BLUE RHINO CORP - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED JULY 31, 2001

COMMISSION FILE NUMBER 0-14133

BLUE RHINO CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE 56-1870472
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

104 CAMBRIDGE PLAZA DRIVE
WINSTON-SALEM, NORTH CAROLINA 27104
(336) 659-6900
(Address of principal executive offices)

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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

None
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock
(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

At September 17, 2001, the aggregate market value of the registrant's
common stock held by non-affiliates of the registrant was approximately
$15,573,517.

At September 17, 2001, the number of shares outstanding of registrant's
common stock was 9,279,152.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the registrant's proxy statement with respect to the
2001 annual meeting of stockholders of the registrant have been incorporated by
reference in Part III of this Annual Report on Form 10-K.

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FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements that
relate to our plans, objectives, estimates, goals and future financial
performance. Words such as "may," "will," "should," "expects," "intends,"
"plans," "anticipates," "believes," "estimates," "predicts," "potential,"
"continue," and variations of such words and similar expressions, identify such
forward-looking statements. Our business is subject to numerous risks and
uncertainties, including our ability to place Blue Rhino cylinder exchange at
additional retail locations, our ability to integrate acquisitions, our ability
to mitigate the effects of high propane commodity prices successfully and our
ability to launch new products and services successfully. These and other risks
and uncertainties, many of which are addressed in the sections entitled
"Business -- Additional Factors that may Affect our Business and Future Results"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations," could cause our actual results, performance and developments to be
materially different from those expressed or implied by any of these
forward-looking statements.

ADDITIONAL INFORMATION

The Blue Rhino name and logo, the names RhinoTUFF(R), Tri-Safe(R),
Bison(R), Uniflame(R), UniGrill(R), DuraClay(R), GardenArt(R), America's Choice
For Grill Gas(R), Endless Summer(TM), Endless Summer Comfort(TM), Grill Gas &
Design,(TM) Harmony(TM) and ShippingSpot(TM) are our registered and pending
trademarks. This Annual Report on Form 10-K also includes trademarks of
companies other than the registrant.
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BLUE RHINO CORPORATION

INDEX

PART I
Item 1: Business.................................................... 1
Item 2: Properties.................................................. 8
Item 3: Legal Proceedings........................................... 8
Item 4: Submission of Matters to a Vote of Security Holders......... 8
PART II
Item 5: Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 9
Item 6: Selected Consolidated Financial Data........................ 10
Item 7: Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 11
Item 7A: Quantitative and Qualitative Disclosures About Market
Risk........................................................ 18
Item 8: Financial Statements and Supplementary Data................. 20
Item 9: Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 44
PART III
Item 10: Directors and Executive Officers............................ 45
Item 11: Executive Compensation...................................... 45
Item 12: Security Ownership of Certain Beneficial Owners and
Management.................................................. 45
Item 13: Certain Relationships and Related Transactions.............. 45
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 46

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PART I

ITEM 1. BUSINESS

GENERAL

We are the leading national provider of propane grill cylinder exchange as
well as a leading provider of complimentary propane and non-propane products to
consumers through many of the world's greatest retailers. Our branded propane
grill cylinder exchange service is offered at more than 27,000 retail locations
in 46 states and Puerto Rico at leading home improvement centers, mass
merchants, hardware, grocery and convenience stores, including Home Depot,
Lowe's, Wal-Mart, Sears, Kmart, Kroger, Food Lion, Winn-Dixie, SuperAmerica,
Circle K and ExxonMobil. Propane grill cylinder exchange provides consumers with
a safe and convenient alternative to traditional propane tank refilling.

We are a brand marketing company focused on increasing consumer demand,
increasing market share, managing retailer and distributor relationships and
managing our proprietary management information systems to leverage our
transactional infrastructure. Our 44 independent distributors focus on the
operational infrastructure of our cylinder exchange service including refilling,
refurbishing and direct-store delivery of grill cylinders to retailers. We
believe that our distributor network affords us the opportunity to service
approximately 90% of the cylinder exchange markets in the United States.

Our products business segment is focused on propane appliances like propane
grills and patio heaters that use grill cylinders as their fuel source in order
to increase consumer demand for grill cylinder exchange. This segment was
significantly expanded with our April 2000 acquisition of Uniflame Corporation,
an import and design company. In addition, we offer non-propane products
including charcoal grills, fireplace accessories and garden products. These
products are sold through many of the same home improvement centers and mass
merchants that offer our branded cylinder exchange service, as well as hearth
and department stores throughout the United States. Also, through our
acquisition of QuickShip, Inc. in October 2000, we offer in-store retail
shipping services, primarily at major grocery chains.

OUR MARKET

The market for propane grill cylinder exchange is a large and growing
market, which we currently estimate to be a $1 billion annual market
opportunity. We believe we can increase this market opportunity by offering new
propane appliances by importing products. Based on the 1999 Barbecue Grill Usage
and Attitude Study conducted on behalf of the Barbecue Industry Association of
America (BIA), we believe that approximately 42 million United States households
own a propane grill. The BIA reports that, since 1997, sales of propane grills
have exceeded the combined annual sales of charcoal, natural gas and electric
grills.

The BIA study also estimates that the average propane grill owner uses 1.9
cylinders of propane per year, which results in an estimated 80 million cylinder
transactions per year. According to the BIA study, propane grill cylinder
exchange, as opposed to the traditional refilling of empty cylinders, represents
approximately 25% of all cylinder transactions, an increase from less than 10%
in 1995. Our growth has come from converting consumers from the traditional
refilling of empty cylinders, which we believe still represents approximately
75% of the market, to our convenient and safe alternative of propane grill
cylinder exchange.

OUR STRATEGY

Our objective is to strengthen our position as the leading national
provider of cylinder exchange by providing the greatest value to consumers and
providing a return to our stakeholders. The key elements of our strategy to
achieve this objective are:

Increase Demand for Propane Grill Cylinder Exchange. We intend to
implement the following sub-strategies:

- Promote the Blue Rhino Brand and Consumer Awareness of Cylinder
Exchange. We have created a distinctive Blue Rhino brand name and logo
that we prominently feature on cylinder sleeves and

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display racks. In addition, we undertake brand marketing and promotional
initiatives, including point of purchase displays, print media and cooperative
advertising, and engage in cross-marketing promotions with other
barbecue-related products. We have also selectively placed targeted
broadcast and print media advertising campaigns that focus on raising
consumer awareness of our cylinder exchange program and are actively
involved with consumer, trade and regulatory associations in an effort to
promote the growth of cylinder exchange.

- Capitalize on New Overfill Prevention Device (OPD) Government
Regulations. The National Fire Protection Association (NFPA) requires
that all propane cylinders refilled after April 1, 2002 be fitted with an
OPD valve. As a result of this new safety standard many of the cylinders
that are currently being presented at refill centers will become obsolete
and the consumer will be forced to purchase or exchange for a new
cylinder that meets the safety standards. We plan to undertake a consumer
education campaign to encourage consumers to upgrade their cylinders at
one of our convenient 27,000 cylinder exchange locations. We estimate
that there are approximately 40 million cylinder valves that will become
obsolete in April 2002.

- Investment in Valve Changing Capacity. We have made a significant
investment in the specialized equipment required to increase our valve
changing capacity to satisfy the expected demand to convert non-OPD
cylinders into OPD cylinders. In May 2000, R4 Technical Center -- North
Carolina, LLC, in which we own a 49% interest, commenced operations of
an automated propane bottling and cylinder refurbishing plant.
Manchester Tank & Equipment Co. owns a 50% interest in this joint
venture, and Platinum Propane, LLC owns the remaining 1% interest in
this joint venture. We believe this facility utilizes the most advanced
technology in the industry, is the only facility of its kind in North
America and has more valve changing capacity than the rest of the
industry combined. We expect it to provide greater cost efficiencies and
quality control for refilling and refurbishing cylinders.

- Overfill Prevention Device (OPD) Valves. We expect to sell to our
distributors our Underwriters Laboratories-approved OPD valve, which
automatically stops the flow of liquid propane gas into the cylinder
when the cylinder is full, to capitalize on the market created by NFPA
standards.

- Market Propane Appliances that Use Grill Cylinders as Their Fuel
Source. In April 2000, we acquired substantially all of the assets of
Uniflame, Inc. (now Uniflame Corporation). Uniflame's core competencies
are designing and importing products, which are sold through major
retailers such as Home Depot, Lowe's, Wal-Mart and Sears. Uniflame
currently offers propane grills, patio heaters and portable patio
heaters, and we expect Uniflame to seek additional propane-fueled
products where it can ensure quality manufacturing and sell through the
same major retailers that offer the branded Blue Rhino cylinder exchange
service.

- Patio Heaters. In April 2000, we acquired substantially all of the
assets of International Propane Products, LLC, the designer and importer
of our Endless Summer patio heaters, which we began selling in December
1998. Our patio heaters use the same cylinders as propane grills, and we
believe they will increase the counterseasonal demand for cylinder
exchange. Uniflame manages the further development, marketing and sales
of patio heaters.

- Develop and Selectively Expand our Retailer Relationships. We target the
following four categories of retailers for cylinder exchange: home
centers/hardware stores, mass merchants, grocery stores and convenience
stores. Our relationships with major retailers such as Home Depot,
Lowe's, Wal-Mart, Sears, Kmart, Kroger, Food Lion, Winn-Dixie,
SuperAmerica, Circle K and ExxonMobil allow us to place cylinders in a
large number of convenient, high traffic locations. We seek to develop
and selectively expand our relationships with retailers in the following
ways:

- Expand into New Locations of our Existing Retailers. We work closely
with our largest retail accounts to coordinate the rollout of our
cylinder exchange service in conjunction with the opening of their new
locations.

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- Selectively Establish Relationships with New Retailers. We believe
there are approximately 225,000 potential grill cylinder exchange
locations in our targeted markets, of which we currently service more
than 27,000. We establish new retail relationships through direct sales
and by acquisition. During fiscal 2001, we added approximately 2,000 new
locations, net of discontinued locations. We continually review our
existing locations to ensure they meet our criteria, de-install
non-performing locations and relocate those assets to more suitable
locations.

Continuously Improve Infrastructure to Support Growth in Cylinder Exchange
Transactions. In the last five years, we have developed what we believe to be
the most advanced and efficient direct-store delivery infrastructure servicing
retailers. We will continue to invest in processes and systems to enhance our
ability to handle significant growth while minimizing incremental costs.

- Utilize Proprietary Management Information Systems (MIS) to Enhance
Efficiency. We have developed and intend to continue to enhance our
sophisticated data warehouse to streamline our operations. We furnish
each distributor with a Blue Rhino-developed handheld device that serves
as the data collection point and integrates with our desktop computer
system to allow us to provide the retailer and the distributor with a
detailed on-line transaction and inventory history as well as demand
forecasts. This system also allows us to bill and collect from retailers
through an electronic gateway, thereby eliminating data entry of
transactions and the handling of paper documents. The reporting system
enables the distributor to better manage inventory and forecast sales
volumes and reduces errors and administrative costs for both the retailer
and the distributor.

- Leverage National Distributor Network. We have also established a
network of 44 independent distributors that we believe cover
approximately 90% of the cylinder exchange markets in the United States.
We plan to leverage this network by increasing each distributor's market
penetration through increased consumer demand for cylinder exchange and
the selective addition of new retail locations. We assist our
distributors' ability to service accounts by providing cylinder and
cylinder display leasing, electronic billing systems through handheld
terminals and other information technology and by arranging for
consolidated propane purchasing, store training and retail merchandising.

Market Products and Services that Leverage our Infrastructure and Offset
our Seasonality. We expect to continue to pursue product and service
opportunities that allow us to leverage our existing corporate infrastructure
and offset the seasonality of our core propane grill cylinder exchange business.
These opportunities currently include:

- Barbecue grills, fireplace accessories and garden products. Uniflame
Corporation, our wholly owned subsidiary, currently offers the
propane-fueled products described above, as well as non-propane products
like charcoal grills, fireplace accessories and an array of garden
products, that are sold through major retailers such as Home Depot,
Lowe's, Wal-Mart and Sears. These products provide leverage with
manufacturers and offset our fixed infrastructure costs.

- Retail Shipping Services. QuickShip, Inc., another of our wholly owned
subsidiaries, offers in-store, retail shipping services that provide
consumers with a convenient, full-service, in-store postal and parcel
shipping depot and retailers with a new revenue source. We expect
QuickShip to leverage our existing corporate infrastructure and to
generate revenues during non-peak cylinder exchange periods.

COMPETITION

The grill cylinder refilling industry is highly fragmented and competitive.
Competition in our industry is based primarily upon convenience, quality of
product, service, historical relationships, perceived safety and price. The 1999
BIA study states that 75% of consumers refill their grill cylinder rather than
exchange their cylinders. Accordingly, our primary competition currently comes
from the approximately 20,000 bulk refilling stations owned and operated by
propane dealers, as well as certain rental outlets, recreational vehicle centers
and hardware stores.

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GOVERNMENTAL REGULATION

The storing and dispensing of propane is governed by guidelines published
by the National Fire Protection Association in Pamphlets 54 and 58. Recent
National Fire Protection Association initiatives include a requirement that all
grill cylinders placed in use or recertified after September 30, 1998, and all
grill cylinders refilled after April 1, 2002 must be fitted with an overfill
prevention device (OPD) valve. Our distributors are also governed by local laws
and regulations that vary by municipality and state. Typically, a distributor
must obtain permits from a local fire marshal for each propane sales location.
Our regional and corporate personnel assist the distributors in this process
whenever feasible. We play an active role in drafting model state legislation
through the National Propane Gas Association, an industry association, which
attempts to create uniform state and local legislation to provide consumers,
retailers and distributors with up-to-date safety regulations.

PROPRIETARY RIGHTS

We have invested substantial time, effort and capital in establishing the
Blue Rhino brand and believe that our trademarks are an important part of our
business strategy. The Blue Rhino name and logo, the names RhinoTUFF(R),
Tri-Safe(R), Bison(R), Uniflame(R), UniGrill(R), DuraClay(R), GardenArt(R),
America's Choice For Grill Gas(R), Endless Summer(TM), Endless Summer
Comfort(TM), Grill Gas & Design,(TM) Harmony(TM) and ShippingSpot(TM) are our
registered and pending trademarks. In addition, we have patents issued for an
Overflow Protection Valve Assembly and a Method for Reconditioning a Propane Gas
Tank, as well as certain other applications pending. While we may apply for
additional trademarks, patents or copyrights in the future, we cannot be sure
that any trademark, patent or copyright will be issued, that any of our
trademarks, patents or copyrights will be held valid if subsequently challenged
or that others will not claim rights in or ownership of our trademarks, patents
or copyrights and other proprietary rights.

SEASONALITY

We have experienced and expect to continue to experience significant
seasonal fluctuations in our revenues and net income (loss). Historically, our
revenues have been highest in our third and fourth fiscal quarters, which
include the majority of the grilling season, and lowest in our first and second
fiscal quarters, which include the winter months. Our acquisition of Uniflame
has, however, resulted in increased revenues in our first and second fiscal
quarters, which include the months in which Uniflame historically has shipped
the majority of its products. Sustained periods of poor weather, particularly in
the spring and summer seasons, could negatively impact our revenues.
Accordingly, the results of operations in any quarter will not necessarily be
indicative of the results that we may achieve for a full fiscal year or any
future quarter.

EMPLOYEES

As of September 17, 2001, we had 137 employees, of whom 32 were engaged in
sales and marketing, 6 in distributor services, 9 in information systems, 56 in
administration and finance and 34 in warehouse functions. We have not
experienced any work stoppages and believe we generally have good relations with
our employees.

FINANCIAL INFORMATION ABOUT SEGMENTS

In fiscal 2001, approximately $86.8 million, or 62.4%, of our revenues were
derived from cylinder exchange and approximately $52.3 million, or 37.6%, of our
revenues were derived from product sales. In fiscal 2000, approximately $68.8
million, or 87.3%, of our revenues were derived from cylinder exchange and
approximately $10.0 million, or 12.7%, of our revenues were derived from product
sales. In fiscal 1999, over 99% of our revenues were derived from cylinder
exchange and less than 1% of our revenues were derived from product sales. For
additional financial information regarding our individual business segments, see
Note 19 of the Notes to Consolidated Financial Statements included in this
Annual Report on Form 10-K.

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ADDITIONAL FACTORS THAT MAY AFFECT OUR BUSINESS AND FUTURE RESULTS

Our revenues are concentrated with a limited number of retailers under
nonexclusive arrangements that they may terminate at will. For fiscal 2001,
Wal-Mart, Home Depot, and Lowe's represented approximately 26%, 20% and 9% of
our net revenues, respectively. None of our significant retail accounts are
contractually bound to offer Blue Rhino cylinder exchange or Uniflame products.
Therefore, retailers can discontinue Blue Rhino cylinder exchange or sales of
Uniflame products at any time and offer a competitor's cylinder exchange or
products or none at all. Continued relations with a retailer depend upon various
factors, including customer service, consumer demand, competition and cost. In
addition, certain of our retailers have multiple vendor policies and may seek to
offer a competitor's cylinder exchange program or products competitive with
Uniflame's products at new or existing locations. If any significant retailer
materially reduces, terminates or is unwilling to expand its relationship with
us, our business may suffer.

Service of our cylinder exchange retail locations is concentrated with a
limited number of distributors. As of July 31, 2001, distributors controlled by
two entities serviced approximately 39% of our cylinder exchange retail
locations. Sales by these key distributors resulted in approximately 39% of our
cylinder exchange net sales for fiscal 2001. The five distributors owned by
Platinum Propane Holding, L.L.C. accounted for approximately 32% of our cylinder
exchange net sales for fiscal 2001. If any of our major distributors were to
reduce or terminate its relationship with us or suffer a disruption in service,
our cylinder exchange business may suffer.

Our retailer relationships depend heavily on our distributors'
performance. We rely exclusively on independent distributors to deliver our
products to retailers. Our success will depend on our ability to maintain
existing distributor relationships and on the distributors' ability to set up
and adequately service an expanding base of retail accounts. We exercise only
limited influence over the resources that our independent distributors devote to
cylinder exchange. We could suffer a loss of consumer or retailer goodwill if
our distributors do not adhere to our quality control and service guidelines or
fail to ensure an adequate and timely supply of cylinders at retail locations.
The poor performance of a single distributor to a national retailer could
jeopardize our entire relationship with that retailer and cause our business to
suffer.

If our distributors and management are unable to manage growth
successfully, our business may suffer. The number of retail locations offering
Blue Rhino cylinder exchange and our corresponding sales have grown
significantly over the past several years along with the creation of our
independent distributor network. For us to continue to grow, our distributors
must be able to adequately service an increasing number of retail accounts.
Certain distributors have experienced service problems in the past, particularly
during peak demand periods such as holiday weekends. Our retailers impose
demanding service requirements on us, and our retail relationships will be
jeopardized if our distributors fail to meet these requirements. We must
implement and improve operational and financial systems and train and manage our
employee base in order to manage our expanding retailer and distributor
relationships. If we fail to manage our growth effectively, our business may
suffer.

We face competition from the grill cylinder refilling industry and from
other grill cylinder exchange providers. Major propane providers, such as
AmeriGas Propane Partners, L.P., Cornerstone Propane Partners, L.P., Ferrellgas
Propane Partners, L.P., Heritage Propane Partners, L.P. and Suburban Propane
Partners, L.P., could establish new or expand their existing cylinder exchange
businesses nationally. These major propane providers have greater resources than
we do and may be able to undertake more extensive marketing campaigns and adopt
more aggressive pricing policies than we can. We also compete with numerous
regional cylinder exchange providers, which typically have operations in a few
states, and with local cylinder exchange providers. If these competitors expand
their cylinder exchange programs or new competitors enter the market or grow to
compete with us on a national scale, our market share and gross margins could
decrease.

If we experience problems associated with the R4 Technical Center, our
business may suffer. In April 2000, operations commenced at the R4 Technical
Center, an automated propane bottling and cylinder refurbishing plant in North
Carolina. If we are unable to attract, retain and manage qualified production
personnel for the plant, or if for any reason we are unable to meet our
production goals, achieve our targeted
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production costs or satisfy our distributors' needs, the ability of our
distributors to service our retail accounts could be impacted and our business
may suffer.

As a result of our ownership interest, we recognize 49% of the R4 Technical
Center's net earnings or losses. For the year ended July 31, 2001, we recognized
approximately $2.57 million as our proportionate share of the R4 Technical
Center's net losses. If the R4 Technical Center is unable to generate earnings,
our business, financial condition and results of operations may suffer.

If we are unable to manage the impact of new overfill prevention device
valve guidelines, our business may suffer. Guidelines published by the National
Fire Protection Association (NFPA) in Pamphlets 54 and 58 require that all grill
cylinders refilled after April 1, 2002 must be fitted with an overfill
prevention device valve. If our distributors or we cannot satisfy the demand for
compliant cylinders such that our retailers maintain an adequate supply, our
retailer relationships may suffer. In addition, we agree with our retailers in
advance with regard to the price to them per cylinder exchange unit. When
pricing, we make certain assumptions with regard to the number of cylinders that
will already have an overfill prevention device valve, on which our margins will
be greater, and the number of cylinders that will need an overfill prevention
device valve. If our assumptions are wrong, our margins on sales to that
retailer will be lower than expected, which may have an adverse effect on our
financial condition and results of operations.

We depend on management information systems to manage all aspects of our
business effectively. We depend on our management information systems (MIS) to
process orders, manage inventory and accounts receivable collections, maintain
distributor and customer information, maintain cost-efficient operations and
assist distributors in delivering products on a timely basis. In addition, our
staff of MIS professionals relies heavily on the support of Information
Management System Services (IMSS), a division of R. J. Reynolds Tobacco Company.
Any disruption in the operation of our MIS, the loss of employees knowledgeable
about such systems, the termination of our relationship with IMSS or our failure
to continue to effectively modify such systems as our business expands could
negatively affect our business.

If we are unable to protect our intellectual property, we may lose assets
or require costly litigation to protect our rights. We consider our trademarks,
particularly the Blue Rhino logo and name, and the design of our product
packaging to be valuable to our business and the establishment of our national
branded cylinder exchange program. We rely on a combination of copyright and
trademark laws and other arrangements to protect our proprietary rights and
could incur substantial expense to enforce our rights under copyright or
trademark laws. The requirement to change any of our trademarks, service marks
or trade names could entail significant expense, result in the loss of any
goodwill associated with that trademark, service mark or trade name, and impact
our ability to apply for copyrights and additional trademarks in the future.

Our business is subject to seasonal and quarterly fluctuations. Our
quarterly operating results fluctuate significantly primarily because consumers
grill most frequently in the spring and summer, especially in colder regions of
the United States. As a result, we earn most of our cylinder exchange revenue
during our third and fourth fiscal quarters ending April 30 and July 31 and a
significant percentage of our product revenue during our first and second fiscal
quarters ending October 31 and January 31, coinciding with the period in which
Uniflame historically ships the majority of its products to retailers. Sustained
periods of poor weather, particularly during the spring and summer, may
negatively impact our total revenues and gross margin. Our timing and rate of
establishing new retail locations and expenses incurred in anticipation of
increased sales also may cause quarterly fluctuations in our results of
operations. Accordingly, the results of operations in any quarter will not
necessarily be indicative of the results that we may achieve for a full fiscal
year or any future quarter.

Propane supplies and costs are unpredictable and propane price increases
could impact our profit margins. Our distributors purchase propane from natural
gas providers and oil refineries that produce propane as a by-product of the
refining process. The R4 Technical Center, the automated propane bottling and
cylinder refurbishing plant in North Carolina, also purchases propane. The
supply and price of propane fluctuates depending upon underlying natural gas and
oil prices and the ability of suppliers to deliver propane. A substantial
increase in propane prices could lead to decreased profit margins for us or our
distributors and could impact our distributors' ability or desire to service our
retail accounts.
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Propane is a volatile product and we face potential product
liability. Propane is a gas which, if exposed to flame or high pressure, may
ignite or explode, potentially causing significant property damage and bodily
harm. In the past, fires and other incidents have occurred at refurbishing and
refilling facilities operated by us and our distributors that resulted in bodily
injuries and substantial property damage. Because of the volatility of propane,
accidents may occur during the refurbishing, refilling, transport, storage,
exchange, use or disposal of cylinders and other Blue Rhino products. Because
the Blue Rhino name and logo are prominently displayed on all cylinders,
cylinder displays and other Blue Rhino products, such as patio heaters, we could
be subjected to damage claims. In addition, we could be subject to additional
product liability for barbecue grills sold by Uniflame and for the failure of an
overfill prevention device (OPD) valve, regardless of whether such valve was
fitted on a Blue Rhino cylinder.

We could also be subject to claims related to manufacturing defects or
workplace accidents at the R4 Technical Center. If an accident happens, we could
incur substantial expense, receive adverse publicity and suffer a loss of sales.
A cylinder-related accident involving personal injury could result in product
liability actions against us or our distributors and could affect the
willingness of retailers to offer or consumers to use cylinder exchange. Adverse
publicity relating to any such incident could also affect our reputation and the
perceived benefits of cylinder exchange. Furthermore, we cannot be sure that
insurance will provide sufficient coverage in any particular case or that we or
our distributors will be able to continue to obtain insurance coverage at
acceptable levels and cost.

In August 2000, 4,700 Blue Rhino propane cylinders filled at the R4
Technical Center were recalled after the cylinder valves were found to have
missing or damaged internal seals. We instructed our distributors to inventory
the cylinders at their plants and retail locations and to remove any cylinders
with the recalled valves. However, we cannot be sure that all the recalled
valves have been removed from circulation. We have not received any reports of
injuries, but the potential defects could cause propane leaks, which can pose
the risk of fire, explosion and burn injuries, and could lead to one or more of
the adverse consequences described above.

Propane is a heavily regulated product. Federal, state and local
authorities regulate the transportation, handling, storage and sale of propane
in order to protect consumers, employees, property and the environment. The
handling of propane in most regions of the United States is governed by
guidelines published by the NFPA in Pamphlets 54 and 58. These guidelines
require that all cylinders produced or recertified after September 30, 1998, and
all grill cylinders refilled after April 1, 2002 must be fitted with an OPD
valve. Failure of our distributors to comply with these regulations could
subject us to potential governmental action for violation of such regulations,
which could result in fines, penalties and/or injunctions.

Varying local permitting processes affect our retail locations. Local
ordinances, which vary from jurisdiction to jurisdiction, generally require
retailers to obtain permits to store and sell propane cylinders. These
ordinances influence retailers' acceptance of cylinder exchange, distribution
methods, cylinder packaging and storage. The ability and time required to obtain
permits varies by jurisdiction. Delays in obtaining permits have from time to
time significantly delayed the installation of new retail locations. Some
jurisdictions have refused to issue the necessary permits, which has prevented
some installations. Certain jurisdictions may also impose additional
restrictions on our ability to market and our distributors' ability to transport
cylinders or otherwise maintain our cylinder exchange program. Revisions to
these regulations or violations of current or future regulations by us or our
distributors may cause our business to suffer.

We depend on our suppliers. To adequately service our retail accounts, our
distributors need a sufficient supply of cylinders and valves. There are only
two major cylinder suppliers and only six major valve suppliers in the U.S.
market. If our distributors are unable to obtain sufficient quantities of
cylinders or valves, delays or reductions in cylinder availability could occur,
which may cause our business to suffer.

Our products segment is reliant on suppliers based in China. We rely on
the products segment of our business, conducted through Uniflame, for a
significant percentage of our net sales. Uniflame imports a substantial
percentage of its products from companies based in China. As a result, Uniflame
may be adversely affected by changes in the prevailing political or economic
climates in China. In addition, if China were to lose its "most favored nation"
trade status with the United States, there would likely be an increase in duty
for Uniflame's products, which may cause our business, financial condition and
results of operations to suffer.
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Our retail shipping services require significant investment. QuickShip,
Inc. has invested substantial resources to develop, install and support its
retail shipping system prior to receipt of any revenues from those services.
QuickShip's business model generally permits the grocery store or other retailer
to offer the service to its customer and to pay QuickShip based on each time a
customer accesses the system. Accordingly, there is no assurance that QuickShip
will be able to recover its investment incurred to install its system with any
particular grocery store or other retailer, or with all such grocery stores and
other retailers.

Terrorist Attacks and Threats or Actual War Create Uncertainty. Terrorist
attacks in the United States on September 11, 2001, as well as subsequent events
occurring in response or connection to them, including, without limitation,
future terrorist attacks against United States targets, rumors or threats of
war, actual war or conflicts involving the United States or its allies or
military or trade disruptions impacting our domestic or foreign suppliers of
products, may impact our products segment, including, among other things,
causing delays or losses in the supply or delivery of products and decreased
sales of our products. More generally, any of these events could cause consumer
confidence and spending to decrease or result in increased volatility in the
U.S. and worldwide financial markets and economy. They also could result in or
lengthen economic recession in the U.S. or abroad. Any of these occurrences may
have a significant impact on our business, financial condition and results of
operations and may result in the volatility of the market price for our common
stock and on the future price of our common stock.

ITEM 2. PROPERTIES

We lease our Winston-Salem, North Carolina headquarters from Rhino Real
Estate, LLC, a company affiliated with two of our directors. Pursuant to the
terms of the lease, we pay annual rent of approximately $233,000, plus our
allocable share of all taxes, utilities and maintenance. The lease terminates on
December 31, 2001 and includes an option to renew for one three-year term. We
currently expect to exercise our option to renew.

Uniflame Corporation, our wholly owned subsidiary, leases an
office/warehouse facility located in Zion, Illinois from H & M Enterprises, LLC,
a company affiliated with the president of Uniflame. Pursuant to the terms of
the lease, Uniflame pays annual rent of approximately $308,000, plus our
allocable share of all taxes, utilities and maintenance. The lease terminates on
March 31, 2005. This facility is used by Uniflame in the conduct of our product
sales business segment.

In the opinion of our management, our properties have been well maintained,
are in sound operating condition and contain all equipment and facilities
necessary for us to operate at present levels.

ITEM 3. LEGAL PROCEEDINGS

On January 26, 2001, we refiled a complaint against PricewaterhouseCoopers
in the Superior Court of Mecklenburg County, North Carolina alleging negligence,
breach of fiduciary duty, breach of contract, defamation and unfair and
deceptive trade practices. The suit is currently in the discovery phase and
relates to the conduct of PriceWaterhouseCoopers during its engagement as our
auditors.

We are not presently involved in any material litigation nor, to our
knowledge, is any material litigation threatened against us or our subsidiaries,
other than routine litigation arising in the ordinary course of business that is
expected to be covered by insurance.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

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PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

Our common stock is traded on the Nasdaq National Market under the symbol
"RINO." The table below shows the high and low per share sales prices of our
common stock for the periods indicated, as reported by the Nasdaq National
Market. As of September 17, 2001, there were 134 record holders of our common
stock.

We have never declared or paid any cash dividends on shares of our common
stock. We currently intend to retain all earnings for future growth and,
therefore, do not anticipate paying any cash dividends in the foreseeable
future. Payments of cash dividends are prohibited by certain of our existing
financing agreements and may be prohibited in the future under then existing
financing agreements. Even if not prohibited by our financing agreements, the
payment of cash dividends in the future will, subject to applicable law, be at
the discretion of the Board of Directors, and there can be no assurance that we
will pay any dividends in the future. Our outstanding Series A Convertible
Preferred Stock accrues a dividend payable in cash or shares of common stock.
Subject to obtaining any consent required under our financing agreements, we may
pay such accrued dividend in cash.

On June 15, 2001, we completed a $15 million private placement of
subordinated debt to an institutional investor. In connection with the placement
of the debenture, we issued a warrant to the investor to purchase 1,372,071
shares of our common stock, with an exercise price of $3.8685 per share (subject
to adjustment for organic changes and for certain future issuances below the
then-existing exercise price). The warrant can be exercised at the holder's
discretion in whole or in part until the later of June 15, 2011 or five years
after payment of all amounts due under the debenture. We issued the debenture
and the warrant in reliance on the exemption from registration provided by Rule
506 promulgated under Section 4(2) of the Securities Act of 1933, as amended,
based on representations received from the investor with regard to its status as
an accredited investor and the nature of the arms'-length, negotiated
transaction. The holder of the warrant has certain registration rights.

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated statement of operations and balance
sheet data of the Company as of and for the periods ended July 31, 2001, 2000,
1999, 1998 and 1997 have been derived from our audited consolidated financial
statements. The financial data set forth below should be read in conjunction
with "Item 7 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Item 8 -- Financial Statements and Supplementary
Data -- Consolidated Financial Statements of the Company and Related Notes
Thereto" included elsewhere herein.

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---------------

(1) See Note 20 of Notes to Consolidated Financial Statements for an explanation
of these items in fiscal 2001 and fiscal 1999. During fiscal 1998 and fiscal
1997, the Company made changes to its business strategy, including the
conversion to an independent distributor network. As a result, the Company
recorded certain nonrecurring charges in both years.
(2) See Note 9 of Notes to Consolidated Financial Statements for an explanation
of these items for fiscal years 2001, 2000, and 1999. During fiscal 1998,
the Company had a loss on investee related to its convertible loan to Bison
Valve, LLC.
(3) See Note 11 for Fiscal 2001 explanation. Dividends payable on our redeemable
preferred stock (the "Old Preferred Stock") were $596 for fiscal 1998 and
$687 for fiscal 1997. The Old Preferred Stock was converted into shares of
common stock in May 1998.
(4) For fiscal years 2001, 2000, 1998 and 1997, the weighted average number of
shares outstanding excludes the effect of the exercise of all outstanding
stock options and warrants and the conversion of the Old Preferred Stock
into shares of common stock because such exercise or conversion would be
anti-dilutive.
(5) The unaudited pro forma information assumes the conversion of Old Preferred
Stock, Old Preferred Stock dividends and the exercise of outstanding
warrants in conjunction with the Company's initial public offering in May
1998, 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 our Consolidated Financial
Statements and Notes thereto included in Item 8 of this Annual Report on Form
10-K.

OVERVIEW

Blue Rhino was founded in March 1994 and has become the leading national
provider of propane grill cylinder exchange as well as a leading provider of
complimentary propane and non-propane products to consumers, with Blue Rhino
cylinder displays at more than 27,000 retail locations in 46 states and Puerto
Rico. Cylinder exchange provides consumers with a convenient means to exchange
empty grill cylinders for clean, safe, precision-filled cylinders. We offer
cylinder exchange at many major home improvement centers, mass merchants,
hardware, grocery and convenience stores, including Home Depot, Lowe's,
Wal-Mart, Sears, Kmart, Kroger, Food Lion, Winn-Dixie, SuperAmerica, Circle K
and ExxonMobil. During fiscal 2001, our net revenues increased approximately
76.6% to approximately $139.1 million from the prior fiscal year due primarily
to growth in product sales and cylinder exchange transactions at existing
locations and an increase in the prices charged to retailers. The number of
retail locations we report in any period is net of any retail locations at which
we have discontinued our cylinder exchange service, whether due to closings,
relocations, performance, competitive, regulatory or other factors.

We partner with retailers and independent distributors to provide consumers
with a nationally branded alternative to traditional grill cylinder refill. We
dedicate our efforts and capital to brand development, value-added marketing,
customer service, cylinders, displays, account growth, distributor network
development and management information systems. Our 44 independent distributors
invest in the vehicles and other operational

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infrastructure necessary to operate cylinder exchange businesses. We believe
that our distributor network affords us the opportunity to service approximately
90% of the cylinder exchange markets in the United States.

We currently offer three types of grill cylinder transactions: (i)
like-for-like cylinder exchanges; (ii) cylinder exchanges with valve upgrades
offering additional safety features; and (iii) filled cylinder sales. Cylinder
transactions accounted for 62.4% of our net revenues in fiscal 2001.

Our products segment revenue grew dramatically in fiscal 2001 to $52.3
million from $10.0 million in fiscal 2000 primarily due to an additional eight
months sales by Uniflame during fiscal 2001, as Uniflame was acquired in April
2000, and growth in Uniflame's sales. Uniflame's revenues are derived from
products that use propane cylinders as their fuel source, principally patio
heaters and grills, and non-propane products such as charcoal grills, fireplace
accessories and garden products. The majority of Uniflame's sales occur in the
fall and winter months, which is counterseasonal to our cylinder exchange
segment. QuickShip, Inc., a retail shipping services company acquired in October
2000, is included within the products segment as it is not currently material on
a stand-alone basis (Note 10).

Our revenues are influenced by a number of factors, including seasonality,
consumer awareness, weather conditions, new propane appliance sales, promotional
activities, advertising and those factors described above under
"Business -- Additional Factors that may Affect our Business and Future
Results." We strategically expanded our business in the past two years to
diversify our revenue stream, balance our seasonality and offer and promote more
products that use our core grill cylinder exchange service. Our acquisitions of
Uniflame and International Propane Products, LLC have allowed us to expand our
offerings to include an array of products including barbecue grills and patio
heaters. In these acquisitions, we also acquired proprietary designs, patents
and human capital to complement our expertise in marketing, sales, and
coordination with manufacturers and distributors. Our products division is
separately managed by Uniflame's management team, which has extensive experience
in the design and import of consumer products sold through mass retailers.

Our cost of sales for cylinder exchange is comprised of a contractually
determined fixed base amount, along with a variable component based on the price
of propane, that we pay to our distributors for each cylinder transaction. Our
cost of sales for products is comprised of the wholesale cost of products sold.

We incurred significantly higher costs for cylinder exchange in fiscal 2001
and fiscal 2000, due to wholesale propane prices reaching a 20-year high while
having fixed price agreements with major retail customers. Between March 2000
and February 2001, we made voluntary payments of $4.2 million to our
distributors to help offset the impact on our distributors of the significantly
higher propane prices, to protect our large retail customers from supply
disruptions, and to ensure continued strong distributor and customer
relationships. On March 1, 2001, we changed the method in which we pay our
distributors and implemented a propane hedging strategy. These measures,
combined with price increases to retailers, began to favorably impact cylinder
exchange gross margins during the third quarter of fiscal 2001. In the fourth
quarter of fiscal 2001, gross margins on cylinder transactions returned to
historical levels in excess of 25%.

While we believe that we have created the infrastructure necessary to
support a nationwide branded products and service company, development of this
infrastructure has resulted in an accumulated deficit of approximately $24.8
million as of July 31, 2001. This has resulted in net operating loss
carryforwards of approximately $36.0 million for federal income tax purposes
that are available to offset future taxable income, if any, in varying amounts
from 2002 through 2021. However, the utilization of the net operating losses
will be subject to certain limitations as prescribed by Section 382 of the
Internal Revenue Code. Based on our history of operating losses, we have
recorded a valuation allowance to the full extent of our net deferred tax
assets.

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RESULTS OF OPERATIONS

The following table sets forth for the periods indicated the percentage
relationship of certain items from our statements of operations to net revenues.
Due to many factors, including the National Fire Protection Association (NFPA)
requirement that all propane cylinders refilled after April 1, 2002 be fitted
with an overfill prevention device, the diversification of our product offerings
and our rapid sales growth, any trends reflected by the following table may not
be indicative of future results.

COMPARISON OF YEARS ENDED JULY 31, 2001 AND 2000

Net revenues. Net revenues increased 76.6% to $139.1 million for fiscal
2001 from $78.7 million for fiscal 2000. Net revenues for fiscal 2001 consisted
of $86.8 million from cylinder transactions and $52.3 million from product
sales. The increase in revenues was due primarily to a four-fold increase in
product sales reflecting an additional eight months of sales by Uniflame this
fiscal year, as Uniflame was acquired in April 2000. Cylinder revenues increased
26.2% primarily due to an approximately 16% increase in same store sales, the
maturity and increased consumer awareness of cylinder exchange locations selling
less than one year and an increase in the prices charged to retailers. The
number of cylinder transactions increased 25.0% to approximately 6.2 million
units during fiscal 2001 from approximately 5.0 million units during fiscal
2000. We currently expect the trend of growth in cylinder transactions to
continue as consumers switch from refill to exchange, particularly as a result
of the National Fire Protection Association (NFPA) requirement that all propane
cylinders refilled after April 1, 2002 be fitted with an overfill prevention
device, and as propane-fueled products like the patio heaters that we offer gain
acceptance in the marketplace.

Gross margin. Our overall gross margin decreased to 23.2% for fiscal 2001
from 26.3% for fiscal 2000. This decrease was due primarily to the increase in
product sales as a percentage of net revenues. Product sales carry a lower gross
margin than do cylinder transactions. Gross margin was also negatively affected
in fiscal 2001 by increased payments to distributors that we made voluntarily
from March 2000 through February 2001 to help offset an increase in wholesale
propane prices. On March 1, 2001, we changed the method in which we pay our
distributors and implemented a propane hedging strategy. These measures,
combined with price

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increases to retailers, began to favorably impact cylinder exchange gross
margins during the third quarter of fiscal 2001. In the fourth quarter of fiscal
2001, gross margins on cylinder transactions returned to historical levels in
excess of 25%. For fiscal 2002, we currently expect cylinder exchange margins to
continue to be at least 25% and product sales gross margins to continue to be
between 12% and 18%.

Selling, general and administrative expenses. Selling, general and
administrative expenses increased 47.0% to $19.8 million for fiscal 2001 from
$13.5 million for fiscal 2000. Selling, general, and administrative expenses
decreased as a percentage of net revenues to 14.2% for fiscal 2001 from 17.1%
for fiscal 2000. The increase in selling, general and administrative expenses
was due primarily to overhead costs resulting from the Uniflame and Quickship
acquisitions being included in operations in fiscal 2001 and to increased
marketing and administrative costs to support the growth in the cylinder
exchange business. The decrease in selling, general and administrative expenses
as a percentage of net revenues was due primarily to the fact that a significant
portion of such expenses are fixed and increased at a slower rate than did net
revenues. We currently expect selling, general and administrative expenses for
fiscal 2002 to continue to decrease as a percentage of net revenues.

Depreciation and amortization. Depreciation and amortization increased to
$8.5 million for fiscal 2001 from $4.7 million for fiscal 2000. Depreciation
expense increased to $5.8 million for fiscal 2001 from $3.7 million for fiscal
2000 primarily due to the increase in the number of installed cylinder displays
and the increase in the number of cylinders held under operating lease
agreements. The increase in cylinders and cylinder displays was necessary to
support the growth in our installed base of retail locations. Amortization
expense increased to $2.7 million in fiscal 2001 from $1.0 million in fiscal
2000. Amortization increased principally due to the amortization of intangibles
associated with acquisitions.

Interest expense. Interest expense increased to $5.1 million for fiscal
2001 from $2.2 million for fiscal 2000. The increase in interest expense
resulted primarily from the additional borrowings outstanding under our credit
facility combined with an increase in interest rates on the credit facility and
interest expense on subordinated debt and related warrants. The additional
borrowings were used primarily to fund operations, to purchase cylinders and
cylinder displays leased to our distributors and to fund business acquisitions
and our investment in and advances to R4 Technical Center -- North Carolina,
L.L.C. ("R4 Tech"), the automated propane bottling and cylinder refurbishing
plant.

Other, net. Other, net increased to income of approximately $301,000 for
fiscal 2001 from a loss of approximately $16,000 for fiscal 2000. The increase
was primarily a result of additional interest income from advances to R4 Tech
and distributors.

Loss on investee. Loss on investee increased to $2.6 million for fiscal
2001 from $403,000 for fiscal 2000. This charge represents our share of the loss
related to our 49% ownership interest in R4 Tech, which began operations in
April 2000. We expect this venture to continue to experience losses, which we
believe are typical in a start-up manufacturing operation, until volumes
increase and revenue from converting cylinders without an overfill prevention
device (OPD) into OPD cylinders is realized, which we believe will occur in the
2002 grilling season. We cannot, however, predict with certainty when this will
occur, if ever. R4 Tech is subject to significant seasonal fluctuations in
revenues and net income (loss). We expect R4 Tech's revenues to be the highest
in our third and fourth quarters, which include the majority of the grilling
season, and lowest in our first and second quarters.

Nonrecurring items. There was a nonrecurring loss of approximately
$449,000 in fiscal 2001 from costs incurred in connection with refinancing our
bank credit facility.

Income taxes. The provision for income taxes increased to $123,000 in
fiscal 2001 from $32,000 for fiscal 2000, which reflects current state income
tax expense.

Extraordinary loss. The extraordinary loss of $486,000 in fiscal 2000
consisted of the unamortized debt discount and other debt issuance costs that
were recognized due to the early retirement of convertible notes in July 2000.

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COMPARISON OF YEARS ENDED JULY 31, 2000 AND 1999

Net revenues. Net revenues increased 46.3% to approximately $78.7 million
for fiscal 2000 from approximately $53.8 million for fiscal 1999. Net revenues
for fiscal 2000 consisted of approximately $68.8 million from cylinder
transactions and $10.0 million from product sales. Product sales consisted of
patio heaters, fireplace accessories, barbecue grills and garden products. The
increase in net revenues was due primarily to an approximately 20% increase in
same store cylinder transaction sales, growth in cylinder exchange locations,
product sales related to the acquisition of Uniflame in April 2000 and growth in
the sales of patio heaters to $3.6 million in fiscal 2000 from $477,000 in
fiscal 1999. The number of cylinder transactions increased 34.6% to
approximately 5.0 million units during fiscal 2000 from approximately 3.7
million units during fiscal 2000.

Gross margin. Our overall gross margin decreased to 26.3% for fiscal 2000
from 28.2% for fiscal 1999. The decrease in gross margin was primarily due to
increased payments to distributors that we made voluntarily beginning in March
2000 to help offset the increase in wholesale propane prices and to an increase
in lower margin product sales as a percentage of net revenues, which were
partially offset by an increase in lease income.

Selling, general and administrative expenses. Selling, general and
administrative expenses increased 57.7% to approximately $13.5 million for
fiscal 2000 from approximately $8.5 million for fiscal 1999. The increase in
selling, general and administrative expenses was due primarily to increased
overhead costs resulting from the acquisition of Uniflame, which contributed
approximately $1.3 million of the increase, as well as increased advertising and
promotional expenses and additional compensation and related costs from the
growth of our sales, administrative and dealer personnel.

Depreciation and amortization. Depreciation and amortization increased to
approximately $4.7 million for fiscal 2000 from approximately $2.9 million for
fiscal 1999. Depreciation expense increased by $1.3 million to approximately
$3.7 million for fiscal 2000 from approximately $2.4 million for fiscal 1999
primarily due to the increase in the number of cylinder displays and the
commencement of depreciation on cylinders held under operating lease agreements.
The increase in cylinders and cylinder displays was due to growth in our
installed base of retail locations. Our purchase of computer technology also
impacted depreciation expense to a lesser extent. Amortization expense increased
by $535,000 to approximately $1.0 million in fiscal 2000 from approximately
$482,000 in fiscal 1999, principally due to the increased amortization of
intangibles associated with acquisitions.

Interest expense. Interest expense increased to approximately $2.2 million
for fiscal 2000 from approximately $837,000 for fiscal 1999. The increase in
interest expense resulted from increased borrowings under our credit facility
related to acquisitions and capital investments related to growth in the number
of cylinder exchange locations.

Other, net. Other, net decreased to an expense of approximately $16,000
for fiscal 2000 from income of approximately $48,000 for fiscal 1999. The
decrease was primarily due to a reduction in interest income resulting from
lower excess cash and notes receivable balances.

Loss on investees. Loss on investees increased to $403,000 for fiscal 2000
from $311,000 for fiscal 1999. This item reflects distinct investees for each
year. Fiscal 2000 reflects our share of losses related to our investment in R4
Tech, the automated propane bottling and cylinder refurbishing plant, which
opened in May 2000. The loss incurred in fiscal 1999 is related to the
application of the equity method of accounting to our convertible loan to Bison
Valve, LLC. We recorded these losses as Bison Valve used the proceeds of our
loan to fund losses incurred primarily in researching, developing, marketing and
producing an OPD and other propane-related products. As of October 31, 1998, we
had recognized charges for the entire principal balance of our convertible loan.
In September 1999, we purchased from Bison Valve the intellectual property,
inventory and certain other assets related to its Underwriters
Laboratories-approved OPD.

Nonrecurring items. For fiscal 1999, we incurred a one-time charge of
$551,000 for expenses incurred in connection with an offering of common stock
that we terminated before completion in February 1999 due to unfavorable market
conditions.
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Income taxes. The provision for income taxes increased slightly to
approximately $32,000 for fiscal 2000, which reflects current state income tax
expense.

Extraordinary loss. The extraordinary loss of $486,000 in fiscal 2000
consisted of the unamortized debt discount and other debt issuance costs that
were recognized due to the early retirement of convertible notes in July 2000.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of funds have been the incurrence of debt, the issuance
of stock and cash flow from operations. We had working capital of approximately
$18.8 million as of July 31, 2001, which was primarily the result of cash
provided by the issuance of stock and debt and, to a lesser extent, cash
provided by operations.

Net cash generated by operating activities was $1.3 million, $6.8 million,
and $1.5 million for fiscal 2001, 2000, and 1999, respectively. Cash provided by
operations in all periods was due primarily to the add-back of non-cash charges,
including depreciation and amortization and loss on investee.

Net cash used in investing activities was $16.2 million for fiscal 2001,
$31.3 million for fiscal 2000, and $21.4 million for fiscal 1999. The primary
components of cash used in investing activities in all periods included
acquisitions, purchases of cylinders leased to our distributors, and investments
in property, plant and equipment. For fiscal 2001, cash used in investing
activities also included advances to R4 Tech. For fiscal 2000, cash used in
investing activities included our net investment in and advances to R4 Tech.

Net cash provided by financing activities was approximately $14.9 million
for fiscal 2001, $24.6 million for fiscal 2000, and $14.9 million for fiscal
1999. The primary components of cash provided by financing activities in fiscal
2001 included the net proceeds from the issuance of preferred stock and
subordinated debt. In fiscal 2000 and 1999, the primary components of cash
provided by financing activities included proceeds from issuance of common stock
and proceeds from notes payable to our lender. The cash used in financing
activities in all periods included payments on various loans, notes payable and
capital lease obligations.

On April 28, 2000, we entered into a joint venture agreement to operate and
manage R4 Tech, which began operations in April 2000. We received a 49%
ownership interest in the joint venture in exchange for our net contribution of
approximately $3.4 million. The joint venture is being accounted for using the
equity method of accounting. During fiscal 2001, we advanced $4.2 million to R4
Tech. At July 31, 2001, we had cumulative advances outstanding of approximately
$5.2 million to R4 Tech. We expect R4 Tech to repay these advances by
transferring to Blue Rhino 100% ownership of the propane bottling and cylinder
refurbishing plant in North Carolina in October 2001. We currently anticipate
providing additional advances to R4 Tech in the future.

On September 7, 2000, we completed a private placement of 1,716,667 shares
of our Series A Convertible Preferred Stock to two institutional investors under
common management and three individuals, including Billy D. Prim, our Chairman,
Chief Executive Officer and President, and Andrew J. Filipowski, our Vice
Chairman, for an aggregate purchase price of approximately $10.3 million.
Messrs. Prim and Filipowski invested $50,000 and $250,000 for 8,333 and 41,667
shares of Series A Convertible Preferred Stock, respectively. We used the
aggregate net proceeds of approximately $9.6 million from our preferred stock
private placement to repay $7.0 million of our term debt, and the balance was
used for general working capital. In connection with this issuance of the Series
A Convertible Preferred Stock we paid William Blair & Co. a placement fee of
$500,000 in cash and have issued a five-year warrant to purchase 16,667 shares
of common stock at $6.00 per share.

The Series A Convertible Preferred Stock accrues a cumulative dividend on
the 20th day of December, March, June, and September of each year based on an
annual rate of 5% through September 7, 2003; 12% from September 8, 2003 through
September 7, 2004; and 15% thereafter. At our election, the dividend may be paid
in cash, in shares of common stock, or a combination of cash and shares of
common stock at any time prior to conversion of the Series A Convertible
Preferred Stock and must be paid at conversion. If we elect to pay the dividend
in shares of common stock, the shares will be valued based on a 30-day trailing
average
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20

ending three business days prior to the date the shares are authorized to be
issued. As of July 31, 2001, we had accrued dividends on the outstanding shares
of Series A Convertible Preferred Stock of $770,000.

Each share of Series A Convertible Preferred Stock is convertible into
common stock at the option of the holder at any time after September 7, 2001. If
the market price of the common stock exceeds a prescribed threshold, we may
convert the Series A Convertible Preferred Stock into common stock at any time
after September 7, 2002. Each share of Series A Convertible Preferred Stock is
convertible into one share of common stock, subject to adjustment for
subdivisions, combinations, stock dividends, reclassifications and other similar
transactions and certain stock issuances below the then-existing conversion
price. The Series A Convertible Preferred Stock has a liquidation preference
over our common stock. The holders of the shares of Series A Convertible
Preferred Stock have certain registration rights.

On October 26, 2000, we completed the acquisition of QuickShip, Inc., a
retail shipping service company previously based in Lenexa, Kansas. QuickShip,
our wholly owned subsidiary, provides consumers with a convenient, full-service,
in-store postal and parcel shipping depot and provides retailers with an
additional revenue source. The aggregate purchase price, including certain
acquisition costs, was approximately $9.8 million, comprised of approximately
$1.0 million in cash and deferred payments, $86,000 in a five-year warrant to
purchase 100,000 shares of common stock with an exercise price of $6.00 per
share, $2.0 million in liabilities assumed and $6.8 million paid in the form of
shares of Series A Convertible Preferred Stock valued at $6.00 per share.

In June 2001, we amended and extended our existing bank credit facility
(the "Credit Facility"). The amended Credit Facility consists of two separate
facilities -- a $38 million revolving line of credit for general corporate
purposes, inclusive of payments made under letters of credit issued for the
benefit of the Company, and a $3.247 million seasonal line for general corporate
purposes. No further borrowings may be made against the seasonal line. The
Credit Facility requires us to meet certain covenants, including minimum net
worth and cash flow requirements. The Credit Facility is collateralized by a
lien on substantially all of our assets. The Credit Facility bears interest at
the prime rate plus 2% per annum. In the event that the total borrowings under
the credit facility exceed $28 million as of December 31, 2001, the rate will be
the prime rate plus 3% per annum thereafter. The Credit Facility matures on
December 31, 2002. At July 31, 2001 the interest rate on both the revolving line
of credit and seasonal line was 8.75%. At July 31, 2001, the balance on the
Credit Facility was $37.6 million.

In conjunction with the Credit Facility, we also entered into an interest
rate swap agreement with a notional amount of $10.0 million as a partial hedge
of our variable interest rate debt. The purpose of the swap is to fix interest
rates on variable rate debt and to reduce our exposure to interest rate
fluctuations. Under the swap agreement, which expires in July 2003, we pay a
fixed rate of 7.36% and receive a rate equivalent to the one-month London
Interbank Offered Rate ("LIBOR").

On June 15, 2001, we completed a $15 million private placement of
subordinated debt to an institutional investor. The agreement requires us to
meet certain cash flow and other covenants and contains restrictions on capital
expenditures and the payment of cash dividends. The debenture bears interest at
the annual rate of 13%, payable quarterly. The principal balance matures on
August 31, 2006. In addition, we issued a warrant to the investor to purchase
1,372,071 shares of common stock, with an exercise price of $3.8685 per share
(subject to adjustment for organic changes and for certain future issuances
below the then-existing exercise price). The warrant can be exercised at the
holder's discretion in whole or in part any time until the later of June 15,
2011 or five years after payment of all amounts due under the debenture.

We anticipate that our total capital expenditures for fiscal 2002,
excluding acquisitions, will be approximately $8.0 million, and will relate
primarily to cylinders, cylinder displays and computer technology. Our capital
expenditure and working capital requirements in the foreseeable future will
change depending on the rate of our expansion, our operating results and any
other adjustments in our operating plan needed in response to competition,
acquisition opportunities or unexpected events. We believe that our existing
borrowing capacity under the Credit Facility, together with cash provided by
operations, will be sufficient to meet our working capital requirements through
fiscal 2002. However, there can be no assurance that we will

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not seek or require additional capital in the future as a result of expansion or
otherwise, or that such additional capital will be available on terms that are
not dilutive to our stockholders.

SEASONALITY

We have experienced and expect to continue to experience significant
seasonal fluctuations in our revenues and net income (loss). Historically, our
revenues have been highest in our third and fourth quarters, which include the
majority of the grilling season, and lowest in our first and second quarters,
which include the winter months. Our acquisition of Uniflame has resulted in
increased revenues for our first quarter, which includes the months in which
Uniflame historically has shipped the majority of its products to retailers.
Sustained periods of poor weather, particularly in the spring and summer
seasons, would negatively impact our revenues. Accordingly, the results of
operations in any quarter will not necessarily be indicative of the results that
we may achieve for a full fiscal year or any future quarter.

INFLATION

We do not believe that inflation has had a material adverse effect on our
revenues, cost of sales or our results of operations. There can be no assurance
that our business will not be affected by inflation in the future.

PRICE OF PROPANE

During the fiscal year ended July 31, 2001, there were dramatic increases
in fuel costs and propane reached unusually high levels. During the fourth
quarter of fiscal 2001, propane prices returned to a range more consistent with
historical levels. On March 1, 2001, we initiated a propane price hedging
strategy that we believe will reduce our gross margin risk resulting from
fluctuations in the price of propane. Our strategy is designed to reduce
exposure to the fuel cost component of a significant portion of our total
cylinder exchange volume. If propane costs rise for an extended period and our
hedging strategy is unsuccessful, our gross margins and results of operations
could be negatively affected due to additional costs that may not be fully
recovered through an increase in our price to our customers.

IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill (and intangible assets deemed
to have indefinite lives) will no longer be amortized but will be subject to
annual impairment tests in accordance with the Statements. Other intangible
assets will continue to be amortized over their useful lives.

We will apply the new rules on accounting for goodwill and other intangible
assets beginning in the first quarter of fiscal year 2002. As of July 31, 2001,
we have unamortized intangibles of $32.3 million that will be subject to the
transition provisions of the Statements. We have not yet determined the impact
of adopting these Statements on our earnings and financial position, including
whether we will be required to recognize any transitional impairment losses as a
cumulative effect of a change in accounting principle. Application of the
nonamortization provisions of the Statements is expected to result in an
increase in net income of approximately $2.6 million in fiscal 2002.

In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 143, Accounting for Asset Retirement
Obligations. The Statement requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. The Statement is effective for fiscal years beginning after June 15,
2002. We do not expect the adoption of Statement No. 143 to have a material
impact on our consolidated results of operations or financial position.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk related to changes in interest rates on
borrowings under our Credit Facility. The Credit Facility bears interest based
on the prime rate and is collateralized by cylinders held under

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operating leases with our independent distributors. The operating leases
currently yield 1% of the cylinder value monthly (approximately 12% annually)
and continue until either party terminates upon 60 days written notice to the
other party. Upon any significant increase in the prime rate, we would attempt
to renegotiate the operating leases with our independent distributors with the
intent of mitigating our interest rate exposure on the Credit Facility. However,
there can be no assurance that we would be successful in such renegotiations or
that we would be able to mitigate any or all of the interest rate risk. To
quantify our exposure to interest rate risk, a 100 basis point increase in
interest rates would have increased interest expense for the year ended July 31,
2001 and 2000 by approximately $341,000 and $207,000, respectively. Actual
changes in interest rates may differ materially from the hypothetical
assumptions used in computing this exposure.

We use derivative financial instruments to manage exposure to fluctuations
in interest rates on our Credit Facility. These derivative financial
instruments, which are generally swap agreements, are not entered into for
trading purposes. A swap agreement is a contract to exchange a floating rate for
a fixed rate without the exchange of the underlying notional amount. In fiscal
2000, we entered into an interest rate swap agreement with a notional amount of
$10 million as a hedge of our variable interest rate debt represented by the
Credit Facility. Under the swap agreement, which expires in July 2003, we pay a
fixed rate of 7.36% and receive a rate equivalent to the one-month LIBOR. In
February 2001, the interest rate on the Credit Facility was changed to a rate
based on the prime rate and is no longer based on the benchmark interest rate of
LIBOR. However, for the three-month period ending July 31, 2001, the interest
rate swap was still an effective cash flow hedge.

We are exposed to commodity price risk related to changes in the price of
propane. If propane prices rise for an extended period, our gross margins and
results of operations could be negatively affected due to additional costs that
may not be fully recovered through an increase in our price to our customers.
Assuming that propane prices are not hedged and any increase cannot be recovered
through an increase in our price, a $.01 increase in the price per gallon of
propane would reduce the gross margin in our cylinder exchange segment by
approximately .2% or 20 basis points. Actual changes in margins may differ
materially from the hypothetical assumptions used in computing this exposure. We
have restructured our payment obligations to distributors and entered into a
series of monthly option contracts that are designed to reduce exposure to the
propane cost component of a significant portion of our total cylinder exchange
volume.

We invest our cash and cash equivalents in investment grade, highly liquid
investments consisting of money market instruments, bank certificates of deposit
and overnight investments in commercial paper. All of our transactions are
conducted and accounts are denominated in U.S. dollars and as such we do not
currently have exposure to foreign currency risk.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

BLUE RHINO CORPORATION

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REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders and Board of Directors of
Blue Rhino Corporation:

We have audited the accompanying consolidated balance sheets of Blue Rhino
Corporation and subsidiaries as of July 31, 2001, and 2000 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years then ended. Our audits also included the financial
statement schedule listed in the index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Blue Rhino Corporation at July 31, 2001, and 2000 and the consolidated results
of their operations and cash flows for each of the three years then ended, in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the related financial schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.

ERNST & YOUNG LLP

Greensboro, North Carolina
October 2, 2001

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BLUE RHINO CORPORATION

CONSOLIDATED BALANCE SHEETS
AS OF JULY 31, 2001 AND 2000
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

The accompanying notes are an integral part of the consolidated financial
statements.

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26

BLUE RHINO CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JULY 31, 2001, 2000 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The accompanying notes are an integral part of the consolidated financial
statements.

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27

BLUE RHINO CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 2001, 2000 AND 1999
(IN THOUSANDS, EXCEPT SHARE DATA)

The accompanying notes are an integral part of the consolidated financial
statements.

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28

BLUE RHINO CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, 2001, 2000 AND 1999
(IN THOUSANDS)

The accompanying notes are an integral part of the consolidated financial
statements.

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BLUE RHINO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Blue Rhino Corporation ("Blue Rhino" or the "Company") is the leading
provider of propane grill cylinder exchange as well as a leading provider of
complimentary propane and non-propane products to consumers. Blue Rhino cylinder
exchange provides consumers with a convenient means to exchange empty grill
cylinders for clean, safe, precision-filled cylinders. The Company has branded
cylinder displays at over 27,000 retail locations in 46 states plus Puerto Rico.
Blue Rhino cylinder exchange is offered at leading home improvement centers,
mass merchants, hardware, grocery and convenience stores. Cylinders are
delivered to retailers through a national network of 44 independent
distributors. A subsidiary, Uniflame Corporation, designs and imports patio
heaters, barbecue grills and various garden and fireplace products primarily
from Asia. These products are marketed primarily to home improvement centers,
mass merchants, and hearth stores. A subsidiary, QuickShip, Inc., provides
consumers with a convenient, full-service, in-store postal and parcel shipping
depot and provides retailers with another revenue source.

The consolidated financial statements of Blue Rhino Corporation (the
"Company") include the accounts of its wholly owned subsidiaries: Uniflame
Corporation ("Uniflame"); QuickShip, Inc. ("QuickShip"); Rhino Services, L.L.C.;
CPD Associates, Inc. and USA Leasing, L.L.C. All material intercompany
transactions and balances have been eliminated in consolidation.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition -- Revenues are recognized at the time of shipment. The
Company accrues for sales returns and other allowances based on its experience.

Accounts Receivable, Net -- Accounts receivable, net include allowances for
doubtful accounts of $848 and $744 at July 31, 2001 and 2000, respectively.

Inventories -- Inventories are valued at the lower of cost or market on a
first-in, first-out (FIFO) basis and consist primarily of finished goods
including cylinders, cylinder valves, grills, patio heaters, fireplace
accessories, and garden products. Cylinder inventories represent cylinders held
for sale.

Cylinders Held Under Operating Lease Agreements, Net -- Cylinders held
under operating lease agreements are stated at cost and depreciated on a
straight-line basis over their estimated useful lives of twenty-five years.
Cylinders held under operating lease agreements include the cost of proprietary
valves. The proprietary valves are depreciated on a straight-line basis over
their estimated useful lives of twelve years. Depreciation expense for the years
ended July 31, 2001 and 2000 was $1,434 and $856, respectively.

Software Development Costs -- Certain development costs for internal use
software are capitalized when incurred. Capitalization of software development
costs begins upon the establishment of technological feasibility and ceases when
the product is ready for release. Software development costs are amortized on a
straight-line basis over the expected life of the product ranging from three to
five years. Capitalized software development costs were $583 and $586 for years
ended July 31, 2001 and 2000, respectively. At July 31, 2001 and 2000, total
capitalized costs were $1,799 and $1,215 and accumulated amortization was $777
and $218, respectively.

Property, Plant and Equipment, Net -- Property, plant and equipment are
stated at cost. Depreciation and amortization are provided for using the
straight-line method over estimated useful lives ranging from 3 to 10 years for
cylinder displays, 3 to 5 years for computer hardware and software, and 5 to 30
years for building and equipment.

In the event that facts and circumstances indicate that the cost of
property, plant and equipment, or other long-lived assets may not be
recoverable, estimated future undiscounted cash flows are compared to the
asset's

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BLUE RHINO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

carrying value and, if less, an impairment loss is recognized in an amount by
which the carrying amount exceeds its fair value.

Intangibles, Net -- Excess cost over fair value of assets acquired is
amortized using the straight-line method over periods ranging from 10 to 30
years. Patents and other intellectual property are amortized over their
estimated useful lives. Non-compete agreements are amortized using the
straight-line method over the life of the agreements which is generally three
years. The Company periodically reviews the carrying value and estimated useful
life of its intangible assets to determine whether current events and
circumstances warrant adjustments. This valuation is performed using the
expected future undiscounted cash flows associated with the intangible assets
compared to the carrying value to determine if a write-down is required. To the
extent such projection indicates that the undiscounted cash flow is not expected
to be adequate to recover the carrying amounts, the assets are written down to
discounted cash flow.

Financial Instruments -- Financial instruments consist of cash and cash
equivalents, accounts receivable, advances, notes receivable, short-term and
long-term debt and derivatives. The Company considers all highly liquid
investments with an original maturity of three months or less at the date of
purchase to be cash equivalents. At July 31, 2001 and 2000 the carrying amounts
of the Company's financial instruments approximated their fair values.

The Company uses derivative financial instruments to manage exposure to
fluctuations in interest rates on its variable rate debt. An interest rate swap
agreement is a contract to exchange floating rate for fixed interest payments
periodically over the life of the agreement without the exchange of the
underlying notional amount. The notional amount of the swap agreement is used to
measure interest to be paid or received and does not represent the amount of
exposure to credit loss. The differential paid or received under the interest
rate swap agreement is recognized as an adjustment to interest expense.

The Company uses derivative financial instruments to hedge against
fluctuations in the propane price component of its distributor payments (Note
16). The Company has entered into a combination of swaps and collars to hedge
against propane price fluctuations. The differential paid or received under the
agreements is recognized as an adjustment to cost of sales.

Advertising and Promotion -- The Company expenses advertising and promotion
costs as incurred and these costs are included as selling, general and
administrative expenses. Advertising and promotion costs for the years ended
July 31, 2001, 2000 and 1999 were $1,175, $1,216 and $129, respectively.

Income Taxes -- Deferred tax assets and liabilities are determined based on
the difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. A valuation allowance is recorded when it
is more likely than not that the deferred tax asset will not be realized.

Stock-Based Compensation -- The Company accounts for its stock option plans
in accordance with the provisions of Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation." Accordingly, since options
were granted at fair value, compensation expense has not been recognized for
stock options granted to date under the 1994 Stock Incentive Plan, the 1998
Stock Incentive Plan or the Director Stock Incentive Plan (Note 11).

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.

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31
BLUE RHINO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Reclassification -- Certain prior year amounts have been reclassified to
conform to the presentation adopted in fiscal 2001.

Recent Accounting Pronouncements -- In June 2001, the Financial Accounting
Standards Board issued Statements of Financial Accounting Standards No. 141,
Business Combinations, and No. 142, Goodwill and Other Intangible Assets,
effective for fiscal years beginning after December 15, 2001. Under the new
rules, goodwill (and intangible assets deemed to have indefinite lives) will no
longer be amortized but will be subject to annual impairment tests in accordance
with the Statements. Other intangible assets will continue to be amortized over
their useful lives.

The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of fiscal year 2002. As of July
31, 2001, the Company has unamortized intangibles of $32,282 that will be
subject to the transition provisions of the Statements. The Company has not yet
determined the impact of adopting these Statements on its earnings and financial
position, including whether it will be required to recognize any transitional
impairment losses as a cumulative effect of a change in accounting principle.
Application of the nonamortization provisions of the Statements is expected to
result in an increase in net income of approximately $2.6 million in fiscal
2002.

In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 143, Accounting for Asset Retirement
Obligations. The Statement requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. The Statement is effective for fiscal years beginning after June 15,
2002. The Company does not expect the adoption of Statement No. 143 to have a
material impact on its consolidated results of operations or financial position.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB No. 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. SAB No. 101
was adopted in the fourth quarter of fiscal 2001. There was no material impact
on the Company's consolidated results of operations or financial position.

3. CONCENTRATION OF CREDIT RISK

The Company's cash and cash equivalents are held by high-quality financial
institutions, thereby reducing credit risk concentrations. Due to the geographic
dispersion and the high credit quality of the Company's significant customers,
credit risk relating to accounts receivable is limited. The Company performs
ongoing credit evaluations of its customers' financial condition and, generally,
requires no collateral on accounts receivable. The Company's three largest
customers accounted for a total of approximately 55%, 44%, and 49% of net
revenues in the years ended July 31, 2001, 2000 and 1999, respectively, as
follows:

Approximately 46% and 49% of accounts receivable at July 31, 2001 and 2000,
respectively, were from these customers. If the financial condition and
operations of these customers deteriorate, the Company's operating results could
be adversely affected.

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BLUE RHINO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. CYLINDERS AND CYLINDER DISPLAYS LEASED UNDER OPERATING LEASE AGREEMENTS

The Company enters into operating lease agreements with its distributors
for cylinders and cylinder displays for use within each distributor's territory.
Under these leases, the distributor (lessee) is obligated to pay for all
maintenance, installation, deinstallation, taxes and insurance related to the
cylinders and cylinder displays. The lessee bears all risk of loss and damage to
the cylinders and, in the event of loss or damage, is required to repair or
replace the cylinders. The leases continue until either party terminates upon 60
days written notice to the other party. As of July 31, 2001, cylinders of
$25,250 with accumulated depreciation of $2,300 and cylinder displays of $15,844
with accumulated depreciation of $4,541 were under lease. Lease income for the
years ended July 31, 2001, 2000 and 1999 was $4,642, $3,676 and $1,985,
respectively. As of July 31, 2001, estimated future minimum rental payments to
be received are approximately $4,198 per year through the year 2006.

5. PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment consists of the following at July 31:

Depreciation and amortization expense for the years ended July 31, 2001,
2000 and 1999 was $4,384, $2,844 and $1,995, respectively.

6. INTANGIBLES, NET

Intangibles consist of the following at July 31:

Amortization expense for the years ended July 31, 2001, 2000 and 1999 was
$2,644, $891, and $355, respectively.

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33
BLUE RHINO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

Long-term debt and capital leases consist of the following at July 31:

The aggregate maturities of long-term debt and capital lease obligations at
July 31, 2001 are as follows:

In June 2001, the Company amended and extended its existing credit facility
(as amended, the "Credit Facility"). The Credit Facility consists of two
separate facilities -- a $38,000 revolving line of credit for general corporate
purposes, inclusive of payments made under letters of credit issued for the
benefit of the Company, and a $3,247 seasonal line for general corporate
purposes. No further borrowings may be made against the seasonal line. The
Credit Facility requires the Company to meet certain covenants, including
minimum net worth and cash flow requirements. The Credit Facility is
collateralized by a lien on substantially all of the Company's assets. The
Credit Facility bears interest at the prime rate plus 2% per annum. In the event
that the total borrowings under the credit facility exceed $28,000 as of
December 31, 2001, the rate will be the prime rate plus 3% per annum thereafter.
The Credit Facility matures on December 31, 2002. At July 31, 2001 the interest
rate on both the revolving line of credit and seasonal line was 8.75%.

On June 15, 2001, the Company completed a $15 million private placement of
subordinated debt to an institutional investor. The agreement requires the
Company to meet certain cash flow and other covenants and contains restrictions
on capital expenditures and the payment of cash dividends. The debenture bears
interest at the annual rate of 13%, payable quarterly. The principal balance
matures on August 31, 2006. In addition, the Company issued a warrant to the
investor to purchase 1,372,071 shares of common stock, with an exercise price of
$3.8685 per share (subject to adjustment for organic changes and for certain
future issuances below the then-existing exercise price) valued at $1,200. The
warrant can be exercised at the holder's discretion in

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34
BLUE RHINO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

whole or in part any time until the later of June 15, 2011 or five years after
payment of all amounts due under the debenture.

Other includes obligations bearing interest at various rates between 6.72%
and 7.75%.

8. COMMITMENTS AND CONTINGENCIES

The Company leases certain facilities and office equipment under
non-cancelable operating leases with original terms ranging from 36 to 60 months
(Note 13). Additionally, the Company has certain computer hardware and software
maintenance and support agreements. Rent expense and fees on these
non-cancelable operating leases and service agreements from both affiliates and
non-affiliates for the years ended July 31, 2001, 2000 and 1999 was $1,034,
$480, and $392 respectively.

Future minimum payments at July 31, 2001 under non-cancelable operating
leases and service agreements with initial or remaining terms of one year or
more to both affiliates and non-affiliates are $1,087 in 2002, $603 in 2003,
$386 in 2004, $246 in 2005 and $0 in 2006.

The Company is involved in various legal proceedings encountered in the
normal course of business. In the opinion of management, the resolution of these
matters will not have a material adverse effect on the Company's consolidated
financial position or results of operations.

9. EQUITY INVESTMENTS

R4 Technical Center -- North Carolina, LLC

On April 28, 2000, the Company entered into a joint venture agreement to
operate and manage an automated propane bottling and cylinder refurbishing
plant. R4 Technical Center North Carolina, LLC ("R4 Tech") began operations in
May 2000. The Company received a 49% ownership interest in the joint venture in
exchange for its net contribution of $3,430, which is being accounted for under
the equity method of accounting. The Company recognized its portion of the loss
in the joint venture for the period ended July 31, 2001 and 2000 of $2,572 and
$403, respectively. At July 31, 2001, the Company had advances outstanding of
$5,235 to R4 Tech. Manchester Tank & Equipment Co. owns a 50% interest in the
joint venture, and Platinum Propane, LLC owns the remaining 1% interest in the
joint venture.

Summary financial information for R4 Tech as of and for the periods ended
July 31, 2001 and 2000 is as follows:

Bison Valve, LLC

On February 12, 1998, the Company invested $635 in Bison Valve, LLC ("Bison
Valve"). Bison Valve was formed to market, produce and sell a specialty valve to
the Company's distributors and third parties. The Company accounted for its
investment in Bison Valve using the equity method of accounting to reflect the
Company's funding of certain losses incurred by this entity primarily related to
researching, developing, marketing and producing certain propane products. The
Company recorded a loss of $311 for the year ended

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BLUE RHINO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

July 31, 1999, to reflect the operating results of the investee, Bison Valve.
The Company acquired the assets of Bison Valve in September 1999 (Note 10).

10. ACQUISITIONS

QuickShip, Inc.

On October 26, 2000, the Company completed the acquisition of QuickShip,
Inc. a retail shipping service company previously based in Lenexa, Kansas.
QuickShip, a wholly owned subsidiary of the Company, offers its service at over
300 retail locations in 29 states. The aggregate purchase price, including
certain acquisition costs, was approximately $9,803, comprised of approximately
$972 in cash and deferred payments, $86 in a five-year warrant to purchase
100,000 shares of common stock, $1,945 in liabilities assumed and $6,800 paid in
the form of shares of Series A Convertible Preferred Stock at $6.00 per share.
This acquisition has been accounted for as a purchase. The purchase price was
allocated based on an independent valuation as follows: approximately $7,433 to
intangibles, approximately $2,201 to property, plant, and equipment consisting
primarily of software and the balance to other assets and liabilities.

Uniflame, Inc.

On April 4, 2000, the Company completed the acquisition of substantially
all of the assets of Uniflame, Inc., including its equity interest in its
subsidiary Uni-Asia, Ltd. Uniflame, a wholly owned subsidiary of the Company,
designs and imports barbecue grills, patio heaters, garden products and
fireplace accessories. The aggregate purchase price was $13,291, of which
approximately $11,286 was allocated to intangibles consisting of goodwill and
non-compete agreements. The purchase price was made up of $4,348 in cash
obtained from the Company's Credit Facility (Note 7), the issuance of 478,716
shares of common stock valued at $6,693 and the issuance of $2,250 of notes
payable. The net assets acquired consisted primarily of inventories, accounts
receivable, and liabilities assumed.

International Propane Products, LLC

On April 3, 2000, the Company completed the acquisition of substantially
all of the assets relating to patio heaters and brass valves for propane
cylinders, including certain intellectual property, developed and distributed by
International Propane Products, LLC, a wholesale and design company. The
aggregate purchase price, including certain acquisition costs, was $4,424, of
which approximately $4,237 was allocated to intangibles consisting of goodwill
and non-compete agreements. The purchase price was made up of $2,888 in cash
obtained from the Company's Credit Facility (Note 7), the issuance of 83,572
shares of common stock valued at $1,123, and $413 of obligations for non-compete
and minimum deferred purchase price agreements. The deferred purchase price is
payable on a quarterly basis for a term equal to the lesser of (a) the life of
the patent that may be issued with respect to the acquired intellectual
property, but in any event not less than five years, or (b) the period ending on
the last day of the first one year period during which the Company does not
make, use or sell the patio heaters. The Company has agreed to pay a minimum
deferred purchase price that may be as much as $530 under certain circumstances.
Also included in the purchase agreement is a provision to pay 1% of future sales
from patio heaters.

Bison Valve, LLC

On September 17, 1999, the Company acquired certain assets related to the
overfill prevention device ("OPD") developed, manufactured and marketed by Bison
Valve. The acquired assets included OPD molds, dies, and all intellectual
property relating to the OPD developed by Bison Valve, which includes two patent
applications on the OPD. The aggregate purchase price was $1,553, of which
$1,470 was allocated to intangibles consisting of patents and non-compete
agreements. The purchase price consisted of $1,239 in cash and a ten year
warrant to purchase 100,000 shares of common stock with an exercise price of
$7.40 per share,

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BLUE RHINO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

which was valued at $314. Also included in the purchase agreement is a provision
to pay between 2 1/2% and 12% of future sales of OPDs over the life of the
patents.

Cylinder Exchange Businesses

During fiscal 2001, 2000 and 1999, the Company completed a number of
cylinder exchange acquisitions for an aggregate cash purchase price of
approximately $362, $2,067 and $7,488, respectively, related to assets including
cylinders, cylinder displays and other equipment and the right, title and
interest in and to sellers' retail propane cylinder exchange accounts and
locations.

During the years ended July 31, 2001, 2000 and 1999, the Company acquired
certain assets described above under various agreements. These acquisitions are
summarized as follows:

The 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.
The following unaudited pro forma summary presents financial information for the
Company for the years ended July 31, 2001, and 2000 as if the acquisitions had
occurred on August 1, 1999. These pro forma results have been prepared for
comparative purposes and do not purport to be indicative of what would have
occurred had the acquisitions been made on August 1, 1999, nor is it indicative
of future results.

11. STOCKHOLDERS' EQUITY

Preferred Stock

On September 7, 2000 (the "Closing Date") the Company completed a private
placement of 1,716,667 shares of its Series A Convertible Preferred Stock to two
institutional investors under common management and three individuals, including
Billy D. Prim, its Chairman, Chief Executive Officer and President, and Andrew
J. Filipowski, its Vice Chairman, for an aggregate purchase price of
approximately $10,300. Messrs. Prim and Filipowski invested $50 and $250 for
8,333 and 41,667 shares of Series A Convertible Preferred Stock, respectively.
In addition, on October 26, 2000, the Company issued 1,133,333 shares of Series
A Convertible Preferred Stock for an aggregate purchase price of $6,800 in
connection with its acquisition of QuickShip (Note 10). The Series A Convertible
Preferred Stock accrues a cumulative dividend on the 20th day of December,
March, June, and September of each year based on an annual rate of: 5% through
the third anniversary of the Closing Date; 12% from the third anniversary of the
Closing Date through the fourth anniversary of the Closing Date; and 15%
thereafter. At the election of the Company, the dividend may be paid in cash, in
shares of common stock or a combination of cash and shares of common stock at
any

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BLUE RHINO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

time prior to conversion of the Series A Convertible Preferred Stock and must be
paid at conversion. If the Company elects to pay the dividend in shares of
common stock, the shares will be valued based on a 30-day trailing average
ending three business days prior to the date the shares are authorized to be
issued. As of July 31, 2001, the Company had accrued dividends on the
outstanding shares of Series A Convertible Preferred Stock of $770. The Company
currently intends to pay the accrued dividends in shares of common stock.

Each share of Series A Convertible Preferred Stock is convertible into
common stock at the option of the holder at any time after the first anniversary
of the Closing Date. If the market price of the common stock exceeds a
prescribed threshold, the Series A Convertible Preferred Stock is convertible
into common stock at the option of the Company at any time after the second
anniversary of the Closing Date. Each share of Series A Convertible Preferred
Stock is initially convertible into one share of common stock, subject to
adjustment for subdivisions, combinations, stock dividends, reclassifications
and other similar transactions and certain stock issuances below the
then-existing conversion price. The Series A Convertible Preferred Stock has a
liquidation preference over the Company's common stock. The holders of the
shares of Series A Convertible Preferred Stock have certain registration rights.

Warrants to purchase 414,116 shares of the Company's common stock at an
exercise price of $8.48 per share contained anti-dilution provisions that were
triggered as a result of the issuance of 1,716,667 shares of Series A
Convertible Preferred Stock at $6.00 per share and the issuance of 1,372,071
common stock warrants at $3.8685 per share in connection with the private
placement of subordinated debt. As a result, the exercise price of such warrants
were reset at $3.8685 and the number of shares of common stock for which those
warrants are exercisable was proportionately increased, which may result in
additional dilution for existing stockholders.

In connection with the issuance of 1,716,667 shares of Series A Convertible
Preferred Stock, the Company has paid William Blair & Co. a placement fee of
$500 in cash and issued a five-year warrant to purchase 16,667 shares of common
stock at an exercise price of $6.00 per share.

Private Placement

In September 1999, the Company completed a $7,200 private placement of
981,119 units, each consisting of one share of the Company's common stock and
one warrant to purchase 0.35 shares of common stock. The offering was made only
to "accredited investors", as defined in Rule 501(a) of Regulation D. The
investors included the following officers and directors of the Company: Billy D.
Prim, Craig J. Duchossois, Andrew J. Filipowski, Mark Castaneda, Steven D.
Devick, Richard A. Brenner and Jerald D. Shadley, who in the aggregate purchased
438,747 of the 981,119 units sold (Note 13). The price per unit was $7.375,
which was the closing price of the Company's common stock on September 3, 1999,
the final trading day prior to the consummation of the offering. The warrants
may be exercised at a price equal to $8.48 per share at any time prior to
September 7, 2004. The net proceeds from this offering were used to repay
indebtedness.

Stock Compensation Plans

The Company has three active stock-based compensation plans (the "Plans")
for outside directors, officers and certain employees to receive stock options
and other equity-based awards. Under the Plans, the Company may, at its
discretion, issue incentive or non-qualified stock options, stock appreciation
rights, restricted stock or deferred stock.

Stock options generally are granted with an exercise price equal to 100% of
the market value per share of the common stock on the date of grant. The options
vest over one to five years and expire ten years from the date of grant. The
terms and conditions of the awards made under the plans vary but, in general,
are at the

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BLUE RHINO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

discretion of the board of directors or its appointed committee. Under the Plans
the Company has reserved 2,739,875 shares of common stock for use and
distribution under the terms of the Plans.

The Company also has a Distributor Stock Option Plan (the "Distributor
Option Plan") for Blue Rhino distributors and their stockholders, partners,
members, directors, general partners, managers, officers, employees and
consultants. The Company has reserved 400,000 shares of common stock for
issuance upon the exercise of options granted under the Distributor Option Plan.
Options issued under the Distributor Option Plan vest ratably over four years
and expire ten years from the date of grant. For the years ended July 31, 2001,
2000 and 1999, the Company recognized compensation expense included in cost of
sales of approximately $180, $138 and $272, respectively, related to stock
options outstanding under the Distributor Option Plan.

A summary of the Company's stock compensation plans at July 31, 2001, 2000
and 1999 and changes during the periods then ended is presented in the table
below:

For various price ranges, weighted average characteristics of outstanding
stock options at July 31, 2001 were as follows:

The Company accounts for its stock compensation plans in accordance with
the provisions of APB No. 25, and complies with the disclosure provisions of
SFAS No. 123. Accordingly, since options were granted at fair value,
compensation expense has not been recognized for stock options granted to date
under the 1994

35
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BLUE RHINO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Stock Incentive Plan, the 1998 Stock Incentive Plan or the Director Option Plan.
Had compensation expense for all of the Plans been determined for options
granted since August 1, 1995 consistent with SFAS No. 123, the Company's pro
forma net income/(loss) and earnings/(loss) per share for the years ended July
31, 2001, 2000 and 1999 would have been as follows:

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for all grants: expected lives of five years; expected
volatility ranging from 30% to 90%; expected dividends of zero and a risk-free
interest rate ranging from 3.5% to 5.8%.

Employee Stock Purchase Plan

The Company established an Employee Stock Purchase Plan (the "ESPP")
effective January 1, 2000, for all eligible employees. Under the ESPP, shares of
the Company's common stock are purchased during annual offerings commencing on
January 1 of each year. Shares are purchased at three-month intervals at 85% of
the lower of the fair market value on the first day of the offering or the last
day of each three-month purchase period. Employees may purchase shares having a
value not exceeding 15% of their annual compensation, or $25,000, whichever is
less. During the years ended July 31, 2001 and 2000, employees purchased 57,449
and 4,880 shares, respectively, at an average price of $2.13 per share and $7.34
per share, respectively. At July 31, 2001, 237,671 shares were reserved for
future issuance under the ESPP.

Common Stock Warrants

The Company has issued common stock warrants in connection with various
debt, equity and acquisition transactions. At July 31, 2001, warrants to
purchase a total of 2,935,704 shares of common stock were outstanding and
exercisable from the present time through June 15, 2011, with exercise prices
ranging from $3.87 to $8.48 per share.

Shares Reserved for Future Issuance

The Company has reserved 9,163,250 authorized shares of common stock for
future issuance as of July 31, 2001.

36
40
BLUE RHINO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. EARNINGS (LOSS) PER SHARE:

The basic and diluted earnings (loss) per share was determined as follows:

Options to purchase common stock and the assumed exercise of warrants
during the years ended 2001 and 2000 have been excluded from the computation of
diluted loss per common share as they were anti-dilutive.

13. RELATED PARTY TRANSACTIONS

On September 7, 2000 the Company completed a private placement of 1,716,667
shares of its Series A Convertible Preferred Stock to two institutional
investors under common management and three individuals, including Billy D.
Prim, its Chairman, Chief Executive Officer and President, and Andrew J.
Filipowski, its Vice Chairman, for an aggregate purchase price of approximately
$10,300. Messrs. Prim and Filipowski invested $50 and $250 for 8,333 and 41,667
shares of Series A Convertible Preferred Stock, respectively (Note 11).

During the years ended July 31, 2001, 2000 and 1999, the Company paid
professional legal fees to Pedersen & Houpt, a Professional Corporation ("P&H")
in the amount of $173, $459, and $344, respectively. A principal of P&H is also
a director of the Company.

The Company leases facilities from affiliates under noncancelable operating
leases that expire December 2001 and March 2005. Rent expense under these leases
was $567, $299, and $76 for the years ended July 31, 2001, 2000 and 1999,
respectively.

As of July 31, 1999, Platinum Propane Holding, LLC ("PPH") and Ark Holdings
("Ark") were affiliates and together operated the Company's eight affiliated
distributors. PPH began operations as a distributor during fiscal 1996, while
Ark began operations as a distributor during fiscal 1998. In August 1999, the
Company's Chairman, Chief Executive Officer and President, Billy D. Prim, and
Vice Chairman, Andrew J. Filipowski sold all of their interests in PPH and Ark
distributors to an existing investor in PPH. This investor is not affiliated
with Blue Rhino Corporation. Messrs. Prim and Filipowski together owned
approximately 42% of PPH, a holding company for five Blue Rhino distributors.
Sales from PPH's distributors represented approximately 32% of Blue Rhino's net
revenues for the year ended July 31, 1999. In addition, Messrs. Prim and
Filipowski together owned approximately 47% of Ark, a holding company for three
Blue Rhino distributors. Sales from Ark distributors represented approximately
6% of Blue Rhino's net revenues for the year ended July 31, 1999. Both Messrs.
Prim and Filipowski continue to serve as directors for PPH and Ark.

37
41
BLUE RHINO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following represents related party balances with these affiliates
outstanding at July 31, 1999 and transactions for the one-month period ended
August 31, 1999 and the fiscal year ended July 31, 1999:

14. PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consists of the following at July
31:

15. INCOME TAXES

The provision for income taxes for the years ended July 31, 2001, 2000 and
1999 consisted of $123, $32 and $30 of current tax expense, respectively.

A reconciliation of the differences between the statutory federal income
tax rate of 34% and the effective tax rate for the years ended July 31, 2001,
2000 and 1999 is as follows:

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BLUE RHINO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liability are as follows:

At July 31, 2001, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $35,950, which are available to
offset future federal taxable income, if any, in varying amounts from 2002
through 2021. However, the utilization of the net operating losses will be
subject to certain limitations as prescribed by Section 382 of the Internal
Revenue Code.

16. DERIVATIVE INSTRUMENTS

Effective August 1, 2000, the Company adopted Statement of Financial
Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133") which establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. All derivatives, whether designated
in hedging relationships or not, are required to be recorded on the balance
sheet at fair value. If the derivative is designated as a fair value hedge, the
changes in the fair value of the derivative and of the hedged item attributable
to the hedged risk are recognized in earnings. If the derivative is designated
as a cash flow hedge, the effective portions of changes in the fair value of the
derivative are recorded in other comprehensive income ("OCI") and are recognized
in the income statement when the hedged item affects earnings. Ineffective
portions of changes in the fair value of cash flow hedges are recognized in
earnings. The cumulative effect of the adoption of SFAS 133 resulted in a
reduction to OCI of $131.

The Company uses derivative instruments to manage exposure to interest rate
fluctuations and wholesale propane price volatility. The Company's objective for
holding derivatives is to minimize risks by using the most effective methods to
eliminate or reduce the impacts of these exposures.

In July 2000, the Company entered into an interest rate swap agreement, as
required under its bank credit facility, with a notional amount of $10,000 as a
cash flow hedge of the variable interest rate debt outstanding under its credit
facility. Under the swap agreement, which expires in July 2003, the Company pays
a fixed rate of 7.36% and receives a rate equivalent to the one-month London
Interbank Offered Rate ("LIBOR"). The swap was designated as a hedge of the
benchmark interest rate. In February 2001, the interest rate on the bank credit
facility was changed to a rate based on the prime rate. As a result, the
interest rate risk being hedged is no longer based on the benchmark interest
rate of LIBOR. However, for the six-month period ending July 31, 2001, the
interest rate swap was still an effective cash flow hedge. As a result of the
interest rate swap

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BLUE RHINO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

agreement, there was a $154 charge to interest expense during the year ended
July 31, 2001 for the effective portion of the hedge. Hedge ineffectiveness,
determined in accordance with SFAS 133, resulted in a $12 charge to other
expense during the year ended July 31, 2001. The fair value of the derivative at
July 31, 2001 was ($636) and it is reflected in the balance sheet in long-term
debt and capital lease obligations, less current maturities.

Effective March 1, 2001, the Company restructured its payment obligations
to distributors such that each payment will include a fixed component and a
variable component based on the price of propane. In March 2001, the Company
entered into a derivative commodity swap instrument as a cash flow hedge against
fluctuations in the propane price component of the distributor payments. In May
through July 2001, the Company entered into additional derivative collar
instruments to hedge additional propane price exposure on a portion of its
anticipated cylinder exchange volume through December 2002. In the aggregate,
the derivative instruments hedge approximately 50% to 95% of the Company's
anticipated monthly cylinder exchange volume during the period from August 2001
through December 2002. As a result of the propane derivative instruments, there
was a $235 charge to cost of sales during the year ended July 31, 2001 for the
effective portion of the hedge. Hedge ineffectiveness, determined in accordance
with SFAS 133, had no impact on earnings for the twelve-month period ended July
31, 2001. The fair value of the derivative at July 31, 2001 was a ($610) current
liability that is reflected in the balance sheet in current portion of long-term
debt and capital lease obligations and a $132 long-term asset that is reflected
in the balance sheet in other assets.

The net derivative loss recorded in OCI will be reclassified into earnings
over the term of the underlying cash flow hedges. The amount that will be
reclassified into earnings will vary depending upon the movement of the
underlying interest rates and propane prices. As interest rates and propane
prices decrease, the charge to earnings will increase. Conversely, as interest
rates and propane prices increase, the charge to earnings will decrease.

The following is a rollforward of the components of OCI for the year ended
July 31, 2001:

Transition adjustment from adoption of SFAS 133............. $ 131
Net change associated with current period hedge
transactions.............................................. 1,372
Net amount reclassified into earnings during the year....... (401)
------
Ending balance deferred in OCI.............................. $1,102
======

Total comprehensive loss was ($5,054) for the year ended July 31, 2001.

17. DEFINED CONTRIBUTION PLAN

The Company maintains a defined contribution employee benefit plan ("401(k)
plan"), which covers all employees over 21 years of age who have completed a
minimum of six months of employment. The 401(k) plan allows for employees'
contributions, which, effective in July 1999, are matched by the Company up to a
specific amount under the provisions of the 401(k) plan. Company contributions
during the years ended July 31, 2001, 2000 and 1999 were approximately $135, $85
and $3 respectively.

40
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BLUE RHINO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

18. SUPPLEMENTAL INFORMATION TO CONSOLIDATED STATEMENTS OF CASH FLOWS

The Company had certain non-cash investing and financing activities during
the years ended July 31, 2001, 2000 and 1999 as follows:

Interest paid during the years ended July 31, 2001, 2000 and 1999 was
$4,562, $2,066 and $778, respectively.

19. SEGMENT INFORMATION

The Company has two reportable segments: cylinder exchange and products and
other. The cylinder exchange segment relates to cylinder exchange transactions
and lease income from cylinders and cylinder displays. The products and other
segment includes the activities required to sell patio heaters, grills,
fireplace accessories and garden products, which are managed and operated
through Uniflame. In addition, the financial information related to QuickShip, a
retail shipping services company acquired in October 2000, is included within
the products segment as it is not currently material on a stand-alone basis
(Note 10).

The Company evaluates performance and allocates resources based on several
factors, of which the primary financial measure is business segment operating
income, defined as earnings before interest, taxes, depreciation and
amortization (EBITDA). The accounting policies of the segments are the same as
those described in the summary of significant accounting policies (Note 2).
There are no significant inter-segment revenues.

The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and operational strategies. The majority
of the products business was acquired in the Uniflame acquisition.

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BLUE RHINO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following items are included in income (loss) before income taxes:

The following items are included in the determination of identifiable
assets:

20. NON-RECURRING ITEMS AND SPECIAL CHARGES

During the year ended July 31, 2001, the Company incurred a charge of $449
related to costs incurred in connection with refinancing its bank credit
facility.

In September 1999, the Company issued $7,000 of 5% Convertible Notes (the
"Convertible Notes"). The Convertible Notes were redeemed in July 2000 with
$7,000 of proceeds from the Credit Facility. The early retirement of the
Convertible Notes resulted in an extraordinary loss of $486 in the year ended
July 31, 2000 due to unamortized discount and other debt issuance costs.

During the year ended July 31, 1999, the Company incurred a charge of $551
related to costs incurred in connection with an offering of common stock, which
was terminated before completion in February 1999 due to unfavorable market
conditions.

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BLUE RHINO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

21. QUARTERLY FINANCIAL DATA (UNAUDITED)

Note: Quarterly amounts may not add to annual amounts due to the effect of
rounding on a quarterly basis.

43
47

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

44
48

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is contained in our definitive proxy
statement relating to our Annual Meeting of Stockholders scheduled to be held on
December 18, 2001, which will be filed within 120 days after the end of the
fiscal year covered by this Annual Report on Form 10-K, under the captions
"Proposal 1 -- Election of Directors," "Information Concerning Executive
Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance," which
are incorporated by reference herein.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is contained in our definitive proxy
statement relating to our Annual Meeting of Stockholders scheduled to be held on
December 18, 2001, which will be filed within 120 days after the end of the
fiscal year covered by this Annual Report on Form 10-K, under the caption
"Executive Compensation," which is incorporated by reference herein.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is contained in our definitive proxy
statement relating to our Annual Meeting of Stockholders scheduled to be held on
December 18, 2001, which will be filed within 120 days after the end of the
fiscal year covered by this Annual Report on Form 10-K, under the caption
"Beneficial Ownership of Directors, Executive Officers and Certain Beneficial
Owners," which is incorporated by reference herein.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is contained in our definitive proxy
statement relating to our Annual Meeting of Stockholders to be held on December
18, 2001, which will be filed within 120 days after the end of the fiscal year
covered by this Annual Report on Form 10-K, under the caption "Certain
Transactions," which is incorporated by reference herein.

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49

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 Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements

(2) Financial Statement Schedules

Schedule II -- Valuation and Qualifying Accounts -- see additional
section of this Report.

(3) Exhibits

See the Exhibit Index following the Signature Page, which is
incorporated herein by reference.

(b) Reports on Form 8-K filed in the fourth quarter of fiscal 2001

(c) The exhibits required by Item 601 of Regulation S-K are filed herewith
and incorporated by reference herein. The response to this portion of Item 14 is
submitted under Item 14(a)(3).

(d) The response to this portion of Item 14 is submitted under Item
14(a)(2).

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50

SIGNATURES

Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

BLUE RHINO CORPORATION

By: /s/ BILLY D. PRIM
------------------------------------
Billy D. Prim
Chairman of the Board, President and
Chief Executive Officer

Date: October 9, 2001

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.

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SCHEDULE II

BLUE RHINO CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FISCAL YEARS ENDED JULY 31, 2001, 2000 AND 1999
(IN THOUSANDS)

---------------

(1) Includes an allowance for doubtful accounts in the amount of $69 acquired in
Uniflame acquisition.
52

EXHIBITS