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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, 2000
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 333-45226
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
incorporation or organization) Number
P.O. BOX C, ROUTE 66, CATAMOUNT INDUSTRIAL PARK, RANDOLPH, VERMONT 05060
------------------------------------------------------------------------
(Address of principal executive offices and zip code)
Issuer's telephone number, including area code: (802) 728-3600
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)
Check whether the Issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [ ]
Check if no disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is contained herein, and no disclosure will be contained, to the best of the
Issuer'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.
Yes [X] No [ ]
The Issuer's revenues for the most recent fiscal year were $35,124,813.
Based on the last sale at the close of business on January 19, 2001, the
aggregate market value of the Issuer's common stock held by non-affiliates of
the Issuer was approximately $26,972,552.
The number of shares outstanding of the Issuer's Common Stock, $.001 par value,
was 20,167,773 on January 19, 2001.
Transitional Small Business Disclosure Format (check one): Yes [] No [X]
ITEM 1. BUSINESS.
The Company bottles, markets and distributes natural spring water under
the Vermont Pure(R) and Hidden Spring(R) brands and distilled water with
minerals added under the Crystal Rock(R) brand to the retail consumer and
home/office markets. The Company sells its products primarily in New England,
New York and New Jersey as well as Mid-Atlantic and Mid-Western states.
INDUSTRY BACKGROUND
Bottled water has been and continues to be one of the fastest growing
segments of the beverage industry. According to studies prepared by Beverage
Marketing Corporation, total bottled water consumption on a per capita basis in
the United States increased 77%, or 6.7 gallons, from 1990 to 1999. Annual
consumption increased from 8.8 gallons per capita in 1990 to 15.5 gallons per
capita in 1999. Bottled water volume in the United States has grown
significantly, increasing from approximately 2.2 billion gallons in 1990 to
approximately 4.3 billion gallons in 1999. The retail sales value in 1990 was
approximately $2.6 billion and has grown to approximately $5.0 billion in 1999.
In the period 1993 to 1999, bottled water has been the fastest growing beverage
category in the United States
The bottled water market is divided into two distinct categories:
non-sparkling (defined as still or non-carbonated water), which accounts for
approximately 91% of bottled water sales, and sparkling (carbonated), which
accounts for approximately 9% of bottled water sales. Non-sparkling water was
responsible for 99% of the incremental volume increase from 1990 to 1999. All of
the Company's natural spring water and distilled water with minerals added are
in the non-sparkling category.
The Company believes that consumers perceive bottled water as a healthy
and refreshing beverage alternative to beer, liquor, wine, soft drinks, coffee
and tea. The Company anticipates 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 consumers' healthy living lifestyles. In
addition, the Company believes that the development and continued growth of the
bottled water industry since the early 1980's 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
consolidation. 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. The primary drivers of this
consolidation are incremental growth through acquiring the customer base and
synergies resulting from integration into existing operations. Additionally,
permitting spring sources has been increasingly more difficult due to increased
state and federal regulation. Companies that have a strong and densely serviced
customer base and permitted natural spring sites are attractive targets for
acquisitions. Another significant impact in the industry has been the entrance
of major soft drink bottlers into the bottling and distribution segment of the
indusry. Both Coca-Cola and Pepsi Cola have started producing and marketing
their own brands of reverse osmosis drinking water within the last three years.
Consequently, by 2000 both companies, based on dollar sales, have entered the
top 10 bottled water companies in the United States.
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COMPANY BACKGROUND
Incorporated in Delaware in 1990, the Company developed Vermont Pure(R)
Natural Spring Water as its flagship brand in the still, non-carbonated retail
consumer category. Over the next decade, the Company grew aggressively both
internally and through acquisition. Growth in the retail consumer market
resulted from establishing productive relationships with beverage distributors
throughout the Northeast as well as brand and product extensions. In addition to
Vermont Pure(R), in 1995 the Company started re-marketing the Company's original
trademark Hidden Spring(R), a brand that it had acquired upon its inception. The
Company also utilizes excess capacity to co-pack retailers private brands. The
Company expanded 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.
The growth in the Home and Office delivery category has predominantly
been fueled by market expansion through acquisition in New England and Northern
New York and subsequent internal growth in those acquired markets. The Company
began to pursue this acquisition strategy in 1996 to minimize its reliance on
the retail consumer side of the business. Prior to 1996 the retail business
represented 90% of total sales revenue. Additional benefits of the Home & office
channel are higher gross margins, approximately 70%, and less seasonal
influence. During this time, the Company expanded its product lines to leverage
its distribution system. In particular, coffee, a product counter seasonal to
water, became the second leading product in the system and grew to account for
almost 10% of the Company's total sales. The Company purchases coffee future
contracts to maintain price and supply stability. Since coffee is a commodity
the Company can not insure 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 affect on the business.
To accommodate the growing demand for bottled spring water, the Company has
increased its investment in plant and equipment. When the company was founded,
the assets included one spring on 1.7 acres of land, a 9,000 square foot office
facility and bottling plant in Randolph, Vermont. Since that time, the Company
has acquired additional springs on approximately 65 acres of land and built a
second office, bottling and warehouse facility of 32,000 square feet in
Randolph, Vermont which was recently expanded to approximately 72,000 square
feet. It also developed a five-gallon bottling facility near Albany, NY and
expanded distribution centers in New England and Northern New York (see
Property). The Company has the original office and bottling facility in
Randolph, Vermont listed for sale.
As the Company entered its second decade in 2000, it continued to grow
internally and with small acquisitions in the home and office area. At the end
of fiscal year 2000, the Company consummated a merger involving the Crystal Rock
Spring Water Company of Watertown, Connecticut. In terms of sales, the Company
nearly doubled its size as a result of this transaction. In addition, it
significantly accelerated its home and office growth strategy and added to its
management depth. Following the acquisition, the home and office segment
accounts for 75% of sales with the retail products comprising the balance.
Crystal Rock is a bottled water manufacturer focusing on the still,
non-carbonated, segment of the bottled water industry. Its primary business is
the marketing and distribution of Crystal Rock brand of purified and mineralized
drinking water to the home and office delivery markets. The company also
distributes coffee and other refreshment type products, and vending services in
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Connecticut, New York and Massachusetts. To achieve merger synergies Crystal
Rock closed and absorbed Vermont Pure route operations in Bloomfield and
Shelton, CT. The Vermont Pure brand is distributed and available through the
Crystal Rock operations.
Crystal Rock was founded in 1914 by Henry Baker, Sr., who delivered
water in 1/2 gallon containers by horse drawn wagon in Stamford, Connecticut. In
1965 Henry E. Baker, Jr. became President, representing the second generation of
Bakers to manage Crystal Rock. Under Henry Baker's tenure as President in the
`60s and `70s Crystal Rock constructed a bottling plant in Stamford, Connecticut
and successfully implemented a strategy to expand sales to the office coffee and
refreshment service market. In 1975 John Baker joined Crystal Rock, with Peter
Baker joining in 1977.
With expansion continuing into the `80s, Crystal Rock constructed a new
facility in 1988 in Watertown, Connecticut. The 72,000 square foot bottling
facility replaced the Stamford facility as a bottling plant and became Crystal
Rock's headquarters. With the construction of the new facility came a new
strategy to market purified and mineralized drinking water. This process can
easily be replicated in any market that Crystal Rock targets for expansion.
Maintaining the strategy to penetrate the office coffee and refreshment service
market, Crystal Rock realized a customer mix of 75% commercial accounts to 25%
residential by 1989.
Crystal Rock is recognized as a water industry leader in the ability to
successfully and continually maintain such integration of coffee and refreshment
products into its bottled water business. This is evident through the
recognition that the Bakers have received from the IBWA. Henry E. Baker was a
Board member for 20 years and is in the IBWA Hall of Fame. Peter K. Baker has
served as a Board member and Chairman of the association
In 1993, John B. Baker and Peter K. Baker were appointed Co-Presidents
of the growing enterprise. Contributing to growth in the `90s were a number of
acquisitions of various office coffee and water companies.
By focusing on the home and office delivery sector, Crystal Rock has
intentionally concentrated efforts on the largest and most profitable segment of
the industry. By offering over 500 products for sale to Crystal Rock's customers
the value of the home and office account base is maximized. Utilization of 100%
of truck space and equitable sales commission plans to Crystal Rock's Route
Sales Personnel creates efficiencies and maintains profitability. A major factor
in Crystal Rock's ability to duplicate its success in other territories is the
water manufacturing process.
Vermont Pure Holdings, Ltd. is now primarily comprised of two operating
subsidiaries, Crystal Rock Spring Water Company and Vermont Pure Springs, Inc.
It is presently integrating the extensive home and office delivery operations of
both companies. In the coming year, this category will be approximately 75% of
the Company's total sales. This places the Company fourth in the United States
and second in the northeast region for this type of distribution. Peter Baker,
as President of the Company is coordinating this effort.
The Company continues to upgrade and expand its bottling operations in
Connecticut, New York and Vermont. Jack Baker, as Executive Vice President, is
in charge of the merged companies production, engineering, and quality
initiatives. Tim Fallon and Bruce MacDonald remain the Company's Chief Executive
and Chief Financial Officer, respectively.
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To finance the merger, the Company re-financed existing debt and borrowed
additional funds from Webster Bank of Watertown, Connecticut. It also financed a
substantial amount of purchase price from the former Crystal Rock shareholders.
This debt is subordinated to the bank. The increased debt will result in
significantly higher interest costs for the Company in the future. Management
expects that growth and efficiencies gained through integration will increase
the cash flow and profitability sufficiently to pay down the debt on schedule.
(For more information concerning the Company's debt, see Note 8 to the Financial
Statements.)
To date, the Company has not experienced significant problems in
integrating its acquired businesses with its existing operations. However, the
acquisition of new businesses, particularly one of the size and complexity of
Crystal Rock may require management to devote 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. Although the Company
expects to complete the merger synergies there can be no assurances that the
Company will be successful with this integration. Any failure to realize
expected synergies could have an adverse effect on the company.
WATER SOURCES AND BOTTLING OPERATIONS
The primary sources of the natural spring water used by the Company are
springs located at the Company's properties in Randolph and Tinmouth, Vermont,
and a spring owned by a third party in Stockbridge, Vermont, that is subject to
a water supply contract in favor of the Company.
Percolation through the earth's surface is nature's best filter of
water. The Company believes that the exceptionally long percolation period of
natural spring water in the north central Vermont area and in particular in the
area of its springs assures a high level of purity. Moreover, the long
percolation period permits the water to become mineralized and Ph balanced.
Management believes that the age and extended percolation period of its
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.
In addition to drawing water from its own springs, the Company
purchases bulk quantities of water from natural springs owned or operated by
non-affiliated entities. All of such springs are approved sources for natural
spring water. See "Government Regulation". During fiscal 1999 and 1998,
purchases of spring water from a non-affiliated source in Vermont amounted to
approximately half of the Company's usage of spring water. During the latest
fiscal year, usage from the third party source amounted to 8% of total water
usage. The Company is actively exploring the acquisition of additional spring
sources that would enable it to reduce its reliance on third-party springs.
The Company has for several years purchased spring water from an
unaffiliated source in Stockbridge, Vermont. Until late 1999, the Company had no
contract with respect to this source. Commencing in November 1999, the Company
has 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 the Company's current needs and within the apparent
capacity of the spring, the Company believes it can readily meet its bulk water
supply needs for the foreseeable future. An interruption or contamination of any
of its spring sites would materially affect the Company. The Company believes
5
that it could find adequate supplies of bulk spring water from other sources,
but that it might suffer inventory shortages or inefficiencies, such as
increased purchase or transport costs, in obtaining such supplies.
Municipal water is the primary raw water source for the Crystal Rock(R)
brand. Although the water source is currently made available from the local
municipality, if the source were eliminated, Crystal Rock could purchase water
from other sources and have it shipped to the Watertown manufacturing facility.
The raw water is purified through a number of processes beginning with
filtration. Utilizing carbon and ion exchange filtration systems, chlorine and
other volatile compounds and dissolved solids are removed. After the filtration
process, 98% of all impurities are removed by reverse osmosis and any remaining
impurities are removed through distillation. This process produces highly
purified water in conformance with U.S. Pharmacopoeia (23rd Revision). Purified
water is ozonated (the process of injecting ozone (O(3)) 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, drinking water has
pharmaceutical grade minerals including calcium and potassium added 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, assuring a sanitary
filling environment.
The Company is highly dependent on the integrity of the sources and
processes by which it derives its product. Natural occurrences beyond the
control of the Company 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 the Company uses. Any such occurrence may have an adverse
impact on the business of the Company. The Company is also dependent on its
availability of water and its bottling processes. An interruption may result in
an inability to meet market demand and/or negative impact the cost to bottle the
products. Finally, the distribution and consumption of the product is dependent
on other businesses and consumers. There is a possibility that integrity of the
product could be changed either inadvertently or by tampering before
consumption. Even if such an event was not attributed to the Company, the
product's integrity may be irreparably harmed. Consequently, the Company would
experience economic hardship.
PRODUCTS
The Company's natural spring water is sold in the retail consumer
market under the Vermont Pure and Hidden Spring brands, packaged in various
bottle sizes ranging from 8 ounces to 1.5 liters and sold in single units and
plastic rings of six and eight bottles. Products are sold in 12-pack and 24-pack
cases. In recent years, sales indicate that the preferred container sizes are
"single serve" sizes" - 750 ml and 500ml. The Company uses a sports cap on
various product sizes to create convenience and add extra value. Consumer sizes
are bottled in clear PET (polyethylene terephthalate) recyclable bottles that
are perceived in the marketplace as a high quality package. Although the Crystal
Rock brand is bottled in this type of bottle for retail sale, in similar sizes,
this outlet does not comprise a significant amount of the Company's sales. The
Company's three major brands are sold in three and five gallon bottles to homes
and offices throughout New England and New York. In general, Crystal Rock is
distributed in Southern New England while Vermont Pure and Hidden Spring are
distributed in Northern New England and Upstate and Western New York. The
Company rents water coolers to dispense bottled water. Coolers are available in
various consumer preferences such as cold, and hot & cold dispensing units. In
conjunction with the home and office accounts, the Company also distributes a
variety of coffee, tea and other hot beverage products and related supplies,
other consumable products used around the office, and offers vending services in
some locations. The Company rents or supplies multi burner coffee machines to
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customers. In addition, the Company supplies whole beans and coffee grinders for
fresh ground coffee as well as cappuccino machines to restaurants. Coffee has
grown to become the Company's second largest selling product, accounting for
close to 10% of total sales. The Company sells its own branded coffee (Crystal
Rock(R) and Vermont Pure(R)) as well as other national brands, most notably,
Green Mountain Coffee Roasters(R).
MARKETING
The Company generally markets its products as "premium" domestic bottled
water products in two categories.
HOME AND OFFICE DELIVERY
The Company distributes and markets its water in five and three gallon
bottles as "premium" bottled water products. It seeks brand differentiation by
offering quality service. Home and office sales are generated and serviced using
directly operated facilities, Company employees and vehicles.
The Company also uses tele-marketers and outside/cold-call sales personnel
to market its home and office delivery. The sales effort is supported through
promotional giveaways and Yellow Page advertising, as well as radio, television
and billboard ad campaigns. The Company also sponsors local area professional
sports and professional sporting events, participates in trade shows and is very
visible in community and charitable events.
The Company markets its home and office delivery service throughout most of
New England and New York.
RETAIL CONSUMER (PET)
In the retail consumer category, a premium bottled water product is
distinguished from other available bottled water products by being packaged in
small portable containers, typically PET recyclable bottles. PET bottles are
sleek, clear plastic and the Company believes that this is the "ultimate"
consumer bottle package because it is clean, clear, light and recyclable and
generally is perceived by consumers to be upscale. The Company believes that the
high quality packaging of its products enhances their image as premium domestic
bottled water products.
The Company prices its Vermont Pure brand competitive to other domestic
premium brands but lower than imported premium water products. The Hidden Spring
products are similarly packaged and sold to retail grocery and convenience
markets. Both of these brands, as well as Crystal Rock, are marketed off the
Company's own delivery routes.
The Crystal Rock brand is marketed by assimilating the same consistent,
refreshing taste in a small package that customers have relied on from their
coolers in their homes and offices. It has also been actively distributed for
sponsorship of organizations and events.
The Company markets its spring water products by highlighting the unique
characteristics of the Company's water, namely a natural spring source, purity,
mineral composition and desirable taste. The Company also uses the image of the
State of Vermont in its marketing and brand identification. The Company believes
that products originating from Vermont have the general reputation for being
pure, wholesome, trustworthy and natural.
The Company has focused its consumer product marketing and sales activities
in the eastern and mid-western United States. The Company currently distributes
7
its products in the New England, New York, New Jersey, Mid-Atlantic and Northern
Mid-Western states and the Northern Virginia - Washington, D.C. - Baltimore
metropolitan area.
SLOTTING FEES
For the Company to achieve placement of its retail consumer products in
certain supermarket chains and individual supermarket stores, it may sometimes
be necessary for the Company to purchase shelf space by paying slotting fees.
Typically, supermarket chains and prominent local supermarkets impose these
charges as a one time payment before the products are permitted in the store or
chain. Other types of retail outlets such as individual convenience stores and
delicatessens less frequently impose slotting fees. The fees are negotiated on
an individual basis. As the Company has become better established and its brands
have achieved greater recognition, the Company has become less dependent on
slotting fees to gain space. Nevertheless, like many producers of food products,
the Company pays slotting fees in some cases, and expects to continue to do so.
ADVERTISING AND PROMOTION
The Company advertises its products primarily through print, television
and radio media. In connection with this advertising, the Company uses point of
sale, in-store displays, price promotions, store coupons, free-standing inserts
and cooperative and trade advertising. The Company has also actively promoted
its products through sponsorship of various organizations and sporting events.
In recent years, the Company has sponsored professional golf and tennis events,
as well as major ski areas and sports arenas, and various charitable and
cultural organizations, such as Special Olympics, the Susan G. Koman Foundation,
the Multiple Sclerosis Society, and the Vermont Symphony Orchestra.
DISTRIBUTION AND SALES
HOME AND OFFICE DELIVERY
The Company sells and delivers products directly to its customers using
its employees and route delivery trucks. Deliveries are made to customers on a
regularly scheduled basis. Water is bottled in the Company's facilities in
Watertown, Connecticut, Randolph, Vermont, and Halfmoon, New York. The Company
also uses a third party co-packer in Syracuse, New York. The Company maintains
numerous distribution locations throughout its market area (see Property). An
inventory of water dispensing equipment, a variety of coffee, tea and other
refreshment products and related supplies is distributed from these locations as
well. Product is shipped between the production and distribution sites by either
the Company's own trucks or contracted carrier. The recent increase in petroleum
and diesel products has had an adverse effect on transportation expenses. The
Company has tried to pass on increases to consumers but there is no guarantee
that it will be successful in passing on these price increases. Any petroleum or
diesel supply shortages or price increases would have an adverse affect the
Company's operations and expense structure.
The company also utilizes outside distributors in areas that the
company currently does not distribute its product. Distributor sales represent
less than one percent of total revenue.
RETAIL CONSUMER (PET)
The Company uses major beverage distributors for the distribution of
most of its retail consumer products, and distributes its home/office products
8
directly. Using distributors is typical in the beverage industry as an efficient
use of capital for maximum market penetration. Beverage distributors purchase
the products of many companies and then wholesale them to retail chains or make
bulk retail sales. Distributors generally have established relationships with
local retail outlets for beverage products and facilitate obtaining shelf space.
Occasionally, the Company sells its products directly to grocery store chains.
The Company distributes its Vermont Pure(R) brand with a number of
distributors. The Company is obligated to supply the distributors with their
requirements of the Vermont Pure brand at established prices. Arrangements with
the distributors of the Hidden Spring(R) brand are, in general, less
restrictive.
During 2000, the Company modified its distribution agreements with
certain distributors in the metropolitan New York City area. As a result,
Vermont Pure is the exclusive spring water brand carried by these distributors.
As discussed elsewhere, the Company is pursuing an acquisition strategy
to purchase independent home and office bottlers and distributors in New England
and New York State. 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, such
as diminished reliance on a single segment of the market. Moreover, the Vermont
Pure and Crystal Rock brands in the multi gallon or home and office setting
affords consumers an opportunity to sample the product, which the Company
believes augments retail sales and contributes to brand awareness.
The Company ships its consumer products from its bottling facilities in
Randolph, Vermont by common carrier either directly to beverage distributors,
retail outlets or to authorized warehouses for later distribution to beverage
distributors and retail outlets. Storage is charged on a per pallet basis.
Transportation costs vary according to the distance of the shipment.
The Company employs a sales force of 8 persons for retail and
distributor coverage on a geographic basis. The Company's sales personnel act as
liaison between distributors/customers and the Company for ordering product,
facilitating distribution, servicing retail outlets, and warehouse distribution.
Sales personnel actively seek to expand the number of retail outlets,
distributors, and participate in overall market development.
CONTRACT PACKAGING
The Company utilizes excess capacity to bottle private label brands for
grocery and food service distributors. The Company also packs five gallon home
and office containers for third parties. Contract packaging is very price
competitive and typically is performed under short-term arrangements. The
Company seeks opportunities for contract packaging for a variety of reasons,
including the fact that it develops favorable relationships with retail chains.
In fiscal year 2000, contract packing represented 7% of total sales revenue of
the combined Vermont Pure and Crystal Rock operations.
SUPPLIES
The Company currently sources all its raw materials from outside
vendors. On the retail PET business the Company sources PET bottles, caps and
corrugated packaging under supply agreements ranging from one to three years.
Pricing is fixed in the agreement with pass through formulas for price increases
9
or decreases based on total market prices for these commodities. Due to
increases in demand or shortage of key raw materials, the Company has at times
had difficulty sourcing raw materials. Supply shortages or subsequent increases
in pricing of these materials have had an adverse effect on the Company's
expense structure. The Company entered into a new supply agreement for bottles
effective January1, 2001 that enables the Company to significantly light-weight
its bottles. The Company will experience savings in raw materials due to the
reduction in gram weight of resin and have a favorable impact on the
environment. Based on this project, the Company will reduce the amount of
plastic in its containers and subsequently reduce the amount of plastic entering
the waste stream by over 1,000,000 lbs. per year. Management believes that this
reduction in raw materials and a stable resin market will stabilize the cost of
goods for fiscal year 2001. Notwithstanding these expectations, the company may
experience shortages or unscheduled price increases that would adversely effect
its cost of goods.
The merger of Crystal Rock and Vermont Pure has nearly doubled the
Company's operations in the Home and Office category and, as a result, afforded
the Company the opportunity to increase its combined buying power for such
things as bottles, dispensing equipment, supplies, and administrative needs. The
Company has experienced some success in this area since the completion of the
merger and expects further synergies to be realized. The company is a member of
the Quality Bottlers Cooperative (QBC). QBC is a purchasing cooperative
comprised of the largest independent home & office 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 due to its size that it can effectively purchase
equipment and supplies at levels competitive to larger national entities. The
company also believes that its relationship with other QBC members provides
access to potential acquisition targets.
No assurance can be given that the Company will be able to obtain the
supplies it requires on a timely basis or that the Company will be able to
obtain them at prices that allow it to maintain the profit margin it has had in
the past. Any raw material disruption or price increase may result in an adverse
impact on the financial condition and prospects for the Company.
For information about the Company's water sources, see "Description of
Water Sources and Bottling Processes."
SEASONALITY
The Company's business is seasonal, with the consumer portion of the
business being somewhat more seasonal than the home and office market. 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 the
Company's core Northeastern United States market. As the larger share of total
sales has trended toward the home and office category, the business, as a whole,
has become less seasonal.
COMPETITION
Management believes that bottled water historically has been a regional
business in the United States. As a result, there are numerous bottling
operations within the United States producing a large number of branded products
which are offered in local supermarkets and other retail outlets in the smaller
consumer sizes and sold to the home and office markets in one gallon and
multiple gallon containers.
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The United States bottled water market is dominated by large multi-national
companies such as Nestle(Perrier Group), Groupe Danone, and the Suntory Water
Group. Perrier markets such regional brands such as Poland Spring, Deer Park,
Ice Mountain, Great Bear, Arrowhead, Calistoga, Ozarka,Zephyr Hills, and its
recent acquisition Aberfoyle Springs. Groupe Danone distributes nationally
Evian, Dannon, Naya and regionally Sparkletts. Suntory markets primarily through
the home & office channel regional brands such as Belmont Springs, Kentwood,
Crystal Springs, Sierra Springs, and Hinckley Springs. Recently Pepsi Cola
(Aquafina) and Coca-Cola (Dasani) have begun marketing drinking water in the PET
retail segment leveraging their production and distribution infrastructure.
These global competitors have greater resources and their brands may be better
established than the company's trademarks.
The Company also faces increased competition from Canadian suppliers at low
prices due to the exchange rate differential and governmental subsidies in the
retail PET business. Additionally there are regional well-established water
companies that could have an adverse effect on the company's business. The
Company also faces competition from the fast growing "private label" and
contract-packaged brands of natural spring water. These brands compete on a
low-price basis and often occupy premium shelf space because they are retailer
brands (also see "Contract Packaging").
The home and office market has several national or large competitors such
as Perrier Group (Poland Spring, Deer Park, and Great Bear), Suntory Water Group
(Belmont Springs), and IONICS (AquaCool). Additionally the company competes with
smaller regional bottlers such as Monadnock (Boston), Leisure Time (NY), and
Mayer Brothers (Buffalo).
The Company competes on the basis of pricing, customer service, quality of
its products, association with the image of the State of Vermont, attractive
packaging, and brand recognition. Crystal Rock competes on the purity of the
distilled product with minerals added back for taste. The Company considers its
trademarks, trade names and brand identities to be very important to its
competitive position, and defends its brands vigorously.
The Company feels that installation of filtration units in the home or
commercial setting poses a competitive threat to the business. To address this,
the Company makes available plumbed in filtration units on a limited basis.
TRADEMARKS
The Company sells its bottled water products under the trade names Vermont
Pure Natural Spring Water, Crystal Rock, Hidden Spring, and Stoneridge. It has
rights to other trade names including, Pequot Natural Spring Water, Excelsior
Spring Water, Happy Spring Water and Vermont Naturals. The Company's 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, the Company's 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
11
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 which are enforced by the
FDA.
The Company is subject to the food labeling regulations required by the
Nutritional Labeling and Education Act of 1990. The regulations, which are
administered by the Secretary of Health and Human Services through the FDA,
require all companies which offer food for sale and have annual gross sales of
more than $500,000, including the Company, to place uniform labels disclosing
the amounts of specified nutrients on all food products intended for human
consumption and offered for sale. The act contains exemptions and modifications
of labeling requirements for certain types of food products, such as those
served in restaurants and other institutions, bulk foods, foods in small
packages and foods containing insignificant amounts of nutrients. The act also
establishes the circumstances in which companies may place nutrient content
claims or health claims on labels. The Company believes it is in substantial
compliance with these regulations.
The Company is subject to periodic, unannounced inspections by the FDA.
Upon inspection, the Company must be in compliance with all aspects of the
quality standards and good manufacturing practices for bottled 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 which redefined the
standards for the identification and quality of bottled water. The Company
believes that it meets the current regulations of the FDA, including the
classification as spring water.
The Company 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 is subject to an annual "compliance monitoring test" by
the State of Vermont. In addition the Company's bottling facilities are
inspected by the Department of Health of the State of Vermont.
The Company's 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. The Company
has received approval for its Vermont Pure and its Hidden Spring brands from 49
states.
The bottled water industry has a comprehensive program of
self-regulation. The Company is a member of the International Bottled Water
Association ("IBWA"). As a member of the IBWA, the Company's facilities are
inspected annually by an independent laboratory, the National Sanitation
Foundation ("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.
12
EMPLOYEES
As of January 19, 2001, the Company had 323 full-time employees and 24
part-time employees. None of the employees belongs to a labor union. The Company
believes that its relations with its employees are good.
The continued success of the Company will depend in large part upon the
expertise of senior management. In conjunction with the merger with Crystal
Rock, Timothy G. Fallon, Chairman and Chief Executive Officer; Peter K. Baker,
President; John B. Baker, Executive Vice President; and Bruce MacDonald, Chief
Financial Officer, Treasurer and Secretary have entered into five-year
employment contracts with the Company. These agreements do not prevent these
employees from resigning. The departure or loss of Mr. Fallon or Peter Baker in
particular could have a negative effect on the business and operations of the
combined entity.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company owns office, bottling and warehouse properties and natural
springs in Randolph, Vermont. It also has owned a spring and recharge acreage in
Sharon Springs, New York since 1991. The Company rents on a monthly basis an
office in an office suite in While Plains, New York.
The Company rents warehouse space in different locations from time to
time for the purpose of the trans-shipment of its bottled water products to its
distributors and retailers. This space is rented on a per pallet basis.
As part of the Company's home and office delivery operations, it has
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 July, 2003 8,500 $ 53,380
Wilmington, MA October, 2003 10,670 $ 82,159
Rochester, NY August, 2003 8,000 $ 24,000
Buffalo, NY September, 2005 10,000 $ 60,000
Syracuse, NY December, 2005 10,000 $ 34,500
Halfmoon, NY April, 2008 22,500 $ 118,125
Plattsburgh, NY August, 2004 3,640 $ 20,568
Watertown, CT October, 2010 72,000 $ 360,000
Stamford, CT October,2010 22,000 $ 216,000
White River Junction, VT March, 2004 3,275 $ 16,211
In conjunction with the Crystal Rock merger, the Company entered into
ten-year lease agreements to lease the buildings that it currently utilizesfor
operations in Watertown sand Stamford CT. The landlord for the buildings is a
Baker family trust.
The Company expanded its bottling plant in Randolph, VT to
approximately 72,000 square feet to accommodate increased bottling operations
and to gain the efficiencies of internal warehouse space. To increase efficiency
13
the Company shut down operations in a separate 9,000 square foot building and
moved the operations into the expanded facility. The smaller building is
presently on the market to be sold. In addition, in January, 2001 the Company
sold substantially all of its land in Sharon Springs, NY.
ITEM 3. LEGAL PROCEEDINGS.
In March of 1999, the Company contracted with Descartes Systems Group,
Inc. ("Descartes"), an Ontario corporation, to provide professional services
related to the design, installation, maintenance, operation and training for
computer hardware and software. The computer hardware and software was marketed
to the Company as a product that would provide computerized management of the
Company's direct distribution through its delivery network, and associated
billing and accounting.
On July 27, 2000, the Company filed a lawsuit against Descartes and
an affiliate of Descartes entitled VERMONT PURE HOLDINGS, LTD. V. DESCARTES
SYSTEMS GROUP, INC. AND ENDGAME SYSTEMS, INC. F/K/A DSD SOLUTIONS, INC., in the
United States District Court for the District of Vermont. The action is docketed
as Civil Action No.2:00-CV-269. The Company has sought monetary damages against
Descartes and Endgame in an amount exceeding $100,000 for the Company's losses
associated with failures of the systems and services provided by the defendants.
In addition, the Company has sought a Declaratory Judgment invalidating the
defendant's demand for payments in the amount of $411,841.10.
The defendants have filed a motion in response to the suit to dismiss
it based on the premise that the federal court is not the proper jurisdiction
and the case should be arbitrated in Ontario, Canada. As of the date of this
disclosure, no ruling has been made in the matter. The Company intends to
vigorously prosecute the lawsuit and has discontinued the use of products and
services of the defendants.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On October 5, 2000, the Company held a special meeting of the
shareholders at 10:00 AM at the office of Foley, Hoag & Eliot in Boston,
Massachusetts to consider and vote upon proposals to:
1. Approve and adopt the agreement and plan of merger and
contribution dated May 5, 2000, as amended, among Vermont Pure
Holdings, Ltd., VP Merger Parent Inc., VP Acquisition Corp.,
Crystal Rock Spring Water Company and the stockholders of Crystal
Rock.
2. Amend the 1998 Stock Option Plan to increase the number of shares
from 500,000 to 1,500,000 and to make other amendments.
3. Adjourn the special meeting if necessary to solicit more proxies.
A total of votes were cast as follows:
"FOR" "AGAINST" "ABSTAIN"
----- --------- ---------
Proposal #1 6,428,476 41,243 14,100
Proposal #2 5,581,714 885,225 16,900
Proposal #3 6,430,209 189,535 44,075
14
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock is traded on the American Stock Exchange ("AMEX")
under the symbols "VPS". The table below indicates the range of the high and low
prices of the Common Stock as reported by AMEX. Prior to May 18, 1999 the
Company traded its common stock on the Nasdaq SmallCap Market under the symbols
"VPUR".
FISCAL YEAR ENDED OCTOBER 31, 1998 High Low
First Quarter ....................... $4.56 $3.81
Second Quarter ...................... $5.44 $3.63
Third Quarter ....................... $4.88 $3.88
Fourth Quarter ...................... $4.50 $2.75
FISCAL YEAR ENDED OCTOBER 30, 1999
First Quarter.......................... $4.81 $3.13
Second Quarter.......................... $4.50 $3.81
Third Quarter.......................... $3.88 $3.81
Fourth Quarter......................... $3.63 $2.63
FISCAL YEAR ENDED OCTOBER 31, 2000
First Quarter.......................... $3.00 $2.50
Second Quarter.......................... $3.75 $3.69
Third Quarter.......................... $4.00 $3.00
Fourth Quarter......................... $3.75 $3.00
The last reported sale price of the Common Stock on the American Stock
Exchange on January 19, 2001 was $2.62.
The Company had 235 record owners of the Common Stock as of January 19,
2001. As of that date, the Company believes that there were in excess of 1,500
beneficial holders of the Common Stock.
No dividends have been declared or paid to date on the Company's common
stock, and the Company does not anticipate paying dividends in the foreseeable
future. The Company has adopted a policy of cash preservation for future use in
the business.
SECURITIES SOLD AND EXEMPTION FROM REGISTRATION CLAIMED.
On October 5, 2000, the Company acquired all of the capital stock of
Crystal Rock Spring Water Company in a transaction in which the stockholders of
Crystal Rock contributed their stock to the Company. Simultaneously, the
Company's wholly owned subsidiary merged with the Company's publicly held
predecessor, then known as Vermont Pure Holdings, Ltd. (now Platinum Acquisition
Corp.), in a transaction in which the stockholders of Vermont Pure Holdings,
Ltd. received shares of common stock of the Company on a one-for-one basis. The
issuance of common stock to the public stockholders was registered under the
Securities Act of 1933.
15
In exchange for their stock, the stockholders of Crystal Rock (members
of the Baker family and related family trusts) received cash in the amount of
$10.2 million, the Company's 12% subordinated promissory notes due 2007 in the
original principal amount of $22.6 million, and 9,873,015 shares of the
Company's common stock valued at $3.15 per share. For more information, see Note
6 of Notes to Financial Statements.
The Company's common stock was issued to the former Crystal Rock
stockholders in a private transaction exempt under Section 4(2) of the
Securities Act of 1933 and Rule 506 of Regulation D.
ITEM 6. SELECTED FINANCIAL DATA
Fiscal Years Ended
October 31, October 30, October 31, October 27, October 26,
2000 1999 1998 1997 1996
------------- ------------ ------------ ------------ ------------
Net sales $ 35,124,813 $ 31,396,375 $ 29,169,185 $ 17,685,442 $ 11,878,829
Net Income (loss) $ (2,382,678) $ 3,398,641 $ 2,858,750 $ 1,067,395 $ (1,267,331)
Net Income (loss)
per share- diluted $ (.22) $ .31 $ .26 $ .11 $ (.13)
Total assets $ 110,825,640 $ 33,834,230 $ 26,173,503 $ 16,546,766 $ 9,971,394
Long term obligations $ 51,888,257 $ 13,733,268 $ 10,422,803 $ 5,739,889 $ 2,878,353
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
When used in the Form 10-K and in future filings by the Company with
the Securities and Exchange Commission, the words or phrases "will likely
result" and "the Company expects", "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. The Company wishes 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 certain
risks and uncertainties that could cause actual results to differ materially
from historical earnings and those presently anticipated or projected. The
Company has no obligation to publicly release the result of any revisions which
may be made to any forward-looking statements to reflect anticipated or
unanticipated events or circumstances occurring after the date of such
statements.
16
RESULTS OF OPERATIONS
YEAR ENDED OCTOBER 31, 2000 COMPARED TO YEAR ENDED OCTOBER 30, 1999
Sales for 2000 were $35,125,000 compared to $31,396,000 for 1999, an
increase of $3,729,000 or 12%. 2000 sales attributable to the merger with
Crystal Rock were $2,023,000, which represented 7 percentage points of the
overall 12 point increase. Excluding revenues attributable to the merger, sales
for 2000 net of acquisitions were $33,102,000. Revenue growth was primarily due
to growth of home and office delivery markets.
Sales of the Company's retail-size products were $14,561,000, a decrease of
9% compared to $15,996,000 in 1999. The sales decline is attributable to
decreased average selling prices as a result of increased competition and
changes in distributor relationships. In addition, an unseasonably cool, rainy
summer in 2000 negatively impacted overall beverage sales in the Company's major
market, the Northeastern United States. Prices continue to fall in the
marketplace with the entrance of large competitors that have low water
processing, bottling, and raw material costs. Year to year average selling price
was down 12%. Vermont Pure brand sales decreased 26% compared to 1999. Hidden
Spring brand sales were up 18% for the year, due to continued growth through
market expansion in secondary distribution channels. During the year, the
Company increased the private label volume that it bottles, resulting in an 8%
increase in sales for these products. Total case sales were up 4%. The increase
in volume was due to the continued growth of Hidden Spring, which increase 19%
during the year and private labels brands, which increased 28% during the year.
Vermont Pure case volume decreased 15%. The decrease in revenue and volume of
the Vermont Pure brand in 2000 compared to 1999 was a result of the Company
terminating its distribution agreement with its largest distributor in April,
1999. This major customer accounted for 16% of the Company's volume in 1999 and
30% in 1998. The Company terminated this distribution agreement because the
distributor had indicated that it planned to bottle and distribute its own brand
of water. Alternative distribution arrangements were significantly less
effective in late 1999 and early 2000. However in March, 2000, the Company
modified its agreements with its new distributors in the New York City area so
that Vermont Pure is the exclusive water being distributed by those companies.
Net of the merger with Crystal Rock, sales for the home and office
delivery category of the business increased in 2000 to $18,541,000 from
$15,400,000 in 1999, an increase of $3,142,000 or 20%. The increase in internal
growth in existing market areas is a result of strong market growth for bottled
water, in general, and greater brand awareness. In addition to internal growth,
the Company completed a major expansion into the home and office market with the
merger with Crystal Rock. Sales attributable to the merger in 2000 were
$2,023,000 resulting in total home and office sales of $20,564,000.
Cost of goods sold for 2000 were $14,682,000, or 42% of sales, compared
to $11,742,000 or 37% of sales, for 1999. The increase in cost of goods sold as
a percentage of sales compared to the prior year is partially attributable to
lower average selling prices combined with increases in raw materials for retail
products. These factors more than offset the fact that higher sales volume for
both retail and home and office packages continue increase efficiency and lower
costs per unit. The Company experienced price increases for bottles, caps, and
corrugated paper that averaged 8-10% during the year. A new supply contract for
bottles as well as a decrease in resin costs in January, 2001 is expected to
result in lower bottle costs over the next 12-18 months. Management is
reconfiguring packaging design to use less material and ultimately achieve lower
packaging costs by mid-2001. The Company's retail products cost more to bottle
17
because the process is more complex and it requires more material, labor, and
handling. The home and office category is characterized by lower bottling costs
because of larger sizes and re-fillable bottles. Of the Company's total sales,
home and office were 59% in 2000 - up from 49% in 1999. As a result of the
product mix and higher sales, in general, the gross profit increased $788,000 to
$20,442,000, or 58% of sales in 2000, from $19,654,000 or 63% of sales, in 1999.
Total operating expenses increased to $21,391,000 from $17,019,000 in
1999, an increase of $4,372,000, or 26%. Of these amounts, selling, general and
administrative ("SG&A") expenses were $16,425,000 and $13,149,000 for 2000 and
1999, respectively, an increase of $3,276,000, or 25%. The increase in selling,
general and administrative expenses was reflective of the increase in home and
office sales. This category is characterized by higher selling expenses than the
retail category. The Company experienced significant increases during the year
for personnel costs as tight labor markets drove costs higher and fuel expense
increased nearly 75%. Since the merger with Crystal Rock occurred at the end of
the fiscal year, many of the synergies used to rationalize that transaction had
not yet materialized. The Company incurred $110,000 of non-recurring charges
related to the merger with Crystal Rock that were included in SG&A expenses.
These expenses were related to personnel changes and elimination of a product
line. Net of non-recurring charges, SG&A expenses increased 24%. In addition, as
a result of the merger with Crystal Rock the Company owned and operated two
major delivery accounting systems. The Company decided to consolidate operations
on one system and consequently wrote down $1,292,000 for the system that was
terminated. This charge consisted of licensing, installation, training, and
consulting costs. Advertising expenses decreased to $2,754,000 in 2000 from
$3,258,000 in 1999, a decrease of $504,000, or 15%. The decrease is related
primarily to the Company's use of different distribution channels that require
less promotional support and the Company's strategy to compete with lower
pricing instead of promotion. However, given the competitive nature of the
industry, the Company anticipates that it is likely to continue to spend
significant amounts in the future for advertising and promotion as it continues
to promote and develop brand recognition and increase market penetration. It can
give no assurances that increases in spending or lower pricing will result in
higher sales. As a result of the merger with Crystal Rock, amortization expense
increased to $802,000 in 2000 from $612,000 in 1999, an increase of $190,000.
The Company booked $58,733,000 of goodwill in fiscal year 2000, primarily as a
result of the merger. This is being amortized over 30 years resulting in an
annual charge of approximately $1,950,000 per year. Although it will not impact
the cash flow of the Company, amortization will have a substantial impact on the
Company's profitability in future years. During the year, the compensation
committee of the Board of Directors approved the extension of exercise periods
for stock options for certain employees and directors. It recognized
compensation expense of $119,000 in conjunction with this.
Loss from operations totaled $948,000 compared to profit from
operations in 1999 of $2,635,000, a decrease of $3,583,000. Net interest expense
increased to $1,893,000 from $1,030,000 in 1999, an increase of $863,000. This
was reflective of higher interest rates and increased borrowing during the
period for operating capital, capital expansion, and the merger with Crystal
Rock. The Company increased its debt approximately $33,000,000 as a result of
the merger with Crystal Rock. It is expected that this debt will increase
interest approximately $3,600,000 in the first year of combined operations. In
the years following interest will decrease but continue to be a very significant
cost for the Company. Also in conjunction with the financing of the merger, the
Company wrote off fees and expenses amounting to $406,000 related to the
financing it closed with First Union and Key Banks in January when it expected
to charge these over the five year term of the facility. Additional expense of
$181,000 was incurred on the write down of land the Company owned in New York
State. The land was originally purchased by the Company in 1991 for spring
18
development. The development did not take place and the land was sold in
January, 2001. Miscellaneous income represents a cash settlement of litigation.
For more information, see Note 12a to the Financial Statements. The net loss
before taxes of $3,152,000 in 2000 compared to net income before taxes of
$1,605,000 in 1999 is a decrease of $4,757,000. The decrease in profitability is
a result of decline in the Company's sales growth trend due to the weather,
lower selling prices, higher material costs, and ongoing integration costs
related to operations as well as $2,108,000 of non-recurring costs.
The net loss of $2,383,000 compared to net income of $3,399,000 in 1999
was a decrease of $5,782,000. The Company recorded a tax benefit of $769,000 in
2000 compared to $1,793,000 in 1999. The decrease in the benefit corresponds
with the interruption in the Company's profit trend and is a partial recognition
of the Company's total available deferred tax assets of approximately $5,527,000
at October 31, 2000, based on an evaluation of likely utilization. If the
Company returns to profitability, the remaining $973,000 of unrecorded deferred
tax benefits will be available for recognition in future years Based on the
weighted number of shares of common stock outstanding of 10,992,995 during 2000
the net loss was $.22 per share. This compares to net income of $.33 per share
based on 10,279,377 weighted average shares and diluted net income per share of
$.31 per share based on the weighted number of shares of diluted common stock
outstanding of 10,790,722 in 1999.
In December, 1999, the United States Securities and Exchange Commission
released Staff Accounting Bulletin No. 101 ("SAB No.101"), "Revenue Recognition
in Financial Statements". (The implementation date of SAB No.101, was
subsequently amended by SAB No.101A and SAB No.101B.) Under SAB No.101
additional guidance on revenue recognition criteria and related disclosure
requirements are required. Implementation of SAB No.101 is required no later
than the than the fourth fiscal quarter of fiscal years beginning after December
15, 1999, but is effective retroactively to the beginning of that fiscal period
(per SAB No.101B). Company management has evaluated the standard and the
reporting implications thereof, and has determined that there will not be a
significant impact on the Company's operating results.
YEAR ENDED OCTOBER 30, 1999 COMPARED TO YEAR ENDED OCTOBER 31, 1998
Sales for 1999 were $31,396,000 compared to $29,169,000 for
1998, an increase of $2,227,000 or 8%. 1999 sales attributable to acquisitions
made during the year were $2,137,000, which represented 7 percentage points of
the overall 8 point increase. Excluding revenues attributable to acquisitions,
sales for 1999 net of acquisitions were $29,259,000. The Company's revenue
growth trend was slowed primarily due to the Company terminating its
distribution agreement with its largest distributor which resulted in some loss
of sales revenue as new distributors were brought on line. The Company's 1
percentage point (1999 over 1998) increase in sales, net of acquisitions, was
accounted for by increases in the following distribution channels: 6 points for
Hidden Spring, 5 points for private label and 6 points for home/office. These
were mostly offset by the 16 point decrease in retail size Vermont Pure, a
direct result of the change in distribution networks. Due to the fact that the
Company operates on a "52-53 week" reporting year, 1999 had 52 weeks of sales
while 1998 had 53 weeks of sales.
Sales of the Company's retail-size products were $15,996,000 in 1999, a
decrease of 8% compared to 1998, when sales of these products were $17,455,000.
The sales decline is partially attributable to the termination of the Company's
agreement with its largest distributor and decreased average selling prices.
Year to year average selling price per case was down 28%. Vermont Pure brand
sales decreased 34% compared to 1998. Hidden Spring brand sales were up 89% for
19
the year, due to continued growth through market expansion in secondary
distribution channels. During the year, the Company increased the number of
private label customers that it packs for, resulting in an 83% increase in sales
for these products.
Sales for the home and office delivery category of the business
increased in 1999 to $15,400,000 from $11,714,000 in 1998, an increase of
$3,686,000 or 31%. In addition to internal growth, the Company continued to
expand its home and office distribution through acquisitions. New sales
attributable to acquisitions in 1999 were $2,137,000. Net of acquisitions,
home/office sales increased 13% in 1999. The increase in internal growth in
existing market areas is a result of strong market growth for bottled water, in
general, and greater brand awareness.
Cost of goods sold for 1999 were $11,742,000 or 37% of sales, compared
to $11,550,000, or 40% of sales, for 1998. The decrease in cost of goods sold as
a percentage of sales compared to the prior year is partially attributable to
lower bottling costs as a result of higher production volumes and more efficient
production, and an increase in home and office distribution, which has better
margins. The Company's mix of sales continued to skew more toward product for
home and office delivery- to 49% in 1999 from 40% in 1998, in large part the
result of acquisitions. The home and office category is characterized by lower
bottling costs because of larger sizes and re-fillable bottles. As a result, the
gross profit was higher in 1999, $19,654,000 or 63% of sales, than in 1998 when
it was $17,619,000, or 60% of sales.
Total operating expenses increased to $17,019,000 in 1999 from
$15,555,000 in 1998, an increase of $1,464,000, or 9%. Of these amounts,
selling, general and administrative expenses were $13,149,000 and $10,235,000
for 1999 and 1998, respectively, an increase of $2,914,000, or 28%. The increase
in selling, general and administrative expenses was due to increased personnel,
rent and lease expenses needed to grow the business as well as expenses
associated with the businesses acquired in 1999. Advertising expenses decreased
to $3,258,000 in 1999 from $4,702,000 in 1998, a decrease of $1,444,000, or 31%.
The decrease is related primarily to the Company's use of different distribution
channels that require less promotional support. However, given the competitive
nature of the industry, the Company anticipates that it is likely to continue to
spend significant amounts in the future for advertising and promotion as it
continues to develop brand recognition and increase market penetration but can
give no assurances that increases in spending will result in higher sales.
Amortization expense decreased slightly to $612,000 in 1999 from $617,000 in
1998, a decrease of $5,000.
Profit from operations in 1999 was $2,635,000 compared to $2,065,000
for 1998, an increase of $570,000. Net interest expense increased to $1,030,000
in 1999 from $755,000 in 1998, an increase of $275,000. The increase was a
result of greater amounts borrowed during the period primarily related to
acquisitions. The improvement in profit before income taxes to $1,605,000 in
1999 from $1,412,000 in 1998 was the result of increased sales and decreased
manufacturing and operating costs, on a per unit basis.
Net income of $3,399,000 in 1999 compared to $2,859,000 in 1998, an
improvement of $540,000. The Company recorded a tax benefit of $1,793,000 in
1999 compared to $1,447,000 in 1998. This benefit reflects a partial recognition
of the Company's total available deferred tax assets of approximately $4.6
million at October 30, 1999, based on an evaluation of likely utilization. If
the Company continues to be profitable, the remaining $832,000 of unrecorded
deferred tax benefits will be available for recognition in future years. No
assurance can be given that the Company will be profitable in the future and
that these tax benefits will actually be used. Based on the weighted number of
shares of common stock outstanding of 10,279,377 during 1999 and 10,248,389
20
during 1998, the basic net income per share was $.33 and $.28 per share,
respectively. Based on the weighted number of shares of diluted common stock
outstanding of 10,790,722 and 10,927,025 for the same respective periods, the
diluted net income per share was $.31 per share in 1999 and $.26 per share in
1998.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 2000, the Company had working capital of $2,977,000.
This represents a decrease of $51,000 from the $3,028,000 of working capital on
October 30, 2000. The small decrease is indicative that working capital has been
largely unaffected by the Company' operating loss and the merger. Specifically,
the Company reserved cash for the large increase in the current portion of the
long-term debt. At the same time, the increased level of accounts payable and
accrued expenses were offset by the increase in receivables.
Cash flow used in operations was $1,432,000 for the fiscal year ended
October 31, 2000 as compared to cash provided from operations of $740,000 in the
fiscal year ended October 30, 1999, an increase of $692,000. The increase of
cash provided from operations primarily reflects increased non-cash expenses,
depreciation and amortization in 2000. In addition, in 1999 the Company
experienced an increase of current assets at year-end resulting from
construction in progress and inventory buildup compared to 2000 when
construction had been completed and inventory build had not yet started.
Cash flows from investing activities had a net outflow of $19,155,000
compared to $4,026,000 in 1999. The increase of $15,129,000 of cash used for
investment activities from 1999 to 2000 was primarily attributable to $3,681,000
for capital expenditures and $10,330,000 for acquisitions. The majority of
capital expenditures were for expansion of the Company's facility in Randolph,
Vermont. The remainder of capital expenditures were in the normal course of the
Company's business - vehicles, bottles, and water dispensing, manufacturing, and
computer equipment. The Company used cash for small acquisitions to increase
density in existing home and office markets.
On October 1, 1999, the Company issued a $975,000 non-interest bearing
convertible debenture due September 30, 2001 to Middlebury Venture Partners,
Inc. ("Middlebury", fomerly Marcon Capital Corporation). As a result of claims
the Company made under the loan documents, the Company received $1,270,000 from
the obligor. Of the proceeds received, $975,000 was invested in a Certificate of
Deposit and is restricted as collateral in favor of Middlebury until the note is
converted.
In January the Company closed an agreement with First Union National
Bank to increase the line of credit to $25 million. Of the $25 million, $4.3
million was allocated to a letter of credit to underwrite a new bond issue for
the Randolph, Vermont building expansion as well as new production equipment
purchases the balance is for working capital and acquisitions and subject to
certain customary covenants.
On May 5, 2000 Vermont Pure Holdings, Ltd. entered into an Agreement
and Plan of Merger and Contribution ("the Agreement") with Crystal Rock Spring
Water Company. Crystal Rock was a privately held company based in Watertown, CT.
The agreement provided for the formation of a new publicly held holding company,
21
also to be known as Vermont Pure Holdings, Ltd., own the two businesses. The
merger and contribution, pursuant to the agreement, were consummated on October
5, 2000. Existing shareholders of Vermont Pure received stock of the new holding
company on a 1-for-1 basis. Shareholders of Crystal Rock received 9,873,015
shares of Vermont Pure Springs common stock. In addition, Crystal Rock
shareholders received $10,241,000 in cash and a subordinated note from the
Company for $22,600,000.
To finance to the merger with Crystal Rock, the Company entered into a
loan agreement with Webster Bank and Manufacturers and Traders Trust Company,
effective October 5, 2000. The financing provides for a $31,000,000 seven-year
term loan. In addition to providing the cash to the sellers, proceeds were used
to payoff and consolidate existing Vermont Pure and Crystal Rock debt and the
expenses of the transaction. The note requires payments of principal and
interest over its term. With the proceeds of the note, in addition to paying
cash to the sellers the Company paid all of the debt to First Union and
bondholders, other bank debt, selected leases, and expenses incurred in the
transaction. (For additional information about these arrangements, see Note 6 to
the Financial Statements.)
The commitment also provides for a $5,000,000 working capital line of
credit for operating capital, capital expenditures, and acquisitions. There is a
separate limit within the line for letters of credit which the Company
predominantly uses for its insurance needs. The line of credit, is for two years
with interest payable monthly.
Both facilities are initially priced at the current LIBOR interest rate
plus 175 basis points and are secured by a lien against all of the assets of
Vermont Pure Holdings and its subsidiaries. The interest rate is subject to
periodic adjustments based on evaluation of the Company's senior funded debt to
EBITDA ratio. In addition, there are other customary covenants that the Company
must achieve to comply with the agreement
In addition to the senior bank debt associated with the merger with
Crystal Rock, the Company financed the transaction with notes to the sellers.
The notes are for a total of $22,600,000, bear an interest rate of 12%, are for
a term of seven years, and are subordinated to the bank. Quarterly payments for
the first three years are interest only with principal and interest due
quarterly in the fourth through seventh year and the principal balance due at
maturity. (For additional information about these arrangements, see Note 6 to
the Financial Statements.)
At October 31, 2000, the Company has recorded a deferred tax asset of
$4,554,000. Based on projected profitability, the realization of such deferred
tax asset would take approximately three more years.
The Company continues to pursue an active program of evaluating
acquisition opportunities. To complete any acquisitions, the Company anticipates
using its capital resources and obtaining financing from outside sources. Except
for the current loan facilities discussed above, the Company has no other
current arrangements with respect to, or sources of, additional financing for
its business or future plans. There can be no assurance given that financing
will be available to the Company on acceptable terms or at all.
Inflation has not had a material impact on the Company's operations to
date.
22
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to the Company's operations result primarily from
changes in interest rates and commodity prices (the resin prices for PET
bottles).
INTEREST RATE RISKS
At October 31, 2000 the Company had approximately $32,000,000 of long term
debt subject to variable interest rates. Under the revolving line of credit
agreement with Webster Bank the Company currently pays interest at a rate of
LIBOR plus 1.75%. A hypothetical 100 basis increase in the LIBOR rate would
result in an additional $114,000 of interest expense on an annualized basis. The
Company uses interest rate "swap" agreements to curtail interest rate risk. In
conjunction with the financing for the Crystal Rock merger it terminated two
such agreements in October, 2000. On November 3, 2000, the Company entered into
a swap agreement with Webster Bank to fix $8,000,000 of its long term debt at
8.32% interest for three years.
COMMODITY PRICE RISKS
PLASTIC - PET
Although the Company has a three-year contract with its vendors that sets
the purchase price of its PET bottles, the vendors are entitled to pass on to
the Company any resin price increases. These prices are related to supply and
demand market factors for PET and, to a lesser extent the price of petroleum,
from where PET is derived. A hypothetical resin price increase of $.05 per pound
would result in an approximate price increase per bottle of $.005 or, at current
volume levels, $300,000 a year.
COFFEE
The cost of the Company's coffee purchases are dictated by commodity
prices. It enters into contracts to mitigate market fluctuation of these costs
by fixing the price for certain periods. Currently it has fixed the price of its
anticipated supply through December 31, 2001 at "green" prices ranging from
$.83-$.91 per pound. The Company is not insulated from price fluctuations beyond
that date. At existing sales levels, an increase in pricing of $.10 per pound
would result in approximately $100,000 of additional cost annually to the
Company if it had not fixed its pricing. In this case, competitors that had
fixed pricing might have a competitive advantage.
ITEM 8. FINANCIAL STATEMENTS AND OTHER SUPPLEMENTARY DATA
Since inception, the Company has not changed accountants and has had no
disagreement on any matter of accounting principles or practices or financial
statement disclosure.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Financials statements and their footnotes are set forth on pages F-1
through F-21
Index to Financial Statements.
Financial Statements: Page
Independent Auditors Report F-2
Consolidated Balance Sheet F-3
Consolidated Statement of Operations F-4
Consolidated Statement of Changes in Stockholders Equity F-5
Consolidated Statement of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Vermont Pure Holdings, Ltd.
Randolph, VT 05060
We have audited the accompanying consolidated balance sheets of Vermont
Pure Holdings, Ltd. and Subsidiaries as of October 31 2000 and October 30, 1999,
and the related consolidated statements of operations, changes in stockholders'
equity and cash flows for the years ended October 31, 2000, October 30, 1999,
and October 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Vermont
Pure Holdings, Ltd. and Subsidiaries as of October 31, 2000 and October 30,
1999, and the results of their operations and their cash flows for the years
ended October 31, 2000, October 30, 1999, and October 31, 1998 in conformity
with generally accepted accounting principles.
/s/ Feldman Sherb & Co., P.C.
Feldman Sherb & Co., P.C
Certified Public Accountants
New York, New York
January 5, 2001
F-2
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 31, October 30,
2000 1999
----------------- ----------------
ASSETS
CURRENT ASSETS:
Cash $ 1,408,158 $ 367,018
Investments - money market fund (restricted balance) 3,301,064 -
Investments - certificate of deposit (restricted balance) 975,000 -
Accounts receivable - net of allowance 6,725,810 3,525,238
Notes Receivable - 975,000
Inventory 2,778,535 2,711,709
Current portion of deferred tax asset 798,000 601,922
Other current assets 1,145,311 781,968
------------------- ------------------
TOTAL CURRENT ASSETS 17,131,878 8,962,855
------------------- ------------------
PROPERTY AND EQUIPMENT - net of accumulated depreciation 21,052,513 11,122,258
------------------- ------------------
OTHER ASSETS:
Intangible assets - net of accumulated amortization 68,469,382 10,443,207
Deferred tax asset 3,756,000 3,182,914
Other assets 415,867 122,996
------------------- ------------------
TOTAL OTHER ASSETS 72,641,249 13,749,117
------------------- ------------------
TOTAL ASSETS $ 110,825,640 $ 33,834,230
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,535,118 $ 3,443,208
Current portion of customer deposits 50,525 45,033
Accrued expenses 2,738,930 851,371
Current portion of long term debt 6,821,673 1,414,930
Current portion of obligations under capital leases 9,064 180,589
------------------- ------------------
TOTAL CURRENT LIABILITIES 14,155,310 5,935,131
Long term debt 51,411,510 1,663,893
Long term obligations under capital leases 16,747 379,583
Line of credit 460,000 11,689,792
Customer deposits 2,453,334 684,334
------------------- ------------------
TOTAL LIABILITIES 68,496,901 20,352,733
------------------- ------------------
STOCKHOLDERS' EQUITY:
Preferred stock - $.001 par value, 500,000 authorized
shares, none issued and outstanding
Common stock -
$.001 par value, 50,000,000 authorized shares, 20,217,774
issued and outstanding shares at October 31, 2000 and
10,339,758 at October 30, 1999 20,218 10,340
Paid in capital 54,249,016 23,197,724
Accumulated deficit (11,940,495) (9,557,817)
Treasury stock, at cost, 50,000 shares as of October 30, 1999 - (168,750)
------------------- ------------------
TOTAL STOCKHOLDERS' EQUITY 42,328,739 13,481,497
------------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 110,825,640 $ 33,834,230
=================== ==================
See notes to consolidated financial statements
F-3
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended
-----------------------------------------------------------
October 31, October 30, October 31,
2000 1999 1998
------------------ ----------------- -----------------
SALES $ 35,124,813 $ 31,396,375 $ 29,169,185
COST OF GOODS SOLD 14,682,361 11,742,003 11,549,871
------------------ ----------------- -----------------
GROSS PROFIT 20,442,452 19,654,372 17,619,314
------------------ ----------------- -----------------
OPERATING EXPENSES:
Selling, general and administrative expenses 16,424,730 13,149,023 10,235,168
Advertising expenses 2,753,734 3,257,918 4,702,498
Writedown of computer software 1,291,719 - -
Amortization 801,695 612,057 616,854
Other compensation 118,670 - -
------------------ ----------------- -----------------
TOTAL OPERATING EXPENSES 21,390,548 17,018,998 15,554,520
------------------ ----------------- -----------------
INCOME (LOSS) FROM OPERATIONS (948,096) 2,635,374 2,064,794
------------------ ----------------- -----------------
OTHER INCOME (EXPENSE):
Interest (1,893,087) (1,030,151) (755,326)
Debt exit fees and expenses (405,972) - -
Loss on writedown of land (180,837) - -
Miscellaneous 276,150 - 102,282
------------------ ----------------- -----------------
TOTAL OTHER (2,203,746) (1,030,151) (653,044)
------------------ ----------------- -----------------
INCOME (LOSS) BEFORE INCOME TAXES (3,151,842) 1,605,223 1,411,750
INCOME TAX BENEFIT 769,164 1,793,418 1,447,000
------------------ ----------------- -----------------
NET INCOME (LOSS) $ (2,382,678) $ 3,398,641 $ 2,858,750
------------------ ----------------- -----------------
NET INCOME (LOSS) PER SHARE - BASIC $ (0.22) $ 0.33 $ 0.28
================== ================= =================
NET INCOME (LOSS) PER SHARE - DILUTED $ (0.22) $ 0.31 $ 0.26
================== ================= =================
Weighted Average Shares Used in Computation - Basic 10,992,995 10,279,377 10,248,389
================== ================= =================
Weighted Average Shares Used in Computation - Diluted 10,992,995 10,790,722 10,927,025
================== ================= =================
See notes to consolidated financial statements
F-4
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock Paid in Treasury Stock Accumulated
--------------------------- ------------------------
Shares Par Value Capital Shares Amount Deficit Total
---------------------------------------------------------------------------------------------------
Balance, October 25, 1997 10,131,980 $ 10,132 $ 22,447,092 - - $ (15,815,208) $ 6,642,016
Issuance of common stock 155,207 156 632,957 633,113
Acquisition of treasury stock 50,000 (168,750) (168,750)
Net income 2,858,750 2,858,750
----------------------------------------------------------------------------------------------------
Balance, October 31,1998 10,287,187 10,288 23,080,049 50,000 (168,750) (12,956,458) 9,965,129
Issuance of common stock 52,571 52 117,675 117,727
Net Income 3,398,641 3,398,641
----------------------------------------------------------------------------------------------------
Balance, October 30,1999 10,339,758 10,340 23,197,724 50,000 (168,750) (9,557,817) 13,481,497
Common stock issued for acquisition 9,873,016 9,873 31,090,127 31,100,000
Sale of common stock 5,000 5 11,245 11,250
Stock compensation 118,670 118,670
Retirement of treasury stock (168,750) (50,000) 168,750 -
Net loss (2,382,678) (2,382,678)
----------------------------------------------------------------------------------------------------
Balance, October 31, 2000 20,217,774 $ 20,218 $ 54,249,016 - $ - $ (11,940,495) $ 42,328,739
----------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
F-5
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
October 31, October 30, October 31,
2000 1999 1998
---------------- -------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $ (2,382,678) $ 3,398,641 $ 2,858,750
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation 2,083,204 1,489,384 1,150,000
Amortization 801,695 612,057 616,854
Increase in deferred tax asset (769,164) (1,793,418) (1,447,000)
Gain on settlement of note receivable (295,000) - -
Loss on disposal of property and equipment 101,499 72,315 93,808
Non cash compensation 118,670
Changes in assets and liabilities
(net of effect of acquisitions):
(Increase) Decrease in accounts receivable 93,831 (250,476) (985,349)
(Increase) Decrease in inventory 559,824 (720,525) (783,421)
(Increase) in other current assets (163,905) (558,998) 65,657
(Increase) Decrease in other assets 80,218 (1,466,274) (567,567)
(Decrease) in accounts payable 83,972 435,578 1,768,238
Increase in customer deposits 76,651 (225,038) (81,525)
(Decrease) Increase in accrued expenses 1,043,446 (253,500) 117,910
---------------- -------------- ---------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,432,263 739,746 2,806,355
---------------- -------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (3,680,793) (2,115,945) (2,983,313)
Purchase of property, plant and equipment
from bond financing (2,467,931) - -
Purchase of money market investment from bond financing (4,125,424) - -
Reduction of money market investment account 2,467,931 - -
Reduction of money market investment account for pay-off of bond issuance 1,657,493 - -
Purchase of money market investment for pay-off of remaining bond issuance (3,301,064) - -
Purchase of certificate of deposit securing outstanding debt (975,000) -
Proceeds from sale of fixed assets 329,550 113,752 67,000
Collection of note receivable 1,270,000 - -
Cash used for acquisitions - net of cash acquired (10,330,062) (2,023,610) (4,458,889)
---------------- -------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES (19,155,300) (4,025,803) (7,375,202)
---------------- -------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of line of credit 5,658,208 2,905,999 843,979
Proceeds from debt 35,067,765 1,278,420 11,233,158
Principal payments of debt (726,307) (780,355) (509,172)
Principal payment of debt relating to refinancing (21,246,739) - (6,942,605)
Exercise of stock options - 87,740 -
Sale of common stock 11,250 - 10,950
---------------- -------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 18,764,177 3,491,804 4,636,310
---------------- -------------- ---------------
NET INCREASE IN CASH 1,041,140 205,747 67,463
CASH - Beginning of year 367,018 161,271 93,808
---------------- -------------- ---------------
CASH - End of year $ 1,408,158 $ 367,018 $ 161,271
================ ============== ===============
Cash paid for interest $ 1,579,381 $ 852,638 $ 755,326
================ ============== ===============
Cash paid for taxes $ 118,503 $ - $ -
================ ============== ===============
NON-CASH FINANCING AND INVESTING ACTIVITIES:
Equipment acquired under capital leases $ 145,844 $ 212,315 $ 89,273
================ ============== ===============
See notes to consolidated financial statements
F-6
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS OF THE COMPANY
Vermont Pure Holdings, Ltd. (the "Company") is engaged in the
production, marketing and distribution of bottled water. The Company's
products are sold predominately in the Northeast as well as
Mid-Atlantic and Mid-Western states. Distribution is accomplished
through a network of independent beverage distributors and with the
Company's own trucks and employees.
SIGNIFICANT ACCOUNTING POLICIES
a. Basis of Presentation - The consolidated financial statements
include the accounts of the Company and its subsidiaries Vermont
Pure Springs, Inc., Crystal Rock Spring Water Company ("Crystal
Rock"), Excelsior Spring Water Co., Inc. and Adirondack Coffee
Services, Inc. The Company's subsidiaries are wholly owned. All
material intercompany profits, transactions, and balances have
been eliminated.
b. FISCAL YEAR - In fiscal year 1998 and 1999 the Company operated on
a "52-53 week" reporting year. Fiscal year 1999 had 52 weeks while
fiscal year 1998 had 53 weeks. On April 30, 2000 the Company
changed to a calendar month basis of reporting. The reason for
this change is to be more compatible with software used in
operation of the business and allow for ease of consolidation of
the financial statements from the Company's subsidiaries. This
change had no material effect on the Company's results.
c. CASH EQUIVALENTS - The Company considers all highly liquid
temporary cash investments, with an original maturity of three
months or less when purchased, to be cash equivalents.
D. ACCOUNTS RECEIVABLE - Accounts receivable are presented net of
allowance for doubtful accounts. The allowance was $732,133 and
$348,167 at October 31, 2000 and October 30, 1999, respectively.
Amounts charged to expense were $334,011, $187,113, and $192,527,
respectively, during the years ended October 31, 2000, October 30,
1999, and October 31, 1998.
e. INVENTORIES - Inventories consist primarily of the packaging
material, labor and overhead content of the Company's products.
Such inventories are stated at the lower of cost or market using
average costing.
f. PROPERTY AND EQUIPMENT - Property and equipment are stated at
cost. Depreciation is calculated on the straight-line method over
F-7
the estimated useful lives of the assets, which range from three
to ten years for equipment, and from ten to 40 years for buildings
and improvements.
g. INTANGIBLE ASSETS - The Company records goodwill in connection
with its acquisitions. Goodwill is amortized over 30 years. The
value of covenants not to compete are amortized over the term of
the agreements.
h. SECURITIES ISSUED FOR SERVICES - The Company accounts for stock
and options issued for services by reference to the fair market
value of the Company's stock on the date of stock issuance or
option grant. Compensation expense is recorded for the fair market
value of the stock issued, or in the case of options, for the
difference between the stock's fair market value on the date of
grant and the option exercise price. In the event that recipients
are required to render future services to obtain the full rights
in the securities received, the compensation expense so recorded
is deferred and amortized as a charge to income over the period
that such rights vest to the recipient.
In 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("SFAS No.123"),
"Accounting for Stock Based Compensation". SFAS No.123 permits
companies to choose to follow the accounting prescribed by SFAS
No. 123 for securities issued to employees, or to continue to
follow the accounting treatment prescribed by Accounting
Principles Board Opinion No.25 ("APB No.25") along with the
additional disclosure required under SFAS No.123 if the Company
elects to continue to follow APB No.25. The Company has adopted
the disclosure only option of SFAS No.123.
i. NET INCOME (LOSS) PER SHARE - Net Income (Loss) 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.
j. ADVERTISING EXPENSES - The Company expenses advertising costs at
the time that the advertising begins to run.
k. 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 a company's product will be carried
for any definite period of time. The Company pays for such fees in
cash, providing free goods or issuing credits for previously sold
goods. The cost of the slotting fees is valued at the amount of
cash paid, or the cost to the Company of the goods provided in
exchange. The Company expenses slotting fees when the obligation
is incurred.
F-8
l. CUSTOMER DEPOSITS - Customers receiving home or office delivery of
water pay a deposit for the water bottle on receipt that is
refunded when it is returned. The Company uses an estimate (based
on historical experience) of the deposits it expects to return
over the next 12 months to determine the current portion of the
liability and classifies the balance as long term.
m. INCOME TAXES - The Company accounts for income taxes under
Statement of Financial Accounting Standards No.109, "Accounting
for Income Taxes" (SFAS No.109). Pursuant to SFAS No.109, 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.
n. USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principals 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.
o. FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts
reported in the 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 approximate fair value.
p. ACCOUNTING FOR LONG-LIVED ASSETS - The Company reviews long-lived
assets, certain identifiable assets and any goodwill related to
those assets for impairment whenever circumstances and situations
change such that there is an indication that the carrying amounts
may not be recovered. At October 31, 2000, the Company believes
that there has been no impairment of its long-lived assets.
q. NEW ACCOUNTING STANDARDS
1. In June 1999, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 137, "Accounting for Derivative Instruments and
Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133." SFAS No. 137 amends SFAS No. 133,
"Accounting for Derivative Instruments and Hedging
Activities," which was issued in June 1998. SFAS defers the
effective date of SFAS No. 133 to all fiscal years beginning
after June 15, 2000. Accordingly, the Company will adopt the
provisions of SFAS No. 133 for the fiscal year 2001 which
commences on November 1, 2000. This statement should not
have a material effect on the Company's financial
statements.
2. In December, 1999, the United States Securities and Exchange
Commission released Staff Accounting Bulletin No. 101 ("SAB
No.101"), "Revenue Recognition in Financial Statements".
(The implementation date of SAB No.101, was subsequently
amended by SAB No.101A and SAB No.101B.) Under SAB No.101
additional guidance on revenue recognition criteria and
related disclosure requirements are required. Implementation
of SAB No.101 is required no later than the than the fourth
fiscal quarter of fiscal years beginning after December 15,
1999, but is effective retroactively to the beginning of
that fiscal period (per SAB No.101B). Company management has
evaluated the standard and the reporting implications
thereof, and has determined that there will not be a
significant impact on the Company's operating results.
F-9
3. MERGERS AND ACQUISITIONS
a) On May 5, 2000 Vermont Pure Holdings, Ltd. entered into an
Agreement and Plan of Merger and Contribution ("the Agreement")
with Crystal Rock Spring Water Company, a privately held company
based in Watertown, CT. The agreement provided for the formation
of a new publicly held holding company, also to be known as
Vermont Pure Holdings, Ltd., to own Crystal Rock and VPS, Inc. The
merger and contribution pursuant to the agreement, was consummated
on October 5, 2000. Existing shareholders of Vermont Pure received
stock of the new holding company on a 1-for-1 basis.
The purchase price paid to the shareholders of Crystal Rock is as
follows:
Cash $ 10,241,063
Issuance of common stock 31,100,000
Note payable 23,106,795
------------
Total $ 64,447,858
============
The stock price of Vermont Pure for purposes of the merger was
$3.15 per share. As a result, the number of Vermont Pure Holdings
common shares issued was 9,873,016.
The transaction was approved by the stockholders of the Company at
a special meeting on October 5, 2000. In conjunction with the
merger agreement, the Company closed a loan agreement and
associated documents with Webster Bank of Waterbury, Connecticut
that provided financing for the transaction and post-merger
working capital and gave a note payable to the sellers (see note
8).
F-10
Goodwill from the acquisition has been calculated as follows:
Purchase Price $64,447,858
Fair Value of Assets Acquired (12,419,789)
Fair Value of Liabilities Assumed 5,161,829
Acquisition Costs 980,687
----------------
Goodwill $58,170,585
================
b) The Company completed other smaller acquisitions to add to its
existing home and office delivery system in Connecticut,
Massachusetts, New Hampshire, New York, and Vermont during fiscal
years 2000 and 1999.
The following table gives an aggregate summary of the acquisitions
when combined with the Crystal Rock merger detailed above:
2000 1999
---- ----
Purchase Price $ 65,500,558 $ 2,446,282
Fair Value of Assets Acquired (12,930,697) (1,195,022)
Fair Value of Liabilities Assumed 5,173,229 49,623
Acquisition Costs 989,995 26,062
------------ ----------
Goodwill $ 58,733,085 $1,326,945
============ ==========
The detailed components consist of the following:
2000 1999
---- ----
Cash to Sellers $ 11,160,763 $1,997,548
Notes to Sellers 23,239,795 418,734
Common Stock to Sellers (9,873,016
shares in 2000 and 8,571 in 1999) 31,100,000 30,000
------------ ------------
Purchase Price $ 65,500,558 $2,446,282
============ ============
2000 1999
---- ----
FAIR VALUE OF ASSETS ACQUIRED
-----------------------------
Accounts Receivable $3,398,928 $ 205,063
Inventory 626,650 147,257
Property, Plant and Equipment 6,295,783 662,448
Intangible Assets 215,125 178,840
Other 2,394,211 1,414
------------ ------------
$ 12,930,697 $1,195,022
============ ============
LIABILITIES ASSUMED
-----------------------------
Accounts Payable $ 1,852,052 -
Customer Deposits 1,697,841 2,900
Assumed Notes 1,623,336 37,910
Other - 8,813
------------ ------------
$ 5,173,229 $ 49,623
============ ============
F-11
The following table summarizes the pro forma consolidated results of
operations (unaudited) of the Company and the 2000 and 1999
acquisitions as though the acquisitions had been consummated at October
31, 1998. The pro forma amounts give effect to the appropriate
adjustments for the fair value of assets acquired and amortization of
goodwill, depreciation and the debt incurred and resulting interest
expense.
Years Ended
-----------
OCTOBER 31, OCTOBER 30,
2000 1999
---- ----
Total Revenue $59,658,061 $57,452,633
Net Income (Loss) $(3,648,946) $ 2,656,890
Net Income (Loss) Per Share $ (0.18) $ 0.13
Weighted Average Number of Shares 20,163,051 20,152,392
========== ===========
INVESTMENT
The Company maintains a money market account for undisbursed funds
relating to the Vermont Economic Development Authority bond issuance
(see note 8). The funds have been invested in First Union's Evergreen
Money Market account and administered by First Union, the Bond Trustee.
The funds of $ 3,301,000 as of October 31, 2000 are restricted for the
expenditures related to purchase of building and equipment and were
disbursed to pay off the bonds on November 1, 2000.
PROPERTY AND EQUIPMENT
LIFE OCTOBER 31, OCTOBER 30,
2000 1999
---- ---- ----
Land, buildings, and improvements 10 - 40 yrs $ 5,631,785 $ 3,624,258
Machinery and equipment 3 -10 yrs 21,964,103 11,741,545
Equipment held under capital leases 3 -10 yrs 30,067 786,776
27,625,955 16,152,579
Less accumulated depreciation 6,573,442 5,030,321
----------- ----------
$ 21,052,513 $11,122,258
=========== ===========
INTANGIBLE ASSETS
LIFE OCTOBER 31, OCTOBER 30,
2000 1999
---- ---- ----
Goodwill 30 yrs. $ 69,654,383 $10,933,826
Covenants not to compete 5 yrs. 405,599 498,412
Customer lists 3 yrs. 1,146,661 946,535
Other Various 105,755 103,717
------------ -----------
71,312,398 12,482,490
Less accumulated amortization 2,843,016 2,039,283
------------- -----------
$ 68,469,382 $10,443,207
============= ===========
F-12
7. ACCRUED EXPENSES
October 31, October 30,
2000 1999
---- ----
Advertising and promotion $ 153,627 $ 130,000
Payroll and vacation 974,792 206,018
Income taxes 345,899 -
Capital expenses 307,428 -
Interest 386,307 -
Miscellaneous 570,877 515,353
----------- -----------
$ 2,738,930 $ 851,371
=========== ===========
8. DEBT
a) SENIOR DEBT - The Company entered into a five year revolving line
with First Union National Bank, formerly CoreStates Banks N.A., on
April 18, 1998. The purpose of the loan was for permitted
acquisitions and capital expenditures, working capital and to
refinance existing term debt. The Company was entitled to borrow
up to $15 million under the terms and conditions of the agreement.
Of this amount, $3 million was allowed for working capital with
the balance available for acquisitions.
On January 28, 2000, the Company amended and restated its
five-year revolving credit agreement with First Union National
Bank and KeyBank National Association. The facility was increased
to $25 million from $15 million under the terms and conditions of
the agreement. The interest rate on funds borrowed under the
agreement was LIBOR plus 2.5%. The Company also entered into a
Letter of Credit with First Union for $4,300,000 to secure bonds
issued for the same amount by the Vermont Economic Development
Authority. The Company paid a 2% annual fee of the Letter of
Credit amount. The Bonds were issued as two series designated as
Variable Rate Demand/Fixed Rate Revenue Bonds (Vermont Pure
Springs, Inc. Project) 1999 Series A 20 year bonds and Variable
Rate Demand/Fixed Rate Revenue Bonds (Vermont Pure Springs, Inc.
Project) 1999 Series A-T 10 year bonds. The Series A Bonds were
issued for $3,195,000 and maturing on January 1, 2020 and the
Series A-T Bonds were issued for $1,105,000 and maturing on
January 1 2011. The "Floating Rate" was a variable rate of
interest equal to the minimum rate of interest necessary, in the
sole judgment of the Remarketing Agent (First Union Securities,
Inc.), to sell the Bonds on any Business Day at a price equal to
the principal amount thereof, exclusive of accrued interest, if
any, thereon. Interest was determined on a weekly basis and was
payable on the first of every month. The bank facility and series
A-T bonds were paid off in conjunction with Crystal Rock merger on
October 6, 2000 while the series A bonds were paid off on November
1, 2000 for the same reason. No prepayment penalties were incurred
as a result of the retirement of this debt.
F-13
In order to finance the merger with Crystal Rock, the Company
entered into a loan agreement with Webster Bank and Manufacturers
and Traders Trust Company, effective October 5, 2000. The
financing provides for a $31,000,000 term loan, the proceeds of
which were used as follows:
Cash to Crystal Rock Shareholders $ 8,041,063
Repay Existing Crystal Rock Debt 1,623,336
Repay Vermont Pure Loans, Bonds, and Leases 20,451,899
Expenses Related to the Transaction 679,475
Operating Cash 204,227
--------------
TOTAL $31,000,000
==============
The commitment also provides for a $5,000,000 working capital line
of credit for operating capital, capital expenditures, and
acquisitions. The Company had borrowed $460,000 under this
facility as of October 31, 2000. There is a separate limit within
the line for letters of credit.
The term loan is for a term of seven years and has scheduled
monthly payments of principal and interest ranging from $417,000
in the first year to $610,000 in the last year.
The line of credit is for two years. Both loans are initially
priced at the current 30 day LIBOR interest rate plus 175 basis
points (9.5% at October 31, 2000) and are secured by a lien
against all of the assets of Vermont Pure Holdings and its
subsidiaries. The interest rate is subject to periodic adjustments
based on evaluation of the Company's senior funded debt to EBITDA
ratio. In addition, there are other customary covenants that the
Company must achieve to comply with the agreement.
b) SUBORDINATED DEBT - As part of the merger agreement with the
shareholders of Crystal Rock, the Company gave notes in the amount
of $22,600,000, effective October 5, 2000. The interest rate is
12% for the seven year term of the note. Scheduled repayments are
made quarterly and are interest only for the first three years.
Quarterly payment of principal and interest range from $678,000
the first year to $2,062,000 the last year. There is a principal
payment of $6,600,000 due at maturity.
The notes are secured by all of the assets of Vermont Pure
Holdings and its subsidiaries but specifically subordinated, with
a separate agreement between the debt holders, to the senior debt
described above.
F-14
c) OTHER LONG TERM DEBT - The Company's other long term debt is as
follows:
October 31, October 30,
2000 1999
---- ----
Mortgage on property purchased in June 1999, interest at .5% over prime,
as of October 31, 2000 the rate is 8.25% to be revised annually,
principal and interest payable monthly through 2014, secured by property.... $ * $ 198,182
Mortgage on property acquired in October 1993, interest at 4.5%, with
interest only due through July 1996, principal and interest due
through 2000 secured (subordinated) by the property.......................... 287,250 318,341
Promissory note, principal and interest at 8.5% payable monthly through
May 2002 with a final payment of $140,099 due June 2002. Note is
unsecured.................................................................... * 235,011
Promissory note, principal and interest at 8.5% payable monthly through
August 2002, with a final payment of $308,474 due September 2002.
Note is unsecured............................................................ * 430,782
Promissory note, principal and interest at 8% payable monthly through
August 2004. Note is unsecured.............................................. * 295,473
Bonds, principal payable on November 1, 2000. Bond is secured by a
Money Market account......................................................... 3,195,000 -
Promissory note, to be paid by conversion to equity by October, 2002.
Note is secured by a six-month certificate of deposit maturing on
December 7, 2000............................................................. 975,000 975,000
Various secured/unsecured notes ranging in amounts of $14,000 to
$58,000 with interest rates of 8.5% to 10%. These notes are
Unsecured.................................................................... 201,745 1,601,068
--------- -----------
$4,633,183 $ 3,078,823
Less current portion............................................................ 4,321,673 1,414,930
--------- -----------
$ 311,510 $ 1,663,893
========= ===========
* repaid during the year ended October 31, 2000
d) Annual maturities of long term debt are summarized as follows:
Senior Subordinated Other Total
------ ------------ ----- -----
CURRENT PORTION $ 2,500,000 $ - $4,321,673 $ 6,821,673
----------- -------- ---------- -----------
Long Term Portion
Year Ending October 31,
2002 3,500,000 - 60,136 3,560,136
2003 4,000,000 - 41,817 4,041,817
2004 4,000,000 2,000,000 44,105 6,044,105
2005 4,500,000 3,000,000 - 7,500,000
2006 4,500,000 4,000,000 - 9,500,000
THEREAFTER 5,500,000 13,600000 165,452 20,765,452
----------- ------------ ---------- -----------
LONG TERM PORTION 7,000,000 22,600,000 311,510 51,411,510
----------- ------------ ----------- -----------
TOTAL DEBT $ 31,000,000 $ 22,600,000 $4,633,183 $58,233,183
============ ============ ========== ===========
F-15
9. STOCK OPTION PLANS
In November 1993, the Company's Board of Directors adopted the 1993
Performance Equity Plan (the "1993 Plan"). The plan authorizes the
granting of awards for up to 1,000,000 shares of common stock to key
employees, officers, directors and consultants. 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 1999 and 2000, there were no
options issued under this plan.
On April 2, 1998 the Company's shareholders approved the 1998 Incentive
and Non Statutory Stock Option Plan (the "1998 Plan"). The 1998 plan
was amended by shareholder approval on October 5, 2000. This plan
provides for issuance of up to 1,500,000 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. During fiscal 2000 and 1999, 870,000
and 48,200 options were issued under this plan, respectively.
The following table illustrates the Company's stock option warrant
issuances and balances outstanding during the last three fiscal years:
Option/ Weighted
Warrant Average
(Shares) Exercise Price
----------- -------------
Balance at October 25, 1997 2,202,187 $3.39
Granted 227,831 3.58
Retired (10,000) 2.50
Exercised (5,000) 2.50
------------- -----------
Balance at October 31, 1998 2,415,018 3.41
Granted 48,200 3.13
Retired (540,000) 5.87
Exercised (36,000) 2.44
------------- -----------
Balance at October 30, 1999
1,887,218 2.71
Granted 870,000 3.23
Exercised (5,000) 2.25
Expired (63,000) 3.27
------------- -----------
BALANCE AT OCTOBER 31, 2000 2,689,218 $2.79
============= ===========
The following is additional information related to the Company's
options and warrants as of October 31, 2000:
Weighted Weighted
Exercise Outstanding Remaining Ave. Exercisable Ave.
Price Options and Contractual Exercise Options and Exercise
Range Warrants Ave. Life Price Warrants Price
----- -------- --------- ----- -------- -----
$1.81 - $2.50 1,501,000 4.63 $2.43 1,363,000 $2.42
$2.81 - $3.38 1,138,218 9.10 $3.22 169,728 $3.10
$3.50 - $4.25 50,000 6.40 $3.95 39,800 $3.87
--------- --------- ----- ------------ ------
2,689,218 6.56 $2.79 1,572,528 $2.53
========= ============
F-17
Outstanding options and warrants include options issued under the 1993
Plan, the 1998 Plan and non-plan options and warrants. There were
1,381,897, 1,485,000, and 1,742,000 options exercisable at October 31,
2000, October 30, 1999, and October 31, 1998, respectively.
10. ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees". Accordingly, no
compensation expense related to stock option grants was recorded in
1999 and 1998 as the exercise price of such options was equal to or
greater than the underlying stock on the date of grant. During 2000,
the Board of Directors voted to extend the exercise period for options
to the estate of a deceased employee and two directors that were
leaving the Board. Consequently, compensation expense of $118,670 was
recorded, representing the aggregate difference in the market price on
the date of the extension over the option's exercise price.
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; such pro-forma information is not
necessarily representative of the effects on reported net income for
future years due primarily to the options vesting periods and to the
fair value of additional options' in future years.
Had compensation cost for the option plans been determined using the
methodology prescribed under the Black-Scholes option pricing model,
the Company's income (loss) would have been ($2,806,851) and ($.26) per
share in 2000; $3,307,489 and $.32 per share in 1999; and $2,509,134
and $.24 per share in 1998. The weighted average fair value of the
options granted were $3.03, $2.11, and $3.42 in 2000, 1999, and 1998,
respectively. Assumptions used for 2000 were: expected dividend yield
of 0%; expected volatility of 51%; risk free interest of 5.7% and
expected life of 5 years. Assumptions used for 1999 were: expected
dividend yield of 0%; expected volatility of 79%; risk free interest of
5.7% and expected life of 5 years. Assumptions used for 1998 were:
expected dividend yield of 0%; expected volatility of 50%; risk free
interest of 5.7% and expected life of 5 years.
11. OPERATING LEASES
In conjunction with the merger with Crystal Rock, the Company entered
into lease agreements to continue to operate out of Crystal Rock's
existing facilities. The agreements run to October, 2010 and are
described in more detail in note 15. The Company also leases office
space on a month-to-month basis and is obligated under several
building, equipment and vehicle leases expiring variously through May
2008. Future minimum rental payments over the terms of these leases are
approximately as follows:
F-18
2000 $1,328,538
2001 1,233,113
2002 1,142,446
2003 963,812
Thereafter 4,192,954
Rent expense under all operating leases was $533,974, $413,217, and
$321,116 for fiscal years ending October 31, 2000, October 30, 1999,
and October 31, 1998.
12. OBLIGATIONS UNDER CAPITAL LEASES
The Company leases equipment under capital lease arrangements. Assets
held under capital leases are included with property and equipment. The
present value of minimum lease payments at October 31, 2000 was
$25,811. Due to the financial restructuring associated with the Crystal
Rock merger, the Company repaid substantially all its outstanding
capital lease obligations.
13. LEGAL PROCEEDINGS
a) PRISTINE MOUNTAIN SPRINGS
In connection with litigation with its largest outside spring
water source, Pristine Mountain Springs, the Company reached a
settlement on December 1, 1999. As part of the settlement, the
owner of the spring and its affiliate paid $1,270,000 to the
Company and acknowledged the Company's rights under the amended
water supply contract and right of first refusal to purchase the
spring site. In order to obtain the rights to the supply contract,
the Company had previously issued a $975,000 non-interest bearing
convertible debenture to the original creditor of the owner of the
spring and its affiliate. Settlement of the transaction resulted
in miscellaneous income being recorded for the period.
Cash Settlement $ 1,270,000
Less: Debt Assumed (975,000)
Less: Legal Fees (22,113)
--------------
Total $ 272,887
==============
b) DESCARTES/ENDGAME SYSTEMS
On July 27, 2000 the Company filed a lawsuit in Vermont Federal
Court against Descartes Systems/Endgame Solutions for
non-performance of the professional services agreement between the
two companies. In the suit Vermont Pure alleges that vendor did
not adequately perform the services rendered in connection with
approximately $500,000 of unpaid billings. Descartes has filed a
motion to dismiss the case based on the premise the Vermont
Federal Court is not the proper jurisdiction and that the case
should be arbitrated in Ontario, Canada.
F-19
14. 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 and other bonuses
and prerequisites. The trustee of the Baker family trusts, which
is a major shareholder of the Company, is also a director. Such
individual is also a principal in a law firm, to which the Company
accrued approximately $10,000 in legal fees during fiscal year
2000.
In addition, the Company paid consulting fees to a director of
$22,000 in both 2000 and 1999. This director resigned in October,
2000
The Company leases a 72,000 square foot facility in Watertown, CT
and a 22,000 square foot facility in Stamford, CT from a Baker
trust. Annual rent payments for the ten year leases are as
follows:
First 5 Yrs. Next 5 Yrs.
----------- -----------
Stamford $216,000 $248,400
Watertown $360,000 $414,000
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.
The Company paid service fees to CDS during October 2000 totaling
$2,031. As of October 31, 2000, the Company holds a note from CDS
entered into August 1, 1998 for the principal amount of $120,000
with accrued interest of $22,950. The note is scheduled to mature
August 15, 2003. The Company is under contract through September,
2001 to pay a monthly maintenance fee of $4,552.
F-20
15. INCOME TAXES
The Company has approximated $15 million of available loss
carryforwards at October 31, 2000 expiring from 2005 through 2018.
The major deferred tax asset (liability) items at October 31, 2000 and
October 30, 1999 are as follows:
October 31, October 30,
2000 1999
---- ----
Accounts receivable allowance...........$ 209,000 $ 139,000
Amortization............................ 353,000 225,000
Depreciation............................ (1,228,000) (919,000)
Slotting fees........................... 8,000 10,000
Other................................... 178,000 95,000
Net operating loss carryforwards........ 6,007,000 5,067,000
----------- -----------
5,527,000 4,617,000
Valuation allowance..................... 973,000 832,000
----------- -----------
Deferred tax asset recorded.............$ 4,554,000 $ 3,785,000
=========== ===========
The benefit for income taxes differs from the amount computed by
applying the statutory tax rate to net income before income tax benefit
as follows:
Year Ended
-----------------------------------------
October 31, October 30, October 31,
2000 1999 1998
---- ---- ----
Income tax benefit (expense) computed
at statutory rate................... $1,072,000 $(546,000) $(480,000)
Effect of permanent differences..... (22,000) (7,000) (74,000)
Effect of temporary differences..... 5,000 115,000 (101,000)
Tax benefit of net operating losses. - 438,000 655,000
Losses for which no benefit recorded (1,055,000) - -
Decrease in valuation allowance..... 769,000 1,793,000 1,447,000
----------- ---------- ------------
Income tax benefit.................. $ 769,000 $1,793,000 $1,447,000
=========== ========== ============
16. MAJOR CUSTOMER AND CUSTOMER COMMITMENTS
The Company's sales to a single customer were 16%, 30% and 31% of the
total sales for 1999, 1998 and 1997, respectively. However, the Company
terminated its distribution agreement with this customer effective
April, 1999. The Company has entered into contracts with distributors
to market Vermont Pure spring water in the territory previously
serviced by the former customer.
F-21
In March 1999, Vermont Pure Holdings, Ltd. entered into distribution
agreements with several other distributors in order to replace a major
customer. Effective March 1, 2000, the Company modified its
distribution agreements with three of these distributors and
consequently became the exclusive spring water brand carried by them.
The distribution area served by these businesses is the greater
metropolitan New York City area.
17. CONCENTRATION OF CREDIT RISK
The Company maintains their cash accounts at various financial
institutions. The balances at times may exceed federally insured
limits. At October 31, 2000, the Company had cash in deposits exceeding
the insured limit by approximately $1,000,000.
18. SUBSEQUENT EVENTS - FINANCING
On November 3, 2000 the Company entered into a three year "swap"
agreement with Webster Bank to fix $8,000,000 its senior debt with the
bank. The agreement fixes the variable LIBOR rate portion of the debt
at 6.57% resulting in a total fixed rate of 8.32% on that portion of
the debt.
23
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 the Company's Annual Meeting of Stockholders scheduled
to be held March 27, 2001.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference from
the Proxy Statement for the Company's Annual Meeting of Stockholders scheduled
to be held March 27, 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated by reference from
the Proxy Statement for the Company's Annual Meeting of Stockholders scheduled
to be held March 27, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference from
the Proxy Statement for the Company's Annual Meeting of Stockholders scheduled
to be held March 27, 2001.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
a) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K, filed October 19, 2000,
to provide further information about the consummation of the merger and
contribution pursuant to which the Company acquired the stock of
Crystal Rock Spring Water Company (the "Merger 8-K").
b) The following documents are filed as part of this report:
Financial Statements and Financial Statement Schedules.
Reference is made to the Index to Financial Statements
included in Item 7 of Part II hereof, where such documents are
listed.
EXHIBITS AS REQUIRED BY ITEM 601 OF REGULATION S-K:
24
Exhibit
Number Description
2.1 Agreement and Plan of Merger and Contribution by and among
Vermont Pure Holdings, Ltd., Crystal Rock Spring Water Company,
VP Merger Parent, Inc. VP Acquisition Corp. and the stockholders
named therein, dated as of May 5, 2000. (Incorporated by
reference to Appendix A to the Form 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").
2.2 Amendment to Agreement and Plan of Merger and Contribution by and
among Vermont Pure Holdings, Ltd., Crystal Rock Spring Water
Company, VP Merger Parent, Inc., VP Acquisition Corp., and the
stockholders named therein, dated as of August 28, 2000.
(Incorporated by reference to Exhibit 2.1 of the S-4 Registration
Statement.)
2.3 Amendment to Agreement and Plan of Merger and Contribution by and
among Vermont Pure Holdings, Ltd., Crystal Rock Spring Water
Company, VP Merger Parent, Inc., VP Acquisition Corp. and the
stockholders named therein, dated as of September 20, 2000.
(Incorporated by reference to Exhibit 2.2 of the Merger 8-K.)
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.)
3.2 Certificate of Amendment of Certificate of Incorporation of the
Company filed October 5, 3.2 2000. (Incorporated by reference to
Exhibit 4.2 of the Merger 8-K.)
3.3 By-laws of the Company. (Incorporated by reference to Exhibit C
of Appendix A to the Proxy Statement included in the S-4
Registration Statement.)
4.1 Form of Lockup Agreement among the Company, Peter K. Baker, Henry
E. Baker, and John B. Baker. (Incorporated by reference to
Exhibit N to Appendix A to the Proxy Statement included in the
S-4 Registration Statement.)
4.2 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 C to the Proxy Statement
included in the S-4 registration statement.)
25
10.3* 1999 Employee Stock Purchase Plan. (Incorporated by reference to
Exhibit A of the 1999 Proxy Statement of Vermont Pure Holdings,
Ltd. f/k/a Platinum Acquisition Corp.)
10.4 Amended and Restated Spring Water Licenses and Supply Agreement
between Vermont Pure Holdings, Ltd. and Pristine Mountain Springs
of Vermont, Inc and Amsource, LLC dated April 13, 1999.
(Incorporated by reference from Exhibit 10.25 of Form 10-K for
the Year Ended October 30, 1999.)
10.5 Convertible Debenture Agreement dated September 30, 1999 between
Vermont Pure Holdings, Ltd. and Middlebury Venture Partners, Inc.
(f/k/a Marcon Capital Corporation) in the amount of $975,000.
(Incorporated by reference from Exhibit 10.27 of Form 10-K for
the Year Ended October 30, 1999.)
10.6* Employment Agreement between the Company and Timothy G. Fallon.
(Incorporated by reference to Exhibit 10.13 of the S-4
Registration Statement.)
10.7* Employment Agreement between the Company and Bruce S. MacDonald.
(Incorporated by reference to Exhibit 10.14 of the S-4
Registration Statement.)
10.8* Employment Agreement between the Company and Peter K. Baker.
(Incorporated by reference to Exhibit 10.15 of the S-4
Registration Statement.)
10.9* Employment Agreement between the Company and John B. Baker.
(Incorporated by reference to Exhibit 10.16 of the S-4
Registration Statement.)
10.10* Employment Agreement between the Company and Henry E. Baker.
(Incorporated by reference to Exhibit 10.17 of the S-4
Registration Statement.)
10.11 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.)
10.12 Lease of Grounds in Stamford, Connecticut from the Henry E. Baker
(Incorporated by reference to Exhibit 10.24 of the S-4
Registration Statement.)
10.13 Lease of Building in Stamford, Connecticut from Henry E. Baker.
(Incorporated by reference to Exhibit 10.23 of the S-4
Registration Statement.)
26
10.14 Loan and Security Agreement between the Company and Webster Bank
dated October 5, 2000.
10.15 Term Note from the Company to Webster Bank dated October 5, 2000
10.16 Subordinated Note from the Company to Henry E. Baker dated
October 5, 2000.
10.17 Subordinated Note from the Company to Joan Baker dated October 5,
2000.
10.18 Subordinated Note from the Company to John B. Baker dated October
5, 2000.
10.19 Subordinated Note from the Company to Peter K. Baker dated
October 5, 2000.
10.20 Subordinated Note from the Company to Ross S. Rapaport, Trustee,
dated October 5, 2000.
10.21 Subordination and Pledge Agreement from Henry E. Baker to Webster
Bank dated October 5,2000.
10.22 Subordination and Pledge Agreement from Joan Baker to Webster
Bank dated October 5,2000.
10.23 Subordination and Pledge Agreement from John B. Baker to Webster
Bank dated October 5,2000.
10.24 Subordination and Pledge Agreement from Peter K. Baker to Webster
Bank dated October 5,2000.
10.25 Subordination and Pledge Agreement from Ross S. Rapaport,
Trustee, to Webster Bank dated October 5,2000.
10.26 Agreement between Vermont Pure Springs, Inc. and
Zuckerman-Honickman Inc. dated October 15, 1998. (Incorporated by
reference to the S-4 Registration Statement.
23.1 Consent of Independent Auditors
27 Financial Data Schedule
* Relates to compensation
27
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
Timothy G. Fallon, Chief Executive Officer,
President, and Chairman of the Board of Directors
Dated: January 29, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
/S/ TIMOTHY G. FALLON
- ---------------------
Timothy G. Fallon Chief Executive Officer and Chairman January 29, 2001
of the Board of Directors
/S/ HENRY E. BAKER Director, Chairman Emeritis January 29, 2001
- ---------------------
Henry E. Baker
/S/ PETER K. BAKER President and Director January 29, 2001
- -------------
Peter K. Baker
/S/ PHILLIP DAVIDOWITZ Director January 29, 2001
- ----------------------
Phillip Davidowitz
/S/ ROBERT C. GETCHELL Director January 29, 2001
- ----------------------
David R. Preston
/S/ DAVID R. PRESTON Director January 29, 2001
- --------------------
Norman E. Rickard
/S/ ROSS S. RAPAPORT Director January 29, 2001
- --------------------
Ross S. Rapaport
/S/ NORMAN E. RICKARD Director January 29, 2001
- ---------------------
Norman E. Rickard
/S/ BEAT SCHLAGENHAUF Director January 29,2001
- ---------------------
Beat Schlagenhauf
/S/ BRUCE S. MACDONALD Chief Financial Officer and Secretary January 29,2001
- ----------------------
Bruce S. MacDonald
28
EXHIBITS TO VERMONT PURE HOLDINGS, LTD.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED OCTOBER 30, 1999
Exhibit
Number Description
10.14 Loan and Security Agreement between the Company and Webster
Bank dated October 5, 2000.
10.15 Term Note from the Company to Webster Bank dated October 5,
2000.
10.16 Subordinated Note from the Company to Henry E. Baker
dated October 5, 2000.
10.17 Subordinated Note from the Company to Joan Baker dated
October 5, 2000.
10.18 Subordinated Note from the Company to John B. Baker dated
October 5, 2000.
10.19 Subordinated Note from the Company to Peter K. Baker dated
October 5, 2000.
10.20 Subordinated Note from the Company to Ross S. Rapaport,
Trustee dated October 5, 2000.
10.21 Subordination and Pledge Agreement from Henry E. Baker to
Webster Bank dated October 5,2000.
10.22 Subordination and Pledge Agreement from Joan Baker to
Webster Bank dated October 5,2000.
10.23 Subordination and Pledge Agreement from John B. Baker to
Webster Bank dated October 5,2000.
10.24 Subordination and Pledge Agreement from Peter K. Baker to
Webster Bank dated October 5,2000.
10.25 Subordination and Pledge Agreement from Ross S. Rapaport,
Trustee to Webster Bank dated October 5,2000.
23.1 Consent of Independent Auditors
27 Financial Data Schedule