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                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
 
                               ----------------
 
                                 FORM 10-K/A-1
 
   [X]           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934
 
                    For the fiscal year ended July 31, 1998
 
                        Commission File Number 0-24287
 
                            BLUE RHINO CORPORATION
            (Exact name of registrant as specified in its charter)
 
               Delaware                              56-1870472
    (State of other jurisdiction of               (I.R.S. Employer
    incorporation or organization)               Identification No.)
 
                               ----------------
 
                           104 Cambridge Plaza Drive
                      Winston-Salem, North Carolina 27104
                   (Address of principal executive offices)
                                (336) 659-6900
 
  Securities Registered Pursuant to Section 12(b) of the Act:
 
<TABLE>
<CAPTION>
                                                         Name of each exchange
      Title of each class                                 on which registered
      -------------------                                ---------------------
      <S>                                                <C>
             None                                                None
</TABLE>
 
  Securities Registered Pursuant to Section 12(g) of the Act:
 
<TABLE>
<CAPTION>
               Common Stock
               ------------    ---
             <S>               <C>
             (Title of Class)
</TABLE>
 
  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 (229.405 of this chapter) 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. [X]
 
  At September 30, 1998, the aggregate market value of the registrant's Common
Stock held by non-affiliates of the registrant was approximately $46,572,185.
 
  At September 30, 1998, the number of shares outstanding of registrant's
Common Stock was 7,630,873.
 
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                      DOCUMENTS INCORPORATED BY REFERENCE
 
  Portions of the Registrant's definitive Proxy Statement for the annual
meeting of Stockholders which will be filed within 120 days after the fiscal
year end covered by this report on Form 10-K are incorporated by reference in
Part III of this Form 10-K.
 
  Certain exhibits to the Registrant's registration statements on Form S-1
dated May 18, 1998 and September 30, 1998 are incorporated by reference as
exhibits to this Form 10-K.
 
                          FORWARD LOOKING STATEMENTS
 
  Certain statements in Item 1--Business and Item 7--Management's Discussion
and Analysis of Financial Condition and Results of Operations contain forward-
looking statements that involve risks and uncertainties, such as statements of
the Company's plans, objectives, expectations and intentions. The cautionary
statements made in this Form 10-K should be read as being applicable to all
related forward-looking statements wherever they may appear in this Form 10-K.
The Company's actual results could differ materially from those discussed
herein. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed in "Risk Factors" as described in the
Company's Registration Statements on Form S-1 as filed with the SEC on May 18,
1998 and September 30, 1998 as well as those discussed elsewhere herein.
Unless otherwise indicated, all references to years in this Form 10-K refer to
the Company's fiscal years, which ran as follows: from August 1, 1994 through
July 31, 1995, August 1, 1995 through July 28, 1996, July 29, 1996 through
July 31, 1997 and August 1, 1997 through July 31, 1998. The Blue Rhino(R)
name, rhino logo, RhinoTUFF(R) and Tri-Safe(TM) are registered trademarks of
the Company. This Form 10-K also includes trademarks of companies other than
the Company.
 
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<PAGE>
 
                             BLUE RHINO CORPORATION
 
                                     INDEX
 
                    For the fiscal year ended July 31, 1998
 
                                    PART 1:
 
<TABLE>
 <C>       <S>                                                             <C>
 Item  1:  Business......................................................    4
 Item  2:  Properties....................................................   11
 Item  3:  Legal Proceedings.............................................   11
 Item  4:  Submission of Matters to a Vote of Security Holders...........   11
 
                                    PART II:
 
 Item  5:  Market for Registrant's Common Equity and Related Stockholder
            Matters......................................................   12
 Item  6:  Selected Financial Data.......................................   12
 Item  7:  Management's Discussion and Analysis of Financial Condition
            and Results of Operations....................................   14
 Item  7A: Quantitative and Qualitative Disclosures About Market Risk....   23
 Item  8:  Financial Statements and Supplementary Data...................   24
 Item  9:  Changes in and Disagreements with Accountants on Accounting
            and Financial Disclosure.....................................   45
 
                                   PART III:
 
 Item 10:  Directors and Executive Officers of the Registrant............   46
 Item 11:  Executive Compensation........................................   47
 Item 12:  Security Ownership of Certain Beneficial Owners and
            Management...................................................   47
 Item 13:  Certain Relationships and Related Transactions................   47
 
                                    PART IV:
 
 Item 14:  Exhibits, Financial Statement Schedules, and Reports on Form
            8-K..........................................................   48
</TABLE>
 
                                       3
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                                    PART I
 
Item 1--Business
 
General
 
  Blue Rhino Corporation ("Blue Rhino" or the "Company") is a leading provider
of grill cylinder exchange in the United States with cylinder exchange
displays at over 9,500 retail locations in 46 states and Puerto Rico as of
July 31, 1998. Cylinder exchange provides consumers with a convenient means to
exchange empty grill cylinders for clean, safer, precision-filled cylinders.
Blue Rhino cylinder exchange is offered at many of the major home
center/hardware, mass merchant, grocery and convenience stores such as Home
Depot, Lowe's, Sears Hardware, Wal*Mart, Kroger and SuperAmerica. Blue Rhino
partners retailers and independent distributors to provide consumers with a
nationally branded product as an alternative to traditional grill cylinder
refill. The Company is focused on promoting its Blue Rhino brand through
retailers and leveraging its network of 53 independent propane distributors.
Because the distributors make the necessary investments in distribution
infrastructure, Blue Rhino can dedicate its efforts and capital to brand
development, value-added marketing, customer service and management
information systems ("MIS"). During the fiscal year ended July 31, 1998, the
Company's sales increased approximately 93% from the prior year's comparable
period to approximately $27.4 million as a result of the growth of sales at
existing locations and the addition of over 5,000 new retail locations.
 
  Blue Rhino is creating a new paradigm for the grill cylinder exchange market
which provides benefits to consumers, retailers and distributors. Blue Rhino
offers consumers a new, convenient, branded product alternative to grill
cylinder refilling. Blue Rhino provides retailers with a high margin, turn-key
branded service which has the potential to increase customer traffic and
utilization of exterior retail space. Blue Rhino's cylinder exchange program
provides independent distributors with a counter-seasonal complement to their
traditional propane business as well as access to major retail accounts,
sophisticated MIS and marketing support.
 
  The Company believes that in the highly fragmented and regionally focused
cylinder exchange industry, opportunities exist to expand through selective
acquisitions of smaller cylinder exchange businesses with established retail
accounts. During fiscal 1998, the Company completed 15 acquisitions of
regional cylinder exchange providers, adding over 2,200 retail locations for a
total purchase price of approximately $4.7 million, including approximately
$3.6 million in cash, seller financing of $318,000 and $750,000 worth of
Common Stock. The largest acquisition involved the acquisition of 750 new
locations. Typically the Company resells or leases assets acquired in these
acquisitions to the Blue Rhino distributor which services the accounts
acquired by the Company.
 
  After operating as a privately held business for several years, the Company
registered and sold 3,105,000 shares of its Common Stock to the public in May
1998 (the "Initial Public Offering") becoming subject to the reporting
requirements under the Securities Exchange Act of 1934, as amended, on May 18,
1998. In connection with its Initial Public Offering, the Company undertook a
recapitalization of its existing equity which included (i) converting all
outstanding shares of its Series A Convertible Participating Preferred Stock
("Preferred Stock") into Common Stock, (ii) converting the accrued dividends
on the Preferred Stock into Common Stock (iii) issuing Common Stock upon the
cashless exercise of all warrants issued prior to 1998 and (iv) undertaking a
1 for 13.22513 reverse split of its Common Stock.
 
  Blue Rhino Corporation was incorporated in North Carolina on March 24, 1994
and reincorporated in Delaware on December 16, 1994. The Company has two
wholly owned subsidiaries, Rhino Services, L.L.C., a Delaware limited
liability company ("Rhino Services"), and CPD Associates, Inc., a North
Carolina corporation ("CPD"). Rhino Services offers centralized purchasing
services to the Company's distributors. CPD was formed to hold the Company's
intangible assets. The Company maintains its executive offices at 104
Cambridge Plaza Drive, Winston-Salem, North Carolina 27104. The Company's
telephone number is (336) 659-6900.
 
                                       4
<PAGE>
 
Industry Background
 
  Barbecue Grill Market. Outdoor barbecuing is increasingly one of the most
popular outdoor activities in the United States driven by consumer trends to
healthier food preparation, as well as the desire to spend more time outside
at family and social gatherings. The popularity of propane grills has
increased significantly in recent years with Barbecue Industry Association
("BIA") statistics indicating that propane grill sales now exceed the combined
sales of charcoal, natural gas and electric grills. According to a 1997 survey
("1997 BIA Study") conducted on behalf of the BIA, consumers enjoy the
convenience of propane grills over charcoal grills as they light easier, heat
up faster and require less preparation and clean up time. Furthermore, the
1997 BIA Study indicates that approximately 68% of propane grill owners use
their grills throughout the year.
 
  According to the 1997 BIA Study, approximately 38.5 million United States
households own a propane grill, with the number of propane grill purchases
growing at a rate of 8% per year from 3.2 million in 1990 to more than 6.0
million in 1997. The 1997 BIA Study also indicates that the average propane
grill owner uses 1.8 cylinders of propane per year, creating an estimated
market for grill cylinder fills of approximately 69.0 million per year. Based
on these estimates, the Company believes the annual retail market for grill
cylinder refills is approximately $1.0 billion. There can be no assurance that
such growth rates will continue or be sustained or that the Company will
benefit from any such growth.
 
  Grill Cylinder Exchange. In recent years, cylinder exchange has emerged as a
convenient alternative to refilling cylinders at traditional propane filling
stations. Cylinder exchange, in which the consumer exchanges an empty grill
cylinder for one which is full, is available at retail locations such as home
center/hardware, mass merchant, grocery and convenience stores. These
retailers typically have longer business hours and are more convenient for
consumers than filling stations. The Company believes that as cylinder
exchange becomes more widely available consumers will embrace it in place of
refilling, which often involves traveling to a remote location and waiting for
a refill. Growing consumer acceptance of cylinder exchange is indicated by BIA
estimates that cylinder exchange increased from less than 10% of grill
cylinder transactions in 1995 to 21% in 1997.
 
  The Company believes that the grill cylinder exchange industry is highly
fragmented with numerous regional distributors typically serving less than 500
locations each. The Company believes this fragmentation results in part from
the relative newness of cylinder exchange and the unique set of challenges
cylinder exchange poses to commercially focused traditional propane
distributors. To build critical mass at the consumer level, propane
distributors must establish and maintain relationships with major retailers,
many of which prefer to stock quality, branded products supplied by reliable,
sophisticated vendors. To service retail cylinder exchange accounts, propane
distributors must make capital investments in cylinder displays, grill
cylinders, refurbishing equipment and vehicles not used in their traditional
propane business. Finally, to properly account for complex exchange, upgrade
and sale transactions, propane distributors must invest in sophisticated
management information and accounting systems tailored to servicing retailers.
 
The Blue Rhino Product
 
  Blue Rhino is creating a new paradigm for the cylinder exchange market which
provides benefits to consumers, retailers and distributors. Blue Rhino offers
consumers a new, convenient, branded product alternative to grill cylinder
refilling. Blue Rhino provides retailers with a high margin, turn-key branded
service which has the potential to increase customer traffic and utilization
of exterior retail space. In addition, Blue Rhino offers retailers a full
service program, including direct delivery, regular inventory maintenance,
centralized billing, electronic data interchange ("EDI") and detailed
reporting typically unavailable from traditional propane distributors. For
Blue Rhino's independent distributors, this cylinder exchange program provides
a counter-seasonal complement to their traditional propane business as well as
access to major retail accounts, sophisticated MIS and marketing support.
 
                                       5
<PAGE>
 
Business Strategy
 
  Blue Rhino's strategy is to continue to build its national brand and
capitalize on its position as the leading grill cylinder exchange provider
through the following initiatives:
 
    Promote the Blue Rhino Brand and Drive Consumer Awareness. The Company's
  branding efforts focus on developing and maintaining a brand identity
  synonymous with a convenient, clean and safer product. Blue Rhino has
  created a distinctive Blue Rhino brand name and rhino logo which are
  prominently displayed on cylinder sleeves and displays. The Company also
  plans to undertake brand marketing and promotional initiatives, including
  point of purchase displays, cross marketing promotions with other barbecue-
  related products, print media and cooperative advertising. The Company's
  recognized brand also provides a platform to introduce new Blue Rhino
  products to the backyard living category.
 
    Deliver Clean, Safer Cylinders at Convenient Locations. The Company
  believes that convenience and safety are critical factors in achieving
  consumer acceptance of cylinder exchange. Blue Rhino cylinder exchange
  allows consumers to exchange empty cylinders for clean, precision-filled,
  cylinders at a variety of well known, convenient retail locations. Blue
  Rhino distributors refill and resleeve cylinders according to prescribed
  standards designed to prevent overfills or refills of unsafe cylinders.
  Each Blue Rhino cylinder has a consistent, like-new appearance, which the
  Company believes enhances retail sales and consumer loyalty.
 
    Expand Relationships and Increase Sales with Retailers. The Company's
  relationships with major retailers such as Home Depot, Lowe's, Sears
  Hardware, Wal*Mart, Kroger and SuperAmerica, allow it to place cylinders in
  a large number of convenient, high traffic locations. The Company believes
  that its ability to provide national and regional retailers with a single
  vendor for branded grill cylinder exchange supported by value-added
  customer service, marketing and MIS gives it a competitive advantage over
  traditional propane distributors. The Company believes there are
  approximately 225,000 potential grill cylinder exchange locations in its
  targeted markets of which it currently services approximately 9,500. The
  Company plans to continue to increase the number of new retail locations by
  driving sales within existing retail accounts. In fiscal 1998, the Company
  added over 5,000 retail locations.
 
    Leverage National Distributor Network. Over the past two years the
  Company has established a network of 53 independent distributors serving 46
  states and Puerto Rico. The Company believes that this distribution network
  strategically positions it to cover approximately 90% of the grilling
  markets in the United States. The Company plans to leverage this network by
  aggressively increasing each distributor's market penetration through the
  addition of new retail locations. Additionally, five of these distributors
  are dedicated exclusively to developing and providing Blue Rhino cylinder
  exchange in certain of the Company's key geographic markets.
 
    Pursue Strategic Account Acquisitions. The Company believes that in the
  highly fragmented and regionally focused cylinder exchange industry,
  opportunities exist to expand through selective acquisitions of smaller
  cylinder exchange businesses with established retail accounts. The Company
  has added over 2,200 retail locations in fiscal 1998 via a number of
  acquisitions for a total purchase price of approximately $4.7 million,
  including approximately $3.6 million in cash, seller financing of $318,000
  and $750,000 worth of Common Stock. Subsequent to July 31, 1998, the
  Company has completed three acquisitions representing approximately 450
  retail locations and has signed six letters of intent to acquire
  approximately 1,150 locations.
 
Cylinder Exchange Program
 
  A typical cylinder exchange transaction begins when a Blue Rhino distributor
visits a retail location to replenish the grill cylinder display. The
distributor enters an inventory of the cylinders in the display rack into a
handheld computer which, utilizing an advanced algorithm in the Company's
proprietary Blue Rhino Electronic Accounting System ("BREAS") software,
automatically calculates the number and type of cylinder exchanges, upgrades
and sales for the location and creates a delivery ticket for the retailer.
Distributors routinely electronically transfer their delivery and inventory
information to Blue Rhino. Blue Rhino then prepares a
 
                                       6
<PAGE>
 
centralized bill for each retailer which typically is transmitted in a
customized electronic format compatible with their existing systems. Blue
Rhino collects invoiced amounts directly from the retailers and in turn remits
a fixed amount per cylinder transaction to its distributors. The Company
negotiates terms of payment with retailers which are generally 30 days from
the date of invoice, as is standard for consumable retail products. The
Company in turn remits payment to its distributors on the fifteenth of each
month for transactions occurring during the previous month.
 
Brand Marketing
 
  The Company's marketing efforts focus primarily on developing and
maintaining a brand identity synonymous with a convenient, clean and safer
product which enhances consumer loyalty and builds retailer and distributor
relationships. The Company's brand marketing efforts include the following
Company initiatives:
 
    Blue Rhino Cylinder Packaging. Blue Rhino cylinders are covered with a
  distinctive and colorful RhinoTUFF cylinder sleeve. The RhinoTUFF cylinder
  sleeve contains safety and use information along with a prominent display
  of the Blue Rhino name and rhino logo. The RhinoTUFF sleeve also protects
  the cylinders from damage during shipping and handling and from exposure to
  the elements. The Company believes that this unique branded packaging
  increases consumer recognition and loyalty.
 
    Blue Rhino Cylinder Displays. Blue Rhino cylinder displays, which
  prominently feature the Blue Rhino name and logo, are typically located
  near a retailer's main entrance or in their lawn and garden department
  providing "billboard" advertising for the Company's products. The Company
  believes these cylinder displays enhance consumer awareness of the Blue
  Rhino brand and reinforce the association of Blue Rhino with convenient,
  clean and safer grilling.
 
    Promotions. Blue Rhino has selectively placed targeted broadcast and
  print media advertising campaigns that focus on raising consumer awareness
  of the Blue Rhino name and service. Such advertising may also include
  certain special promotions to encourage purchases of spare filled cylinders
  before the grilling season. Blue Rhino is actively involved with consumer,
  trade and regulatory associations in an effort to promote the growth of
  cylinder exchange. Ongoing Blue Rhino promotions include development of the
  Company's web site (www.bluerhino.com), co-operative advertising programs,
  cooking and safety demonstrations and direct mail initiatives.
 
Retailer Relationships
 
  The Company targets the following four categories of retailers:
 
<TABLE>
<CAPTION>
            Retail Category                           Major Accounts
      ----------------------------          ----------------------------------
      <S>                                   <C>
      Home Centers/Hardware Stores          Home Depot, Lowe's, Sears Hardware
      Mass Merchants                        Wal*Mart, Kmart, Meijer
      Grocery Stores                        Kroger, Food Lion, Winn Dixie
      Convenience Stores                    SuperAmerica, Kwik Shop, Conoco
</TABLE>
 
  Retailer Opportunity. Blue Rhino offers retailers the opportunity to
increase sales and profits with minimal time and financial investment. Blue
Rhino cylinder exchange is available to retailers nationally, providing
retailers with attractive sales margins while utilizing exterior retail space.
In addition, Blue Rhino has the potential to increase retailers' sales of
ancillary products through increased traffic from repeat cylinder exchange
customers and cross-marketing initiatives with other barbecue-related
products.
 
  Account Set-Up. Blue Rhino actively assists distributors and retailers in
obtaining local permits to set up the cylinder exchange program and developing
a site plan for cylinder displays. The permitting process is generally
completed within sixty days. Typically, within two weeks of obtaining the
necessary permits or other approvals, the distributor installs the cylinder
displays at the retail location. During the set-up process, Blue Rhino's
customer service and training personnel conduct in-store training and provide
safety manuals to store employees.
 
 
                                       7
<PAGE>
 
  Account Service. Blue Rhino cylinder exchange is a turn-key program in which
the Company and its distributors set up new accounts, train store employees,
deliver the cylinders directly to retail locations, maintain the display racks
and cylinder inventory and provide ongoing marketing and sales support. In
addition, through its nationwide distributor network, the Company can install
and service the Blue Rhino program at almost any domestic location of the
retailer.
 
  Sales Support. The Company's retail sales organization is divided into four
regions and includes seven corporate sales executives supported by a network
of approximately 500 independent sales representatives and grocery brokers.
This sales force is responsible for selling the Blue Rhino program to targeted
retailers and developing value-added relationships with manufacturers of
grills and other barbecue-related products. Blue Rhino's sales managers
analyze sales volume by location and coordinate promotions to maximize sales
opportunities.
 
  Systems Support. Through the use of its electronic accounting software
BREAS, the Company provides accurate, timely customized invoices and can
provide EDI to relieve store managers of processing invoices generated by a
local propane distributor. The Company, through the use of its Online Account
Sales Information System ("OASIS"), is capable of providing retailers with
detailed information regarding sales trends at each of its Blue Rhino
locations.
 
  Customer Service. The Company places a high priority on customer service and
as a result has hired a telemarketing service company, Ruppman Marketing
Technologies, Inc. ("Ruppman"), to provide customer and retailer assistance.
Ruppman is an experienced customer service organization which has provided
similar services to a variety of major consumer product companies, including
Saturn, Motorola Inc. and Sony Corp. By staffing this function through an
experienced outside vendor, the Company believes it provides a vital service
to its end-users while taking advantage of the cost savings associated with a
dedicated third party provider.
 
  Major Retailers. The Company depends upon its relationships with a limited
number of major retailers for a significant portion of its sales. Home Depot,
Lowe's and Wal*Mart each represented in excess of 15% of the Company's sales
for fiscal 1998. These retailers, as a group, represented approximately 58% of
the Company's sales for fiscal 1998 with Home Depot representing 26% of the
Company's sales for the period. As a result, the Company's success depends, in
part, upon the business success and growth of such retailers and such
retailers' willingness to offer Blue Rhino cylinder exchange. Failure to
maintain relationships with any of these retailers could have a material
adverse effect on the Company's business, financial condition and results of
operations.
 
Distributor Network
 
  In an effort to build a strong national cylinder exchange program, Blue
Rhino has sought to attract experienced, well-capitalized, safety conscious
propane distributors to service its target gas grilling markets nationwide.
 
  Distributor Opportunity. Propane distributors have traditionally generated a
large part of their sales during cold weather months. Blue Rhino provides
distributors with an attractive counter-seasonal propane business and access
to major retail accounts in a growing market. The Company continually pursues
new relationships and additional locations with existing retail partners to
increase the density of each distributor's territory. Blue Rhino personnel are
experienced in regulatory matters and assist distributors in completing the
permitting and set-up process. The Company established the Distributor
Incentive Stock Option Plan (the "Distributor Option Plan") pursuant to which
it has reserved 400,000 shares of its Common Stock for issuance upon the
exercise of options granted to distributors. The Company has granted existing
distributors options to purchase 240,887 shares under the Distributor Option
Plan. The Company, through its Rhino Services, L.L.C. subsidiary, also offers
distributors a cooperative propane buying program and cylinder financing
program. The Company leases cylinder display racks and subleases handheld
computers to its distributors. The cylinder display racks are subject to
leases pursuant to which the distributors pay the Company monthly rental
payments equal to 1% of the initial purchase price of the display racks for
the term of the lease. The distributors are also responsible for maintenance,
insurance and risk of loss with respect to the subleased cylinder display
racks. The cylinder display rack leases
 
                                       8
<PAGE>
 
may be terminated by either party on 60 days notice. The distributors pay
$1.00 per month for each handheld computer which they sublease from the
Company, which is approximately $155 less than the average monthly rents the
Company pays on its leases for the handheld computers. Either party may
terminate the handheld computer subleases on 60 days notice.
 
  Distributor Standards. The Company sets standards for and continually
monitors its distributors to ensure a high level of account service.
Distributors are encouraged to develop an infrastructure sufficient to: (i)
complete customer installations within two weeks of receipt of all necessary
permits and governmental approvals; (ii) resolve stock-outs within 48 hours;
(iii) respond to emergency requests within 30 minutes; and (iv) refurbish and,
when necessary, recertify cylinders according to prescribed standards. The
Company helps ensure product quality by regularly checking on distributor
compliance with Blue Rhino refilling, packaging, safety and delivery
standards.
 
  Distributor Selection Process. Blue Rhino has selectively identified and
pursued high quality distributors through direct contacts and industry trade
forums. The Company screens all distributor candidates by reviewing credit
reports and safety records and conducting management reference checks. As a
result of this thorough selection process, Blue Rhino has replaced only two
distributors to date.
 
  Distributor Services. Blue Rhino employs business development managers to
cultivate and manage ongoing distributor relationships, address set-up and
servicing problems and provide distributors with marketing feedback and
industry updates. Blue Rhino also employs safety and training personnel who
provide set-up seminars and safety training. This continuing support allows
distributors to concentrate their efforts on opening and servicing retail
locations.
 
  Dedicated Distributors. In order to establish a presence in and rapidly
develop certain key markets, the Company has entered into distribution
agreements with five distributors dedicated solely to providing Blue Rhino
cylinder exchange. Platinum Propane, the Company's largest distributor by
locations served and sales revenues generated, covers the Company's
south/southeast, Chicago and Los Angeles markets and Ceramic Industries Inc.
serves the Houston and Dallas markets. Three recently formed distributors,
Caribou Propane, Javelina Propane and Raven Propane service the Pacific
northwest, Phoenix and New Jersey/Philadelphia markets, respectively. These
distributors are related parties to the Company.
 
  Distribution Agreements. The Company has entered into distribution
agreements with each of its 53 distributors on substantially similar terms.
Pursuant to these agreements, each distributor must meet prescribed service
standards and maintain designated amounts of liability insurance naming the
Company as an additional insured party. The agreements typically run for a
term of five years and may be terminated by the Company if, among other
things, the distributor does not meet certain required service levels. Each
agreement also includes a two-year non-compete clause in the event an
agreement is terminated.
 
  Major Distributors. Approximately 48% of the Company's retail locations are
serviced by five of the Company's 53 distributors. Sales by these key
distributors resulted in approximately 63% of the Company's revenues for
fiscal 1998. A related party, Platinum Propane Holding, L.L.C. and its
subsidiaries (collectively, "Platinum Propane") accounted for approximately
38% and Ceramic Industries, Inc. accounted for approximately 10% of the
Company's revenues, for fiscal 1998. A disruption in service by one or more of
these key distributors may adversely affect the Company's results of
operations.
 
  In connection with the Company's transition from a vertically integrated
business model to an independent distributor business model, the Company sold
most of its distribution assets to its independent distributors. In most of
these sales the purchase price was represented by a promissory note from the
distributor to the Company payable monthly over 60 months and bearing 10.5%
interest. The Company has a lien on the assets which it sold to the
distributors pursuant to security agreements which contain standard
representations and covenants intended to protect the Company's security
interest. As of July 31, 1998, seven distributors owed the Company in the
aggregate approximately $1.3 million for the purchase of distribution assets
from the Company.
 
                                       9
<PAGE>
 
Management Information Systems
 
  The Company has made a substantial investment in MIS which enhances its
ability to serve retailers and helps to differentiate the Company from other
providers of cylinder exchange and cylinder refill services. Blue Rhino's
technology utilizes highly integrated, scalable software applications which
cost-effectively support the Company's growing retail location base. The
Company's systems also allow the Company to use historical data to further
enhance the execution, service and identification of new markets and marketing
opportunities. The primary components of the Company's systems include the
following:
 
    Sales and Marketing Support System. In partnership with Information
  Management System Services ("IMSS"), a subsidiary of R.J. Reynolds Tobacco
  Company, the Company has developed and implemented a custom relational
  database and information repository known as OASIS (Online Account Sales
  Information System). This system facilitates the exchange of information
  between distributors and the Company and allows the Company to develop a
  database to track delivery and transaction statistics.
 
    Distributor Level Technology. Each distributor is electronically linked
  to the Company's accounting and database systems which allow drivers to
  provide delivery, inventory and invoicing information through handheld
  computers. This technology provides retailers with accurate and timely
  inventory and invoices and assists the distributor in avoiding location
  stock-outs.
 
    Financial Systems. The Company uses BREAS, a custom software module which
  bridges the handheld computers used by the distributors to the Company's
  accounting and financial reporting system. All delivery transaction
  information entered into the handheld computers is uploaded routinely into
  BREAS where it is validated and transmitted to the Company's accounting
  system for invoice processing. Many retailers are invoiced via EDI,
  eliminating paper processing of those transactions. The Company pays
  distributors via electronic deposits to further minimize administrative
  costs. In connection with a planned enhancement of BREAS, the system will
  be upgraded to address year 2000 compliance issues. The Company has engaged
  Integrated Solutions International, L.L.C. to upgrade BREAS and believes
  that it will be fully operational and in year 2000 compliance within the
  next six months, however any failure to complete this upgrade by January 1,
  2000 could lead to a significant disruption in the Company's ability to
  account for sales and deliveries, having a material adverse affect on the
  Company's business, financial condition and results of operations.
 
Seasonality
 
  The Company's business is subject to seasonal fluctuations, especially in
colder regions of the United States, which have caused, and are expected to
continue to cause, significant fluctuations in its quarterly results of
operations. Approximately 48.8% of the Company's sales in fiscal 1998 occurred
during its fourth quarter ending July 31, 1998. The Company anticipates that
it will continue to derive the majority of its operating revenues from the
spring and summer seasons when consumers are more likely to grill out, which
coincide with the Company's third and fourth fiscal quarters (ending April 30
and July 31, respectively). The Company's timing and rate of establishing new
retail locations and expenses incurred in anticipation of increased sales also
have caused, and may continue to cause, quarterly fluctuations in the
Company's results of operations. Accordingly, the results of operations in any
quarter will not necessarily be indicative of the results that may be achieved
for a full fiscal year.
 
Competition
 
  The grill cylinder refilling industry is highly fragmented and intensely
competitive. The Company competes primarily on the basis of quality of
product, service, perceived safety and price. The 1997 BIA Study results
indicated that approximately 79% of the retail demand for grill cylinders was
provided by traditional propane refilling stations rather than exchange. The
Company's primary competition comes from the approximately 20,000 bulk
refilling stations owned and operated by propane dealers, as well as certain
rental outlets, recreational vehicle centers and hardware stores. Major
propane providers such as AmeriGas Propane Partners, L.P. and Suburban Propane
Partners, L.P. offer cylinder exchange in limited locations and could expand
their cylinder exchange business nationally. These major propane providers
have greater resources than the Company
 
                                      10
<PAGE>
 
and may be able to undertake more extensive marketing campaigns and adopt more
aggressive pricing policies than the Company. The Company also competes with
numerous regional cylinder exchange programs which typically have operated in
one or two states. There can be no assurance that these competitors will not
expand their cylinder exchange programs nationwide. Furthermore, there can be
no assurance that the Company will be able to compete effectively with current
or future competitors or that the competitive pressures faced by the Company
will not have a material adverse effect on the Company's business, financial
condition and results of operations.
 
Governmental Regulation
 
  The storing and dispensing of propane is governed by guidelines published by
the NFPA in Pamphlets 54 and 58. Recent NFPA initiatives include a requirement
that all grill cylinders placed in use or recertified after September 30, 1998
be fitted with an overfill prevention device valve ("OPD Valve") and all grill
cylinders refilled after April 2002 have an OPD Valve. The distributor is also
governed by local laws and regulations which vary by municipality and state.
Typically, a distributor is required to obtain permits from a local fire
marshal for each location at which propane is sold. The Company's regional and
corporate staffs attempt to assist the distributors in this process whenever
feasible. The Company plays an active role in drafting model state legislation
through the National Propane Gas Association ("NPGA"), an industry
association, which attempts to make state and local legislation uniform to
provide consumers, retailers and distributors with up to date and appropriate
regulations and safety.
 
Proprietary Rights
 
  The Company has invested substantial time, effort and capital in
establishing the Blue Rhino brand name and believes that its trademarks are an
important part of its business strategy. The Company has a trademark for the
use of the Blue Rhino name and logo, the RhinoTUFF name, and trademark
applications pending for Tri-Safe and Fuel Check names. While the Company may
apply for additional trademarks or copyrights in the future, no assurance can
be given that any trademarks or copyrights will be issued, that any of the
Company's trademarks or patents will be held valid if subsequently challenged
or that others will not claim rights in or ownership of the trademarks or
copyrights and other proprietary rights held by the Company.
 
Employees
 
  As of July 31, 1998, the Company had 56 employees, of whom 17 were engaged
in sales and marketing, 11 in distributor services, five in information
systems and 23 in administration and finance. The Company has not experienced
any work stoppages and considers its relations with its employees to be good.
 
Item 2--Properties
 
  The Company's headquarters are located in Winston-Salem, North Carolina in
facilities leased by the Company from Platinum Services Corporation, an entity
affiliated with the Corporation by common ownership and control. Pursuant to
the terms of the lease, the Company pays annual rent of $82,000, plus its
allocable share of all taxes, utilities and maintenance. Although the lease
terminates, on December 31, 1998, the Company expects to renew the lease on
substantially similar terms for an additional three-year term.
 
Item 3--Legal Proceedings
 
  In the ordinary course of its business, the Company is involved in certain
pending or threatened legal proceedings from time to time. In the opinion of
management, none of such legal proceedings currently pending or threatened
will have a material effect on the financial position or results of operations
of the Company.
 
Item 4--Submission of Matters to a Vote of Security Holders
 
  The Company did not submit any matters to a vote of its security holders
during the fourth quarter of the fiscal year covered in this report.
 
                                      11
<PAGE>
 
                                    PART II
 
Item 5--Market for the Registrant's Common Equity and Related Stockholder
Matters
 
  The Common Stock of the Company has been traded on the Nasdaq National
Market under the symbol RINO since the Company's initial public offering on
May 19, 1998 (the "Initial Public Offering"). The highest and lowest closing
sale prices for the Common Stock, as reported by the Nasdaq National Market,
for the periods indicated, are set forth in the following table.
 
<TABLE>
<CAPTION>
      Fiscal 1998                                                 High     Low
      -----------                                                ------- -------
      <S>                                                        <C>     <C>
      First Quarter.............................................     --      --
      Second Quarter............................................     --      --
      Third Quarter.............................................     --      --
      Fourth Quarter............................................ $19.125 $14.375
</TABLE>
 
  As of July 31, 1998, there were approximately 54 holders of record of the
Company's Common Stock.
 
  The Company has never declared or paid any cash dividends on shares of its
Common Stock. The Company currently intends to retain its earnings for future
growth and, therefore, does not anticipate paying any cash dividends in the
foreseeable future. The payment of cash dividends in the future will be at the
discretion of the Board of Directors and may be prohibited under any then
existing financing agreements. There can be no assurance that the Company will
pay any dividends in the future.
 
  In connection with the Initial Public Offering, the Company issued a total
of 3,105,000 shares of Common Stock and received proceeds, net of underwriters
discounts and commissions and other offering expenses, of approximately $36.4
million. The Company utilized the net proceeds from the Initial Public
Offering to repay approximately $29.1 million of principal and interest on
indebtedness including approximately $16.5 million on the Company's 10.5%
Senior Discount Notes, approximately $7.0 million outstanding under the Bank
Credit Facility, approximately $3.4 million on the 1998 Stockholder Loans and
approximately $2.1 million for the purchase of cylinder displays previously
financed under an operating lease facility. The Company used approximately
$350,000 of the net proceeds to acquire assets from seven local and regional
cylinder exchange providers adding approximately 200 new accounts through
these acquisitions. The Company also used approximately $1.3 million for
general corporate purposes during the fourth quarter of fiscal 1998. As of
July 31, 1998, the remaining net proceeds from the Initial Public Offering
totaled approximately $5.9 million which the Company intends to use for
general corporate purposes, including working capital and future acquisitions.
 
Item 6--Selected Consolidated Financial Data
 
  The following selected consolidated income statement and balance sheet data
of the Company as of and for the fiscal years ended July 31, 1994, July 31,
1995, July 28, 1996, July 31, 1997 and July 31, 1998 have been derived from
the Company's 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 Supplemental Data--Consolidated Financial
Statements of the Company and Related Notes Thereto" included elsewhere
herein.
 
                                      12
<PAGE>
 
<TABLE>
<CAPTION>
                          Predecessor
                           Company(1)                     Fiscal Year
                          ------------ -------------------------------------------------------------
                            June 30,   July 31,    July 31,     July 28,     July 31,     July 31,
                              1994       1994        1995         1996         1997         1998
                          ------------ ---------   ----------   -----------  -----------  ----------
                           (in thousands, except per share and selected operating data)
<S>                       <C>          <C>         <C>          <C>          <C>          <C>
Consolidated Statement
 of Operations Data:
  Net sales--
   distributors.........     $   --     $     --   $      --    $     2,386  $    13,060  $   27,372
  Net sales--direct.....         393           56       2,728         5,830        1,151         --
                             -------    ---------  ----------   -----------  -----------  ----------
    Total net sales.....         393           56       2,728         8,216       14,211      27,372
                             -------    ---------  ----------   -----------  -----------  ----------
  Cost of sales--
   distributors.........         --           --          --          1,811        9,873      20,525
  Cost of sales--
   direct...............         126           59       3,523         6,089        1,771         --
                             -------    ---------  ----------   -----------  -----------  ----------
    Total cost of
     sales..............         126           59       3,523         7,900       11,644      20,525
                             -------    ---------  ----------   -----------  -----------  ----------
Gross profit (loss).....         267           (3)       (795)          316        2,567       6,847
                             -------    ---------  ----------   -----------  -----------  ----------
Operating expenses
 (income):
  Sales and marketing...         --           --          532         1,112        1,950       2,392
  General and
   administrative.......         228          374       2,787         3,192        3,022       3,461
  Lease income, net.....         --           --          --            (89)        (143)        (81)
  Depreciation and
   amortization.........          25            3         284           868          873       1,278
  Nonrecurring
   charges(2)...........         --           --          --          1,363          970         563
                             -------    ---------  ----------   -----------  -----------  ----------
    Total operating
     expenses...........         253          377       3,603         6,446        6,672       7,526
                             -------    ---------  ----------   -----------  -----------  ----------
Income (loss) from
 operations.............          14         (380)     (4,398)       (6,130)      (4,105)       (679)
Other expense (income):
  Interest expense......           5          --          287         1,469        1,665       1,707
  Loss on investee......         --           --          --            --           --          324
  Other (income)
   expense, net.........          (2)         --          (25)         (168)        (186)       (234)
                             -------    ---------  ----------   -----------  -----------  ----------
    Net income (loss)...     $    11    $    (380)    $(4,660)  $    (7,431) $    (5,584) $   (2,476)
                             =======    =========  ==========   ===========  ===========  ==========
    Loss applicable to
     common
     stockholders(3)....         --     $    (380) $   (5,055)  $    (8,067) $    (6,271) $   (3,072)
                             =======    =========  ==========   ===========  ===========  ==========
Loss per common share:
  Basic and diluted.....         --     $   (0.25) $    (3.09)  $     (4.96) $     (3.74) $    (1.04)
  Pro forma diluted(4)..         --           --   $    (1.08)  $     (1.72) $     (1.27) $    (0.61)
Weighted average common
 shares used in
 computing loss per
 common share:
  Basic and diluted.....         --         1,517       1,638         1,628        1,678       2,945
  Pro forma diluted(4)..         --           --        4,303         4,313        4,406       5,077
Selected Operating Data:
  Retail locations (at
   period end)..........         --           331       1,608         2,981        4,400       9,500
  Cylinder transactions
   (000's)..............         --             5         306           769        1,239       2,201
<CAPTION>
                                       July 31,    July 31,     July 28,     July 31,     July 31,
                                         1994        1995         1996         1997         1998
                                       ---------   ----------   -----------  -----------  ----------
                                                        (in thousands)
<S>                       <C>          <C>         <C>          <C>          <C>          <C>
Consolidated Balance
 Sheet Data:
  Cash and cash
   equivalents..........                $     150  $      209   $     1,126  $       325  $    5,908
  Working capital.......                      109      (3,264)        1,580          737      11,819
  Total assets..........                      631      10,424        11,897        9,974      30,470
  Long-term obligations,
   less current
   maturities...........                      518       1,361        14,174       16,110         260
  Total stockholders'
   (deficit) equity.....                     (179)     (5,149)      (13,217)     (18,488)     24,816
</TABLE>
--------
(1) Effective June 30, 1994, the assets of American Cylinder Exchange (the
    "Predecessor Company") were contributed to the Company in exchange for
    approximately 98,000 shares of Common Stock which were distributed to the
    Predecessor Company's shareholders.
 
                                      13
<PAGE>
 
(2) See Note 11 of Notes to Consolidated Financial Statements for an
    explanation of the nonrecurring charges.
(3) Includes net loss less redeemable preferred stock dividends of $395, $636,
    $687 and $596 for fiscal 1995, 1996, 1997 and 1998, respectively.
(4) The unaudited pro forma information assumes the conversion of Preferred
    Stock, Preferred Stock dividends and the exercise of warrants outstanding
    (other than the 1998 Warrants) were effective as of the beginning of the
    first year presented.
 
Item 7--Management's Discussion and Analysis of Financial Condition and
Results of Operations
 
  The following discussion and analysis should be read in conjunction with
"Item 6--Selected Consolidated Financial Data" and the Company's Consolidated
Financial Statements and Notes thereto included in Item 8 of this Form 10K.
 
Overview
 
  Blue Rhino was founded in March 1994 and has become a leading provider of
grill cylinder exchange in the United States offering consumers a convenient
means to obtain fuel for their barbecue grills. The Company originally focused
on serving markets in the southeastern United States and has since developed a
network of 53 independent distributors which deliver Blue Rhino grill cylinder
exchange to approximately 9,500 retail locations in 46 states and Puerto Rico
as of July 31, 1998. During the fiscal year ended July 31, 1998, the Company's
sales increased approximately 93% from the prior year's comparable period to
approximately $27.4 million as a result of the growth of sales at existing
locations and the addition of over 5,000 new retail locations.
 
  Since its formation, the Company has focused on creating an infrastructure
to support its nationwide cylinder exchange program. Initially, the Company
developed a vertically integrated operation, purchasing and leasing grill
cylinders, cylinder displays, filling sites, refurbishing equipment and
delivery trucks while at the same time developing a sales, marketing and MIS
infrastructure. In March 1996, the Company began to transition from a
vertically integrated business model to an independent distributor business
model in order to implement its cylinder exchange program in a more capital
efficient manner and to accelerate development of its program. At this time,
the Company began to dispose of distribution assets and to enter into
exclusive agreements with independent distributors to refurbish and refill
cylinders and service Blue Rhino's retail accounts. As a result, the Company
has significantly accelerated the growth of its nationwide service, pursued
additional retailer relationships and invested in the sales, marketing and MIS
infrastructure to support its growing cylinder exchange program. The Company
expects to focus future capital investments on cylinders, cylinder displays
and continued enhancement of its MIS. The transition to a 100% independent
distributor business model was completed in the third quarter of fiscal 1997
although some expenses related to the prior business model were incurred in
1998.
 
  The Company currently offers three types of grill cylinder transactions: (i)
like for like cylinder exchanges; (ii) cylinders with valve upgrades offering
additional safety features; and (iii) outright cylinder sales. The Company's
net sales from cylinder exchanges, cylinder upgrades and cylinder sales
comprised approximately 81%, 10% and 9%, respectively, of the Company's net
sales for fiscal 1998. The Company's suggested retail prices for cylinder
exchanges, cylinder upgrades and cylinder sales are currently $14.99, $24.99
and $39.99, respectively, although the actual prices for these transactions
may vary from retailer to retailer. The Company recognizes net sales at the
time its distributor makes a delivery at a retail location. The Company
invoices its retailers, receives payment and remits a fixed portion of this
payment to its distributors for their services. The Company's net sales growth
depends on increasing sales at existing locations and increasing the number of
new retail locations that it serves. Other factors which influence net sales
include seasonality, consumer awareness, weather conditions, new grill sales,
alternative uses for grill cylinders, promotional activities and advertising.
 
  The Company's cost of sales are comprised of a fixed charge per cylinder
transacted which is paid to distributors based upon the type of transaction
and determined on a contractual basis. Cylinder sales have the
 
                                      14
<PAGE>
 
highest cost of sales per unit while cylinder exchanges have the lowest cost
of sales. Selling and marketing expenses are primarily comprised of
compensation, commissions and promotional and travel costs. General and
administrative expenses are primarily comprised of compensation, professional
fees, rent, software development and travel costs. Lease income, net is
comprised of revenue from cylinder displays and certain plant facilities and
equipment leased to distributors offset by rent expense paid by the Company to
lease the cylinder displays under an operating lease. Depreciation and
amortization consist primarily of depreciation of cylinder displays and to a
lesser extent, depreciation on equipment, buildings, computer hardware and
software and amortization of intangibles. Operating expenses also include non-
recurring charges of approximately $1.4 million, $1.0 million and $563,000
incurred during fiscal 1996, 1997 and 1998, respectively, as the Company
transitioned from a vertically integrated business model to its present
independent distributor business model. The Company does not anticipate
incurring any additional charges in connection with this transition. In
connection with our $635,000 convertible loan to Bison Valve, L.L.C. ("Bison
Valve") we recognized a charge of $324,000 during the fourth quarter of fiscal
1998 related to losses incurred by Bison Valve. This charge reflects the
application of the equity method of accounting to our convertible loan.
 
  While the Company believes that it has created the infrastructure necessary
to support a nationwide cylinder exchange program, development of this
infrastructure has resulted in an accumulated deficit of approximately $21.5
million as of July 31, 1998. This has resulted in a net operating loss
carryforward for federal income tax purposes of approximately $19.9 million
which is available to be used to offset future taxable income, if any. Based
on the Company's history of operating losses, the Company has recorded a
valuation allowance to the full extent of its net deferred tax asset.
 
Results of Operations
 
  The following table sets forth, for the periods indicated, the percentage
relationship of certain items from the Company's statement of operations to
net sales. Due to the Company's change in its business model and its rapid
sales growth, any trends reflected by the following table may not be
indicative of future results.
 
<TABLE>
<CAPTION>
                                                    Percentage of total Net
                                                             Sales
                                                   ----------------------------
                                                       Fiscal Year Ended
                                                   ----------------------------
                                                   July 28,  July 31,  July 31,
                                                     1996      1997      1998
                                                   --------  --------  --------
<S>                                                <C>       <C>       <C>
Total net sales...................................  100.0%    100.0%    100.0%
Total cost of sales...............................   96.2      81.9      75.0
                                                    -----     -----     -----
Gross margin......................................    3.8      18.1      25.0
                                                    -----     -----     -----
Operating expenses (income):
  Sales and marketing.............................   13.5      13.7       8.7
  General and administrative......................   38.9      21.3      12.7
  Lease income, net...............................   (1.1)     (1.0)     (0.3)
  Depreciation and amortization...................   10.6       6.1       4.7
  Nonrecurring charges............................   16.5       6.8       1.7
                                                    -----     -----     -----
    Total operating expenses......................   78.4      46.9      27.5
                                                    -----     -----     -----
Loss from operations..............................  (74.6)    (28.8)     (2.5)
Other expense (income):
  Interest expense................................   17.8      11.7       6.2
  Loss on investee................................    --        --        1.2
  Other income, net...............................   (2.0)     (1.3)     (0.9)
                                                    -----     -----     -----
Net loss..........................................  (90.4)%   (39.2)%    (9.0)%
                                                    =====     =====     =====
As a percentage of total net sales
  Net sales--distributors.........................   29.0%     91.9%    100.0%
  Net sales--direct...............................   71.0%      8.1%      --
Total gross margin................................    3.8%     18.1%     25.0%
  Gross margin of net sales--distributors.........   24.1%     24.4%     25.0%
  Gross loss of net sales--direct.................   (4.4)%   (53.9)%     --
</TABLE>
 
 
                                      15
<PAGE>
 
Comparison of Years Ended July 31, 1997 and 1998
 
  Net sales. Net sales consist of net sales from the Company's current
independent distributor network ("net sales--distributors") and to a lesser
extent to the Company's previous vertically integrated distribution operations
("net sales--direct"). During the third quarter of fiscal 1997, the Company
completed its transition to the independent distributor business model and, as
a result, all of the Company's net sales during fiscal 1998 were, and for the
foreseeable future will be, net sales--distributors. Total net sales increased
92.6% from approximately $14.2 million for fiscal 1997 to approximately $27.4
million for fiscal 1998. Net sales--distributors increased 109.6% from
approximately $13.1 million in fiscal 1997 to approximately $27.4 million in
fiscal 1998. The increase in net sales--distributors was due primarily to the
increase in the number of retail locations placed in service and the
corresponding increase in the number of cylinder transactions during the
period. The installed base of retail locations increased 116.0% from
approximately 4,400 locations at July 31, 1997 to approximately 9,500
locations at July 31, 1998. The number of cylinders transacted increased 77.6%
from approximately 1.2 million units in fiscal 1997 to approximately 2.2
million units in fiscal 1998.
 
  Gross margin. Gross margin increased from 18.1% in fiscal 1997 to 25.0% in
fiscal 1998. This increase was due to the shift in net sales from a vertically
integrated business model to an independent distributor business model. With
respect to net sales--distributors, gross margin increased from 24.4% in
fiscal 1997 to 25.0% in fiscal 1998. This increase was due to a shift in the
mix of cylinders transacted, with lower margin cylinder sales accounting for a
smaller percentage of total net sales than in previous years as well as a
price increase, which became effective April 1, 1998 on all cylinder
transactions.
 
  Sales and marketing expenses. Sales and marketing expenses increased 22.7%
from approximately $2.0 million in fiscal 1997 to approximately $2.4 million
in fiscal 1998 but decreased as a percentage of total net sales from 13.7% in
fiscal 1997 to 8.7% in fiscal 1998. The increase in absolute sales and
marketing expense was due primarily to additional commissions to outside
brokers, which are based on a percentage of net sales. The decrease in sales
and marketing expenses as a percentage of net sales was due primarily to the
fact that a significant portion of the compensation of the Company's sales and
marketing staff is fixed and, as a result, sales and marketing expenses
increased at a slower rate than net sales.
 
  General and administrative expenses. General and administrative expenses
increased 18.8% from approximately $3.0 million in fiscal 1997 to
approximately $3.5 million in fiscal 1998 but decreased as a percentage of
total net sales from 21.3% in fiscal 1997 to 12.7% in fiscal 1998. The
increase in absolute general and administrative expenses was due primarily to
additional compensation costs. The decrease in general and administrative
expense as a percentage of net sales was due primarily to the fact that a
significant portion of compensation is fixed and, as a result, general and
administrative expenses increased at a slower rate than net sales.
 
  Lease income, net. Gross lease income for fiscal 1997 and 1998 increased
from approximately $295,000 to $566,000, respectively, while gross rent
expense for the same period increased from approximately $152,000 to $485,000.
The increase in lease income was due to the implementation of a plant facility
and equipment lease with a distributor during the second quarter of fiscal
1997 and the addition of new retail locations resulting in an increase in the
number of cylinder displays under lease. The increase in rent expense was due
primarily to the increase in the number of cylinder displays purchased under
an operating lease facility was initiated in the first quarter of fiscal 1997.
The Company purchased all of the assets leased pursuant to the lease facility
and terminated the lease facility in May 1998 with proceeds of the Initial
Public Offering.
 
  Depreciation and amortization. Depreciation and amortization increased from
approximately $873,000 in fiscal 1997 to approximately $1.3 million in fiscal
1998. Depreciation expense increased by $337,000 from $764,000 in fiscal 1997
to $1.1 million in fiscal 1998 principally due to the purchase of additional
cylinder display panels and the acquisition of computer technology under
capital leases. Amortization expense increased by approximately $68,000 from
approximately $109,000 in fiscal 1997 to approximately $177,000 in fiscal 1998
principally due to increased goodwill amortization associated with the
acquisitions of retail locations from local and regional cylinder exchange
providers.
 
                                      16
<PAGE>
 
  Nonrecurring charges. Nonrecurring charges decreased from approximately
$970,000 in fiscal 1997 to approximately $476,000 for fiscal 1998.
Nonrecurring charges are associated with the Company's transition from a
vertically integrated business model to an independent distributor business
model and consist primarily of the write-down of facilities and equipment
purchased to support the vertically integrated business model.
 
  Loss on investee. Loss on investee was $324,000 in fiscal 1998 which
reflects the application of the equity method of accounting to our convertible
loan to Bison Valve. A loss was recorded because Bison Valve used the proceeds
of our loan to fund losses incurred primarily in researching, developing,
marketing and producing an overfill prevention device and other propane
related products. We have signed a letter of intent to acquire all
intellectual property and other assets of Bison Valve related to its overfill
prevention device.
 
  Interest expense. Interest expense remained relatively constant at
approximately $1.7 million for fiscal 1997 and 1998. Interest expense was
attributed to accretion of interest on the Company's 10.5% Senior Discount
Notes (the "Senior Discount Notes") issued in October 1995, additional
borrowings under lines of credit and, to a lesser extent, borrowings from
stockholders. However, these debts were paid in full in May 1998 with proceeds
from the Initial Public Offering, eliminating the incurrence of additional
interest expense.
 
  Other income, net. Other income, net increased from approximately $186,000
in fiscal 1997 to approximately $234,000 in fiscal 1998. Other income, net
consists primarily of interest income from various notes receivable and excess
cash balances.
 
Comparison of Years Ended July 28, 1996 and July 31, 1997
 
  Net sales. Total net sales increased 72.9% from approximately $8.2 million
for fiscal 1996 to approximately $14.2 million for fiscal 1997. Net sales--
distributors increased from approximately $2.4 million for fiscal 1996 to
approximately $13.1 million for fiscal 1997. The increase in net sales--
distributors was due primarily to the Company's transition from a vertically
integrated business model to an independent distributor business model, as
well as an increase in the number of retail locations placed in service and an
increase in the number of cylinder transactions during the period. The
installed base of retail locations increased 47.6% from approximately 3,000
locations at the end of fiscal 1996 to approximately 4,400 locations at the
end of fiscal 1997. The number of cylinders transacted increased 61.1% from
approximately 769,000 units for fiscal 1996 to approximately 1.2 million units
for fiscal 1997.
 
  Gross margin. Gross margin increased from 3.8% for fiscal 1996 to 18.1% for
fiscal 1997. This increase was due to the shift in net sales from a vertically
integrated business model to an independent distributor business model. With
respect to net sales--distributors, gross margin increased from 24.1% for
fiscal year 1996 to 24.4% for fiscal 1997.
 
  Sales and marketing expenses. Sales and marketing expenses increased 75.4%
from approximately $1.1 million for fiscal 1996 to approximately $2.0 million
for fiscal 1997 and as a percentage of total net sales increased from 13.5%
for fiscal 1996 to 13.7% for fiscal 1997. The increase in absolute sales and
marketing expenses was due primarily to additional compensation, promotional
and advertising expenditures.
 
  General and administrative expenses. General and administrative expenses
decreased 5.3% from approximately $3.2 million for fiscal 1996 to
approximately $3.0 million for fiscal 1997, and decreased as a percentage of
total net sales from 38.9% for fiscal 1996 to 21.3% for fiscal 1997. The
decrease in absolute general and administrative expenses was due to the
transition to the independent distributor business model.
 
  Lease income, net. Lease income, net increased 60.7% from $89,000 for fiscal
1996 to approximately $143,000 for fiscal 1997. The increase in lease income,
net was due to the implementation of certain plant facilities and equipment
leases with distributors during the fourth quarter of fiscal 1996 and the
second quarter of fiscal 1997 and the addition of new retail locations
resulting in an increase in the number of cylinder displays under lease.
 
                                      17
<PAGE>
 
  Depreciation and amortization. Depreciation and amortization increased from
approximately $868,000 for fiscal 1996 to approximately $873,000 for fiscal
1997.
 
  Nonrecurring charges. Nonrecurring charges are associated with the
transition to the independent distributor model and decreased from
approximately $1.4 million during fiscal 1996 the first year of the transition
to approximately $1.0 million during fiscal 1997.
 
  Interest expense. Interest expense increased from approximately $1.5 million
for fiscal 1996 to approximately $1.7 million for fiscal 1997 due to accretion
of interest on Senior Discount Notes and additional borrowings under the
Company's Bank Credit Facility.
 
  Other income--net. Other income--net increased from approximately $168,000
for fiscal 1996 to approximately $186,000 for fiscal 1997.
 
Selected Quarterly Results of Operations
 
  The Company has experienced and is expected to continue to experience
significant seasonal fluctuations in net sales and net income (loss). The
Company's net sales generally are highest in the third and fourth quarters,
which include the majority of the grilling season, and historically have been
lower in the first and second quarters which include the winter months.
Sustained periods of poor weather, particularly in the spring and summer
seasons, can negatively impact sales. The Company's rate of establishing new
retail locations and expenses incurred in anticipation of increased sales also
cause quarterly fluctuations in the Company's results of operations.
Accordingly, the results of operations in any quarter will not necessarily be
indicative of the results that may be achieved for a full fiscal year or any
future quarter.
 
  The following table sets forth selected unaudited quarterly financial
information and operating data for the last five quarters. This information
has been prepared on the same basis as the Consolidated Financial Statements
and includes, in the opinion of management, all normal and recurring
adjustments that management considers necessary for a fair statement of the
quarterly results for the periods. Given the Company's limited operating
history, seasonal demand for its product and market acceptance of cylinder
exchange by retailers and consumers, there may be significant variation in the
Company's operating results for any quarter. The operating results and data
for any quarter are not necessarily indicative of the results for future
periods.
 
                                      18
<PAGE>
 
<TABLE>
<CAPTION>
                                             Quarter Ended
                          ------------------------------------------------------
                          July 31,   October 31, January 31, April 30,  July 31,
                            1997        1997        1998       1998       1998
                          --------   ----------- ----------- ---------  --------
                                 (in thousands, except per share data)
<S>                       <C>        <C>         <C>         <C>        <C>
Total net sales.........  $ 6,702      $ 4,139     $ 4,174    $ 5,694   $13,364
Total cost of sales.....    5,160        3,154       3,216      4,322     9,832
                          -------      -------     -------    -------   -------
    Gross profit........    1,542          985         958      1,372     3,532
                          -------      -------     -------    -------   -------
Operating expenses
 (income):
  Sales and marketing...      666          564         463        563       802
  General and
   administrative.......      900          844         863        906       978
  Lease income, net.....      (19)           8          15         18      (122)
  Depreciation and
   amortization.........      251          245         270        331       432
  Nonrecurring charges..      224          281         127         99       (31)
                          -------      -------     -------    -------   -------
    Total operating
     expenses...........    2,022        1,942       1,738      1,917     1,929
                          -------      -------     -------    -------   -------
Income (loss) from
 operations.............     (480)        (957)       (780)      (545)    1,603
Other expense (income):
  Interest expense......      415          434         496        566       211
  Loss on investee......      --           --          --         --        324
  Other income, net.....      (63)         (51)        (53)       (44)      (86)
                          -------      -------     -------    -------   -------
    Net income (loss)...  $  (832)     $(1,340)    $(1,223)   $(1,067)  $ 1,154
                          =======      =======     =======    =======   =======
    Income (loss)
     applicable to
     common
     stockholders.......  $(1,010)     $(1,447)    $(1,484)   $(1,280)  $ 1,140
                          =======      =======     =======    =======   =======
Income (loss) per common
 share:
  Basic.................  $ (0.57)     $ (0.81)    $ (0.83)   $ (0.72)  $  0.18
  Diluted...............  $ (0.57)     $ (0.81)    $ (0.83)   $ (0.72)  $  0.17
  Pro forma diluted
   (1)..................  $ (0.19)     $ (0.30)    $ (0.27)   $ (0.24)  $  0.17
Weighted average common
 shares used in
 computing income (loss)
 per common share:
  Basic.................    1,779        1,779       1,779      1,779     6,407
  Diluted (2)...........    1,779        1,779       1,779      1,779     6,611
  Pro forma diluted
   (1)..................    4,464        4,464       4,464      4,464     6,611
<CAPTION>
                              Percentage of Total Net Sales Quarter Ended
                          ------------------------------------------------------
                          July 31,   October 31, January 31, April 30,  July 31,
                            1997        1997        1998       1998       1998
                          --------   ----------- ----------- ---------  --------
<S>                       <C>        <C>         <C>         <C>        <C>
Total net sales.........    100.0%       100.0%      100.0%     100.0%    100.0%
Total cost of sales.....     77.0         76.2        77.1       75.9      73.6
                          -------      -------     -------    -------   -------
    Gross margin........     23.0         23.8        22.9       24.1      26.4
Operating expenses
 (income):
  Sales and marketing...      9.9         13.6        11.1        9.9       6.0
  General and
   administrative.......     13.4         20.4        20.6       15.9       7.3
  Lease income, net.....     (0.3)         0.2         0.4        0.3      (0.9)
  Depreciation and
   amortization.........      3.7          5.9         6.5        5.8       3.2
  Nonrecurring charges..      3.5          6.8         3.0        1.8       0.4
                          -------      -------     -------    -------   -------
    Total operating
     expenses...........     30.2         46.9        41.6       33.7      16.0
                          -------      -------     -------    -------   -------
Income (loss) from
 operations.............     (7.2)       (23.1)      (18.7)      (9.6)     10.4
Other expense (income):
  Interest expense......      6.1         10.5        11.8        9.9       1.6
  Other income, net.....     (0.9)        (1.2)       (1.2)      (0.8)     (0.6)
                          -------      -------     -------    -------   -------
    Net income (loss)...    (12.4)%      (32.4)%     (29.3)%    (18.7)%     9.4%
                          =======      =======     =======    =======   =======
</TABLE>
--------
(1) The unaudited pro forma information assumes the conversion of Preferred
    Stock, Preferred Stock dividends and the exercise of Warrants outstanding
    (other than the 1998 Warrants) were effective as of the beginning of the
    first period presented.
(2) For the three months ended July 31, 1997, October 31, 1997, January 31,
    1998 and April 30, 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 Preferred Stock into common stock because
    such exercise and conversion would be anti-dilutive.
 
                                      19
<PAGE>
 
Liquidity and Capital Resources
 
  The Company's primary sources of funds have been the issuance of stock and
the incurrence of debt. The Company had positive working capital of
approximately $11.7 million as of July 31, 1998 resulting primarily from the
available proceeds from the Initial Public Offering, seasonal increase in
accounts receivable and the purchases of cylinders from distributors.
 
  Net cash used in operations was approximately $4.9 million, $2.2 million and
$5.2 million for fiscal 1998, 1997 and 1996, respectively. For all periods net
cash used in operations resulted primarily from net losses from operations as
well as increases in accounts receivable due to the seasonal nature of the
business and significant growth in sales year over year. Also, during fiscal
1998, the Company paid approximately $1.7 million to purchase cylinders from
distributors.
 
  Net cash used in investing activities was approximately $6.0 million for
fiscal 1998. Net cash provided by investing activities was approximately
$342,000 for fiscal 1997 and net cash used in investing activities was
approximately $1.4 million for fiscal 1996. Investments in property and
equipment represented the primary component of cash used in investing
activities with the exception of fiscal 1998 when cash used in acquisitions
aggregated approximately $3.6 million and the Company loaned $635,000 to Bison
Valve, L.L.C.. The primary components of cash provided from investing
activities included collections on notes receivable and proceeds from the sale
of property and equipment.
 
  Net cash provided by financing activities was approximately $16.5 million
for fiscal 1998, $1.0 million for fiscal 1997 and $7.5 million for fiscal
1996. The primary components of cash provided by financing activities included
net proceeds from the Initial Public Offering, the issuance of Senior Discount
Notes, 1998 Stockholder Loans (as hereinafter defined) and bank borrowings.
The primary components of cash used in financing activities included repayment
of the Senior Discount Notes, 1998 Stockholder Loans the purchase of
previously leased display racks and payments on various notes payable, long-
term debt and capital lease obligations.
 
  In connection with the Initial Public Offering, the Company issued a total
of 3,105,000 shares of Common Stock and received proceeds, net of underwriters
discounts and commissions and other offering expenses, of approximately $36.4
million. The Company utilized the net proceeds from the Initial Public
Offering to repay approximately $29.1 million of principal and interest on
indebtedness including approximately $16.5 million on the Company's 10.5%
Senior Discount Notes, approximately $7.0 million outstanding under the Bank
Credit Facility, approximately $3.4 million on the 1998 Stockholder Loans and
approximately $2.1 million for the purchase of cylinder displays previously
financed under an operating lease facility. The Company also used
approximately $350,000 of the net proceeds to acquire assets from seven local
and regional cylinder exchange providers adding approximately 200 new accounts
through these acquisitions. The Company also used approximately $1.3 million
for general corporate purposes during the fourth quarter of fiscal 1998. As of
July 31, 1998, the remaining net proceeds from the Initial Public Offering
totaled approximately $5.9 million which the Company intends to use for
general corporate purposes, including working capital and future acquisitions.
 
  In January 1998, four stockholders collectively loaned the Company $3.25
million (the "1998 Stockholder Loans") which bore interest at 10.5% per annum.
In connection with the Stockholder Loans, the stockholders also received
warrants (the "1998 Warrants") to purchase 81,913 shares of the Company's
Common Stock. The 1998 Warrants may be exercised prior to December 31, 2008 at
an exercise price of $13.00 per share. The 1998 Stockholder Loans were repaid
in full in May 1998 with approximately $3.4 million of the proceeds of the
Initial Public Offering.
 
  In December 1997, the Company entered into a loan agreement with
NationsBank, N.A. (the "Bank Credit Facility") which allows for maximum
borrowing of $9.0 million, including (i) a $3.0 million revolving line of
credit with a $1.0 million overadvance provision, (ii) a $1.0 million capital
expenditure line of credit and (iii) a $4.0 million acquisition line of
credit. The Bank Credit Facility is collateralized by a lien on substantially
all of the assets of the Company. The Bank Credit Facility requires the
Company to meet certain covenants, including minimum net worth and cash flow
ratios. The Bank Credit Facility was amended at July 30, 1998 to remove
 
                                      20
<PAGE>
 
certain covenants, release the guarantees of a principal stockholder and an
entity affiliated with certain principal stockholders and to waive a violation
of the cash flow ratio as of April 30, 1998. The Company was in compliance
with the amended covenants, and had no amounts outstanding under the Bank
Credit Facility, as of July 31, 1998. The loans under the Bank Credit Facility
bear interest at the prime rate plus 0.5% per annum. Any amounts outstanding
under the Bank Credit Facility are due on November 30, 1998. The Company is
presently in discussions with the lender to replace this line of credit.
 
  The Company currently leases 200 handheld computers from three lessors under
the terms of three master leases. Pursuant to a master lease agreement with
Leasing Innovations, Incorporated, the Company leases 150 handheld computers
for a term of 30 months under which the Company pays approximately $222,000 in
total annual rents. At the end of the term of the lease term, the Company may
purchase the equipment for its fair market value. Pursuant to a master lease
agreement with Nelco, Ltd., the Company leases 25 handheld computers for a
term of 42 months under which the Company pays approximately $45,000 in total
annual rents. At the end of the lease term, the Company may purchase the
equipment for $1.00 per handheld unit. The Company leases 25 handheld
computers for a term of 36 months pursuant to a master lease agreement with
Green Tree Vendor Services Corporation under which the Company pays
approximately $37,000 in total annual rents. The Company may purchase the
equipment for $1.00 per hand held unit at the end of the lease term. Under
each of the three handheld computer leases, the Company is responsible for
insurance, maintenance and taxes on the leased equipment.
 
  The Company currently leases its offices under a lease from Platinum
Services Corporation, an entity affiliated with the Company by common
ownership and control. Pursuant to the terms of the lease, the Company pays
annual rent of $82,000, plus its allocable share of all taxes, utilities, and
maintenance. Although the lease terminates on December 31, 1998, the Company
expects to renew the lease on substantially similar terms for an additional
three year term.
 
  In September 1996, the Company entered into a $3.0 million operating lease
facility with Forsythe/McArthur Associates, Inc. to finance cylinder displays
(the "Cylinder Display Lease Facility"). Under the Cylinder Display Lease
Facility, the Company leased cylinder display racks for a minimum term of 48
months. The Company purchased the display racks leased under and terminated
the Cylinder Display Lease Facility with approximately $2.1 million of the
proceeds of the Initial Public Offering in May 1998.
 
  In October 1995, the Company sold 12,575 units (the "Units") for $1,000 per
Unit, each Unit being comprised of a 10.5% Senior Discount Note due October
11, 2000 with a face value of $1,364.93 and a warrant to purchase
approximately 40 shares of Common Stock at an exercise price of approximately
$4.59 per share. The gross proceeds of the Unit offering was approximately
$12.6 million. The Senior Discount Notes were repaid in full with
approximately $16.5 million of the proceeds of, and the warrants were
converted in a cashless exercise into Common Stock in connection with, the
Initial Public Offering in May 1998.
 
  In December 1994, the Company raised approximately $6.7 million pursuant to
an offering of its Preferred Stock and warrants to purchase 318,650 shares of
Common Stock at an exercise price of $0.45 per share. The Company used the
proceeds primarily to fund development of cylinder refurbishing and
distribution plants and to establish the infrastructure for its national
cylinder exchange program. The Preferred Stock and accrued preferred dividend
were converted to Common Stock in connection with the Initial Public Offering.
 
  The Company anticipates that the total capital expenditures excluding
acquisitions for fiscal 1999 will be approximately $5.5 million, and will
relate primarily to cylinder displays, computer hardware and software
development. The Company's capital expenditure and working capital
requirements in the foreseeable future will change depending on the rate of
the Company's expansion, the Company's operating results and any other
adjustments in its operating plan as needed in response to competition,
acquisition opportunities or unexpected events. The Company believes that the
existing borrowing capacity under the Bank Credit Facility, together with the
remaining proceeds from the Initial Public Offering and cash provided by
operations, will be sufficient to meet the Company's working capital
requirements through fiscal 1999.
 
                                      21
<PAGE>
 
  There can be no assurance that the Company will not seek or require
additional capital in the future as a result of future acquisitions, expansion
or otherwise.
 
Impact of New Accounting Pronouncements
 
  Statement of Financial Accounting Standards No. 130 ("SFAS No. 130")
establishes standards for reporting and display of comprehensive income and
its components (revenues, gains, expenses, losses) in a full set of general
purpose financial statements and is effective for fiscal years beginning after
December 15, 1997. Management of the Company does not expect SFAS No. 130 to
have any impact on the Company's consolidated financial statements.
 
  In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
No. 131"). SFAS No. 131 requires public business enterprises to adopt its
provisions for periods beginning after December 15, 1997, and to report
certain information about operating segments in complete sets of financial
statements of the enterprise and in condensed financial statements of interim
periods issued to shareholders. Management of the Company does not expect SFAS
No. 131 to have any impact on the Company's consolidated financial statements.
 
  In February 1998, the Financial Accounting Standards Board issued SFAS No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits"
("SFAS No. 132"). This statement standardizes the disclosure requirements for
pensions and postretirement benefits and will require changes in disclosures
of benefit obligations and fair values of plan assets. The Company believes
SFAS No. 132 will have no effect on its consolidated financial statements as
the Company has no pension or postretirement benefit plans.
 
  In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and hedging activities. It also requires entities to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. Management of
the Company does not expect SFAS No. 133 to have any impact on the Company's
consolidated financial statements as the Company does not invest in any
derivative instruments or engage in any hedging activities.
 
Year 2000 Compliance
 
  Year 2000 issues are the result of computer programs that were written using
two digits rather than four to define the applicable year. For example, date
sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations
causing disruptions of operations, including, among other material adverse
consequences, a temporary inability to process transactions or engage in
similar normal business activities. The Company depends on its MIS to process
orders, manage inventory and accounts receivable collections, maintain
distributor and customer information, assist distributors in delivering
products on a timely basis and in maintaining cost-efficient operations. See
"Business--Management Information Systems."
 
  The Company's State of Readiness for Year 2000. The Company began the
process of evaluating its MIS for Year 2000 compliance in January 1997. The
Company is developing a Year 2000 compliance policy encompassing employee
education, testing, progress reporting, funding requirements, external impact
plans and contingency plans. The Company has assigned its Chief Information
Officer ("CIO") to implement its Year 2000 compliance policy and oversee the
remediation and testing of MIS. The Company's non-information technology
systems are also being evaluated to determine whether such systems are Year
2000 compliant. Final test procedures for Year 2000 compliance are being
developed by the CIO. Currently, the Company believes that it is approximately
50% ready for the Year 2000. By March 31, 1999, management believes the
Company itself will be 100% Year 2000 compliant. In addition, the Company
intends to have solicited Year 2000 compliance certificates from all material
third parties by such date. However, if the Company's modifications,
 
                                      22
<PAGE>
 
testing and solicitations of third party compliance are not made on a timely
basis or do not resolve Year 2000 issues facing the Company, such issues could
have a material adverse effect on the Company's operations.
 
  Historical and Estimated Costs. The Company has not established a separate
Year 2000 compliance budget and does not expect to do so in the immediate
future. To date, the Company has incurred approximately $8,000 in Year 2000
compliance costs. The Company currently anticipates that the implementation of
its Year 2000 compliance policy will cost approximately $35,000, all of which
will be expensed. Although no assurances can be given, management does not
expect future costs related to Year 2000 compliance to have a material adverse
effect on the Company's results of operations or financial condition. Costs
are based on current estimates and actual results may vary significantly from
such estimates.
 
  Most Reasonably Likely Worst Case Scenario. The most reasonably likely worst
case Year 2000 scenario facing the Company is an interruption of the Company's
business operations caused by the inadvertent failure of third parties with
which it has a material relationship to achieve Year 2000 compliance. The
consequences of such a third party failure are unknown, but could have a
material adverse effect on the Company's business. The Company is considering
several contingency plans to address possible business interruptions caused by
a non-compliant third party. Possible contingency plans include using
alternate service providers, increasing the inventory of critical raw
materials and using a manual payment and collection system. In addition, in an
effort to protect itself and increase the awareness of third parties with
which it has a material relationship, the Company is seeking to obtain
certifications from such third parties that they are Year 2000 compliant.
 
Item 7A--Quantitative and Qualitative Disclosures About Market Risk
 
  The Company is exposed to market risk related to changes in interest rates
on its borrowing under its Bank Credit Facility however the Company does not
believe these risks to be material given the low amount of borrowing under and
the short term of the Bank Credit Facility. Under the Bank Credit Facility,
the sole commitment to lend remaining outstanding is a $3.0 million revolving
line of credit which bears interest at 0.5% over the prime interest rate.
Amounts due under the revolving line of credit are due on November 30, 1998.
At July 31, 1998, the Company had no balance outstanding under its Bank Credit
Facility. While the Company may negotiate a new line of credit upon expiration
of the existing Bank Credit Facility, the Company does not expect to borrow
under the Bank Credit Facility prior to its maturity.
 
  The Company has no derivative financial instruments or derivative commodity
instruments in its cash and cash equivalents and investments. The Company
invests its cash and cash equivalents in high-quality and highly liquid
investments consisting of certificates of deposit, money market instruments
and overnight investments in high grade commercial paper. As of July 31, 1998,
the Company's cash and cash equivalents and investments consisted primarily of
taxable money market instruments, bank certificates of deposit, commercial
paper and overnight repurchase agreements with maturities of less than 35
days. The Company believes that its overall market risk exposure with respect
to the investment of its cash and cash equivalents is not material because the
overall contribution to net revenue of the Company was under 1% for fiscal
1998 and the Company does not anticipate a higher contribution percentage
during fiscal 1999.
 
  All of the Company's transactions are conducted and accounts are denominated
in United States Dollars and as such the Company does not currently have
exposure to foreign currency risk. Furthermore, the Company does not have any
direct exposure to commodity price risk.
 
                                      23
<PAGE>
 
Item 8--Financial Statements and Supplementary Data
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
                             BLUE RHINO CORPORATION
 
<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
<S>                                                                        <C>
Report of Independent Accountants.........................................  25
Consolidated Balance Sheets as of July 31, 1997 and 1998..................  26
Consolidated Statements of Operations for the Fiscal Years Ended July 28,
 1996
 and July 31, 1997 and 1998 ..............................................  27
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
 for the Fiscal Years Ended July 28, 1996 and July 31, 1997 and 1998......  28
Consolidated Statements of Cash Flows for the Fiscal Years Ended July 28,
 1996,
 and July 31, 1997 and 1998...............................................  29
Notes to Consolidated Financial Statements................................  30
</TABLE>
 
                                       24
<PAGE>
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors of and Stockholders of
 Blue Rhino Corporation:
 
  In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in stockholders' equity
(deficit) and cash flows present fairly, in all material respects, the
financial position of Blue Rhino Corporation and its subsidiaries at July 31,
1998 and 1997, and the results of their operations and their cash flows for
each of the three fiscal years in the period ended July 31, 1998, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe our
audits provide a reasonable basis for the opinion expressed above.
 
  The accompanying consolidated financial statements as of and for the year
ended July 31, 1998 have been adjusted as discussed in Note 21.
 
                                          /s/ PricewaterhouseCoopers LLP
 
PricewaterhouseCoopers LLP
Greensboro, North Carolina
September 22, 1998, except
for the information in
Note 21 for which
the date is February 8, 1999.
 
                                       25
<PAGE>
 
                             BLUE RHINO CORPORATION
 
                          CONSOLIDATED BALANCE SHEETS
 
                          As of July 31, 1997 and 1998
                (in thousands, except share and per share data)
 
<TABLE>
<CAPTION>
                          ASSETS                              1997      1998
                          ------                            --------  --------
<S>                                                         <C>       <C>
Cash and cash equivalents.................................. $    325  $  5,908
Trade accounts receivable, net.............................    3,110     7,901
Cylinder inventories.......................................      220     2,377
Notes receivable...........................................      417       540
Prepaid expenses and other current assets..................       81       487
                                                            --------  --------
    Total current assets...................................    4,153    17,213
Property and equipment, net................................    4,438     8,505
Notes receivable...........................................    1,196       789
Intangibles, net...........................................      104     3,532
Other assets...............................................       83       431
                                                            --------  --------
    Total assets........................................... $  9,974  $ 30,470
                                                            ========  ========
<CAPTION>
       LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED
         STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
       ---------------------------------------------
<S>                                                         <C>       <C>
Trade accounts payable..................................... $  2,407  $  4,421
Acquisition notes payable..................................       81       212
Current portion of long-term debt and capital lease
 obligations...............................................      165       286
Accrued liabilities........................................      763       475
                                                            --------  --------
    Total current liabilities..............................    3,416     5,394
Long-term debt, less current maturities....................   15,142       104
Notes payable to bank......................................      840       --
Capital lease obligations, less current maturities.........      128       156
                                                            --------  --------
    Total liabilities......................................   19,526     5,654
                                                            --------  --------
Commitments
Convertible redeemable preferred stock.....................    8,936       --
                                                            --------  --------
Stockholders' equity (deficit):
  Common stock, $0.001 par value, 100,000,000 shares
   authorized, 1,778,920
   and 7,630,873 shares issued and outstanding at July 31,
   1997 and 1998, respectively.............................        2         8
  Additional paid-in capital...............................      332    46,320
  Accumulated deficit......................................  (18,822)  (21,512)
                                                            --------  --------
    Total stockholders' equity (deficit)...................  (18,488)   24,816
                                                            --------  --------
    Total liabilities, convertible redeemable preferred
     stock and stockholders' equity (deficit).............. $  9,974  $ 30,470
                                                            ========  ========
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                       26
<PAGE>
 
                            BLUE RHINO CORPORATION
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
     For the Fiscal Years Ended July 28, 1996, and July 31, 1997 and 1998
                (in thousands, except share and per share data)
 
<TABLE>
<CAPTION>
                                                      Fiscal Years Ended
                                                    -------------------------
                                                     1996     1997     1998
                                                    -------  -------  -------
<S>                                                 <C>      <C>      <C>
Net sales--distributors............................ $ 2,386  $13,060  $27,372
Net sales--direct..................................   5,830    1,151      --
                                                    -------  -------  -------
    Total net sales................................   8,216   14,211   27,372
                                                    -------  -------  -------
Cost of sales:
  Cost of sales--distributors......................   1,811    9,873   20,525
  Cost of sales--direct............................   6,089    1,771      --
                                                    -------  -------  -------
    Total cost of sales............................   7,900   11,644   20,525
                                                    -------  -------  -------
    Gross profit...................................     316    2,567    6,847
                                                    -------  -------  -------
Operating expenses (income):
  Sales and marketing..............................   1,112    1,950    2,392
  General and administrative.......................   3,192    3,022    3,591
  Lease income, net................................     (89)    (143)     (81)
  Depreciation and amortization....................     868      873    1,278
  Nonrecurring charges.............................   1,363      970      476
                                                    -------  -------  -------
    Total operating expenses.......................   6,446    6,672    7,526
                                                    -------  -------  -------
    Loss from operations...........................  (6,130)  (4,105)    (679)
Other expenses (income):
  Interest expense.................................   1,469    1,665    1,707
  Loss on investee.................................     --       --       324
  Other income, net................................    (168)    (186)    (234)
                                                    -------  -------  -------
    Net loss....................................... $(7,431) $(5,584) $(2,476)
                                                    =======  =======  =======
Basic and diluted loss per common share............ $ (4.96) $ (3.74) $ (1.04)
                                                    =======  =======  =======
Weighted average common shares used in computing
 basic and diluted loss per common share...........  1,628    1,678    2,945
                                                    =======  =======  =======
</TABLE>
 
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                      27
<PAGE>
 
                             BLUE RHINO CORPORATION
 
      CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
 
      For the Fiscal Years Ended July 28, 1996 and, July 31, 1997 and 1998
                (in thousands, except share and per share data)
 
<TABLE>
<CAPTION>
                                  Common       Additional
                             -----------------  paid-in   Accumulated
                              Shares    Amount  capital     deficit    Total
                             ---------  ------ ---------- ----------- --------
<S>                          <C>        <C>    <C>        <C>         <C>
Balances, July 31, 1995..... 1,687,428   $ 2    $    20    $ (5,171)  $ (5,149)
  Cancellation of restricted
   stock for nonvested
   terminations.............   (59,735)  --          (1)        --          (1)
  Preferred dividends.......       --    --         --         (636)      (636)
  Net loss..................       --    --         --       (7,431)    (7,431)
                             ---------   ---    -------    --------   --------
Balances, July 28, 1996..... 1,627,693     2         19     (13,238)   (13,217)
  Issuance of common stock..   151,227   --       1,000         --       1,000
  Preferred dividends.......       --    --        (687)        --        (687)
  Net loss..................       --    --         --       (5,584)    (5,584)
                             ---------   ---    -------    --------   --------
Balances, July 31, 1997..... 1,778,920     2        332     (18,822)   (18,488)
  Preferred dividends.......       --              (332)       (264)      (596)
  Issuance of common stock
   in connection with
   Initial Public Offering,
   net of offering expenses
   of $4,320................ 3,105,000     3     36,042         --      36,045
  Compensation expense
   related to stock option
   plan.....................       --    --         --           50         50
  Conversion of preferred
   stock and preferred
   dividends................ 1,750,472     2      9,528         --       9,530
  Exercise of warrants......   938,789     1        --          --           1
  Issuance of common stock
   as partial consideration
   for an acquisition.......    57,692   --         750         --         750
  Net loss..................       --    --         --       (2,476)    (2,476)
                             ---------   ---    -------    --------   --------
Balances, July 31, 1998..... 7,630,873   $ 8    $46,320    $(21,512)  $ 24,816
                             =========   ===    =======    ========   ========
</TABLE>
 
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                       28
<PAGE>
 
                             BLUE RHINO CORPORATION
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
        For the Fiscal Years Ended July 28, 1996, July 31, 1997 and 1998
                (in thousands, except share and per share data)
 
<TABLE>
<CAPTION>
                                                       Fiscal Years Ended
                                                     -------------------------
                                                      1996     1997     1998
                                                     -------  -------  -------
<S>                                                  <C>      <C>      <C>
Cash flows from operating activities:
  Net loss.......................................... $(7,431) $(5,584) $(2,476)
  Adjustments to reconcile net loss to net cash used
   in operating activities:
    Accretion on senior discount notes..............   1,049    1,489    1,378
    Depreciation and amortization...................     868      873    1,278
    Nonrecurring charges............................   1,268      963      198
    Loss on investee................................     --       --       324
    Compensation expense related to Distributor
     Option Plan....................................     --       --        50
    Changes in operating assets and liabilities, net
     of business acquisitions:
      Trade accounts receivable.....................    (990)  (1,186)  (4,791)
      Cylinder inventories..........................    (473)     127   (1,726)
  Other current assets..............................      35      166     (389)
  Accounts payable..................................     624    1,045    1,516
  Accrued liabilities...............................    (120)     (85)    (261)
                                                     -------  -------  -------
        Net cash used in operating activities.......  (5,170)  (2,192)  (4,899)
                                                     -------  -------  -------
Cash flows from investing activities:
  Business acquisitions.............................     --       --    (3,640)
  Payment of organizational costs...................     --       --       (25)
  Proceeds from disposal of cylinders...............      29      340      --
  Purchases of property and equipment...............  (1,840)    (537)  (2,283)
  Proceeds from disposal of property and equipment..     360      159       65
  Issuance of note receivable.......................     --       --      (635)
  Collections on notes receivable...................      58      380      496
                                                     -------  -------  -------
        Net cash (used in) provided by investing
         activities.................................  (1,393)     342   (6,022)
                                                     -------  -------  -------
Cash flows from financing activities:
  Proceeds from issuance of common stock, net of
   expenses paid of $3,947 in 1998..................     --     1,000   36,418
  Proceeds from issuance of preferred stock.........     100      400      --
  Proceeds from issuance of senior discount notes...  12,575      --       --
  Repayment of senior discount notes................     --       --   (16,491)
  Proceeds from stockholder loans...................     --       --     3,250
  Payments of stockholder loans.....................     --       --    (3,250)
  Proceeds from notes payable to bank...............   2,700    3,995    8,411
  Payments on notes payable to bank.................  (4,900)  (3,155)  (9,251)
  Payment on cylinder display lease facility........     --       --    (2,119)
  Payments on acquisition notes payable.............    (669)     (90)    (108)
  Payment of debt issuance costs....................     (57)     (58)    (108)
  Repayment of note payable to vendor...............    (948)    (752)     --
  Payments on long-term debt and capital lease
   obligations......................................  (1,321)    (291)    (248)
                                                     -------  -------  -------
        Net cash provided by financing activities...   7,480    1,049   16,504
                                                     -------  -------  -------
Increase (decrease) in cash and cash equivalents....     917     (801)   5,583
Cash and cash equivalents at beginning of period....     209    1,126      325
                                                     -------  -------  -------
        Cash and cash equivalents at end of period.. $ 1,126  $   325  $ 5,908
                                                     -------  -------  -------
Supplemental disclosure of cash paid for:
  Interest.......................................... $   428  $   176  $   342
                                                     =======  =======  =======
</TABLE>
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                       29
<PAGE>
 
                            BLUE RHINO CORPORATION
 
              CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
 
       For the Fiscal Years Ended July 28, 1996, July 31, 1997 and 1998
                (in thousands, except share and per share data)
 
  Supplemental schedule of non-cash investing and financing activities:
 
    During the fiscal years ended July 28, 1996, and July 31, 1997 and 1998,
  the Company entered into capital lease obligations in the amounts of
  approximately $541, $243, and $306, respectively, for computers, vehicles
  and certain equipment.
 
    In connection with the conversion to an independent distributor network,
  as further discussed in Note 1, the Company consummated the following
  transactions:
 
    . During the fiscal year ended July 31, 1997, the Company transferred
      capital leases to distributors for vehicles with remaining book
      values of $351 and remaining obligations of approximately $344.
 
    . In the fiscal years ended July 31, 1997 and 1998, the Company sold
      cylinders and certain equipment aggregating approximately $310 and
      $224, respectively, in exchange for notes receivable from
      distributors (Notes 4 and 15).
 
    . In the fiscal year ended July 31, 1997, certain assets approximating
      $70 were reclassified as notes receivable.
 
  During the fiscal year ended July 31, 1998, the Company purchased certain
assets from existing cylinder exchange companies under various agreements
which have been recorded as follows (Note 5):
 
<TABLE>
      <S>                                                                <C>
      Property and equipment............................................ $  774
      Cylinders.........................................................    439
      Intangibles.......................................................  3,495
                                                                         ------
                                                                         $4,708
                                                                         ======
      Cash paid......................................................... $3,640
      Common stock issued...............................................    750
      Acquisition notes payable.........................................    318
                                                                         ------
                                                                         $4,708
                                                                         ======
</TABLE>
 
  The Company accreted preferred dividends from paid in capital and
accumulated deficit of $636, $687 and $596 for the fiscal years ended July 28,
1996, and July 31, 1997 and 1998, respectively.
 
  The Company has unpaid costs associated with its Initial Public Offering of
$373 outstanding at July 31, 1998.
 
  The Company financed the premiums on certain insurance policies in the
amount of $164.
 
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                      30
<PAGE>
 
                            BLUE RHINO CORPORATION
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                (in thousands, except share and per share data)
 
1. Description of Business and Basis of Presentation:
 
  Blue Rhino Corporation (the "Company" or "Blue Rhino") was founded in March
1994 and commenced operations on July 1, 1994. The Company has become the
leading provider of grill cylinder exchange in the United States offering
consumers a convenient means to obtain fuel for their barbecue grills. The
Company currently offers three types of grill cylinder transactions: (i) like
for like cylinder exchanges; (ii) cylinders with valve upgrades offering
additional safety features; and (iii) outright cylinder sales. The Company
originally focused on serving markets in the southeastern United States and
has since developed a network of independent distributors which deliver Blue
Rhino grill cylinder exchange to retail locations across the United States.
 
  Since its formation, the Company has focused on creating an infrastructure
to support its nationwide cylinder exchange program. Initially, the Company
developed a vertically integrated operation, purchasing and leasing grill
cylinders, cylinder displays, filling sites, refurbishing equipment and
delivery trucks while at the same time developing a sales, marketing and
management information systems ("MIS") infrastructure. In March 1996, the
Company began to transition from a vertically integrated business model to an
independent distributor business model in order to implement its cylinder
exchange program in a more capital efficient manner and to accelerate
development of its program. At this time, the Company began to dispose of
distribution assets and began to enter into exclusive agreements with
independent distributors to refurbish and refill cylinders and service Blue
Rhino's retail accounts. As a result, the Company has significantly
accelerated the growth of its nationwide service, pursued additional retailer
relationships and invested in the sales, marketing and MIS infrastructure to
support its growing cylinder exchange program. The Company expects to focus
future capital investments on cylinders, cylinder displays and continued
enhancement of its MIS. The transition to a 100% independent distributor
network was completed in the fourth quarter of fiscal 1997.
 
  While the Company believes that it has created the infrastructure necessary
to support a nationwide cylinder exchange program, development of this
infrastructure has resulted in an accumulated deficit of approximately $21.4
million as of July 31, 1998. Management believes that by leveraging the
distributors' existing infrastructure the Company has eliminated significant
capital requirements necessary to support the geographic expansion and further
penetration throughout the nation's significant demographic markets.
Management believes that the existing infrastructure and independent
distribution business model will improve future cash flows.
 
  These consolidated financial statements include the accounts of Blue Rhino
and its wholly owned subsidiaries Rhino Services, L.L.C., formed in March 1997
and CPD Associates, Inc., formed in March 1998. All intercompany transactions
and balances have been eliminated in consolidation.
 
2. Summary of Significant Accounting Policies:
 
  Revenue Recognition--Revenues are recognized upon delivery of cylinders to
customer locations. Sales returns, which are immaterial, occur principally
upon removal of cylinders and deinstallation of cylinder displays from
customer locations.
 
  Cash and Cash Equivalents--The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents. Cash equivalents consisting of certificates of deposit totaled
$115 and $1,126 at July 31, 1997 and 1998, respectively.
 
  Trade Accounts Receivable, Net--Trade accounts receivable, net include
allowances for doubtful accounts of approximately $154, and $134 at July 31,
1997 and 1998, respectively.
 
                                      31
<PAGE>
 
                            BLUE RHINO CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                (in thousands, except share and per share data)
 
  Cylinder Inventories--Cylinder inventories are valued at the lower of cost
or market determined on a first-in, first-out (FIFO) basis and represent
cylinders held for sale.
 
  Property and Equipment, Net--Property and equipment are stated at cost and
depreciated over the estimated useful lives of the related assets using the
straight-line method. The estimated useful lives are principally 30 years for
buildings and leasehold improvements, 10 years for machinery and equipment,
vehicles and cylinder displays, 5 years for computer hardware and 3 years for
computer software. Equipment leased under capital leases are amortized over
their estimated useful lives.
 
  In the event that facts and circumstances indicate that the cost of property
and equipment, or other long-lived assets may not be recoverable, the
estimated future undiscounted cash flows is compared to the asset's carrying
value and if less, an impairment loss is recognized in an amount by which the
carrying amount exceeds its fair value. As a result of changes the Company
made to its business strategy (Note 11), impairments to property and equipment
recorded in 1997 and 1998 were $736 and $196, respectively.
 
  Intangibles, net--Excess cost over fair value of assets acquired (goodwill)
is being amortized using the straight-line method, principally over 30 years.
Noncompete agreements are being amortized using the straight-line method over
the life of the agreements ranging from three to five years. The carrying
value of intangible assets is periodically reviewed by the Company, as well
as, the amortization period to determine whether the current events and
circumstances warrant adjustments to the carrying values and/or revised
estimates of useful lives. This valuation is performed using the expected
future undiscounted cash flows associated with the intangible assets compared
to the carrying value to determine if a writedown is required. To the extent
such projection indicates that the undiscounted cash flow is not expected to
be adequate to recover the carrying amounts, the assets are written down to
discounted cash flow.
 
  Advertising and Promotion--The Company expenses advertising and promotion
costs as incurred and these costs are included as sales and marketing
expenses. Advertising and promotion costs for the fiscal years ended July 28,
1996, and July 31, 1997 and 1998 were $16, $36 and $114, respectively.
 
  Income Taxes--Deferred tax assets and liabilities are determined based on
the difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. A valuation allowance is recorded when it
is more likely than not that the deferred tax asset will not be realized.
 
  Financial Instruments--Financial instruments consist of cash and cash
equivalents, accounts receivable, notes receivable, short-term debt and long-
term, variable-rate and fixed-rate debt. The Company estimates the fair value
of its long-term, fixed-rate debt using a discounted cash flow analysis based
on interest rates for similar types of debt currently available in the
marketplace. At July 31, 1997 and 1998 the carrying amounts of the Company's
financial instruments approximated their fair values.
 
  Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of temporary cash investments and trade
accounts receivable. The Company continually monitors the credit quality of
the domestic financial institutions in which temporary investments are
maintained. At times, such deposits may be in excess of the FDIC insurance
limit. The Company performs ongoing credit evaluations of its customers'
financial condition and, generally, requires no collateral from its customers.
Due to the geographic dispersion and the high credit quality of the Company's
significant customers, credit risk relating to trade accounts receivable is
limited. The Company's three largest customers accounted for approximately
46%, 58% and 58%, of sales in the fiscal years ended July 28, 1996, and July
31, 1997 and 1998 as follows:
 
                                      32
<PAGE>
 
                            BLUE RHINO CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                (in thousands, except share and per share data)
 
<TABLE>
<CAPTION>
                                                                  1996  1997  1998
                                                                  ----  ----  ----
      <S>                                                         <C>   <C>   <C>
      Customer A.................................................  30%   29%   26%
      Customer B.................................................  16    16    16
      Customer C.................................................  --    13    16
                                                                  ---   ---   ---
                                                                   46%   58%   58%
                                                                  ===   ===   ===
</TABLE>
 
Approximately 32% and 53% of trade accounts receivable at July 31, 1997 and
1998 were from these customers, respectively. If the financial condition and
operations of these customers deteriorate, the Company's operating results
could be adversely affected.
 
  Use of Estimates--The preparation of the consolidated financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities at the dates of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from these estimates.
 
  Statement of Accounting Standards not yet Adopted--Statement of Financial
Accounting Standards ("SFAS") No. 130 ("SFAS No. 130") establishes standards
for reporting and display of comprehensive income and its components
(revenues, gains, expenses, losses) in a full set of general purpose financial
statements and is effective in Fiscal 1999 for the Company. Management of the
Company does not expect SFAS No. 130 to have any impact on the Company's
Consolidated Financial Statements.
 
  In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
No. 131"). Statement 131 requires public business enterprises to adopt its
provisions for periods beginning after December 15, 1997, and to report
certain information about operating segments in complete sets of financial
statements of the enterprise and in condensed financial statements of interim
periods issued to shareholders. Management of the Company does not expect SFAS
No. 131 to have any impact on the Company's consolidated financial statements.
 
  In February 1998, the Financial Accounting Standards Board issued SFAS No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits"
("SFAS No. 132"). This statement standardizes the disclosure requirements for
pensions and postretirement benefits and will require changes in disclosures
of benefit obligations and fair values of plan assets. The Company believes
SFAS No. 132 will have no effect on its financial statements as the Company
has no pension or postretirement benefit plans.
 
  In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and hedging activities. It also requires entities to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. Management of
the Company does not expect SFAS No. 133 to have any impact on the Company's
consolidated financial statements as the Company has not invested in any
derivative instruments or engaged in any hedging activities.
 
  Reclassification--Certain prior year amounts have been reclassified to
conform to the presentation adopted in fiscal 1998.
 
                                      33
<PAGE>
 
                            BLUE RHINO CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                (in thousands, except share and per share data)
 
3. Property and Equipment, net:
 
  Property and equipment consists of the following at July 31:
 
<TABLE>
<CAPTION>
                                                                1997     1998
                                                               -------  -------
<S>                                                            <C>      <C>
Land.........................................................  $    20  $    20
Building and leasehold improvements..........................      661      661
Cylinder displays, including panel graphics..................    3,188    7,688
Machinery and equipment......................................    1,361    1,235
Computer hardware and software...............................      175      654
Equipment leased under capital leases........................      346      492
                                                               -------  -------
                                                                 5,751   10,750
Less accumulated depreciation and amortization (including $65
 and $144, respectively, for equipment under capital
 leases).....................................................   (1,313)  (2,245)
                                                               -------  -------
                                                               $ 4,438  $ 8,505
                                                               =======  =======
</TABLE>
 
  Depreciation and amortization expense for the fiscal years ended July 28,
1996, and July 31, 1997 and 1998 was $683, $764 and $1,101, respectively.
 
4. Notes Receivable:
 
  In connection with the conversion to the distributor program discussed in
Note 1, the Company has financed the sale of cylinders and certain equipment
principally to distributors, including Platinum Propane Holding, L.L.C.
("PPH") (Note 15), who now service territories previously serviced by the
Company. These notes receivable are due at various times through 2002 and are
payable monthly with interest ranging from 9.25% to 12.5%.
 
  On February 12, 1998, the Company loaned $635 to Bison Valve, L.L.C. ("Bison
Valve"), an entity formed to market, produce and sell a specialty valve to the
Company's distributors and third parties. The loan is convertible into 65% of
the membership units of Bison Valve, at $1 per unit, at the option of the
Company. In the event of non-conversion the loan accrues interest at 9.5% for
four (4) years after which the principal and accrued interest will be
amortized over two (2) years.
 
  The aggregate maturities of these notes receivable at July 31, 1998 are as
follows:
 
<TABLE>
           <S>                                         <C>
           1999....................................... $  540
           2000.......................................    350
           2001.......................................    432
           2002.......................................      7
                                                       ------
                                                       $1,329
                                                       ======
</TABLE>
 
  Interest income related to these notes for the fiscal years ended July 31,
1997 and 1998 was approximately $182 and $159, respectively. The notes
receivable from the sale of cylinders are collateralized by the cylinders.
 
5. Intangibles, net:
 
  During fiscal 1998, the Company completed a number of acquisitions (the
"Acquisitions") for approximately $4,700 in the aggregate related to assets
including cylinders, cylinder display racks and other
 
                                      34
<PAGE>
 
                            BLUE RHINO CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                (in thousands, except share and per share data)
equipment and the right, title and interest in and to sellers' retail propane
cylinder exchange accounts and locations.
 
  The aggregate purchase price was paid approximately $3,600 in cash,
initially financed with borrowings under the Bank Credit Facility and
subsequently repaid with proceeds from the Initial Public Offering, $750 in
common stock and $318 in seller financing. Acquisitions have been accounted
for under the purchase method and, accordingly, the operating results from
these acquisitions have been included in the Company's consolidated financial
statements since the dates of acquisition.
 
  Intangibles consist of the following at July 31:
 
<TABLE>
<CAPTION>
                                                                1997    1998
                                                                -----  -------
      <S>                                                       <C>    <C>
      Goodwill.................................................  $124   $3,518
      Noncompete agreements....................................   --       102
      Accumulated amortization.................................   (20)     (88)
                                                                -----  -------
                                                                $ 104  $ 3,532
                                                                =====  =======
</TABLE>
 
  Amortization expense for the fiscal years ended July 28, 1996, July 31, 1997
and 1998 was $8, $14 and $68, respectively.
 
  The following unaudited pro forma summary presents the financial information
as if the acquisitions had occurred on August 1, 1996. These pro forma results
have been prepared for comparative purposes and do not purport to be
indicative of what would have occurred had the acquisitions been made on
August 1, 1996, nor it is indicative of future results.
 
<TABLE>
<CAPTION>
                                                               1997     1998
                                                              -------  -------
      <S>                                                     <C>      <C>
      Net sales.............................................. $17,611  $28,717
                                                              =======  =======
      Net loss............................................... $(5,459) $(2,320)
                                                              =======  =======
      Net loss per common share.............................. $ (3.66) $ (0.99)
                                                              =======  =======
</TABLE>
 
6. Notes Payable to Bank:
 
  On December 18, 1997, the Company entered into a short-term loan Agreement
(the "Bank Credit Facility") which allows for maximum borrowings up to $9,000
including a $3,000 revolving line of credit based on 80% of eligible
receivables with a $1.0 million overadvance provision, a $1,000 capital
expenditures line of credit and a $4,000 acquisition line of credit. These
lines of credit mature on November 30, 1998 and bear interest at the prime
rate (8.50% at July 31, 1998) plus 0.5%. As of July 31, 1998, the Company had
no outstanding borrowings under the Bank Credit Facility.
 
  The agreement requires payment of a fee of 0.25 percent of the average
unused portion of the revolving line of credit, and requires the Company to
meet certain covenants, including minimum net worth and earnings before
interest, taxes, depreciation and amortization and restricts the level of
capital expenditures, as defined. The Company was in compliance with these
covenants as of July 31, 1998.
 
  The Bank Credit Facility was amended at July 30, 1998 to remove certain
covenants, release the guarantees of a principal stockholder and an entity
affiliated with certain principal stockholders and to waive a violation of the
cash flow ratio as of April 30, 1998.
 
                                      35
<PAGE>
 
                            BLUE RHINO CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                (in thousands, except share and per share data)
 
7. Notes Payable to Vendor and Stockholder Loans:
 
  In January 1998, several stockholders collectively loaned the Company $3,250
(the "1998 Stockholder Loans"). The 1998 Stockholder Loans were repaid in full
in May 1998, including accrued interest at 10.5% with $3,400 of the proceeds
from the Initial Public Offering. The stockholders also received Warrants to
purchase approximately .08 shares of Common Stock for every $3.00 they loaned
to the Company for a total of 81,913 shares of common stock (the "1998
Warrants"). The 1998 Warrants may be exercised prior to December 31, 2008 at a
price per share equal to $13.00.
 
  Prior to the conversion to the distributor program, the Company financed the
acquisition of certain cylinders with its primary cylinder vendor. The
original line of credit was for purchases up to approximately $1,900 and was
to be repaid in various installments including interest at prime plus 1%. The
balance due on this note was paid in full during fiscal year ended July 31,
1997.
 
8. Long-Term Debt:
 
  Long-term debt consists of the following at July 31:
 
<TABLE>
<CAPTION>
                                                                    1997   1998
                                                                   ------- ----
   <S>                                                             <C>     <C>
   Senior discount notes due October 2000......................... $15,113 $--
   Various equipment and vehicle notes and insurance premium
    financing bearing interest at rates varying from 8% to 15%,
    due in monthly installments through April 2001................      65  174
                                                                   ------- ----
                                                                    15,178  174
   Less amounts due within one year...............................      36   70
                                                                   ------- ----
                                                                   $15,142 $104
                                                                   ======= ====
</TABLE>
 
  The aggregate maturities of long-term debt at July 31, 1998 are $70, $66 and
$38 for 1999, 2000 and 2001, respectively.
 
  In October 1995, the Company issued 12,575 units, each consisting of
approximately $1 principal amount (approximately $17,200 aggregate) of senior
discount notes due in October 2000 and warrants to purchase 39.764 shares of
common stock. The gross proceeds were $12,575. The notes accreted in value at
an effective rate of 10.5% through May 1998 until they were repaid with
proceeds from the Initial Public Offering in the amount of $16,491. Each
warrant entitled the holders to acquire one share of common stock for $4.5896
per share.
 
9. Capital Lease Obligations:
 
  Capital lease obligations for computer equipment as of July 31, 1998 are as
follows:
 
<TABLE>
   <S>                                                                     <C>
   1999................................................................... $254
   2000...................................................................  157
   2001...................................................................   10
                                                                           ----
   Total minimum lease payments...........................................  421
   Less imputed interest at varying rates ranging from 11.75% to 19%......   49
                                                                           ----
   Present value of minimum lease payments................................  372
   Less current maturities................................................  216
                                                                           ----
                                                                           $156
                                                                           ====
</TABLE>
 
                                      36
<PAGE>
 
                            BLUE RHINO CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                (in thousands, except share and per share data)
 
10. Operating Leases and Other Commitments:
 
  The Company leases certain office and vehicle equipment under noncancelable
operating leases with original terms ranging from 36 to 51 months.
Additionally, the Company has a land lease with an original term of 5 years.
This lease carries 3 renewal options for periods of 5 years each.
 
  Rent expense on these facilities and equipment for the fiscal years ended
July 28, 1996 and July 31, 1997 and 1998 was $435, $44 and $21, respectively.
 
  In addition, the Company leases certain plant facilities and equipment to
distributors including PPH (Note 15). Lease income under these leases was $62,
$118 and $118 for the fiscal years ending 1996, 1997 and 1998, respectively.
 
  In September 1996, the Company entered into a $3.0 million operating lease
facility to finance cylinder displays. In May 1998, the Company repaid the
lease facility, aggregating $2,119, with proceeds from the initial public
offering. Rental expense under this lease for the fiscal years ended July 31,
1997 and 1998 was approximately $152 and $485, respectively.
 
  Lease income, net on the consolidated statements of operations is made up of
the following for the fiscal years ended:
 
<TABLE>
<CAPTION>
                                                             1996  1997   1998
                                                             ----  -----  -----
      <S>                                                    <C>   <C>    <C>
      Lease income.......................................... $(89) $(295) $(566)
      Lease expense.........................................  --     152    485
                                                             ----  -----  -----
      Net (income) expense.................................. $(89) $(143) $ (81)
                                                             ====  =====  =====
</TABLE>
 
  Future minimum lease payments at July 31, 1998 from non-cancelable operating
leases with both affiliates (Note 15) and non-affiliates with initial or
remaining terms of one year or more are $109, $41, $33, $27 and $1 for 1999,
2000, 2001, 2002 and 2003, respectively.
 
  The Company also executes operating lease agreements with its distributors
including PPH (Note 15) for cylinder displays (both leased and owned) for use
within each distributor's territory. Under these leases, the distributor
(lessee) is obligated for all maintenance, installation, deinstallation, taxes
and insurance related to the cylinder displays. The terms of the leases
continue until either party terminates upon 60 days written notice to the
other party. The monthly rental amounts are based on 1% of the original fair
market value of the cylinder displays. Lease income for the fiscal years ended
July 28, 1996 and July 31, 1997 and 1998 was approximately $27, $177 and $448,
respectively. As of July 31, 1998, estimated future minimum rental payments to
be received are approximately $664 per year through the year 2003.
 
  In December 1997, the Company entered into a service agreement with
Information Management System Services ("IMSS") whereby IMSS will provide
certain electronic data processing and telecommunications services including
the provision of customized software and hardware. Fees under the service
agreement for fiscal year ended July 31, 1998 were $306.
 
                                      37
<PAGE>
 
                            BLUE RHINO CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                (in thousands, except share and per share data)
 
11. Nonrecurring Charges:
 
  As described in Note 1, the Company made changes to its business strategy,
including the conversion to an independent distributor network. As a result,
the Company recorded certain nonrecurring charges in fiscal years ended July
28, 1996 and July 31, 1997 and 1998 as summarized below:
 
<TABLE>
<CAPTION>
                                                                1996  1997 1998
                                                               ------ ---- ----
<S>                                                            <C>    <C>  <C>
Adjust equipment, including leasehold improvements of $160,
 $447 and $0, respectively, to net realizable value........... $  814 $736 $196
Impairment of goodwill........................................    355  --   --
Severance, professional fees and other........................    194  234  280
                                                               ------ ---- ----
                                                               $1,363 $970 $476
                                                               ====== ==== ====
</TABLE>
 
  In the fiscal years ended July 28, 1996 and July 31, 1997, equipment
including vehicles, display racks, leasehold improvements of two distribution
centers, cylinders, computer equipment and filling station equipment were
written down to estimated net realizable value. Substantially all the
equipment has either been sold or physically scrapped. In the fiscal year
ended July 28, 1996, as part of the changes in business strategy it was
determined not to focus on the smaller convenience store locations due to
lower profit margins. As a result, the Company recorded an impairment of
goodwill ascribed to the convenience store locations of $355. In the fiscal
year ended July 31, 1998, the Company made a commitment to acquire new
handheld terminal technology. As a result, the Company recorded a $115
impairment adjustment to reduce the carrying value of existing handheld
terminals as the future benefit of these assets could not be fully recoverable
over their original estimated lives.
 
12. Convertible Redeemable Preferred Stock:
 
  On December 21, 1994, the Company issued 1,572,474 shares of Series A
cumulative preferred stock and warrants to purchase 318,650 shares of common
stock to investors through a private placement offering. The exercise price
for these warrants was $0.45896 per share. These warrants were exercised upon
consummation of the initial public offering (Note 13).
 
  Holders of Series A preferred stock were able to convert any portion of the
preferred shares into common shares at any time. Each share of Series A
preferred was convertible to one share of common stock. The preferred shares
had a liquidation preference equal to the liquidation value of $4.5896 as
defined in the Certificate of Incorporation. The preferred shares ranked
senior to the common stock in respect to dividend rights and had full voting
rights.
 
  The Company was required to redeem the outstanding Series A preferred shares
in equal increments semiannually between October 31, 2000 and April 30, 2002.
The redemption price was $4.5896 per share plus undeclared, accrued dividends
at a rate of 8% compounded daily of $1,031, $1,718 and $596 at July 28, 1996,
and July 31, 1997 and the period August 1, 1997 through May 18, 1998 (the date
amounts were funded through issuance of common stock in conjunction with the
initial public offering), respectively. Dividends are cumulative until
declared by the Board.
 
  In May 1998, contemporaneous with the closing of the initial public
offering, all outstanding shares of preferred stock were converted on a one
for one basis into common stock and common stock was issued in payment of
accrued preferred dividends of $2,314.
 
                                      38
<PAGE>
 
                            BLUE RHINO CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                (in thousands, except share and per share data)
 
13. Stockholders' Equity (Deficit):
 
  On November 17, 1997, the Board approved the following matters for which
stockholder consent was received effective December 31, 1997 that were
executed contemporaneously with the closing of the IPO:
 
  . A reverse stock split of 1 share of common stock for 13.225130 shares of
    the Company's common shares outstanding. The reverse stock split has been
    reflected in the average shares outstanding, shares outstanding and loss
    per share amounts in the balance sheets, statements of operations and
    changes in shareholders deficit.
 
  . The authorized shares of the Capital Stock were increased to 120,000,000
    comprised of 100,000,000 shares of Common Stock par value $0.001 per
    share and 20,000,000 shares of preferred, with terms to be determined by
    the Board.
 
  . Issue shares of common stock to the holders of outstanding warrants to
    satisfy their right to receive common stock (assuming a cashless exercise
    of their warrants).
 
  . Accelerate the vesting of all outstanding options under the 1994 Stock
    Incentive Plan.
 
  Common Stock Options and Restricted Stock--The Company has four active stock
option plans (the "Plans") and has reserved 981,853 shares of common stock for
use and distribution under terms of the Plans. Under the Plans, the Company
may, at its discretion, issue incentive or non-qualified stock options, stock
appreciation rights, restricted stock or deferred stock. The terms and
conditions of the awards made under the plans vary but, in general, are at the
discretion of the Board of Directors or its appointed committee.
 
  The 1994 Stock Incentive Plan was adopted by the Board of Directors and
approved by the stockholders in December 1994 and has 181,853 shares of Common
Stock reserved for issuance upon the exercise of Options granted thereunder.
As of July 31, 1998, Options to purchase 181,853 shares of Common Stock at a
weighted average exercise price of $6.03 per share were outstanding under the
1994 Stock Incentive Plan. All Options are vested and exercisable, however, no
Options have been exercised. These options expire 10 years from their date of
grant. No additional options, stock appreciation rights, restricted stock or
deferred stock can be granted under the 1994 Stock Incentive Plan.
 
  The 1998 Stock Incentive Plan was adopted by the Board of Directors and
approved by the stockholders in May 1998 under which 300,000 shares of Common
Stock have been reserved for issuance upon the exercise of Options granted
thereunder. As of July 31, 1998, the Company had 275,300 Options outstanding,
none of the Options are vested or exercisable. The exercise price for
outstanding Common Stock options is $13.00 per share. Pursuant to the 1998
Stock Incentive Plan, the Company may make grants of options to officers,
employees, consultants and advisors of the Company. These options vest ratably
over 5 years and expire 10 years from their date of grant.
 
  All non-employee directors are entitled to participate in the Non-Employee
Director Stock Option Plan (the "Director Option Plan"). The Director Option
Plan was adopted by the Board of Directors and approved by the stockholders in
November 1997, and became effective on May 18, 1998. The Company has reserved
100,000 shares of Common Stock for issuance under the Director Option Plan. As
of July 31, 1998, the Company has not granted any options under this plan. The
Board of Directors has approved an annual grant to each Director under the
Director Option Plan of options to purchase 4,000 shares of Common Stock at a
price per share equal to the fair market value per share of the Common Stock
as of the grant date consisting of 1,000 shares for each quarterly board
meeting such director attended during the previous year. One third of these
options will vest on each of the first three anniversaries of the grant date
and expire 10 years from their date of grant.
 
                                      39
<PAGE>
 
                            BLUE RHINO CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                (in thousands, except share and per share data)
 
  In November 1997, the Board of Directors adopted and the stockholders
approved the Distributor Incentive Stock Option Plan (the "Distributor Option
Plan") which became effective on May 18, 1998. The Company has reserved
400,000 shares of Common Stock for issuance upon the exercise of options
granted under the Distributor Option Plan. In May 1998, the Company granted
Options to purchase 240,887 shares of Common Stock to existing Blue Rhino
distributors at an exercise price equal to $13.00 per share. Blue Rhino
distributors and their stockholders, partners, members, directors, general
partners, managers, officers, employees and consultants are eligible to
receive options under the Distributor Option Plan. As of July 31, 1998 the
Company had 240,887 options outstanding, none of the Options are vested or
exercisable. Options issued under the Distributor Option Plan vest ratably
over 4 years and expire 10 years from their date of grant. For the fiscal year
ended 1997, the Company recognized compensation expense of $50 related to the
issuance of stock options under the Distributor Option Plan.
 
  The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting For Stock-Based Compensation." Accordingly, since options were
granted at fair value, no compensation cost has been recognized for stock
options granted to date. Had compensation cost for these plans been determined
for options granted since August 1, 1995 consistent with SFAS No. 123, the
Company's net loss and loss per share would have increased to the following
pro forma amounts.
 
<TABLE>
<CAPTION>
                                                      For the Fiscal Years
                                                              Ended
                                                     -------------------------
                                                      1996     1997     1998
                                                     -------  -------  -------
<S>                                                  <C>      <C>      <C>
Net loss:
  As reported....................................... $(7,431) $(5,584) $(2,369)
                                                     =======  =======  =======
  Pro forma......................................... $(7,454) $(5,649) $(2,694)
                                                     =======  =======  =======
Basic and diluted loss per common share:
  As reported....................................... $ (4.96) $ (3.74) $ (1.01)
                                                     =======  =======  =======
  Pro forma......................................... $ (4.97) $ (3.78) $ (1.12)
                                                     =======  =======  =======
</TABLE>
 
  The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for all grants: expected lives of 6 years; expected
volatility 30%; expected dividends of $0 and a risk-free interest rate of
5.5%.
 
                                      40
<PAGE>
 
                            BLUE RHINO CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                (in thousands, except share and per share data)
 
  A summary of the status of the Company's Plans at July 31, 1996, July 31,
1997 and 1998 and changes during the periods then ended is presented in the
table and narrative below:
 
<TABLE>
<CAPTION>
                                  1994                   1998               Distributor              Director
                          Stock Incentive Plan   Stock Incentive Plan       Option Plan            Option Plan
                         ---------------------- ---------------------- ---------------------- ----------------------
                                    Weighted               Weighted               Weighted               Weighted
                                    Average                Average                Average                Average
                         Shares  Exercise Price Shares  Exercise Price Shares  Exercise Price Shares  Exercise Price
                         ------- -------------- ------- -------------- ------- -------------- ------- --------------
<S>                      <C>     <C>            <C>     <C>            <C>     <C>            <C>     <C>
Shares under option:
 Outstanding at
  August 1, 1995........  43,478     $4.59          --      $  --          --      $  --          --      $ --
   Granted..............  37,731      4.79          --         --          --         --          --        --
   Exercised............     --        --           --         --          --         --          --        --
   Forfeited............   9,149      4.59          --         --          --         --          --        --
   Exercisable..........   7,183      4.59          --         --          --         --          --        --
 Weighted average fair
  value of options
  granted...............     --       1.53          --         --          --         --          --        --
 Outstanding at July
  28, 1996..............  72,060      4.70          --         --          --         --          --        --
   Granted.............. 104,044      6.69          --         --          --         --          --        --
   Exercised............     --        --           --         --          --         --          --        --
   Forfeited............  12,159      4.85          --         --          --         --          --        --
   Exercisable..........  21,399      4.67          --         --          --         --          --        --
 Weighted average fair
  value of options
  granted...............     --       2.21          --         --          --         --          --        --
 Outstanding at July
  31, 1997.............. 163,945      5.94          --         --          --         --          --        --
   Granted..............  18,887      6.61      275,300      13.00     240,887      13.00         --        --
   Exercised............     --        --           --         --          --         --          --        --
   Forfeited............     979      6.15                                                        --        --
   Exercisable.......... 181,853      6.01          --         --          --         --          --        --
 Weighted average fair
  value of options
  granted...............     --       2.69          --        5.29         --        4.77         --        --
 Outstanding at July
  31, 1998.............. 181,853      6.01      275,300      13.00     240,887      13.00         --        --
 Options available for
  grant at July 31,
  1998..................     --        --        24,700        --      159,113        --      100,000       --
</TABLE>
 
  Warrants--During fiscal 1998, the Company issued 81,913 warrants ("1998
Warrants") to stockholders in connection with loans made to the Company (Note
7). In fiscal 1997, the Company issued approximately 226,841 warrants in
connection with the cylinder display lease facility (Note 10), and the
issuance of the common stock to PPH (Note 15). In addition, during fiscal
years ended July 28, 1996 and July 31, 1995, the Company issued approximately
303,513 warrants to individuals to purchase common stock for their assistance
in connection with various debt placements. During fiscal 1998, 938,789 shares
of common stock were issued for the exercise of all outstanding warrants,
except for the 1998 Warrants, upon consummation of the initial public
offering.
 
                                      41
<PAGE>
 
                            BLUE RHINO CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                (in thousands, except share and per share data)
 
14. Loss per Share:
 
  The Company has retroactively adopted SFAS No. 128, "Earnings Per Share."
The impact of adopting this statement had no effect on loss per share for
fiscal years 1998, 1997 and 1996. The basic and diluted loss per share was
determined as follows:
 
<TABLE>
<CAPTION>
                                                          Fiscal Years Ended
                                                      ----------------------------
                                                      July 28,  July 31,  July 31,
                                                        1996      1997      1998
                                                      --------  --------  --------
<S>                                                   <C>       <C>       <C>
Basic and diluted loss per common share:
 Net loss...........................................  $(7,431)  $(5,584)  $(2,476)
 Less: Redeemable preferred stock dividends.........      636       687       596
                                                      -------   -------   -------
Loss applicable to common stockholders..............  $(8,067)  $(6,271)  $(3,072)
Weighted average common shares used in computing the
 basic and diluted loss per common share (in
 thousands).........................................    1,628     1,678     2,945
                                                      -------   -------   -------
 Basic and diluted loss per common share............  $ (4.96)  $ (3.74)  $ (1.04)
                                                      =======   =======   =======
</TABLE>
 
  Options to purchase common stock and the assumed exercise of warrants during
the fiscal years ended 1998, 1997 and 1996 have been excluded from the
computation of diluted earnings per common share as they were anti-dilutive.
 
15. Related Party Transactions:
 
  PPH, Caribou Cylinder Exchange, L.L.C. ("Caribou"), Javelina Cylinder
Exchange, L.L.C. ("Javelina") and Raven Propane, L.L.C. ("Raven Propane"), are
affiliates and operate as distributors for the Company. PPH began operations
as a distributor during fiscal 1996, while Caribou, Javelina and Raven Propane
began operations as distributors during fiscal 1998. The following represents
related party balances with these affiliates outstanding at July 28, 1996 and
July 31, 1997 and 1998, and transactions for the fiscal years then ended,
respectively:
 
<TABLE>
<CAPTION>
                                            PPH          Javelina Raven Caribou
                                    -------------------- -------- ----- -------
                                     1996   1997   1998    1998   1998   1998
                                    ------ ------ ------ -------- ----- -------
<S>                                 <C>    <C>    <C>    <C>      <C>   <C>
Notes receivable................... $1,399 $1,191 $1,072   $--    $--    $--
Trade accounts payable.............    407    648    903     33    130     33
Cost of sales--distributors........  1,561  5,319  7,889    118    381     31
Interest income....................     43    142    117    --     --     --
Lease income.......................     25    160    160      2      3      1
Issuance of common stock...........    --   1,000    --     --     --     --
Cylinder usage fee.................    --     --      51    --       3    --
Cylinder purchases.................    --     --   1,397      7     89     22
</TABLE>
 
  Certain operational and financial management services were provided to the
Company by an affiliate through common ownership. Fees for these services for
the fiscal years ended July 28, 1996 and July 31, 1997 were approximately
$519, and $154, respectively.
 
  The Company leases a facility from an affiliate under a noncancelable
operating lease which expires in December 1998. Future minimum lease payments
for the lease are $34 for the fiscal year ending 1999. Rent expense under this
lease was $22, $76, and $82 for the fiscal years ended July 28, 1996, and July
31, 1997 and 1998, respectively.
 
                                      42
<PAGE>
 
                             BLUE RHINO CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                (in thousands, except share and per share data)
 
  The Company leases a facility and certain equipment to PPH. Lease income from
PPH for the fiscal years ended July 28, 1996, July 31, 1997, and 1998 was $62,
$56, and $55, respectively.
 
  During fiscal 1998, the Company paid professional fees to Pedersen & Houpt,
P.C. ("P & H") in the amount of $401. A partner of P & H is also a director of
the Company.
 
16. Income Taxes:
 
  Due to the Company's operating losses, there is no current or deferred tax
expense for the fiscal years ended July 28, 1996, and July 31, 1997 and 1998.
 
  A reconciliation of the differences between the statutory federal income tax
rate of 34% and the effective rate of income tax expense is as follows:
 
<TABLE>
<CAPTION>
                                                          Fiscal Years Ended
                                                      --------------------------
                                                      July 28, July 31, July 31,
                                                        1996     1997     1998
                                                      -------- -------- --------
<S>                                                   <C>      <C>      <C>
Federal statutory tax rate...........................   34.0%    34.0%    34.0%
  Operating losses having no current tax benefit.....  (33.8)   (33.9)   (33.1)
  Permanent differences and other....................   (0.2)    (0.1)    (0.9)
                                                       -----    -----    -----
Effective tax rate...................................    0.0%     0.0%     0.0%
                                                       =====    =====    =====
</TABLE>
 
  The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liability are as follows at:
 
<TABLE>
<CAPTION>
                                                       July     July     July
                                                        28,      31,      31,
                                                       1996     1997     1998
                                                      -------  -------  -------
<S>                                                   <C>      <C>      <C>
Assets:
  Net operating loss carry forward................... $ 4,842  $ 6,981  $ 7,781
  Allowance for doubtful accounts....................      32       60      242
  Inventory capitalization...........................      19        4      105
  Organization costs.................................      37       24       12
  Other..............................................      34       78       23
  Depreciation and amortization......................     --         1      --
                                                      -------  -------  -------
    Total gross deferred tax assets..................   4,964    7,148    8,163
  Valuation allowance................................  (4,960)  (7,148)  (8,095)
                                                      -------  -------  -------
    Net deferred tax assets.......................... $     4  $   --   $    68
                                                      =======  =======  =======
Liability:
  Depreciation and amortization...................... $     4  $   --   $    68
                                                      =======  =======  =======
</TABLE>
 
  At July 31, 1998, the Company had a net operating loss carryforward for
federal income tax purposes of approximately $19,900 which is available to
offset future federal taxable income, if any, in varying amounts through 2013.
 
17. Defined Contribution Plan:
 
  The Company has a 401(k) plan, sponsored by an affiliate, which allows
participants to make voluntary pretax contributions, through payroll
deductions, up to 10% of total compensation, subject to Internal Revenue
Service limitations. All employees who have at least one year of service and
1,000 hours within that year of
 
                                       43
<PAGE>
 
                            BLUE RHINO CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                (in thousands, except share and per share data)
service are eligible to participate in this plan. The plan provides for
discretionary profit sharing contributions by the Company. The Company made no
contributions to the plan during fiscal 1996, 1997 and 1998.
 
18. Change in Fiscal Year End:
 
  In 1997, the Company changed from a 52-53 week year end, to a July 31 fiscal
year end. The effect of this change was not material.
 
19. Subsequent Events:
 
  The Company completed three acquisitions in August and September 1998 for
approximately $1.1 million in the aggregate related to assets including
cylinders, cylinder display racks, and right, title and interest in and to
sellers' retail propane cylinder exchange accounts and locations. These
acquisitions were funded with proceeds received from the Initial Public
Offering.
 
20. Quarterly Financial Data (unaudited):
 
<TABLE>
<CAPTION>
                                             Fiscal 1997 Quarter Ended
                                     ------------------------------------------
                                     October 31, January 31, April 30, July 31,
                                        1996        1997       1997      1997
                                     ----------- ----------- --------- --------
                                       (in thousands, except per share data)
<S>                                  <C>         <C>         <C>       <C>
Net sales...........................   $ 2,491     $ 2,018    $ 3,000  $ 6,702
                                       =======     =======    =======  =======
Gross profit........................       285         218        522    1,542
                                       =======     =======    =======  =======
Net loss............................   $(1,215)    $(1,566)   $(1,971) $  (832)
                                       =======     =======    =======  =======
Per share data:
  Basic and diluted loss per common
   share............................   $ (0.85)    $ (1.07)   $ (1.26) $  0.57)
                                       =======     =======    =======  =======
<CAPTION>
                                             Fiscal 1998 Quarter Ended
                                     ------------------------------------------
                                     October 31, January 31, April 30, July 31,
                                        1997        1998       1998      1998
                                     ----------- ----------- --------- --------
                                       (in thousands, except per share data)
<S>                                  <C>         <C>         <C>       <C>
Net sales...........................   $ 4,139     $ 4,174    $ 5,694  $13,364
                                       =======     =======    =======  =======
Gross profit........................       985         958      1,372    3,532
                                       =======     =======    =======  =======
Net income (loss)...................   $(1,340)    $(1,223)   $(1,067) $ 1,154
                                       =======     =======    =======  =======
Per share data:
  Basic income (loss) per common
   share............................   $ (0.81)    $ (0.83)   $ (0.72) $  0.18
                                       =======     =======    =======  =======
Diluted income (loss) per common
 share..............................   $ (0.81)    $ (0.83)   $ (0.72) $  0.17
                                       =======     =======    =======  =======
</TABLE>
 
21. Equity Method
 
  On February 12, 1998, the Company invested $635 in Bison Valve, L.L.C.
("Bison Valve") in the form of a convertible note receivable. The loan is
convertible into 65% of the membership units of Bison Valve, at $1 per unit,
at the option of the Company. The loan accrued interest at 9.5% for four (4)
years after which the principal and accrued interest will be amortized over
two (2) years. Bison Valve was formed to market, produce and sell a specialty
valve to the Company's distributors and third parties. The Company has
accounted for its investment in Bison Valve using the equity method of
accounting to reflect the Company's funding of certain losses incurred by this
entity primarily related to researching, developing, marketing and producing
certain propane products.
 
  The financial statements for the year ended July 31, 1998 have been revised
primarily to reflect the application of this equity method of accounting to
the operating results of the investee Bison Valve, net of the allowance
previously recorded of $130. The net effect of the revisions to the 1998
financial statements was an increase in the net loss of $107 or $0.03 per
share.
 
                                      44
<PAGE>
 
Item 9--Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
 
  None.
 
                                       45
<PAGE>
 
                                    PART III
 
Item 10--Executive Officers and Directors
 
  Executive officers and directors of the Company, and their ages as of the
date hereof are as follows:
 
<TABLE>
<CAPTION>
   Name                     Age                    Position
   ----                     ---                    --------
<S>                         <C> <C>
Billy D. Prim (1).........   43 Chairman of the Board, President and
                                 Chief Executive Officer
Andrew J. Filipowski (1)..   47 Vice Chairman
Mark Castaneda............   34 Director, Secretary and Chief Financial Officer
Kay B. Martin.............   45 Vice President, Chief Information Officer
Richard E. Belmont........   38 Vice President, Sales and Marketing
Joseph T. Culp............   41 Vice President, Partner Development
Steven D. Devick (2)(3)...   47 Director
Craig J. Duchossois
 (1)(2)...................   53 Director
Richard A. Brenner
 (2)(3)...................   35 Director
John H. Muehlstein (3)....   43 Director
</TABLE>
--------
(1) Member of the Executive Committee.
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.
 
  Billy D. Prim co-founded the Company in March 1994 and has served as its
Chief Executive Officer and Chairman of the Board since its incorporation and
as its President since January 1996. Mr. Prim also serves as President and
Chief Executive Officer and is a 51% stockholder of American Oil and Gas
Company, Inc., a North Carolina based holding company which until April 1995
was also a distributor of propane gas, home heating oil, diesel fuel and
kerosene. Mr. Prim is a director and part owner of several privately-held
companies, including Platinum Propane, Caribou Propane, Javelina Propane and
Raven Propane which act as distributors for the Company. Mr. Prim is also a
director of Bison Valve, L.L.C., a valve distributor to which the Company has
made a convertible loan, Southern Community Bank & Trust and the National
Propane Gas Association.
 
  Andrew J. Filipowski co-founded the Company in March 1994 and has served as
Vice Chairman of the Board since May 1994. Mr. Filipowski is a co-founder of
Platinum Technology, Inc. and has been its Chairman of the Board, President and
Chief Executive Officer since its formation in April 1987. Mr. Filipowski is
also a director of Platinum Entertainment, Inc., Eagle River Interactive, Inc.,
System Software Associates, Inc. and several privately-held companies including
Platinum Propane, Caribou Propane, Javelina Propane and Raven Propane which act
as distributors for the Company.
 
  Mark Castaneda has served as Chief Financial Officer since October 1997 as
Secretary since February 1998 and as a director since August 1998. Prior to
joining the Company, Mr. Castaneda served as the Vice President of Finance and
the Chief Financial Officer for All Star Gas Corporation, from July 1995 until
October 1997; as a Director of Planning and Controller of Skelgas Propane, Inc.
from May 1991 to July 1995; and as a certified public accountant with Deloitte
& Touche, LLP from June 1986 to May 1991.
 
  Kay B. Martin has served as Vice President and Chief Information Officer
since March 1997. Prior to joining the Company, Ms. Martin served as the
Director of Information Resources for R.J. Reynolds Tobacco Company from March
1988 to March 1997.
 
  Richard E. Belmont has served as Vice President of Sales and Marketing since
March 1995. Prior to joining the Company, Mr. Belmont was the product planning
manager and parts and product manager with the Char-
 
                                       46
<PAGE>
 
Broil Division of W.C. Bradley Co. from January 1990 to March 1995. Mr.
Belmont is currently a director of the BIA.
 
  Joseph T. Culp has served as Vice President of Partner Development since
November 1995. Prior to joining the Company, Mr. Culp was the general manager
of Skelgas Propane, Inc. from February 1994 to November 1995, and as a
regional manager for Suburban Propane Partners, L.P. from January 1981 to
February 1994.
 
  Steven D. Devick has served as a director since May 1994. Mr. Devick is the
founder of Platinum Entertainment, Inc. and has served as its Chairman of the
Board and Chief Executive Officer since January 1992 and as its president
since January 1996. Mr. Devick is a director of Platinum Technology, Inc., as
well as serving as an officer and director of several privately-held
companies.
 
  Craig J. Duchossois has served as a director since May 1994. Mr. Duchossois
has been the Chief Executive Officer of Duchossois Industries, Inc., a
privately-held diversified manufacturing and service company since 1995, and
previously served as its President from 1986 to 1995. Mr. Duchossois has also
served as a director of Platinum Entertainment, Inc., and currently serves as
a director of Bissell, Inc. and LaSalle National Bank as well as several
privately-held companies, including Bison Valve, L.L.C.
 
  Richard A. Brenner, has served as a director since August 1998. Mr. Brenner
has served as President of Amarr Company since July 1993. Mr. Brenner has
served on the Board of Advisors of Wachovia Bank since 1993 and also acts as a
board member for several privately-held companies.
 
  John H. Muehlstein has served as a director since September 1995. Since
1986, Mr. Muehlstein has been a partner of the law firm of Pedersen & Houpt,
P.C., legal counsel to the Company. Mr. Muehlstein also serves as a director
of Einstein/Noah Bagel Corp., SpinCycle, Inc. and several privately-held
companies.
 
Section 16(a) Beneficial Ownership Reporting Compliance
 
  Based solely on a review of the Form 3, Form 4 and Form 5 disclosure
statements furnished to the Company by its executive officers, directors and
the beneficial owners of over 10% of the Company's common stock, the Company
does not believe that any of such reports were not filed on a timely basis or
failed to report any transaction required to be reported therein.
 
Item 11--Executive Compensation
 
  The Information concerning the compensation of the Company's executive
officers and directors, contained in the sections titled Director Compensation
and Executive Compensation in the Company's definitive Proxy Statement for the
annual meeting of Stockholders which will be filed within 120 days after the
fiscal year end covered by this report are incorporated herein by reference.
 
Item 12--Principal Stockholders
 
  The Information concerning the principal stockholders of the Company,
contained in the section titled Common Stock Ownership of Directors, Executive
Officers and Certain Beneficial Owners in the Company's definitive Proxy
Statement for the annual meeting of Stockholders which will be filed within
120 days after the fiscal year end covered by this report are incorporated
herein by reference.
 
Item 13--Certain Transactions
 
  The Information concerning certain transactions to be disclosed pursuant to
Rule 404, contained in the section titled Certain Transactions in the
Company's definitive Proxy Statement for the annual meeting of Stockholders
which will be filed within 120 days after the fiscal year end covered by this
report are incorporated herein by reference.
 
                                      47
<PAGE>
 
                                    PART IV
 
Item 14--Exhibits, Financial Statement Schedules and Reports on Form 8-K
 
  (a) The following documents are filed as part of this report:
 
    (1) Consolidated Financial Statements of the Company are included in
        Part II, Item 8:
 
      Report of Independent Accountants
 
      Consolidated Balance Sheets
 
      Consolidated Statements of Operations
 
      Consolidated Statements of Changes in Stockholders' (Deficit) Equity
 
      Consolidated Statements of Cash Flows
 
      Notes to Consolidated Financial Statements
 
    (2) Financial Statement Schedules
 
      None of the financial statement schedules set forth in the
      applicable accounting regulations of the Commission are required to
      be made a part of this report under the applicable instructions to
      such regulations.
 
    (3) Exhibits
 
      See the Exhibit Index following the Signature Page, which is
         incorporated herein by reference.
 
  (b) Reports on Form 8-K
 
    The Company did not file any reports on Form 8-K during the last
    quarter of the period covered by this report.
 
                                       48
<PAGE>
 
                                   SIGNATURES
 
  Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
 
                                          Blue Rhino Corporation
 
                                                    /s/ Billy D. Prim
                                          By: _________________________________
                                                       Billy D. Prim
                                             Chairman, President and Chief
                                              Executive Officer
 
Date: February 9, 1999
 
  Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated.
 
<TABLE>
<CAPTION>
             Signature                           Title                    Date
             ---------                           -----                    ----
<S>                                  <C>                           <C>
        /s/ Billy D. Prim            Chairman, President and        February 9, 1999
____________________________________  Chief Executive Officer
           Billy D. Prim              (Principal Executive
                                      Officer)
 
        /s/ Mark Castaneda           Secretary, Chief Financial     February 9, 1999
____________________________________  Officer and Director
           Mark Castaneda             (Principal Financial and
                                      Accounting Officer)
 
     /s/ Andrew J. Filipowski        Vice Chairman of the Board     February 9, 1999
____________________________________
        Andrew J. Filipowski
 
     /s/ Craig J. Duchossois         Director                       February 9, 1999
____________________________________
        Craig J. Duchossois
 
       /s/ Steven D. Devick          Director                       February 9, 1999
____________________________________
          Steven D. Devick
 
      /s/ John H. Muehlstein         Director                       February 9, 1999
____________________________________
         John H. Muehlstein
 
      /s/ Richard A. Brenner         Director                       February 9, 1999
____________________________________
         Richard A. Brenner
 
</TABLE>
 
                                       49
<PAGE>
 
                                    EXHIBITS
 
<TABLE>
<CAPTION>
 Exhibit
 Number                       Description of Exhibit
 -------                      ----------------------
 <C>     <S>                                                                <C>
  3.1    Second Amended and Restated Certificate of Incorporation of the
         Company, incorporated by reference to Exhibit 3.1 to the
         Company's Report on Form 10-Q dated July 2, 1998.
  3.2    Amended and Restated Bylaws of the Company, incorporated by
         reference to Exhibit 3.2 to the Company's Registration Statement
         on Form S-1 dated May 18, 1998.
  4.1    Form of Certificate of Common Stock of the Company, incorporated
         by reference to Exhibit 4.1 to the Company's Registration
         Statement on Form S-1 dated May 18, 1998.
 10.1(a) Loan Agreement, dated as of December 18, 1997, between the
         Company and NationsBank, N.A., incorporated by reference to
         Exhibit 10.1(a) to the Company's Registration Statement on Form
         S-1 dated May 18, 1998.
 10.1(b) Security Agreement, dated as of November 26, 1997 between the
         Company and NationsBank, N.A., incorporated by reference to
         Exhibit 10.1(b) to the Company's Registration Statement on Form
         S-1 dated May 18, 1998.
 10.1(c) Amendment to Loan Agreement dated July 30, 1998 between the
         Company and NationsBank, N.A., incorporated by reference to
         Exhibit 10.1(c) to the Company's Registration Statement on Form
         S-1 dated September 30, 1998.
 10.2    Note Purchase Agreement, dated as of January 1, 1998, among the
         Company and Craig J. Duchossois, Andrew Filipowski, James
         Liautaud and Lennard Carlson, incorporated by reference to
         Exhibit 10.2 to the Company's Registration Statement on Form S-1
         dated May 18, 1998.
 10.4(a) Asset Purchase Agreement, dated as of December 9, 1997, between
         the Company and Bison Propane Bottle Exchange, LLC, incorporated
         by reference to Exhibit 10.4(a) to the Company's Registration
         Statement on Form S-1 dated May 18, 1998.
 10.4(b) First Amendment to the Asset Purchase Agreement, dated as of
         December 10, 1997, between the Company and Bison Propane Bottle
         Exchange, LLC, incorporated by reference to Exhibit 10.4(b) to
         the Company's Registration Statement on Form S-1 dated May 18,
         1998.
 10.5    Multi-Draw Convertible Secured Promissory Note, dated as of
         February 12, 1998, by Bison Valve, L.L.C. to the Company,
         incorporated by reference to Exhibit 10.5 to the Company's
         Registration Statement on Form S-1 dated May 18, 1998.
 10.6    Collateral Assignment of License Agreement, dated as of February
         12, 1998, by Bison Valve, L.L.C. to the Company, incorporated by
         reference to Exhibit 10.6 to the Company's Registration
         Statement on For S-1 dated May 18, 1998.
 10.7(a) Form of Distribution Agreement of the Company and Its
         Distributors, incorporated by reference to Exhibit 10.7(a) to
         the Company's Registration Statement on Form S-1 dated May 18,
         1998.
 10.7(b) Form of Sublease of Personal Property between the Company and
         Its Distributors, incorporated by reference to Exhibit 10.7(b)
         to the Company's Registration Statement on Form S-1 dated May
         18, 1998.
 10.8(a) Form of Security Agreement to Secure the Sale of Cylinders
         between the Company and its Distributors, incorporated by
         reference to Exhibit 10.8(a) to the Company's Registration
         Statement on Form S-1 dated May 18, 1998.
 10.8(b) Form of Promissory Note Evidencing the Sale of Cylinders between
         the Company and its Distributors, incorporated by reference to
         Exhibit 10.8(b) to the Company's Registration Statement on Form
         S-1 dated May 18, 1998.
 10.9    Director Option Plan of the Company, incorporated by reference
         to Exhibit 10.12 to the Company's Registration Statement on Form
         S-1 dated May 18, 1998.
</TABLE>
 
 
                                       50
<PAGE>
 
<TABLE>
<CAPTION>
 Exhibit
  Number                       Description of Exhibit
 --------                      ----------------------
 <C>      <S>                                                               <C>
 10.10    Distributor Stock Option Plan of the Company, incorporated by
          reference to Exhibit 10.13 to the Company's Registration
          Statement on Form S-1 dated May 18, 1998.
 10.11    1994 Stock Incentive Plan of the Company, incorporated by
          reference to Exhibit 10.14 to the Company's Registration
          Statement on Form S-1 dated May 18, 1998.
 10.12    Amended and Restated Registration Rights Agreement, dated as of
          March 1, 1997, among the Company, Forsythe/Lunn Technology
          Partners, L.L.C., Platinum Propane Holding, L.L.C., the
          Purchasers of Units pursuant to the Unit Purchase Agreement
          dated October 11, 1995 and the Purchasers of the Company's
          Series A Convertible Participating Preferred Stock,
          incorporated by reference to Exhibit 10.15 to the Company's
          Registration Statement on Form S-1 dated May 18, 1998.
 10.13    1998 Stock Incentive Plan of the Company, incorporated by
          reference to Exhibit 10.18 to the Company's Registration
          Statement on Form S-1 dated May 18, 1998.
 10.14    Real Estate Lease between the Company and Platinum Services
          Corporation dated as of January 1, 1996, incorporated by
          reference to Exhibit 10.19 to the Company's Registration
          Statement on Form S-1 dated May 18, 1998.
 10.15(a) Master Lease dated as of February 1, 1996 between the Company
          and Nelco, Ltd., Incorporated by reference to Exhibit 10.20(a)
          to the Company's Registration Statement as Form S-1 dated May
          18, 1998.
 10.15(b) Lease Agreement dated July 30, 1996 between the Company and
          Leasing Innovations, Incorporated incorporated by reference to
          Exhibit 10.20(b) to the Company's Registration Statement as
          Form S-1 dated May 18, 1998.
 10.15(c) Lease Agreement dated June 26, 1997 between the Company and
          Green Tree Vendor Services Corporation, incorporated by
          reference to Exhibit 10.20(c) to the Company's Registration
          Statement on Form S-1 dated May 18, 1998.
 10.16    Services Agreement dated June 1, 1997 between the Company and
          Information Management Services filed as exhibit to the
          Company's report on Form 10-K dated October 29, 1998.
 10.17    Underwriting Agreement dated May 22, 1998 among the Company,
          Hambrecht & Quist, L.L.C., NationsBanc Montgomery Securities
          LLC and Dain Raucher Wessels Incorporated incorporated by
          reference to Exhibit 1.1 to the Company's Registration
          Statement on Form S-1 dated May 18, 1998.
 21.1     Subsidiaries of the Company incorporated by reference to
          Exhibit 21.1 to the Company's Registration Statement on Form S-
          1 dated May 18, 1998.
 24.1     Power of Attorney
 27.1     Financial Data Schedule
</TABLE>
 
                                       51