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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended July 31, 2002
Commission File No. 000-31797
VERMONT PURE HOLDINGS, LTD.
(Exact name of registrant as specified in its charter)
Delaware 03-0366218
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Route 66; PO Box C; Randolph, VT 05060
(Address of principal executive offices) (Zip Code)
(802) 728-3600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ____
--------------- ------------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class September 11, 2002
----- -------------------
Common Stock, $.001 Par Value 21,168,927
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
INDEX
Page Number
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of
July 31, 2002 (unaudited) and
October 31, 2001 3
Consolidated Statements of Operations
(unaudited) for the Three Months and Nine
Months ended July 31, 2002 and 2001 4
Consolidated Statements of Cash Flows
(unaudited) for the Nine Months ended
July 31, 2002 and 2001 5
Notes to Consolidated Financial Statements
(unaudited) 6-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 13-20
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 21-22
Part II - Other Information 23-27
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures and Certifications 28-30
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 31, October 31,
2002 2001
------------------- ------------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 371,990 $ 1,099,223
Accounts receivable - net of allowance 10,971,091 7,470,152
Inventories 4,603,430 3,147,985
Current portion of deferred tax asset 2,112,978 2,313,000
Other current assets 1,777,037 2,297,358
------------------- ------------------
TOTAL CURRENT ASSETS 19,836,526 16,327,718
------------------- ------------------
PROPERTY AND EQUIPMENT - net of accumulated depreciation 22,639,050 21,231,954
------------------- ------------------
OTHER ASSETS:
Goodwill 70,427,887 65,724,781
Other intangible assets - net of accumulated amortization 706,140 375,931
Deferred tax asset 1,255,618 2,301,000
Other assets 234,581 255,046
------------------- ------------------
TOTAL OTHER ASSETS 72,624,226 68,656,758
------------------- ------------------
TOTAL ASSETS $ 115,099,802 $ 106,216,430
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,539,793 $ 4,102,235
Current portion of customer deposits 178,075 155,943
Accrued expenses 3,817,142 3,291,923
Unrealized loss on derivatives 851,105 973,537
Line of credit 1,916,628 -
Current portion of long term debt 4,768,509 3,560,128
------------------- ------------------
TOTAL CURRENT LIABILITIES 17,071,252 12,083,766
Long term debt - net of current portion 47,760,235 47,851,386
Customer deposits 2,789,849 2,443,100
------------------- ------------------
TOTAL LIABILITIES 67,621,336 62,378,252
------------------- ------------------
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, 21,168,927 issued and outstanding
shares at July 31, 2002 and 20,767,670 at October 31, 2001 21,169 20,768
Paid-in capital 56,848,470 55,562,599
Accumulated deficit (8,540,068) (10,771,652)
Other comprehensive loss (851,105) (973,537)
------------------- ------------------
TOTAL STOCKHOLDERS' EQUITY 47,478,466 43,838,178
------------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 115,099,802 $ 106,216,430
=================== ==================
See notes to consolidated financial statements
3
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended Nine months ended
July 31, July 31,
------------------------------------- ------------------------------------
2002 2001 2002 2001
----------------- ----------------- ---------------- ----------------
(unaudited) (unaudited)
SALES $ 21,578,891 $ 18,171,586 $ 53,801,750 $ 47,197,468
COST OF GOODS SOLD 10,783,602 8,488,534 26,211,873 21,643,564
----------------- ----------------- ---------------- ----------------
GROSS PROFIT 10,795,289 9,683,052 27,589,877 25,553,904
----------------- ----------------- ---------------- ----------------
OPERATING EXPENSES:
Selling, general and administrative 6,691,147 6,453,774 18,915,101 17,716,632
Advertising 453,992 339,817 1,152,386 926,902
Amortization 58,050 636,594 174,152 1,905,905
----------------- ----------------- ---------------- ----------------
TOTAL OPERATING EXPENSES 7,203,189 7,430,185 20,241,639 20,549,439
----------------- ----------------- ---------------- ----------------
INCOME FROM OPERATIONS 3,592,100 2,252,867 7,348,238 5,004,465
----------------- ----------------- ---------------- ----------------
OTHER INCOME (EXPENSE):
Interest (1,186,774) (1,241,445) (3,569,380) (3,903,481)
Miscellaneous (263,500) (2,380) (59,550) 5,836
----------------- ----------------- ---------------- ----------------
TOTAL OTHER EXPENSE (1,450,274) (1,243,825) (3,628,930) (3,897,645)
----------------- ----------------- ---------------- ----------------
INCOME BEFORE INCOME TAXES 2,141,826 1,009,042 3,719,308 1,106,820
INCOME TAX EXPENSE (850,028) - (1,487,724) -
----------------- ----------------- ---------------- ----------------
NET INCOME $ 1,291,798 $ 1,009,042 $ 2,231,584 $ 1,106,820
----------------- ----------------- ---------------- ----------------
NET INCOME PER SHARE - BASIC $ 0.06 $ 0.05 $ 0.11 $ 0.05
================= ================= ================ ================
NET INCOME PER SHARE - DILUTED $ 0.06 $ 0.05 $ 0.10 $ 0.05
================= ================= ================ ================
Weighted Average Shares Used in Computation - Basic 21,118,235 20,516,477 21,091,729 20,307,411
================= ================= ================ ================
Weighted Average Shares Used in Computation - Diluted 21,978,485 20,882,987 22,111,467 20,465,869
================= ================= ================ ================
See notes to consolidated financial statements
4
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended
July 31,
-------------------------------
2002 2001
-------------- ---------------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,231,584 $ 1,106,820
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 3,209,817 2,670,509
Amortization 174,152 1,905,905
Decrease in deferred tax asset 1,245,404 -
Gain on disposal of property and equipment (1,225) 59,962
Non cash compensation 52,400 -
Changes in assets and liabilities (net of effect of acquisitions):
Accounts receivable (3,500,939) (1,582,115)
Inventory (1,455,445) (211,368)
Other current assets 550,426 (192,606)
Other assets 20,465 (142,755)
Accounts payable 1,437,558 (1,053,411)
Customer deposits 173,509 326,742
Accrued expenses 525,217 (331,000)
-------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,662,923 2,556,683
-------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (3,993,938) (2,955,329)
Proceeds from sale of money market investment - 3,301,064
Proceeds from sale of fixed assets 27,750 31,700
Cash used for acquisitions - net of cash acquired (4,987,073) (120,000)
-------------- ---------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (8,953,261) 257,435
-------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit 3,865,706 3,240,000
Proceeds from debt 4,200,000 -
Principal payments of debt (5,031,847) (6,737,217)
Exercise of stock options 308,349 -
Sale of common stock 220,897 339,131
-------------- ---------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 3,563,105 (3,158,086)
-------------- ---------------
NET DECREASE IN CASH (727,233) (343,968)
CASH AND CASH EQUIVALENTS - Beginning of year 1,099,223 1,408,158
-------------- ---------------
CASH AND CASH EQUIVALENTS - End of period $ 371,990 $ 1,064,190
============== ===============
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 3,430,164 $ 3,467,987
============== ===============
Cash paid for taxes $ 725,593 $ -
============== ===============
Common Stock in connection with acquisition $ 704,627 $ -
============== ===============
Debt converted to common stock $ - $ 725,000
============== ===============
See notes to consolidated financial statements
5
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
---------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with Form 10-Q instructions and in the opinion
of management contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position,
results of operations, and cash flows for the periods presented. The
results have been determined on the basis of generally accepted
accounting principles and practices applied consistently with the
Annual Report on Form 10-K of Vermont Pure Holdings, Ltd. (the
"Company") for the year ended October 31, 2001.
Certain information and footnote disclosures normally included in
financial statements presented in accordance with generally accepted
accounting principles have been condensed or omitted. The
accompanying consolidated financial statements should be read in
conjunction with the financial statements and notes thereto
incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended October 31, 2001.
2. RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
On April 30, 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 145,
"Rescission of FASB Statement No. 4, 44 and 64, Amendment of FASB
Statement No.13, and Technical Corrections." The rescission of SFAS
No.4, "Reporting Gains and Losses from Extinguishments," and SFAS
No.64, "Extinguishments of Debt made to Satisfy Sinking Fund
Requirements," which amended SFAS No.4, will affect income statement
classification of gains and losses from extinguishment of debt. SFAS
No.4 requires that gains and losses from extinguishment of debt be
classified as an extraordinary item, if material. Under SFAS No. 145,
extinguishment of debt is now considered a risk management strategy by
the reporting enterprise and the FASB does not believe it should be
considered extraordinary under the criteria in APB Opinion No.30,
"Reporting the Results of Operations-Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," unless the debt extinguishment
meets the unusual in nature and infrequency of occurrence criteria in
APB Opinion No. 30. SFAS No. 145 will be effective for fiscal years
beginning after May 15, 2002. Upon adoption, extinguishments of debt
shall be classified under the criteria in APB Opinion No. 30.
In June 2002, the FASB issued SFAS No.146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses
6
financial accounting and reporting for costs associated with exit or
disposal activities and nullified Emerging Issues Task Force Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the
liability is incurred. A fundamental conclusion reached by the FASB in
this statement is that an entity's commitment to a plan, by itself,
does not create a present obligation to others that meets the
definition of a liability. SFAS No. 146 also establishes that fair
value is the objective for initial measurement of the liability. The
provisions of this statement are effective for exit or disposal
activities that are initiated after December 31, 2002, with early
application encouraged. The Company has not yet determined the impact
of SFAS No.146 on its financial position and results of operations, if
any.
3. GOODWILL AND AMORTIZATION
-------------------------
In July 2001, the FASB issued 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. Effective November 1, 2001, the Company elected early adoption of
SFAS No. 142. SFAS No. 142 eliminates the amortization for goodwill and
other intangible assets with indefinite lives. Intangible assets with
lives restricted by contractual, legal, or other means will continue to
be amortized over their useful lives. Goodwill and other intangible
assets not subject to amortization are tested for impairment annually
or more frequently if events or changes in circumstances indicate that
the asset might be impaired. SFAS No. 142 requires a two-step process
for testing impairment. First, the fair value of each reporting unit is
compared to its carrying value to determine whether an indication of
impairment exists. If impairment is indicated, then the implied fair
value of the reporting unit's goodwill is determined by allocating the
unit's fair value to its assets and liabilities (including any
unrecognized intangible assets) as if the reporting unit had been
acquired in a business combination. The amount of impairment for
goodwill and other intangible assets is measured as the excess of its
carrying value over its implied fair value. The Company hired an
independent consultant to conduct the initial test of the carrying
value of its goodwill during the second quarter of fiscal 2002, and, as
a result, the Company concluded that there was no current impairment of
goodwill. In subsequent fiscal years, the Company will conduct an
annual assessment of the carrying value of its goodwill, as required by
SFAS No. 142.
In accordance with SFAS No. 142, the Company discontinued amortization
of goodwill effective November 1, 2001. The pro forma effects of the
adoption of SFAS No. 142 on net income and basic and diluted
earnings per share are as follows:
7
Three Months Ended Nine Months Ended
July 31, July 31,
2002 2001 2002 2001
---- ---- ---- ----
Net income, as reported $1,291,798 $1,009,042 $2,231,584 $1,106,820
Intangible amortization net of $0 tax - 590,028 - 1,770,084
---------- ---------- ---------- ----------
Net income, pro forma $1,291,798 $1,599,070 $2,231,584 $2,876,904
========== ========== ========== ==========
Basic earnings per share:
Net income per share, as reported $.06 $.05 $.11 $.05
Intangible amortization net of $0 tax - .03 - .09
----- ---- ---- ----
Net income per share, pro forma $.06 $.08 $.11 $.14
==== ==== ==== ====
Diluted earnings per share:
Net income per share, as reported $.06 $.05 $.10 $.05
Intangible amortization net of $0 tax - .03 - .09
----- ---- ---- ----
Net income per share, pro forma $.06 $.08 $.10 $.14
==== ==== ==== ====
4. PROMOTIONAL ALLOWANCES
----------------------
Effective February 1, 2001, the Company adopted the provisions of
Emerging Issues Task Force ("EITF") Issue No. 01-09, "Accounting for
Consideration Given by a Vendor to a Customer or a Reseller of the
Vendor's Products." EITF 01-09 codifies and reconciles EITF Issue No.
00-14, "Accounting for Certain Sales Incentives," Issue 3 of Issue No.
00-22, "Accounting for `Points' and Certain Other Time-Based or
Volume-Based Sales Incentive Offers, and Offers for Free Products or
Services to Be Delivered in the Future" and EITF No. 00-25, "Vendor
Income Statement Characterization of Consideration Paid to a Reseller
of the Vendor's Products."
The effect of the adoption of EITF Issue No. 01-09 is as follows:
Three Months Ended July 31, Nine Months Ended July 31,
2002 2001 2002 2001
---- ---- ---- ----
Gross Sales $22,464,293 $18,974,434 $55,839,661 $48,739,591
Promotion ( 885,402) ( 802,848) ( 2,037,911) ( 1,542,123)
---------- ---------- ------------ ------------
Net Sales $21,578,891 $18,171,586 $53,801,750 $47,197,468
=========== =========== =========== ===========
In addition to reducing sales, the adoption of the EITF also resulted
in a reduction of advertising expenses by $2,037,911 and $1,542,123 for
the nine months ended July 31, 2002 and 2001, respectively. Similarly,
advertising expenses for the three month periods ending July 31, 2002
and 2001 decreased by $885,402 and $802,848, respectively. These
reclassifications had no impact on operating income.
8
5. OPERATING LEASES
----------------
During the nine month period ended July 31, 2002, the Company entered
into operating leases, primarily related to vehicles it uses to operate
its business. The total increase in lease payments as a result of these
commitments over the next five years totals approximately $630,000.
6. SEGMENTS
--------
During the first quarter of fiscal 2002, the Company started accounting
for its business in two separate segments, "retail" and "home and
office." Reorganization and integration of operations in fiscal year
2001 has resulted in management's preparation of more detailed
information to evaluate these businesses.
The segments are identifiable based on the types of products and their
distribution channels.
Home and Office - characterized by the sale of five gallon bottles of
water and water coolers delivered by the Company's trucks and
employees, and other products that are sold through this distribution
channel which are ancillary to the primary product, such as office
refreshments.
Retail - characterized by the sale of water in small, portable
containers that are constructed from clear PET plastic. Bottle sizes
range from 8 oz. to 1.5 L. These products are sold to wholesale
beverage distributors, supermarkets and convenience stores.
The Company allocates costs directly when possible and uses various
applicable allocation methods to allocate shared costs such as
insurance. Costs incurred by the holding company have not been
allocated and are accounted for as "Corporate" for the purposes of
reconciling to net income before taxes. There are no inter-segment
revenues for the periods reported.
For the three months ended July 31, 2002 and 2001:
Home & Office Retail Corporate Total
-------------- -------------- ---------------- ----------------
(000's $) 2002 2001 2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ---- ---- ----
Sales 12,852 12,447 8,727 5,725 - - 21,579 18,172
Cost of Goods Sold 4,884 4,532 5,900 3,957 - - 10,784 8,489
---------- ---------- --------- --------- ----------- ----------- ----------- -----------
Gross Profit 7,968 7,915 2,827 1,768 10,795 9,683
Operating Expenses 4,708 5,179 1,694 1,251 801 1,000 7,203 7,430
---------- ---------- --------- --------- ----------- ----------- ----------- -----------
Operating Income 3,260 2,736 1,133 517 (801) (1,000) 3,592 2,253
Interest (Expense) (1,187) (1,242) (1,187) (1,242)
Other Income (263) (2) (263) (2)
---------- ---------- --------- --------- ----------- ----------- ----------- -----------
Income Before Taxes 2,997 2,734 1,133 517 (1,988) (2,242) 2,142 1,009
========== ========== ========= ========= =========== =========== =========== ===========
9
For the nine months ended July 31, 2002 and 2001:
Home & Office Retail Corporate Total
-------------- -------------- ---------------- ----------------
(000's $) 2002 2001 2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ---- ---- ----
Sales 36,335 34,995 17,467 12,202 - - 53,802 47,197
Cost of Goods Sold 13,864 13,434 12,348 8,210 - - 26,212 21,644
---------- ---------- ---------- ---------- ----------- ----------- ------------ -----------
Gross Profit 22,471 21,561 5,119 3,992 27,590 25,553
Operating Expenses 14,252 15,207 3,691 3,079 2,299 2,263 20,242 20,549
---------- ---------- ---------- ---------- ----------- ----------- ------------ -----------
Operating Income 8,219 6,354 1,428 913 (2,299) (2,263) 7,348 5,004
Interest (Expense) (3,569) (3,903) (3,569) (3,903)
Other Income (264) 6 204 (60) 6
---------- ---------- ---------- ---------- ----------- ----------- ------------ -----------
Income Before Taxes 7,955 6,360 1,632 913 (5,868) (6,166) 3,719 1,107
========== ========== ========== ========== =========== =========== ============ ===========
7. MERGERS AND ACQUISITIONS
------------------------
On November 1, 2001, the Company acquired substantially all the assets
of Iceberg Springs Water, Inc. The acquired assets were merged into the
Company's Home & Office operations in Connecticut.
The purchase price paid for Iceberg Springs Water, Inc. is as follows:
Cash $ 4,833,856
Issuance of Common Stock 704,627
-------------
Total $ 5,538,483
=============
Goodwill from the acquisition has been calculated as follows:
Purchase Price $ 5,538,483
Fair Value of Assets Acquired (1,314,481)
Fair Value of Liabilities Assumed 195,373
Acquisition Costs 158,374
-------------
Goodwill $ 4,577,749
=============
The stock price of Vermont Pure for purposes of the acquisition was
$3.294 per share. As a result, the number of Vermont Pure Holdings
common shares issued was 213,912.
The following table summarizes the pro forma consolidated results of
operations (unaudited) of the Company for the three and nine months
ended July 31, 2002 and July 31, 2001 as though the acquisition had
been consummated at the beginning of the periods presented:
10
Three Months Ended Nine Months Ended
-------------------------------- ----------------------------------
July 31, 2002 July 31, 2001 July 31, 2002 July 31, 2001
------------- ------------- ------------- -------------
Total Revenue $21,578,891 $18,936,947 $53,801,750 $49,362,333
Net Income $ 1,291,798 $ 1,076,166 $ 2,231,584 $ 1,285,598
Net Income Per Share - Diluted $ .06 $ .05 $ 0.10 $ .06
Weighted Average Common Shares Outstanding
- - Diluted 21,978,485 20,882,987 22,111,467 20,465,869
============= ============ =============== ===============
8. DEBT
----
During the nine months ended July 31, 2002 the Company borrowed
approximately $3,866,000 from its working capital line of credit with
Webster Bank. As of July 31, 2002 the total obligation outstanding
under this facility was $1,916,628. The line of credit has a limit of
$5,000,000 and matures on October 5, 2002. In addition, letters of
credit totaling $636,264 secured by the line were issued on the
Company's behalf, reducing the availability of the line by that amount.
Webster Bank also agreed to modify its lending agreement with the
Company in order to provide $4,200,000 of additional debt to facilitate
the acquisition of Iceberg Springs Water, Inc. (see note 7).
Based on the Company's 2001 year end results, its applicable margin on
the outstanding facilities from Webster decreased 25 basis points
effective March 1, 2002. On March 15, 2002, the Bank approved an
amendment to the Loan and Security Agreement to allow $1,800,000 of
capital expenditures to be excluded from capital expenditures under the
debt service covenant effective January 30, 2002.
9. COMPREHENSIVE INCOME
The following table summarizes the computations reconciling net income
to comprehensive income for the three months and nine months ended July
31, 2002:
Three Months Ended Nine Months Ended
July 31, 2002 July 31, 2001 July 31, 2002 July 31, 2001
------------- ------------- ------------- -------------
Net Income $1,291,798 $1,009,042 $ 2,231,584 $ 1,106,820
------------------ ---------------- ----------------- ------------------
Other Comprehensive Income
Unrealized (loss) gain on derivatives
designated as cash flow hedges. (134,836) (121,620) 122,432 (505,355)
------------------ ---------------- ----------------- ------------------
Comprehensive Income $ 1,156,962 $ 887,422 $ 2,354,016 $ 601,465
================== ================ ================= ==================
11
10. 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
shares issued under this plan during the nine months ended July 31,
2002 was 62,740.
11. EARNINGS PER SHARE AND WEIGHTED AVERAGE SHARES
----------------------------------------------
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:
Three Months Ended Nine Months Ended
---------------------------------- ----------------------------------------
July 31, 2002 July 31, 2001 July 31, 2002 July 31, 2001
------------- ------------- ------------- -------------
Net Income $ 1,291,798 $ 1,009,042 $ 2,231,584 $ 1,106,820
----------- ----------- ----------- -----------
Denominator:
Basic Weighted Average Shares
Outstanding 21,118,235 20,516,477 21,091,729 20,307,411
Effect of Stock Options 860,250 366,510 1,019,738 158,458
----------- ----------- ----------- -----------
Diluted Weighted Average Shares
Outstanding 21,978,485 20,882,987 22,111,467 20,465,869
---------- ---------- ---------- ----------
Basic Earnings Per Share $.06 $.05 $.11 $.05
Diluted Earnings Per Share $.06 $.05 $.10 $.05
12. TAX SETTLEMENT
On October 31, 2001 the Company was in the process of being audited by
the State of New York (the "State") concerning compliance of 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. On July 15, 2002 the Company paid $189,000 to
the State of New York in full settlement of the inquiry.
13. SUBSEQUENT EVENTS
Compliance with Financial Covenants of the Company's Bank Agreement
The Company's Loan and Security agreement requires that it be in
compliance with certain financial covenants at the end of each fiscal
quarter. The Company was in compliance with all of its financial
covenants at the end of the third quarter except the debt service
coverage ratio. The bank waived the covenant for the period and agreed
to modify the covenant in future negotiations. The Company's operating
line of credit expires on October 5, 2002 and Webster Bank has agreed
to extend the line of credit 120 days from that date. The Company is
currently negotiating a modification of its entire agreement to
increase debt capacity.
12
PART I - Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto as filed in the Annual Report on Form
10-K of Vermont Pure Holdings, Ltd. (the "Company") for the year ended October
31, 2001.
Forward-Looking Statements
--------------------------
When used in the Form 10-Q and in future filings by the Company with the
Securities and Exchange Commission, the words or phrases "will likely result,"
"the Company expects," "will continue," "is anticipated," "estimated,"
"project," "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
speaks 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. Among these
risks are water supply and bottling capacity constraints in the face of
significant growth, dependence on outside distributors, and reliance on
commodity price fluctuations as they influence raw material pricing. 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
---------------------
During 2001, the Company integrated and consolidated operations following the
merger with Crystal Rock in October 2000. This process effectively created
operating segments that are defined by the kind of product and its distribution
channel, specifically a home and office segment and a retail segment.
Accordingly, over that time, management has developed reporting that evaluates
the Company by these segments. Starting with the first quarter of 2002, the
Company incorporated this segmental reporting into its financial statements as a
means for readers to evaluate the Company more closely. For the purposes of
segmental reporting, management has allocated all costs for which there is a
justifiable basis of allocation but has maintained administrative and interest
charges incurred by the holding company in a "corporate" classification.
During its second fiscal quarter of 2002 the Company adopted several recent
accounting pronouncements that significantly affect the way it accounts for
sales and promotional expenses but has no effect on the reported earnings.
Traditionally, the Company has accounted for certain promotional
programs, defined in the pronouncements, as expenses. As of July 31, 2002
the Company has excluded these allowances from both sales and operating expenses
in its Consolidated Statements of Operations for the periods presented herein in
2002 and 2001.
13
For the Three Months Ended July 31, 2002 (Third Quarter)
- --------------------------------------------------------
Sales - Sales for the third quarter of fiscal year 2002 were $21,579,000
compared to $18,172,000 for the same period of fiscal year 2001, an increase of
$3,407,000, or 19%. Adoption of recent accounting pronouncements required that
$885,000 and $803,000 of what were traditionally promotional costs be
reclassified to reduce sales in 2002 and 2001, respectively.
Sales for the home and office segment for the third quarter of fiscal 2002 were
$12,852,000 compared to $12,447,000 for the corresponding period of fiscal year
2001, an increase of $405,000, or 3%. The increase was primarily the result of
an acquisition completed on November 1, 2001 in the Company's core Connecticut
market. Of the total home and office segment sales for the quarter, water sales
totaled $6,757,000, an increase of 5% from the same period a year ago and
equipment rental was $2,195,000, an increase of 9% over the combined total for
the same period a year ago. Sales of coffee and other products were $3,900,000
for the third quarter of fiscal 2002, a decrease of 2% compared to the same
period a year ago. This reflects a decrease in demand for certain other products
sold in the home and office distribution system including coffee and the
ancillary products associated with it. Management believes that the decrease in
this line of products is due to the general slowdown in economic conditions in
the Northeastern United States. Demand for coffee and related products is
traditionally greater in the winter months than in the summer.
Sales for the retail segment for the third quarter of fiscal 2002 were
$8,727,000 compared to $5,725,000 for the corresponding period of fiscal year
2001, an increase of $3,002,000, or 52%. For the third quarter of the fiscal
year, sales of private label brands increased 147% compared to the same period a
year ago. Growth of private label brands reflects both new account acquisitions
and market share gain in the established customer base during the period. In
light of increasing competition in established markets for regional and national
brands, the Company has accelerated its strategy to become a premier private
label spring water provider. Sales of the Vermont Pure and Hidden Spring brands
decreased 17% and 5%, respectively, compared to the third quarter a year ago.
Average net selling prices of retail-size products for the three months ended
July 31, 2002 decreased 12% compared to the corresponding period in fiscal year
2001. The decrease in average selling price was primarily attributable to the
competitive nature of the branded product market, lower prices for private label
products, in general, and the addition of a one-gallon size product to
accommodate a specific private label customer. The gallon size is a lower priced
product by volume compared to other products and the Company pays a packing fee
to a supplier to produce the product.
Cost of Goods Sold/Gross Profit - For the three months ended July 31, 2002, cost
of goods sold was $10,784,000 compared to $8,489,000 for the same period in
fiscal 2001, or an increase of 27%. Gross profit for the third quarter of 2002
was $10,795,000 compared to $9,683,000 for the corresponding period a year ago,
an increase of $1,112,000, or 11%. The increase in gross profit is primarily the
result of higher sales volume. As a percentage of sales, gross profit for the
third quarter was 50% in 2002 and 53% in 2001. The decrease in the percentage is
a result of a higher sales mix of retail-size products and a lower gross profit
14
rate on those products. Gross profit for the home and office segment was
$7,968,000, or 62% of sales, in the third quarter of fiscal 2002 compared to
$7,915,000, or 64% of sales, for the comparable period in 2001. The increase in
gross profit for the home and office segment was primarily due to generally
higher sales volume. The decrease in the gross margin percentage is attributable
to higher production costs. Gross profit for the retail segment was $2,827,000,
or 32% of sales, in the third quarter of fiscal 2002 compared to $1,768,000, or
31% of sales, for the comparable period in 2001. The increase in gross profit
for the retail segment was the result of higher sales volume. Although average
selling prices decreased, higher volume contributed to lower product costs and
gross margin increased slightly.
Operating Expenses - For the three months ended July 31, 2002, compared to the
corresponding period in fiscal year 2001, total operating expenses were
$7,203,000 and $7,430,000, respectively, a decrease of $227,000. Selling,
general and administrative expenses ("SG&A") increased by $237,000, or 4%, for
the third quarter compared to the corresponding period a year ago. The increase
in SG&A was primarily due to increased sales for the period. SG&A for the
quarter were $4,375,000 for the home and office segment in the 2002 compared to
$4,376,000 for the same period in the prior year. SG&A for the retail segment
was $1,515,000 for the retail segment in the third quarter compared to
$1,077,000 for the same period a year ago, an increase of 41%. This increase was
a result of higher freight and warehouse costs related to increased sales. SG&A
also includes $801,000 of corporate expenses for the period compared to
$1,000,000 in the third quarter of 2001 as a result of a reduction for internal
administration costs and outside administrative services. Advertising and
promotional expenses increased $114,000, or 34%, during the third quarter of
2002 compared to the corresponding period a year earlier. The increase was
primarily due to an increase in advertising in the home and office segment in an
effort to offset the effect of an economic slowdown. Advertising costs in the
home and office segment totaled $275,000 in the period compared to $166,000 a
year ago. As mentioned above, certain promotional activity associated with the
retail segment reported as expenses in previous periods have been reclassified
with the effect of reducing sales. Promotion and advertising for the retail
segment totaled $179,000 in the period compared to $174,000 a year ago. The
slight increase is indicative of the sales trend of the Company's branded retail
products.
For the third quarter of fiscal year 2002, amortization decreased $579,000 to
$58,000 from $637,000 for the same period a year ago. Amortization decreased
because the Company implemented Statement of Financial Accounting Standards No.
142 in the first quarter of 2002 which stipulates that goodwill will not be
amortized.
Income from Operations - Income from operations for the third quarter of fiscal
2002 was $3,592,000 as compared to $2,253,000 for the corresponding period last
year, an improvement of $1,339,000, or 59%. The increased income is primarily
the result of higher sales and lower operating expenses. The reduction of
operating expenses is due to the substantial decrease in amortization discussed
above. Income from operations in the home and office segment increased to
$3,260,000 in the third quarter of 2002 from $2,736,000 in the third quarter of
2001 primarily because of an increase in sales and decrease in operating
expenses. Income from operations in the retail segment increased to $1,133,000
in the third quarter of 2002 compared to income of $517,000 in the third quarter
of 2001. The increase in this segment is attributable to higher sales for the
period.
15
Other Income/Expense - Interest expense decreased $54,000 to $1,187,000 in the
third quarter of fiscal 2002 from $1,241,000 in the third quarter of fiscal year
2001. The decrease in interest expense was a result of significantly lower
interest rates on the Company's senior debt. The Company recognized other
expenses in the period of $264,000 for settlement of a sales tax assessment in
New York, settlement of an uninsured workers compensation claim and loss on sale
of assets.
Income Before Income Taxes - The Company's net income before taxes for the three
months ended July 31, 2002 was $2,142,000 compared to net income before taxes of
$1,009,000 for the corresponding period last year. The improvement of $1,133,000
is attributable to higher sales and decreased amortization and interest charges
that more than offset increases in other operating expenses.
Income Tax/Net Income - The Company accrued income tax expense at an effective
rate of 40% for the quarter ended July 31, 2002. Based on the expected
utilization of tax loss carryforwards, the Company's income tax expense was
offset by an increase in its deferred tax asset for the quarter ended July 31,
2001 resulting in no net tax expense for the quarter. Net income for the quarter
was $1,292,000 in 2002 compared to $1,009,000 in 2001, an improvement of
$283,000, or 28%.
For the Nine Months Ended July 31, 2002
Sales - Sales for the first nine months of fiscal year 2002 were $53,802,000
compared to $47,197,000 for fiscal year 2001, an increase of $6,605,000, or 14%.
Promotional allowances of $2,038,000 and $1,542,000 for 2002 and 2001 were
excluded from gross sales in each of the respective years.
Sales for the home and office segment for the first nine months of fiscal 2002
were $36,335,000 compared to $34,995,000 for the corresponding period of fiscal
year 2001, an increase of $1,340,000 or 4%. The increase is primarily the result
of market demand for water and coolers and an acquisition completed November 1,
2001 in the Company's core Connecticut market. Of the total home and office
segment sales for the nine month period, water sales totaled $18,202,000, an
increase of 8% from the same period a year ago and equipment rental was
$6,568,000, an increase of 10% over the same period a year ago. Sales of coffee
and other products were $11,565,000, a decrease of 5% compared to the same
period a year ago. This decrease is attributable to unseasonably warm weather
during the first fiscal quarter, when coffee sales peak, and a decrease in
demand due to the general slowdown in economic conditions in the Northeastern
United States.
Sales for the retail segment for the nine months ended July 31, 2002 were
$17,467,000 compared to $12,202,000 for the corresponding period of fiscal year
2001, an increase of $5,265,000, or 43%. For the first nine months of the fiscal
year, sales of private label brands increased 132% compared to the same period a
year ago. Growth of private label brands reflects both new account acquisitions
and market share gain in the established customer base during the period. Sales
of the Vermont Pure and Hidden Spring brands decreased 12% and 9%, respectively,
compared to the first nine months a year ago. Average selling prices of
retail-size products for the nine month period decreased 10% compared to the
corresponding period in fiscal year 2001. The decrease in average selling price
was primarily attributable to the competitive nature of the branded product
16
market, lower prices for private label products, in general, and the addition of
a one-gallon size product to accommodate a specific private label customer. The
gallon size is a lower priced product by volume compared to other products and
the Company pays a packing fee to a supplier to produce the product.
Cost of Goods Sold/Gross Profit - For the nine months ended July 31, 2002, cost
of goods sold was $26,212,000 compared to $21,644,000 for the same period in
fiscal 2001, or an increase of 21%. Gross profit for the nine months was
$27,590,000 compared to $25,554,000 for the corresponding period a year ago, an
increase of $2,036,000, or 8%. The increase in gross profit is primarily the
result of higher sales volume. As a percentage of sales, gross profit for the
nine month period was 51% in 2002 and 54% in 2001. The decrease in the
percentage is a result of a higher sales mix of retail-size products and a lower
gross profit rate on those products. Gross profit for the home and office
segment was $22,471,000, or 62% of sales, for the first nine months of fiscal
2002 compared to $21,561,000, or 62% of sales, for the comparable period in
2001. The increase in gross profit was primarily due to generally higher sales
volume. Gross profit for the retail segment was $5,119,000, or 29% of sales, in
the first three quarters of fiscal 2002 compared to $3,992,000, or 33% of sales,
for the comparable period in 2001. The increase in gross profit, in absolute
terms, was the result of higher sales volume, while gross profit, as a
percentage of sales, decreased as the result of lower average selling prices
primarily influenced by the higher mix of private label products and, in
particular, introduction of a one-gallon size product. The margin on the
one-gallon size is significantly lower than the other products the Company sells
in this segment. During the first two quarters, the Company experienced
production inefficiencies during the installation of additional bottling
equipment which increased costs per case. Installation and startup of this
equipment was completed in the second quarter of 2002 and better efficiency and
higher volume improved gross margin in the third quarter.
Operating Expenses - For the nine months ended July 31, 2002 compared to the
corresponding period in fiscal year 2001, total operating expenses were
$20,242,000 and $20,549,000, respectively, a decrease of $307,000. Selling,
general and administrative expenses ("SG&A") increased by $1,198,000, or 10%,
for the nine month period compared to the corresponding period a year ago. The
increase in SG&A expenses was primarily due to increased sales for the period
and increases to administrative infrastructure required to support customer
service and sales initiatives in the home and office segment and corporate
public entity operations. SG&A for the home and office segment for the first
three quarters were $13,389,000 in 2002 compared to $12,787,000 in 2001, an
increase of $602,000 or 5%. SG&A increased in the retail segment to $3,228,000
in 2002 from $2,667,000 the corresponding period last year. Corporate expenses
increased slightly to $2,299,000 in 2002 from $2,263,000 in 2001 for the
comparable nine month period. The change is attributable to an increase in legal
costs coupled with a decrease in costs for administration. Advertising and
promotional expense increased $225,000, or 24%, during the first nine months of
2002 compared to the corresponding period a year earlier. The increase was
primarily due to sales, slotting fees expensed in the first quarter of 2002, and
an increase in the home and office segment in an effort to offset the effect of
an economic slowdown. Advertising costs in the home and office segment totaled
$689,000 in the period compared to $514,000 to a year ago, an increase of 34%.
As mentioned above, certain promotional activity associated with the retail
segment reported as expenses in the previous periods have been reclassified with
the effect of reducing sales. Promotion and advertising for the retail segment
totaled $463,000 in the period compared to $413,000 a year ago, a 12% increase.
17
For the first three quarters of fiscal year 2002, amortization decreased
$1,732,000 to $174,000 from $1,906,000 for the same period a year ago.
Amortization decreased because the Company implemented Statement of Financial
Accounting Standards No. 142 in the first quarter of 2002 which stipulates that
goodwill will not be amortized. The pronouncement also stipulates that goodwill
will be assessed periodically for impairment. The Company completed a valuation
of its goodwill in the second quarter and determined that there is no impairment
to the goodwill presently on the balance sheet. Other intangible assets continue
to be amortized. All amortization is accounted for in the home and office
segment.
Income from Operations - Income from operations for the nine months ended July
31, 2002 was $7,348,000 as compared to $5,004,000 for the corresponding period
last year, an improvement of $2,344,000, or 47%. The increased income is
primarily the result of higher sales and lower operating expenses. The reduction
of operating expenses is due to the substantial decrease in amortization
discussed above. Income from operations in the home and office segment increased
to $8,219,000 in the first three quarters of 2002 from $6,354,000 in the first
three quarters of 2001 primarily because of an increase in sales and decrease in
operating expenses due to lower amortization. Income from operations in the
retail segment increased to $1,428,000 in the first three quarters of 2002
compared to income of $913,000 in the first three quarters of 2001. The increase
is due to higher sales and increased production efficiencies in the third
quarter.
Other Income/Expense - Interest expense decreased $334,000 to $3,569,000 during
the first nine months of fiscal 2002 from $3,903,000 in the first nine months of
fiscal year 2001. The decrease in interest expense was a result of significantly
lower interest rates on the Company's senior debt and operating line of credit.
The Company also recognized $204,000 from the sale of a trademark, net of legal
expenses incurred for the transaction and expenses for other matters as
described above.
Income Before Income Taxes - The Company's net income before taxes for the nine
months ended July 31, 2002 was $3,719,000 compared to net income before taxes of
$1,107,000 for the corresponding period last year. The increase of $2,612,000 is
attributable to higher sales and decreased amortization and interest charges
that more than offset increases in other operating expenses.
Income Tax/Net Income - The Company accrued income tax expense at an effective
rate of 40% for the nine month period ended July 31, 2002. Based on the expected
utilization of tax loss carryforwards, the Company's income tax expense was
offset by an increase in its deferred tax asset for the nine months ended July
31, 2001 resulting in no net tax expense for the period. Net income for the
first nine months of fiscal 2002 was $2,232,000 compared to $1,107,000 in the
first nine months of 2001, an increase of $1,125,000.
18
Liquidity and Capital Resources
--------------------------------
As of July 31, 2002 the Company had working capital of $2,765,000 compared to
$4,244,000 on October 31, 2001, a decrease of $1,479,000. The decrease in
working capital was a result of seasonal cash needs and capital expenditures
associated with installation of a second bottling line for retail products in
its Randolph facility that was financed from the Company's operating line of
credit.
Increases in accounts receivable and inventory are reflective of the seasonal
upturn in the retail segment of the business in the second and third quarters.
The Company reduced its deferred tax asset by $1,245,000 principally due to the
utilization in 2002 of its tax carryforwards. Accordingly, cash used for payment
of taxes is significantly less than the amount of income tax expense the Company
has booked for the first three quarters. Current liabilities increased as a
result of the escalation of the Company's debt repayment schedule over the next
twelve months.
The Company used $3,993,000 for equipment purchases. Approximately $1,400,000 of
this amount was used for the installation of the second bottling line. This
project was completed and the line was started up during the second quarter. The
balance of capital spending was for equipment used in the normal course of
business. The most significant of these items are bottles, coolers and brewers.
The Company borrowed up to $3,866,000 from its operating line of credit as a
source of cash during the nine month period for its operating and capital cash
requirements. The Company's line of credit with Webster Bank has a limit of
$5,000,000 and matures October 5, 2002. As of July 31, 2002, there was an
outstanding balance of $1,917,000 as well as $636,000 committed for letters of
credit. Regularly scheduled principal payments continue to be made on senior
debt. During the first nine months of 2002, the Company paid $3,043,000 to make
scheduled debt repayments to Webster Bank. In addition, it has repaid $2,076,000
that was borrowed from its operating line in the last nine months.
To complete the $5,538,000 acquisition of Iceberg Springs Water, Inc., the
Company borrowed $4,200,000 from Webster Bank during the first quarter of the
fiscal year by amending its Loan and Security Agreement with the bank. The term
of the loan is for five years and is to be repaid in equal monthly installments
over that time. The additional borrowings are at an interest rate 100 basis
points higher than the original term debt specified in the agreement. The
Company also funded the acquisition with $634,000 of cash, stock valued at
$705,000, and assumed liabilities of $195,000.
Effective January 30, 2002, the bank approved an amendment to the Loan and
Security Agreement to allow $1,800,000 of non-recurring capital expenditures
made during the last four fiscal quarters to expand bottling capacity to be
excluded from capital expenditures under the debt service coverage covenant
defined in the agreement. The covenant is intended to measure the Company's
capability to generate cash to cover repayment of debt and routine capital
expenditures. The Company was in compliance with all of its financial covenants
at the end of the third quarter except the debt service coverage covenant. The
bank agreed to waive the covenant for the period and modify the measure in
future negotiations.
19
The Company is currently negotiating a modification of its entire loan agreement
with Webster Bank to extend the expiring line of credit and make more debt
capacity available for capital expansion, acquisitions, and retirement of a
portion of subordinated debt. In the interim, the bank has agreed to extend the
current line of credit arrangement for 120 days from the expiration date. The
Company expects that its cash on hand and the cash generated from its future
operations combined with the operating line of credit with Webster Bank will
provide sufficient capital for routine operations in the current fiscal year and
in the future. It also expects that growth we be able to be funded under a new
financing agreement. However, no assurance can be given that this will be the
case and that adequate financing at reasonable interest rates will be secured if
more cash is needed.
Critical Accounting Policies
----------------------------
The Securities and Exchange Commission ("SEC") recently issued proposed guidance
for disclosure of critical accounting policies. The SEC defines "critical
accounting policies" as those that require application of management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effects of matters that are inherently uncertain and
may change in subsequent periods. To the extent that final SEC rules on this
subject may require disclosures in addition to those the Company already makes,
the Company intends to adopt such additional disclosure requirements once the
final rules are required to be adopted.
20
PART I - Item 3
- ---------------
QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to the Company's operations result primarily from changes
in interest rates and commodity prices.
Interest Rate Risks
At July 31, 2002, the Company had approximately $13,700,000 of long
term debt subject to variable interest rates. Under the loan and security
agreement with Webster Bank, the Company paid interest at a rate of LIBOR plus a
margin of 1.75% through February 28, 2002. The margin was adjusted to 1.5% on
March 1, 2002 based on the Company's performance as outlined in the agreement
with Webster Bank. A hypothetical 100 basis point increase in the LIBOR rate
would result in an additional $137,000 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 one to two 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
equal to offset and minimize the risks of rising and falling interest rates.
Future low rates may compel management to fix the interest rate on a higher
portion of the Company's debt in order to further stabilize cash flow and
expenses.
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.
21
Coffee
------
The cost of the Company's coffee purchases are dictated by commodity
prices. The Company 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 at "green" prices ranging from $.63-$.77 per
pound through approximately the end of the calendar year. 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.
22
PART II - Other Information
Item 1 - Legal Proceedings
None.
Item 2 - Changes in Securities
(a) None.
(b) None.
(c) None.
Item 3 - Defaults upon Senior Securities
None.
Item 4 - Submission of Matters to a Vote of Security Holders
None.
Item 5 - Other Information
Certification Under Sarbanes-Oxley Act
The Company's chief executive officer and chief financial officer have
furnished to the SEC the certification with respect to this Report that
is required by Section 906 of the Sarbanes-Oxley Act of 2002.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
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").
23
Exhibit Number
Description
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 Report on Form 8-K filed by the
Company on October 19, 2000 (the "Merger 8-K").)
3.1 Certificate of Incorporation of the Company. (Incorporated by
reference to Exhibit B to Appendix A to the Proxy Statement included
in the S-4 Registration Statement.)
3.2 Certificate of Amendment of Certificate of Incorporation of the
Company filed October 5, 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 ended July 31, 2001.)
4.1 Registration Rights Agreement among the Company, Peter K. Baker, Henry
E. Baker, John B. Baker and Ross Rapaport. (Incorporated by reference
to Exhibit 4.6 of the Merger 8-K.)
10.1* 1993 Performance Equity Plan. (Incorporated by reference from Exhibit
10.9 of Registration Statement 33-72940.)
10.2* 1998 Incentive and Non-Statutory Stock Option Plan, as amended.
(Incorporated by reference to Appendix 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.)
10.4* Employment Agreement between the Company and Timothy G. Fallon.
(Incorporated by reference to Exhibit 10.13 of the S-4 Registration
Statement.)
10.5* Employment Agreement between the Company and Bruce S. MacDonald.
(Incorporated by reference to Exhibit 10.14 of the S-4 Registration
Statement.)
24
Exhibit Number
Description
10.6* Employment Agreement between the Company and Peter K. Baker.
(Incorporated by reference to Exhibit 10.15 of the S-4 Registration
Statement.)
10.7* Employment Agreement between the Company and John B. Baker.
(Incorporated by reference to Exhibit 10.16 of the S-4 Registration
Statement.)
10.8* Employment Agreement between the Company and Henry E. Baker.
(Incorporated by reference to Exhibit 10.17 of the S-4 Registration
Statement.)
10.9 Lease of Buildings and Grounds in Watertown, Connecticut from the
Baker's Grandchildren Trust. (Incorporated by reference to Exhibit
10.22 of the S-4 Registration Statement.)
10.10 Lease of Grounds in Stamford, Connecticut from Henry E. Baker.
(Incorporated by reference to Exhibit 10.24 of the S-4 Registration
Statement.)
10.11 Lease of Building in Stamford, Connecticut from Henry E. Baker.
(Incorporated by reference to Exhibit 10.23 of the S-4 Registration
Statement.)
10.12 Amended and Restated Loan and Security Agreement between the company
and Webster Bank dated November 1, 2001. (Incorporated by reference
from Exhibit 10.14 to Form 10-K for the year ended October 31, 2001.)
10.13 Term Note from the Company to Webster Bank dated October 5, 2000.
(Incorporated by reference from Exhibit 10.15 to Form 10-K for the
year ended October 31, 2001.)
10.14 Subordinated Note from the Company to Henry E. Baker dated October 5,
2000. (Incorporated by reference to Exhibit 10.16 of Form 10-K for the
year ending October 31, 2000.)
10.15 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.)
10.16 Subordinated Note from the Company to John B. Baker dated October 5,
2000. (Incorporated by reference to Exhibit 10.18 of Form 10-K for the
year ending October 31, 2000.)
25
Exhibit
Number Description
10.17 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.)
10.18 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.)
10.19 Reaffirmation of Subordination and Pledge Agreement from Henry E.
Baker to Webster Bank Dated November 1, 2001. (Incorporated by
reference to Exhibit 10.21 of Form 10-K for the year ending October
31, 2001.)
10.20 Reaffirmation of Subordination and Pledge Agreement from Joan Baker to
Webster Bank Dated November 1, 2001. (Incorporated by reference to
Exhibit 10.22 of Form 10-K for the year ending October 31, 2001.)
10.21 Reaffirmation of Subordination and Pledge Agreement from John B. Baker
to Webster Bank Dated November 1, 2001. (Incorporated by reference to
Exhibit 10.23 of Form 10-K for the year ending October 31, 2001.)
10.22 Reaffirmation of Subordination and Pledge Agreement from Peter K.
Baker to Webster Bank Dated November 1, 2001. (Incorporated by
reference to Exhibit 10.23 of Form 10-K for the year ending October
31, 2001.)
10.23 Reaffirmation of Subordination and Pledge Agreement from Ross S.
Rapaport, Trustee, to Webster Bank Dated November 1, 2001.
(Incorporated by reference to Exhibit 10.25 of Form 10-K for the year
ended October 31, 2001.)
10.24 Agreement between Vermont Pure Springs, Inc. and Zuckerman-Honickman
Inc. dated October 15, 1998. (Incorporated by reference to the S-4
Registration Statement.)
10.25 Term Note from the Company to Webster Bank dated November 1, 2001.
(Incorporated by reference to Exhibit 10.27 of Form 10-K for the year
ended October 31, 2001.)
10.26 Amended and Restated Revolving Line of Credit Note between the Company
and Webster Bank. (Incorporated by reference to Exhibit 10.28 of Form
10-K for the year ended October 31, 2001.)
26
Exhibit
Number Description
10.27 Modification Agreement to the Amended and Restated Loan and Security
Agreement dated November 1, 2001 between the Company and Webster Bank.
10.28 Waiver from Webster Bank in reference to the debt service coverage
covenant for the period ending July 31, 2002 pursuant to the Amended
and Restated Loan and Security Agreement and extension to the Amended
and Restated Line of Credit Note between the Company and Webster Bank.
* Relates to compensation
(b) Reports on Form 8-K
None.
27
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: September 16, 2002
Randolph, Vermont
VERMONT PURE HOLDINGS, LTD.
By: /s/ Bruce S. MacDonald
-------------------------
Bruce S. MacDonald
Vice President, Chief Financial Officer
(Principal Accounting Officer and
Principal Financial Officer)
28
CERTIFICATION
PURSUANT TO SECTION 302
OF THE
SARBANES-OXLEY ACT OF 2002
I, Timothy G. Fallon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Vermont Pure Holdings,
Ltd.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report
Date: September 16, 2002
/s/ Timothy G. Fallon
- ---------------------
Timothy G. Fallon
Chief Executive Officer
29
CERTIFICATION
PURSUANT TO SECTION 302
OF THE
SARBANES-OXLEY ACT OF 2002
I, Bruce S. MacDonald, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Vermont Pure Holdings,
Ltd.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report
Date: September 16, 2002
/s/ Bruce S. MacDonald
- ----------------------
Bruce S. MacDonald
Chief Financial Officer
30