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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(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, 2002
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 25, 2002, the aggregate market value of the registrant's
common stock held by non-affiliates of the registrant was $156,966,590.
At September 25, 2002, the number of shares outstanding of
registrant's common stock was 14,210,637.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's proxy statement with respect to
the 2002 annual meeting of stockholders of the registrant to be filed with the
Securities and Exchange Commission 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. Such statements are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995 and
speak only as of the date of this report. Our business is subject to numerous
risks and uncertainties, including, in particular, our ability to place Blue
Rhino cylinder exchange at additional retail locations and to increase the
number of cylinder exchange transactions at existing retail locations, our
ability to reach definitive agreements and successfully complete our proposed
acquisitions of certain distributors, our ability to integrate acquisitions,
our ability to mitigate the effects of high propane commodity prices
successfully, our ability to launch new products and services successfully and
the effect of new safety guidelines on consumer demand for cylinder exchange.
These and other risks and uncertainties, many of which are addressed in the
sections of this report 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" or in future filings that we
make with the Securities and Exchange Commission, could cause our actual
results, performance and developments to be materially different from those
expressed or implied by any of these forward-looking statements. To the extent
permitted by applicable law, we make no commitment to update any
forward-looking statement or to disclose any facts, events or circumstances
after the date of this report that may affect the accuracy of any
forward-looking statement.
ADDITIONAL INFORMATION REGARDING TRADEMARKS
The Blue Rhino name and logo, the names RhinoTUFF(R), Tri-Safe(R),
Bison(R) and Bison Design(R), Uniflame(R), UniGrill(R), DuraClay(R),
GardenArt(R), America's Choice For Grill Gas(R), Endless Summer(R), Endless
Summer Comfort(R), Grill Gas(R) and Grill Gas Design(R), Harmony(TM),
ShippingSpot(TM) and ShippingSpot Design(TM), Grill Aficionado(TM) and
SkeeterVac(TM) are our registered and pending trademarks. This Annual Report on
Form 10-K may also include trademarks of companies other than the registrant.
AVAILABILITY OF REPORTS
The registrant's Internet website is www.bluerhino.com. The registrant
makes available on its website, via hyperlink to a third party service that
maintains filings made with the Securities and Exchange Commission, its annual
report on Form 10-K, its quarterly reports on Form 10-Q and its current reports
on Form 8-K, and all amendments to such reports, as soon as reasonably
practicable after they are filed with the SEC.
BLUE RHINO CORPORATION
INDEX
PART I
Item 1: Business.................................................................. 1
Item 2: Properties................................................................ 8
Item 3: Legal Proceedings......................................................... 8
Item 4: Submission of Matters to a Vote of Security Holders....................... 8
PART II
Item 5: Market for the Registrant's Common Equity and Related Stockholder Matters. 9
Item 6: Selected Consolidated Financial Data...................................... 10
Item 7: Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................. 11
Item 7A: Quantitative and Qualitative Disclosures About Market Risk................ 19
Item 8: Financial Statements and Supplementary Data............................... 21
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial 51
Disclosure................................................................
PART III
Item 10: Directors and Executive Officers of the Registrant........................ 51
Item 11: Executive Compensation.................................................... 51
Item 12: Security Ownership of Certain Beneficial Owners and Management............ 51
Item 13: Certain Relationships and Related Transactions............................ 51
PART IV
Item 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......... 52
SIGNATURES 53
CERTIFICATIONS 54
PART I
ITEM 1. BUSINESS
GENERAL
As used in this section, the terms "we," "us," and "our" may, as the
context requires, refer together to Blue Rhino Corporation and its
subsidiaries, CPD Associates, Inc., QuickShip, Inc., USA Leasing, L.L.C. and
Uniflame Corporation.
We believe we are the leading national provider of propane grill
cylinder exchange as well as a leading provider of complementary 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 26,000 retail locations in 48 states and Puerto Rico at leading home
improvement centers, mass merchants, hardware, grocery and convenience stores.
Our retail partners include Home Depot, Lowe's, WaloMart, 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 46 distributors, which are
currently independent, focus on the operational infrastructure of our cylinder
exchange service including refilling, refurbishing and direct-store delivery of
grill cylinders to retailers, and we have agreed in principle on financial
terms on which we would acquire nine of our key distributors. 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 propane cylinders as their fuel
source in order to increase consumer demand for propane 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. With our acquisition
of QuickShip, Inc. in October 2000, we also offer in-store retail shipping
services, primarily at major grocery chains.
OUR MARKET
Cylinder Exchange. 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 our market opportunity by
importing new propane appliance products like patio heaters. Based on the 2001
Barbecue Grill Usage and Attitude Study conducted on behalf of the Hearth, Patio
and Barbecue Association ("HPBA"), we believe that approximately 49 million
United States households own a propane grill. The HPBA reports that, from 1997
to 2001, sales of propane grills exceeded the combined annual sales of charcoal,
natural gas and electric grills.
The HPBA study estimates that the average propane grill owner uses 1.8
cylinders of propane per year, which results in an estimated 88 million
cylinder transactions per year. According to the HPBA study, propane grill
cylinder exchange, as opposed to the traditional refilling of empty cylinders,
represents approximately 30% of all cylinder transactions, up from 25% in 1999
and 21% in 1997. Our growth has primarily resulted from converting consumers
from the traditional refilling of empty cylinders to our convenient and safe
alternative of propane grill cylinder exchange.
Products. Uniflame focuses on selling a wide assortment of charcoal,
electric and propane grills through retailers and also sells propane-fueled
outdoor patio heaters and other outdoor hearth products that complement the use
of grills by extending outdoor living in cooler weather conditions. According
to the HPBA study, 76% of United States households own a grill, 3 out of 5
barbecue grills are used year round and more than 14 million barbecue grills
were shipped to retailers in 2001. Based on research published by the HPBA, the
market for grills and other propane appliances exceeds $1.7 billion annually.
OUR STRATEGY
Our objective is to strengthen our position as the leading national
provider of propane 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: converting refill consumers to exchange,
increasing cylinder exchange demand and leveraging our infrastructure.
1
Converting Refillers to Propane Grill Cylinder Exchange. According to the 2001
HPBA study, propane grill cylinder exchange as opposed to traditional refilling
of empty cylinders, represents approximately 30% of all cylinder transactions,
up from less than 10% in 1995.
- - 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
grilling-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.
- - Capitalize on Recent Guidelines Requiring Overfill Prevention Device
("OPD") Valves. Beginning April 1, 2002, National Fire Protection
Association ("NFPA") guidelines require that all propane cylinders
refilled be fitted with an OPD valve. As a result of this new safety
standard, many of the cylinders that are presented at refill centers
are obsolete, forcing the consumer to purchase or exchange for a new
cylinder to meet the safety standard. We launched a consumer education
campaign to encourage consumers to upgrade their cylinders at one of
our convenient 26,000 cylinder exchange locations. We currently
believe that this new safety standard will positively affect the
demand for cylinder exchange through our fiscal year 2004.
- 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 commenced operations of an automated propane bottling and
cylinder refurbishing plant. We own a 49% interest,
Manchester Tank & Equipment Co. owns a 50% interest, and
Platinum Propane, LLC owns the remaining 1% interest in this
joint venture. We currently 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 and
currently expect it to provide increased cost efficiencies
and quality control for refilling and refurbishing cylinders.
- Sale of Valves. To capitalize on the market created by the
NFPA standard, we sell our Underwriters Laboratories'-approved
OPD valve, which automatically stops the flow of liquid
propane gas into the cylinder when the cylinder is full, to
many of our distributors.
- - 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, WaloMart, 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 26,000. We establish new retail
relationships through direct sales and by acquisition. We
continually review our existing locations to ensure they meet
our performance criteria and we de-install non-performing
locations and relocate those assets to more suitable
locations.
Increasing Demand for Cylinder Exchange. We have the ability to provide the
consumer with the initial appliance purchase that uses cylinders as their fuel
source and the necessary, recurring purchase of fuel through propane cylinder
exchange.
- - Market Propane Appliances that Use Grill Cylinders as Their Fuel
Source. We currently offer propane grills, patio heaters and portable
patio heaters that are sold through major retailers such as Home
Depot, Lowe's, Wal*Mart and Sears. In addition, we will soon offer
propane-fueled mosquito exterminators, and we expect our products
segment to seek to identify additional quality-manufactured,
propane-fueled products to 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(R) patio heaters,
which we began selling in December 1998. Our patio heaters,
now marketed and sold by Uniflame, use the same cylinders as
propane grills, and we believe they will increase the
counterseasonal demand for cylinder exchange.
- Mosquito Exterminators. A variety of propane-powered mosquito
exterminators have recently been introduced to the
marketplace to provide an enhanced and healthier outdoor
living experience. These environmentally friendly devices,
which have begun to receive retail and consumer acceptance,
use propane from standard 20-lb. propane cylinders to create
carbon dioxide that, when combined with the chemical octenol,
attracts blood-seeking insects such as mosquitoes, black
flies and no see-ums. The devices then trap the insects where
they dehydrate and die. If operated continuously throughout
the mosquito season, we currently expect that mosquito
exterminators will use approximately six propane cylinders.
We have developed a high performance mosquito exterminator
that we believe will help expand market acceptance of this
product more quickly and create even greater demand for
cylinder exchange, and we currently anticipate beginning to
ship this product to retailers during our second fiscal
quarter.
2
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 and technology infrastructure to streamline our
operations. We furnish each distributor with handheld devices that
utilize Blue Rhino developed custom software to serve as the data
collection point for every delivery. This data is seamlessly
integrated with our delivery, imaging and financial databases to allow
us to provide the retailer and the distributor with a detailed
transactional and inventory history as well as demand 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 established a network
of 46 distributors that are currently independent and we have agreed
in principle on financial terms on which we would acquire nine of our
key distributors. We believe our distributor network covers
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, by providing electronic billing
systems through handheld terminals, by providing 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
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
Cylinder exchange. The propane grill cylinder refilling industry is
highly fragmented and competitive. Competition is based primarily upon
convenience, quality of product, service, historical relationships, perceived
safety and price. We believe that we are the leading national provider of
propane grill cylinder exchange, but the 2001 HPBA study states that 70% of
consumers refill their grill cylinders rather than exchange them. 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.
3
Products. The $1.7 billion barbecue grill and patio heater market is
extremely competitive. In the barbecue grill industry, five of our competitors
control 90% of the market share. Competition in the direct import products
business is primarily based on price, quality and performance of products and
product features.
REGULATIONS AND STANDARDS
Cylinder exchange. The storing and dispensing of propane is covered 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 that all grill cylinders refilled after April 1, 2002
must be fitted with an overfill prevention device. 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 typically
assist the distributors in this process when feasible. We are actively involved
with the National Propane Gas Association, an industry association that
participates in the drafting of model state legislation designed to create
uniform state and local legislation to provide consumers, retailers and
distributors with up-to-date safety regulations.
Products. Uniflame's propane grills are tested and designed to
standards determined by the American National Standards Institute. Uniflame's
patio heaters are tested and designed to standards determined by the Canadian
Standards Association. Uniflame's electric grill is listed with Underwriters'
Laboratories and is designed to standards determined by Underwriters'
Laboratories.
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) and Bison Design(R), Uniflame(R), UniGrill(R),
DuraClay(R), GardenArt(R), America's Choice For Grill Gas(R), Endless
Summer(R), Endless Summer Comfort(R), Grill Gas(R) and Grill Gas Design(R),
Harmony(TM), ShippingSpot(TM) and ShippingSpot Design(TM), Grill Aficionado(TM)
and SkeeterVac(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 became effective April 1, 2002.
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 intellectual property or other proprietary rights.
SEASONALITY
We have experienced and currently expect to continue to experience
seasonal fluctuations in our revenues and operating income. Our revenues and
operating income have been highest in the spring and summer, which includes the
majority of the grilling season, and lowest in the fall and winter. Our
cylinder exchange segment, which generally enjoys higher margins than our
products and other segment, experiences higher revenues and operating income in
the spring and summer. Conversely, our products and other segment experiences
higher revenues and operating income in the fall and winter. Sustained periods
of poor weather, particularly in the spring and summer or otherwise resulting
in a shortened outdoor living season, can 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 August 31, 2002, we had 136 employees, of whom 26 were engaged
in sales and marketing, 19 in distributor services, 10 in information systems,
54 in administration and finance and 27 in warehouse functions. We have not
experienced any work stoppages and believe we generally have good relations
with our employees.
4
FINANCIAL INFORMATION ABOUT SEGMENTS AND GEOGRAPHIC AREAS
In fiscal 2002, approximately $127.9 million, or 62.2%, of our
revenues were derived from cylinder transactions and approximately $77.6
million, or 37.8%, of our revenues were derived from product sales. In fiscal
2001, approximately $85.7 million, or 62.1%, of our revenues were derived from
cylinder transactions and approximately $52.3 million, or 37.9%, of our
revenues were derived from product sales. In fiscal 2000, approximately $68.3
million, or 87.3%, of our revenues were derived from cylinder transactions and
approximately $10.0 million, or 12.7%, 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. In fiscal 2002, 2001
and 2000, respectively, approximately $203.4 million(98.9%), approximately
$134.3 million (97.3%) and approximately $77.5 million (99.1%) of our revenues
were derived from customers in the United States. For each year, the balance of
our revenues was derived from customers located in other countries, primarily
Canada. At July 31, 2002, approximately $400,000 of our long-lived assets were
located in countries other than the United States.
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 2002,
Wal*Mart, Home Depot, and Lowe's represented approximately 32%, 18% 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, 2002, distributors controlled
by two entities serviced approximately 35% of our cylinder exchange retail
locations. Sales by these key distributors resulted in approximately 41% of our
cylinder exchange net sales for fiscal 2002. The five distributors owned by
Platinum Propane Holding, L.L.C. accounted for approximately 32% of our
cylinder exchange net sales for fiscal 2002. If any of our major distributors
were to reduce or terminate their 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 currently 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.
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 major propane providers and other grill
cylinder exchange providers. Major propane providers, such as AmeriGas 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.
5
If we experience problems associated with the R4 Technical Center, our
business may suffer. In May 2000, R4 Technical Center - North Carolina, LLC, a
joint venture in which we own a 49% ownership interest, commenced operations of
an automated propane bottling and cylinder refurbishing plant in North
Carolina. Many of our distributors rely on the R4 Technical Center for their
required supplies of refilled and refurbished cylinders. Management of the
joint venture is effectively shared with Manchester Tank & Equipment Co., a 50%
owner. If the R4 Technical Center experiences problems, whether operational,
caused by management disagreements or otherwise, it may be unable to meet
production goals, achieve targeted production costs or otherwise satisfy our
distributors' needs in which event the ability of our distributors to service
our retail accounts may be adversely impacted and cause our business to suffer.
Furthermore, based on our ownership interest, we recognize 49% of the R4
Technical Center's net earnings or 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 recent 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 we or our distributors cannot satisfy the
demand for compliant cylinders such that our retailers maintain an adequate
supply, our retailer relationships may suffer. In addition, we have fixed in
advance the price per cylinder exchange unit charged to our retailers. When
pricing, we make certain assumptions with regard to the number of cylinders that
will already have an overfill prevention device valve when presented for
exchange, on which our margins will be greater, and the number of cylinders that
will need an overfill prevention device valve. If our actual experience is
inconsistent with our assumptions, 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
several key consultants. Any disruption in the operation of our MIS, loss of
employees knowledgeable about such systems, termination of our relationship
with one or more of these key consultants or failure to continue to modify such
systems effectively 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. We
have experienced and currently expect to continue to experience seasonal
fluctuations in our revenues and operating income. Our revenues and operating
income have been highest in the spring and summer, which includes the majority
of the grilling season, and lowest in the fall and winter. Our cylinder
exchange segment, which generally enjoys higher margins than our products and
other segment, experiences higher revenues and operating income in the spring
and summer. Conversely, our products and other segment experiences higher
revenues and operating income in the fall and winter. Sustained periods of poor
weather, particularly during the spring and summer or otherwise resulting in a
shortened outdoor living season, 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 which could
negatively affect our business.
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
6
have occurred at refurbishing and refilling facilities operated by 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. Because the Blue Rhino name and logo are prominently displayed on
all cylinders and cylinder displays, we could be subjected to damage claims. In
addition, we offer or will offer propane-fueled appliances like grills, patio
heaters and mosquito exterminators that use propane cylinders as their fuel
source. Accidents may occur while using the appliances due to misuse or
malfunction, resulting in property damage and bodily harm. We also sell an OPD
valve for use in propane cylinders. Accidents may occur while using propane
cylinders fitted with this valve due to misuse or failure, resulting in
property damage or bodily harm. Because we have offered these propane
appliances and OPD valves to consumers, we could be subject to damage claims.
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. 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 desired
insurance coverage at an acceptable cost.
In addition to damage claims, any cylinder-related accident involving
personal injury could affect our reputation and the perceived benefits of
cylinder exchange and, particularly if the accident were to trigger adverse
publicity, could affect the willingness of retailers to continue to offer, or
consumers to continue to use, cylinder exchange, any of which may cause our
business, financial condition and results of operations to suffer.
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.
There are few sources of cylinders and valves. 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. We have cylinder supply relationships with four
international partners and a valve supply relationship with one international
partner. As a result of the new OPD guidelines, the demand for cylinders and
valves exceeds their supply and shortages have occurred during the summer of
2002. If we or our distributors are unable to obtain sufficient quantities of
cylinders or valves, delays or reductions in service could occur which may
cause our business, financial condition and results of operations to suffer.
Our products segment is reliant on suppliers based in China. We rely
on the products segment of our business 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 shipping services to its customers and to pay
QuickShip each time a customer accesses the system. Accordingly, we cannot be
sure that QuickShip will be able to recover the investment made 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
7
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 our CEO and one of our directors.
Pursuant to the terms of the lease, we pay annual rent of approximately
$333,264, plus our allocable share of all taxes, utilities and maintenance. The
lease terminates on December 31, 2002 and includes an option to renew for one
one-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 its
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
products business segment.
QuickShip, Inc., our wholly owned subsidiary, leases office space at
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, QuickShip pays annual rent of approximately $14,496, plus its allocable
share of all taxes, utilities and maintenance. The lease terminates on April
30, 2003 and includes an option to renew for one one-year term. We currently
expect to exercise our option to renew.
In September 2001, we purchased the land, buildings, and equipment
owned and used by R4 Tech located in Hamptonville, NC. Contemporaneously with
the sale, R4 leased back the land, buildings and equipment from us under the
terms of a three-year operating lease. We receive annual rent of $760,000. The
land consists of approximately 17 acres and the buildings consist of: (i) the
office building containing approximately 4,930 square feet, (ii) the production
building containing approximately 23,900 square feet, (iii) the warehouse
building containing approximately 17,955 square feet, and (iv) the service
building containing approximately 4,800 square feet.
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.
8
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 25, 2002, there were 129 record holders of our common
stock.
PRICE RANGE OF
COMMON STOCK
--------------
HIGH LOW
---- ---
FISCAL YEAR ENDED JULY 31, 2002
First Quarter................ $ 4.88 $3.00
Second Quarter............... 7.54 4.50
Third Quarter................ 9.57 6.90
Fourth Quarter............... 14.57 8.60
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
We have never declared nor 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 be at the discretion of the Board
of Directors and subject to applicable law, and there can be no assurance that
we will pay any dividends in the future.
In March, April and May 2002, we issued an aggregate of 1,000,000
shares of our common stock upon the voluntary conversion of an aggregate of
1,000,000 shares our Series A Convertible Preferred Stock by the holder thereof
as permitted under our Second Amended and Restated Certificate of
Incorporation, as amended. The shares of common stock were issued in reliance
on Section 3(a)(9) of the Securities Act of 1933, as amended, as a security
exchanged with an existing security holder exclusively where no commission or
other remuneration is paid or given, directly or indirectly for soliciting such
exchange. In conjunction with these conversions, we also issued an aggregate of
96,532 shares of our common stock in satisfaction of the accrued dividend
payable upon conversion of such shares of Series A Convertible Preferred Stock.
Effective September 24, 2002, as permitted under our Second Amended and
Restated Certificate of Incorporation, as amended, we converted the remaining
1,850,000 shares of our outstanding Series A Convertible Preferred Stock into
1,850,000 shares of our common stock, similarly in reliance on Section 3(a)(9)
of the Securities Act. In conjunction with this conversion, we issued an
aggregate of 137,079 shares of our common stock in satisfaction of the accrued
dividend payable upon conversion of such shares of Series A Convertible
Preferred Stock.
On September 5, 2002, we issued 100,000 shares of our common stock
upon exercise of a warrant in common stock for consideration of $6.00 per share
in reliance on Section 4(2) of the Securities Act of 1933, as amended, based on
the isolated nature of the transaction and representations previously received
from the warrant holder with regard to his knowledge and experience in business
and financial matters, access to material information and status as an
accredited investor.
9
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated statements of operations and
balance sheet data of the Company as of and for the periods ended July 31,
2002, 2001, 2000, 1999 and 1998 have been derived from our audited consolidated
financial statements. The financial data set forth below should be read in
conjunction with "Item 7 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Item 8 -- Financial Statements and
Supplementary Data -- Consolidated Financial Statements of the Company and
Related Notes Thereto" included elsewhere herein.
FISCAL YEAR ENDED
-------------------------------------------------------------------
JULY 31, JULY 31, JULY 31, JULY 31, JULY 31,
2002 2001 2000 1999 1998
--------- --------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND
RETAIL LOCATIONS DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net revenues ........................................ $ 205,585 $ 137,957 $ 78,230 $ 53,820 $ 27,938
Operating costs and expenses:
Cost of sales ..................................... 159,440 106,783 57,994 38,661 20,525
Selling, general and administrative ............... 21,886 18,688 12,966 8,539 6,338
Depreciation and amortization ..................... 7,888 8,461 4,717 2,872 1,278
Nonrecurring items(1) ............................. -- -- -- -- 476
--------- --------- --------- -------- --------
Total operating costs and expenses ........ 189,214 133,932 75,677 50,072 28,617
--------- --------- --------- -------- --------
Income (loss) from operations ............. 16,371 4,025 2,553 3,748 (679)
Other expenses (income):
Interest expense .................................. 6,217 5,134 2,949 837 1,734
Loss on investees(2) .............................. 714 2,572 403 311 324
Nonrecurring items(1) ............................. -- 449 -- 551 --
Other, net ........................................ (422) (301) 16 (48) (234)
--------- --------- --------- -------- --------
Income (loss) before income taxes and
extraordinary loss .......................... 9,862 (3,829) (815) 2,097 (2,503)
Income taxes ........................................ 47 123 32 30 --
--------- --------- --------- -------- --------
Income (loss) before extraordinary loss ... 9,815 (3,952) (847) 2067 (2,503)
Extraordinary loss, net ............................. -- -- 158 -- 304
--------- --------- --------- -------- --------
Net income (loss) ......................... $ 9,815 $ (3,952) $ (1,005) $ 2,067 $ (2,807)
Preferred dividends ................................. 1,789 770 -- -- 596
--------- --------- -------- --------
Income (loss) available to common
Stockholders(3) ......................... $ 8,026 $ (4,722) $ (1,005) $ 2,067 $ (3,403)
========= ========= ========= ======== ========
PER SHARE DATA:
Basic earnings (loss) before extraordinary loss
per common share .................................. $ 0.63 $ (0.41) $ (0.10) $ 0.27 $ (1.06)
Basic extraordinary loss per common share .......... -- -- (0.02) -- (.10)
--------- --------- --------- -------- --------
Basic earnings (loss) per common share .............. $ 0.63 $ (0.41) $ (0.12) $ 0.27 $ (1.16)
========= ========= ========= ======== ========
Diluted earnings (loss) before extraordinary loss
per common share .................................. $ 0.55 $ (0.41) $ (0.10) $ 0.27 $ (1.06)
Diluted extraordinary loss per common share ......... -- -- (0.02) -- (.10)
--------- --------- --------- -------- --------
Diluted earnings (loss) per common share ............ $ 0.55 $ (0.41) $ (0.12) $ 0.27 $ (1.16)
========= ========= ========= ======== ========
Shares used in per share calculations:
Basic ............................................. 12,658 11,641 8,736 7,645 2,945
========= ========= ========= ======== ========
Diluted(4) ........................................ 14,701 11,641 8,736 7,787 2,945
========= ========= ========= ======== ========
SELECTED OPERATING DATA:
Retail locations (at period end)(5) ................. 26,000 27,000 25,000 18,500 9,500
Cylinder transactions ............................... 8,267 6,243 4,995 3,710 2,201
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents ........................... $ 1,563 $ 1,044 $ 1,079 $ 913 $ 5,908
Working capital ..................................... 15,256 18,761 5,667 7,442 9,442
Total assets ........................................ 143,373 127,344 108,175 59,899 30,470
Long-term obligations, less current maturities ...... 39,259 50,931 42,396 24,111 260
Total stockholders' equity .......................... 78,362 57,149 41,952 27,338 24,816
- ---------
(1) See Note 21 of Notes to Consolidated Financial Statements for an
explanation of this item in fiscal 2001. During fiscal 1999, the
Company incurred costs in connection with an offering of common stock
that was terminated before completion due to unfavorable market
conditions. During fiscal 1998, the Company made changes to its
business strategy, including the conversion to an independent
distributor network. As a result, the Company recorded certain
nonrecurring charges.
10
(2) See Note 9 of Notes to Consolidated Financial Statements for an
explanation of these items for fiscal years 2002, 2001, and 2000.
During fiscal 1999 and 1998, the Company had a loss on investee
related to its convertible loan to Bison Valve, LLC.
(3) See Note 11 for fiscal 2002 and fiscal 2001 explanation. Dividends
payable on our redeemable preferred stock (the "Old Preferred Stock")
were $596 for fiscal 1998. The Old Preferred Stock was converted into
shares of common stock in May 1998.
(4) For fiscal years 2001, 2000 and 1998, the weighted average number of
shares outstanding excludes the effect of the exercise of all
outstanding stock options and warrants and the conversion of the Old
Preferred Stock into shares of common stock because such exercise or
conversion would be anti-dilutive.
(5) 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.
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 1 - Business - Additional Factors that may Affect our Business or
Future Results," "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. We believe we have become the
leading national provider of propane grill cylinder exchange and a leading
provider of complementary 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 26,000 retail locations in 48 states
and Puerto Rico, including leading home improvement centers, mass merchants,
hardware, grocery and convenience stores. Our retail partners include 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.
Our cylinder exchange segment partners with retailers and
distributors, which are currently independent, 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 46 distributors invest in
the vehicles and other operational infrastructure necessary to operate cylinder
exchange businesses and we have agreed in principle on financial terms on which
we would acquire nine of our key distributors. 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 62.2% of our net revenues in fiscal 2002.
Our products segment revenue grew significantly in fiscal 2002 to
$77.6 million from $52.3 million in fiscal 2001 primarily due to a substantial
increase in the number of grills sold and an increase in the number of patio
heaters sold. 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. 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 the strongest
months for our cylinder exchange segment. QuickShip, Inc., a retail shipping
services company that we acquired in October 2000, is included within the
products segment as it is not currently significant 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 have strategically expanded our business to better diversify our
revenue stream, balance our seasonality and offer and promote more products
that use our core grill cylinder exchange service like barbecue grills and
patio heaters.
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, which we pay to our distributors for each
cylinder transaction. Our cost of sales for products is comprised of the
wholesale cost of products sold.
11
Development of the infrastructure necessary to support a nationwide
branded products and service company has resulted in an accumulated deficit of
approximately $17.5 million as of July 31, 2002. This has resulted in net
operating loss carryforwards of approximately $30.0 million for federal income
tax purposes that are available to offset future taxable income, if any, in
varying amounts from 2003 through 2021, 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.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements and related public financial
information are based on the application of generally accepted accounting
principles of the United States of America ("GAAP"). GAAP requires the use of
estimates, assumptions, judgments and subjective interpretations of accounting
principles that have an impact on the assets, liabilities, and revenue and
expense amounts reported. We believe our uses of estimates and underlying
accounting assumptions adhere to GAAP and are consistently applied. Valuations
based on estimates are reviewed for reasonableness on a consistent basis.
Actual results may differ materially from these estimates.
We have identified the following critical accounting policies that,
among others, affect the more significant judgments and estimates used in the
preparation of our consolidated financial statements (for further detail, see
"Summary of Significant Accounting Policies" in Note 2 of the Notes to
Consolidated Financial Statements):
Revenue Recognition. We recognize: (i) cylinder exchange revenues upon
delivery of the cylinders to retailers by our distributors; (ii) products
revenues upon shipment to retailers; and (iii) shipping services revenues at
the time consumers ship packages at the in-store retail depot. We estimate
returns and allowances against the revenues and record the estimated returns
and allowances in the same period in which the revenue is recorded. These
estimates are based upon historical analysis, customer agreements and/or
currently known factors that arise in the normal course of business. If the
allowances we calculate do not accurately reflect returns associated with
current revenue, actual revenues could be higher or lower than the level
recognized. Effective February 1, 2002, we adopted the Emerging Issues Task
Force's Issue No. 00-14, Accounting for Certain Sales Incentives, which
addresses the recognition, measurement and income statement classification for
certain sales incentives, including rebates, coupons and free products or
services. As provided in EITF No. 00-14, certain cooperative advertising costs
historically included by the Company in selling, general and administrative
expenses are now classified as reductions of net revenues. Prior period amounts
have been reclassified for comparative purposes.
Allowance for doubtful accounts. Allowances for doubtful accounts are
estimated at the segment level based on estimates of losses related to customer
receivable balances. Quantitative estimates are developed from accounts
receivable agings based on expected losses. Qualitative estimates are based on
evaluations of specific customer accounts in light of current economic
conditions. Balances due from customers in bankruptcy are considered
uncollectible. The establishment of reserves requires the use of judgments and
assumptions regarding the potential for losses on receivable balances. If the
allowances we calculate do not accurately reflect losses associated with
current receivables, actual losses could be higher or lower than the level
recognized.
Depreciation of propane cylinders, cylinder displays and proprietary
valves. We own cylinders and cylinder displays that we lease to our distributors
under operating lease agreements (Notes 4 and 5 of the Notes to Consolidated
Financial Statements). Cylinders are depreciated over their estimated useful
lives of 25 years. Our distributors are contractually obligated to refurbish
cylinders into like-new condition and reimburse us for any inventory shortages
related to cylinders in the form of cash or like-new cylinders. This
refurbishment cost is expensed as part of our cost of goods sold. Our displays
are depreciated over their estimated useful lives of 10 years and our
proprietary valves are depreciated over their estimated useful lives of 12
years. We believe these estimates are reflective of the future usefulness of
these assets to our operations. In the event that future facts and circumstances
indicate that the carrying value of cylinders, cylinder displays or proprietary
valves may not be recoverable, estimated future undiscounted cash flows will be
compared to the carrying value of the particular asset and, if less, an
impairment loss will be recognized in an amount by which the carrying amount
exceeds fair value.
Intangible assets and goodwill impairment. As discussed in Note 6 of
the Notes to Consolidated Financial Statements and in the "Impact of New
Accounting Pronouncements" section of this report, we have significant
intangible assets on our Consolidated Balance Sheets that include goodwill and
other intangibles related to acquisitions. The valuation and classification of
these assets and the assignment of useful amortization lives involves judgments
and the use of estimates. 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. We applied the
new rules on accounting for goodwill and other intangible assets beginning in
the first quarter
12
of fiscal year 2002. 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 and, in certain circumstances, more frequent
impairment tests in accordance with the Statements. Impairment tests are
designed to review the recoverability of the carrying values of the intangible
assets and require the use of judgments and assumptions. The fair value of the
intangible assets would be different using different estimates and assumptions
in these valuation techniques. We cannot be sure that future goodwill
impairment tests will not result in a change in asset valuations and a charge
to earnings.
Derivative instruments. As discussed in Note 17 of the Notes to
Consolidated Financial Statements and in Item 7A, "Quantitative and Qualitative
Disclosures About Market Risk," we use derivative instruments to manage
exposure to interest rate fluctuations and wholesale propane price volatility.
In connection with these activities, we have adopted Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended, which requires that all financial derivative
instruments be recorded on the balance sheet at fair value. Fair values are
based on listed market prices, when such prices are available. To the extent
that listed market prices are not available, fair value is determined based on
other relevant factors, including dealer price quotations, price quotations for
similar instruments traded in different markets, and pricing models that
consider current market conditions and contractual prices for the underlying
financial instruments or commodities. Changes in the interest rate and
commodity markets will impact our estimates of fair value in the future,
potentially affecting our results of operations.
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") guidelines that require 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.
2002 2001 2000
----- ----- -----
Net revenues ......................................... 100.0% 100.0% 100.0%
Operating costs and expenses:
Cost of sales ...................................... 77.6 77.4 74.2
Selling, general and administrative ................ 10.6 13.6 16.6
Depreciation and amortization ...................... 3.8 6.1 6.0
----- ----- -----
Total operating costs and expenses ............. 92.0 97.1 96.8
----- ----- -----
Income from operations ......................... 8.0 2.9 3.2
Interest and other expenses (income):
Interest expense ................................... 3.0 3.7 3.8
Loss on investee ................................... 0.4 1.8 0.5
Nonrecurring items ................................. -- 0.3 --
Other, net ......................................... (0.2) (0.2) --
----- ----- -----
Income (loss) before income taxes and
extraordinary loss ........................... 4.8 (2.7) (1.1)
Income taxes ......................................... -- (0.1) --
----- ----- -----
Income (loss) before extraordinary loss ........ 4.8 (2.8) (1.1)
Extraordinary loss, net .............................. -- -- 0.2
----- ----- -----
Net income (loss) .......................... 4.8 (2.8) (1.3)
Preferred dividends .................................. 0.9 0.6 --
----- ----- -----
Net income (loss) available to common
stockholders ............................ 3.9% (3.4)% (1.3)%
===== ===== =====
COMPARISON OF YEARS ENDED JULY 31, 2002 AND 2001
Net revenues. Net revenues increased 49.0% to $205.6 million for
fiscal 2002 from $138.0 million for fiscal 2001. Net revenues for fiscal 2002
consisted of $128.0 million from cylinder transactions and $77.6 million from
product sales. Cylinder exchange revenues increased 49.4% due primarily to an
approximately 33% increase in the number of cylinder transactions to 8.3
million units in fiscal year 2002 from 6.2 million units during fiscal 2001,
reflecting the positive trend toward consumer acceptance of cylinder exchange
versus refill and the impact of the new NFPA guidelines requiring that all
propane cylinders refilled after April 1, 2002 be fitted with an overfill
prevention device ("OPD"). Approximately one-third of the increase in cylinder
exchange revenues was due to price increases to retailers, enabled by a higher
mix of upgrade transactions, and approximately two-thirds was due to an
increase in the number of total cylinder transactions. Product revenues
increased 48.5% due principally to an increase in the number of grills sold and
to a lesser degree an increase in the number of patio heaters sold. We
currently anticipate double-digit revenue growth for both our cylinder exchange
and products and other segments for fiscal year 2003 and we currently expect
the new NFPA guidelines to continue to contribute to our cylinder exchange
revenue growth through at least the end of fiscal 2004.
13
Gross margin. Our overall gross margin decreased slightly to 22.4% for
fiscal 2002 from 22.6% for fiscal 2001. Gross margin percentage increased 70
basis points in cylinder exchange to 27.4% from 26.7% in fiscal 2001 due
primarily to price increases to retailers partially offset by a restructured
payment plan to distributors to reflect their cost of installing OPD valves. We
have implemented propane hedges and modified our distributor payment structure
in a manner that we currently believe will continue to limit the exposure of
our cylinder exchange gross margin to volatility in propane prices. The
products and other segment gross margin decreased to 14.3% in fiscal 2002 from
15.9% in fiscal 2001 due primarily to a shift in sales mix to products that
carry a lower margin. For fiscal 2003, 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 ("SG&A") expenses increased 17.1% to $21.9 million for fiscal
2002 from $18.7 million for fiscal 2001 and, as a percentage of net revenues,
decreased to 10.6% for fiscal 2002 from 13.5% for fiscal 2001. The decrease in
SG&A 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. SG&A expenses in the cylinder exchange segment
increased 13.5% to $14.4 million for fiscal 2002 from $12.7 million for fiscal
2001 primarily due to increased personnel costs to support growth, additional
costs associated with distributor operations and increased professional fees,
partially offset by a decrease in marketing costs. SG&A expenses in the
products and other segment increased 24.6% to $7.5 million from $6.0 million in
the same period in the prior year primarily due to increased personnel costs to
support growth at Uniflame and additional costs related to QuickShip, which had
operating costs for the entire fiscal year 2002 compared to nine months in
fiscal 2001. We currently expect selling, general and administrative expenses
for fiscal 2003 to continue to decrease as a percentage of net revenues.
Depreciation and amortization. Depreciation and amortization decreased
to $7.9 million for fiscal 2002 from $8.5 million for fiscal 2001. This
decrease was primarily due to a reduction in amortization expense to $309,000
for fiscal 2002 from $2.6 million for fiscal 2001 as a result of the
elimination of goodwill amortization due to the implementation of SFAS No. 142,
Goodwill and Other Intangible Assets. The decrease was partially offset by an
increase in depreciation expense resulting from an increase in the number of
cylinders held under operating lease agreements and from our acquisition,
effective September 30, 2001, of machinery and equipment from R4 Technical
Center North Carolina, LLC, the Company's joint venture ("R4 Tech").
Interest expense. Interest expense increased to $6.2 million for
fiscal 2002 from $5.1 million for fiscal 2001 primarily due to increased
interest rates from our $15 million of subordinated debt that we obtained on
June 15, 2001.
Loss on investee. Loss on investee decreased to $714,000 for fiscal
2002 from $2.6 million for fiscal 2001 due primarily to increased revenue and
improved gross margins. This charge represents our share of the loss related to
our 49% ownership interest in R4 Tech. We currently expect R4 Tech to break
even for fiscal 2003 and anticipate R4 Tech's revenues and operating income to
be 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.
Other, net. Other, net increased to approximately $422,000 for fiscal
2002 from approximately $301,000 for fiscal 2001. Other income consists
primarily of interest income from advances made to R4 Tech and distributors.
Income taxes. The provision for income taxes, which reflects current
state income tax expense, decreased to $47,000 in fiscal 2002 from $123,000 for
fiscal 2001.
COMPARISON OF YEARS ENDED JULY 31, 2001 AND 2000
Net revenues. Net revenues increased 76.3% to $138.0 million for
fiscal 2001 from $78.2 million for fiscal 2000. Net revenues for fiscal 2001
consisted of $85.7 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 in fiscal 2001, as Uniflame was acquired in April 2000. Cylinder
revenues increased 25.5% 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 2001 from approximately 5.0 million units
during fiscal 2000.
Gross margin. Our overall gross margin decreased to 22.6% for fiscal
2001 from 25.9% for fiscal 2000. This decrease was due primarily to the
increase in product segment 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
14
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%.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 44.1% to $18.7 million for fiscal 2001 from
$13.0 million for fiscal 2000. Selling, general and administrative expenses
decreased as a percentage of net revenues to 13.5% for fiscal 2001 from 16.6%
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.
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 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. R4 Tech is subject to significant seasonal fluctuations
in revenues and net income (loss).
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, which reflects current
state income tax expense, increased to $123,000 in fiscal 2001 from $32,000 for
fiscal 2000.
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. The primary sources of cash
for fiscal 2002 were cash provided by operations and, to a lesser extent, cash
provided by the issuance of stock. Cash provided by operations was used to pay
down existing debt in fiscal 2002, resulting in a $3.5 million decrease in
working capital from fiscal 2001 to 2002. The primary sources of cash for
fiscal 2001 and 2000 were cash provided by the issuance of stock and the
proceeds from debt and, to a lesser extent, cash provided by operations.
Net cash generated by operating activities was $16.7 million, $1.3
million, and $6.8 million for fiscal 2002, 2001, and 2000, respectively. The
increase in cash provided by operations for fiscal 2002 over fiscal 2001 and
2000 was primarily due to the increase in net income and, to a lesser extent,
the decrease in working capital needs due to improved management of accounts
receivable and accounts payable.
15
Net cash used in investing activities was $13.1 million for fiscal 2002,
$16.3 million for fiscal 2001, and $31.3 million for fiscal 2000. The primary
components of cash used in investing activities in all periods included
purchases of cylinders leased to our distributors, investments in property,
plant and equipment and advances to R4 Tech. For fiscal 2000, the primary
components of cash used in investing activities included acquisitions and our
net investment in, and advances to, R4 Tech.
Net cash used in financing activities was $3.1 million for fiscal 2002
while net cash provided by financing activities was $14.9 million for fiscal
2001 and $24.6 million for fiscal 2000. Cash used in financing activities for
fiscal 2002 included net payments on our credit facility and payments on
long-term debt and capital lease obligations partially offset by net proceeds of
$10.2 million from the sale of common stock in a private placement. Cash
provided by financing activities for fiscal 2001 included $15.0 million in
subordinated debt and net proceeds of $9.7 million from a preferred stock
private placement partially offset by net payments on our credit facility. Cash
provided by financing activities for fiscal 2000 included net proceeds on our
credit facility, $6.4 million in net proceeds from the sale of common stock and
$7.0 million in proceeds from the issuance of convertible debt.
The following table summarizes our contractual payment obligations and
other commercial commitments (in thousands):
PAYMENT OBLIGATIONS BY FISCAL YEAR ENDED JULY 31,
CONTRACTUAL OBLIGATIONS 2003 2004 2005 2006 2007 THEREAFTER TOTAL
-------- -------- -------- -------- -------- ---------- --------
Long-term debt ................... $ 1,922 $ 250 $ 12,334 $ -- $ -- $ 10 $ 14,516
Capital lease obligations ........ 91 22 -- -- -- -- 113
Operating leases ................. 1,034 564 333 163 33 -- 2,127
-------- -------- -------- -------- -------- ---------- --------
Total contractual cash obligations $ 3,047 $ 836 $ 12,667 $ 163 $ 33 $ 10 $ 16,756
======== ======== ======== ======== ======== ========== ========
OTHER COMMERCIAL COMMITMENTS 2003 2004 2005 2006 2007 THEREAFTER TOTAL
-------- -------- -------- -------- -------- ---------- --------
Line of credit $ -- $ 26,643 $ -- $ -- $ -- $ -- $ 26,643
Standby letters of credit 1,093 -- -- -- -- -- 1,093
-------- -------- -------- -------- -------- ---------- --------
Total commercial commitments $ 1,093 $ 26,643 $ -- $ -- $ -- $ -- $ 27,736
======== ======== ======== ======== ======== ========== ========
Blue Rhino Corporation and QuickShip, Inc. lease their respective
facilities from Rhino Real Estate, LLC, a company affiliated with Billy D. Prim,
our Chairman, Chief Executive Officer and President, and Andrew J. Filipowski,
our Vice Chairman. The leases expire on December 31, 2002 and April 30, 2003,
respectively. Blue Rhino's rent expense for the years ended July 31, 2002, 2001
and 2000 was $239, $214 and $199, respectively, and QuickShip's rent expense for
the years ended 2002 and 2001 was $33 and $45, respectively. Blue Rhino
currently expects to exercise its option to renew the lease for an additional
one-year term. Uniflame Corporation leases its facility from H & M Enterprises,
LLC, a company affiliated with Mac McQuilkin, the president of Uniflame. The
lease terminates on March 31, 2005. Uniflame's rent expense for the years ended
July 31, 2002, 2001 and 2000 was $316, $308 and $100, respectively.
On April 28, 2000, we entered into a joint venture agreement to operate
and manage the automated propane bottling and cylinder refurbishing plant in
North Carolina then owned by R4 Tech, which 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. 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 for $7.6 million. The purchase price was used by
R4 Tech to repay our outstanding advances. Contemporaneously with the sale, R4
Tech leased back the land, buildings and equipment from us under the terms of a
three-year operating lease agreement. During fiscal years 2002 and 2001, we
provided net advances of $1.0 million and $4.2 million, respectively, to R4
Tech. At July 31, 2002, we had advances outstanding of approximately $141,000 to
R4 Tech and payables to R4 Tech of $1.8 million.
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 Prim
and Andrew Filipowski, 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. 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 issued a
five-year warrant to purchase 16,667 shares of common stock at $6.00 per share.
16
The Series A Convertible Preferred Stock accrued 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. Effective September 7, 2001, the annual
dividend rate increased to 15% because a registration statement covering the
shares of common stock into which the Series A Convertible Preferred Stock was
convertible was not yet effective. The 15% rate continued until the registration
statement became effective on April 8, 2002. As of July 31, 2002 and 2001, we
had accrued dividends on the outstanding shares of Series A Convertible
Preferred Stock of $1.7 million and $770,000, respectively. During March, April
and May 2002, the holder of 1,000,000 shares of Series A Convertible Preferred
Stock voluntarily converted such shares into 1,000,000 shares of common stock.
Effective September 24, 2002, as permitted by our Second Amended and Restated
Certificate of Incorporation, as amended, we converted the remaining 1,850,000
outstanding shares of Series A Convertible Preferred Stock into 1,850,000 shares
of common stock. Prior to the respective conversions, the shares of Series A
Convertible Preferred Stock accrued a cumulative dividend that we satisfied, as
permitted by the terms of the Series A Convertible Preferred Stock, by issuing
an aggregate of 233,611 shares of our common stock to the holders of the Series
A Convertible Preferred Stock upon conversion.
On October 26, 2000, we completed the acquisition of QuickShip, Inc., a
retail shipping service company and our wholly owned subsidiary. QuickShip,
which currently offers its service at over 300 retail locations in 29 states,
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 1,133,333 shares of Series A
Convertible Preferred Stock valued at $6.00 per share. We currently project
QuickShip to be dilutive to earnings before interest, taxes, depreciation, and
amortization ("EBITDA") by approximately $700,000 in fiscal 2003 and to be
further dilutive to earnings as a result of expected depreciation and
amortization expense.
In July 2002, we amended and extended our existing bank credit facility
(as amended, the "Credit Facility"). The Credit Facility consists of a $41.5
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
has a maturity date of August 1, 2003. The Credit Facility stipulates that the
amount of the revolving line of credit will decrease to $40.0 million on January
1, 2003 and to $38.0 million on May 1, 2003. The Credit Facility includes a .50%
fee on the average daily unused amount for each fiscal quarter. According to the
terms of the Credit Facility, unless we have satisfied the entire outstanding
indebtedness by the corresponding date, we are required to pay the bank: a
$50,000 fee on December 31, 2002; a $100,000 fee on March 31, 2003; a $150,000
fee on June 30, 2003; and a $150,000 fee on September 30, 2003 and each
successive quarter thereafter. The Credit Facility requires us to meet certain
covenants, including minimum net worth and cash flow requirements, is
collateralized by a lien on substantially all of our assets and permits early
extinguishment of our $15 million in subordinated debt. The Credit Facility
bears interest at the thirty-day London Interbank Offered Rate ("LIBOR") plus 3%
per annum and, at July 31, 2002, the interest rate was 4.84%. At July 31, 2002,
the balance on the Credit Facility was $26.6 million, and we were in compliance
with all covenants. In conjunction with the amendment and extension of the
Credit Facility, we entered into a syndication agreement with Bank of America
intended to replace the Credit Facility with an expanded three-year syndicated
facility of $50 million, which we currently expect to close in our fiscal second
quarter ending January 31, 2003.
We are a party to 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 thirty-day LIBOR, adjusted quarterly.
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. At July 31, 2002, we were in
compliance with all covenants. The debenture bears interest at the annual rate
of 13%, payable quarterly. The principal balance matures on August 31, 2006. In
conjunction with the subordinated debt, 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 in our common stock 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.
On April 19, 2002, we completed the sale of 1.5 million shares of our
common stock for $10.875 million in a private placement through SunTrust
Robinson Humphrey Capital Markets, as Placement Agent, to selected institutional
and individual investors at a price of $7.25 per share. The net proceeds from
the financing were used to pay down the Credit Facility.
17
We do not have any material capital commitments outstanding. We
currently anticipate that our total capital expenditures for fiscal 2003,
excluding acquisitions, will be approximately $10.0 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 many factors including, but not limited to, 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 (or the proposed replacement syndicated facility), together with cash
provided by operations, will be sufficient to meet our capital expenditure and
working capital requirements through fiscal 2003. However, if we are unable to
close the proposed replacement syndicated facility or if we experience an
unexpected decrease in demand for our cylinder exchange service or our products,
we may need additional funds to meet our capital requirements. In that event, or
if we perceive conditions to be favorable, we may seek additional debt or equity
financing. We cannot be sure that any additional equity or debt financing will
be available on favorable terms or on terms that are not dilutive to our
stockholders.
SEASONALITY
We have experienced and currently expect to continue to experience
seasonal fluctuations in our revenues and operating income. Our revenues and
operating income have been highest in the spring and summer, which includes the
majority of the grilling season, and lowest in the fall and winter. Our cylinder
exchange segment, which generally enjoys higher margins than our products and
other segment, experiences higher revenues and operating income in the spring
and summer. Conversely, our products and other segment experiences higher
revenues and operating income in the fall and winter. Sustained periods of poor
weather, particularly in the spring and summer, can 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. We cannot be sure that
our business will not be materially affected by inflation in the future.
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 and continuing through the fourth quarter of
fiscal 2002, propane prices returned to a range more consistent with historical
levels. On March 1, 2001, we initiated a propane price hedging strategy that has
reduced, and we believe will continue to 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 retailers.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any transactions, obligations or
relationships that could be considered off-balance sheet arrangements.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards ("SFAS") 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 applied the new rules on accounting for goodwill and other intangible
assets beginning in the first quarter of fiscal year 2002. Application of the
nonamortization provisions of the Statements resulted in an increase in net
income of approximately $2.6 million in fiscal 2002.
At July 31, 2002, we had unamortized intangibles of $30.6 million that
were subject to the transition provisions of the Statements. We did not
recognize any impairment of goodwill upon adoption of SFAS 142. We are required
to perform goodwill
18
impairment tests on an annual basis and, in certain circumstances, more
frequently. We cannot be sure that future goodwill impairment tests will not
result in a charge to earnings.
Effective February 1, 2002, we adopted the Emerging Issues Task Force's
Issue No. 00-14, Accounting for Certain Sales Incentives, which addresses the
recognition, measurement and income statement classification for certain sales
incentives, including rebates, coupons and free products or services. As
provided in EITF No. 00-14, certain cooperative advertising costs that we
historically included in selling, general and administrative expenses are now
classified as reductions of net revenues. Prior period amounts have been
reclassified for comparative purposes.
In August 2001, the Financial Accounting Standards Board issued SFAS 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 currently expect the
adoption of SFAS No. 143 to have a material impact on our consolidated results
of operations or financial position.
In October 2001, the Financial Accounting Standards Board issued SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This
Statement establishes a single accounting model for the impairment or disposal
of long-lived assets. As required by SFAS No. 144, we will adopt this new
accounting standard for fiscal year 2003. We do not currently expect the
adoption of SFAS No. 144 to have a material impact on our consolidated results
of operations or financial position.
In April 2002, the Financial Accounting Standards Board issued SFAS No.
145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections. This statement eliminates an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions and establishes that
gains and losses from extinguishment of debt should be classified as
extraordinary items only if they meet the criteria of extraordinary. We do not
currently expect the adoption of SFAS No. 145 to have a material impact on our
consolidated results of operations or financial position.
In June 2002, the Financial Accounting Standards Board issued SFAS No.
146, Accounting for Costs Associated with Exit or Disposal Activities. This
Statement requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. SFAS No. 146
also establishes that fair value is the objective for initial measurement of the
liability. We will adopt this standard by the required December 2002 deadline.
We do not currently expect the adoption of SFAS No. 146 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 LIBOR 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 LIBOR, 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, we cannot be sure 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, 2002 and 2001 by
approximately $243,000 and $341,000, 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 thirty-day LIBOR,
adjusted quarterly. In July 2002, the interest rate on the Credit Facility was
changed to a rate based on the thirty-day LIBOR, adjusted monthly. At July 31,
2002, the interest rate swap was 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
through an increase in our price, a $.01 increase in the price per gallon of
propane would reduce the gross margin in our cylinder
19
exchange segment by approximately .3% or 30 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.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
BLUE RHINO CORPORATION
PAGE
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Report of Independent Accountants..................................... 22
Consolidated Balance Sheets as of July 31, 2002 and 2001.............. 23
Consolidated Statements of Operations for the years ended
July 31, 2002, 2001 and 2000........................................ 24
Consolidated Statements of Stockholders' Equity for the
years ended July 31, 2002, 2001 and 2000............................ 25
Consolidated Statements of Cash Flows for the years ended
July 31, 2002, 2001 and 2000........................................ 26
Notes to Consolidated Financial Statements............................ 27
R4 TECHNICAL CENTER - NORTH CAROLINA, LLC
PAGE
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Report of Independent Accountants..................................... 44
Balance Sheet as of December 31, 2000................................. 45
Statement of Operations and Changes in Members' Capital
for the period from April 28, 2000 to December 31, 2000............ 46
Statement of Cash Flows for the year ended
December 31, 2000................................................... 47
Notes to Financial Statements......................................... 48
21
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 Corporati