Grilled stakes: Blue Rhino was red-hot, cooking on all burners until a dispute with its auditor skewered its stock price.

Blue Rhino Corp. came out charging. After an initial public offering in May 1998, the Winston-Salem-based company's shares gained 90% in eight months. Its accounts with retail giants such as Wal-Mart and Home Depot kept revenues climbing by creating a national market: a cleaner, more-efficient way for backyard chefs to replace the empty propane tanks that had fueled their grills.

Then, in January, on the cusp of a secondary stock offering, Blue Rhino stumbled. Early that month, The Wall Street Journal speculated that the company might have been doing a bit of barbecuing of its own in its first-quarter report, filed in mid-December, to inflate its share price before the new offering. Just before the quarter's end, the company moved $6.5 million of inventory off its balance sheet, replacing it with cash. The trouble: A leasing company controlled by Blue Rhino's CEO, vice chairman and another company director had bought the inventory.

Adding fuel to that fire, Blue Rhino's auditor, PricewaterhouseCoopers LLP, took a highly unusual step in early February. The national office took issue with an item in the company's annual report, filed in October and signed off on by the accounting firm's Greensboro office. It dealt with a $635,000 convertible loan, which the national office decided should have been entered as an equity investment. Blue Rhino was forced to restate its annual and first-quarter earnings. It posted losses in the first quarter instead of the earnings it had initially reported and bigger annual losses.

Blue Rhino's CEO, Billy D. Prim, says PricewaterhouseCoopers didn't give "proper direction" and fired the auditor. Wherever fault lay, reaction from investors was swift. Share value fell 21%, from $18.31 to $14.50, the day the restated earnings were released, then an additional 20% the next day. Blue Rhino called off the secondary offering in February. And despite strong third-quarter results, Blue Rhino's stock remains depressed. After trading between $9 and $10 in July, it hit an all-time low, $6.88, on Aug. 10. Management faces a scenario that, just a year ago, was unthinkable - having to rebuild Blue Rhino's tarnished reputation.

If Prim is concerned, he doesn't show it. The boyish-looking 43-year-old projects soft-spoken confidence as he sits in Blue Rhino's headquarters, where 50 of its 75 employees work. "Our goal is to be a $500 million company by 2003," he declares. Revenue in 1998 was $27.4 million, up 92.6% from 1997. For the three months ended April 30, revenue was $11.9 million, up 103.5% from a year earlier.

Prim places his faith in the company's burgeoning sales and its business model: a nationwide network of 16,000 retail outlets that offer cylinder exchange. Blue Rhino distributors pick up the empty cylinders, clean and refill them with propane and return them to the stores. Federal law requires that propane cylinders be stored outside retail buildings. For Blue Rhino, that amounts to free advertising - a 6-foot billboard outside participating outlets, which happen to be some of the nation's biggest retailers: Wal-Mart, Sears, Lowe's and Home Depot.

For retailers, the exchange is an attractive proposition. Americans bought an estimated 6 million gas grills in 1998, and the propane cylinders send customers back to the stores for refills, which typically sell for $13 to $15. Blue Rhino contracts with 53 independent distributors across the country. "We're the brand-marketing company," Prim says. "Like Coke, we have local distributors in every market. They take their bottles to the retailers, bring the empties back, wash them out, fill 'em up and take 'em back out."

In 1994, when Blue Rhino trotted onto the field, cylinder exchange didn't even register on the Barbecue Industry Association's survey of gas-grill owners. By 1997, 20% of owners were trading their empty cylinders for fresh ones. Today, Blue Rhino holds a 5% share - more than any other company - of the $1.2 billion gas-cylinder market, whose annual growth is estimated at 15%. Several companies are in the market on a regional basis, but nobody has emerged to challenge Blue Rhino coast to coast.

But outdoor grilling is seasonal. Nearly 50% of Blue Rhino's sales come in the company's fourth quarter, May through July. To offset that, Blue Rhino is launching a line of propane-powered patio heaters, which use the same 20-pound cylinders as gas grills. "It extends the grilling season," Prim says. "A guy in Chicago who buys a $500 Weber grill, you think he wants to quit using it in September?"

By Labor Day, Prim hopes Blue Rhino patio heaters - its residential models will fetch between $249 and $299 - will be fixtures in the same stores offering cylinder exchange. He compares the market to that of gas grills nearly 20 years ago - small volume and very high prices. "That's the way gas grills were in the early '80s," Prim says. "Then you took them to the major retailers. The volume goes up, the price comes down." Prim estimates 20,000 to 30,000 patio heaters are sold annually. "We'll do many times that," he says.

Prim is no newcomer to entrepreneurship. The Yadkin County native was a freshman at N.C. State University when his father died in 1975, forcing him to drop out and take over the family farm-supply business, Moxley Store & Oil Co. Then, as now, times were tough for farmers, so he decided to switch course. He bought a Boonville heating-oil company, Quality Oil Co. In the late '70s and '80s, with help from friends and angel investors, he bought a string of oil distributors and built a chain of convenience stores, Quik-Pik Food Marts, as well as an interstate trucking company.

While putting together American Oil & Gas Inc., Prim kept an eye on Wall Street, trading in stocks and commodities. He became a partner in a venture-capital firm, Platinum Venture Partners LLP, run by a longtime friend, Flip Filipowski, now Blue Rhino's vice chairman. Prim's goal, from the beginning, was to take the company public. "I think every entrepreneur has it on his wish list to someday do an initial public offering. It was certainly one of my goals."

The break came in 1993, when a Wal-Mart manager in Elkin approached Prim's salespeople. "He said, 'We sell hundreds of gas grills every week but have nowhere to send our customers to get gas, especially on weekends,'" Prim recalls. "'Would you think about putting in cylinder exchange for Wal-Mart?'"

Prim figured he shouldn't turn down Wal-Mart. He studied the market and found that gas grills were overtaking charcoal grills at a phenomenal rate. In the early '80s only about 300,000 gas grills were being sold. In 1994, 6 million were sold - more than charcoal, electric and natural-gas models combined.

And the nation's growing appetite for gas grilling was being poorly served by the propane industry. Consumers were hauling their empty propane cylinders to service stations or propane distributors for a refill - a messy and cumbersome process. A few regional companies had come up with a better idea: an exchange service that allowed consumers to swap their grimy cylinders for clean, full ones. But no one had taken the concept national, and that's why Wal-Mart came knocking.

Prim recognized an opportunity to dominate an emerging industry. It would require selling the concept to investors and raising the capital needed to serve big, national retailers. It demanded a publicly funded company. That's just what Prim wanted.

He did much of his business plan in February 1.994, while on a photo safari in Africa, which also yielded the company name. "I was trying to incorporate the blue flame in propane with something that was identifiable - hoping it would do for us what the Pink Panther did for Owens-Corning." When he returned, Prim looked at retail distribution of gas grills and found that 50% were sold by Wal-Mart, Kmart, Sears, Lowe's and Home Depot. None of them sold gas. "They were having to send people to their competitors, down to the Ace Hardware to get their tank filled," Prim says. "It was like selling toys without batteries."

Landing accounts was not difficult. Within the first year, Blue Rhino struck deals with each of the big five retailers. The challenge was to be big enough, fast enough. Soon, he says, the Winston-Salem office was swamped with calls from retailers asking, "When are you going to be in Seattle?" or "When are you going to be in Phoenix? I need you in L.A. tomorrow."

Blue Rhino raised more than $20 million from private investors, including friends, family and Prim himself in 1994. The company went public in May 1998. The stock hit its all-time high, $24.75, on Jan. 7. Then, in February, Wall Street got word of the restated earnings.

PricewaterhouseCoopers won't discuss the events leading up to the restatement, citing client confidentiality. But Blue Rhino's chief financial officer, Mark Castaneda, says the accounting firm's Greensboro office twice approved the balance-sheet treatment of the $635,000 convertible loan Blue Rhino made to Elgin, Ill.-based Bison Valve LLC, a company owned by a man unaffiliated with Blue Rhino. Bison Valve was to research, market, produce and sell an environmentally safe valve for propane tanks. But months later, while reviewing securities filings for Blue Rhino's secondary offering, the national office overruled its local office. It demanded that the loan be treated as an equity investment because the company had signed a letter of intent to buy Bison Valve's assets, Castaneda says.

At the same time, PricewaterhouseCoopers' national office scrutinized Blue Rhino's dealings with USA Leasing LLC, a Winston-Salem-based company that leases cylinders to Blue Rhino distributors. Prim, Filipowski and another Blue Rhino director own 74% of USA Leasing, and Blue Rhino guaranteed 80% of the debt on USA Leasing's purchase of $6.5 million of Blue Rhino inventory in October.

Castaneda says that after the Journal article appeared, Merrill Lynch & Co., Blue Rhino's New York-based underwriter for the secondary offering, expressed concern. According to Castaneda, PricewaterhouseCoopers assured the investment banker that Blue Rhino's accounting methods were sound. Then, at the end of the road show for the secondary offering, the accounting firm's national office balked, saying USA Leasing's financial statements should be consolidated into Blue Rhino's.

Blue Rhino handled the two items as the national office instructed, and the results were crushing. In the restated earnings, Blue Rhino took charges of $107,000 in fiscal 1998 anti $492,000 in the first quarter of fiscal 1999 to write off its loan to Bison Valve. The company also consolidated the financial statements of USA Leasing. The restatements resulted in a net loss of $70,000 for the first quarter of fiscal 1999, as opposed to its initially reported earnings of $422,000. Results for fiscal 1998 were worse, too, with a net loss of $2.5 million instead of $2.4 million.

Prim denies the transaction with USA Leasing was intended to burnish the balance sheet. "It did not affect revenues or earnings, as the article implied," he says. "It had no effect. It was just a balance-sheet transaction, basically." That's true, although had USA Leasing defaulted on its loan, the inventory would have wound up back on Blue Rhino's books. As for the Bison Valve loan, Prim lays blame squarely on the company's auditor. "We had accounted for it: in the way we had been told to, and they had signed off on it," he says. "The national office disagreed with it and asked us to change it. Because of that we felt like we didn't get proper direction. We certainly did it the way we were instructed."

Blue Rhino promptly fired PricewaterhouseCoopers and, in May, hired Ernst & Young LLP. But the damage was done. It shelved its secondary offering in February after the stock tumbled. "Typically the market, when there's a credibility issue, requires some time for that credibility to be restored," Castaneda says. Prim insists the share price will rebound. "We're not in it for one big hit, for what the share price is today," he says. "We know where we're going. If we continue to grow at this rate and show the market the revenue and earnings growth that they're going to see over the next couple of years, the share price will take care of itself."

Blue Rhino tried to sell USA Leasing to ease concerns on Wall Street. But by August, there were no takers, so Blue Rhino acquired 100% of it. It means Blue Rhino will sell cylinders directly to distributors rather than using a third party. The company projects revenues of $53 million for its current fiscal year. Prim's counting on nine times that amount by 2003 and expansion to 40,000 retail locations.

"We want to be the next Coca-Cola," Prim says. "We want to be the Jacuzzi in this industry. We want them to name it after us." When Blue Rhino expands to 8,000 to 10,000 more locations, Prim says, the company will unfold a national advertising campaign.

Despite the restatement setback, some analysts are still high on Blue Rhino. "They've taken their knocks, but fundamentally they're very strong," says Vie Lowden, an analyst with Richmond, Va.-based Branch Cabell & Co. "They have a cloud over them that they're trying to remove. That cloud does still linger, otherwise the stock price would be a little higher." Hiring Ernst & Young as its new auditor is an important step toward credibility, Lowden adds.

Today, Prim seems at ease with his success, though not entirely comfortable with the scrutiny that comes with running a publicly held company. He and his wife, Debbie, are living the good life, with homes in Winston-Salem and on Lake Norman. He reflects on the ups and downs of life in the public market and concludes he has no regrets.

Still, there is a price to pay. "You're very much under a microscope," he says. "There are not many secrets in life. When you run a privately held company, you don't have to show everything every quarter." Now Prim lives his life in 90-day increments - "not the best way to live, but that's the way the public world works."

Lee Buchanan is a High Point-based free-lance writer.