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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, 2001
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 Number
incorporation or organization)
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)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d ) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. Yes [X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Based on the last sale at the close of business on January 17, 2002 as reported
on the American Stock Exchange, the aggregate market value of the Issuer's
common stock held by non-affiliates of the Issuer was approximately $59,988,000.
The number of shares outstanding of the Issuer's Common Stock, $.001 par value,
was 21,073,734 on January 17, 2002.
Documents Incorporated by Reference
Portions of the registrant's definitive proxy statement, which is expected to be
filed not later than 120 days after the registrant's fiscal year ended October
31, 2001, to be delivered in connection with the registrant's annual meeting of
stockholders, are incorporated by reference to Part III to this Form 10-K.
1
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 the mid-atlantic and the 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 88%, or 7.7 gallons, from 1990 to 2000. Annual
consumption increased from 8.8 gallons per capita in 1990 to 16.5 gallons per
capita in 2000. Bottled water volume in the United States has grown
significantly, increasing from approximately 2.2 billion gallons in 1990 to
approximately 5 billion gallons in 2000, a 127% increase. The retail sales value
in 1990 was approximately $2.6 billion and has grown to approximately $5.0
billion in 2000. In the period 1993 to 2000, 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 2000. 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 to be 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 the incremental growth realized by acquiring the target
company's customer base, and the synergies resulting from integrating 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.
2
Another significant impact in the industry has been the entrance of
major soft drink bottlers into the bottling and distribution segment of the
industry. 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, had entered the top
10 bottled water companies in the United States.
Company Background
Vermont Pure Holdings, Ltd. is primarily comprised of two operating
subsidiaries, Crystal Rock Spring Water Company and Vermont Pure Springs, Inc.
Established 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 acquisitions, primarily in the home and office market. Additionally,
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 marketing the Vermont Pure(R)
brand, in 1995 the Company renewed marketing efforts with respect to its
original trademark Hidden Spring(R). 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.
At the end of fiscal year 2000, the Company consummated a merger
involving the Crystal Rock Spring Water Company of Watertown, Connecticut.
Crystal Rock has historically focused its manufacturing resources on the still,
non-carbonated, segment of the bottled water industry. Although its primary
business has been the marketing and distribution of Crystal Rock(R) brand of
purified and mineralized drinking water to the home and office delivery markets,
it also distributes coffee, other refreshment type products, and vending
services in Connecticut, New York and Massachusetts.
The Company continued its acquisition strategy in 2001 with smaller
acquisitions in its established Home and Office markets. The most significant of
these was Iceberg Springs. Iceberg was a Home and Office distributor that
serviced Fairfield and New Haven counties in Connecticut and the suburban New
York communities in Westchester and Putnam counties. Iceberg's annual revenue
was approximately $3 million while servicing 4,500 customers.
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 ones of significant size and
complexity, may require management to devote substantial time and energy to the
successful, efficient and timely integration of operations, labor forces,
administrative systems (including accounting practices and procedures and
management information systems), and varying corporate cultures. A failure to
realize expected synergies could have an adverse effect on the Company.
Notwithstanding such risks, management believes that the Company's
acquisition strategy has been a success. In particular, as a result of the
merger with Crystal Rock, in terms of sales, the Company nearly doubled its size
as a result of the transaction. In addition, it significantly accelerated its
home and office growth strategy and added to its management depth. Following the
merger, the home and office segment has accounted for 75% of Company sales with
the retail consumer products comprising the balance.
3
The Company has also pursued a strategy of diversifying its product
offerings. In particular, the Company began to utilize an acquisition strategy
in 1996 to minimize its reliance on the retail consumer side of the business and
to increase growth in other categories. Prior to 1996 the retail business
represented 90% of the Company's total sales revenue. In the coming year,
management expects that the Company's Home and Office delivery category will
represent approximately 75% of the Company's total sales. Based on historical
data, this would place the Company fourth in the United States and second in the
northeast region for this type of distribution. Additional benefits of
increasing the Home & Office channel have included higher gross margins and less
seasonal influence in that area.
The growth in the Company's Home and Office delivery category has been
predominantly fueled by market expansion through this acquisition strategy,
which the Company has pursued primarily in New England and northern New York.
The Company has also experienced subsequent internal growth in those acquired
markets following such acquisitions.
Additionally, the Company has leveraged its distribution system to
expand its product lines. In particular, coffee, a product that is counter
seasonal to water, became the second leading product in the distribution channel
and grew to account for almost 10% of the Company's total sales. The Company
purchases coffee under contracts that set prices for a period of six to eighteen
months to maintain price and supply stability. Since coffee is a commodity the
Company cannot 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.
In the consumer retail market, the Company has taken advantage of its
customer relationships and quality water sources and bottling operations by
co-packing private brands. Private labels are a growing portion of the category
and are increasingly competitive with branded products in terms of price and
market share. In addition to providing increased bottling volume and
contributing margin, management believes this business enhances relationships
with the retailers the Company serves. Current customers include large northeast
retail grocers such as A&P, Giant Carlisle, Finast, Hannaford, Shop Rite, Stop &
Shop, and Tops among others.
To accommodate the growing demand for the Company's bottled spring
water products, 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 a 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. Most recently, the Company has added a
second bottling line for its retail consumer products. As of January 2002, the
new line will more than double the production capacity for this category. The
Company also leases a second 72,000 square foot facility located on ten acres in
Watertown, Connecticut. This site houses the bottling operations, the Company's
largest home and office distribution center, and centralized customer service
and administration for the Company's subsidiary, Crystal Rock. The Company has
also developed a five-gallon bottling facility near Albany, NY and expanded
distribution centers in New England and northern New York. The Company has the
original office and bottling facility in Randolph for sale.
4
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. Over the past two years, purchases of spring water from a source
in Vermont that is not owned or affiliated with the Company amounted to
approximately 15% of the Company's usage of spring water. 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 purchased spring water for several years from a 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 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, The Company 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, approximately 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 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, in order to create a
sanitary filling environment.
5
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 the
availability of water and the continued functioning of its bottling processes.
An interruption may result in an inability to meet market demand and/or
negatively impact the cost to bottle the products. Additionally, the
distribution and consumption of the product is dependent on other businesses and
consumers. There is a possibility that characteristics 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.
Finally, the terrorist attacks of September 11, 2001 and any further
attacks could impact the Company's operations negatively if such attacks result
in a prolonged or severe economic downturn. Further, because the Company's
products are packaged for human consumption and could be considered a substitute
for public water infrastructure, there is a possibility that the Company or its
products could be a direct target of future terrorist attacks. Although
management believes this risk to be remote, and is increasing security measures,
any such act of terrorism or attempted act could be catastrophic to the
Company's operations.
Products
The Company's natural spring water is sold in the retail consumer
market under the Vermont Pure(R) and Hidden Spring(R) brands, packaged in
various bottle sizes ranging from 8 ounces to 1.5 liters and sold in single
units and plastic shrinkfilm of six, eight, and twelve 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 500 ml. 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(R) 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(R) is distributed in southern New
England while Vermont Pure(R) and Hidden Spring(R) are distributed in northern
New England and upstate and western New York. 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 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).
6
Marketing and Sales
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 advertising campaigns. The Company also sponsors local area
professional sports and professional sporting events, participates in trade
shows and is highly 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 perceived by consumers to be higher quality. 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(R) brand competitive to other
domestic premium brands but lower than imported premium water products. The
Hidden Spring(R) brand products are similarly packaged and sold to retail
grocery and convenience markets. Both of these brands, as well as Crystal
Rock(R), are marketed from the Company's own delivery routes.
The Crystal Rock(R) 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 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.
7
Slotting Fees
For the Company to achieve placement of its retail consumer products in
certain supermarket chains and individual supermarket stores, it is sometimes
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 National Association of
Breast Cancer Organizations, the Multiple Sclerosis Society, and the Vermont
Symphony Orchestra.
Sales and Distribution
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. 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 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.
The Company is continuing to pursue 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.
Retail Consumer (PET)
The Company uses major beverage distributors for the distribution of
most of its retail consumer products, and distributes its Home and Office
products 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.
8
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.
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 and customers and the Company for ordering product,
facilitating distribution, servicing retail outlets, and coordinating warehouse
distribution. Sales personnel actively seek to expand the number of retail
outlets and distributors, and they participate in overall market development.
Contract Packaging
In addition to its own brands, the Company bottles 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 a growing
part of the retail consumer marketplace and is price competitive. 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 2001, contract packing represented the most significant growth portion of
the Company's retail consumer product sales revenue - doubling in revenue.
Private label revenue was 9% of the Company's total sales in 2001 compared to 7%
in 2000.
Supplies
The Company currently sources all of 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
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 procuring 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 January 1, 2001 that enables the Company to significantly reduce the
weight of its bottles. During the most recent year, the Company has effectively
reduced its cost per case for bottles due to the reduction in gram weight of
resin. In addition, this reduction has had a favorable impact on the
environment, reducing the amount of plastic in its containers and the amount of
plastic entering the waste stream by over 1,000,000 pounds per year. Management
is undertaking further raw material cost saving initiatives for caps, plastic,
and corrugated packaging in fiscal year 2002. Notwithstanding these
expectations, the Company may experience shortages or unscheduled price
increases that would adversely effect its cost of goods.
9
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), a purchasing cooperative comprised of
some of the largest independent Home and Office water companies in the United
States. QBC acts as a purchasing and negotiating agent to acquire national
pricing for the cooperative on common materials such as bottles, water coolers,
cups, and other supplies. QBC believes 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.
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.
10
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, and the Aqua-Cool division of
Ionics. Groupe Danone distributes Evian, Dannon, and Naya nationally and
Sparkletts regionally. 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 are often better established
than the Company's brands.
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 well-established regional water
companies with operations that could adversely effect 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.
The Home and Office market has several national or large competitors
such as Perrier Group (Poland Spring, Deer Park, and Great Bear), and Suntory
Water Group (Belmont Springs). Additionally, the Company competes with smaller
regional bottlers such as Monadnock in the Boston area, Leisure Time in the
Hudson valley of New York, and Mayer Brothers in Buffalo.
The Company, with its Vermont Pure brand, competes on the basis of
pricing, customer service, quality of its products, the image of the State of
Vermont, attractive packaging, and brand recognition. With the Crystal Rock
brand, the Company competes on the basis of 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 and servicing contracts
on a limited basis.
Trademarks
The Company sells its bottled water products under the trade names
Vermont Pure Natural Spring Water(R), Crystal Rock(R), Hidden Spring(R), and
Stoneridge(R). It has rights to other trade names including, Pequot Natural
Spring Water(R), Excelsior Spring Water(R), Happy Spring Water(R) and Vermont
Naturals(R). 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
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.
11
The Company is subject to the food labeling regulations required by the
Nutritional Labeling and Education Act of 1990. 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 are 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.
Employees
As of January 11, 2002, the Company had 351 full-time employees and 33
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. On October 5, 2000, 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 entered into five-year employment contracts with the Company. These
agreements do not prevent these employees from resigning and John Baker's
contract has a "reduced employment" option starting in April 2002 which allows
for part-time employment at his option. The departure or loss of Mr. Fallon or
Mr. Peter Baker in particular could have a negative effect on the business and
operations of the combined entity.
12
ITEM 2. DESCRIPTION OF PROPERTY.
The Company owns office, bottling and warehouse properties and natural
springs in Randolph, Vermont. The Company also rents on a monthly basis, an
office in an office suite in White 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 $ 61,995
Wilmington, MA October, 2003 10,670 $ 97,273
Rochester, NY August, 2003 8,000 $ 29,180
Buffalo, NY September, 2005 10,000 $ 60,000
Syracuse, NY December, 2005 10,000 $ 33,420
Halfmoon, NY October, 2011 15,000 $ 125,043
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 utilizes for
operations in Watertown and Stamford, CT. The landlord for the buildings is a
trust with which Henry, John, and Peter Baker, and Ross Rapaport are affiliated.
To increase efficiency, the Company shut down operations in a 9,000
square foot building in Randolph, VT and moved the operations to its larger
facility in Randolph. The smaller building is presently on the market to be
sold. The Company has sold all of its land in Sharon Springs, NY that never had
been used in the operation of the business.
These current facilities are currently expected to meet the Company's
needs for the next two years.
13
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 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 filed a Motion to dismiss the case based on the premise
that the Federal court does not have the proper jurisdiction and the case should
be arbitrated in Ontario, Canada. In an order dated April 11, 2001, the District
Court granted DesCartes' Motion to Dismiss the case. Subsequently, the parties
have reached an agreement to arbitrate the case in the state of Florida at a
date uncertain. The Company intends to vigorously defend its claim through out
this process.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of our security holders during the
quarter ended October 31, 2001.
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
daily closing prices of the Common Stock as reported by AMEX. Prior to May 18,
1999, the Company's common stock traded on the NASDAQ SmallCap Market under the
symbols "VPUR".
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
Fiscal Year Ended October 31, 2001
First Quarter........................ $3.00 $1.75
Second Quarter....................... $2.85 $2.05
Third Quarter........................ $4.07 $2.59
Fourth Quarter....................... $3.55 $2.55
The last reported sale price of the common stock on AMEX on January 17,
2002 was $5.40.
14
The Company had 353 record owners of the Common Stock as of January 17,
2002. As of that date, the Company believes that there were in excess of 1,800
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 follows a policy of cash preservation for future use in the
business.
Securities Sold and Exemption from Registration Claimed.
On October 1, 1999, the Company issued a $975,000 non-interest bearing
Convertible Debenture due September 30, 2001 (the "Debenture") to Marcon Capital
Corporation, now known as Middlebury Venture Partners ("Middlebury"). The
transaction was exempt from registration under the Securities Act of 1933 as a
private placement under Section 4(2) thereof. Middlebury was entitled to convert
the Debenture into shares of the Company's Common Stock at a conversion price
equal to 85% of the average closing price of the Common Stock during the 20
business days prior to conversion. If the Debenture was not sooner converted, it
would, subject to the satisfaction of various conditions, be automatically
converted into Common Stock on the maturity date, September 30, 2001.
The following table sets forth the conversion schedule of the Debenture
in fiscal year 2001:
Exercise Conversion
Date Debt Cost Price Shares
---- ---- ---- ----- ------
October 1, 1999 $975,000
January 26, 2001 $825,000 $150,000 $2.12 70,621
March 12, 2001 $675,000 $150,000 $2.13 70,422
May 4, 2001 $525,000 $150,000 $2.13 70,422
June 20, 2001 $250,000 $275,000 $2.29 120,087
September 30, 2001 $ - $250,000 $2.52 99,331
The transactions were exempt from registration under the Securities Act
of 1933 under Section 3(a)(9) thereof.
15
On November 1, 2001, the Company acquired substantially all of the
assets of Iceberg Springs Water, Inc. for total consideration valued at
$5,700,000, of which $600,000 was paid in cash, $4,395,373 in debt and assumed
liabilities and $704,627 by the issuance of 213,912 shares of the Company's
common stock. The transaction was exempt from registration under the Securities
Act of 1933 as a private placement under Section 4(2) thereof.
On the dates set forth below, each of the following Directors of the
Corporation exercised options to purchase 10,000 shares of the Common Stock of
the Company at a per share price of $2.12, being, in the case of each such
director, an aggregate sales price of $21,200.
Director Date of Transaction
-------- -------------------
Robert Getchell May 23, 2001
David Preston May 10, 2001
Norman Rickard May 25, 2001
Beat Schlagenhauf May 30, 2001
Each such transaction was exempt from registration under the Securities
Act of 1933 as a private placement under Section 4(2) thereof.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with the Company's financial statements and footnotes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this report. The historical results are not
necessarily indicative of the operating results to be expected in the future.
Fiscal Years Ended
October 31, October 31, October 30, October 31, October 27,
2001 2000 1999 1998 1997
---------- ----------- ----------- ----------- -------------
Net sales $ 67,170,895 $ 35,124,813 $31,396,375 $29,169,185 $ 17,685,442
Net Income (loss) $ 1,168,844 $ (2,382,678) $ 3,398,641 $ 2,858,750 $ 1,067,395
Net Income (loss)
per share- diluted $ .06 $ (.22) $ .31 $ .26 $ .11
Total assets $ 106,216,430 $110,825,640 $33,834,230 $26,173,503 $ 16,546,766
Long term obligations $ 47,851,386 $ 51,888,257 $13,733,268 $10,422,803 $ 5,739,889
16
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.
Results of Operations
Year Ended October 31, 2001 Compared to Year Ended October 31, 2000
The Company completed a merger with Crystal Rock Spring Water Company
in October 2000. This transaction had a significant impact on nearly all of the
Company's quantitative results. For comparison purposes only, the tables for the
respective reporting periods set forth,
(1) the fiscal year 2000 consolidated condensed operating results for
Vermont Pure Holdings, Ltd.,
(2) the fiscal year 2000 consolidated condensed operating results for
Crystal Rock Spring Water Company,
(3) adjustments consistent with the pro forma financial statements
presented in the Company's Proxy Statement/Prospectus dated
September 8, 2000 with respect to the transaction, as if the merger
had occurred on October 31, 1999, and
(4) the "Combined" totals of (1), (2) and (3).
The tables also set forth,
(5) the fiscal year 2001 consolidated condensed operating results for
Vermont Pure Holdings, Ltd.
Although they are derived from the financial statements of the Company and
Crystal Rock, the figures in the tables, including without limitation the "Pro
Forma Combined" column, are not, and should not be considered to be, financial
statements prepared in accordance with generally accepted accounting principles,
nor are they necessarily indicative of future results. The table is intended
solely to provide a basis for a more meaningful comparison of the consolidated
unaudited financial information with the combined operating results for the
Company for the respective reporting periods in fiscal year 2000. Certain
expenses have been reclassified from operating expense to cost of goods sold
from the Company's operating statement of a year ago to provide consistency
between the two companies and comparison to 2001.
17
For the Year Ending:
---------------- -------------- --------------- ------------------- ----------------
(000's of $) (1) (2) (3) (4) (5)
---------------- -------------- --------------- ------------------- ----------------
October 31, October 31, 2000 October 31, 2000 Oct. 31, 2001
2000 2000 Pro Forma FY00 Pro Forma FY01
---------------- -------------- --------------- ------------------- ----------------
Vermont Pure Crystal Rock Adjustments Combined Consolidated
---------------- -------------- --------------- ------------------- ----------------
Sales $ 35,125 $ 24,536 $59,661 $ 67,171
Cost of Goods Sold 17,072 10,804 $ 16 27,892 29,803
---------- --------- ---------- ----------- ---------------
Gross Profit 18,053 13,732 (16) 31,769 37,367
Operating Expenses 19,001 11,318 1,298 31,617 30,491
---------- --------- ---------- ----------- ---------------
Income (Loss) from Operations (948) 2,414 (1,314) 152 6,877
Interest Expense 1,893 280 3,428 5,601 5,034
Other (Income) Expense 311 (392) - (81) 6
---------- --------- ---------- ----------- ---------------
Income (Loss) before Taxes (3,152) 2,526 (4,742) (5,368) 1,849
Income Tax Expense (Benefit) (769) 842 (1,176) (1,103) 680
---------- --------- ---------- ----------- ---------------
Net Income (Loss) $ (2,383) $1,684 $ (3,566) $(4,265) $ 1,169
========== ========= ========== =========== ===============
Weighted Average Shares 20,743,540 20,447,609
=========== ===============
Basic Earnings Per Share $ (.21) $ .06
=========== ===============
Sales for 2001 were $67,171,000 compared to $59,661,000 for 2000, an
increase of $7,510,000 or 13%.
Sales through the home and office distribution channel were 71% of
total sales and increased in 2001 to $47,552,000 from $44,348,000 in 2000, an
increase of $3,204,000 or 7%. The growth represented market growth typical for
the industry category. Water sales totaled $23,001,000 in 2001 compared to
$20,117,000 in 2000, an increase of $2,884,000, or 14%. Coffee and other product
sales in this area were $16,528,000 in 2001 compared to $16,593,000 in 2000, a
decrease of $65,000. Equipment rentals totaled $8,023,000 in 2001 compared to
$7,638,000 in 2000, an increase of $385,000, or 5%. In addition to market
growth, the increase in water sales is indicative of the relatively cooler
summer weather in 2000 compared to the normal seasonal weather in 2001. The
decrease in the sales of other products is due to the shift of the sale of some
of the Company's products to an outside distributor in the consumer retail
channel.
Sales of the Company's retail-size products were 29% of total sales and
increased to $19,620,000 in 2001 from $15,313,000 in 2000, an increase of
$3,526,000, or 28%. The sales increase is attributable to increased sales volume
for the Company's Vermont Pure brand and other private label brands it bottles
as well as new private label relationships that were finalized during the year.
In addition, average selling prices stabilized from a decreasing trend over the
last few years, increasing 1%, and the weather in the northeastern United States
resumed a normal summer pattern from a cooler than normal 2000. Vermont Pure
brand sales increased 9% compared to 2000 as a result of strengthening existing
distributor relationships and market expansion. Hidden Spring brand sales
decreased 3% for the year due to competitive activity in mature markets and the
loss of a major customer through bankruptcy. The Company continued to increase
the private label volume that it bottles, resulting in an increase of 45% in
sales for these products. The increase was due to growing market demand and the
addition of two major grocery chains as customers during the year. Private label
is a growing category in the marketplace and the Company has been able to
capitalize on its position as quality bottler and branding partner in consumer
product lines. Total case sales of all consumer retail products were also up
18%.
18
Cost of goods sold for 2001 were $29,803,000, or 44% of sales, compared
to $27,892,000 or 47% of sales, for 2000. The decrease in cost of goods sold, as
a percentage of sales, compared to the prior year is attributable to production
efficiency and cost savings as a result of the merger with Crystal Rock. Higher
sales volume for both retail and home and office packages continue to enhance
efficiency and lower costs per unit. Material pricing was stable. Although the
Company decreased its bottle costs during the year, it experienced price
increases for other raw materials. The Company's retail products cost more to
bottle 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 product sizes and re-fillable bottles. The Company
expanded its production capabilities in 2001 and will continue that expansion in
2002.
Gross profit increased to $37,367,000, or 56% of sales, in 2001 from
$31,769,000, or 53% of sales, in 2000. Overall, gross profit increased 18% from
the prior year. The increase is attributable to higher sales volume and selling
prices combined with lower costs of goods sold.
Total operating expenses decreased to $30,491,000 from $31,617,000 in
2000, a decrease of $1,126,000, or 4%. Of these amounts, selling, general and
administrative ("SG&A") expenses were $24,317,000 and $23,999,000 for 2001 and
2000, respectively, an increase of $318,000, or 1%. The increase in selling,
general and administrative expenses is a result of the increase in Home and
Office sales. This category is characterized by higher selling expenses than the
retail category. The relatively small increase in SG&A costs as compared to the
growth in the Company's sales is attributable to savings realized as a result of
the Crystal Rock merger.
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 onto one system and consequently wrote down $1,292,000
for the system that was terminated in 2000. This charge consisted of licensing,
installation, training, and consulting costs. There were no such charges in
2001.
Advertising expenses increased to $3,630,000 in 2001 from $3,410,000 in
2000, an increase of $220,000, or 6%. The increase is primarily related to the
increase in sales volume for consumer retail products. On a per case basis,
advertising and promotional spending decreased in 2001 as a result of 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 assurance that
increases in spending or lower pricing will result in higher sales.
As a result of the merger with Crystal Rock, amortization expense
decreased to $2,544,000 in 2001 from $2,797,000 on a pro forma basis in 2000, a
decrease of $253,000. This is a result of a decrease in the goodwill charges
during the year for agreements that had reached full amortization as well as
actual goodwill being less than the amount projected on a pro forma basis. In
2000, 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 for 2000. There was no such cost in 2001.
Income from operations was $6,877,000 compared to $152,000 in 2000, an
increase of $6,725,000. The increase was a result of higher sales, improved
gross margin, and lower operating costs. Net interest expense decreased to
$5,034,000 in 2001 from the pro forma amount of $5,601,000 in 2000, a decrease
of $567,000. This was reflective of substantially lower interest rates. 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. It had 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. There were no such charges in 2001.
The Company had $668,000 of miscellaneous income in 2000 related to settlement
of litigation and sale of fixed assets which did not reoccur in 2001. Net income
before taxes of $1,849,000 in 2001 compared to a net loss before taxes of
$5,368,000 in 2000 is an improvement of $7,217,000. The return to profitability
is a result of increased sales, including a higher percentage of Home and Office
sales, and effective integration of the Vermont Pure and Crystal Rock businesses
to take advantage of cost savings. During the year, interest rates decreased to
levels that they had not been in many years. A significant portion of the
Company's debt is variable. The Company's interest average rate was
substantially lower in 2001 as a result. Cost increased since the amount of
debt, as a result of the Crystal Rock merger, increased significantly. No
assurance can be given that rates will remain low for the term of the
outstanding debt. (For more information, see Item 7A "Interest Rate Risk.")
19
Net income of $1,169,000 in 2001 compared to a net loss of $4,265,000
in 2000 was an improvement of $5,434,000. The Company recorded net tax expense
of $680,000 in 2001 compared to $1,103,000 in 2000. Tax expense in the
respective years was offset by deferred tax benefits of $973,000 and $769,000
that was recognized based on its profitability trends. The Company's effective
tax rate in 2001 was 37% compared to its assumed statutory rate on 40%. The rate
was lowered by the recognition of the deferred tax benefit but the benefit was
offset by amortization from the Crystal Rock merger that is not deductible for
tax purposes. (For a reconciliation of the effective and statutory expense, see
footnote 17 to the Company's Notes to the Consolidated Financial Statements.)
Based on the weighted average number of shares of common stock
outstanding of 20,447,609 (basic) and 20,651,239 (diluted) during 2001, net
income was $.06 per share under both methods. This compares to a net loss of
$.21 per share based on 20,743,540 (basic) pro forma weighted average shares in
2000. Calculation of diluted weighted average shares outstanding in 2000 for use
as a denominator for earnings per share would be anti-dilutive.
On June 29, 2001 the Financial Accounting Standards Board approved SFAS
141 and 142 concerning new accounting procedures for business combinations and
goodwill and intangible assets. SFAS 141 requires that business combinations
after June 30, 2001 to be accounted for using the purchase method of accounting
and outlines new criteria for purchase price allocation. The Company did not
complete any material transactions after June 30, 2001 during the fiscal year.
It plans to adopt SFAS 142 in fiscal year 2002. As a result, the Company's
financial statements will be materially impacted. Under the new statement, in
fiscal year 2002 and beyond, the Company will no longer be amortizing goodwill.
Consequently, the Company's amortization will decrease by $2.3 million from 2001
to 2002. Accordingly, net income is expected to include an increase of that
amount. In addition, the Company is required to assess its goodwill to determine
if it is impaired within the first six months of fiscal year 2002 and
periodically thereafter. If any portion of the goodwill on the books is
determined to be impaired, that total impaired amount will be written off during
the year. The Company has not yet tested its goodwill in accordance with the new
standards.
As discussed above, the Company periodically executes interest rate
swaps as part of its strategy to curtail its interest rate risk. Such
instruments are considered hedges under SFAS No. 133 and 137. Since the
instrument is intended to hedge against variable cash flows, it is considered a
cash flow hedge. As a result, the change in the fair value of the derivative
will be recognized as comprehensive income (loss) until the hedged item is
recognized in earnings. Cumulatively, the fair value of the Company's three
outstanding swaps decreased $973,537 for the year. This amount has been
recognized as an adjustment to net income to arrive at comprehensive income as
defined by the standards. Further, it has been recorded as a current liability
and decreased owners equity on the Company's balance sheet.
20
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 accounted for 7% of the total 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 fell
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 increased 19%
during the year and private label 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 was 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 to 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. 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.
21
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 anticipated synergies 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 consolidated operations on one combined
system and consequently wrote down $1,292,000 for the system that was
terminated.
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. 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 had been amortized over 30 years resulting in an
annual charge of approximately $1,950,000 per year but will be subject to SFAS
142 in future years (see discussion above). During the year 2000, 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 in 2000 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
development. The development did not take place and the land was sold in January
2001. Miscellaneous income represents a cash settlement of litigation. 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.
22
The net loss of $2,383,000 in 2000 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 average 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
average number of shares of diluted common stock outstanding of 10,790,722 in
1999.
Liquidity and Capital Resources
At October 31, 2001, the Company had working capital of $4,244,000.
This represents an increase of $1,267,000 from the $2,977,000 of working capital
on October 31, 2000. The increase is a result of the Company's return to
profitability while servicing its debt. A considerable portion of the Company's
expenses do not require cash. Depreciation, amortization and other items
totaling $6,248,000 more than offset the usage of cash for changes in assets and
liabilities of $1,869,000. When combined with net income, these items provide
$5,548,000 from operating activities compared to $1,432,000 in 2000, an increase
of $4,116,000. This is indicative that the Company's consolidated home and
office operations, which are capital intensive, have been effective at
generating cash in its first full year.
Cash flows from investing activities had a net inflow of $152,000. The
inflow was generated from the release of restricted money market funds for
scheduled debt payment of $4,276,000. Otherwise, the Company invested $4,156,000
on capital equipment for operations and small acquisitions to increase market
density. Capital expenditures in the normal course of the Company's business are
typically vehicles, bottles, and water dispensing, manufacturing, and computer
equipment. During 2000, the Company had a net cash outflow from investing
activities of $19,155,000. This was primarily attributable to funding the
Crystal Rock merger and the pay down of debt related to the merger. Capital
expenditures totaled $3,861,000 in 2000. The majority of capital expenditures
were for expansion of the Company's facility in Randolph, Vermont.
To finance the merger with Crystal Rock, the Company re-financed
existing debt and borrowed additional funds from Webster Bank of Waterbury,
Connecticut in 2000. It also financed a substantial amount of the purchase price
from the former shareholders of Crystal Rock. The debt to the former
shareholders is subordinated to the bank debt. The increased debt has resulted
in significantly higher interest costs for the Company compared to historic
levels. Management expects growth and efficiencies gained through integration
will increase the cash flow and profitability sufficiently to pay down debt on
schedule but assurance can be given that this will be the case. (For more
information on the Company's debt, see Note 8 of the Notes to the Consolidated
Financial Statements.)
23
During the past fiscal year, the Company paid down $5,872,000 of debt
in cash primarily related to the financing of the merger. In addition, it
borrowed $3,040,000 and repaid $3,500,000 of its operating line of credit to
fund seasonal cash needs. As of October 31, 2001 the Company did not have an
outstanding balance on the line. The Company issued stock for the retirement of
debt. 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", formerly 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 was restricted as collateral in favor of Middlebury until the note
was converted. During 2001, the note was converted to stock (see Item 5,
"Securities Sold and Exemption from Registration Claimed" for details concerning
the conversion.) In addition, the Company issued stock pursuant to the 1999
Employee Stock Purchase Plan and for the exercise of options of Director and
Officers.
The Company's cash balance at October 31, 2001 decreased by a net
amount of $309,000 from October 31, 2000. The decrease in cash is attributable
to the pay down of debt. Based on 2001 financial results as of and for the year
ended October 31, 2001, the Company is in compliance with its financial
covenants in its senior debt agreement with Webster Bank. Since the 2001
financial results demonstrated the achievement of a specified covenant in the
agreement, the margin for the Company's borrowings is scheduled to decrease from
1.75% to 1.50% over LIBOR as of March 1, 2002.
At October 31, 2001, the Company had recognized all available deferred
tax assets and recorded a deferred tax asset balance of $4,614,000 after
application of a portion of the asset to the current year's liability. The
Company has recorded all available deferred tax benefits. Based on historical
pre-tax income and projected profitability, the realization of such deferred tax
asset would take approximately two more years. Management estimates that
$2,313,000 will be applied in 2002 and $2,301,000 will be applied in 2003.
On November 1, 2001, the Company acquired substantially all of the
assets of Iceberg Springs Water, Inc. for total consideration valued at
$5,700,000, of which $600,000 was paid in cash, $4,395,373 in debt and assumed
liabilities and $704,627 by the issuance of 213,912 shares of the Company's
common stock. The assets were merged into the Company's Connecticut Home and
Office operations. To complete the transaction, the Company amended its
agreement with Webster Bank in order to borrow an additional $4,200,000. The
additional borrowings are at an interest rate 100 basis points higher than the
original term debt. Otherwise, the terms of the agreement did not change
materially.
The Company continues to pursue an active program of evaluating
acquisition opportunities. As a result, the Company anticipates using its
capital resources and obtaining financing from outside sources in order to
complete any further acquisitions. 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.
24
Other Recent Accounting Developments
In August 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long Lived
Assets." SFAS No. 144 supercedes SFAS No. 121, "Accounting for the Impairment of
Long Lived Assets and Assets to be Disposed of" and the accounting and reporting
provisions of Accounting Principles Board Opinion No. 30 "Reporting the Results
of Operations - Reporting the Effects of Disposal of a Segment of Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS
No. 144 also amends Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to eliminate the exception to consolidation for a subsidiary for
which control is likely to be temporary. SFAS No.144 will be effective for
fiscal years beginning after December 15, 2001.
The most significant changes made by SFAS No. 144 are (1) goodwill is
removed from its scope and therefore, it eliminates the requirements of SFAS 121
to allocate goodwill to long lived assets to be tested for impairment, and (2)
it describes a probability-weighted cash flow estimation approach to apply to
situations in which alternative course of action to recover the carrying amount
of long lived assets are under consideration or a range is estimated for the
amount of possible future cash flows.
The Company is required to adopt SFAS No. 144 for its fiscal 2003 year.
It has not yet determined the effect that the pronouncement will have on its
consolidated financial position or results of operations.
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, primarily the resin prices for
PET bottles.
Interest Rate Risks
At October 31, 2001 the Company had approximately $13,500,000 of long
term debt subject to variable interest rates. Under the loan and security
agreement with Webster Bank the Company currently pays interest at a rate of
LIBOR plus a margin of 1.75%. The margin is subject to change based on the
Company's performance as outlined in the loan agreement with Webster Bank and is
subject to decrease to 1.50% as of March 1, 2002. A hypothetical 100 basis
increase in the LIBOR rate would result in an additional $135,000 of interest
expense on an annualized basis. Conversely, a decrease would result in a
proportionate interest cost savings.
The Company uses interest rate "swap" agreements to curtail interest
rate risk. 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. On April 2, 2001, the Company entered into a swap agreement with Webster
Bank to fix an additional $4,000,000 of its long term debt at 7.03% interest for
three years. On July 24, 2001, the Company entered into a swap agreement with
Webster Bank to fix an additional $4,000,000 of its long term debt at 6.75%
interest for three years.
In aggregate, the Company has fixed the interest rate on this
$16,000,000 of debt at 7.5% over the next two to three years. Currently,
management believes that this is above market rates though the agreements are
based on three year rate projections. They serve to stabilize the Company's cash
flow and expense but ultimately may cost more or less in interest than if the
Company had carried all of its debt at a variable rate over the swap term. Since
significantly increasing its debt in October 2001, management's strategy has
been to keep the fixed and variable portions of its senior debt approximately
25
equal to offset and minimize the respective the risk of rising and falling
interest rates. Future low rates may compel management to fix a higher portion
to further stabilize cash flow and expenses as it monitoring short and long term
rates and debt balances.
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,
an essential component of PET. 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, $350,000 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, 2002 at "green" prices ranging from
$.46-$.57 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. In this case, competitors that had fixed pricing might have a
competitive advantage.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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. FINANCIAL STATEMENTS AND OTHER SUPPLEMENTARY DATA
Financials statements and their footnotes are set forth on pages F-1
through F-22
INDEX TO THE FINANCIAL STATEMENTS
Financial Statements:...... Page
Independent Auditors Report F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statement of Changes in Stockholders' Equity F-5
Consolidated Statement of Changes in 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 2001 and 2000, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the three years in the period ended October 31, 2001.
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 auditing standards generally
accepted in the United States of America. 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 at October 31, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended October 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Feldman Sherb & Co., P.C.
Feldman Sherb & Co., P.C
Certified Public Accountants
New York, New York
December 14, 2001
F-2
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 31,
-----------------------------------------
2001 2000
----------------- ----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,099,223 $ 1,408,158
Investments - Money Market Fund (restricted balance) - 3,301,064
Investments - Certificate of Deposit (restricted balance) - 975,000
Accounts receivable - net of allowance 7,470,152 6,725,810
Inventories 3,147,985 2,778,535
Current portion of deferred tax asset 2,313,000 798,000
Other current assets 2,297,358 1,145,311
------------------- ------------------
TOTAL CURRENT ASSETS 16,327,718 17,131,878
------------------- ------------------
PROPERTY AND EQUIPMENT - net of accumulated depreciation 21,231,954 21,052,513
------------------- ------------------
OTHER ASSETS:
Intangible assets - net of accumulated amortization 66,100,712 68,469,382
Deferred tax asset 2,301,000 3,756,000
Other assets 255,046 415,867
------------------- ------------------
TOTAL OTHER ASSETS 68,656,758 72,641,249
------------------- ------------------
TOTAL ASSETS $ 106,216,430 $ 110,825,640
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,102,235 $ 4,535,118
Current portion of customer deposits 155,943 50,525
Accrued expenses 3,291,923 2,738,930
Unrealized loss on derivatives 973,537 -
Current portion of long term debt 3,560,128 6,821,673
Current portion of obligations under capital leases - 9,064
------------------- ------------------
TOTAL CURRENT LIABILITIES 12,083,766 14,155,310
Long term debt 47,851,386 51,411,510
Long term obligations under capital leases - 16,747
Line of credit - 460,000
Customer deposits 2,443,100 2,453,335
------------------- ------------------
TOTAL LIABILITIES 62,378,252 68,496,902
------------------- ------------------
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, 20,767,670 issued and outstanding
shares at October 31, 2001 and 20,217,774 at October 31, 2000 20,768 20,218
Paid in capital 55,562,599 54,249,016
Accumulated deficit (10,771,652) (11,940,496)
Other comprehensive loss (973,537) -
------------------- ------------------
TOTAL STOCKHOLDERS' EQUITY 43,838,178 42,328,738
------------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 106,216,430 $ 110,825,640
=================== ==================
See notes to consolidated financial statements
F-3
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended
---------------------------------------------------------
October 31, October 31, October 30,
2001 2000 1999
----------------- ----------------- ----------------
SALES $ 67,170,895 $ 35,124,813 $ 31,396,375
COST OF GOODS SOLD 29,803,176 14,682,361 11,742,003
----------------- ----------------- ----------------
GROSS PROFIT 37,367,719 20,442,452 19,654,372
----------------- ----------------- ----------------
OPERATING EXPENSES:
Selling, general and administrative expenses 24,317,316 16,424,730 13,149,023
Advertising expenses 3,629,608 2,753,734 3,257,918
Writedown of computer software - 1,291,719 -
Amortization 2,543,820 801,695 612,057
Other compensation - 118,670 -
----------------- ----------------- ----------------
TOTAL OPERATING EXPENSES 30,490,744 21,390,548 17,018,998
----------------- ----------------- ----------------
INCOME (LOSS) FROM OPERATIONS 6,876,975 (948,096) 2,635,374
----------------- ----------------- ----------------
OTHER INCOME (EXPENSE):
Interest (5,033,760) (1,893,087) (1,030,151)
Debt exit fees and expenses - (405,972) -
Loss on writedown of land - (180,837) -
Miscellaneous 5,836 276,150 -
----------------- ----------------- ----------------
TOTAL OTHER (5,027,924) (2,203,746) (1,030,151)
----------------- ----------------- ----------------
INCOME (LOSS) BEFORE INCOME TAXES 1,849,051 (3,151,842) 1,605,223
INCOME TAX (EXPENSE) BENEFIT (680,207) 769,164 1,793,418
----------------- ----------------- ----------------
NET INCOME (LOSS) $ 1,168,844 $ (2,382,678) $ 3,398,641
----------------- ----------------- ----------------
NET INCOME (LOSS) PER SHARE - BASIC $ 0.06 $ (0.22) $ 0.33
================= ================= ================
NET INCOME (LOSS) PER SHARE - DILUTED $ 0.06 $ (0.22) $ 0.31
================= ================= ================
Weighted Average Shares Used in Computation - Basic 20,447,609 10,992,995 10,279,377
================= ================= ================
Weighted Average Shares Used in Computation - Diluted 20,651,239 10,992,995 10,790,722
================= ================= ================
See notes to consolidated financial statements
F-4
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock Treasury Stock Other
--------------------- Paid in ------------------- Accumulated Comprehensive Comprehensive
Shares Par Value Capital Shares Amount Deficit Loss Total Loss
-----------------------------------------------------------------------------------------------------
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 (50,000) (50) (168,700)(50,000) 168,750 -
Net Loss (2,382,679) (2,382,679)
-----------------------------------------------------------------------------------------------------
Balance, October 31, 2000 20,167,774 20,168 54,249,066 - - (11,940,496) - 42,328,738
Stock Compensation 6,598 7 15,745 15,752
Debt converted to common stock 430,883 431 974,569 975,000
Exercise of stock options 100,000 100 227,100 227,200
Shares purchased under employee
stock plan 62,415 62 96,119 96,182
Net Income 1,168,844 1,168,844 1,168,844
Unrealized loss on derivatives (973,537) (973,537) (973,537)
--------------------------------------------------------------------------------------------------
Balance, October 31, 2001 20,767,670 $ 20,768 $55,562,599 $ - $ - $(10,771,652) $ (973,537) $43,838,178 $195,307
==================================================================================================
See notes to consolidated financial statements
F-5
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIAIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended
----------------------------------------------
October 31, October 31, October 30,
2001 2000 1999
-------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $ 1,168,844 $(2,382,678) $ 3,398,641
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 3,690,675 2,083,204 1,489,384
Amortization 2,543,820 801,695 612,057
Increase in deferred tax asset (60,000) (769,164) (1,793,418)
Gain on settlement of note receivable - (295,000) -
Loss on disposal of property and equipment 56,962 101,499 72,315
Non cash compensation 15,752 118,670
Changes in assets and liabilities (net of effect of acquisitions):
Accounts receivable (744,342) 93,831 (250,476)
Inventories (369,450) 559,824 (720,525)
Other current assets (1,152,046) (163,905) (558,998)
Other assets 160,821 80,218 (1,466,274)
Accounts payable (432,883) 83,972 435,578
Customer deposits 95,184 76,651 (225,038)
Accrued expenses 574,839 1,043,446 (253,500)
-------------- -------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,548,176 1,432,263 739,746
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (3,827,225) (3,680,793) (2,115,945)
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 3,301,064 1,657,493 -
Purchase of Money Market Investment for pay-off of remaining bond issuance - (3,301,064) -
Sale (Purchase) of Certificate of Deposit securing outstanding debt 975,000 (975,000)
Proceeds from sale of fixed assets 31,700 329,550 113,752
Collection of note receivable - 1,270,000 -
Cash used for acquisitions - net of cash acquired (328,550) (10,330,062) (2,023,610)
-------------- -------------- --------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 151,989 (19,155,300) (4,025,803)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit 3,040,000 5,658,208 2,905,999
Proceeds from debt 35,067,765 1,278,420
Payment on line of credit (3,500,000) - -
Principal payments of debt (5,872,482) (726,307) (780,355)
Principal payment of debt relating to refinancing - (21,246,739) -
Exercise of stock options 227,200 - 87,740
Sale of common stock 96,182 11,250 -
-------------- -------------- --------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (6,009,100) 18,764,177 3,491,804
-------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (308,935) 1,041,140 205,747
CASH AND CASH EQUIVALENTS - Beginning of year 1,408,158 367,018 161,271
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS - End of year $ 1,099,223 $ 1,408,158 $ 367,018
============== ============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest $ 4,421,322 $ 1,579,381 $ 852,638
============== ============== ==============
Cash paid for taxes $ 301,000 $ 118,503 $ -
============== ============== ==============
NON-CASH FINANCING AND INVESTING ACTIVITIES:
Equipment acquired under capital leases $ - $ 145,844 $ 212,315
============== ============== ==============
Debt converted to common stock $ 975,000 $ - $ -
============== ============== ==============
See notes to consolidated financial statements
F-6
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS OF THE COMPANY
Vermont Pure Holdings, Ltd. (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.
2. 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 Company Co. Inc. and Adirondack
Coffee Services, Inc. The Company's subsidiaries are wholly
owned. All intercompany profits, transactions, and balances have
been eliminated.
b. 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.
c. Accounts Receivable - Accounts receivable are presented net of
allowance for doubtful accounts.
d. 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.
e. Property and Equipment - Property and equipment are stated at
cost. Depreciation is calculated on the straight-line method over
the estimated useful lives of the assets, which range from three
to ten years for equipment, and from ten to 40 years for
buildings and improvements.
f. 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.
g. Securities Issued for Services - The Company follows the
accounting treatment prescribed by Accounting Principles Board
Opinion No.25 ("Accounting for Stock Issues to Employees") when
accounting for stock-based compensation granted to employees and
directors. It provides the required pro forma disclosures as if
the fair value method
F-7
under Statement of Financial Accounting Standards No. 123 ("SFAS
No.123"), "Accounting for Stock Based Compensation" was adopted.
Any stock-based compensation awards to non-employees are
accounted for using the provisions of SFAS No. 123.
h. 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 during each period that
income is reported. In periods that the Company reports a loss,
potential common shares are not included in the diluted earnings
per share calculation since the inclusion of those shares in the
calculation would be anti-dilutive.
i. Advertising Expenses - The Company expenses advertising costs at
the time that the advertising begins to run with the exception of
advertising from which it derives direct responses from
customers. The Company expenses direct response advertising,
which consists of yellow page advertising, over a period of
twelve months consistent with its expected period of future
benefit based on historical responses. Prepaid advertising at
October 31, 2001 and 2000 was $202,000 and $163,000,
respectively.
j. 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.
k. Customer Deposits - Customers receiving home or office delivery
of water pay a deposit for the water bottle upon receipt, which
is refunded when the bottle 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.
l. 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.
F-8
m. 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.
n. 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 based on the prevailing market interest rates.
o. 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, 2001, the Company believes
that there has been no impairment of its long-lived assets.
p. Revenue Recognition - The Company adopted the guidance issued
under United States Securities and Exchange Commission Staff
Accounting Bulletin No. 101 ("SAB No.101"), "Revenue Recognition
in Financial Statements in its fiscal 2001 year. Adoption of the
pronouncement had no material effect on the Company's Financial
Statements. Revenue is recognized when products are delivered to
customers through the Company's home and office distribution
channel. For consumer retail product, revenue is recognized upon
shipment or delivery of the product based on the F.O.B.
arrangements with the customer.
q. New Accounting Pronouncements
(i) In July 2001 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 141,
"Business Combinations," and SFAS No.142, "Goodwill and Other
Intangible Assets." SFAS 141 is effective for all business
combinations completed after June 30,2001. SFAS 142 is
effective for fiscal years beginning after December 15, 2001
with provisions for early adoption. However, the Company
intends to adopt the new standard for fiscal year 2002. With
the adoption of SFAS No. 142, the Company will discontinue the
periodic amortization of existing goodwill and test the
remaining value of relevant intangible assets for possible
impairment within six months, and periodically thereafter,
based on the required valuation criteria. Based on the value
of intangible assets as of October 31, 2001, application of
the non-amortization provisions would result in a reduction of
F-9
expenses of $2.3 million in the first full fiscal year in
which they are applied. The new pronouncements require
business combinations after June 30, 2001 to be accounted for
using the purchase method of accounting and outlines new
criteria for purchase price allocation. Goodwill acquired
after June 30, 2001 will not be amortized. No material
transactions were completed during the year after June 30,
2001.
(ii) The Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board took definitive action on two
issues during 2001 that potentially effect the Company's
accounting policies. The issues relate to "Accounting for
Certain Sales Incentives" (EITF 00-14) and "Vendor Income
Statement Characterization of Consideration Paid to the
Reseller of the Vendors Products" (EITF 00-25). The Company
plans to implement these pronouncements in the first quarter
of its 2002 fiscal year but has not yet determined the impact
that it will have on its consolidated financial statements.
(iii) The Company has adopted SFAS No. 133 and No. 137 "Accounting
for Derivative Instruments and Hedging Activities" for the
year ended October 31, 2001. SFAS No. 133 establishes a new
model for accounting for derivatives and hedging instruments
and supersedes and amends a number of existing standards. The
Company periodically executes interest rate swaps as part of
its strategy to curtail its interest rate risk. Such
instruments are considered hedges under SFAS No. 133 and 137.
Moreover, since the instrument is intended to hedge against
variable cash flows, it is considered a cash flow hedge. As a
result, the change in the fair value of the derivative will be
recognized as comprehensive income (loss) until the hedged
item is recognized in earnings. The Company entered into three
such instruments during the year, fixing $16 million of its
senior term debt. Cumulatively, the fair value of the
Company's three outstanding swaps decreased $973,537 for the
twelve months ending October 31, 2001.
(iv) In August 2001, the Financial Accounting Standards Board
("FASB") issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long Lived Assets." SFAS No. 144 supercedes
SFAS No. 121, "Accounting for the Impairment of Long Lived
Assets and Assets to be Disposed of" and the accounting and
reporting provisions of Accounting Principles Board Opinion
No. 30 "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." SFAS No. 144 also amends Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," to
eliminate the exception to consolidation for a subsidiary for
which control is likely to be temporary. SFAS No.144 will be
effective for fiscal years beginning after December 15, 2001.
F-10
The most significant changes made by SFAS No. 144 are (1)
goodwill is removed from its scope and therefore, it
eliminates the requirements of SFAS 121 to allocate goodwill
to long lived assets to be tested for impairment, and (2) it
describes a probability-weighted cash flow estimation approach
to apply to situations in which alternative course of action
to recover the carrying amount of long lived assets are under
consideration or a range is estimated for the amount of
possible future cash flows.
The Company is required to adopt SFAS No. 144 for its fiscal
2003 year. It has not yet determined the effect that the
pronouncement will have on its consolidated financial position
or results of operations.
3. CASH EQUIVALENTS
The Company maintains a money market account and a certificate of
deposit with a local financial institution. The balances as of October
31, 2001 were $ 394,215 and $ 252,157 respectively. These amounts were
treated as cash equivalents for financial reporting purposes.
4. ACCOUNTS RECEIVABLE
The Company reduces its receivables by an allowance for future
uncollectible accounts. The reconciliation of these balances is as
follows:
Year Ended
----------------------------------------------------
October 31, October 31, October 30,
Allowance for Doubtful Accounts: 2001 2000 1999
----------------- ---------------- -----------------
Beginning Balance $732,133 $348,167 $307,020
Additions Charged to Expenses 522,004 547,645 187,113
Deductions (740,508) (163,679) (145,966)
----------------- ---------------- -----------------
Ending Balance $513,629 $732,133 $348,167
================= ================ =================
5. PROPERTY AND EQUIPMENT
October 31,
----------------------------
Life 2001 2000
----------- -------------
Land, buildings, and improvements...10 - 40 yrs. $ 5,722,756 $ 5,631,785
Machinery and equipment.... ........ 3 -10 yrs. 24,358,545 21,964,103
Equipment held under capital leases...3 -10 yrs. - 30,067
---------- ----------
30,081,301 27,625,955
Less accumulated depreciation............................ 8,849,347 6,573,442
---------- ----------
$ 21,231,954 $21,052,513
========== ===========
F-11
6. INTANGIBLE ASSETS
October 31,
---------------------
Life 2001 2000
-------- ----------- -------------
Goodwill 30 yrs. $69,799,534 $69,654,383
Covenants not to compete 5 yrs. 435,599 405,599
Customer lists 3 yrs. 1,146,661 1,146,661
Other Various 105,754 105,755
----------- -------------
$71,487,548 $71,312,398
Less accumulated amortization 5,386,836 2,843,016
----------- -------------
$66,100,712 $68,469,382
=========== =============
7. ACCRUED EXPENSES
October 31,
---------------------------------------
2001 2000
------------- -----------
Advertising and promotion $ 85,275 $ 153,627
Payroll and vacation 1,343,533 974,792
Income taxes 300,000 345,899
Capital expenses - 307,428
Interest 810,413 386,307
Miscellaneous 752,704 570,877
------------ -----------
$ 3,291,925 $ 2,738,930
============ ===========
8. DEBT
a) Senior Debt - The Company entered into a loan agreement with Webster
Bank of Waterbury, Connecticut effective October 5, 2000. The financing
provides for a $31,000,000 term loan. The 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 balance as of October 31, 2001 was $28,500,000.
The commitment also provides for a $5,000,000 working capital line of
credit for operating capital, capital expenditures, and acquisitions.
The Company had no balances against this facility as of October 31,
2001. There is a separate limit within the line for letters of credit.
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 (4.1% at
October 31, 2001) 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.
F-12
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.
c) Other Long Term Debt - The Company's other long term debt is as
follows:
October 31, October 30,
2001 2000
-------------- -----------------
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 prperty.............. $ 254,732 $ 287,250
Bonds, principal payable on November 1, 2000; 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 certificate of
deposit................................................ - 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....................... 56,782 201,745
-------------- -----------------
311,514 4,633,183
Less current portion.................................... 60,128 4,321,673
-------------- -----------------
$ 251,386 $ 311,510
============== =================
* repaid during the year ended October 31, 2001
F-13
d) Annual maturities of long term debt are summarized as follows:
Senior Subordinated Other Total
Current Portion $3,500,000 - $ 60,128 $3,560,128
---------- ----------- -----------
Long Term Portion
Year Ending Oct. 31,
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 46,537 7,546,537
2006 5,500,000 4,000,000 49,122 9,549,122
2007 7,000,000 7,000,000 44,060 14,044,060
Thereafter 0 6,600,000 25,745 6,625,745
------------ ----------- ------------ ------------
Long Term Portion $25,000,000 $22,600,000 $ 251,386 $47,851,386
------------ ----------- ------------ ------------
Total Debt $28,500,000 $22,600,000 $ 311,514 $51,411,514
----------- ----------- ----------- -----------
9. INTEREST RATE HEDGES
a) On November 3, 2000, April 2, 2001 and July 24, 2001, the
Company entered into separate three year "swap" agreements
with Webster Bank to fix a total of $16,000,000 of its senior
debt with the bank. The agreements fix the variable LIBOR rate
portion of the debt at 6.57%, 5.28% and 5.00%, respectively.
Under the Company's loan agreement with the bank, the current
applicable margin is 1.75% resulting in a total fixed rate of
8.32%, 7.03% and 6.75% for each respective agreement for the
contract period. The margin is subject to change based on the
Company's performance as outlined in the loan agreement with
Webster Bank.
b) The Company adopted SFAS No. 133 and No. 137 on November 1,
2001. Such instruments are considered hedges under SFAS No.
133 and 137. Since the instrument is intended to hedge against
variable cash flows, it is considered a cash flow hedge. As a
result, the change in the fair value of the derivative will be
recognized as comprehensive income (loss) until the hedged
item is recognized in earnings. Cumulatively, the fair value
of the Company's three outstanding swaps decreased $973,537
during the year.
10. 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.
F-14
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 2001 and 2000, 183,103
and 870,000 options were issued under this plan, respectively.
The following table illustrates the Company's issuances of stock
options and outstanding stock option balances during the last three
fiscal years:
Weighted-
Option Average
(Shares) Exercise Price
---------------------------------
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
---------------------------------
Granted 183,103 3.12
Exercised (100,000) 2.27
Expired (104,000) 1.94
--------------------------------
Balance at October 31, 2001 2,668,321 $2.70
===========================
The following table summarizes information pertaining to outstanding
stock options as of October 31, 2001:
Weighted Weighted
Exercise Remaining Average Average
Price Outstanding Contractual Exercise Exercisable Exercise
Range Options Life Price Options Price
- ------------------------------------------------------------------------------------------------------
$2.19-$2.50 1,297,000 4.18 $2.47 1,228,000 $2.47
$2.81-$3.38 1,256,321 7.49 3.19 430,452 3.11
$3.50-$4.25 115,000 6.98 3.76 39,800 3.87
-----------------------------------------------------------------------------------
2,668,321 5.86 $2.70 1,698,252 $2.51
-----------------------------------------------------------------------------------
Outstanding options include options issued under the 1993 Plan, the
1998 Plan and non-plan options. There were 1,698,252, 1,572,528, and
1,485,000 options exercisable at October 31, 2001, October 31, 2000,
and October 30, 1999, respectively.
F-15
The weighted average fair value of the options granted in 2001, 2000,
and 1999 using the Black-Scholes option pricing model were $2.29,
$1.63, and $2.11 per share, respectively.
11. EMPLOYEE STOCK PURCHASE PLAN
On June 15, 1999 the Company's shareholders approved the "Vermont Pure
Holdings, Ltd. 1999 Employee Stock Purchase Plan." On January 1, 2001,
employees commenced participation in the plan. The total number of the
Company's common shares issued during the year under the plan was
62,415.
12. ACCOUNTING FOR STOCK-BASED COMPENSATION
During 2000, the Board of Directors voted to extend the exercise period
for the options of the estate of a deceased employee and two directors
that were leaving the Board. Consequently, compensation of $118,670 was
recorded, representing the aggregate difference in market price on the
date of the extension over the options exercise price.
The Company has elected to follow Accounting Principles Board Opinion
No.25, "Accounting for Stock Issues to Employees." 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 $462,783 and $.02 in 2001;
($2,806,851) and ($.26) per share in 2000; and $3,307,489 and $.32 per
share in 1999. Assumptions used for each of the three years were:
expected dividend yield of 0%; risk free interest of 5.7% and expected
life of 5 years. Expected volatility assumptions used were: 91% in
2001, 51% in 2000, and 79% in 1999.
13. RETIREMENT PLAN
The Company has a defined contribution plan which meets the
requirements of section 401(k) of the Internal Revenue Code. All
employees of the Company who are at least twenty-one years of age are
eligible to participate in the plan. The plan allows employees to defer
a portion of their salary on a pre-tax basis and the Company
contributes 25% of amounts contributed by employees up to 6% of their
salary. Company contributions to the plan amounted to $ 94,000, $
44,000, and $34,000 for the years ended October 31, 2001, October 31,
2000, and October 30, 1999, respectively.
F-16
14. OPERATING LEASES
Future minimum rental payments over the terms of various lease
contracts are approximately as follows:
2002 1,509,000
2003 1,458,000
2004 1,250,000
2005 1,141,000
Thereafter 4,016,000
Rent expense under all operating leases was $1,003,479, $533,974, and
$413,217 for fiscal years ending October 31, 2001, October 31, 2000,
and October 30, 1999, respectively.
15. LEGAL PROCEEDINGS
a) Trademark Infringement During 2001, the Company brought a
civil suit against another company alleging that it was
infringing on the Company's rights in a trademark. The parties
negotiated a settlement in the matter in which the other
company agreed to buy the trademark for $250,000 and the
Company has agreed to dismiss the civil suit. The settlement
was finalized in January 2002.
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 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.
In an order dated April 11, 2001, the District Court granted
Descartes' motion to dismiss the case. Subsequently, the
parties have agreed to arbitrate the matter in the state of
Florida at a time and place that has yet to be determined.
16. RELATED PARTY TRANSACTIONS
a) Directors and Officers
-------------------------
Three of the Company's major shareholders (former Crystal Rock
shareholders) have employment contracts with the Company through
October 5, 2005. Two are also directors. One contract entitles the
shareholder to annual compensation of $25,000 as well as a leased
Company vehicle. The other two contracts entitle the respective
shareholders to annual compensation of $250,000 and other bonuses and
benefits. The trustee of the Baker family trusts, which is a major
F-17
shareholder of the Company, is also a director. Such trustee is also a
principal in a law firm, to which the Company paid legal fees of
$57,000 in 2001 and $10,000 in 2000.
In addition, the Company paid consulting fees to a director of $22,000
in each of 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 Next
5 Years 5 Years
-------- --------
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. During 2001, the
Company paid $207,861 for service, $24,660 for software, and $61,790
for hardware. As of October 31, 2001, the Company holds a note from CDS
entered into August 1, 1998 for the principal amount of $120,000 with
accrued interest of $33,150. The note is scheduled to mature August 15,
2003. During 2001, the Company's share of CDS losses decreased its
equity investment in CDS from $70,000 to $14,000, under the equity
method of accounting..
F-18
17. INCOME TAXES
The Company has approximated $11 million of available loss
carryforwards at October 31, 2001 expiring from 2005 through 2018.
The major deferred tax asset (liability) items at October 31, 2001 and
October 31, 2000 are as follows:
October 31,
-----------------------------
2001 2000
------------ -------------
Accounts receivable allowance..........$ 206,000 $ 209,000
Amortization........................... 1,123,000 353,000
Depreciation........................... (1,440,000) (1,228,000)
Other.................................. 105,000 186,000
Net operating loss carryforwards....... 4,620,000 6,007,000
--------- ---------
$4,614,000 $5,527,000
Valuation allowance.................... - 973,000
--------- ----------
Deferred tax asset recorded........... $4,614,000 $4,554,000
========= =========
The income tax expense (benefit) differs from the amount computed by
applying the statutory tax rate to net income (loss) before income tax
as follows:
Year Ended
--------------------------------------
October 31, October 30, October 31,
2001 2000 1999
--------- ------------ -----------
Income tax benefit (expense) computed
at the statutory rate........................$ (628,000) $ 1,072,000 $ (546,000)
Effect of permanent differences............... (35,000) (22,000) (7,000)
Effect of temporary differences............... (250,000) 5,000 115,000
Tax benefit of net operating losses.......... - - 438,000
Losses for which no benefit recorded..... - (1,055,000) -
Federal alternative minimum tax................ (65,000) - -
State income taxes............................. (535,000) - -
Other.......................................... (140,000) - -
Decrease in valuation allowance................. 973,000 769,000 1,793,000
---------- ------------ -------------
Income tax benefit (expense)............... $ (680,000) $ 769,000 $ 1,793,000
========== ============ =============
F-19
The following is a composition of income tax expense:
Year Ending:
--------------------------------------------------
October 31, October 31, October 30,
----------------- --------------- ----------------
2001 2000 1999
----------------- --------------- ----------------
Current:
Federal 66,000 - -
State 674,000 - -
----------------- --------------- ----------------
Total current payable 740,000 - -
----------------- --------------- ----------------
Deferred:
Federal (60,000) (769,000) (1,793,000)
State - - -
----------------- --------------- ----------------
Total deferred tax expense (benefit) (60,000) (769,000) (1,793,000)
----------------- --------------- ----------------
----------------- --------------- ----------------
Total Income tax expense (benefit) 680,000 (769,000) (1,793,000)
================= =============== ================
18. MAJOR CUSTOMER AND CUSTOMER COMMITMENTS
The Company's sales to a single customer, located in the greater
metropolitan New York City area, were 16% of the total sales for the
year ended October 31, 1999.
19. EARNINGS PER SHARE
As required by SFAS 128, the Company considers outstanding in-the-money
stock options as potential common stock in its calculation of diluted
earnings per share and uses the treasury stock method to calculate the
applicable number of shares. The following calculation provides the
reconciliation of the denominators used in the calculation of basic and
fully diluted earnings per share:
Year Ended
----------------- ----------------- -----------------
October 31, October 31, October 30,
2001 2000 1999
----------------- ----------------- -----------------
Net Income (Loss) $1,168,844 $(2,382,678) $3,398,641
================= ================= =================
Denominator:
Basic Weighted Average Shares Outstanding
20,447,609 10,992,995 10,279,377
Effect of Stock Options 203,630 - 511,345
----------------- ----------------- -----------------
Diluted Weighted Average Shares Outstanding
20,651,239 10,992,995 10,790,722
================= ================= =================
Basic Earnings Per Share $.06 $(.22) $.33
Diluted Earnings Per Share $.06 $(.22) $.31
For the year ended October 31, 2000 potentially dilutive securities
have not been included in the calculation of the denominator for the
F-20
purposes of computing diluted earnings per share since the Company had
a net loss that year and the inclusion of additional potential shares
of common stock would have been anti-dilutive. The additional shares
issued if outstanding options were exercised net of repurchased shares
at the yearly average price amount to 402,401.
20. UNAUDITED QUARTERLY FINANCIAL DATA
The Company's unaudited quarterly financial data for the last two
fiscal years is as follows:
Fiscal 2001 For the quarter ending:
-----------------------
(000's of $ except earnings per January 31, April 30, July 31, October 31,
share) 2001 2001 2001 2001
---------------- ----------------- ---------------- ----------------
Net Sales $14,219 $15,546 $18,974 $18,432
Gross Profit $7,991 $8,619 $10,486 $10,273
Net Income $24 $74 $1,009 $62
Earnings per Share:
Basic $.00 $.00 $.05 $.00
Diluted $.00 $.00 $.05 $.00
Fiscal 2000 For the quarter ending:
-----------------------
(000's of $ except earnings per January 29, April 30, July 31, October 31,
share) 2000 2000 2000 2000
---------------- ----------------- ---------------- ----------------
Net Sales $6,424 $8,225 $10,158 $10,318
Gross Profit 4,112 4,969 5,483 5,854
Net (Loss) (91) (88) (59) (2,144)
(Loss) per Share:
Basic $.00 $(.01) $(.01) $(.20)
Diluted $.00 $(.01) $(.01) $(.20)
21. 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, 2001, the Company had cash in deposits exceeding
the insured limit by approximately $700,000.
22. SUBSEQUENT EVENTS
------------------
Acquisition Financing
----------------------
On November 1, 2001, the Company acquired substantially all of the
assets of Iceberg Springs Water, Inc. for total consideration valued at
$5,700,000, of which $600,000 was paid in cash, 4,395,373 in debt and
assumed liabilities and $704,627 by the issuance of 213,912 shares of
the Company's common stock. The acquired assets were merged into the
Company's home and office operations in Connecticut.
F-21
Tax Audit
On October 31, 2001 the Company was in the process of being audited by
the State of New York (the "State") concerning compliance with the
State's sales and use tax regulations for the period March 1, 1997 to
August 31, 2000. The Company conducts a significant amount of its
business in the State. The State has informed the Company that it may
have underpaid these taxes by $282,000. The Company does not believe
that this estimate is accurate and is working with the State to
ascertain the amount, if any, that is due.
To date, no additional tax has been assessed. If or when it is probable
that an estimated assesment is due, the Company will reconize the
liability. .
F-22
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 April 9, 2002.
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 April 9, 2002.
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 April 9, 2002.
26
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 April 9, 2001.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
a) The Company did not file any reports on Form 8-K during the quarter
ended October 31, 2001.
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:
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.)
27
Exhibit
Number Description
------- --------------------------------------------------------------
3.1 Certificate of Incorporation of the Company. (Incorporated by
reference to Exhibit B to Appendix A to the Proxy Statement
included in the S-4 Registration Statement.)
3.2 Certificate of Amendment of Certificate of Incorporation of
the Company filed October 5, 2000. (Incorporated by reference
to Exhibit 4.2 of the Merger 8-K.)
3.3 By-laws of the Company. (Incorporated by reference from
Exhibit 3.3 to Form 10-Q for the Quarter Ending July 31,
2001.)
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.)
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.)
28
Exhibit
Number Description
------- --------------------------------------------------------------
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.)
10.14 Amended and Restated Loan and Security Agreement between the
Company and Webster Bank dated November 1, 2001.
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. (Incorporated 10.16 by reference to Exhibit
10.16 of Form 10-K for the year ending October 31, 2000.)
29
Exhibit
Number Description
------- --------------------------------------------------------------
10.17 Subordinated Note from the Company to Joan Baker dated October
5, 2000. (Incorporated by reference to Exhibit 10.17 of Form
10-K for the year ending October 31, 2000.)
10.18 Subordinated Note from the Company to John B. Baker dated
October 5, 2000. (Incorporated 10.18 by reference to Exhibit
10.18 of Form 10-K for the year ending October 31, 2000.)
10.19 Subordinated Note from the Company to Peter K. Baker dated
October 5, 2000. (Incorporated by reference to Exhibit 10.19
of Form 10-K for the year ending October 31, 2000.)
10.20 Subordinated Note from the Company to Ross S. Rapaport,
Trustee, dated October 5, 2000. (Incorporated by reference to
Exhibit 10.20 of Form 10-K for the year ending October 31,
2000.)
10.21 Reaffirmation of Subordination and Pledge Agreement from Henry
E. Baker to Webster Bank dated November 1, 2001.
10.22 Reaffirmation of Subordination and Pledge Agreement from Joan
Baker to Webster Bank dated November 1, 2001.
10.23 Reaffirmation of Subordination and Pledge Agreement from John
B. Baker to Webster Bank dated November 1, 2001.
10.24 Reaffirmation of Subordination and Pledge Agreement from Peter
K. Baker to Webster Bank dated November 1, 2001.
10.25 Reaffirmation of Subordination and Pledge Agreement from Ross
S. Rapaport, Trustee, to Webster Bank dated November 1, 2001.
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.
10.27 Term Note from the Company to Webster Bank dated November 1,
2001.
10.28 Amended and Restated Revolving Line of Credit Note between the
Company and Webster Bank.
21 Subsidiaries of the Registrant
23.1 Consent of Independent Auditors
* Relates to compensation
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Vermont Pure Holdings, Ltd. has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
VERMONT PURE HOLDINGS, LTD.
By: /s/ Timothy G. Fallon
-----------------------------------------------------
Dated: January 29, 2002 Timothy G.Fallon, Chief Executive Officer, President,
and Chairman of the Board of Directors
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 Chief Executive Officer and Chairman of the
- --------------------- Board of Directors January 29, 2002
Timothy G. Fallon
/s/ Henry E. Baker Director, Chairman Emeritis January 29, 2002
- ---------------------
Henry E. Baker
/s/ Peter K. Baker President and Director January 29, 2002
- -------------
Peter K. Baker
/s/Phillip Davidowitz Director January 29, 2002
- ---------------------
Phillip Davidowitz
/s/ Robert C. Getchell Director January 29, 2002
- ----------------------
Robert C. Getchell
/s/ Carol R. Lintz Director January 29, 2002
- ------------------
Carol R. Lintz
/s/ David R. Preston Director January 29, 2002
- ---------------------
David R. Preston
/s/ Ross S. Rapaport Director January 29, 2002
- --------------------
Ross S. Rapaport
/s/ Norman E. Rickard Director January 29, 2002
- ---------------------
Norman E. Rickard
January 29,2002
/s/ Beat Schlagenhauf Director
- ---------------------
Beat Schlagenhauf
/s/ Bruce S. MacDonald Chief Financial Officer and Secretary January 29,2002
- ----------------------
Bruce S. MacDonald
31
EXHIBITS TO VERMONT PURE HOLDINGS, LTD.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2001
Exhibits Filed Herewith
Exhibit
Number Description
------- ------------------
10.14 Amended and Restated Loan and Security Agreement
between the Company and Webster Bank dated November
1, 2001
10.21 Reaffirmation and Subordination and Pledge Agreement
from Henry E. Baker to Webster Bank dated November 1,
2001.
10.22 Reaffirmation of Subordination and Pledge Agreement
from Joan Baker to Webster Bank dated November 1,
2001.
10.23 Reaffirmation of Subordination and Pledge Agreement
from John B. Baker to Webster Bank dated November 1,
2001.
10.24 Reaffirmation of Subordination and Pledge Agreement
from Peter K. Baker to Webster Bank dated November 1,
2001.
10.25 Reaffirmation of Subordination and Pledge Agreement
from Ross S. Rapaport, Trustee to Webster Bank dated
November 1, 2001.
10.27 Term Note from the Company to Webster Bank dated
November 1, 2001.
10.28 Amended and Restated Revolving Line of Credit Note
between the Company and Webster Bank.
21 Subsidiaries of the Registrant
23.1 Consent of Independent Auditors
32