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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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 October 31, 2004
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from __________________
to ___________________
Commission File Number 000-31797
VERMONT PURE HOLDINGS, LTD.
---------------------------
(Exact name of business issuer in its charter)
DELAWARE 03-0366218
- ------------------------------------- -----------------------------------------
(State or other jurisdiction of I.R.S. Employer Identification Number
incorporation or organization)
P.O. Box 536, 45 Krupp Drive, Williston, Vermont 05495
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(Address of principal executive offices and zip code)
Issuer's telephone number, including area code: (802) 860-1126
Securities registered pursuant to Section 12(g) of the Act: None
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.001 per share
---------------------------------------
(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 requirement 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. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value of the registrant's voting and non-voting common
equity held by non-affiliates of the registrant, computed by reference to the
last sale price per share of common stock on April 30, 2004, the last day of the
registrant's most recently completed second fiscal quarter, as reported on the
American Stock Exchange, was $33,127,187.
The number of shares outstanding of the Issuer's Common Stock, $.001 par value,
was 21,549,826 on January 24, 2005.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement, which is expected to be
filed not later than 120 days after the registrant's fiscal year ended October
31, 2004, to be delivered in connection with the registrant's annual meeting of
stockholders, are incorporated by reference to Part III into this Form 10-K.
Table of Contents
PAGE
----
PART I
Item 1. Business 3
Item 2. Properties 11
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 13
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 25
Item 8. Financial Statements and Supplementary Data 25
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 25
Item 9A. Controls and Procedures 26
Item 9B. Other Information 26
PART III
Item 10. Directors and Executive Officers of the Registrant 27
Item 11. Executive Compensation 27
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 27
Item 13. Certain Relationships and Related Transactions 27
Item 14. Principal Accountant Fees and Services 27
ITEM IV
Item 15. Exhibits and Financial Statement Schedules 28
Signatures
In this annual report on Form 10-K, "Vermont Pure," the "Company," "we," "us"
and "our" refer to Vermont Pure Holdings, Ltd. and its subsidiaries, taken as a
whole, unless the context otherwise requires.
This Annual Report on Form 10-K contains references to trade names, label
design, trademarks and registered marks of Vermont Pure Holdings, Ltd. and its
subsidiaries and other companies, as indicated. Unless otherwise provided in
this Annual Report on Form 10-K, trademarks identified by (R) are registered
trademarks or trademarks, respectively, of Vermont Pure Holdings, Ltd. or its
subsidiaries. All other trademarks are the properties of their respective
owners.
Market data used throughout this annual report was obtained from internal
company estimates and various trade associations which monitor the industries in
which we compete. We have not independently verified this market data.
Similarly, internal company estimates, while believed to be reliable, have not
been verified by any independent sources, and neither we nor any other person
makes any representation as to the accuracy of the information. While we are not
aware of any misstatements regarding any industry or similar data presented
herein, such data involves risks and uncertainties and is subject to change
based on various factors.
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PART I
ITEM 1. BUSINESS.
INTRODUCTION AND INDUSTRY TRENDS
Vermont Pure Holdings, Ltd. is engaged in the production, marketing and
distribution of bottled water and the distribution of coffee, ancillary
products, and other office refreshment products. Through February 2004, when we
divested the retail segments of our business, our products were sold
predominantly in the Northeast, as well as in the Mid-Atlantic and Mid-Western
United States. Commencing March 2004, we operate exclusively as a Home and
Office delivery business, using our own trucks to distribute throughout New
England, New York, and New Jersey. All of our water products are still
(non-sparkling) waters.
We believe that consumers perceive bottled water to be a healthy and refreshing
beverage alternative to beer, liquor, wine, soft drinks, coffee and tea. United
States bottled water sales have risen at an average annual rate of approximately
8% over the past 10 years, and we anticipate that sales of bottled water will
continue to grow as consumers focus on health and fitness, alcohol moderation
and the avoidance of both caffeine and sodium. Bottled water has become a
mainstream beverage as the centerpiece of many consumers' healthy living
lifestyles. In addition, we believe that the development and continued growth of
the bottled water industry reflects growing public awareness of the potential
contamination and unreliability of municipal water supplies.
In recent years, the bottled water industry has experienced periods of
significant consolidation and aggressive price competition. Large multi-national
companies such as Perrier (owned by Nestle), Groupe Danone and Suntory Water
Group have been active acquirers of small and medium sized regional bottled
water companies. In 2003, Danone and Suntory pooled their respective United
States assets in the industry into a joint venture to create the largest Home
and Office water delivery company in the country. In general, the primary
drivers of this consolidation are the incremental growth realized by acquiring
the target company's customer base, and synergies resulting from integrating
existing operations. Moreover, the entrance of major soft drink bottlers,
notably Coca-Cola (with Dasani) and Pepsi Cola (with Aquafina), into the
bottling and distribution segment of the industry has had a major impact on the
bottled water industry.
COMPANY BACKGROUND
Incorporated in Delaware in 1990, we originally developed Vermont Pure(R)
Natural Spring Water as our flagship brand in the still, non-carbonated retail
consumer category. Over the next decade, we grew aggressively both internally
and through acquisitions, primarily in the Home and Office market. In addition
to marketing the Vermont Pure(R) brand, in 1995 we renewed marketing efforts
with respect to our original trademark, Hidden Spring(R). We expanded our
product lines to include more sizes and features, such as sports caps on
selected bottle sizes for convenient single serve, and multi-packs for the
grocery and convenience store channels.
By 1996, we began to pursue a strategy of diversifying our product offerings.
Most notably, we began to utilize an acquisition strategy in 1996 to minimize
our reliance on the retail consumer side of the business and to increase growth
in other categories. Prior to 1996, our retail business represented 90% of our
total sales revenues. In 2003, by way of contrast, our Home and Office
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delivery category represented 65% of our total sales. Based on historical data,
this sales volume would place us fourth in the United States and second in the
northeast region for this type of distribution. Additional benefits of
increasing the Home and Office channel have included higher gross margins and
reduced seasonality of our sales.
In October 2000, we merged with the Crystal Rock Spring Water Company, Inc. of
Watertown, Connecticut. Crystal Rock had historically focused its manufacturing
resources on the still, non-carbonated segment of the bottled water industry.
Although its primary business had been the marketing and distribution of Crystal
Rock(R) brand of purified and mineralized drinking water to the Home and Office
delivery markets, it also distributed coffee, other refreshment type products,
and vending services in Connecticut, New York and Massachusetts. We continued
our acquisition strategy in fiscal 2002 and 2003 with smaller acquisitions in
our established Home and Office markets.
We closed acquisitions in fiscal year 2004 with $5 million in annual sales in
our core market areas. The activity for the year culminated with the acquisition
of Mayer Brothers Home and Office division in Buffalo, NY, making us the largest
distributor in that market. Previously in the year, we had acquired Mayer
Brothers smaller Rochester operations. Combined these acquisitions solidified
our presence in the western New York region.
In 2004, we sold the retail segments (which we traditionally have referred to
separately as "PET" and "Gallon") of our business, while retaining our Home and
Office distribution business. The segments sold included our retail consumer
business under our own brands, as well as the private label business that we
packed for others. The asset sale included the springs, manufacturing facility,
inventory, and the related machinery and equipment located in Randolph Center,
Vermont. We retained the Vermont Pure(R) trademark and continue to distribute
water under that brand throughout our Home and Office distribution area, while
licensing it to the buyer, for a period of 30 years, for use in the bottling and
distribution of retail products. The buyer acquired our Hidden Spring(R)
trademark and licenses it back to us for Home and Office distribution. We
relocated our five-gallon Home and Office bottling operations from Randolph to
White River Junction, Vermont, and source our spring water under an existing
water supply agreement. Also in conjunction with the sale, we relocated our
corporate headquarters to our Williston, Vermont facility.
Although we are proud of the business and brands we built in the retail consumer
market, the goal of the transaction was to enable us to concentrate on our
higher margin, and more profitable, Home and Office business, which distributes
the Crystal Rock(R) brand of water, as well as our Vermont Pure(R) water, coffee
and other products. It is the culmination of a strategy that we began pursuing
in 1996, when we originally diversified into the Home and Office segment. Over
time, the retail segments became unprofitable to us, as margins have been
squeezed by intense competition in this segment of the market.
We continue to pursue an acquisition strategy to purchase independent Home and
Office bottlers and distributors in New England and New York State, and to grow
the business internally as well. Management's decision to expand in this market
has been driven by, among other things, attractive margins and good cash flows
from equipment rentals, as well as by the advantages of product diversification.
Moreover, the Vermont Pure(R) and Crystal Rock(R) brands in the multi-gallon or
Home and Office setting affords consumers an opportunity to sample the product,
which we believe augments retail sales and contributes to brand awareness.
4
To date, we have not experienced significant problems in integrating our
acquired businesses with our existing operations. However, the acquisition of
new businesses, particularly ones of significant size and complexity, may
require management to devote substantial time and energy to the successful,
efficient and timely integration of operations, labor forces, administrative
systems (including accounting practices and procedures and management
information systems), and varying corporate cultures. A failure to realize
expected synergies could have an adverse effect on our business. We believe
that, despite such risks, our acquisition strategy has been and continues to be
a success.
EXPANSION OF PRODUCT LINES
Following our merger with Crystal Rock, we leveraged our distribution system to
expand our product lines. In particular, coffee, a product that is counter
seasonal to water, became the second leading product in the distribution
channel, now accounting for 17% of our total sales in fiscal year 2004. We
generally buy coffee under contracts that set prices for up to eighteen months,
in order to maintain price and supply stability. Please refer to "Commodity
Price Risks -- Coffee" on page 25 of this report for additional information on
our coffee supply agreements. Because coffee is a commodity, we cannot ensure
that future supplies and pricing will not be subject to volatility in the world
commodity markets. Any interruption in supply or dramatic increase in pricing
may have an adverse effect on our business.
WATER SOURCES, TREATMENT, AND BOTTLING OPERATIONS
Water from the local municipality is the primary raw source for the Crystal
Rock(R) brand. The raw water is purified through a number of processes beginning
with filtration. Utilizing carbon and ion exchange filtration systems, we remove
chlorine and other volatile compounds and dissolved solids. After the filtration
process, impurities are removed by reverse osmosis and/or distillation. We
ozonate our purified water (by injecting ozone into the water as an agent to
prohibit the formation of bacteria) prior to storage in four 30,000-gallon
storage tanks. Prior to bottling, we add pharmaceutical grade minerals to the
water, including calcium and potassium, for taste. The water is again ozonated
and bottled in a fully enclosed clean room with a high efficiency particulate
air, or HEPA, filtering system designed to prevent any airborne contaminants
from entering the bottling area, in order to create a sanitary filling
environment.
If for any reason this municipal source for Crystal Rock(R) water were curtailed
or eliminated, we could, though probably at greater expense, purchase water from
other sources and have it shipped to the Watertown manufacturing facility.
The primary source of our natural spring water is a spring owned by a third
party in Stockbridge, Vermont, that is subject to a water supply contract. We
also obtain water, under similar agreements with third parties, from springs in
Bennington and Tinmouth, Vermont. All of the springs we use are approved by the
State of Vermont as sources for natural spring water.
We have for several years bought spring water from a source in Stockbridge,
Vermont. Until late 1999, we had no contract with respect to this source.
Commencing in November 1999, we obtained a 50-year water supply contract to
purchase, on a first priority basis, up to 5,000,000 gallons per month from the
spring owner. Because this amount is well in excess of our current needs and
within
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the apparent capacity of the spring, we believe that we can readily meet our
bulk water supply needs for the foreseeable future.
In 2002, we signed a 20-year agreement with the Town of Bennington, Vermont to
purchase water from a spring owned by the town. Under that agreement, we can use
up to 100,000 gallons a day from this site. We plan to use this water primarily
in our Halfmoon, New York bottling facility. We started using water from this
site in November 2004.
Percolation through the earth's surface is nature's best filter of water. We
believe that the exceptionally long percolation period of natural spring water
assures a high level of purity. Moreover, the long percolation period permits
the water to become mineralized and pH balanced. We believe that the age and
extended percolation period of our natural spring water provides the natural
spring water with certain distinct attributes: a purer water, noteworthy mineral
characteristics (including the fact that the water is sodium free and has a
naturally balanced pH), and a light, refreshing taste.
An interruption or contamination of any of our spring sites would materially
affect our business. We believe that we could find adequate supplies of bulk
spring water from other sources, but that we might suffer inventory shortages or
inefficiencies, such as increased purchase or transport costs, in obtaining such
supplies.
We are highly dependent on the integrity of the sources and processes by which
we derive our products. Natural occurrences beyond our control, such as drought,
earthquake or other geological changes, a change in the chemical or mineral
content or purity of the water, or environmental pollution may affect the amount
and quality of the water emanating from the springs or municipal sources that we
use. There is a possibility that characteristics of the product could be changed
either inadvertently or by tampering before consumption. Even if such an event
were not attributable to us, the product's reputation could be irreparably
harmed. Consequently, we would experience economic hardship. Occurrence of any
of these events could have an adverse impact on our business. We are also
dependent on the continued functioning of our bottling processes. An
interruption may result in an inability to meet market demand and/or negatively
impact the cost to bottle the products. Additionally, the distribution of the
product is dependent on other businesses.
Finally, the terrorist attacks of September 2001 and any further attacks could
impact our operations negatively if such attacks result in a prolonged or severe
economic downturn. Further, because our products are packaged for human
consumption and could be considered a substitute for public water
infrastructure, there is a possibility that we or our products could be a direct
target of future terrorist attacks. Although we believe this risk to be remote,
any such act of terrorism or attempted act could be catastrophic to our business
or operations.
PRODUCTS
We sell our three major brands in three and five gallon bottles to homes and
offices throughout New England, New York, and New Jersey. In general, Crystal
Rock(R) is distributed in southern New England, while Vermont Pure(R) and Hidden
Spring(R) are distributed in northern New England and upstate and western New
York. We rent water coolers to customers to dispense bottled water. Our coolers
are available in various consumer preferences such as cold, or hot and cold,
dispensing units. In conjunction with our Home and Office accounts, we also
distribute a variety of coffee, tea and other hot beverage products and related
supplies, as well as other consumable products used around
6
the office. We offer vending services in some locations. We rent or supply
multi-burner coffee machines to customers. In addition, we supply whole beans
and coffee grinders for fresh ground coffee and cappuccino machines to
restaurants. We are the exclusive office coffee distributor of Baronet Coffee in
New England, New York and New Jersey. In addition to Baronet Coffee, we sell
other national brands, most notably, Green Mountain Coffee Roasters.
Please refer to Note 7 to our Consolidated Financial Statements for information
on inventories at October 31, 2004.
MARKETING AND SALES OF BRANDED PRODUCTS
Our water products are marketed and distributed in five and three-gallon bottles
as "premium" bottled water. We seek brand differentiation by offering a choice
of high quality spring and purified water along with a wide range of coffee and
office refreshment products, and value-added service. Home and Office sales are
generated and serviced using our own facilities, employees and vehicles.
Telemarketers and outside/cold-call sales personnel are used to market our Home
and Office delivery. We support this sales effort through promotional giveaways
and Yellow Pages advertising, as well as radio, television and billboard
advertising campaigns. We also sponsor local area sporting events, participate
in trade shows, and endeavor to be highly visible in community and charitable
events.
We market our Home and Office delivery service throughout most of New England
and New York and parts of New Jersey.
Advertising and Promotion
We advertise our products primarily through Yellow Pages and other print media
and secondarily through print, television and radio media. We have also actively
promoted our products through sponsorship of various organizations and sporting
events. In recent years, we have sponsored professional golf and tennis events
and various charitable and cultural organizations, such as Special Olympics, the
National Association of Breast Cancer Organizations, the Multiple Sclerosis
Society, and the Vermont Symphony Orchestra.
Sales and Distribution
We sell and deliver products directly to our customers using our own employees
and route delivery trucks. We make deliveries to customers on a regularly
scheduled basis. We bottle our water at our facilities in Watertown,
Connecticut, White River Junction, Vermont, and Halfmoon, New York. We maintain
numerous distribution locations throughout our market area. From these locations
we also distribute dispensing equipment, a variety of coffee, tea and other
refreshment products, and related supplies. We ship between our production and
distribution sites using both our own and contracted carriers.
We use outside distributors in areas where we currently do not distribute our
products. Distributor sales represented less than 2% of total revenue in 2004.
SUPPLIES
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We currently source all of our raw materials from outside vendors. As one of the
largest Home and Office distributors in the country, we are able to capitalize
on volume to continue to reduce costs. We are a member of the Quality Bottlers
Cooperative, or QBC, a purchasing cooperative comprised of some of the largest
independent Home and Office water companies in the United States. QBC acts as a
purchasing and negotiating agent to acquire national pricing for the cooperative
on common materials such as bottles, water coolers, cups, and other supplies.
QBC believes that due to its size it can effectively purchase equipment and
supplies at levels competitive to larger national entities. We also believe that
our relationship with other QBC members can provide access to potential
acquisition targets.
We rely on trucking to receive raw materials and transport and deliver our
finished products. Consequently, the price of fuel significantly impacts the
cost of our products. We purchase our own fuel for our Home and Office delivery
and use third parties for transportation of raw materials and finished goods
between our warehouses. While volume purchases and hedging can help control
erratic fuel pricing, market conditions ultimately determine the price. We have
entered into some agreements with haulers and fuel vendors in an effort to
control costs, but substantial changes in fuel prices, including, for example,
increases due to hostilities in the Middle East, would likely affect our
profitability.
No assurance can be given that we will be able to obtain the supplies we require
on a timely basis or that we will be able to obtain them at prices that allow us
to maintain the profit margins we have had in the past. Any raw material
disruption or price increase may result in an adverse impact on our financial
condition and prospects.
No assurance can be given that we will be able to obtain the supplies we require
on a timely basis or that we will be able to obtain them at prices that allow us
to maintain the profit margins we have had in the past. We believe that we will
be able to either renegotiate contracts with these suppliers when they expire
or, alternatively, if we are unable to renegotiate contracts with our key
suppliers, we believe that we could replace them. Any raw material disruption or
price increase may result in an adverse impact on our financial condition and
prospects. For instance, we could incur higher costs in renegotiating contracts
with existing suppliers or replacing those suppliers, or we could experience
temporary dislocations in its ability to deliver products to our customers,
either of which could have a material adverse effect on our results of
operations.
SEASONALITY
Our business is somewhat seasonal. The period from June to September represents
the peak period for sales and revenues due to increased consumption of beverages
during the summer months in our core Northeastern United States market.
COMPETITION
We believe that bottled water historically has been a regional business in the
United States. However, the Home and Office market includes several national or
large competitors such as Perrier Group (Poland Spring, Deer Park, and Great
Bear), and Danone/Suntory (Belmont Springs). Additionally, we compete with
smaller regional bottlers such as Monadnock in the Boston area and Leisure Time
in the Hudson Valley of New York.
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With our Vermont Pure(R) brand, we compete on the basis of pricing, customer
service, and quality of our products, the image of the State of Vermont,
attractive packaging, and brand recognition. With the Crystal Rock(R) brand, we
compete on the basis of taste, service, and the purity of the distilled product
with minerals added back. We consider our trademarks, trade names and brand
identities to be very important to our competitive position and defend our
brands vigorously.
We feel that installation of filtration units in the home or commercial setting
poses a competitive threat to our business. To address this, we make available
plumbed-in filtration units and servicing contracts on a limited basis.
Competition from non-traditional sources is changing the marketplace. The two
most notable examples are water filtration as a substitute for purchasing water
and cheaper coolers from offshore sources, making customer purchasing a more
viable alternative to leasing. We are reacting to these changes by integrating
these options into our business. If we are not able to successfully integrate
them into our business, our sales and profits could decrease.
There has also a been a trend developing in the marketplace for consumers to own
their own water coolers, thereby foregoing rental charges on the unit. If this
trend continues, it could have a negative impact on our sales as a result of the
reduced rental income.
TRADEMARKS
We sell our bottled water products under the trade names Vermont Pure Natural
Spring Water(R), Crystal Rock(R), and Stoneridge(R). We have rights to other
trade names, including Hidden Spring(R), Pequot Natural Spring Water(R),
Excelsior Spring Water(R), Happy Spring Water(R), Manitock Spring Water(R), and
Vermont Naturals(R). Our trademarks as well as label design are registered with
the United States Patent and Trademark Office.
GOVERNMENT REGULATION
The Federal Food and Drug Administration (FDA), regulates bottled water as a
"food." Accordingly, our bottled water must meet FDA requirements of safety for
human consumption, of processing and distribution under sanitary conditions and
of production in accordance with the FDA "good manufacturing practices." To
assure the safety of bottled water, the FDA has established quality standards
that address the substances that may be present in water which may be harmful to
human health as well as substances that affect the smell, color and taste of
water. These quality standards also require public notification whenever the
microbiological, physical, chemical or radiological quality of bottled water
falls below standard. The labels affixed to bottles and other packaging of the
water are subject to FDA restrictions on health and nutritional claims for foods
under the Fair Packaging and Labeling Act. In addition, all drinking water must
meet Environmental Protection Agency standards established under the Safe
Drinking Water Act for mineral and chemical concentration and drinking water
quality and treatment that are enforced by the FDA.
We are subject to the food labeling regulations required by the Nutritional
Labeling and Education Act of 1990. We believe we are in substantial compliance
with these regulations.
We are subject to periodic, unannounced inspections by the FDA. Upon inspection,
we must be in compliance with all aspects of the quality standards and good
manufacturing practices for bottled
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water, the Fair Packaging and Labeling Act, and all other applicable regulations
that are incorporated in the FDA quality standards.
In May 1996, new FDA regulations became effective that redefined the standards
for the identification and quality of bottled water. We believe that we meet the
current regulations of the FDA, including the classification as spring water.
We also must meet state regulations in a variety of areas. The Department of
Health of the State of Vermont regulates water products for purity, safety and
labeling claims. Bottled water sold in Vermont must originate from an "approved
source." The water source must be inspected and the water sampled, analyzed and
found to be of safe and wholesome quality. The water and the source of the water
are subject to an annual "compliance monitoring test" by the State of Vermont.
In addition, our bottling facilities are inspected by the Department of Health
of the State of Vermont.
Our product labels are subject to state regulation (in addition to the federal
requirements) in each state where the water products are sold. These regulations
set standards for the information that must be provided and the basis on which
any therapeutic claims for water may be made. We have received approval from
every state for which we have sought approval and can distribute our brands in
49 states.
The bottled water industry has a comprehensive program of self-regulation. We
are a member of the International Bottled Water Association, or IBWA. As a
member, our facilities are inspected annually by an independent laboratory, the
National Sanitation Foundation, or NSF. By means of unannounced NSF inspections,
IBWA members are evaluated on their compliance with the FDA regulations and the
association's performance requirements, which in certain respects are more
stringent than those of the federal and various state regulations.
The laws that regulate our activities and properties are subject to change. As a
result, there can be no assurance that additional or more stringent requirements
will not be imposed on the our operations in the future. Although we believes
that our water supply, products and bottling facilities are in substantial
compliance with all applicable governmental regulations, failure to comply with
such laws and regulations could have a material adverse effect on our business.
EMPLOYEES
As of January 21, 2005, we had 317 full-time employees and 27 part-time
employees. None of the employees belongs to a labor union. We believe that our
relations with our employees are good.
Our continued success will depend in large part upon the expertise of senior
management. On January 1, 2005, Timothy G. Fallon, Chairman and Chief Executive
Officer; Peter K. Baker, President; and John B. Baker, Executive Vice President;
entered into three-year employment contracts with the Company. Bruce MacDonald,
Chief Financial Officer, Treasurer and Secretary is under contract until October
2005. These agreements do not prevent these employees from resigning. The
departure or loss of Mr. Fallon or Mr. Peter Baker in particular could have a
negative effect on our business and operations.
ADDITIONAL AVAILABLE INFORMATION
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Our principal website is www.vermontpure.com. We make our annual, quarterly and
current reports, and amendments to those reports, available free of charge on
www.vermontpure.com, as soon as reasonably practicable after we electronically
file such material with, or furnish it to, the Securities and Exchange
Commission. Reports of beneficial ownership of our common stock, and changes in
that ownership, by directors and officers on Forms 3, 4 and 5 are likewise
available free of charge on our website.
The information on our website is not incorporated by reference in this annual
report on Form 10-K or in any other report, schedule, notice or registration
statement filed with or submitted to the SEC.
The SEC maintains an Internet site that contains reports, proxy and information
statements, and other information regarding issuers that file electronically at
www.sec.gov. You may also read and copy the materials we file with the SEC at
the SEC's Public Reference Room at 450 Fifth Street, NW., Washington, DC 20549.
You may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330.
ITEM 2. PROPERTIES.
As part of our Home and Office delivery operations, we have entered into or
assumed various lease agreements for properties used as distribution points and
office space. The following table summarizes these arrangements:
Location Lease expiration Sq. Ft. Annual Rent
- -------- ---------------- ------- -----------
Williston, VT Month-to-Month 10,000 $ 67,500
Waltham, MA December, 2008 11,760 $ 108,780
Londonderry, NH April, 2005 4,800 $ 27,500
Rochester, NY January, 2007 15,000 $ 89,400
Buffalo, NY September, 2005 10,000 $ 60,000
Syracuse, NY December, 2005 10,000 $ 34,500
Halfmoon, NY October, 2011 22,500 $ 165,825
Plattsburgh, NY Month to month 3,640 $ 20,568
Watertown, CT October, 2010 67,000 $ 360,000
Stamford, CT October, 2010 22,000 $ 216,000
White River Junction, VT June, 2009 12,000 $ 69,100
Waterbury, CT June, 2007 5,000 $ 24,200
All locations are used primarily for warehousing and distribution and have
limited office space for location managers and support staff. The exception is
the Watertown, CT location that has a substantial amount of office space for
sales, accounting, information systems, customer service, and general
administrative staff. We also rent, on a monthly basis, an office in White
Plains, New York.
In conjunction with the Crystal Rock merger, we entered into ten-year lease
agreements to lease the buildings that are utilized for operations in Watertown
and Stamford, Connecticut. The landlord for the buildings is a trust with which
Henry, John, and Peter Baker, and Ross Rapaport are affiliated. Rent charged
under these leases approximate fair value.
We expect that these facilities will meet our needs for the next several years.
For leases that expire in 2005, we plan to negotiate a renewal arrangement or
enter into a lease in another facility that better meets our needs on a long
term basis.
11
ITEM 3. LEGAL PROCEEDINGS.
In August 2003 we filed a lawsuit in federal court in Massachusetts against
Nestle Waters North America, Inc. and its parent company, Nestle S.A. Our
lawsuit alleged that Nestle has engaged, and continues to engage, in false and
misleading advertising of its Poland Spring(R) brand of bottled water, and that
Nestle has marketed and sold, and continues to market and sell, Poland Spring(R)
as "spring water" with the knowledge that it is not spring water and does not
meet the scientific, regulatory or plain English definitions of the term. We
believe that these practices have helped Nestle, one of our major competitors,
to capture a very significant market share of the bottled water market.
We have made claims under the federal Lanham Act, which creates civil liability
for any person who, in commercial advertising or promotion, misrepresents the
nature, characteristics, qualities or geographic origin of goods, services or
commercial activities. We have also made claims under corresponding provisions
of unfair trade practice laws in approximately 25 states that provide a private
right of action for such violations. We are seeking an injunction that would
require Nestle not to engage in false advertising and to publish corrective
advertising that would retract its false and misleading statements. We are also
seeking monetary damages. Nestle has filed a motion to dismiss the case on the
grounds that we have failed to state a proper claim.
The Court denied in part and granted in part the motion to dismiss filed by
Nestle. The Court ruled that the definition of "spring water" is governed by FDA
regulations and therefore any claim asserting a violation of the regulations can
only be brought by the FDA; any private right of action is preempted. The Court
ruled however, that the claims of false advertising relating to misrepresenting
the source of Poland Spring Water and false claims that it is from "protected
sources deep within the woods of Maine" are actionable. The Company accordingly
filed an amended complaint based on the Court ruling. Nestle filed a second
motion to dismiss and the Court dismissed that motion. The case is now
proceeding in its discovery phase.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the quarter ended
October 31, 2004.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our Common Stock is traded on the American Stock Exchange, or AMEX, under the
symbol VPS. The table below indicates the range of the high and low daily
closing prices per share of Common Stock as reported by AMEX.
Fiscal Year Ended October 31, 2004
High Low
----- -----
First Quarter $3.45 $3.00
Second Quarter $3.50 $2.75
Third Quarter $3.10 $2.05
Fourth Quarter $2.24 $1.79
Fiscal Year Ended October 31, 2003
First Quarter $4.40 $3.54
Second Quarter $4.15 $3.00
Third Quarter $3.92 $3.05
Fourth Quarter $3.70 $3.33
The last reported sale price of our Common Stock on AMEX on January 25, 2005 was
$2.39 per share.
As of that date, we had 394 record owners and believe that there were
approximately 3,200 beneficial holders of our Common Stock.
No dividends have been declared or paid to date on our Common Stock, and we do
not anticipate paying dividends in the foreseeable future. We follow a policy of
cash preservation for future use in the business.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS.
The following table sets forth additional information as of October 31, 2004,
about shares of our Common Stock that may be issued upon the exercise of options
and other rights under our existing equity compensation plans and arrangements,
divided between plans approved by our stockholders and plans or arrangements
that were not required to be and were not submitted to our stockholders for
approval.
13
(a) (b) (c)
- --------------------------------------------------------------------------------------------------------------------
Number of Securities
remaining available for
Number of Securities to be Weighted-average exercise future issuance under
issued upon exercise of price of outstanding equity compensation plans
outstanding options, options, warrants and (excluding securities
Plan Category warrants and rights rights reflected in column (a)).
- --------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security
holders 2,179,655 $3.10 515,697
Equity compensation plans
not approved by security
holders (1)(2)(3) 483,135 $2.50 -0-
Total 2,662,790 $2.98 515,697
(1) On July 24, 1996, we granted non-qualified stock options to each of Robert
Getchell, Beat Schlagenhauf, Norman Rickard, and David Preston to acquire 30,000
shares of our Common Stock for a per share price of $2.50. The options expire in
July 2006. Each grantee was a director at the time of grant and received the
option as a performance incentive. The material features of these plans are
substantially similar to those of the stockholder-approved plans.
(2) On September 12, 1997, we granted non-qualified stock options to David
Preston to acquire 26,000 shares of our Common Stock, and to each of Robert
Getchell, Beat Schlagenhauf, and Norman Rickard to acquire, in each case, 22,000
shares of our Common Stock for a per share price of $2.50. The options expire in
September 2007. Each grantee was a director at the time of grant and received
the option as a performance incentive. The material features of these plans are
substantially similar to those of the stockholder-approved plans.
(3) In an agreement dated November 4, 1994, and modified on September 12, 1997,
we granted non-qualified stock options to Tim Fallon to acquire 293,335 shares
of our Common Stock for a per share price of $2.50. The options expired on
December 1, 2004. In February 2002 and May 2004, Mr. Fallon exercised 33,200 of
these options. On July 24, 1996 we granted an additional 10,000 shares of our
Common Stock of non-qualified stock options at an exercise price of $2.50 per
share. The material features of these plans are substantially similar to those
of the stockholder-approved plans.
(4) Please refer to Note 13 to our Consolidated Financial Statements for
additional information on stock option plans approved by our stockholders.
SECURITIES SOLD AND EXEMPTION FROM REGISTRATION CLAIMED.
None
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS DURING
THE FOURTH QUARTER.
In August 2004, the following officers and directors purchased shares of the
Company's Common Stock on the open market:
14
Director Number of Shares Average Price
- -------- ---------------- -------------
John Baker 5,000 $ 2.20
Timothy Fallon 3,984 $ 3.10
Bruce MacDonald 1,300 $ 3.10
David Preston 3,000 $ 2.00
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data set forth below should be read in
conjunction with our financial statements and footnotes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this report. The historical results are not necessarily
indicative of the operating results to be expected in the future.
Fiscal Years Ended
October 31, October 31, October 31, October 31, October 30,
(000's except per share) 2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ -----------
Net sales $ 52,473 $ 49,854 $ 49,068 $ 47,551 $ 20,922
Net income (loss) from continuing
operations $ 491 $ 962 $ 2,069 $ 853 $ (1,600)
Net income (loss) per share from
continuing operations - diluted $ .02 $ .04 $ .09 $ .04 $ (.15)
Total assets $ 103,983 $ 111,334 $ 109,334 $ 106,216 $ 110,826
Long term debt $ 37,854 $ 48,274 $ 46,540 $ 47,851 $ 51,412
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following Management's Discussion and Analysis (MD&A) is intended to help
the reader understand our company. The MD&A should be read in conjunction with
our consolidated financial statements and the accompanying notes. This overview
provides our perspective on the individual sections of the MD&A, as well as a
few helpful hints for reading these pages. The MD&A includes the following
sections:
- Forward-Looking Statements -- cautionary information about
forward-looking statements and a brief description of certain risks
and uncertainties that could cause our actual results to differ
materially from the Company's historical results or our current
expectations or projections.
- Business Overview - Trends -- a brief description of fiscal year
2004 and our prospects for fiscal year 2005. We have also provided
in this section a brief description of certain acquisitions and a
divesture we made that affect the comparability of the results being
analyzed.
- Results of Operations -- an analysis of our consolidated results of
operations for the three years presented in our consolidated
financial statements.
- We present the discussion in this MD&A on a consolidated
basis.
16
- We no longer report segment information in this report
because following the sale of our retail segments in
March 2004, our company operates in one business - the
Home and Office business.
- The results of operations for the retail segments are
classified as discontinued operations in the periods
reported.
- Liquidity, Capital Resources and Financial Position -- an analysis
of cash flows, sources and uses of cash, contractual obligations,
and financial position and a discussion of factors affecting our
future cash flow.
- Critical Accounting Policies -- a discussion of accounting policies
that require critical judgments and estimates. Our significant
accounting policies, including the critical accounting policies
discussed in this section, are summarized in the notes to the
accompanying consolidated financial statements.
FORWARD-LOOKING STATEMENTS
When used in the Form 10-K and in our future filings with the Securities
and Exchange Commission, the words or phrases "will likely result," "we expect,"
"will continue," "is anticipated," "estimated," "project," or "outlook" or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. We wish to
caution readers not to place undue reliance on any such forward-looking
statements, each of which speak only as of the date made. Such statements are
subject to various risks and uncertainties that could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected. We have no obligation to publicly release the result of any revisions
that may be made to any forward-looking statements to reflect anticipated or
unanticipated events or circumstances occurring after the date of such
statements.
RESULTS OF OPERATIONS
Business Overview - Trends
Fiscal year 2004 was a transitional and transformational year for the Company.
We sold the retail segments of our business due primarily to our view that the
competitive pricing environment and advertising investments from multinational
competitors would continue to outweigh any returns that we could generate from
these segments. This divestiture provided the opportunity to reduce costly debt.
Subsequently, we made several acquisitions to strengthen the core markets of our
Home and Office business. Although net income declined from fiscal year 2003 to
2004, we feel that the transformation of our business will lead to increased
profitability.
Fiscal Year Ended October 31, 2004 Compared to Fiscal Year Ended October 31,
2003
Sales
Sales for fiscal year 2004 were $52,473,000 compared to $49,854,000 for 2003, an
increase of $2,619,000 or 5%. Sales attributable to acquisitions in fiscal year
2004 were $3,022,000. Net of the acquisitions, sales decreased 1%.
The comparative breakdown of sales is as follows:
15
2004 2003 Difference % Diff.
Product Line ------------ ------------ ------------ -----------
- --------------------------------- (in 000's $) (in 000's $) (in 000's $)
Water $ 25,043 $ 24,030 $ 1,013 4%
Coffee and Other Products 18,524 17,284 1,240 7%
Equipment Rental 8,906 8,540 366 4%
------------ ------------ ------------
Total $ 52,473 $ 49,854 $ 2,619 5%
============ ============ ============
Water - Net of acquisitions, water sales decreased 2%. The decrease was
primarily a result of a decrease in distributor volume. This was a result of the
loss of a major distributor and lower volume from remaining distributors. Sales
to distributors are the least profitable part of our business and account for
about 4% of water sales. The volume of water from our own distribution system
was flat while the average selling price per delivered bottle increased 1%,
reflecting competitive pressures in our core market. The increase in selling
price was not enough to offset the decrease in distributor volume.
Coffee and Other Products - The acquisition of a large office coffee
distributor during the second half of fiscal year 2003 and in the last quarter
of fiscal year 2004 accounted for 6% of the increase in sales. Net of
acquisitions, the category increased 1%. Sales of Keurig single-serve coffee
packages more than offset a decrease in conventional coffee sales to account for
the growth. However, the margin on single serve distribution is lower than
traditional coffee products. In addition, a non-recurring favorable adjustment a
year ago related to deposits for bottles not returned resulted in a 2% decrease
in sales for this category.
Equipment Rental - Growth from acquisitions resulted in a 5% increase in
cooler rental placements. Average rental price was down 1%. Brewer rentals
increased slightly as a result of demand for single serve units. Net of
acquisitions, rental income was down 1%.
Gross Profit/Cost of Goods Sold
Gross profit increased $642,000, or 2% in fiscal year 2004 compared to 2003, to
$29,696,000 from $29,054,000. The increase in gross profit was attributable to
higher sales. As a percentage of sales, gross profit decreased to 57% of sales
from 58% for the respective period. The decrease in gross profit, as a
percentage of sales, was attributable to higher costs of sales and a higher
percentage of sales of non-water related products. The increase in cost of sales
is attributable to higher costs of production as a result of higher costs of
materials for bottles and labor, and higher service costs as a result of lower
sales volume per customer.
Income from Operations/Operating Expenses
Income from operations decreased to $4,490,000 from $5,837,000 in 2003, a
decrease of $1,347,000, or 23%. The decrease was related to a higher sales mix
of lower margin products, higher production and service costs and higher
operating costs.
Total operating expenses increased to $25,206,000 for the year, up from
$23,217,000 the prior year, an increase of $1,989,000, or 9%. Selling, general
and administrative (SG&A) expenses were $23,714,000 in fiscal year 2004 and
$22,190,000 in 2003, an increase of $1,524,000, or 7%. Of total SG&A expenses,
route distribution costs, significantly influenced by labor, fuel, vehicle, and
insurance costs, increased 11%. In addition, selling costs decreased 8% as a
result of vacancies in our sales staffing and administration costs increased 5%
as a result of the costs of serving more customers and increasing regulatory
requirements.
17
Advertising expenses were $1,049,000 in fiscal year 2004 compared to $802,000 in
2003, an increase of $247,000, or 31%. The increase in advertising costs is
related to additional yellow page advertising in 2004.
Amortization increased to $409,000 in fiscal year 2004 from $186,000 in 2003.
This increase is attributable to intangible assets that were acquired as part of
several acquisitions in fiscal years 2003 and 2004.
Other compensation in fiscal year 2004 totaled $34,000 compared to $39,000 in
2003. This expense relates to compensation paid to directors and officers in
Company stock in lieu of cash for board fees and bonus compensation.
Compensation paid in cash is accounted for in SG&A expenses.
Interest, Taxes, and Other Expenses - Income from Continuing Operations
Interest expense was $3,507,000 for fiscal year 2004 compared to $4,269,000 in
2003, a decrease of $762,000. Lower interest costs were primarily a result of
reduced amounts of senior and subordinated debt combined with lower fixed rate
commitments compared to a year ago.
The gain on sale of equipment was $10,000 in fiscal year 2004 compared to a loss
of $2,000 in 2003 primarily related to the sale of bottling equipment when new
equipment was purchased in 2004 for relocation of a bottling line from Randolph
to White River Junction Vermont. We also recognized an impairment charge related
to our investment in a software provider as we determined it was likely that the
investment was not recoverable. The amount of the charge was $153,000. See Note
16 b) of our Notes to Consolidated Financial Statements for further information.
We expect to continue to receive reliable products and service from the
provider.
Income from continuing operations before income tax expense was $840,000 in
fiscal year 2004 compared to income from continuing operations before taxes of
$1,567,000 in 2003. The tax expense for fiscal year 2004 was $349,000 compared
to tax expense of $605,000 in 2003 and was based on an expected effective tax
rate of 41% in 2004 and 39% in 2003. The increase in the tax rate is a result of
higher estimated tax liability for fiscal year 2004 in some of the states where
we conduct business. Our total effective tax rate is a combination of federal
and state rates for the states in which we operate. Historically, our rate has
been approximately 40% of income before taxes and we expect that to continue.
For a reconciliation of the effective and statutory expense, see Note 18 to our
Notes to the Consolidated Financial Statements.
Income from continuing operations was $491,000 in 2004, $471,000 less than
income from continuing operations of $962,000 in 2003.
Discontinued Operations
The loss from operations for discontinued retail segments in fiscal year 2004
was $79,000. This related to the four months of operations of those segments.
The gain on the sale of assets of the discontinued operations was $353,000. The
corresponding tax expense of loss from discontinued operations combined with the
gain on the sale of $114,000 was calculated at 42%. Income from discontinued
operations in fiscal year 2003 was $637,000. Tax expense, calculated at an
effective rate of 40%, was $246,000. Total income from discontinued operations
was $160,000 in 2004 compared to $391,000 in 2003.
18
Net Income
Net income of $651,000 in fiscal year 2004 was attributable to income from
continuing operations and loss from discontinued operations combined with a gain
on the sale of a portion of the retail business. This was a decrease in net
income of $702,000 from net income of $1,353,000 in 2003.
Based on the weighted average number of shares of Common Stock outstanding of
21,497,000 (basic) and 21,575,000 (diluted) during 2004, net income was $.03 per
share - basic and diluted. Of the $.03 earnings per share, $.02 was attributable
to continuing operations while $.01 was from discontinued operations, basic and
diluted. This compares to $.06 per share, $.04 continuing and $.02 discontinued,
basic and diluted, in 2003.
Cumulatively, the fair value of our swaps increased $139,000 during the year,
resulting in an unrealized gain of $103,000, net of taxes. This amount has been
recognized as an adjustment to net income to arrive at comprehensive income as
defined by the applicable accounting standards. Further, it has been recorded as
a current asset and a decrease in stockholders' equity on our balance sheet.
Fiscal Year Ended October 31, 2003 Compared to Fiscal Year Ended October 31,
2002
Sales
Sales increased to $49,854,000 in 2003 from $49,068,000 in 2002, an increase of
$786,000 or 2%. The increase was a result of several small acquisitions. Net of
the acquisitions, sales were down 5%, primarily due to lower sales prices and
lower demand for products.
The comparative breakdown of sales of the product lines is as follows:
2003 2002 Difference % Diff.
Product Line ------------ ------------ ------------ ------------
- --------------------------------- (in 000's $) (in 000's $) (in 000's $)
Water $ 24,030 $ 24,738 $ (708) (3%)
Coffee and Other Products 17,284 15,581 1,703 11%
Equipment Rental 8,540 8,749 (209) (2%)
------------ ------------ ------------
Total $ 49,854 $ 49,068 $ 786 2%
============ ============ ============
Water - Sales were favorably affected by $260,000 of sales attributable to
acquisitions made during the year. A 1% decrease in delivered bottles, net of
acquisitions, accounted for $523,000 of the decrease in sales. The decreased
volume was a result of lower market demand due to the economic environment and
competition from the filtration market. The average selling price per delivered
bottle decreased 2% as a result of competitive pressures in our core market. In
aggregate, the change in price amounted to $445,000 of the decrease in sales for
this line.
Coffee and Other Products - The acquisition of a large office coffee
distributor during the year increased sales $653,000. In addition, revenue
increased $707,000 from administrative fees billed to customers to recapture
increased fuel costs in the third quarter and the recovery of bottle deposits
not returned.
Equipment Rental - Water cooler rental was down as a result of the lower
market demand referred to above and competition from retail outlets selling
units. Placements were down less than 1% and average price was down 2%,
resulting in an aggregate decrease in rentals of $202,000. Brewer rentals
increased slightly as a result in demand for single serve units.
19
Gross Profit/Cost of Goods Sold
Gross profit decreased to $29,054,000, or 58% of sales, in 2003 from
$30,009,000, or 61% of sales, in 2002. The decrease in gross profit was due to
lower sales volume and average selling prices, particularly for our higher
margin water-related products. In addition, increased cost of sales lowered
margins. The increase in cost of sales is attributable to higher insurance and
employee benefit costs, higher costs of production as a result of higher costs
of materials for bottles and labor, and higher service costs as a result of
lower sales volume per customer.
Income from Continuing Operations/Operating Expenses
Total operating expenses increased to $23,217,000 in 2003 from $21,799,000 in
2002, an increase of $1,418,000, or 7%. Higher operating costs, combined with
lower selling prices and higher production costs, resulted in a decrease in
income from continuing operations of $2,373,000, to $5,837,000 in 2003 compared
to $8,210,000 in 2002.
Selling, general and administrative (SG&A) expenses increased to $22,190,000 in
2003 from $20,410,000 in 2002, an increase of $1,780,000, or 9%. This increase
was primarily driven by an increase in the sales force to maintain and improve
sales volume.
Advertising expenses decreased 27% to $802,000 in 2003 from $1,104,000 in 2002.
The decrease is reflective of a sales strategy that focused more on direct sales
than advertising.
Amortization decreased to $186,000 in 2002 to $232,000 in 2003 because certain
acquisition agreements that we amortize have been fully amortized during the
year. Our annual independent test of goodwill indicated no impairment existed at
October 31, 2003 or 2002.
Other compensation in fiscal year 2003 totaled $39,000 compared to $52,000 in
fiscal year 2002. This expense relates to compensation paid in Company stock.
Interest, Taxes, and Other Expenses
Net interest expense decreased to $4,269,000 in 2003 from $4,409,000 in 2002, a
decrease of $140,000. This was reflective of lower market interest rates on the
variable portion of our senior debt and operating line of credit. Further
savings were mitigated by higher-than-market interest rate swaps that fixed a
portion of our senior debt.
We had a loss of $2,000 on the sale of equipment in the normal course of
business in fiscal year 2003 compared to a loss of $228,000 in 2002.
Income from continuing operations before income tax expense was $1,567,000 for
2003 compared to $3,513,000 in 2002. Lower taxable income resulted in a $839,000
decrease in income tax expense from 2002 to 2003. The effective tax rate that we
used to compute our expense reduced slightly from 41% to 39%. The reduction was
a result our estimated tax liability for fiscal year in some of the states in
which we operate. For a reconciliation of the effective and statutory expense,
see Note 18 to our notes to the consolidated financial statements
20
Income from Continuing Operations
Lower interest and taxes did not offset lower prices and higher costs mentioned
earlier. As a result, net income decreased to $962,000 in 2003 from $2,069,000
in 2002, a decrease of $1,107,000, or 53%.
Discontinued Operations
The income from operations for discontinued segments in fiscal year 2003 was
$391,000 compared to $441,000 in 2002. The lower income was attributable to
lower margins as a result of lower average selling prices. The corresponding tax
expense of loss from discontinued operations combined with the gain on the sale
of $114,000 was calculated at 42%. Income from discontinued operations in fiscal
year 2003 was $637,000. Tax expense, calculated at an effective rate of 40%, was
$246,000. Total income from discontinued operations was $160,000 in 2003
compared to $391,000 in 2002.
Net Income
Net income of $1,353,000 in fiscal year 2003 was attributable to income from
continuing operations and income from discontinued operations combined with a
gain on the sale of a portion of the retail business. This was a decrease in net
income of $1,156,000 from net income of $2,509,000 in 2002.
Based on the weighted average number of shares of Common Stock outstanding of
21,282,294 (basic) and 21,764,698 (diluted) during 2003, net income was $.06 per
share - basic and diluted. Of the total earnings per share, $.04 was
attributable to continuing operations while $.02 was derived from discontinued
operations, basic and diluted. This compares to $.12 per share ($.10 from
continuing operations, $.02 from discontinued operations), basic, and $.11 per
share ($.09 from continuing operations, $.02 from discontinued operations),
diluted, in 2002.
We entered into a new swap agreement during the year ended October 31, 2003 as
described under Liquidity and Capital Resources. Cumulatively, the fair value of
our four outstanding swaps increased $807,000 during the 2003 fiscal year,
resulting in an unrealized loss of $36,000, net of taxes, over the life of the
instruments. This amount has been recognized as an adjustment to net income to
arrive at comprehensive income as defined by the applicable accounting
standards. Further, it has been recorded as a current liability and a decrease
in stockholders' equity on our balance sheet.
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 2004 we had working capital of $637,000 compared to $5,061,000
on October 31, 2003, a decrease of $4,425,000. The decrease in working capital
was primarily the result of our operating line of credit becoming current debt
during the year. It is due April 1, 2005.
In addition, we used cash for capital expenditures, acquisitions, and repayment
of debt in fiscal year 2004. Capital expenditures of $3,231,000 excluding
acquisitions were applied to the purchase of bottling equipment, and coolers,
brewers, bottles and racks related to Home and Office distribution. During the
year, we also paid $3,104,000 for regularly scheduled debt repayments on our
senior credit facility.
As of October 31, 2004, we had borrowed $1,500,000 on our working capital line
of credit and $5,346,000 on our acquisition line of credit. We borrowed
$3,746,000 from the acquisition line, spent $702,000 in cash, and gave $640,000
of notes to the sellers in fiscal year 2004 for acquisitions. In addition, there
is $1,050,000 committed for letters of credit on our working capital line of
credit.
21
As noted above, we sold the assets of our retail segments in March, 2004. The
sale produced gross cash proceeds of $10,068,000. The proceeds were used reduce
our debt as follows: $5,000,000 was used to pay down the senior term debt with
Webster Bank and $5,000,000 was used to pay down our subordinated debt. Also, in
conjunction with the sale we paid down $210,000 of senior and subordinated debt
to other lenders. In addition, we received a promissory note from the buyer for
$500,000 and we used $1,147,000 in cash for transactions related to the sale.
Transaction costs primarily included severance and other personnel related
costs, legal, accounting, and bank fees, and equipment and software transition
costs.
On November 3, 2003 a swap agreement for $10,000,000 matured, on April 2, 2004 a
swap agreement for $4,000,000 matured, and on August 5, 2004 another swap
agreement for $4,000,000 matured. As of October 31, 2004, we had $10,000,000 of
fixed rate debt in an outstanding swap agreement.
In fiscal year 2004 we reduced our deferred tax asset by $144,000 to reflect
usage of federal net operating loss carryforwards. This reflects our utilization
of net operating losses to offset taxes that would have been payable in cash for
the period. We have increased the current portion and decreased the long-term
portion of the deferred tax asset to reflect current estimates of future
utilization. There is a total deferred tax asset of $2,105,000 as of October 31,
2004.
In 2003 and 2004, an independent firm completed a valuation of our business. We
used the reports to determine that there was no impairment of goodwill related
to acquisitions as of October 31, 2002 and 2003.
We expect that cash on hand and cash generated from future operations, combined
with the operating line of credit with Webster Bank will provide sufficient cash
flow for routine operations and growth until April 1, 2005 at which time any
balance remaining on the operating line is payable and the acquisition line of
credit will convert to a term note.
We believe that we will be able to negotiate acceptable terms with the Bank to
extend the operating line of credit on a long term basis in conjunction with the
existing senior financing arrangement, which runs until 2008. In addition, we
are actively pursuing a new senior credit facility in an effort to continue to
reduce our cost of capital. Whether it is by renewal of the line of credit or
establishing a new senior credit facility, we are confident that we will have
long term credit capacity to provide sufficient availability to supplement
operating cash flows during our peak business cycles.
In the event we cannot refinance our current credit facility we would use cash
flows from operations to pay the outstanding balance of the working capital line
on April 1, 2005 and would seek additional sources of working capital to
supplement operating cash flows during our peak business cycle. If we cannot pay
the working capital line of credit upon maturity, it would constitute an event
of default and the entire balance of the facility, approximately $25,754,000 as
of October 31, 2004, would become due and payable. We expect the balance of the
operating line of credit to be $2,000,000 as of April 1, 2005 Although, we feel
the probability is remote, no assurance can be given that adequate financing at
reasonable interest rates will be secured if more cash is needed other than that
generated from operations. We are in compliance with the financial covenants of
our financing agreements as of October 31, 2004 and current on our scheduled
interest and principal payments for all of our financing arrangements.
22
In addition to our senior and subordinated debt commitments, we have significant
future cash commitments, primarily in the form of operating leases that are not
reported on the balance sheet. The following table sets forth our contractual
commitments as of July 31, 2004:
Fiscal Interest on Fixed Operating Coffee Purchase
Year Debt (1) Rate Debt (1) Leases (2) Commitments (3) Total
- ------ ----------- ----------------- ---------- --------------- -----------
2005 $ 6,141,000 $ 2,112,000 $2,206,000 $ 230,000 $10,689,000
2006 4,627,000 $ 2,112,000 1,964,000 0 8,703,000
2007 5,081,000 $ 2,112,000 1,711,000 0 8,904,000
2008 28,145,000 $ 1,232,000 1,462,000 0 30,839,000
2009 0 0 1,033,000 0 1,033,000
Thereafter 0 0 973,000 0 973,000
----------- ----------------- ---------- --------------- -----------
Total $43,994,000 $ 7,568,000 $9,349,000 $ 230,000 $60,141,000
=========== ================= ========== =============== ===========
(1) Please refer to Notes 11 and 21 to our Consolidated Financial Statements for
additional information regarding our debt obligations.
(2) Please refer to Note 15 to our Consolidated Financial Statements for
additional information regarding operating leases. We lease office space in
several locations in the US.
(3) Please refer to "Commodity Price Risks -- Coffee" on page 25 of this report
for additional information on our coffee supply agreements.
The debt obligation in fiscal year 2005 includes payoff of the operating line of
credit balance as of October 31, 2004 which matures in March 2005. As of the
date of this report, we have no other material contractual obligations or
commitments.
Factors Affecting Future Cash Flow
As mentioned above, we are in the process of actively pursuing new financing. We
are seeking either to renew our operating line of credit or obtain other
financing to continue to have sufficient cash, on a seasonal basis, to operate
our business. In addition, we will continue to pursue an active program of
evaluating acquisition opportunities. As a result, we anticipate that we may use
capital resources and financing from outside sources in order to complete any
further acquisitions. Finally, since we have relied on debt to finance our
acquisition strategy and accumulated a significant amount of debt, it is our
objective to continue to lower our blended interest rate by maximizing our
senior debt capacity and retiring as much of our higher rate subordinated debt
as possible.
However, interest rates have been trending up and we continue to be exposed to
market rates. See Item 7A for a discussion of interest rate risk. In addition,
we would expect inventory and capital spending in fiscal year 2005 to remain
relatively unchanged from 2004, which likewise will not increase the
availability of cash. We expect that cash on hand and cash generated from future
operations combined with the operating line of credit will provide sufficient
cash flow for routine operations and growth in the foreseeable future. There is
no assurance that financing will be available on acceptable terms or at all to
execute future plans.
Inflation has had no material impact on our performance.
23
CRITICAL ACCOUNTING POLICIES
The Securities and Exchange Commission has requested that filers report their
critical accounting policies. The SEC defines "critical accounting policies" as
those that require application of management's most difficult, subjective or
complex judgments, often as a result of the need to make estimates about the
effects of matters that are inherently uncertain and may change in subsequent
periods.
Our financial statements are prepared in accordance with generally accepted
accounting principles. Preparation of the statements in accordance with these
principles requires that we make estimates, using available data and our
judgment for such things as valuing assets, accruing liabilities, and estimating
expenses. The following is a list of what we feel are the most critical
estimations that we make when preparing our financial statements.
Accounts Receivable - Allowance for Doubtful Accounts
We routinely review our accounts receivable, by customer account aging, to
determine the collectibility of the amounts due based on information we receive
from the customer, past history, and economic conditions. In doing so, we adjust
our allowance accordingly to reflect the cumulative amount that we feel is
uncollectible. This estimate may vary from the proceeds that we actually
collect. If the estimate is too low we may incur higher bad debt expenses in the
future resulting in lower net income. If the estimate is too high, we may
experience lower bad debt expense in the future resulting in higher net income.
Fixed Assets - Depreciation
We maintain buildings, machinery and equipment, and furniture and fixtures to
operate our business. These assets have extended lives. We estimate the life of
individual assets to spread the cost over the expected life. The basis for such
estimates is use, technology, required maintenance, and obsolescence. We
periodically review these estimates and adjust them if necessary. Nonetheless,
if we overestimate the life of an asset or assets, at a point in the future, we
would have to incur higher depreciation costs and consequently, lower net
income. If we underestimate the life of an asset or assets, we would absorb too
much depreciation in the early years resulting in higher net income in the later
years when the asset is still in service.
Goodwill - Intangible Asset Impairment
We have acquired a significant number of companies. The difference between the
value of the assets and liabilities acquired, including transaction costs, and
the purchase price is recorded as goodwill. If goodwill is not impaired, it
remains as an asset on our balance sheet at the value acquired. If it is
impaired, we are required to write down the asset to an amount that accurately
reflects its carrying value. We have had an independent valuation of the Home
and Office reporting unit performed, where all goodwill is recorded. By
comparing the fair value of the reporting unit to the carrying value of the
goodwill, we have determined that it is not impaired. In providing the
valuation, the valuation company has relied, in part, on projections of future
cash flows of the assets that we provided. If these projections change in the
future, there may be a material impact on the valuation of goodwill, resulting
in impairment of the asset.
Deferred Tax Asset
We have recognized a deferred tax asset on our balance sheet to reflect
cumulative current benefit of future tax loss carryforwards. We expect this
asset to be realized over the next two years and therefore have not provided a
valuation allowance related to this asset. We have relied on our estimated
financial results for future years. If we have overestimated earnings in future
years, we
24
may have, in turn, overestimated the deferred tax asset and may have to provide
a valuation allowance, decreasing net income. Conversely, it may take us longer
to realize the value of the asset.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISKS
At October 31, 2004, we had approximately $16,400,000 of long-term debt subject
to variable interest rates. Under the loan and security agreement with Webster
Bank, we currently pay interest at a rate of LIBOR plus a margin of 2.25%. A
hypothetical 100 basis point increase in the LIBOR rate would result in an
additional $164,000 of interest expense on an annualized basis. Conversely, a
decrease would result in a proportionate interest cost savings.
We have fixed the interest rate on $10,000,000 of debt at 4.99% with a swap
agreement until June 2006. Currently, this is a rate favorable to the market. We
will continue to evaluate swap rates as agreements mature. They serve to
stabilize our cash flow and expense but ultimately may cost more or less in
interest than if we had carried all of our debt at a variable rate over the swap
term. Our strategy is to keep the fixed and variable portions of our senior debt
approximately equal to offset and minimize the respective risk of rising and
falling interest rates. Future low rates may compel us to fix a higher portion
to further stabilize cash flow and expenses as we monitor short and long term
rates and debt balances.
COMMODITY PRICE RISKS
Coffee
The cost of our coffee purchases are dictated by commodity prices. Currently, we
are purchasing green coffee on the spot market and fixed price contracts with
our vendors. We enter into contracts to mitigate market fluctuation of these
costs by fixing the price for certain periods. Currently we have fixed the price
of our anticipated supply through January 2005 at a "green" price of $.82 -$1.00
per pound. We are not insulated from price fluctuations beyond that date. At our
existing sales levels, an increase in pricing of $.10 per pound would increase
our total cost for coffee $75,000. In this case, competitors that had fixed
pricing might have a competitive advantage.
Diesel Fuel
We own and operate vehicles to deliver product to customers. The cost of fuel to
operate these vehicles fluctuates over time. During the most recent quarter,
fuel prices have increased significantly. We estimate that a $0.10 increase per
gallon in fuel cost would result in an increase to operating costs of
approximately $60,000. In aggregate, we have spent approximately an additional
$120,000 on fuel as a result of higher prices in fiscal year 2004 compared to
2003.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial statements and their footnotes are set forth on pages
F-1 through F-25.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
25
ITEM 9A. CONTROLS AND PROCEDURES
Our Chairman and Chief Executive Officer, our Chief Financial Officer, and other
members of our senior management team have evaluated the effectiveness of our
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)). Based on such evaluation, our Chairman and Chief Executive
Officer and Chief Financial Officer have concluded that our disclosure controls
and procedures, as of the end of the period covered by this report, were
adequate and effective to provide reasonable assurance that information required
to be disclosed by the Company, including our consolidated subsidiaries, in
reports that we file or submit under the Exchange Act, is recorded, processed,
summarized and reported, within the time periods specified in the Commission's
rules and forms.
The effectiveness of a system of disclosure controls and procedures is subject
to various inherent limitations, including cost limitations, judgments used in
decision making, assumptions about the likelihood of future events, the
soundness of internal controls, and fraud. Due to such inherent limitations,
there can be no assurance that any system of disclosure controls and procedures
will be successful in preventing all errors or fraud, or in making all material
information known in a timely manner to the appropriate levels of management.
ITEM 9B. OTHER INFORMATION
None.
26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference from the
Proxy Statement for our Annual Meeting of Stockholders scheduled to be held
April 13, 2005.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference from the
Proxy Statement for our Annual Meeting of Stockholders scheduled to be held
April 13, 2005.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information required by this Item is incorporated by reference from the Proxy
Statement for our Annual Meeting of Stockholders scheduled to be held April 13,
2005.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference from the
Proxy Statement for our Annual Meeting of Stockholders scheduled to be held
April 13, 2005.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this Item is incorporated by reference from the
Proxy Statement for our Annual Meeting of Stockholders scheduled to be held
April 13, 2005.
27
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
a) The following documents are filed as part of this report:
Financial Statements
Reference is made to the Financial Statements included in Item 8 of
Part II hereof.
b) Exhibits as required by Item 601 of Regulation S-K:
Exhibit
Number Description
- ------- -----------
3.1 Certificate of Incorporation of the Company. (Incorporated by
reference to Exhibit B to Appendix A to the Proxy Statement
included in the S-4 Registration Statement filed by Vermont Pure
Holdings, Ltd., f/k/a VP Merger Parent, Inc., File No. 333-45226,
on September 6, 2000 (the "S-4 Registration Statement").)
3.2 Certificate of Amendment of Certificate of Incorporation of the
Company filed October 5, 2000. (Incorporated by reference to
Exhibit 4.2 of the Report on Form 8-K filed by the Company on
October 19, 2000 (the "Merger 8-K").)
3.3 By-laws of the Company. (Incorporated by reference from Exhibit
3.3 to Form 10-Q for the Quarter ended July 31, 2001.)
4.1 Registration Rights Agreement among the Company, Peter K. Baker,
Henry E. Baker, John B. Baker and Ross Rapaport. (Incorporated by
reference to Exhibit 4.6 of the Merger 8-K.)
10.1* 1993 Performance Equity Plan. (Incorporated by reference from
Exhibit 10.9 of Registration Statement 33-72940.)
10.2* 1998 Incentive and Non-Statutory Stock Option Plan, as amended.
(Incorporated by reference to Appendix A to the Definitive Proxy
Statement dated March 10, 2003.)
10.3* 1999 Employee Stock Purchase Plan. (Incorporated by reference to
Exhibit A of the 1999 Definitive Proxy Statement dated May 15,
1999.)
10.4* Employment Agreement dated January 1, 2005 between the Company
and Timothy G. Fallon.
28
10.5* Employment Agreement between the Company and Bruce S. MacDonald.
(Incorporated by reference to Exhibit 10.14 of the S-4
Registration Statement.)
10.6* Employment Agreement dated January 1, 2005 between the Company
and Peter K. Baker.
10.7* Employment Agreement January 1, 2005 between the Company and John
B. Baker.
10.8* Employment Agreement between the Company and Henry E. Baker.
(Incorporated by reference to Exhibit 10.17 of the S-4
Registration Statement.)
10.9 Lease of Buildings and Grounds in Watertown, Connecticut from the
Baker's Grandchildren Trust. (Incorporated by reference to
Exhibit 10.22 of the S-4 Registration Statement.)
10.10 Lease of Grounds in Stamford, Connecticut from Henry E. Baker.
(Incorporated by reference to Exhibit 10.24 of the S-4
Registration Statement.)
10.11 Lease of Building in Stamford, Connecticut from Henry E. Baker.
(Incorporated by reference to Exhibit 10.23 of the S-4
Registration Statement.)
10.12 Amended and Restated Loan and Security Agreement between the
Company and Webster Bank, M &T Bank, Banknorth Group, and
Rabobank dated December 29, 2004.
10.13 Form of Amended and Restated Term Note from the Company to
Webster Bank and participants dated December 29, 2004.
10.14 Amended and Restated Subordinated Promissory Note from the
Company to Henry E. Baker dated March 5, 2003. (Incorporated by
reference to Exhibit 10.12 of Form 10-Q for the quarter ended
January 31, 2003.)
10.15 Amended and Restated Subordinated Promissory Note from the
Company to Joan Baker dated March 5, 2003. (Incorporated by
reference to Exhibit 10.12 of Form 10-Q for the quarter ended
January 31, 2003.)
10.16 Amended and Restated Subordinated Promissory Note from the
Company to John B. Baker dated March 5, 2003. (Incorporated by
reference to Exhibit 10.12 of Form 10-Q for the quarter ended
January 31, 2003.)
10.17 Amended and Restated Subordinated Promissory Note from the
Company to Peter K. Baker dated March 5, 2003. (Incorporated by
reference to Exhibit 10.12 of Form 10-Q for the quarter ended
January 31, 2003.)
29
10.18 Amended and Restated Subordinated Promissory Note from the
Company to Ross S. Rapaport, Trustee, dated March 5, 2003.
(Incorporated by reference to Exhibit 10.12 of Form 10-Q for the
quarter ended January 31, 2003.)
10.19 Reaffirmation of Subordination from Henry E. Baker to Webster
Bank dated December 29, 2004.
10.20 Reaffirmation of Subordination from Joan Baker to Webster Bank
dated December 29, 2004.
10.21 Reaffirmation of Subordination from John B. Baker to Webster Bank
dated December 29, 2004.
10.22 Reaffirmation of Subordination from Peter K. Baker to Webster
Bank dated December 29, 2004.
10.23 Reaffirmation of Subordination from Ross S. Rapaport, Trustee, to
Webster Bank dated December 29, 2004.
10.24 Form of Amended and Restated Acquisition/Capital Line of Credit
Note from the Company to Webster Bank and participants dated
December 29, 2004.
10.25 Form of Amended and Restated Revolving Line of Credit Note from
the Company to Webster Bank and participants dated December 29,
2004.
10.26** Form of Indemnification Agreements, dated November 1, 2002,
between the Company and the following Directors and Officers:
Henry E. Baker
John B. Baker
Peter K. Baker
Phillip Davidowitz
Timothy G. Fallon
Robert C. Getchell
David Jurasek
Carol R. Lintz
Bruce S. MacDonald
David R. Preston
Ross S. Rapaport
Norman E. Rickard
Beat Schlagenhauf
(Incorporated by reference to Exhibit 10.27 of Form 10-K for the
year ended October 31, 2002.)
10.27 Purchase and Sale Agreement among Vermont Pure Springs, Inc.,
Vermont Pure Holdings, Ltd. and Micropack Corporation dated as of
30
March 1, 2004. (Incorporated by reference to Exhibit 10.27 of
Form 10-Q for the quarter ended January 31, 2004.)
10.28 Trademark License Agreement between Vermont Pure Holdings Ltd.
and MicroPack Corporation dated March 1, 2004. (Incorporated by
reference to Exhibit 10.28 of Form 10-Q for the quarter ended
January 31, 2004.)
10.29 Supply and Sublicense Agreement between Vermont Pure Holdings
Ltd. and MicroPack Corporation dated March 1, 2004. (Incorporated
by reference to Exhibit 10.29 of Form 10-Q for the quarter ended
January 31, 2004.)
10.30* 2004 Stock Incentive Plan. (Incorporated by reference to Annex B
to the Definitive Proxy Statement dated March 9, 2004.)
10.31* Amendment to Non-Incentive Stock Option Agreement dated as of
September 12, 1997 between the Company and Robert Getchell.
(Incorporated by reference to Exhibit 10.3 of Registration
Statement on Form S-8, File No. 333-100310 dated October 4,
2002.)
10.32* Amendment to Non-Incentive Stock Option Agreement dated as of
September 12, 1997 between the Company and Beat Schlagenhauf.
(Incorporated by reference to Exhibit 10.5 of Registration
Statement on Form S-8, File No. 333-100310 dated October 4,
2002.)
10.33* Non-Incentive Stock Option Agreement dated as of May 15, 1995
between the Company and Norman Rickard. (Incorporated by
reference to Exhibit 10.8 from Registration Statement on Form
S-8, No. 33-95908.)
10.34* Amendment to Non-Incentive Stock Option Agreement dated as of
September 12, 1997 between the Company and Norman Rickard.
(Incorporated by reference to Exhibit 10.7 of Registration
Statement on Form S-8, File No. 333-100310 dated October 4,
2002.)
10.35* Non-Incentive Stock Option Agreement dated as of December 6, 1995
between the Company and David Preston. (Incorporated by reference
to Exhibit 10.8 of Registration Statement on Form S-8, File No.
333-100310 dated October 4, 2002.)
10.36* Amendment to Non-Incentive Stock Option Agreement dated as of
September 12, 1997 between the Company and David Preston.
(Incorporated by reference to Exhibit 10.9 of Registration
Statement on Form S-8, File No. 333-100310 dated October 4,
2002.)
10.37* Non-Incentive Stock Option Agreement dated as of July 24, 1996
between the Company and Robert Getchell. (Incorporated by
reference to Exhibit 10.12 of Registration Statement on Form S-8,
File No. 333-100310 dated October 4, 2002.)
31
10.38* Non-Incentive Stock Option Agreement dated as of July 24, 1996
between the Company and Beat Schlagenhauf. (Incorporated by
reference to Exhibit 10.13 of Registration Statement on Form S-8,
File No. 333-100310 dated October 4, 2002.)
10.39* Non-Incentive Stock Option Agreement dated as of July 24, 1996
between the Company and Norman Rickard. (Incorporated by
reference to Exhibit 10.14 of Registration Statement on Form S-8,
File No. 333-100310 dated October 4, 2002.)
10.40* Non-Incentive Stock Option Agreement dated as of July 24, 1996
between the Company and David Preston. (Incorporated by reference
to Exhibit 10.15 of Registration Statement on Form S-8, File No.
333-100310 dated October 4, 2002.)
21 Subsidiaries of the Registrant
23.1 Consent of Independent Registered Public Accounting Firm
23.2 Consent of Independent Registered Public Accounting Firm
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Relates to compensation
** The form contains all material information concerning the agreement and
the only differences are the name and the contact information of the director or
officer who is party to the agreement.
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Vermont Pure Holdings, Ltd. has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
VERMONT PURE HOLDINGS, LTD.
By: /s/ Timothy G. Fallon
---------------------------------------
Dated: January 31, 2005 Timothy G. Fallon, Chief Executive Officer
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 and on the dates indicated.
Name Title Date
- ---- ----- ----
/s/ David R. Preston Chairman of the Board of Directors January 31, 2005
- --------------------
David R. Preston
/s/ Henry E. Baker Director, Chairman Emeritis January 31, 2005
- ------------------
Henry E. Baker
/s/ John B. Baker Executive Vice President and Director January 31, 2005
- -----------------
John B. Baker
/s/ Peter K. Baker President and Director January 31, 2005
- ------------------
Peter K. Baker
/s/ Philip Davidowitz Director January 31, 2005
- ---------------------
Phillip Davidowitz
/s/ Timothy G. Fallon Director January 31, 2005
- ---------------------
Timothy G. Fallon
/s/ Robert C. Getchell Director January 31, 2005
- ----------------------
Robert C. Getchell
/s/ Carol R. Lintz Director January 31, 2005
- ------------------
Carol R. Lintz
/s/ Ross S. Rapaport Director January 31, 2005
- --------------------
Ross S. Rapaport
/s/ Norman E. Rickard Director January 31, 2005
- ---------------------
Norman E. Rickard
/s/ Beat Schlagenhauf Director January 31, 2005
- ---------------------
Beat Schlagenhauf
/s/ Bruce S. MacDonald Chief Financial Officer and Secretary January 31, 2005
- ----------------------
Bruce S. MacDonald
EXHIBITS TO VERMONT PURE HOLDINGS, LTD.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2004
EXHIBITS FILED HEREWITH
Exhibit
Number Description
- ------ -----------
10.4* Employment Agreement dated January 1, 2005 between the Company
and Timothy G. Fallon.
10.6* Employment Agreement dated January 1, 2005 between the Company
and Peter K. Baker.
10.7* Employment Agreement January 1, 2005 dated between the Company
and John B. Baker.
10.12 Amended and Restated Loan and Security Agreement between the
Company and Webster Bank, M &T Bank, Banknorth Group, and
Rabobank dated December 29, 2004.
10.13 Form of Amended and Restated Term Note from the Company to
Webster Bank and participants dated December 29, 2004.
10.19 Reaffirmation of Subordination from Henry E. Baker to Webster
Bank dated December 29, 2004.
10.20 Reaffirmation of Subordination from Joan Baker to Webster Bank
dated December 29, 2004.
10.21 Reaffirmation of Subordination from John B. Baker to Webster Bank
dated December 29, 2004.
10.22 Reaffirmation of Subordination from Peter K. Baker to Webster
Bank dated December 29, 2004.
10.23 Reaffirmation of Subordination from Ross S. Rapaport, Trustee, to
Webster Bank dated December 29, 2004.
10.24 Form of Amended and Restated Acquisition/Capital Line of Credit
Note from the Company to Webster Bank and participants dated
December 29, 2004.
10.25 Form of Amended and Restated Revolving Line of Credit Note from
the Company to Webster Bank and participants dated December 29,
2004.
21 Subsidiaries of the Registrant
23.1 Consent of Independent Registered Public Accounting Firm
23.2 Consent of Independent Registered Public Accounting Firm
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----------
Independent Auditors' Reports F-1
Financial Statements:
Consolidated Balance Sheets,
October 31, 2004 and 2003 F-3
Consolidated Statements of Operations,
Fiscal Years Ended October 31, 2004, 2003, and 2002 F-4
Consolidated Statements of Stockholders' Equity
and Comprehensive Income
Fiscal Years Ended October 31, 2004, 2003, and 2002 F-5
Consolidated Statements of Cash Flows,
Fiscal Years Ended October 31, 2004, 2003, and 2002 F-6
Notes to Consolidated Financial Statements F-7 - F-25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Vermont Pure Holdings, Ltd.
Williston, Vermont
We have audited the accompanying consolidated balance sheets of Vermont Pure
Holdings, Ltd. and subsidiaries (the "Company") as of October 31, 2004 and 2003,
and the related consolidated statements of operations, stockholders' equity and
comprehensive income and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (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 consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Vermont Pure Holdings, Ltd. and
subsidiaries at October 31, 2004 and 2003, and the results of their operations
and their cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
January 18, 2005
Hartford, Connecticut
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Vermont Pure Holdings, Ltd.
Williston, VT 05495
We have audited the accompanying consolidated statement of operations, changes
in stockholders' equity and cash flows of Vermont Pure Holdings Ltd. and
Subsidiaries for the year ended October 31, 2002. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit 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 results of operations,
changes in stockholders' equity and cash flows of Vermont Pure Holdings Ltd. and
Subsidiaries for the year ended October 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.
/s/ GRASSI & CO., CPAs, P.C.
GRASSI & CO., CPAs, P.C.
Certified Public Accountants
New York, New York
December 13, 2002
(Except Note 19 which is dated January 28, 2005).
F-2
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 31,
----------------------------
2004 2003
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 783,445 $ 1,170,321
Accounts receivable - net of reserve of $303,304 and $335,321
for 2004 and 2003, respectively 7,065,530 6,198,942
Inventories 1,069,834 1,018,970
Current portion of deferred tax asset 1,439,446 1,093,000
Other current assets 1,665,831 1,761,617
Unrealized gain on derivatives 103,100 -
Discontinued operations - 3,876,654
------------ ------------
TOTAL CURRENT ASSETS 12,127,186 15,119,504
------------ ------------
PROPERTY AND EQUIPMENT - net of accumulated depreciation 12,147,200 13,482,857
Discontinued Operations - 7,142,676
------------ ------------
TOTAL PROPERTY AND EQUIPMENT 12,147,200 20,625,533
------------ ------------
OTHER ASSETS:
Goodwill 74,772,591 72,899,355
Other intangible assets - net of accumulated amortization 3,734,899 1,247,994
Deferred tax asset 665,271 1,156,000
Other assets 536,000 285,678
------------ ------------
TOTAL OTHER ASSETS 79,708,761 75,589,027
------------ ------------
TOTAL ASSETS $103,983,147 $111,334,064
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long term debt $ 6,140,635 $ 3,148,274
Accounts payable 2,828,787 2,318,720
Accrued expenses 2,318,486 2,329,163
Current portion of customer deposits 202,244 169,504
Unrealized loss on derivatives - 35,504
Discontinued operations - 2,056,938
------------ ------------
TOTAL CURRENT LIABILITIES 11,490,152 10,058,103
Long term debt, less current portion 37,853,696 48,273,782
Customer deposits 3,168,483 2,655,560
------------ ------------
TOTAL LIABILITIES 52,512,331 60,987,445
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock - $.001 par value, 50,000,000 authorized shares
21,569,711 issued and 21,498,161 outstanding shares as of
July 31, 2004 and 21,430,987 issued and 21,359,437
outstanding as of October 31, 2003 21,569 21,431
Additional paid in capital 57,869,411 57,535,069
Treasury stock, at cost, 71,550 shares as of October 31, 2003
and 2004 (264,735) (264,735)
Accumulated deficit (6,258,531) (6,909,642)
Accumulated other comprehensive income (loss) 103,100 (35,504)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 51,470,815 50,346,619
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $103,983,146 $111,334,064
============ ============
See the accompanying notes to the consolidated financial statements.
F-3
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Year Ended October 31,
------------------------------------------
2004 2003 2002
------------ ------------ ------------
NET SALES $ 52,473,401 $ 49,854,313 $ 49,068,325
COST OF GOODS SOLD 22,777,542 20,799,833 19,059,180
------------ ------------ ------------
GROSS PROFIT 29,695,859 29,054,480 30,009,145
------------ ------------ ------------
OPERATING EXPENSES:
Selling, general and administrative expenses 23,713,854 22,190,138 20,410,354
Advertising expenses 1,048,835 802,297 1,104,248
Amortization 409,380 186,060 232,201
Other compensation 34,234 38,997 52,400
------------ ------------ ------------
TOTAL OPERATING EXPENSES 25,206,303 23,217,492 21,799,203
------------ ------------ ------------
INCOME FROM OPERATIONS 4,489,556 5,836,988 8,209,942
------------ ------------ ------------
OTHER EXPENSE:
Interest (3,506,769) (4,268,958) (4,408,791)
Gain/(Loss) on disposal of property and equipment 9,649 (1,523) (228,025)
Miscellaneous (152,838) - (60,574)
------------ ------------ ------------
TOTAL OTHER EXPENSE (3,649,958) (4,270,481) (4,697,390)
------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX EXPENSE 839,598 1,566,507 3,512,552
INCOME TAX EXPENSE 348,708 604,974 1,443,620
------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS 490,890 961,533 2,068,932
DISCONTINUED OPERATIONS:
(Loss) income from discontinued operations (78,555) 637,044 747,903
Gain on disposal of discontinued operations 352,535 - -
Income tax expense from discontinued operations (113,759) (246,022) (307,380)
------------ ------------ ------------
INCOME FROM DISCONTINUED OPERATIONS 160,221 391,022 440,523
------------ ------------ ------------
NET INCOME $ 651,111 $ 1,352,555 $ 2,509,455
============ ============ ============
NET INCOME PER SHARE - BASIC
Continuing operations $ 0.02 0.04 0.10
Discontinued operations 0.01 0.02 0.02
------------ ------------ ------------
NET INCOME $ 0.03 $ 0.06 $ 0.12
============ ============ ============
NET INCOME PER SHARE - DILUTED
Continuing operations $ 0.02 0.04 0.09
Discontinued operations 0.01 0.02 0.02
------------ ------------ ------------
NET INCOME $ 0.03 $ 0.06 $ 0.11
============ ============ ============
WEIGHTED AVERAGE SHARES USED IN COMPUTATION - BASIC 21,497,251 21,282,294 21,091,837
============ ============ ============
WEIGHTED AVERAGE SHARES USED IN COMPUTATION - DILUTED 21,574,515 21,764,698 22,035,269
============ ============ ============
See the accompanying notes to the consolidated financial statements.
F-4
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
Additional
Common Stock Paid in Treasury Stock
Shares Par Value Capital Shares Amount
---------- --------- ----------- -------- ---------
Balance, October 31, 2001 20,767,670 20,768 55,562,599 - $ -
Common stock issued for acquisition 213,912 214 704,413
Stock compensation 12,105 12 52,388
Exercise of stock options 179,500 179 482,859
Shares purchased under employee
stock plan 62,740 63 220,834
Net income
Unrealized gain on derivatives
---------- --------- ----------- -------- ---------
Balance, October 31, 2002 21,235,927 21,236 57,023,093 - $ -
Stock compensation 9,285 9 38,988
Exercise of stock options 125,000 125 281,124
Treasury stock purchase (71,550) 71,550 $(264,735)
Shares purchased under employee 60,775 61 191,864
stock plan
Net income
Unrealized gain on derivatives
---------- --------- ----------- -------- ---------
Balance, October 31, 2003 21,359,437 $ 21,431 $57,535,069 71,550 $(264,735)
========== ========= =========== ======== =========
Stock compensation 7,484 7 56,350
Exercise of stock options 33,200 33 82,967
Restricted Stock Grants 26,000 26 57,174
Shares purchased under employee 72,040 72 179,777
stock plan
Officer share purchases 5,741
Deferred Compensation (47,667)
Net income
Unrealized gain on derivatives
---------- --------- ----------- -------- ---------
Balance, October 31, 2004 21,498,161 $ 21,569 $57,869,411 71,550 $(264,735)
========== ========= =========== ======== =========
Accumulated
Other
Accumulated Comprehensive Comprehensive
Deficit Gain (Loss) Total Income
------------ ------------- ------------ -------------
Balance, October 31, 2001 (10,771,652) (973,537) 43,838,178
Common stock issued for acquisition 704,627
Stock compensation 52,400
Exercise of stock options 483,038
Shares purchased under employee
stock plan 220,897
Net income 2,509,455 2,509,455 $ 2,509,455
Unrealized gain on derivatives 130,639 130,639 130,639
------------ ------------- ------------ -------------
Balance, October 31, 2002 (8,262,197) (842,898) 47,939,234 $ 2,640,094
=============
Stock compensation 38,997
Exercise of stock options 281,249
Treasury stock purchase (264,735)
Shares purchased under employee 191,925
stock plan
Net income 1,352,555 1,352,555 $ 1,352,555
Unrealized gain on derivatives 807,394 807,394 807,394
------------ ------------- ------------ -------------
Balance, October 31, 2003 $ (6,909,642) $ (35,504) $ 50,346,619 $ 2,159,949
============ ============= ============ =============
Stock compensation 56,357
Exercise of stock options 83,000
Restricted Stock Grants 57,200
Shares purchased under employee 179,849
stock plan
Officer share purchases 5,741
Deferred Compensation (47,667)
Net income 651,111 651,111 $ 651,111
Unrealized gain on derivatives 138,604 138,604 138,604
------------ ------------- ------------ -------------
Balance, October 31, 2004 $ (6,258,531) $ 103,100 $ 51,470,815 $ 789,715
============ ============= ============ =============
See the accompanying notes to the consolidated financial statements.
F-5
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended October 31,
------------------------------------------
2004 2003 2002
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 651,111 $ 1,352,555 $ 2,509,455
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 5,091,470 5,074,159 4,398,432
Provision for bad debts 366,844 598,142 443,633
Amortization 409,380 186,060 232,201
Change in deferred tax asset 144,283 585,776 1,779,000
(Gain) Loss on disposal of property and equipment (9,649) 42,137 228,025
Gain on sale of a segment of business (352,535) - -
Non cash compensation 34,234 38,997 52,400
Loss on investment in CDS 152,838
Changes in assets and liabilities (net of effect of acquisitions):
Accounts receivable (154,303) (1,011,285) (689,447)
Inventories (594,561) 1,102,285 (919,755)
Other current assets 45,636 (559,154) 1,125,000
Other assets (136,027) 603,765 (21,676)
Accounts payable 178,516 446,557 (594,173)
Accrued expenses (477,290) (58,536) (483,191)
Customer deposits 235,867 (157,212) 187,860
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,585,814 8,244,246 8,247,764
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (3,231,338) (4,171,835) (4,692,785)
Proceeds from sale of a segments of business - net of transaction costs 8,921,693 - -
Proceeds from sale of property and equipment 584,565 106,526 271,262
Cash used for acquisitions - net of cash acquired (4,448,477) (3,953,692) (4,987,073)
Other investing activities - (116,236) -
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,826,443 (8,135,237) (9,408,596)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit borrowings 6,689,248 1,866,433 3,865,706
Proceeds from debt - 3,746,653 4,200,000
Payments on line of credit (1,443,248) (1,866,433) (3,865,706)
Principal payments of debt (13,313,725) (3,545,984) (4,190,123)
Exercise of stock options 83,000 281,249 483,039
Purchase of treasury stock - (264,735) -
Proceeds from sale of common stock 185,590 191,925 220,897
------------ ------------ ------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (7,799,135) 409,108 713,813
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (386,878) 518,117 (447,019)
CASH AND CASH EQUIVALENTS - beginning of year 1,170,321 652,204 1,099,223
------------ ------------ ------------
CASH AND CASH EQUIVALENTS - end of year $ 783,443 $ 1,170,321 $ 652,204
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest $ 3,715,739 $ 4,398,114 $ 4,556,831
============ ============ ============
Cash paid for taxes $ 72,079 $ 360,238 $ 193,372
============ ============ ============
NON-CASH FINANCING AND INVESTING ACTIVITIES:
Notes payable issued in acquisitions $ 640,000 $ 200,000 $ -
Note receivable on sales of segments of business (500,000) - -
------------ ------------ ------------
$ 140,000 $ 200,000 $ -
============ ============ ============
See the accompanying notes to the consolidated financial statements.
F-6
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS OF THE COMPANY
Vermont Pure Holdings, Ltd. and Subsidiaries (collectively, the "Company")
is engaged in the production, marketing and distribution of bottled water
and distribution of coffee, ancillary products, and other office
refreshment products. Through February, 2004, when the Company divested
the retail segments of its business, the Company's products were sold,
predominantly in the Northeast, as well as in the Mid-Atlantic and
Mid-Western United States. Distribution was accomplished through a network
of independent beverage distributors and with the Company's own trucks and
employees. Commencing March 2004, the Company operated exclusively as a
home and office delivery business, using its own trucks to distribute
throughout New England, New York, and New Jersey.
2. SIGNIFICANT ACCOUNTING POLICIES
a. Basis of Presentation - For 2002 and 2003, the consolidated
financial statements include the accounts of Vermont Pure
Holdings, Ltd. and its wholly-owned subsidiaries, Vermont Pure
Springs, Inc., Crystal Rock Spring Water Company ("Crystal
Rock"), Excelsior Spring Water Company Inc. and Adirondack
Coffee Services. In 2004, the Company merged the subsidiaries
mentioned above into Vermont Pure Holdings, Ltd. All material
inter-company profits, transactions, and balances have been
eliminated in consolidation.
b. Cash Equivalents - The Company considers all highly liquid
temporary cash investments with an original maturity of three
months or less to be cash equivalents.
c. Inventories - In 2002 and 2003, inventories consisted
primarily of the packaging material, labor and overhead
content of the Company's products and were stated at the lower
of cost or market using average costing. In 2004, inventories
primarily consist of products that are purchased for resale
are stated at the lower of cost or market on a first in, first
out basis.
d. Property and Equipment - Property and equipment are stated at
cost net of accumulated depreciation. Depreciation is
calculated on the straight-line method over the estimated
useful lives of the assets, which range from three to ten
years for equipment, and from ten to forty years for buildings
and improvements.
e. Goodwill and Other - The Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 142 which
eliminates the amortization of goodwill and other intangible
assets with indefinite lives. Intangible assets with lives
restricted by contractual, legal, or other means
F-7
will continue to be amortized over their useful lives (defined by
SFAS No. 142 as the period over which the asset is expected to
contribute to the future cash flows of the entity). Goodwill and
other intangible assets not subject to amortization are tested for
impairment annually or more frequently if events or changes in
circumstances indicate that the asset might be impaired. The amount
of impairment for goodwill and other intangible assets is measured
as the excess of their carrying values over their implied fair
values. The Company conducted assessments of the carrying value of
its goodwill as required by SFAS No. 142 in the third quarter of
fiscal years 2004 and 2003, and, as a result, the Company concluded
that there was no current impairment of goodwill as of such date.
The Company will conduct assessments of the carrying value of its
goodwill annually and when other indicators are present.
In accordance with SFAS No. 142, the Company discontinued
amortization of goodwill effective November 1, 2001.
f. Securities Issued for Services - The Company follows the accounting
treatment prescribed by Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees" when accounting
for stock-based compensation granted to employees and directors. Any
stock-based compensation awards to non-employees and non-directors
are accounted for using the provisions of Emerging Issues Task Force
No. 96-18 "Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling
Goods or Services."
Pro-forma information regarding net income and net income per share
is presented below as if the Company had accounted for its employee
stock options under the fair value method using SFAS No. 123,
Accounting for Stock Based Compensation, net of tax. Such pro forma
information is not necessarily representative of the effects on
reported net income for future years due primarily to option vesting
periods and to the fair value of additional options in future years.
F-8
Years Ended
October 31,
2004 2003 2002
-------- ----------- ----------
Net Income - As Reported $651,111 $ 1,352,555 $2,509,455
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all
awards, net of related tax effects 347,626 249,656 633,742
-------- ----------- ----------
Pro Forma Net Income $303,485 $ 1,102,899 $1,875,713
======== =========== ==========
Basic Net Income Per Share:
As Reported $ .03 $ .06 $ .12
======== =========== ==========
Pro Forma $ .01 $ .05 $ .09
======== =========== ==========
Diluted Net Income Per Share:
As Reported $ .03 $ .06 $ .11
======== =========== ==========
Pro Forma $ .01 $ .05 $ .09
======== =========== ==========
The weighted average fair values of the options granted for the
respective fiscal years, using the Black-Scholes option pricing
model, were $1.15, $1.70, and $2.26, respectively.
Assumptions used for estimating the fair value of the options on the
date of grant under the Black-Scholes option pricing model are as
follows for the fiscal years ended October 31, 2004, 2003 and 2002:
2004 2003 2002
-------- --------- ---------
Expected Dividend Yield 0% 0% 0%
Expected Life 5 Years 5 Years 5 Years
Risk free Interest Rate 3.0% 5.7% 5.7%
Volatility 39% 36% 54%
g. Net Income Per Share - Net income per share is based on the weighted
average number of common shares outstanding during each period.
Potential common shares are included in the computation of diluted
per share amounts outstanding during each period that income is
reported. In periods in which the Company reports a loss, potential
common shares are not included in the diluted earnings per share
calculation since the inclusion of those shares in the calculation
would be anti-dilutive. As required by SFAS No. 128, the Company
considers outstanding "in-the-money" stock options as potential
common stock in its calculation of diluted earnings per share and
uses the treasury stock method to calculate the applicable number of
shares.
F-9
h. Advertising Expenses - The Company expenses advertising costs at the
time the advertising begins to run with the exception of advertising
from which it derives direct responses from customers. The Company
expenses direct response advertising, which consists of Yellow Pages
advertising, over a period of twelve months consistent with its
expected period of future benefit based on historical responses.
Prepaid advertising at October 31, 2004 and 2003 was $288,000 and
$302,000, respectively, and is included in other current assets on
the accompanying consolidated balance sheets.
i. Slotting Fees - Slotting fees are paid to individual supermarkets
and supermarket chains to obtain initial shelf space for new
products. Fees vary from store to store. The payment of slotting
fees does not guarantee that the Company's product will be carried
for any definite period of time. The Company pays for such fees
either in cash, by providing free goods, or by issuing credits for
previously sold goods. The cost of the slotting fees is valued at
the amount of cash paid or the fair value of the goods provided in
exchange. The Company expenses slotting fees when the obligation is
incurred. Slotting fees were not incurred following the sale of the
retail segments of the business.
j. Customer Deposits - Customers receiving home or office delivery of
water pay the Company a deposit for the water bottle that is
refunded when the bottle is returned. Based on historical
experience, the Company uses an estimate of the deposits it expects
to refund over the next twelve months to determine the current
portion of the liability, and classifies the balance of the amount
as a long term liability.
k. Income Taxes - The Company uses SFAS 109 when calculating its tax
expense and the value of tax related assets and liabilities. This
requires that the tax impact future events be considered when
determining the value of assets and liabilities in its financial
statements and tax returns. The Company accounts for income taxes
under the liability method. Under the liability method, a deferred
tax asset or liability is determined based upon the tax effect of
the differences between the financial statement and tax basis of
assets and liabilities as measured by the enacted rates that will be
in effect when these differences reverse.
l. Use of Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
F-10
m. Fair Value of Financial Instruments - The carrying amounts reported
in the consolidated balance sheet for cash, trade receivables,
accounts payable and accrued expenses approximate fair value based
on the short-term maturity of these instruments. The carrying amount
of the Company's borrowings also approximates fair value.
n. Impairment for Long-Lived and Intangible Assets - The Company
reviews long-lived assets and certain identifiable intangible assets
for impairment whenever circumstances and situations change such
that there is an indication that the carrying amounts may not be
recovered. Recoverability is assessed based on estimated
undiscounted future cash flows. At October 31, 2004 and 2003, the
Company believes that there has been no impairment of its long-lived
and intangible assets.
o. Revenue Recognition - Revenue is recognized when products are
delivered to customers through the Company's home and office
distribution channel. For consumer retail products, revenue is
recognized upon shipment or delivery of the product based on the
terms of the F.O.B. arrangements with the customer.
p. Shipping and Handling Costs - The Company classifies shipping and
handling costs as a component of selling, general and administrative
expenses. Shipping and handling costs were approximately $706,000,
$2,308,000, and $2,030,000 for fiscal years ended October 31, 2004,
2003 and 2002, respectively. The Company does not charge these costs
to its customers. These charges apply to the retail segment of
business that the Company disposed of in March, 2004.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, and
Amendment of ARB No. 43, Chapter 4." SFAS No. 151 clarifies the accounting
for abnormal amounts of idle facility expense, freight, handling costs, and
wasted material (spoilage). SFAS No. 151 is effective for inventory costs
incurred after October 31, 2005. The Company does not believe SFAS No. 151
will have a material impact on its consolidated financial statements.
Also in November 2004, the FASB issued SFAS No. 152 "Accounting for Real
Estate Time Sharing Transactions, an Amendment of FASB Statements No. 66 and
67," and SFAS No. 153, "Exchange of Nonmonetary Assets, and Amendment of APB
Opinion No. 29." These statements are not expected to have a material impact
on the Company's consolidated financial condition or results of operations.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment,"
("SFAS 123R"), which requires that the cost resulting for all share-based
payment transactions be recognized in the financial statements. This
statement is effective for the Company as of August 1, 2005.
F-11
4. SEGMENTS
The Company has historically prepared detailed information to evaluate its
operations on a segment basis. It accounted for the business in three
separate segments, "Retail", "Retail-Gallons" and "Home and Office."
Following the sale by the Company of its two retail segments in March 2004,
its remaining operations consist solely of the Home and Office business. As a
result of the sale, the results of operations for the retail segments are
classified as discontinued operations in the periods reported. Consequently,
the Company will not report segment information in this report.
5. MERGERS AND ACQUISITIONS
During 2004, Vermont Pure Holdings, Ltd. made seven acquisitions and merged
these into the Company's Home and Office operations:
The purchase price paid for the acquisitions is was follows:
Cash $ 4,331,351
Notes Payable 640,000
Acquisition Costs 552,125
-----------
$ 5,523,476
===========
The operating results of the acquired entities have been included in the
accompanying statements of operations since their respective dates of
acquisition.
The allocation of purchase price related to these acquisitions is as follows:
Accounts Receivable $ 296,189
Inventory 1,048,320
Goodwill 1,875,263
Other Intangibles 2,613,500
Bottle Deposits (309,796)
------------
Purchase Price $ 5,523,476
============
The following table summarizes the pro forma consolidated condensed results
of operations (unaudited) of the Company for the fiscal years ended October
31, 2004 and October 31, 2003 as though the acquisitions had been consummated
at the beginning of the periods presented:
October 31,
-------------------------
2004 2003
----------- -----------
(Unaudited)
Total Sales $56,502,401 $54,617,313
=========== ===========
Net Income $ 741,113 $ 1,512,555
=========== ===========
Net Income Per Share - Diluted $ 0.03 $ 0.07
=========== ===========
Weighted Average Common Shares
Outstanding - Diluted 21,574,515 21,764,698
=========== ===========
F-12
During 2003, the purchase price paid for acquisitions was as follows:
Cash $ 3,888,764
Notes Payable 200,000
Acquisition Costs 64,928
-----------
$ 4,153,692
===========
The operating results of the acquired entities have been included in the
accompanying statements of operations since their respective dates of
acquisition.
The allocation of the purchase price of the 2003 acquisitions is as follows:
Accounts Receivable $ 895,620
Inventory 116,875
Goodwill 2,355,232
Other Intangibles 785,965
----------
Purchase Price $4,153,692
==========
The following table summarizes the pro forma consolidated condensed results
of operations (unaudited) of the Company for the fiscal years ended October
31, 2003 and October 31, 2002 as though the acquisitions had been consummated
at the beginning of the periods presented:
October 31,
-----------
2003 2002
----------- -----------
(Unaudited)
Total Sales $52,715,313 $53,304,325
=========== ===========
Net Income $ 1,705,555 $ 2,994,075
=========== ===========
Net Income Per Share - Diluted $ 0.08 $ 0.14
=========== ===========
Weighted Average Common Shares
Outstanding - Diluted 21,764,698 22,035,269
=========== ===========
6. ACCOUNTS RECEIVABLE
The Company reduces its receivables by an allowance for future uncollectible
accounts. The activity in the allowance for continuing operations is as
follows:
October 31,
-----------
2004 2003 2002
--------- ----------- ----------
Balance, beginning of year $ 335,321 $ 248,880 $ 255,629
Provision 366,844 598,142 443,633
Write-offs (398,861) (511,701) (450,382)
--------- ----------- ----------
Balance, end of year $ 303,304 $ 335,321 $ 248,880
========= =========== ==========
F-13
7. INVENTORIES
Inventories at October 31, consisted of:
October 31,
------------------------
2004 2003
---------- -----------
Finished Goods $ 900,917 $ 947,397
Raw Materials 168,917 71,573
---------- -----------
Total Inventories $1,069,834 $ 1,018,970
========== ===========
8. PROPERTY AND EQUIPMENT
Property and equipment at October 31, consisted of:
October 31,
Useful ---------------------------
Life 2004 2003
------------ ----------- -----------
Buildings and improvements 10 - 40 yrs. $ 332,518 $ 287,869
Machinery and equipment 3 - 10 yrs. 26,504,296 25,662,405
----------- -----------
26,836,814 25,950,274
Less accumulated depreciation 14,689,614 12,467,417
----------- -----------
$12,147,200 $13,482,857
=========== ===========
Depreciation expense for the fiscal years ended October 31, 2004, 2003 and
2002 was $5,091,470, $5,074,159, and $4,398,432, respectively.
9. GOODWILL AND OTHER INTANGIBLE ASSETS
Major components of intangible assets at October 31, consisted of:
2004 2003
----------------------------- -------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------ -------------- ------------
Amortized Intangible
Assets:
Customer Lists and
Covenants Not to Compete $ 4,152,840 $ 759,591 $ 2,984,887 $ 1,779,674
Other Intangibles 513,604 171,954 123,467 80,686
-------------- ------------ -------------- ------------
Total $ 4,666,444 $ 931,545 $ 3,108,354 $ 1,860,360
============== ============ ============== ============
Amortization expense for fiscal years 2004, 2003, and 2002 was $409,380,
186,060, and 232,201, respectively.
Estimated Amortization Expense:
for the fiscal year ending October 31, 2005 $761,459
October 31, 2006 729,884
October 31, 2007 591,278
October 31, 2008 548,149
October 31, 2009 371,452
F-14
The changes in the carrying amount of goodwill for the fiscal years ending
October 31, are as follows:
2004 2003
----------- -----------
Beginning Balance $72,899,355 $70,427,887
Goodwill acquired during the year 1,875,263 2,471,468
Goodwill disposed of during the year (2,027) --
----------- -----------
Balance as of October 31 $74,772,591 $72,899,355
=========== ===========
10. ACCRUED EXPENSES
Accrued expenses as of October 31, were as follows:
October 31,
-------------------------
2004 2003
---------- ----------
Payroll and vacation $ 959,633 $ 877,043
Income taxes 205,133 35,000
Interest 607,203 799,140
Miscellaneous 546,517 617,980
---------- ----------
$2,318,486 $2,329,163
========== ==========
11. DEBT
The Company borrowed up to $3,045,000 during fiscal year 2004 on its
operating line of credit and had $1,500,000 outstanding as of October 31,
2004. During the twelve months ended October 31, 2004 and 2003 the Company
borrowed approximately $3,746,000 and $1,600,000 from its acquisition line of
credit with Webster Bank to finance acquisitions of Home and Office
distribution assets. The rate of interest on the acquisition line is current
30 day LIBOR rate plus 250 basis points (4.5% at October 31, 2004) and is due
April 1, 2005. The acquisition line is secured by a lien against all of the
assets of Vermont Pure Holdings and its subsidiaries. In addition, letters of
credit totaling $1,050,000 secured by the line were issued on the Company's
behalf, reducing the availability of the line by that amount.
a) Senior Debt Refinancing
On March 5, 2003 the Company refinanced its credit facility ("New Credit
Facility") with Webster Bank and other participants. The New Credit Facility
refinanced $28.5 million of existing senior debt, provides a working capital
line of $6.5 million for a term of five years maturing February 29, 2008. The
rate of interest on the New Credit Facility and working capital line was
established at the current 30-day LIBOR rate plus 200 basis points (3.2% at
October 31, 2003), and is secured by a lien against all of the assets of
Vermont Pure Holdings and its subsidiaries. The new facility made available
up to $15 million to be used for acquisitions and the partial repayment of
the outstanding 12% subordinated notes. Of the $15 million, up to $10 million
was available for acquisitions in the Company's Home and Office business, and
up to $5 million was potentially available for, but ultimately was not
applied to, the repayment of subordinated debt if the Company was able to
achieve specified financial performance targets in fiscal year 2003.
F-15
There are no further scheduled principal payments on the subordinated debt
until 2008 when the full senior facility is due.
The New Credit Facility amortizes the payback of the existing debt over five
years and amortizes the payback of the new acquisition debt for three years
after the first two years, starting on May 1, 2005. During the first two
years, interest only is paid on a monthly basis for amounts drawn down for
acquisitions and subordinated debt repayment (see section b). The operating
line of credit was renewed for two years for a total of $6,500,000. The
operating line will expire on April 1, 2005. The Company is currently
negotiating to renew the line or replace it and the rest of the entire New
Credit Facility.
Interest on all borrowings is tied to the Company's performance. At October
31, 2004 the rate was the 30-day LIBOR plus 225 basis points.
Use of the proceeds related to acquisitions and retirement of subordinated
debt are restricted by the Company's attainment of certain covenants,
requirements, and projections. The Company's credit facility agreement
requires that it be in compliance with certain financial covenants at the end
of each fiscal quarter. The Company was in compliance with all of its
financial covenants at the end of the fiscal year ended October 31, 2004.
b) Subordinated Debt
As part of the acquisition agreement in 2000 with the former shareholders of
Crystal Rock, the Company issued subordinated notes in the amount of
$22,600,000. The notes have an effective date of October 5, 2000, are for an
original term of seven years (subsequently extended to 2008) and bear
interest at 12% per year. Scheduled repayments are made quarterly and are
interest only for the life of the note unless specified financial targets are
met. In April 2004, the Company repaid $5,000,000 of the outstanding
principal. Payments of interest only of $528,000 are due quarterly with a
principal payment of $17,600,000 due at maturity.
The notes are secured by all of the assets of the Company but specifically
subordinated, with a separate agreement between the debt holders, to the
senior debt described in Note above.
c) Annual maturities of debt as of October 31, 2004 are summarized as
follows:
Senior Credit Lines Subordinated Other Total
------ ------------ ------------ ----- -----
Fiscal year ending October 31,
2005 3,733,000 1,768,000 - 640,000 6,141,000
2006 3,958,000 669,000 - - 4,627,000
2007 4,146,000 936,000 - - 5,082,000
2008 7,071,000 3,473,000 17,600,000 - 28,144,000
----------- ------------ ------------ --------- -----------
Total Debt $18,908,000 $ 6,846,000 $ 17,600,000 $ 640,000 $43,994,000
=========== ============ ============ ========= ===========
F-16
12. INTEREST RATE HEDGES
The Company uses interest rate swaps to fix its long term interest rates. The
swap rates are based on the floating 30-day LIBOR rate and are structured
such that if the loan rate for the period exceeds the fixed rate of the swap
then the bank pays the Company to lower the effective interest rate.
Conversely, if the rate is lower than the fixed rate, the Company pays the
bank additional interest. As of October 31, 2004, the Company had one swap
for $10,000,000 for a three year term maturing in June, 2006. Based on the
rates for fiscal year 2004, the Company paid $304,000 more in interest than
it would have without the swaps.
This instrument is considered a hedge under SFAS No. 133 and 137. Since the
instrument is intended to hedge against variable cash flows, it is considered
a cash flow hedge. As a result, the change in the fair value of the
derivative is recognized as comprehensive income until the hedged item is
recognized in earnings. The net unrealized realized gain for the years ended
October 31, 2004, 2003 and 2002 was $138,604, 807,394 and 130,639,
respectively. The accumulated other comprehensive gain (loss) as of October
31, 2004 and 2003 was $103,100 and $(35,504), respectively.
13. STOCK BASED COMPENSATION
a) Stock Option Plan
In November 1993, the Company adopted the 1993 Performance Equity Plan (the
"1993 Plan"). The 1993 Plan authorizes the granting of awards for up to
1,000,000 shares of common stock to key employees, officers, directors and
consultants until November 2003. Grants can take the form of stock options
(both qualified and non-qualified), restricted stock awards, deferred stock
awards, stock appreciation rights and other stock based awards. During fiscal
2004, 2003, and 2002 there were no options issued under this plan.
In April 1998, the Company's shareholders approved the 1998 Incentive and Non
Statutory Stock Option Plan. In April 2003, the Company's shareholders
approved an increase in the authorized number of shares to be issued from its
1998 Incentive and Non-Statutory Stock Option Plan from 1,500,000 to
2,000,000. This plan provides for issuance of up to 2,000,000 options to
purchase the Company's common stock under the administration of the
compensation committee of the Board of Directors. The intent of the plan is
to reward options to officers, employees, directors, and other individuals
providing services to the Company. The following table summarizes the
activity related to stock options and outstanding stock option balances
during the last three fiscal years:
F-17
Outstanding Options Weighted Average
(Shares) Exercise Price
------------------- ----------------
Balance at October 31, 2001 2,678,321 $2.70
Granted 90,000 4.36
Exercised (179,500) 2.73
Expired (5,000) 2.00
---------
Balance at October 31, 2002 2,583,821 2.93
Granted 65,000 4.09
Exercised (125,000) 2.25
Expired (45,000) 3.64
---------
Balance at October 31, 2003 2,478,821 2.98
Granted 265,000 2.96
Exercised (33,200) 2.50
Expired (47,831) 2.77
---------
Balance at October 31, 2004 2,662,790 $2.96
========= =====
The following table summarizes information pertaining to outstanding stock
options as of October 31, 2004:
Weighted
Average Weighted Weighted
Exercise Outstanding Remaining Average Exercisable Average
Price Options Contractual Exercise Options Exercise
Range (Shares) Life Price (Shares) Price
- ------------- ---------- ----------- -------- ---------- ---------
$1.81 - $2.60 1,017,800 1.43 $2.50 1,017,800 $2.50
$2.81 - $3.38 1,404,990 6.28 3.13 1,199,990 3.13
$3.50 - $4.25 185,000 6.71 3.89 185,000 3.89
$4.28 - $4.98 55,000 5.57 4.82 55,000 4.82
--------- ---- ----- --------- -----
2,662,790 4.44 $2.96 2,457,790 $2.96
========= ==== ===== ========= =====
Outstanding options and warrants include options issued under the 1993 Plan,
the 1998 Plan and non-plan options and warrants. There were 2,096,795
exercisable options at a weighted average price of $2.91 per share and
2,018,045 exercisable options at a weighted average price of $2.80 per share
as of October 31, 2003 and 2002, respectively.
Outstanding options have lives ranging from 5-10 years, vesting from 0-5
years, and have exercise prices ranging from $1.81-$4.98 per share.
b) Employee Stock Purchase Plan
In June 1999 the Company's shareholders approved the Vermont Pure Holdings,
Ltd. 1999 Employee Stock Purchase Plan. On January 1, 2001, employees
commenced participation in the plan. The Company issued 72,040, 60,775, and
62,740 common shares for the fiscal years ended October 31, 2004, 2003 and
2002, respectively.
c) 2004 Stock Incentive Plan
In April 2004 the Company's shareholders approved the 2004 Stock Incentive
Plan. The plan provides for issuance of awards up to 250,000 restricted or
unrestricted shares, or incentive or non-statutory stock options, of the
Company's common stock. On
F-18
September 17, 2004, the Company issued 26,000 restricted shares for two
awards to employees under this plan. These awards vest one year from the
anniversary date and were valued at the market price at the acceptance date.
The total value of the awards was $57,200. The Company recognizes
compensation over the vesting period resulting in $9,533 of expense in fiscal
2004.
14. RETIREMENT PLAN
The Company has a defined contribution plan which meets the requirements of
Section 401(k) of the Internal Revenue Code. All employees of the Company who
are at least twenty-one years of age are eligible to participate in the plan.
The plan allows employees to defer a portion of their salary on a pre-tax
basis and the Company contributes 25% of amounts contributed by employees up
to 6% of their salary. Company contributions to the plan amounted to
$107,000, $102,000, and $114,000 for the fiscal years ended October 31, 2004,
2003, and 2002, respectively.
15. COMMITMENTS AND CONTINGENCIES
a. Operating Leases
The Company's operating leases consist of trucks, office equipment and rental
property.
Future minimum rental payments over the terms of various lease contracts are
approximately as follows:
Fiscal Year Ending October 31,
2005 $2,206,019
2006 1,963,678
2007 1,710,599
2008 1,462,242
2009 1,033,057
Thereafter 973,202
----------
Total $9,348,797
==========
Rent expense was $2,502,739, $2,136,596, and $2,020,296 for the fiscal years
ended October 31, 2004, 2003, and 2002, respectively.
b. Contingencies
In January 2003, the Company settled a suit alleging that a vendor did not
adequately perform the services rendered in connection with approximately
$500,000 of unpaid billings. In settling the suit, the Company agreed to pay
$50,000 to the vendor in full settlement of the litigation, and the parties
released each other from any further liability in the case. A gain of
$150,000 was recognized in the first quarter of 2003 since the Company had
set up a reserve for settlement of the suit that exceeded the final amount
paid. The gain has been included as a reduction of selling, general and
administrative expenses.
F-19
16. RELATED PARTY TRANSACTIONS
a) Directors and Officers
Three of the Company's major shareholders (former Crystal Rock shareholders)
have employment contracts with the Company through October 5, 2005. Two are
also directors. One contract entitles the shareholder to annual compensation
of $25,000 as well as a leased Company vehicle. The other two contracts
entitle the respective shareholders to annual compensation of $250,000 each
and other bonuses and prerequisites.
The Company leases a 67,000 square foot facility in Watertown, CT and a
22,000 square foot facility in Stamford, CT from a family trust controlled by
a related party. The lease expires in October 2010. Future minimum rental
payments under these leases are as follows:
Fiscal year ending October 31, Stamford Watertown Total
2005 $ 216,000 $ 360,000 $ 576,000
2006 248,400 414,000 662,400
2007 248,400 414,000 662,400
2008 248,400 414,000 662,400
2009 248,400 414,000 662,400
Thereafter 248,400 414,000 662,400
---------- ---------- ----------
Totals $1,458,000 $2,430,000 $3,888,000
========== ========== ==========
b) Investment in Voyageur
The Company has an equity position in a software company named Computer
Design Systems, Inc. (CDS), d/b/a Voyageur Software. One of the Company's
directors is a member of the board of directors of CDS. The Company uses
software designed, sold and serviced by CDS in its Home and Office delivery
system to manage customer service, deliveries, inventory, billing and
accounts receivable. During fiscal 2004, 2003 and 2002, the Company paid
$582,277, $113,193, and $275,332, respectively, for service, software, and
hardware.
As of October 31, 2003, the Company held a note receivable from CDS dated
August 1, 1998 for the principal amount of $120,000 with accrued interest of
$43,650 and an original maturity date of August 15, 2003. At October 31, 2003
interest accrued on the note and due from CDS was $50,150. In October 2003,
the Company exercised the option to convert the principal amount of the note
into additional common shares of CDS during 2003. At October 31, 2003, the
Company's share of CDS losses resulted in a net equity investment in CDS of
$100,988, representing approximately 24% of the common stock of CDS. In July
2004, the Company exercised the option to convert the interest amount into
additional common shares of CDS. In 2004, the Company determined that it's
investment in Voyageur was impaired and wrote off the remaining balance of
$152,838 which is reflected as a charge to operations as a miscellaneous
expense in the accompanying statement of operations.
F-20
17. INCOME TAXES
The Company has approximately $6.4 million of available net operating loss
carryforwards at October 31, 2004 expiring from 2005 through 2018.
The major deferred tax asset (liability) items at October 31, 2004 and
October 31, 2003 are as follows:
October 31,
--------------------------------
2004 2003
------------ ------------
Accounts receivable allowance $ 115,256 $ 447,000
Amortization 159,587 632,000
Payroll 228,270 338,000
Tax effect of operating loss carryforwards 2,415,924 3,222,000
Sale of Business Segment 807,564 -
Other 298,860 -
------------ ------------
Total deferred tax asset 4,025,461 4,639,000
------------ ------------
Depreciation (838,519) (1,630,000)
Returnable Containers (1,082,225) (694,000)
Other - (66,000)
------------ ------------
Total deferred tax liability (1,920,744) (2,390,000)
------------ ------------
Deferred tax asset, net $ 2,104,717 $ 2,249,000
============ ============
Income tax expense differs from the amount computed by applying the statutory
tax rate to net income before income tax expense as follows:
Fiscal Year Ended October 31,
-------------------------------------------
2004 2003 2002
-------- -------- ----------
Income tax expense computed at the statutory rate $378,577 $748,004 $1,449,000
Effect of permanent differences 22,661 28,881 64,000
State income taxes 61,229 74,115 201,000
Other - - 37,000
-------- -------- ----------
Income tax expense $462,467 $851,000 $1,751,000
======== ======== ==========
F-21
The following is the composition of income tax expense (benefit):
Fiscal Year Ended October 31,
------------------------------------------
2004 2003 2002
-------- -------- ----------
Current:
Federal $199,000 $ 53,000 $ (66,000)
State 119,000 212,000 38,000
-------- -------- ----------
Total current 318,000 265,000 (28,000)
-------- -------- ----------
Deferred:
Federal 105,000 586,000 1,513,000
State 39,000 - 266,000
-------- -------- ----------
Total deferred tax expense (benefit) 144,000 586,000 1,779,000
-------- -------- ----------
Total income tax expense $462,000 $851,000 $1,751,000
======== ======== ==========
On September 3, 2003 the Company reached settlement with the Internal Revenue
Service related to an audit of federal income tax for its Crystal Rock
subsidiary for the tax year ending October 5, 2000. The settlement resulted
in an increase in the Company's income taxes of $136,000. This amount has
been included in income tax expense for 2003.
In calculating its effective tax rate, the Company has considered the effect
of certain contingent factors involving state and local income taxes.
Although it believes that the tax returns filed accurately reflect operations
and financial results, the deferred tax liability as of October 31, 2004
contains approximately $160,000 for the purpose of settling disputes in the
event that certain jurisdictions viewed particular tax laws differently than
the Company did when the returns were filed.
18. EARNINGS PER SHARE
The following calculation provides the reconciliation of the denominators
used in the calculation of basic and fully diluted earnings per share:
F-22
Fiscal Year Ended October 31,
2004 2003 2002
----------- ----------- -----------
Income from Continuing Operations $ 490,892 $ 961,533 $ 2,068,932
Income from Discontinued Operations 160,221 391,022 440,523
----------- ----------- -----------
Net Income $ 651,113 $ 1,352,555 $ 2,509,455
=========== =========== ===========
Denominator:
Basic Weighted Average Shares
Outstanding 21,497,251 21,282,294 21,091,837
Effect of Stock Options 77,264 482,404 943,432
----------- ----------- -----------
Diluted Weighted Average Shares Outstanding 21,574,515 21,764,698 22,035,269
=========== =========== ===========
Basic Earnings Per Share:
Income from Continuing Operations $ .02 $ .04 $ .10
Income from Discontinued Operations $ .01 $ .02 $ .02
----------- ----------- -----------
Net Income $ .03 $ .06 $ .12
=========== =========== ===========
Diluted Earnings Per Share:
Income from Continuing Operations $ .02 $ .04 $ .09
Income from Discontinued Operations $ .01 $ .02 $ .02
----------- ----------- -----------
Net Income $ .03 $ .06 $ .11
=========== =========== ===========
In addition to the options used to calculate the effect of dilution, there
were 1,645,000 and 185,000 options outstanding for the years ended October
31, 2004 and 2003, respectively, that were not included in the dilution
calculation because the options' exercise price exceeded the market price of
the underlying common shares. For the comparable period in 2002, all
outstanding options were used to determine the effect of dilution because the
market price exceeded the exercise prices.
19. SALE OF BUSINESS SEGMENTS
On March 2, 2004 the Company completed the sale of substantially all of the
assets related to its Retail and Retail - Gallons segments. These segments
have been accounted for as discontinued operations.
The sale resulted in a gain before income taxes, reported in discontinued
operations, of $352,535. The gain was calculated by deducting the net
carrying value of the assets and liabilities and transaction costs from the
net proceeds as follows:
Selling Price $ 10,567,998
Accounts Receivable (1,147,229)
Inventory (2,490,181)
Property, Plant, and Equipment (7,093,641)
Accounts Payable 1,739,347
Transaction Costs (1,223,759)
------------
Gain before Income Taxes $ 352,535
============
In addition to cash proceeds of $10,067,998, the Company received a
$500,000, 5% subordinated note from the buyer as consideration for the
sale. Interest is payable by the
F-23
seller on a quarterly basis and the total principal is due on the second
anniversary of the sale. Substantially all of the proceeds of the sale were
used to reduce debt. $5,000,000 was used to pay down the Company's senior
term debt with Webster Bank and $5,000,000 was used to pay down its
subordinated debt.
Revenues, expenses, and costs have been excluded from the respective captions
in the related financial statements and reported as (loss) income from
discontinued operations, net of income taxes, for all periods presented. For
the year ended October 31, 2004, 2003 and 2002, net sales from discontinued
operations were $6,434,000, $26,341,000 and $22,652,000, respectively. The
loss before income taxes was $79,000 for fiscal year 2004 and income before
taxes was $637,000 and $748,000 for fiscal years 2003 and 2002, respectively.
The respective losses and income do not include any allocation of corporate
costs that were previously allocated to the discontinued operations. Those
costs are expected to continue in the future and will be allocated only to
the remaining line of business.
20. UNAUDITED QUARTERLY FINANCIAL DATA
The Company's unaudited quarterly financial data for the last two fiscal
years is as follows: Fiscal 2004:
For the quarter ended:
Fiscal 2004 ----------------------
(000's of $ except net income per January 31, April 30, July 31, October 31,
share) 2004 2004 2004 2004
----------- --------- -------- -----------
Net Sales $11,998 $13,182 $13,555 $13,738
Gross Profit $ 5,360 $ 5,960 $ 5,745 $ 5,713
Income(Loss) from Continuing
Operations $ (320) $ 187 $ 390 $ 235
Income from Discontinued
Operations $ 64 $ 96 - -
Net Income (Loss) $ (256) $ 283 $ 390 $ 235
Earnings (Loss) per Share:
Continuing Operations - Basic and
Diluted $ (.01) $ .01 $ .02 -
Discontinued Operations - Basic
and Diluted - $ .01 - -
------- ------- ------- -------
Net Income - Basic and Diluted $ (.01) $ .02 $ .02 -
======= ======= ======= =======
F-24
For the quarter ended:
Fiscal 2003 ----------------------
(000's of $ except net income per January 31, April 30, July 31, October 31,
share) 2003 2003 2003 2003
------------ ------------ ------------ ------------
Net Sales $ 11,518 $ 11,923 $ 13,352 $ 13,061
Gross Profit $ 4,825 $ 4,844 $ 5,537 $ 5,594
Income from Continuing
Operations $ 53 $ 386 $ 420 $ 103
Income(Loss) from Discontinued
Operations $ 54 $ 101 $ 146 $ 90
Net Income $ 107 $ 487 $ 566 $ 193
Earnings per Share:
Continuing Operations - Basic and
Diluted - $ .02 $ .01 $ .01
Discontinued Operations - Basic
and Diluted $ .01 - $ .01 -
------------ ------------ ------------ ------------
Net Income - Basic and Diluted $ .01 $ .02 $ .02 $ .01
============ ============ ============ ============
21. CONCENTRATION OF CREDIT RISK
The Company maintains its cash accounts at various financial institutions.
The balances at times may exceed federally insured limits. At October 31,
2004, the Company had cash in deposits exceeding the insured limit by
approximately $583,000.
22. SUBSEQUENT EVENTS
In conjunction with the merger of its direct and indirect wholly owned
subsidiaries into Vermont Pure Holdings, Ltd, in December 2004, the
Company organized a new wholly owned subsidiary, Crystal Rock, LLC, and
assigned all of its material operating assets, leases and other contracts
to the new subsidiary.
On December 30, 2004 the Company signed an Amended and Restated Loan and
Security Agreement with Webster Bank. The primary purpose of the agreement
was to modify the parties named in the agreement to reflect the change in
subsidiaries.
F- 25