 34.6% to
approximately 5.0 million units during fiscal 2000 from approximately 3.7
million units during fiscal 2000.
Gross margin. Our overall gross margin decreased to 26.3% for fiscal
2000 from 28.2% for fiscal 1999. The decrease in gross margin was primarily due
to increased payments to distributors that we made voluntarily beginning in
March 2000 to help offset the increase in wholesale propane prices and to an
increase in lower margin product sales as a percentage of net revenues, which
were partially offset by an increase in lease income.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 57.7% to approximately $13.5 million for
fiscal 2000 from approximately $8.5 million for fiscal 1999. The increase in
selling, general and administrative expenses was due primarily to increased
overhead costs resulting from the acquisition of Uniflame, which contributed
approximately $1.3 million of the increase, as well as increased advertising and
promotional expenses and additional compensation and related costs from the
growth of our sales, administrative and dealer personnel.
Depreciation and amortization. Depreciation and amortization increased
to approximately $4.7 million for fiscal 2000 from approximately $2.9 million
for fiscal 1999. Depreciation expense increased by $1.3 million to approximately
$3.7 million for fiscal 2000 from approximately $2.4 million for fiscal 1999
primarily due to the increase in the number of cylinder displays and the
commencement of depreciation on cylinders held under operating lease agreements.
The increase in cylinders and cylinder displays was due to growth in our
installed base of retail locations. Our purchase of computer technology also
impacted depreciation expense to a lesser extent. Amortization expense increased
by $535,000 to approximately $1.0 million in fiscal 2000 from approximately
$482,000 in fiscal 1999, principally due to the increased amortization of
intangibles associated with acquisitions.
Interest expense. Interest expense increased to approximately $2.9
million for fiscal 2000 from approximately $837,000 for fiscal 1999. The
increase in interest expense resulted from increased borrowings under our credit
facility related to acquisitions, capital investments related to growth in the
number of cylinder exchange locations and unamortized debt discount and other
debt issuance costs that were recognized due to the early retirement of
convertible notes in July 2000.
Other, net. Other, net decreased to an expense of approximately $16,000
for fiscal 2000 from income of approximately $48,000 for fiscal 1999. The
decrease was primarily due to a reduction in interest income resulting from
lower excess cash and notes receivable balances.
Loss on investees. Loss on investees increased to $403,000 for fiscal
2000 from $311,000 for fiscal 1999. This item reflects distinct investees for
each year. Fiscal 2000 reflects our share of losses related to our investment in
R4 Tech, the operator of the automated propane bottling and cylinder
refurbishing plant, which opened in May 2000. The loss incurred in fiscal 1999
is related to the application of the equity method of accounting to our
convertible loan to Bison Valve, LLC. We recorded these losses as Bison Valve
used the proceeds of our loan to fund losses incurred primarily in researching,
developing, marketing and producing an OPD and other propane-related products.
As of October 31, 1998, we had recognized charges for the entire principal
balance of our convertible loan. In September 1999, we purchased from Bison
Valve the intellectual property, inventory and certain other assets related to
its Underwriters Laboratories-approved OPD.
Nonrecurring items. For fiscal 1999, we incurred a one-time charge of
$551,000 for expenses incurred in connection with an offering of common stock
that we terminated before completion in February 1999 due to unfavorable market
conditions.
Income taxes. The provision for income taxes increased slightly to
approximately $32,000 for fiscal 2000, which reflects current state income tax
expense.
13
Extraordinary loss. The extraordinary loss of $158,000 in fiscal 2000
consisted of the unamortized debt discount and other debt issuance costs that
were recognized due to the early retirement of convertible notes in July 2000.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of funds have been the incurrence of debt, the
issuance of stock and cash flow from operations. We had working capital of
approximately $18.8 million as of July 31, 2001, which was primarily the result
of cash provided by the issuance of stock and debt and, to a lesser extent, cash
provided by operations.
Net cash generated by operating activities was $1.3 million, $6.8
million, and $1.5 million for fiscal 2001, 2000, and 1999, respectively. Cash
provided by operations in all periods was due primarily to the add-back of
non-cash charges, including depreciation and amortization and loss on investee.
Net cash used in investing activities was $16.2 million for fiscal
2001, $31.3 million for fiscal 2000, and $21.4 million for fiscal 1999. The
primary components of cash used in investing activities in all periods included
acquisitions, purchases of cylinders leased to our distributors, and investments
in property, plant and equipment. For fiscal 2001, cash used in investing
activities also included advances to R4 Tech. For fiscal 2000, cash used in
investing activities included our net investment in and advances to R4 Tech.
Net cash provided by financing activities was approximately $14.9
million for fiscal 2001, $24.6 million for fiscal 2000, and $14.9 million for
fiscal 1999. The primary components of cash provided by financing activities in
fiscal 2001 included the net proceeds from the issuance of preferred stock and
subordinated debt. In fiscal 2000 and 1999, the primary components of cash
provided by financing activities included proceeds from issuance of common stock
and proceeds from notes payable to our lender. The cash used in financing
activities in all periods included payments on various loans, notes payable and
capital lease obligations.
On April 28, 2000, we entered into a joint venture agreement for R4
Tech to operate and manage the automated propane bottling and cylinder
refurbishing plant in North Carolina. The plant began operations in May 2000. We
received a 49% ownership interest in the joint venture in exchange for our net
contribution of approximately $3.4 million. The joint venture is being accounted
for using the equity method of accounting. During fiscal 2001, we advanced $4.2
million to R4 Tech. At July 31, 2001, we had cumulative advances outstanding of
approximately $5.2 million to R4 Tech. Effective September 30, 2001, we entered
into a sale and leaseback transaction with R4 Tech. We purchased all of the
land, buildings and equipment associated with the propane bottling and cylinder
refurbishing operation. The assets were purchased for $7.6 million. The purchase
price was used to repay outstanding advances to R4 Tech. Simultaneously, R4 Tech
leased the land, buildings, and equipment from us. The sale and leaseback
transaction is not expected to have a material impact on our consolidated
results of operations or financial position.
On September 7, 2000, we completed a private placement of 1,716,667
shares of our Series A Convertible Preferred Stock to two institutional
investors under common management and three individuals, including Billy D.
Prim, our Chairman, Chief Executive Officer and President, and Andrew J.
Filipowski, our Vice Chairman, for an aggregate purchase price of approximately
$10.3 million. Messrs. Prim and Filipowski invested $50,000 and $250,000 for
8,333 and 41,667 shares of Series A Convertible Preferred Stock, respectively.
We used the aggregate net proceeds of approximately $9.6 million from our
preferred stock private placement to repay $7.0 million of our term debt, and
the balance was used for general working capital. In connection with this
issuance of the Series A Convertible Preferred Stock we paid William Blair & Co.
a placement fee of $500,000 in cash and have issued a five-year warrant to
purchase 16,667 shares of common stock at $6.00 per share.
The Series A Convertible Preferred Stock accrues a cumulative dividend
on the 20th day of December, March, June, and September of each year based on an
annual rate of 5% through September 7, 2003; 12% from September 8, 2003 through
September 7, 2004; and 15% thereafter. At our election, the dividend may be paid
in cash, in shares of common stock, or a combination of cash and shares of
common stock at any time prior to conversion of the Series A Convertible
Preferred Stock and must be paid at conversion. If we elect to pay the dividend
in shares of common stock, the shares will be valued based on a 30-day trailing
average ending three business days prior to the date the shares are authorized
to be issued. As of July 31, 2001, we had accrued dividends on the outstanding
shares of Series A Convertible Preferred Stock of $770,000.
Each share of Series A Convertible Preferred Stock is convertible into
common stock at the option of the holder at any time after September 7, 2001. We
may convert the Series A Convertible Preferred Stock into common stock at any
time after September 7, 2002 if the average of the closing prices of our common
stock over a ten trading day period ending shortly before we give notice of
conversion exceeds 160% of the then-existing conversion price for the Series A
Convertible Preferred Stock. Each share of Series A Convertible Preferred Stock
is convertible into one share of common stock, subject to adjustment for
subdivisions, combinations,
14
stock dividends, reclassifications and other similar transactions and certain
stock issuances below the then-existing conversion price. The Series A
Convertible Preferred Stock has a liquidation preference over our common stock.
The holders of the shares of Series A Convertible Preferred Stock have certain
registration rights.
On October 26, 2000, we completed the acquisition of QuickShip, Inc., a
retail shipping service company previously based in Lenexa, Kansas. QuickShip,
our wholly owned subsidiary, provides consumers with a convenient, full-service,
in-store postal and parcel shipping depot and provides retailers with an
additional revenue source. The aggregate purchase price, including certain
acquisition costs, was approximately $9.8 million, comprised of approximately
$1.0 million in cash and deferred payments, $86,000 in a five-year warrant to
purchase 100,000 shares of common stock with an exercise price of $6.00 per
share, $2.0 million in liabilities assumed and $6.8 million paid in the form of
shares of Series A Convertible Preferred Stock valued at $6.00 per share.
In June 2001, we amended and extended our existing bank credit facility
(the "Credit Facility"). The amended Credit Facility consists of two separate
facilities -- a $38 million revolving line of credit for general corporate
purposes, inclusive of payments made under letters of credit issued for the
benefit of the Company, and a $3.247 million seasonal line for general corporate
purposes. No further borrowings may be made against the seasonal line. The
Credit Facility requires us to meet certain covenants, including minimum net
worth and cash flow requirements. The Credit Facility is collateralized by a
lien on substantially all of our assets. The Credit Facility bears interest at
the prime rate plus 2% per annum. In the event that the total borrowings under
the credit facility exceed $28 million as of December 31, 2001, the rate will be
the prime rate plus 3% per annum thereafter. The Credit Facility matures on
December 31, 2002. At July 31, 2001 the interest rate on both the revolving line
of credit and seasonal line was 8.75%. At July 31, 2001, the balance on the
Credit Facility was $37.6 million.
In conjunction with the Credit Facility, we also entered into an
interest rate swap agreement with a notional amount of $10.0 million as a
partial hedge of our variable interest rate debt. The purpose of the swap is to
fix interest rates on variable rate debt and to reduce our exposure to interest
rate fluctuations. Under the swap agreement, which expires in July 2003, we pay
a fixed rate of 7.36% and receive a rate equivalent to the one-month London
Interbank Offered Rate ("LIBOR").
On June 15, 2001, we completed a $15 million private placement of
subordinated debt to an institutional investor. The agreement requires us to
meet certain cash flow and other covenants and contains restrictions on capital
expenditures and the payment of cash dividends. The debenture bears interest at
the annual rate of 13%, payable quarterly. The principal balance matures on
August 31, 2006. In addition, we issued a warrant to the investor to purchase
1,372,071 shares of common stock, with an exercise price of $3.8685 per share
(subject to adjustment for organic changes and for certain future issuances
below the then-existing exercise price). The warrant can be exercised at the
holder's discretion in whole or in part any time until the later of June 15,
2011 or five years after payment of all amounts due under the debenture.
We anticipate that our total capital expenditures for fiscal 2002,
excluding acquisitions, will be approximately $8.0 million, and will relate
primarily to cylinders, cylinder displays and computer technology. Our capital
expenditure and working capital requirements in the foreseeable future will
change depending on the rate of our expansion, our operating results and any
other adjustments in our operating plan needed in response to competition,
acquisition opportunities or unexpected events. We believe that our existing
borrowing capacity under the Credit Facility, together with cash provided by
operations, will be sufficient to meet our working capital requirements through
fiscal 2002. However, there can be no assurance that we will not seek or require
additional capital in the future as a result of expansion or otherwise, or that
such additional capital will be available on terms that are not dilutive to our
stockholders.
SEASONALITY
We have experienced and expect to continue to experience significant
seasonal fluctuations in our revenues and net income (loss). Historically, our
revenues have been highest in our third and fourth quarters, which include the
majority of the grilling season, and lowest in our first and second quarters,
which include the winter months. Our acquisition of Uniflame has resulted in
increased revenues for our first quarter, which includes the months in which
Uniflame historically has shipped the majority of its products to retailers.
Sustained periods of poor weather, particularly in the spring and summer
seasons, would negatively impact our revenues. Accordingly, the results of
operations in any quarter will not necessarily be indicative of the results that
we may achieve for a full fiscal year or any future quarter.
INFLATION
We do not believe that inflation has had a material adverse effect on
our revenues, cost of sales or our results of operations. There can be no
assurance that our business will not be affected by inflation in the future.
15
PRICE OF PROPANE
During the fiscal year ended July 31, 2001, there were dramatic
increases in fuel costs and propane reached unusually high levels. During the
fourth quarter of fiscal 2001, propane prices returned to a range more
consistent with historical levels. On March 1, 2001, we initiated a propane
price hedging strategy that we believe will reduce our gross margin risk
resulting from fluctuations in the price of propane. Our strategy is designed to
reduce exposure to the fuel cost component of a significant portion of our total
cylinder exchange volume. If propane costs rise for an extended period and our
hedging strategy is unsuccessful, our gross margins and results of operations
could be negatively affected due to additional costs that may not be fully
recovered through an increase in our price to our customers.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, Business Combinations, and
No. 142, Goodwill and Other Intangible Assets, effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill (and intangible
assets deemed to have indefinite lives) will no longer be amortized but will be
subject to annual impairment tests in accordance with the Statements. Other
intangible assets will continue to be amortized over their useful lives.
We will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of fiscal year 2002. As of July
31, 2001, we have unamortized intangibles of $32.3 million that will be subject
to the transition provisions of the Statements. We have not yet determined the
impact of adopting these Statements on our earnings and financial position,
including whether we will be required to recognize any transitional impairment
losses as a cumulative effect of a change in accounting principle. Application
of the nonamortization provisions of the Statements is expected to result in an
increase in net income of approximately $2.6 million in fiscal 2002.
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 143, Accounting for Asset
Retirement Obligations. The Statement requires entities to record the fair value
of a liability for an asset retirement obligation in the period in which it is
incurred. The Statement is effective for fiscal years beginning after June 15,
2002. We do not expect the adoption of Statement No. 143 to have a material
impact on our consolidated results of operations or financial position.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk related to changes in interest rates on
borrowings under our Credit Facility. The Credit Facility bears interest based
on the prime rate and is collateralized by cylinders held under operating leases
with our independent distributors. The operating leases currently yield 1% of
the cylinder value monthly (approximately 12% annually) and continue until
either party terminates upon 60 days written notice to the other party. Upon any
significant increase in the prime rate, we would attempt to renegotiate the
operating leases with our independent distributors with the intent of mitigating
our interest rate exposure on the Credit Facility. However, there can be no
assurance that we would be successful in such renegotiations or that we would be
able to mitigate any or all of the interest rate risk. To quantify our exposure
to interest rate risk, a 100 basis point increase in interest rates would have
increased interest expense for the year ended July 31, 2001 and 2000 by
approximately $341,000 and $207,000, respectively. Actual changes in interest
rates may differ materially from the hypothetical assumptions used in computing
this exposure.
We use derivative financial instruments to manage exposure to
fluctuations in interest rates on our Credit Facility. These derivative
financial instruments, which are generally swap agreements, are not entered into
for trading purposes. A swap agreement is a contract to exchange a floating rate
for a fixed rate without the exchange of the underlying notional amount. In
fiscal 2000, we entered into an interest rate swap agreement with a notional
amount of $10 million as a hedge of our variable interest rate debt represented
by the Credit Facility. Under the swap agreement, which expires in July 2003, we
pay a fixed rate of 7.36% and receive a rate equivalent to the one-month LIBOR.
In February 2001, the interest rate on the Credit Facility was changed to a rate
based on the prime rate and is no longer based on the benchmark interest rate of
LIBOR. However, for the three-month period ending July 31, 2001, the interest
rate swap was still an effective cash flow hedge.
We are exposed to commodity price risk related to changes in the price
of propane. If propane prices rise for an extended period, our gross margins and
results of operations could be negatively affected due to additional costs that
may not be fully recovered through an increase in our price to our customers.
Assuming that propane prices are not hedged and any increase cannot be recovered
16
through an increase in our price, a $.01 increase in the price per gallon of
propane would reduce the gross margin in our cylinder exchange segment by
approximately .2% or 20 basis points. Actual changes in margins may differ
materially from the hypothetical assumptions used in computing this exposure. We
have restructured our payment obligations to distributors and entered into a
series of monthly option contracts that are designed to reduce exposure to the
propane cost component of a significant portion of our total cylinder exchange
volume.
We invest our cash and cash equivalents in investment grade, highly
liquid investments consisting of money market instruments, bank certificates of
deposit and overnight investments in commercial paper. All of our transactions
are conducted and accounts are denominated in U.S. dollars and as such we do not
currently have exposure to foreign currency risk.
17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
BLUE RHINO CORPORATION
PAGE
----
Report of Independent Accountants ............................ 19
Consolidated Balance Sheets as of July 31, 2001 and 2000 ..... 20
Consolidated Statements of Operations for the years ended
July 31, 2001, 2000 and 1999 ............................... 21
Consolidated Statements of Stockholders' Equity for the
years ended July 31, 2001, 2000 and 1999 ................... 22
Consolidated Statements of Cash Flows for the years ended
July 31, 2001, 2000 and 1999 ............................... 23
Notes to Consolidated Financial Statements ................... 24
R4 TECHNICAL CENTER - NORTH CAROLINA, LLC
PAGE
----
Report of Independent Accountants ............................ 39
Balance Sheet as of December 31, 2000 ........................ 40
Statement of Operations and Changes in Members' Capital
for the period from April 28, 2000 to December 31, 2000 ... 41
Statement of Cash Flows for the year ended
December 31, 2000 .......................................... 42
Notes to Financial Statements ................................ 43
18
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Blue Rhino Corporation:
We have audited the accompanying consolidated balance sheets of Blue Rhino
Corporation and subsidiaries as of July 31, 2001, and 2000 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years then ended. Our audits also included the financial
statement schedule listed in the index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Blue Rhino Corporation at July 31, 2001, and 2000 and the consolidated results
of their operations and cash flows for each of the three years then ended, in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the related financial schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
As more fully described in Note 23, the previously issued consolidated
financial statements for the years ended July 31, 2001, 2000, and 1999 have been
restated to reflect changes in the accounting for common stock warrants and a
beneficial conversion feature issued in conjunction with a debt transaction.
ERNST & YOUNG LLP
Greensboro, North Carolina
October 2, 2001, except for Note 23 as to which the date is April 3, 2002
19
BLUE RHINO CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF JULY 31, 2001 AND 2000
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
RESTATED RESTATED
2001 2000
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 1,044 $ 1,079
Accounts receivable, net .............................................. 19,619 19,254
Inventories ........................................................... 7,960 5,415
Prepaid expenses and other current assets ............................. 9,402 3,746
--------- ---------
Total current assets .......................................... 38,025 29,494
Cylinders leased under operating lease agreements, net .................. 31,466 27,277
Property, plant and equipment, net ...................................... 23,636 20,332
Intangibles, net ........................................................ 32,282 27,347
Investment in joint venture ............................................. 455 3,027
Other assets ............................................................ 1,480 698
--------- ---------
Total assets .................................................. $ 127,344 $ 108,175
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................................... $ 13,314 $ 16,565
Current portion of long-term debt and capital lease obligations ....... 2,333 5,786
Accrued liabilities ................................................... 3,617 1,476
--------- ---------
Total current liabilities ..................................... 19,264 23,827
Long-term debt and capital lease obligations, less current maturities ... 50,931 42,396
--------- ---------
Total liabilities ............................................. 70,195 66,223
Stockholders' equity:
Common stock, $0.001 par value, 100,000,000 shares
authorized, 9,279,152 and 9,221,703 shares issued and
outstanding at July 31, 2001 and 2000, respectively ................ 9 9
Preferred stock, $0.001 par value, 20,000,000 shares
authorized, 2,850,000 and no shares issued and outstanding
at July 31, 2001 and 2000, respectively; liquidation value
$17,870 at July 31, 2001 .......................................... 3 --
Capital in excess of par .............................................. 77,389 59,897
Common stock warrants ................................................. 6,403 2,877
Accumulated deficit ................................................... (25,553) (20,831)
Accumulated other comprehensive loss .................................. (1,102) --
--------- ---------
Total stockholders' equity .................................... 57,149 41,952
--------- ---------
Total liabilities and stockholders' equity .................... $ 127,344 $ 108,175
========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
20
BLUE RHINO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JULY 31, 2001, 2000 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
RESTATED
--------
2001 2000 1999
--------- -------- --------
Net revenues ................................................ $ 139,063 $ 78,733 $ 53,820
Operating costs and expenses:
Cost of sales ............................................. 106,783 57,994 38,661
Selling, general and administrative ....................... 19,794 13,469 8,539
Depreciation and amortization ............................. 8,461 4,717 2,872
--------- -------- --------
Total operating costs and expenses ................ 135,038 76,180 50,072
--------- -------- --------
Income from operations ............................ 4,025 2,553 3,748
Interest and other expenses (income):
Interest expense .......................................... 5,134 2,949 837
Loss on investees ......................................... 2,572 403 311
Nonrecurring items ........................................ 449 -- 551
Other, net ................................................ (301) 16 (48)
--------- -------- --------
Income (loss) before income taxes and
extraordinary loss ............................. (3,829) (815) 2,097
Income taxes ................................................ 123 32 30
--------- -------- --------
Income (loss) before extraordinary loss ........... (3,952) (847) 2,067
Extraordinary loss, net ..................................... -- 158 --
--------- -------- --------
Net income (loss) ................................. (3,952) (1,005) 2,067
Preferred dividends ......................................... 770 -- --
--------- -------- --------
Income (loss) available to common stockholders ...... $ (4,722) $ (1,005) $ 2,067
========= ======== ========
Basic and diluted earnings (loss) per common share before
extraordinary loss ........................................ $ (0.41) $ (0.10) $ 0.27
Basic and diluted extraordinary loss per common share ....... -- (0.02) --
--------- -------- --------
Basic and diluted earnings (loss) per common share .......... $ (0.41) $ (0.12) $ 0.27
========= ======== ========
Shares used in per share calculations:
Basic ..................................................... 11,641 8,736 7,645
========= ======== ========
Diluted ................................................... 11,641 8,736 7,787
========= ======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
21
BLUE RHINO CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 2001, 2000 AND 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
ACCUM-
CAPITAL ULATED
IN OTHER TOTAL TOTAL
COMMON STOCK PREFERRED STOCK EXCESS COMMON ACCUM- COMPRE- STOCK- COMPRE-
------------------ ------------------ OF STOCK ULATED HENSIVE HOLDERS' HENSIVE
SHARES AMOUNT SHARES AMOUNT PAR WARRANTS DEFICIT LOSS EQUITY INCOME (LOSS)
--------- ------ --------- ------ ------- -------- --------- --------- -------- -------------
Balances, July 31,
1998 (Restated)........ 7,630,873 $ 8 $46,370 $ 331 $(21,893) $24,816
Proceeds from exercise
of stock options..... 35,662 183 183
Expenses related to
distributor stock
option plan.......... 272 272
Net income............. 2,067 2,067 $ 2,067
-------
Total comprehensive
income (loss)........ $ 2,067
----------------------------------------------------------------------------------------------=======
Balances, July 31,
1999 (Restated)........ 7,666,535 8 46,825 331 (19,826) 27,338
Issuance of common
stock in private
placement............ 981,119 1 5,227 5,228
Issuance of common
stock in connection
with acquisitions.... 562,288 7,816 7,816
Issuance of common
stock under Employee
stock purchase and
option plans......... 11,761 69 69
Issuance of convertible
debt with beneficial
conversion feature
net of repurchase
of beneficial
conversion feature... (178) (178)
Issuance of common
stock warrants....... 2,546 2,546
Expenses related to
distributor stock
option plan............ 138 138
Net loss................. (1,005) (1,005) $(1,005)
--------
Total comprehensive
income (loss).......... $(1,005)
----------------------------------------------------------------------------------------------========
Balances, July 31,
2000 (Restated)........ 9,221,703 9 59,897 2,877 (20,831) 41,952
Issuance of Series A
Convertible Preferred
stock................ 1,716,667 $ 2 9,659 9,661
Issuance of common
stock warrants....... 3,526 3,526
Issuance of preferred
stock in connection
with acquisitions.... 1,133,333 1 6,799 6,800
Issuance of common
stock under Employee
stock purchase and
option plans......... 57,449 84 84
Accretion of Preferred
dividend............. 770 (770) 0
Expenses related to
distributor stock
option plan............ 180 180
Loss on derivative
instruments............ $(1,102) (1,102) $(1,102)
Net loss................. (3,952) (3,952) (3,952)
-------
Total comprehensive
income (loss).......... $ 5,054
----------------------------------------------------------------------------------------------=======
Balances, July 31,
2001 (Restated)........ 9,279,152 $ 9 2,850,000 $ 3 $77,389 $ 6,403 $(25,553) $(1,102) $57,149
===========================================================================================
22
BLUE RHINO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, 2001, 2000 AND 1999
(IN THOUSANDS)
RESTATED
--------
2001 2000 1999
--------- --------- -------
Cash flows from operating activities:
Net income (loss) .............................................. $ (3,952) $ (1,005) $ 2,067
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization ............................... 8,461 4,717 2,872
Loss on investees ........................................... 2,572 403 311
Expense related to distributor stock option plan ............ 180 138 272
Loss on retirement of debt .................................. -- 158 --
Accretion of the discount on notes .......................... -- 1,002 --
Nonrecurring items .......................................... 449 -- 551
Other ....................................................... 248 95 151
Changes in operating assets and liabilities, net of
business acquisitions:
Accounts receivable ....................................... (485) (5,232) (4,835)
Inventories ............................................... (2,477) (3,517) (106)
Other current assets ...................................... (1,540) 577 (1,884)
Accounts payable and accrued liabilities .................. (2,159) 9,493 2,125
---------- --------- ---------
Net cash provided by (used in) operating activities .... 1,297 6,829 1,524
--------- --------- ---------
Cash flows from investing activities:
Business acquisitions .......................................... (1,334) (10,542) (7,488)
Purchases of property, plant and equipment ..................... (5,582) (7,109) (8,073)
Purchase of cylinders held under operating leases, net ......... (5,414) (10,756) (6,076)
Net investment in and advances to joint venture ................ (4,152) (3,014) --
Issuance of note receivable .................................... (334) -- --
Collections on notes receivable and other ...................... 551 163 235
--------- --------- ---------
Net cash used in investing activities .................. (16,265) (31,258) (21,402)
--------- --------- ---------
Cash flows from financing activities:
Payments on notes payable to bank .............................. (27,240) (27,933) (13,273)
Proceeds from notes payable to bank ............................ 20,586 55,627 29,853
Proceeds from issuance of common stock, net .................... 84 6,431 182
Payments of cylinder and cylinder display financing ............ (7,000) --
Payments on convertible notes .................................. (7,000) --
Payment of debt issuance and common stock registration costs ... (932) (562) (1,065)
Payments of long-term debt and capital lease obligations ....... (2,226) (1,968) (814)
Proceeds from issuance of preferred stock, net ................. 9,661 -- --
Proceeds from debt issuance .................................... 15,000 7,000 --
--------- --------- ---------
Net cash provided by financing activities .............. 14,933 24,595 14,883
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ............. (35) 166 (4,995)
Cash and cash equivalents at beginning of period ................. 1,079 913 5,908
--------- --------- ---------
Cash and cash equivalents at end of period ............. $ 1,044 $ 1,079 $ 913
========= ========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
23
BLUE RHINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Blue Rhino Corporation ("Blue Rhino" or the "Company") believes it is
the leading provider of propane grill cylinder exchange as well as a leading
provider of complimentary propane and non-propane products to consumers. Blue
Rhino cylinder exchange provides consumers with a convenient means to exchange
empty grill cylinders for clean, safe, precision-filled cylinders. The Company
has branded cylinder displays at over 27,000 retail locations in 46 states plus
Puerto Rico. Blue Rhino cylinder exchange is offered at leading home improvement
centers, mass merchants, hardware, grocery and convenience stores. Cylinders are
delivered to retailers through a national network of 44 independent
distributors. A subsidiary, Uniflame Corporation, designs and imports patio
heaters, barbecue grills and various garden and fireplace products primarily
from Asia. These products are marketed primarily to home improvement centers,
mass merchants, and hearth stores. A subsidiary, QuickShip, Inc., provides
consumers with a convenient, full-service, in-store postal and parcel shipping
depot and provides retailers with another revenue source.
The consolidated financial statements of Blue Rhino Corporation (the
"Company") include the accounts of its wholly owned subsidiaries: Uniflame
Corporation ("Uniflame"); QuickShip, Inc. ("QuickShip"); Rhino Services, L.L.C.;
CPD Associates, Inc. and USA Leasing, L.L.C. All material intercompany
transactions and balances have been eliminated in consolidation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition -- Blue Rhino recognizes: (i) cylinder exchange
revenues upon delivery of the cylinders to retailers by our distributors; (ii)
products revenues upon shipment to the retailers; and (iii) shipping services
revenues at the time consumers ship packages at the in-store retail depot. The
Company accrues for sales returns and other allowances based on its experience.
Accounts Receivable, Net -- Accounts receivable, net include allowances
for doubtful accounts of $848 and $744 at July 31, 2001 and 2000, respectively.
Inventories -- Inventories are valued at the lower of cost or market on
a first-in, first-out (FIFO) basis and consist primarily of finished goods
including cylinders, cylinder valves, grills, patio heaters, fireplace
accessories, and garden products. Cylinder inventories represent cylinders held
for sale.
Cylinders Held Under Operating Lease Agreements, Net -- Cylinders held
under operating lease agreements are stated at cost and depreciated on a
straight-line basis over their estimated useful lives of twenty-five years.
Cylinders held under operating lease agreements include the cost of proprietary
valves. The proprietary valves are depreciated on a straight-line basis over
their estimated useful lives of twelve years. Depreciation expense for the years
ended July 31, 2001 and 2000 was $1,434 and $856, respectively.
Software Development Costs -- Certain development costs for internal
use software are capitalized when incurred. Capitalization of software
development costs begins upon the establishment of technological feasibility and
ceases when the product is ready for release. Software development costs are
amortized on a straight-line basis over the expected life of the product ranging
from three to five years. Capitalized software development costs were $583 and
$586 for years ended July 31, 2001 and 2000, respectively. At July 31, 2001 and
2000, total capitalized costs were $1,799 and $1,215 and accumulated
amortization was $777 and $218, respectively.
Property, Plant and Equipment, Net -- Property, plant and equipment are
stated at cost. Depreciation and amortization are provided for using the
straight-line method over estimated useful lives ranging from 3 to 10 years for
cylinder displays, 3 to 5 years for computer hardware and software, and 5 to 30
years for building and equipment.
In the event that facts and circumstances indicate that the cost of
property, plant and equipment, or other long-lived assets may not be
recoverable, estimated future undiscounted cash flows are 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.
Intangibles, Net -- Excess cost over fair value of assets acquired is
amortized using the straight-line method over periods ranging from 10 to 30
years. Patents and other intellectual property are amortized over their
estimated useful lives. Non-compete agreements
24
are amortized using the straight-line method over the life of the agreements
which is generally three years. The Company periodically reviews the carrying
value and estimated useful life of its intangible assets to determine whether
current events and circumstances warrant adjustments. 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 write-down 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.
Financial Instruments -- Financial instruments consist of cash and cash
equivalents, accounts receivable, advances, notes receivable, short-term and
long-term debt and derivatives. The Company considers all highly liquid
investments with an original maturity of three months or less at the date of
purchase to be cash equivalents. At July 31, 2001 and 2000 the carrying amounts
of the Company's financial instruments approximated their fair values.
The Company uses derivative financial instruments to manage exposure to
fluctuations in interest rates on its variable rate debt. An interest rate swap
agreement is a contract to exchange floating rate for fixed interest payments
periodically over the life of the agreement without the exchange of the
underlying notional amount. The notional amount of the swap agreement is used to
measure interest to be paid or received and does not represent the amount of
exposure to credit loss. The differential paid or received under the interest
rate swap agreement is recognized as an adjustment to interest expense.
The Company uses derivative financial instruments to hedge against
fluctuations in the propane price component of its distributor payments (Note
17). The Company has entered into a combination of swaps and collars to hedge
against propane price fluctuations. The differential paid or received under the
agreements is recognized as an adjustment to cost of sales.
Advertising and Promotion -- The Company expenses advertising
(including cooperative advertising) and promotion costs as incurred and these
costs are included as selling, general and administrative expenses. Advertising
and promotion costs for the years ended July 31, 2001, 2000 and 1999 were
$1,175, $1,216 and $129, respectively.
Income Taxes -- Deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. A valuation allowance is recorded when it
is more likely than not that the deferred tax asset will not be realized.
Stock-Based Compensation -- The Company accounts for the 1994 Stock
Incentive Plan, the 1998 Stock Incentive Plan and the Director Option Plan in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). Under APB 25, no
compensation expense is recognized for stock options issued with an exercise
price equivalent to the fair value of the Company's common stock on the date of
grant. In general, stock options and other equity instruments granted or issued
under the Distributor Stock Option Plan are accounted for in accordance with
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). For companies that continue to account for
stock-based compensation arrangements under APB 25, SFAS 123 requires disclosure
of the pro forma effect on net income (loss) as if the fair value based method
prescribed by SFAS 123 had been applied. The Company has adopted the pro forma
disclosure requirements of SFAS 123.
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.
Reclassification -- Certain prior year amounts have been reclassified
to conform to the presentation adopted in fiscal 2001.
Recent Accounting Pronouncements -- In June 2001, the Financial
Accounting Standards Board issued Statements of Financial Accounting Standards
No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible
Assets, effective for fiscal years beginning after December 15, 2001. Under the
new rules, goodwill (and intangible assets deemed to have indefinite lives) will
no longer be amortized but will be subject to annual impairment tests in
accordance with the Statements. Other intangible assets will continue to be
amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and
other intangible assets beginning in the first quarter of fiscal year 2002. As
of July 31, 2001, the Company has unamortized intangibles of $32,282 that will
be subject to the transition provisions of the Statements. The Company has not
yet determined the impact of adopting these Statements on its earnings and
25
financial position, including whether it will be required to recognize any
transitional impairment losses as a cumulative effect of a change in accounting
principle. Application of the nonamortization provisions of the Statements is
expected to result in an increase in net income of approximately $2.6 million in
fiscal 2002.
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 143, Accounting for Asset
Retirement Obligations. The Statement requires entities to record the fair value
of a liability for an asset retirement obligation in the period in which it is
incurred. The Statement is effective for fiscal years beginning after June 15,
2002. The Company does not expect the adoption of Statement No. 143 to have a
material impact on its consolidated results of operations or financial position.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB No. 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. SAB No. 101
was adopted in the fourth quarter of fiscal 2001. There was no material impact
on the Company's consolidated results of operations or financial position.
3. CONCENTRATION OF CREDIT RISK
The Company's cash and cash equivalents are held by high-quality
financial institutions, thereby reducing credit risk concentrations. Due to the
geographic dispersion and the high credit quality of the Company's significant
customers, credit risk relating to accounts receivable is limited. The Company
performs ongoing credit evaluations of its customers' financial condition and,
generally, requires no collateral on accounts receivable. The Company's three
largest customers accounted for a total of approximately 55%, 44%, and 49% of
net revenues in the years ended July 31, 2001, 2000 and 1999, respectively, as
follows:
2001 2000 1999
---- ---- ----
Customer A ............................. 26% 11% 13%
Customer B ............................. 20 23 23
Customer C ............................. 9 10 13
- -- --
55% 44% 49%
== == ==
Approximately 46% and 49% of accounts receivable at July 31, 2001 and
2000, respectively, were from these customers. If the financial condition and
operations of these customers deteriorate, the Company's operating results could
be adversely affected.
4. CYLINDERS AND CYLINDER DISPLAYS LEASED UNDER OPERATING LEASE AGREEMENTS
The Company enters into operating lease agreements with its
distributors for cylinders and cylinder displays for use within each
distributor's territory. Under these leases, the distributor (lessee) is
obligated to pay for all maintenance, installation, deinstallation, taxes and
insurance related to the cylinders and cylinder displays. The lessee bears all
risk of loss and damage to the cylinders and, in the event of loss or damage, is
required to repair or replace the cylinders. The leases continue until either
party terminates upon 60 days written notice to the other party. As of July 31,
2001, cylinders of $25,250 with accumulated depreciation of $2,300 and cylinder
displays of $15,844 with accumulated depreciation of $4,541 were under lease.
Lease income for the years ended July 31, 2001, 2000 and 1999 was $4,642, $3,676
and $1,985, respectively. As of July 31, 2001, estimated future minimum rental
payments to be received are approximately $4,198 per year through the year 2006.
5. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consists of the following at July 31:
2001 2000
-------- --------
Land .......................................................... $ 20 $ 20
Building and leasehold improvements ........................... 721 721
Cylinder displays, including panel graphics ................... 24,023 19,623
Machinery and equipment ....................................... 2,177 2,025
Computer hardware and software ................................ 6,048 2,920
Equipment leased under capital leases ......................... 1,689 1,714
-------- --------
34,678 27,023
Less accumulated depreciation and amortization (including
$744 and $411 as of July 31, 2001 and 2000,
respectively, for equipment under capital leases) ........ (11,042) (6,691)
-------- --------
$ 23,636 $ 20,332
======== ========
26
Depreciation and amortization expense for the years ended July 31,
2001, 2000 and 1999 was $4,384, $2,844 and $1,995, respectively.
6. INTANGIBLES, NET
Intangibles consist of the following at July 31:
2001 2000
-------- -------
Goodwill .......................... $ 33,654 $ 26,302
Patents and trademarks ............ 1,406 1,399
Non-compete agreements ............ 994 983
-------- -------
36,054 28,684
Accumulated amortization .......... (3,772) (1,337)
-------- -------
$ 32,282 $ 27,347
======= ========
Amortization expense for the years ended July 31, 2001, 2000 and 1999
was $2,644, $891, and $355, respectively.
7. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital leases consist of the following at July 31:
RESTATED RESTATED
2001 2000
---- ----
Bank credit facility .................................... $ 37,620 $44,274
Subordinated debt ....................................... 15,000 --
Discount on subordinated debt ........................... (3,410) --
Acquisition notes payable ............................... 1,476 2,519
Capital lease obligations bearing interest at various
rates from 9.98% to 11.42% .............................. 419 861
Other ................................................... 2,159 528
-------------------------
53,264 48,182
Less amounts due within one year ........................ 2,333 5,786
-------------------------
$ 50,931 $42,396
=========================
The aggregate maturities of long-term debt and capital lease
obligations at July 31, 2001 are as follows:
RESTATED
LONG-TERM CAPITAL LEASE
DEBT OBLIGATIONS TOTAL
---- ----------- -----
2002 ............................. $ 2,034 $ 321 $ 2,355
2003 ............................. 39,221 122 39,343
2004 ............................. -- -- --
2005 ............................. -- -- --
2006 ............................. -- -- --
Thereafter........................ 11,590 -- 11,590
------- -------- --------
52,845 443 53,288
Less imputed interest............. -- (24) (24)
------- -------- --------
$52,845 $ 419 $ 53,264
======= ======== ========
In June 2001, the Company amended and extended its existing credit
facility (as amended, the "Credit Facility"). The amendment extended the
maturity date from November 30, 2001 to December 31, 2002, reduced the interest
rate from the prime rate plus 3 percent to the prime rate plus 2 percent and
established new financial covenants. At the time the amendment was made to the
Credit Facility in June 2001, the Company expensed $449 in net deferred costs
related to its prior credit facility and classified the expense as nonrecurring.
The Credit Facility consists of two separate facilities --a $38,000 revolving
line of credit for general corporate purposes, inclusive of payments made under
letters of credit issued for the benefit of the Company, and a $3,247 seasonal
line for general corporate purposes. No further borrowings may be made against
the seasonal line. The Credit Facility requires the Company to meet certain
covenants, including minimum net worth and cash flow requirements. The Credit
Facility is collateralized by a lien on substantially all of the Company's
assets. The Credit Facility bears interest at the prime rate plus 2% per annum.
In the event that the
27
total borrowings under the credit facility exceed $28,000 as of December 31,
2001, the rate will be the prime rate plus 3% per annum thereafter. The Credit
Facility matures on December 31, 2002. At July 31, 2001 the interest rate on
both the revolving line of credit and seasonal line was 8.75%
On June 15, 2001, the Company completed a $15 million private placement
of subordinated debt to an institutional investor. The agreement requires the
Company to meet certain cash flow and other covenants and contains restrictions
on capital expenditures and the payment of cash dividends. The debenture bears
interest at the annual rate of 13%, payable quarterly. The principal balance
matures on August 31, 2006. In addition, the Company issued a warrant to the
investor to purchase 1,372,071 shares of common stock, with an exercise price of
$3.8685 per share (subject to adjustment for organic changes and for certain
future issuances below the then-existing exercise price) valued at $3,440. The
warrant can be exercised at the holder's discretion in whole or in part any time
until the later of June 15, 2011 or five years after payment of all amounts due
under the debenture. The effective interest rate of the subordinated debt is
20.81%.
Interest expense included the non-cash amortization of debt issuance
costs for the years ended July 31, 2001, 2000 and 1999 of $192, $125 and $111,
respectively.
Other includes obligations bearing interest at various rates between
6.72% and 7.75%.
8. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities and office equipment under
non-cancelable operating leases with original terms ranging from 36 to 60 months
(Note 13). Additionally, the Company has certain computer hardware and software
maintenance and support agreements. Rent expense and fees on these
non-cancelable operating leases and service agreements from both affiliates and
non-affiliates for the years ended July 31, 2001, 2000 and 1999 was $1,034,
$480, and $392 respectively.
Future minimum payments at July 31, 2001 under non-cancelable operating
leases and service agreements with initial or remaining terms of one year or
more to both affiliates and non-affiliates are $1,087 in 2002, $603 in 2003,
$386 in 2004, $246 in 2005 and $0 in 2006.
The Company is involved in various legal proceedings encountered in the
normal course of business. In the opinion of management, the resolution of these
matters will not have a material adverse effect on the Company's consolidated
financial position or results of operations.
9. EQUITY INVESTMENTS
R4 Technical Center -- North Carolina, LLC
On April 28, 2000, the Company entered into a joint venture agreement
to operate and manage R4 Technical Center North Carolina, LLC ("R4 Tech"). R4
Tech began operations of its automated propane bottling and cylinder
refurbishing plant in May 2000. The Company received a 49% ownership interest in
R4 Tech in exchange for its net contribution of $3,430, which is being accounted
for under the equity method of accounting. The Company recognized its portion of
the loss in R4 Tech for the period ended July 31, 2001 and 2000 of $2,572 and
$403, respectively. At July 31, 2001, the Company had advances outstanding of
$5,235 to R4 Tech. Manchester Tank & Equipment Co. owns a 50% interest in R4
Tech, and Platinum Propane, LLC owns the remaining 1% interest in R4 Tech.
Summary financial information for R4 Tech as of and for the periods
ended July 31, 2001 and 2000 is as follows:
2001 2000
---- ----
Current assets .................................... $ 1,496 $ 884
Property, plant, and equipment and other assets ... 7,617 7,450
Current liabilities ............................... 8,162 2,223
Long-term debt .................................... 22 32
Net sales ......................................... 9,910 908
Gross loss ........................................ (3,802) (327)
Net loss .......................................... (5,250) (822)
Effective September 30, 2001, the Company entered into a sale and
leaseback transaction with R4 Tech. The Company purchased all of the land,
buildings and equipment associated with the propane bottling and cylinder
refurbishing operation. The assets were
28
purchased for $7.6 million. The purchase price was used to repay outstanding
advances to R4 Tech. Simultaneously, R4 Tech leased the land, buildings, and
equipment from the Company under the terms of a three year operating lease
agreement. The sale and leaseback transaction is not expected to have a material
impact on the Company's consolidated results of operations or financial
position.
Bison Valve, LLC
On February 12, 1998, the Company invested $635 in Bison Valve, LLC
("Bison Valve"). Bison Valve was formed to market, produce and sell a specialty
valve to the Company's distributors and third parties. The Company accounted for
its investment in Bison Valve using the equity method of accounting to reflect
the Company's funding of certain losses incurred by this entity primarily
related to researching, developing, marketing and producing certain propane
products. The Company recorded a loss of $311 for the year ended July 31, 1999,
to reflect the operating results of the investee, Bison Valve. The Company
acquired the assets of Bison Valve in September 1999 (Note 10).
10. ACQUISITIONS
QuickShip, Inc.
On October 26, 2000, the Company completed the acquisition of
QuickShip, Inc. a retail shipping service company previously based in Lenexa,
Kansas. QuickShip, a wholly owned subsidiary of the Company, offers its service
at over 300 retail locations in 29 states. The aggregate purchase price,
including certain acquisition costs, was approximately $9,803, comprised of
approximately $972 in cash and deferred payments, $86 in a five-year warrant to
purchase 100,000 shares of common stock, $1,945 in liabilities assumed and
$6,800 paid in the form of shares of Series A Convertible Preferred Stock at
$6.00 per share. This acquisition has been accounted for as a purchase. The
purchase price was allocated based on an independent valuation as follows:
approximately $7,433 to intangibles, approximately $2,201 to property, plant,
and equipment consisting primarily of software and the balance to other assets
and liabilities.
Uniflame, Inc.
On April 4, 2000, the Company completed the acquisition of
substantially all of the assets of Uniflame, Inc., including its equity interest
in its subsidiary Uni-Asia, Ltd. Uniflame, a wholly owned subsidiary of the
Company, designs and imports barbecue grills, patio heaters, garden products and
fireplace accessories. The aggregate purchase price was $13,291, of which
approximately $11,286 was allocated to intangibles consisting of goodwill and
non-compete agreements. The purchase price was made up of $4,348 in cash
obtained from the Company's Credit Facility (Note 7), the issuance of 478,716
shares of common stock valued at $6,693 and the issuance of $2,250 of notes
payable. The net assets acquired consisted primarily of inventories, accounts
receivable, and liabilities assumed.
International Propane Products, LLC
On April 3, 2000, the Company completed the acquisition of
substantially all of the assets relating to patio heaters and brass valves for
propane cylinders, including certain intellectual property, developed and
distributed by International Propane Products, LLC , a wholesale and design
company. The aggregate purchase price, including certain acquisition costs, was
$4,424, of which approximately $4,237 was allocated to intangibles consisting of
goodwill and non-compete agreements. The purchase price was made up of $2,888 in
cash obtained from the Company's Credit Facility (Note 7), the issuance of
83,572 shares of common stock valued at $1,123, and $413 of obligations for
non-compete and minimum deferred purchase price agreements. The deferred
purchase price is payable on a quarterly basis for a term equal to the lesser of
(a) the life of the patent that may be issued with respect to the acquired
intellectual property, but in any event not less than five years, or (b) the
period ending on the last day of the first one year period during which the
Company does not make, use or sell the patio heaters. The Company has agreed to
pay a minimum deferred purchase price that may be as much as $530 under certain
circumstances. Also included in the purchase agreement is a provision to pay 1%
of future sales from patio heaters.
Bison Valve, LLC
On September 17, 1999, the Company acquired certain assets related to
the overfill prevention device ("OPD") developed, manufactured and marketed by
Bison Valve. The acquired assets included OPD molds, dies, and all intellectual
property relating to the OPD developed by Bison Valve, which includes two patent
applications on the OPD. The aggregate purchase price was $1,553, of
29
which $1,470 was allocated to intangibles consisting of patents and non-compete
agreements. The purchase price consisted of $1,239 in cash and a ten year
warrant to purchase 100,000 shares of common stock with an exercise price of
$7.40 per share, which was valued at $314. Also included in the purchase
agreement is a provision to pay between 2 1/2% and 12% of future sales of OPDs
over the life of the patents.
Cylinder Exchange Businesses
During fiscal 2001, 2000 and 1999, the Company completed a number of
cylinder exchange acquisitions for an aggregate cash purchase price of
approximately $362, $2,067 and $7,488, respectively, related to assets including
cylinders, cylinder displays and other equipment and the right, title and
interest in and to sellers' retail propane cylinder exchange accounts and
locations.
During the years ended July 31, 2001, 2000 and 1999, the Company
acquired certain assets described above under various agreements. These
acquisitions are summarized as follows:
2001 2000 1999
------- -------- -------
Net assets acquired including intangibles .... $ 8,220 $ 21,335 $ 8,167
Deferred purchase price ...................... -- (2,663) (679)
Common stock and warrants issued ............. (6,886) (8,130) --
------- -------- -------
Cash paid for acquisitions ................... $ 1,334 $ 10,542 $ 7,488
======== ======== =======
The acquisitions have been accounted for under the purchase method and,
accordingly, the operating results from these acquisitions, which include the
Quickship acquisition, have been included in the Company's consolidated
financial statements since the dates of acquisition. The following unaudited pro
forma summary presents financial information for the Company for the years ended
July 31, 2001, and 2000 as if the acquisitions had occurred on August 1, 1999.
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, 1999, nor is it indicative of future results.
2001 2000
---- ----
(UNAUDITED)
Net revenues ....................... $ 139,195 $ 98,828
Income before extraordinary loss ... $ (4,768) $ (561)
Net loss ........................... $ (5,572) $ (1,387)
Basic loss per common share ........ $ (0.47) $ (0.13)
11. STOCKHOLDERS' EQUITY
Preferred Stock
On September 7, 2000 (the "Closing Date") the Company completed a
private placement of 1,716,667 shares of its Series A Convertible Preferred
Stock to two institutional investors under common management and three
individuals, including Billy D. Prim, its Chairman, Chief Executive Officer and
President, and Andrew J. Filipowski, its Vice Chairman, for an aggregate
purchase price of approximately $10,300. Messrs. Prim and Filipowski invested
$50 and $250 for 8,333 and 41,667 shares of Series A Convertible Preferred
Stock, respectively. In addition, on October 26, 2000, the Company issued
1,133,333 shares of Series A Convertible Preferred Stock for an aggregate
purchase price of $6,800 in connection with its acquisition of QuickShip (Note
10). The Series A Convertible Preferred Stock accrues a cumulative dividend on
the 20th day of December, March, June, and September of each year based on an
annual rate of: 5% through the third anniversary of the Closing Date; 12% from
the third anniversary of the Closing Date through the fourth anniversary of the
Closing Date; and 15% thereafter. At the election of the Company, the dividend
may be paid in cash, in shares of common stock or a combination of cash and
shares of common stock at any time prior to conversion of the Series A
Convertible Preferred Stock and must be paid at conversion. If the Company
elects to pay the dividend in shares of common stock, the shares will be valued
based on a 30-day trailing average ending three business days prior to the date
the shares are authorized to be issued. As of July 31, 2001, the Company had
accrued dividends on the outstanding shares of Series A Convertible Preferred
Stock of $770. The Company currently intends to pay the accrued dividends in
shares of common stock.
The holder of each share of Series A Convertible Preferred Stock is
entitled to vote on all matters upon which holders of common stock have the
right to vote, with the number of votes on such matters to be equal to the
largest number of full shares of common stock into which such share of Series A
Convertible Preferred Stock could then be converted. The holders of a majority
of the outstanding shares of Series A Convertible Preferred Stock, voting as a
separate class, are entitled to elect one director to the Company's Board of
Directors. Each share of Series A Convertible Preferred Stock is convertible
into common stock at the
30
option of the holder at any time after the first anniversary of the Closing
Date. The Series A Convertible Preferred Stock is convertible into common stock
at the option of the Company at any time after the second anniversary of the
Closing Date if the average of the closing prices of common stock over a ten
trading day period ending shortly before the Company gives notice of conversion
exceeds 160% of the then-existing conversion price for the Series A Convertible
Preferred Stock. Each share of Series A Convertible Preferred Stock is initially
convertible into one share of common stock, subject to adjustment for
subdivisions, combinations, stock dividends, reclassifications and other similar
transactions and certain stock issuances below the then-existing conversion
price. The Series A Convertible Preferred Stock has a liquidation preference
over the Company's common stock. The holders of the shares of Series A
Convertible Preferred Stock have certain registration rights.
Warrants to purchase 414,116 shares of the Company's common stock at an
exercise price of $8.48 per share contained anti-dilution provisions that were
triggered as a result of the issuance of 1,716,667 shares of Series A
Convertible Preferred Stock at $6.00 per share and the issuance of 1,372,071
common stock warrants at $3.8685 per share in connection with the private
placement of subordinated debt. As a result, the exercise price of such warrants
were reset at $3.8685 and the number of shares of common stock for which those
warrants are exercisable was increased by 589,467 shares to 1,003,583 shares,
which may result in additional dilution for existing stockholders.
In connection with the issuance of 1,716,667 shares of Series A
Convertible Preferred Stock, the Company has paid William Blair & Co. a
placement fee of $500 in cash and issued a five-year warrant to purchase 16,667
shares of common stock at an exercise price of $6.00 per share.
Private Placement
In September 1999, the Company completed a $7,200 private placement of
981,119 units, each consisting of one share of the Company's common stock and
one warrant to purchase 0.35 shares of common stock. The offering was made only
to "accredited investors", as defined in Rule 501(a) of Regulation D. The
investors included the following officers and directors of the Company: Billy D.
Prim, Craig J. Duchossois, Andrew J. Filipowski, Mark Castaneda, Steven D.
Devick, Richard A. Brenner and Jerald D. Shadley, who in the aggregate purchased
438,747 of the 981,119 units sold (Note 13). The price per unit was $7.375,
which was the closing price of the Company's common stock on September 3, 1999,
the final trading day prior to the consummation of the offering. The warrants
may be exercised at a price equal to $8.48 per share at any time prior to
September 7, 2004. The net proceeds from this offering were used to repay
indebtedness.
Stock Compensation Plans
The Company has three active stock-based compensation plans (the
"Plans") for outside directors, officers and certain employees to receive stock
options and other equity-based awards. Under the Plans, the Company may, at its
discretion, issue incentive or non-qualified stock options, stock appreciation
rights, restricted stock or deferred stock.
Stock options generally are granted with an exercise price equal to
100% of the market value per share of the common stock on the date of grant. The
options vest over one to five years and expire ten years from the date of grant.
The terms and conditions of the awards made under the plans vary but, in
general, are at the discretion of the board of directors or its appointed
committee. Under the Plans the Company has reserved 2,739,875 shares of common
stock for use and distribution under the terms of the Plans.
The Company also has a Distributor Stock Option Plan (the "Distributor
Option Plan") for Blue Rhino distributors and their stockholders, partners,
members, directors, general partners, managers, officers, employees and
consultants. The Company has reserved 400,000 shares of common stock for
issuance upon the exercise of options granted under the Distributor Option Plan.
Options issued under the Distributor Option Plan vest ratably over four years
and expire ten years from the date of grant. For the years ended July 31, 2001,
2000 and 1999, the Company recognized compensation expense included in cost of
sales of approximately $180, $138 and $272, respectively, related to stock
options outstanding under the Distributor Option Plan.
A consolidated summary of the Company's Plans and Distributor Option
Plan at July 31, 2001, 2000 and 1999 and changes during the periods then ended
is presented in the table below:
31
2001 2000 1999
-------------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- ------- -------- ------- --------
Shares under option:
Outstanding, beginning of year 1,535,307 $ 10.58 966,552 $12.52 698,796 $11.18
Granted ................... 1,148,360 2.61 653,004 7.76 327,945 14.59
Exercised ................. 0 -- 6,881 9.08 35,662 14.89
Cancelled ................. 215,774 9.63 77,368 11.54 24,527 13.01
--------- --------- -------
Outstanding, end of year ..... 2,467,893 6.93 1,535,307 10.58 966,552 12.52
--------- --------- -------
Exercisable, end of year ..... 688,173 11.23 445,909 11.29 257,480 9.15
========= ========= =======
Weighted average fair value of
options granted .............. $ 1.18 $ 3.42 $ 7.74
========= ========= =======
Options available for grant, end
of year ........................ 671,982 304,568 880,395
========= ========= =======
For various price ranges, weighted average characteristics of
outstanding stock options at July 31, 2001 were as follows:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
--------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE PRICES SHARES LIFE (YEARS) PRICE SHARES PRICE
------------------------ --------- ------------ -------- ------- --------
$ 2.13-- $ 4.25......... 1,099,883 9.40 $ 2.39 -- $ --
$ 4.59-- $ 6.50......... 175,451 7.46 6.11 62,451 5.48
$ 6.61-- $ 7.75......... 163,012 6.74 7.04 113,012 6.91
$ 8.06-- $12.75......... 367,413 8.82 8.48 93,401 8.69
$13.00-- $14.75......... 603,134 7.05 13.04 380,571 13.03
$19.13-- $24.25......... 59,000 7.41 21.63 38,738 21.65
--------- ---- ------- ------- -------
2,467,893 8.38 $ 6.93 688,173 $ 11.23
========= ==== ======= ======= =======
Had compensation expense for the 1994 Stock Incentive Plan, the 1998
Stock Incentive Plan or the Director Option Plan been determined for options
granted since August 1, 1995 in accordance with SFAS No. 123, the Company's pro
forma net income/(loss) and earnings/(loss) per share for the years ended July
31, 2001, 2000 and 1999 would have been as follows:
RESTATED
-----------------------------------------------
2001 2000 1999
---------- ---------- ---------
Net income (loss) available for common stockholders:
As reported ............................................ $ (4,722) $ (1,005) $ 2,067
========== ========== =========
Pro forma .............................................. $ (5,952) $ (2,035) $ 1,429
========== ========== =========
Earnings (loss) per common share:
Basic:
As reported ............................................ $ (0.41) $ (0.12) $ 0.27
========== ========== =========
Pro forma .............................................. $ (0.51) $ (0.23) $ 0.19
========== ========== =========
Diluted:
As reported ............................................ $ (0.41) $ (0.12) $ 0.27
========== ========== =========
Pro forma .............................................. $ (0.51) $ (0.23) $ 0.19
========== ========== =========
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions used for all grants: expected lives of five years; expected
volatility ranging from 30% to 90%; expected dividends of zero and a risk-free
interest rate ranging from 3.5% to 5.8%.
Employee Stock Purchase Plan
The Company established an Employee Stock Purchase Plan (the "ESPP")
effective January 1, 2000, for all eligible employees. Under the ESPP, shares
of the Company's common stock are purchased during annual offerings commencing
on January 1 of each year. Shares are purchased at three-month intervals at 85%
of the lower of the fair market value on the first day of the offering or the
last day of each three-month purchase period. Employees may purchase shares
having a value not exceeding 15% of their annual compensation, or $25,000,
whichever is less. During the years ended July 31, 2001 and 2000, employees
purchased 57,449 and 4,880 shares, respectively, at an average price of $2.13
per share and $7.34 per share, respectively. At July 31, 2001, 237,671 shares
were reserved for future issuance under the ESPP.
Common Stock Warrants
The Company has issued common stock warrants in connection with
various debt, equity and acquisition transactions. At July 31, 2001, warrants
to purchase a total of 2,935,704 shares of common stock were outstanding, fully
vested and exercisable from the
32
present time through June 15, 2011, with exercise prices ranging from $3.87 to
$8.48 per share. Interest expense related to the outstanding warrants was $30
for the year ended July 31, 2001. The fair value of each warrant is estimated
on the date of grant using an option pricing model with the following weighted
average assumptions used for all grants: expected lives of five to ten years;
expected volatility ranging from 30% to 90%; expected dividends of zero and a
risk-free interest rate ranging from 3.5% to 5.8%.
Shares reserved for future issuance
The Company has reserved 9,163,250 authorized shares of common stock
for future issuance as of July 31, 2001.
12. EARNINGS (LOSS) PER SHARE:
The basic and diluted earnings (loss) per share was determined as
follows:
RESTATED
---------------------------------------
2001 2000 1999
-------- ------- ------
Basic and diluted earnings (loss) per common share:
Net income (loss) ...................................... $(3,952) $(1,005) $2,067
Less: Preferred stock dividends ........................ 770 -- --
------- ------- ------
Income (loss) available to common stockholders ........... $(4,722) $(1,005) $2,067
======= ======= ======
Weighted average common shares used in computing the
earnings (loss) per common share (in thousands):
Basic .................................................. 11,641 8,736 7,645
Effect of dilution ..................................... -- -- 142
Diluted ................................................ 11,641 8,736 7,787
======= ======= ======
Basic and diluted earnings (loss) per common share ....... $ (0.41) $ (0.12) $ 0.27
======= ======= ======
The shares related to common stock options and common stock warrants
listed below were not included in the computation of diluted earnings per share
for 2001, 2000 and 1999, respectively, because their inclusion would have been
anti-dilutive.
2001 2000 1999
--------- --------- ------
Common stock options.............. 2,467,893 1,535,307 73,000
Common stock warrants............. 2,935,704 857,499 81,913
13. RELATED PARTY TRANSACTIONS
On September 7, 2000 the Company completed a private placement of
1,716,667 shares of its Series A Convertible Preferred Stock to two
institutional investors under common management and three individuals,
including Billy D. Prim, its Chairman, Chief Executive Officer and President,
and Andrew J. Filipowski, its Vice Chairman, for an aggregate purchase price of
approximately $10,300. Messrs. Prim and Filipowski invested $50 and $250 for
8,333 and 41,667 shares of Series A Convertible Preferred Stock, respectively
(Note 11).
During the years ended July 31, 2001, 2000 and 1999, the Company paid
professional legal fees to Pedersen & Houpt, a Professional Corporation ("P&H")
in the amount of $173, $459, and $344, respectively. A principal of P&H is also
a director of the Company.
The Company leases facilities from affiliates under noncancelable
operating leases that expire December 2001 and March 2005. Rent expense under
these leases was $567, $299, and $76 for the years ended July 31, 2001, 2000
and 1999, respectively.
As of July 31, 1999, Platinum Propane Holding, LLC ("PPH") and Ark
Holdings ("Ark") were affiliates and together operated the Company's eight
affiliated distributors. PPH began operations as a distributor during fiscal
1996, while Ark began operations as a distributor during fiscal 1998. In August
1999, the Company's Chairman, Chief Executive Officer and President, Billy D.
Prim, and Vice Chairman, Andrew J. Filipowski sold all of their interests in
PPH and Ark distributors to an existing investor in PPH. This investor is not
affiliated with Blue Rhino Corporation. Messrs. Prim and Filipowski together
owned approximately 42% of PPH, a holding company for five Blue Rhino
distributors. Sales from PPH's distributors represented approximately 32% of
Blue Rhino's net revenues for the year ended July 31, 1999. In addition,
Messrs. Prim and Filipowski together owned approximately 47% of Ark, a holding
company for three Blue Rhino distributors. Sales from Ark distributors
represented approximately 6% of Blue Rhino's net revenues for the year ended
July 31, 1999. Both Messrs. Prim and Filipowski continue to serve as directors
for PPH and Ark.
33
The following represents related party balances with these affiliates
outstanding at July 31, 1999 and transactions for the one-month period ended
August 31, 1999 and the fiscal year ended July 31, 1999:
PPH ARK
------------------- ------------------
2000 1999 2000 1999
---- ------- ---- ------
Accounts receivable .. $ -- $ 308 $ -- $ 69
Product sales ........ -- 308 -- 69
Notes receivable ..... -- 133 -- --
Accounts payable ..... -- 945 -- 213
Cost of sales ........ 873 11,340 241 2,071
Interest income ...... 1 64 -- --
Lease income ......... 94 863 16 121
Cylinder purchases ... -- 6,470 -- 1,337
14. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consists of the following at
July 31:
2001 2000
------ ------
Advances ........... $7,890 $1,600
Prepaid expenses ... 1,234 1,485
Notes receivable ... 278 661
------ ------
$9,402 $3,746
====== ======
15. OTHER, NET
The Company had certain non-operating income and expenses classified
as other, net during the years ended July 31, 2001, 2000 and 1999 as follows:
2001 2000 1999
----- ---- -----
Interest income .............. $(573) $(82) $(173)
Miscellaneous expenses ....... 221 2 100
Loss on disposal of assets ... 51 96 25
----- ---- -----
$(301) $ 16 $ (48)
===== ==== =====
16. INCOME TAXES
The provision for income taxes for the years ended July 31, 2001, 2000
and 1999 consisted of $123, $32 and $30 of current tax expense, respectively.
A reconciliation of the differences between the statutory federal
income tax rate of 34% and the effective tax rate for the years ended July 31,
2001, 2000 and 1999 is as follows:
RESTATED
----------------------------------------
2001 2000 1999
---- ---- ----
Federal statutory tax rate ........... (34.0)% (34.0)% 34.0%
Change in valuation allowance ...... 32.5 26.6 (35.5)
Permanent differences and
other ............................ 2.5 7.4 2.0
State taxes net of federal
benefit .......................... 2.2 3.9 0.9
---- ---- ----
Effective tax rate ................... 3.2% 3.9% 1.4%
==== ==== ====
34
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liability are as follows:
2001 2000 1999
-------- -------- -------
Assets:
Net operating loss
carryforward .................... $ 13,884 $ 9,977 $ 7,131
Allowance for doubtful
accounts ......................... 1,042 493 438
Distributor option plan ............. 205 68 125
Deferred loss on joint venture ...... 529 157 --
Accrued expenses .................... 531 -- --
Reserves ............................ 280 -- --
Other ............................... 311 68 82
-------- -------- -------
Total gross deferred tax
assets ........................... 16,782 10,763 7,776
Valuation allowance ................. (8,616) (7,337) (7,145)
-------- -------- -------
Net deferred tax assets ............... $ 8,166 $ 3,426 $ 631
======== ======== =======
Liability:
Depreciation and amortization ....... 8,166 3,426 631
-------- -------- -------
Total gross deferred tax
liabilities ......................... $ 8,166 $ 3,426 $ 631
======== ======== =======
At July 31, 2001, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $35,950, which are available to
offset future federal taxable income, if any, in varying amounts from 2002
through 2021. However, the utilization of the net operating losses will be
subject to certain limitations as prescribed by Section 382 of the Internal
Revenue Code.
17. DERIVATIVE INSTRUMENTS
Effective August 1, 2000, the Company adopted Statement of Financial
Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133") which establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded
in other contracts and for hedging activities. All derivatives, whether
designated in hedging relationships or not, are required to be recorded on the
balance sheet at fair value. If the derivative is designated as a fair value
hedge, the changes in the fair value of the derivative and of the hedged item
attributable to the hedged risk are recognized in earnings. If the derivative
is designated as a cash flow hedge, the effective portions of changes in the
fair value of the derivative are recorded in other comprehensive income ("OCI")
and are recognized in the income statement when the hedged item affects
earnings. Ineffective portions of changes in the fair value of cash flow hedges
are recognized in earnings. The cumulative effect of the adoption of SFAS 133
resulted in a reduction to OCI of $131.
The Company uses derivative instruments to manage exposure to interest
rate fluctuations and wholesale propane price volatility. The Company's
objective for holding derivatives is to minimize risks by using the most
effective methods to eliminate or reduce the impacts of these exposures.
In July 2000, the Company entered into an interest rate swap
agreement, as required under its bank credit facility, with a notional amount
of $10,000 as a cash flow hedge of the variable interest rate debt outstanding
under its credit facility. Under the swap agreement, which expires in July
2003, the Company pays a fixed rate of 7.36% and receives a rate equivalent to
the one-month London Interbank Offered Rate ("LIBOR"). The swap was designated
as a hedge of the benchmark interest rate. In February 2001, the interest rate
on the bank credit facility was changed to a rate based on the prime rate. As a
result, the interest rate risk being hedged is no longer based on the benchmark
interest rate of LIBOR. However, for the six-month period ending July 31, 2001,
the interest rate swap was still an effective cash flow hedge. As a result of
the interest rate swap agreement, there was a $154 charge to interest expense
during the year ended July 31, 2001 for the effective portion of the hedge.
Hedge ineffectiveness, determined in accordance with SFAS 133, resulted in a
$12 charge to other expense during the year ended July 31, 2001. The fair value
of the derivative at July 31, 2001 was ($636) and it is reflected in the
balance sheet in long-term debt and capital lease obligations, less current
maturities.
Effective March 1, 2001, the Company restructured its payment
obligations to distributors such that each payment will include a fixed
component and a variable component based on the price of propane. In March
2001, the Company entered into a derivative commodity swap instrument as a cash
flow hedge against fluctuations in the propane price component of the
distributor payments. In May through July 2001, the Company entered into
additional derivative collar instruments to hedge additional propane price
exposure on a portion of its anticipated cylinder exchange volume through
December 2002. In the aggregate, the derivative instruments hedge approximately
50% to 95% of the Company's anticipated monthly cylinder exchange volume during
the period from August 2001 through December 2002. As a result of the propane
derivative instruments, there was a $235 charge to cost of sales during the
year ended July 31, 2001 for the effective portion of the hedge. Hedge
ineffectiveness, determined in accordance with SFAS 133, had no impact on
earnings for the twelve-month period ended July 31, 2001. The fair value of the
derivative at July 31, 2001 was a ($610) current liability that is reflected in
the balance sheet in current portion of long-term debt and capital lease
obligations and a $132 long-term asset that is reflected in the balance sheet
in other assets.
The net derivative loss recorded in OCI will be reclassified into
earnings over the term of the underlying cash flow hedges. The amount that will
be reclassified into earnings will vary depending upon the movement of the
underlying interest rates and propane
35
prices. As interest rates and propane prices decrease, the charge to earnings
will increase. Conversely, as interest rates and propane prices increase, the
charge to earnings will decrease.
The following is a rollforward of the components of OCI for the year ended
July 31, 2001:
Transition adjustment from adoption of SFAS 133 $ 131
Net change associated with current period hedge
transactions 1,372
Net amount reclassified into earnings
during the year (401)
------
Ending balance deferred in OCI $1,102
======
Total comprehensive loss was ($5,054) for the year ended July 31,
2001.
18. DEFINED CONTRIBUTION PLAN
The Company maintains a defined contribution employee benefit plan
("401(k) plan"), which covers all employees over 21 years of age who have
completed a minimum of six months of employment. The 401(k) plan allows for
employees' contributions, which, effective in July 1999, are matched by the
Company up to a specific amount under the provisions of the 401(k) plan.
Company contributions during the years ended July 31, 2001, 2000 and 1999 were
approximately $135, $85 and $3 respectively.
19. SUPPLEMENTAL INFORMATION TO CONSOLIDATED STATEMENTS OF CASH FLOWS
The Company had certain non-cash investing and financing activities
during the years ended July 31, 2001, 2000 and 1999 as follows:
RESTATED RESTATED
-------- --------
2001 2000 1999
------ ------ ------
Capital lease obligations ..................... $ -- $ 448 $1,293
Notes receivable exchanged for the purchase of
assets ..................................... 157 498 929
Warrants issued in connection with debt, equity
and acquisition transactions ............... 3,526 2,546 --
Cylinders acquired through vendor financing ... -- -- 7,000
Accreted preferred dividends .................. 770 -- --
Interest paid during the years ended July 31, 2001, 2000 and 1999 was
$4,562, $2,066 and $778, respectively.
20. SEGMENT INFORMATION
The Company has two reportable segments: cylinder exchange and
products and other. The cylinder exchange segment relates to cylinder exchange
transactions and lease income from cylinders and cylinder displays. The
products and other segment includes the activities required to sell patio
heaters, grills, fireplace accessories and garden products, which are managed
and operated through Uniflame. In addition, the financial information related
to QuickShip, a retail shipping services company acquired in October 2000, is
included within the products segment as it is not currently material on a
stand-alone basis (Note 10).
The Company evaluates performance and allocates resources based on
several factors, of which the primary financial measure is business segment
operating income, defined as earnings before interest, taxes, depreciation and
amortization (EBITDA). The accounting policies of the segments are the same as
those described in the summary of significant accounting policies (Note 2).
There are no significant inter-segment revenues.
The Company's reportable segments are strategic business units that
offer different products and services. They are managed separately because each
business requires different technology and operational strategies. The majority
of the products business was acquired in the Uniflame acquisition.
2001 2000 1999
-------- -------- -------
Net revenues:
Cylinder exchange ............................ $ 86,772 $ 68,771 $53,343
Products and other ........................... 52,291 9,962 477
-------- -------- -------
$139,063 $ 78,733 $53,820
======== ======== =======
Segment EBITDA before extraordinary loss:
Cylinder exchange ............................ $ 10,219 $ 6,406 $ 6,573
Products and other ........................... 2,267 864 47
-------- -------- -------
Total segment EBITDA before extraordinary ...... 12,486 7,270 6,620
loss
Depreciation and amortization .................. 8,461 4,717 2,872
-------- -------- -------
Income from operations ......................... $ 4,025 $ 2,553 $ 3,748
======== ======== =======
Total assets:
Cylinder exchange ............................ $ 93,594 $ 82,429 $59,899
Products and other ........................... 33,750 25,746 --
-------- -------- -------
$127,344 $108,175 $59,899
======== ======== =======
36
The following items are included in income (loss) before income taxes:
2001 2000 1999
------ ------ ------
Equity in loss of equity method investees:
Cylinder exchange ............................ $2,572 $ 403 $ 311
Products and other ........................... -- -- --
------ ------ ------
$2,572 $ 403 $ 311
====== ====== ======
Depreciation and amortization:
Cylinder exchange ............................ $5,965 $4,388 $2,872
Products and other ........................... 2,496 329 --
------ ------ ------
$8,461 $4,717 $2,872
====== ====== ======
The following items are included in the determination of identifiable
assets:
2001 2000 1999
------- ------- -------
Investments in equity method investees:
Cylinder exchange ...................... $ 455 $ 3,027 $ --
Products and other ..................... -- -- --
------- ------- -------
$ 455 $ 3,027 $ --
======= ======= =======
Capital expenditures:
Cylinder exchange ...................... $10,844 $17,824 $14,149
Products and other ..................... 152 41 --
------- ------- -------
$10,996 $17,865 $14,149
======= ======= =======
21. NONRECURRING ITEMS AND SPECIAL CHARGES
During the year ended July 31, 2001, the Company incurred a charge of
$449 related to costs incurred in connection with refinancing its bank credit
facility.
In September 1999, the Company issued $7,000 of 5% Convertible Notes
(the "Convertible Notes"). The Convertible Notes were redeemed in July 2000
with $7,000 of proceeds from the Credit Facility. The early retirement of the
Convertible Notes resulted in an extraordinary loss of $158 in the year ended
July 31, 2000 due to unamortized discount and other debt issuance costs.
During the year ended July 31, 1999, the Company incurred a charge of
$551 related to costs incurred in connection with an offering of common stock,
which was terminated before completion in February 1999 due to unfavorable
market conditions.
22. QUARTERLY FINANCIAL DATA (UNAUDITED)
FISCAL 2001 QUARTER ENDED
-----------------------------------------------------------------------
OCTOBER 31 JANUARY 31 APRIL 30 JULY 31
---------- ---------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenues ................................... $ 33,821 $ 31,668 $ 31,575 $41,999
Total operating costs and expenses ............. 32,204 32,361 31,881 38,592
-------- -------- -------- -------
Income (loss) from operations .................. 1,617 (693) (306) 3,407
Net income (loss) .............................. $ (184) $ (2,465) $ (2,131) $ 828
Preferred dividends ............................ 128 214 214 214
-------- -------- -------- -------
Income (loss) available to common
stockholders ................................ $ (312) $ (2,679) $ (2,345) $ 614
======== ======== ======== =======
Per share data:
Basic and diluted earnings (loss) per common
share ....................................... $ (0.03) $ (0.22) $ (0.19) $ 0.05
======== ======== ======== =======
37
FISCAL 2000 QUARTER ENDED
-------------------------------------------------------------
RESTATED RESTATED RESTATED RESTATED
OCTOBER 31 JANUARY 31 APRIL 30 JULY 31
---------- ---------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenues ................................... $14,208 $15,214 $17,036 $ 32,275
Total operating costs and expenses ............. 13,490 14,479 15,633 32,578
------- ------- ------- --------
Income (loss) from operations .................. 718 735 1,403 (303)
Income (loss) before extraordinary loss ........ $ 256 $ 101 $ 494 $ (1,698)
Extraordinary loss ............................. -- -- -- 158
------- ------- ------- --------
Net income (loss) .............................. $ 256 $ 101 $ 494 $ (1,856)
======= ======= ======= ========
Per share data:
Basic earnings (loss) per common
share before extraordinary loss ............. $ 0.03 $ 0.01 $ 0.06 $ (0.18)
======= ======= ======= ========
Diluted earnings (loss) per common share
before extraordinary loss ...................... $ 0.03 $ 0.01 $ 0.05 $ (0.20)
======= ======= ======= ========
Basic earnings (loss) per common
share ....................................... $ 0.03 $ 0.01 $ 0.06 $ (0.18)
======= ======= ======= ========
Diluted earnings (loss) per common share ....... $ 0.03 $ 0.01 $ 0.05 $ (0.20)
======= ======= ======= ========
Note: Quarterly amounts may not add to annual amounts due to the effect of
rounding on a quarterly basis.
23. RESTATEMENT
Management changed its estimates of the fair values of certain
warrants and convertible debt issued by the Company during the fiscal years
ended July 31, 2001 and 2000. As a result, the consolidated financial
statements of the Company as of July 31, 2001 and 2000, and for the year ended
July 31, 2000, have been restated where applicable to reflect the non-cash
effects of the new estimates of the fair values of the warrants and convertible
debt and of recognizing a beneficial conversion feature. There was no change to
the consolidated statement of operations for the year ended July 31, 2001. The
net effect on the consolidated statement of operations for the year ended July
31, 2000 increased the net loss available to common stockholders by a non-cash
charge of $433. The changes for the year ended July 31, 2000 increased non-cash
interest expense by approximately $761 and reduced non-cash extraordinary loss
by $328. The change in the consolidated balance sheet as of July 31, 2000 was
an increase to stockholders' equity of $433, resulting in no net change to
total stockholders' equity as of July 31, 2000. The change to the consolidated
balance sheet as of July 31, 2001 was a non-cash increase in common stock
warrants by $2,240, resulting in an increase in discount on subordinated debt
by $2,240.
A summary of the effects of the restatement for the years ended July
31, 2001 and 2000 is as follows:
CONSOLIDATED BALANCE SHEETS 2001 2000
--------------------------- ----------------------------- ----------------------------
AS AS
PREVIOUSLY PREVIOUSLY
REPORTED AS RESTATED REPORTED AS RESTATED
---------- ----------- ---------- ----------
Common stock............................ $ 9 $ 9 $ 9 $ 9
Preferred stock......................... 3 3
Capital in excess of par................ 77,567 77,389 60,075 59,897
Common stock warrants................... 3,221 6,403 1,935 2,877
Accumulated deficit..................... (24,789) (25,553) (20,067) (20,831)
Accumulated other
comprehensive loss................... (1,102) (1,102)
--------- ----------- --------- ---------
Total stockholders' equity.............. $ 54,909 $ 57,149 $ 41,952 $ 41,952
========= =========== ========= =========
CONSOLIDATED STATEMENT OF OPERATIONS 2000
------------------------------------------------- -----------------------------
AS
PREVIOUSLY
REPORTED AS RESTATED
---------- -----------
(Loss) before income taxes and extraordinary loss $ (54) $ (815)
Income taxes 32 32
------ -------
(Loss) before extraordinary loss (86) (847)
Extraordinary loss, net (486) (158)
------ -------
Net (loss) $ (572) $(1,005)
====== =======
Basic and diluted (loss) per common share $(0.07) $ (0.12)
====== =======
38
Report of Independent Auditors
Board of Managers
R4 Technical Center - North Carolina, LLC
We have audited the accompanying balance sheet of R4 Technical Center
- North Carolina, LLC (the "Company") as of December 31, 2000, and the related
statements of operations and changes in members' capital, and cash flows for
the period from April 28, 2000 (date of inception) to December 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of R4 Technical Center
- North Carolina, LLC at December 31, 2000, and the results of its operations
and its cash flows for the period from April 28, 2000 (date of inception) to
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
The accompanying financial statements have been prepared assuming that
R4 Technical Center - North Carolina, LLC will continue as a going concern. As
more fully described in Notes 1 and 11, the Company has incurred operating
losses since inception and has a working capital deficiency. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regards to these matters are also described in
Notes 1 and 11. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from
the outcome of this uncertainty.
/s/ Ernst & Young LLP
-------------------------
Winston-Salem, North Carolina
March 14, 2001
39
R4 TECHNICAL CENTER - NORTH CAROLINA, LLC
BALANCE SHEET
DECEMBER 31, 2000
ASSETS
Current assets:
Cash and cash equivalents ................................. $ 235,551
Accounts receivable ....................................... 171,575
Accounts receivable from related parties .................. 568,517
Inventories ............................................... 170,449
Prepaid expenses and other current assets ................. 186,300
----------
Total current assets ......................... 1,332,392
Property, plant and equipment, net ........................... 7,404,507
----------
Total assets ................................. $8,736,899
==========
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities:
Accounts payable .......................................... $ 914,082
Accrued expenses .......................................... 321,936
Amounts due to Blue Rhino Corporation ..................... 3,253,650
----------
Total current liabilities .................... 4,489,668
Capital lease obligations, less current maturities ........... 26,275
----------
Total liabilities ....................... 4,515,943
Members' capital ............................................. 4,220,956
----------
Total liabilities and members' capital ....... $8,736,899
==========
The accompanying notes are an integral part of the financial statements.
40
R4 TECHNICAL CENTER - NORTH CAROLINA, LLC
STATEMENT OF OPERATIONS AND
CHANGES IN MEMBERS' CAPITAL
For the Period from April 28, 2000 (date of inception) to December 31, 2000
Net revenues ............................... $ 3,871,065
Costs and expenses:
Cost of sales ........................... 5,453,824
Selling, general and administrative ..... 590,206
Depreciation and amortization ........... 308,536
-----------
Operating loss ............................. (2,481,501)
Other income (expense):
Start up expenses ....................... (172,299)
Interest expense ........................ (125,244)
-----------
Net loss ................................... (2,779,044)
Issuance of member units ................... 7,000,000
-----------
Members' capital at December 31, 2000 ...... $ 4,220,956
===========
The accompanying notes are an integral part of the financial statements.
41
R4 TECHNICAL CENTER - NORTH CAROLINA, LLC
STATEMENT OF CASH FLOWS
Period from April 28, 2000 (date of inception) to December 31, 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ....................................................... $(2,779,044)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ............................. 308,536
Non-cash start up expenses ................................ 172,299
Changes in operating assets and liabilities:
Accounts receivable ..................................... (740,092)
Inventories ............................................. (163,693)
Prepaid expenses and other current assets ............... (181,903)
Accounts payable ........................................ 914,082
Accrued expenses ........................................ 314,680
-----------
Net cash used in operating activities .......................... (2,155,135)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment ..................... (1,224,281)
-----------
Net cash used in investing activities .......................... (1,224,281)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from Blue Rhino Corporation ........................... 3,253,650
Proceeds from the issuance of member units, net ................ 363,177
Principal payments on capital lease obligation ................. (1,860)
-----------
Net cash provided by financing activities ...................... 3,614,967
-----------
Increase in cash and cash equivalents .......................... 235,551
Cash and cash equivalents at beginning of period ............... --
-----------
Cash and cash equivalents at end of period ..................... $ 235,551
===========
The accompanying notes are an integral part of the financial statements
42
R4 TECHNICAL CENTER - NORTH CAROLINA, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000
1. DESCRIPTION OF BUSINESS AND ECONOMIC DEPENDENCY
R4 Technical Center - North Carolina, LLC (the "Company") was formed
on April 28, 2000 as a joint venture to operate and manage an automated propane
bottling and cylinder refurbishing plant. Membership units of the Company are
owned by Manchester Tank & Equipment Co. ("Manchester") - 50%, Blue Rhino
Corporation ("Blue Rhino") - 49%, and Platinum Propane, LLC ("Platinum") - 1%.
The Company began operations in May 2000 and provides services to Blue Rhino
and its distributors.
The Company experienced a loss from operations of $2,779,044 for the
period from April 28, 2000 (date of inception) through December 31, 2000. Blue
Rhino provided operating and financing advances totaling approximately
$3,270,000 for the same period. Additionally, all customers of the Company are
distributors of Blue Rhino. Platinum is the largest customer of the Company,
comprising approximately 68% of revenues for the period from April 28, 2000
(date of inception) to December 31, 2000. See Notes 8 and 11.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates -- The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
Cash and cash equivalents -- The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. The carrying value of cash and cash equivalents approximates fair
value.
Inventories --- Inventories are valued at the lower of cost or market
on a first-in, first-out (FIFO) basis and consist primarily of propane, paint,
sleeves and costs incurred to refill and refurbish cylinders.
Revenue Recognition -- The Company generates revenue by refurbishing
and refilling propane cylinders. Revenues are recognized when goods are shipped
to customers.
Property, plant and equipment -- Property, plant and equipment is
stated at cost. Depreciation and amortization is provided for on the
straight-line method over the estimated useful lives ranging from three to
thirty years.
In the event that facts and circumstances indicate that the cost of
property, plant and equipment, or other long-lived assets may not be
recoverable, the estimated future undiscounted cash flows is compared to the
asset's carrying value and, if less, an impairment loss is recognized in an
amount by which the carrying amount exceeds its fair value.
Income Taxes -- The Company is considered a partnership for federal
and state income tax reporting purposes. As a result, the Company's results of
operations are included in the income tax returns of its members. Accordingly,
the financial statements do not include a provision for income taxes.
Recent Accounting Pronouncements -- In June 1998, the Financial
Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which was effective for fiscal years
beginning after June 15, 2000. SFAS No. 133 was amended by SFAS No. 138,
"Accounting for Derivative Instruments and Hedging Activities." The provisions
of the statements require the recognition of all derivatives as either assets
or liabilities in the statement of financial position and the measurement of
those instruments at fair value. Changes in the fair market value of
derivatives are recorded each period in current earnings or comprehensive
income, depending on whether a derivative is designed as part of a hedge
transaction and, if so, the type of hedge transaction. The Company was required
to and adopted the standards effective January 1, 2001. As the Company does not
currently have any derivative instruments, the adoption of SFAS No. 133 will
not have an impact on its results of operations or financial position. The
Company may enter into derivative instruments in the future.
43
In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements," which provides guidance on the recognition,
presentation, and disclosure of revenue in financial statements filed with the
SEC. SAB No. 101 outlines the basic criteria that must be met to recognize
revenue and provides guidance for disclosures related to revenue recognition
policies. SAB No. 101 was implemented in the fourth quarter of fiscal 2000.
Application of SAB No. 101 did not have any impact on its results of operations
or financial position.
3. CONCENTRATIONS OF CREDIT RISK
Financial investments that potentially subject the Company to
concentrations of credit risk consist primarily of customer receivables and
deposits in excess of federally insured limits with financial institutions.
As of and for the period ended December 31, 2000, related party
customers accounted for 77% of accounts receivables and 68% of revenues.
4. INVENTORIES
Inventories at December 31, 2000, consist of the following:
Raw materials ...... $114,352
Work in process .... 5,284
Finished goods ..... 50,813
--------
$170,449
========
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 2000, consist of the
following:
Land and improvements ............................ $ 922,838
Buildings ........................................ 2,061,323
Machinery and equipment .......................... 4,460,281
Vehicles ......................................... 24,220
Furniture and fixtures ........................... 95,031
Computer equipment and software .................. 149,350
-----------
7,713,043
Less accumulated depreciation and amortization ... (308,536)
-----------
$ 7,404,507
===========
6. MEMBERS' CAPITAL
The initial capital contribution to the Company consisted of
$3,500,000 in cash from Manchester and $70,000 in cash from Platinum. Blue
Rhino's contribution consisted of $6,453,371 in property, plant and equipment,
$172,299 in start-up expenses, $106,000 in cash, and $11,153 in other assets.
The joint venture agreement provided for the excess amounts contributed, of
$3,312,823, to be repaid to Blue Rhino, resulting in a net capital contribution
by Blue Rhino of $3,430,000.
7. CAPITAL LEASE OBLIGATION
The Company obtained equipment through a capital lease obligation
amounting to $35,391, which is payable in monthly installments of principal and
interest of $801, through January 2005. This obligation is secured by equipment
with a net book value of $36,578. The aggregate amounts the capital lease
obligation maturing in each of the next five years are as follows: $7,256 in
2001; $7,842 in 2002; $8,476 in 2003; $9,161 in 2004; and $796 in 2005. The
current portion of the capital lease obligation of $7,256 is included in
accrued expenses at December 31, 2000.
Cash paid for interest for the period from April 28, 2000 (date of
inception) to December 31, 2000 was $79,559.
44
8. RELATED PARTY TRANSACTIONS
The Company had the following transactions with related parties for
the period from April 28, 2000 (date of inception) to December 31, 2000:
BLUE RHINO PLATINUM TOTAL
----------- ----------- -----------
Amounts due to affiliates at beginning of
period ........................................... $ -- $ -- $ --
Transactions during the period:
Sales ............................................ -- (2,638,349) (2,638,349)
Insurance ........................................ 57,733 -- 57,733
Interest expense ................................. 99,991 -- 99,991
Cylinder lease expense ........................... 91,504 -- 91,504
Valve requalification service revenue ............ (138,465) -- (138,465)
Rental income .................................... -- (52,177) (52,177)
Rent expense ..................................... -- 37,542 37,542
Inventory purchases .............................. 362,233 -- 362,233
Administrative services .......................... 254,516 -- 254,516
Payments, nets ................................... 2,526,138 2,084,467 4,610,605
----------- ----------- -----------
Amounts due to (from) affiliates at end of
period ........................................... $ 3,253,650 $ (568,517) $ 2,685,133
=========== =========== ===========
The Company has notes payable totaling $2,978,500 plus $24,557 accrued
interest due to Blue Rhino as of December 31, 2000. Interest accrues at the
rate of 10.0% per annum. These notes are payable upon demand. Blue Rhino has
also made operating advances in the amount of $250,593 at December 31, 2000.
The Company enters into operating lease agreements with Blue Rhino for
cylinders for use within its business. Under these leases, the Company, as
lessee, is obligated for all maintenance, taxes and insurance related to the
cylinders. The terms of the leases continue until either party terminates upon
60 days written notice to the other party. As of December 31, 2000, estimated
future minimum rental payments to be paid are approximately $119,796 per year
through the year 2005.
The Company has entered into an agreement with Blue Rhino to provide
administrative services including operations management, information systems,
accounting and human resources. The agreement is for a one year term ending
April 1, 2001. The agreement provides for automatic one-year renewal options
unless either party provides written notice terminating the agreement thirty
days prior to termination.
Through December 31, 2000, the Company was operating under oral
agreements with entities related to Platinum to lease office facilities,
production facilities and equipment in Boonville, North Carolina and Zellwood,
Florida on a month-to-month basis.
Also, through December 31, 2000, the Company leases office facilities
to Platinum. The lease agreement calls for monthly rental of $2,832, expiring
in February 2003. The lease has renewal options for an additional two-year
term. The Company also has an oral agreement with Platinum under which the
Company receives rent for additional office, warehouse, and storage facilities
for $5,371 per month. Estimated future minimum lease receipts under
noncancelable leases are $33,894 in 2001; $33,894 in 2002; and $2,832 in 2003.
9. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution 401(k) plan (the "Plan"),
covering substantially all employees who are at least 18 years of age and have
completed 60 days of employment. The Company is required to provide matching
contributions of 50% of each participant's contributions, up to 3% of
compensation. The Company incurred expenses in the amount of $6,744 under the
Plan during the period from April 28, 2000 through December 31, 2000.
10. COMMITMENTS
The Company has various agreements with propane vendors to provide
agreed upon quantities of propane at market prices over scheduled periods.
45
11. GOING CONCERN
The financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As disclosed in Note 1, the
Company is currently economically dependent upon Blue Rhino to provide
operating and financing advances and on a significant customer for the majority
of its revenue. While the members of the Company are committed and believe that
the Company will become a successful enterprise, uncertainty exists when the
Company will be able to become self-sustaining. Management plans to seek
additional financing to provide additional permanent and working capital. The
Company's ability to continue as a going concern is, among others, dependent
upon its ability to successfully obtain additional capital. However, although
no assurances can be given, management remains confident that the Company will
be able to continue operating as a going concern.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is contained in our definitive
proxy statement relating to our Annual Meeting of Stockholders scheduled to be
held on December 18, 2001, which will be filed within 120 days after the end of
the fiscal year covered by this Annual Report on Form 10-K, under the captions
"Proposal 1 -- Election of Directors," "Information Concerning Executive
Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance," which
are incorporated by reference herein.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is contained in our definitive
proxy statement relating to our Annual Meeting of Stockholders scheduled to be
held on December 18, 2001, which will be filed within 120 days after the end of
the fiscal year covered by this Annual Report on Form 10-K, under the caption
"Executive Compensation," which is incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained in our definitive
proxy statement relating to our Annual Meeting of Stockholders scheduled to be
held on December 18, 2001, which will be filed within 120 days after the end of
the fiscal year covered by this Annual Report on Form 10-K, under the caption
"Beneficial Ownership of Directors, Executive Officers and Certain Beneficial
Owners," which is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained in our definitive
proxy statement relating to our Annual Meeting of Stockholders to be held on
December 18, 2001, which will be filed within 120 days after the end of the
fiscal year covered by this Annual Report on Form 10-K, under the caption
"Certain Transactions," which is incorporated by reference herein.
46
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements of Blue Rhino Corporation
are included in Part II, Item 8:
Report of Independent Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Consolidated Financial Statements of R4 Technical Center -
North Carolina, LLC are included in Part II, Item 8:
Report of Independent Accountants
Consolidated Balance Sheet
Consolidated Statement of Operations
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts -- see
additional section of this Report.
(3) Exhibits
See the Exhibit Index following the Signature Page, which is
incorporated herein by reference.
(b) Reports on Form 8-K filed in the fourth quarter of fiscal 2001
Form Type Date Filed Reporting Purpose
---- ---- ---------- -----------------
8-K Item 5 6/20/01 To report the refinancing of bank debt and placement
of $15 million of subordinated debt to Allied
Capital Corporation.
(c) The exhibits required by Item 601 of Regulation S-K are filed herewith
and incorporated by reference herein. The response to this portion of Item 14
is submitted under Item 14(a)(3).
(d) The response to this portion of Item 14 is submitted under Item
14(a)(2).
47
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
BLUE RHINO CORPORATION
By: /s/ BILLY D. PRIM
----------------------------------------
Billy D. Prim
Chairman of the Board, President and
Chief Executive Officer
Date: April 3, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ BILLY D. PRIM Chairman of the Board, April 3, 2002
------------------------------- President
Billy D. Prim and Chief Executive
Officer (Principal
Executive Officer)
/s/ MARK CASTANEDA Secretary, Chief Financial April 3, 2002
------------------------------- Officer
Mark Castaneda and Director (Principal
Financial and
Accounting
Officer)
/s/ ANDREW J. FILIPOWSKI Vice Chairman of the Board April 3, 2002
-------------------------------
Andrew J. Filipowski
/s/ STEVEN D. DEVICK Director April 3, 2002
-------------------------------
Steven D. Devick
/s/ JOHN H. MUEHLSTEIN Director April 3, 2002
-------------------------------
John H. Muehlstein
/s/ RICHARD A. BRENNER Director April 3, 2002
-------------------------------
Richard A. Brenner
/s/ ROBERT J. LUNN Director April 3, 2002
-------------------------------
Robert J. Lunn
/s/ DAVID L. WARNOCK Director April 3, 2002
-------------------------------
David L. Warnock
48
SCHEDULE II
BLUE RHINO CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FISCAL YEARS ENDED JULY 31, 2001, 2000 AND 1999
(IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------------------------------- ---------- --------- ---------- -------
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
-------------------------------- ---------- --------- ---------- -------
Year ended July 31, 1999
Allowance for doubtful
accounts ....................... $134 $296 $ -- $430
Year ended July 31, 2000
Allowance for doubtful ....... 430 430 116(1) 744
accounts
Year ended July 31, 2001
Allowance for doubtful ....... 744 837 733 848
accounts
---------
(1) Includes an allowance for doubtful accounts in the amount of $69
acquired in Uniflame acquisition.
EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
--------- ----------------------
2.1 -- Agreement and Plan of Reorganization dated October
25, 2000 by and among the Company, QuickShip
Acquisition Corp., QuickShip, Inc., Thomas E.
Brandtonies, Gold Banc Corporation, Inc.,
incorporated by reference to Exhibit 2.1 to the
Company's Annual Report on Form 10-K for the year
ended July 31, 2000.
3.1(a) -- Second Amended and Restated Certificate of
Incorporation of the Company, as amended,
incorporated by reference to Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the year
ended July 31, 2000.
3.1(b) -- Certificate of Designation, Rights and Preferences
of Series A Convertible Preferred Stock Dated
September 7, 2000, incorporated by reference to
Exhibit 4.10 to the Company's Registration Statement
on Form S-3 dated September 25, 2000.
3.1(c) -- Certificate of Designation, Number of Authorized
Shares of Series A Convertible Preferred Stock dated
October 25, 2000, incorporated by reference to
Exhibit 4.10 to the Company's Annual Report on Form
10-K for the year ended July 31, 2000.
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
March 10, 1998.
4.1(a) -- Form of Certificate of Common Stock of the Company,
incorporated by reference to Exhibit 4.1 to
Amendment No. 2 to the Company's Registration
Statement on Form S-1 dated May 13, 1998.
4.1(b) -- Form of Certificate of Series A Convertible
Preferred Stock of the Company, incorporated by
reference to Exhibit 4.1(b) to the Company's Annual
Report on Form 10-K for the year ended July 31,
2000.
4.2 -- Registration Rights Agreement among the Company and
the purchasers of Common Stock and Warrants dated
September 7, 1999, incorporated by reference to
Exhibit 4.1 to the Company's Current Report on Form
8-K dated September 23, 1999.
4.3 -- Registration Rights Agreement among the Company and
the Buyers of its Convertible Notes dated September
22, 1999, incorporated by reference to Exhibit 4.2
to the Company's Current Report on Form 8-K dated
September 23, 1999.
4.4(a) -- Amended and Restated Registration Rights Agreement,
dated as of March 1, 1997, among the Company,
Forsythe Technology/Lunn Partners Venture Leasing,
L.P., 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 March 10, 1998.
4.4(b) -- First Amendment to Amended and Restated Registration
Rights Agreement among the Company and certain
holders of its common stock dated September 7, 1999,
incorporated by reference to Exhibit 4.3 to the
Company's Current Report on Form 8-K dated September
23, 1999.
4.5 -- Form of Warrant to Purchase Common Stock of the
Company issued to purchasers of the Company's Common
Stock in its private offering dated September 7,
1999, incorporated by reference to Exhibit 4.4 to
the Company's Current Report on Form 8-K dated
September 23, 1999.
4.6 -- Form of Warrant to Purchase Common Stock of the
Company issued to purchasers of the Company's
Convertible Notes on September 20, 1999,
incorporated by reference to Exhibit 4.5 to the
Company's Current Report on Form 8-K dated September
23, 1999.
4.7 -- Form of Warrant issued to Michael A. Waters dated
September 17, 1999, incorporated by reference to
Exhibit 4.6 to the Company's Current Report on Form
8-K dated September 23, 1999.
4.8 -- Registration Rights Agreement among the Company and
the stockholders and certain employees of Uniflame,
Inc. dated March 31, 2000, incorporated by reference
to Exhibit 4.1 to the Company's Current Report on
Form 8-K dated April 18, 2000.
4.9 -- Amended and Restated Registration Rights Agreement
dated October 25, 2000 among the Company, the
investors listed therein and the former stockholders
of QuickShip, Inc., incorporated by reference to
Exhibit 4.12 to the Company's Annual Report on Form
10-K for the year ended July 31, 2000.
4.10 -- Form of Warrant issued to Thomas E. Brandtonies
dated October 26, 2000, incorporated by reference to
Exhibit 4.1 to the Company's Current Report on Form
8-K dated November 13, 2000.
4.11 -- Senior Subordinated Debenture dated June 15, 2001 in
the amount of $15,000,000 from the Company payable
to Allied Capital Corporation.*
4.12 -- Warrant issued to Allied Capital Corporation dated
June 15, 2001.*
4.13 -- Investor Rights Agreement dated June 15, 2001 among
the Company, Allied Capital Corporation and certain
stockholders of the Company.*
9.1 -- Amended and Restated Stockholders Agreement dated
October 25, 2000 among the Company and the holders
of Series A Preferred Stock listed therein,
incorporated by reference to Exhibit 9.1 to the
Company's Annual Report on Form 10-K for the year
ended July 31, 2000.
10.1(a) -- Second Amended and Restated Loan Agreement between
Bank of America, N.A. and the Company dated as of
June 30, 2000, incorporated by reference to Exhibit
10.1(a) to the Company's Annual Report on Form 10-K
for the year ended July 31, 2000.
10.1(b) -- Security Agreement, dated as of December 31, 1998
between the Company and NationsBank, N.A.,
incorporated by reference to Exhibit 10.1(b) to
Amendment No. 1 to the Company's Registration
Statement on Form S-1 dated January 15, 1998.
10.1(c) -- Amendment to Security Agreement between Bank of
America, N.A. and the Company dated as of December
9, 1999, incorporated by reference to Exhibit 10.2
to the Company's Quarterly Report on Form 10-Q for
the Quarter Ended October 31, 1999.
10.1(d) -- Promissory Note in the amount of $7 million dated as
of June 30, 2000 made by the Company payable to Bank
of America, N.A., incorporated by reference to
Exhibit 10.1(d) to the Company's Annual Report on
Form 10-K for the year ended July 31, 2000.
10.1(e) -- Promissory Note in the amount of $10 million dated
as of June 30, 2000 made by the Company payable to
Bank of America, N.A., incorporated by reference to
Exhibit 10.1(e) of the Company's Annual Report on
Form 10-K for the year ended July 31, 2000.
10.1(f) -- Promissory Note in the amount of $38 million dated
as of June 30, 2000 made by the Company payable to
Bank of America, N.A., incorporated by reference to
Exhibit 10.1(f) of the Company's Annual Report on
Form 10-K for the year ended July 31, 2000.
10.1(g) -- Pledge Agreement by the Company to Bank of America,
N.A. dated as of June 30, 2000, incorporated by
reference to Exhibit 10.1(g) of the Company's Annual
report on Form 10-K for the year ended July 31,
2000.
10.1(h) -- Continuing and Unconditional Guaranty Agreement
between CPD Associates, Inc. and Bank of America,
N.A. dated December 9, 1999, incorporated by
reference to Exhibit 10.4 to the Company's Quarterly
Report on Form 10-Q for the Quarter Ended October
31, 1999.
10.1(i) -- Continuing and Unconditional Guaranty Agreement
between Rhino Services, L.L.C. and Bank of America,
N.A., dated December 9, 1999, incorporated by
reference to Exhibit 10.5 to the Company's Quarterly
Report on Form 10-Q for the Quarter Ended October
31, 1999.
10.1(j) -- Continuing and Unconditional Guaranty Agreement
between USA Leasing, L.L.C. and Bank of America,
N.A. dated December 9, 1999, incorporated by
reference to Exhibit 10.6 to the Company's Quarterly
Report on Form 10-Q for the Quarter Ended October
31, 1999.
10.1(k) -- Continuing and Unconditional Guaranty Agreement
between QuickShip, Inc. and Bank of America, N.A.
dated October 26, 2000, incorporated by reference to
Exhibit 10.1(k) to the Company's Annual Report on
Form 10-K for the year ended July 31, 2000.
10.2(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 March 10, 1998.
10.2(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 March 10,
1998.
10.3(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
Amendment No. 1 to the Company's Registration
Statement on Form S-1 dated April 22, 1998.
10.3(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
Amendment No. 1 to the Company's Registration
Statement on Form S-1 dated April 22, 1998.
10.4 -- Amended and Restated Stock Option Plan for
Non-Employee Directors, as amended and restated May
17, 2001.*
10.5 -- Distributor Stock Option Plan of the Company,
incorporated by reference to Exhibit 10.13 to
Amendment No. 1 to the Company's Registration
Statement on Form S-1 dated April 22, 1998.
10.6 -- 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
March 10, 1998.
10.7 -- 1998 Stock Incentive Plan of the Company, as amended
December 19, 2000.*
10.8 -- Lease Agreement dated December 4, 1998 between the
Company and Rhino Real Estate, L.L.C. incorporated
by Reference to Exhibit 10.14 to the Company's
Registration Statement on Form S-1 dated January 5,
1999.
10.9 -- Master Equipment Lease Agreement dated August 11,
1996 between the Company and Leasing Innovations,
Incorporated, incorporated by Reference to Exhibit
10.15(b) to Amendment No. 1 to the Company's
Registration Statement as Form S-1 dated January 15,
1999.
10.10 -- 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.
10.11 -- Securities Purchase Agreement among the Company HFTP
Investment, L.L.C. and Leonardo, L.P., dated
September 22, 1999, incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form
8-K dated September 23, 1999.
10.12 -- Form of Convertible Note issued to purchasers of the
Company's Convertible Notes on September 22, 1999,
incorporated by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K dated September
23, 1999.
10.13 -- Asset Purchase Agreement among the Company, Bison
Valve, L.L.C. and Michael A. Waters dated September
17, 2000, incorporated by reference to Exhibit 10.3
to the Company's Current Report on Form 8-K dated
September 23, 2000.
10.14 -- Employment Agreement between the Company and Billy
D. Prim dated May 31, 1999 effective as of January
1, 1999, incorporated by reference to Exhibit 10.20
to the Company's Annual Report on Form 10-K for the
year ended July 31, 1999.
10.15 -- Asset Purchase Agreement between the Company and
Georgia Gas Distributions, Inc. dated December 9,
2000, incorporated by reference to Exhibit 10.7 to
the Company's Quarterly Report on Form 10-Q for the
Quarter Ended October 31, 2000.
10.16 -- Asset Purchase Agreement by and among the Company,
Uniflame, Mac R. McQuilkin and James E. Harris dated
as of March 31, 2000, incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form
8-K dated April 18, 2000.
10.17 -- Employment Agreement by and between the Company and
Michael Fasel dated April 1, 2000, incorporated by
reference to Exhibit 10.2 to the Company's Current
Report on Form 8-K dated April 18, 2000.
10.18 -- Employment Agreement by and between the Company and
Martin Bossler dated April 1, 2000, incorporated by
reference to Exhibit 10.3 to the Company's Current
Report on Form 8-K dated April 18, 2000.
10.19 -- Asset Purchase Agreement by and among the Company,
International Propane Products, LLC and Michael A.
Waters dated as of March 31, 2000, incorporated by
reference to Exhibit 10.4 to the Company's Current
Report on Form 8-K dated April 18, 2000.
10.20 -- Indemnification Agreement by and among the Company,
International Propane Products, LLC and Michael A.
Waters dated as of March 31, 2000, incorporated by
reference to Exhibit 10.5 to the Company's Current
Report on Form 8-K dated April 18, 2000.
10.21 -- License Agreement by and among the Company,
International Propane Products, LLC and Michael A.
Waters dated as of March 31, 2000, incorporated by
reference to Exhibit 10.6 to the Company's Current
Report on Form 8-K dated April 18, 2000.
10.22 -- Agreement to Amend the Convertible Notes by and
among the Company, HFTP Investment L.L.C. and
Leonardo, L.P. dated of April 3, 2000, incorporated
by reference to Exhibit 10.8 to the Company's
Current Report on Form 8-K dated April 18, 2000.
10.23 -- Form of Amendment No. 1 to Convertible Notes, dated
as of March 31, issued to purchasers of the
Company's Convertible Notes, dated September 23,
2000, incorporated by reference to Exhibit 10.9 to
the Company's Current Report on Form 8-K dated April
18, 2000.
10.24 -- Limited Liability Company Agreement of R4 Technical
Center -- North Carolina, LLC dated April 28, 2000,
incorporated by reference to Exhibit 10.24 to the
Company's Annual Report on Form 10-K for the year
ended July 31, 2000.
10.25 -- Real Estate Lease between Uniflame, Inc. and H & M
Enterprises, L.L.C. dated March 1, 1995, as amended
February 8, 2000, incorporated by reference to
Exhibit 10.25 to the Company's Annual Report on Form
10-K for the year ended July 31, 2000.
10.26 -- Investment Agreement dated June 15, 2001 among the
Company, USA Leasing, LLC, Rhino Services, LLC, CPD
Associates, Inc., QuickShip, Inc., Uniflame
Corporation and Allied Capital Corporation.*
10.27 -- Third Modification Agreement dated June 15, 2001 by
and among the Company, USA Leasing, LLC, Rhino
Services, LLC, CPD Associates, Inc., QuickShip,
Inc., Uniflame Corporation and Bank of America,
N.A.*
21.1 -- Subsidiaries of the Company.*
23.1 -- Consent of Ernst & Young LLP.
23.2 -- Consent of Ernst & Young LLP.
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* previously filed