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, 2002
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 10, 2003 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 $47,224,606.
The number of shares outstanding of the Issuer's Common Stock, $.001 par value,
was 21,235,926 on January 10, 2003.
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, 2002, 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
PART I
ITEM 1. BUSINESS.
We bottle, market and distribute 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.
We sell our 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, on a calendar year basis, total bottled water consumption
on a per capita basis in the United States more than doubled from 1990 to 2001.
Annual consumption increased from 8.8 gallons per capita in 1990 to 19.5 gallons
per capita in 2001. Bottled water volume in the United States has grown
significantly, increasing from approximately 2.2 billion gallons in 1990 to
approximately 5.4 billion gallons in 2001, a 145% increase. The retail sales
value of bottled water increased more, from approximately $2.6 billion in 1990
to approximately $6.9 billion in 2001. Over the period from 1993 to 2001,
bottled water was 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 the balance. Non-sparkling water was responsible for 99% of the
incremental volume increase from 1990 to 2001. Both our natural spring water and
our distilled water with minerals added are in the non-sparkling category.
We believe that consumers perceive bottled water to be a healthy and
refreshing beverage alternative to beer, liquor, wine, soft drinks, coffee and
tea. We anticipate that sales of bottled water will continue to grow as
consumers focus on health and fitness, alcohol moderation and the avoidance of
both caffeine and sodium. Bottled water has become a mainstream beverage as the
centerpiece of consumers' healthy living lifestyles. In addition, we believe
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
significant 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. In general, the primary
drivers of this consolidation are the incremental growth realized by acquiring
the target company's customer base, and synergies resulting from integrating
existing operations.
The entrance of major soft drink bottlers into the bottling and
distribution segment of the industry has had a major impact on the bottled water
industry. Both Coca-Cola and Pepsi Cola have started producing and marketing
their own brands of reverse osmosis drinking water within the past four years
and, based on dollar sales, are among the top ten bottled water companies in the
United States.
2
Company Background
Vermont Pure Holdings, Ltd. has two main operating subsidiaries,
Crystal Rock Spring Water Company and Vermont Pure Springs, Inc.
Established in 1990, we originally developed Vermont Pure(R) Natural
Spring Water as our flagship brand in the still, non-carbonated retail consumer
category. Over the next decade, we grew aggressively both internally and through
acquisitions, primarily in the Home & Office market. In addition to marketing
the Vermont Pure(R) brand, in 1995 we renewed marketing efforts with respect to
our original trademark, Hidden Spring(R). We expanded our product lines to
include more sizes and features, such as sports caps on selected bottle sizes
for convenient single serve, and multi-packs for the grocery and convenience
store channels.
By 1996, we began to pursue a strategy of diversifying our product
offerings. Most notably, we began to utilize an acquisition strategy in 1996 to
minimize our reliance on the retail consumer side of the business and to
increase growth in other categories. Prior to 1996, our retail business
represented 90% of our total sales revenues. In 2002, by way of contrast, our
Home & Office delivery category represented 68% of our total sales. Based on
historical data, this sales volume would place us fourth in the United States
and second in the northeast region for this type of distribution. Additional
benefits of increasing the Home & Office channel have included higher gross
margins and reduced seasonality of our sales.
In October 2000, we merged with the Crystal Rock Spring Water Company
of Watertown, Connecticut. Crystal Rock had historically focused its
manufacturing resources on the still, non-carbonated segment of the bottled
water industry. Although its primary business had been the marketing and
distribution of Crystal Rock(R) brand of purified and mineralized drinking water
to the Home & Office delivery markets, it also distributed coffee, other
refreshment type products, and vending services in Connecticut, New York and
Massachusetts. We continue to provide these products and services.
We continued our acquisition strategy in fiscal year 2002 with smaller
acquisitions in our established Home & Office markets. Noteworthy among these
was our acquisition of Iceberg Springs, a Home & Office distributor servicing
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, we have not experienced significant problems in integrating
our acquired businesses with our existing operations. However, the acquisition
of new businesses, particularly ones of significant size and complexity, may
require management to devote substantial time and energy to the successful,
efficient and timely integration of operations, labor forces, administrative
systems (including accounting practices and procedures and management
information systems), and varying corporate cultures. A failure to realize
expected synergies could have an adverse effect on our business.
Management believes that, despite such risks, our acquisition strategy
has been and continues to be a success. The combination with Crystal Rock
enabled us to nearly double our sales revenues, significantly accelerated our
Home & Office growth strategy and added to management depth.
3
The growth in our Home & Office delivery category has been
predominantly fueled by market expansion through our acquisition strategy, which
we have pursued mainly in New England and northern New York. We have also
experienced subsequent internal growth in those acquired markets following these
acquisitions.
We have also leveraged our distribution system to expand our product
lines. In particular, coffee, a product that is counter seasonal to water,
became the second leading product in the distribution channel, now accounting
for almost 10% of our total sales. We buy coffee under contracts that set prices
for a period of six to eighteen months, in order to maintain price and supply
stability. Because coffee is a commodity, we cannot ensure that future supplies
and pricing will not be subject to volatility in the world commodity markets.
Any interruption in supply or dramatic increase in pricing may have an adverse
effect on our business.
In the consumer retail market, we have taken advantage of our customer
relationships, quality water sources and bottling operations by co-packing
private brands. Private labels are a growing portion of this category and have
become increasingly competitive with branded products in terms of price and
market share. In addition to providing increased bottling volume and
contributing margin, we believe this business enhances relationships with the
retailers we serve. Current customers include large northeast retail grocers
such as A&P, Giant Carlisle, Finast, Hannaford, Shop Rite, Stop & Shop, CVS, and
Tops, among others. In 2002, private label sales grew to account for 64% of our
consumer retail sales, representing 20% of our total sales.
To accommodate the growing demand for our bottled spring water
products, we have regularly increased our investment in plant and equipment.
When we were founded, our 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, we have acquired additional springs on approximately 65 acres
of land in Randolph. We have also built a second office, bottling and warehouse
facility of 32,000 square feet in Randolph, which we recently expanded to
approximately 72,000 square feet. In 2002, we added a second bottling line for
our retail consumer products, more than doubling the production capacity for
this category. We also lease a 67,000 square foot facility located on ten acres
in Watertown, Connecticut. This facility houses the bottling operations, our
largest Home & Office distribution center, and centralized customer service and
administrative offices for our Crystal Rock subsidiary. We also have a
five-gallon bottling facility near Albany, New York, and distribution centers
throughout New England and northern New York.
Water Sources and Bottling Operations
The primary sources of our natural spring water are springs located at
our 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.
Percolation through the earth's surface is nature's best filter of
water. We believe that the exceptionally long percolation period of natural
spring water in the north central Vermont area and, in particular, in the area
of our springs, assures a high level of purity. Moreover, the long percolation
period permits the water to become mineralized and pH balanced.
We believe that the age and extended percolation period of our natural
spring water provides the natural spring water with certain distinct attributes:
a purer water, noteworthy mineral characteristics (including the fact that the
water is sodium free and has a naturally balanced pH), and a light, refreshing
taste.
4
In addition to drawing water from our own springs, we buy bulk
quantities of water from natural springs owned or operated by non-affiliated
entities. All of these springs are approved sources for natural spring water.
During fiscal year 2002, purchases of spring water from a source in Vermont that
is not owned by or affiliated with us amounted to approximately 54% of our usage
of spring water. We are actively exploring the acquisition of additional spring
sources that would enable us to reduce our reliance on third-party springs.
We have for several years bought spring water from a source in
Stockbridge, Vermont. Until late 1999, we had no contract with respect to this
source. Commencing in November 1999, we obtained a 50-year water supply contract
to purchase, on a first priority basis, up to 5,000,000 gallons per month from
the spring owner. Because this amount is well in excess of our current needs and
within the apparent capacity of the spring, we believe that we can readily meet
our bulk water supply needs for the foreseeable future.
In 2002, we signed a 20-year agreement with the Town of Bennington,
Vermont to purchase water from a spring owned by the town. Under that agreement,
we can use up to 100,000 gallons a day from this site. We plan to use this water
primarily in our Halfmoon, New York bottling facility.
An interruption or contamination of any of our spring sites would
materially affect our business. We believe that we could find adequate supplies
of bulk spring water from other sources, but that we might suffer inventory
shortages or inefficiencies, such as increased purchase or transport costs, in
obtaining such supplies.
Water from the local municipality is the primary raw source for the
Crystal Rock(R) brand. The raw water is purified through a number of processes
beginning with filtration. Utilizing carbon and ion exchange filtration systems,
we remove chlorine and other volatile compounds and dissolved solids. After the
filtration process, approximately 98% of all impurities are removed by reverse
osmosis and any remaining impurities are removed through distillation. We
ozonate our purified water (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, we add pharmaceutical grade
minerals to the water, including calcium and potassium, for taste. The water is
again ozonated and bottled in a fully enclosed clean room with a high efficiency
particulate air, or HEPA, filtering system designed to prevent any airborne
contaminants from entering the bottling area, in order to create a sanitary
filling environment.
If for any reason this municipal source for Crystal Rock(R) water were
curtailed or eliminated, we could, though probably at greater expense, purchase
water from other sources and have it shipped to the Watertown manufacturing
facility.
We are highly dependent on the integrity of the sources and processes
by which we derive our products. Natural occurrences beyond our control, such as
drought, earthquake or other geological changes, a change in the chemical or
mineral content or purity of the water, or environmental pollution may affect
the amount and quality of the water emanating from the springs we use. There is
a possibility that characteristics of the product could be changed either
inadvertently or by tampering before consumption. Even if such an event were not
attributable to us, the product's reputation could be irreparably harmed.
Consequently, we would experience economic hardship. Occurrence of any of these
events could have an adverse impact on our business. We are also dependent on
the availability of water and the continued functioning of our bottling
processes. An interruption may result in an inability to meet market demand
and/or negatively impact the cost to bottle the products. Additionally, the
distribution of the product is dependent on other businesses.
5
Finally, the terrorist attacks of September 11, 2001 and any further
attacks could impact our operations negatively if such attacks result in a
prolonged or severe economic downturn. Further, because our products are
packaged for human consumption and could be considered a substitute for public
water infrastructure, there is a possibility that we or our products could be a
direct target of future terrorist attacks. Although management believes this
risk to be remote, any such act of terrorism or attempted act could be
catastrophic to our business or operations.
Products
We sell our natural spring water in the retail consumer market under
the Vermont Pure(R) and Hidden Spring(R) brands, packaging the product in
various bottle sizes ranging from 8 ounces to 1.5 liters, and selling it in
single units and plastic shrinkfilm of six, eight, and twelve bottles. We sell
our products 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. We
use a sports cap on various product sizes to create convenience and add extra
value. We bottle consumer sizes 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, and in similar sizes, this outlet does not comprise a
significant amount of our sales.
We sell our three major brands 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. We rent water coolers to customers to dispense bottled water. Our coolers
are available in various consumer preferences such as cold, or hot and cold,
dispensing units. In conjunction with our Home & Office accounts, we also
distribute a variety of coffee, tea and other hot beverage products and related
supplies, as well as other consumable products used around the office. We offer
vending services in some locations. We rent or supply multi-burner coffee
machines to customers. In addition, we supply whole beans and coffee grinders
for fresh ground coffee and cappuccino machines to restaurants. We are the
exclusive office coffee distributor of Baronet Coffee in New England, New York
and New Jersey. In addition to Baronet Coffee, we sell other national brands,
most notably, Green Mountain Coffee Roasters.
Marketing and Sales of Branded Products
Marketing
We generally market our products as "premium" domestic bottled water
products in two categories.
Home & Office Delivery
We distribute and market our water in five and three-gallon bottles as
"premium" bottled water products. We seek brand differentiation by offering
quality service. Home & Office sales are generated and serviced using our own
facilities, employees and vehicles.
We also use telemarketers and outside/cold-call sales personnel to
market our Home & Office delivery. We support this sales effort through
promotional giveaways and Yellow Page advertising, as well as radio, television
and billboard advertising campaigns. We also sponsor local area professional
sports and professional sporting events, participate in trade shows, and
endeavor to be highly visible in community and charitable events.
6
We market our Home & Office delivery service throughout most of New
England and New York.
Retail Consumer (PET)
In the retail consumer category, consumers distinguish a premium
bottled water product from other available bottled water products by packaging
consisting of small portable containers, typically clear plastic PET recyclable
bottles. We believe 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. We also believe that the high quality packaging of our
products enhances their image as premium domestic bottled water products.
We endeavor to price our Vermont Pure(R) brand at a level that is
competitive with other domestic premium brands, but lower than imported premium
water products. 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 our own delivery routes.
We market the Crystal Rock(R) brand by providing the same consistent,
refreshing taste in a small package that customers have relied on from their
coolers in their homes and offices. We also distribute Crystal Rock(R) products
for sponsorship of organizations and events.
We market our spring water products such as the Vermont Pure(R) brand
by highlighting the unique characteristics of our water, namely a natural spring
source, purity, mineral composition and desirable taste. We also strive to use
the image of the State of Vermont in our marketing and brand identification. We
believe that consumers feel that products originating from Vermont have a
general reputation for being pure, wholesome, trustworthy and natural.
We have focused our consumer product marketing and sales activities in
the eastern and mid-western United States. We currently distribute our products
in the New England, New York, New Jersey, mid-Atlantic and northern mid-western
states and the northern Virginia - Washington, D.C. - Baltimore metropolitan
area.
Slotting Fees
To achieve placement of our retail consumer products in certain
supermarket chains and individual supermarket stores, we must sometimes 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, impose slotting fees
less frequently. These fees are negotiated on an individual basis. As we have
become better established and as our brands have achieved greater recognition,
we have become less dependent on slotting fees to gain space. Nevertheless, like
many producers of food products, we still pay slotting fees in some cases, and
expect to continue to do so.
7
Advertising and Promotion
We advertise our products primarily through print, television and radio
media. In connection with this advertising, we use point of sale, in-store
displays, price promotions, store coupons, free-standing inserts and cooperative
and trade advertising. We have also actively promoted our products through
sponsorship of various organizations and sporting events. In recent years, we
have sponsored professional golf and tennis events, 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 & Office Delivery
We sell and deliver products directly to our customers using our own
employees and route delivery trucks. We make deliveries to customers on a
regularly scheduled basis. We bottle our water at our facilities in Watertown,
Connecticut, Randolph, Vermont, and Halfmoon, New York. We maintain numerous
distribution locations throughout our market area. From these locations we also
distribute dispensing equipment, a variety of coffee, tea and other refreshment
products, and related supplies. We ship between our production and distribution
sites using both our own and contracted carriers.
We use outside distributors in areas where we currently do not
distribute our products. Distributor sales represent less than 1% of total
revenue.
We continue to pursue an acquisition strategy to purchase independent
Home & 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. Moreover, the Vermont Pure(R)
and Crystal Rock(R) brands in the multi-gallon or Home & Office setting affords
consumers an opportunity to sample the product, which we believe augments retail
sales and contributes to brand awareness.
Retail Consumer (PET)
We use major beverage distributors to distribute most of our retail
consumer products, while we distribute our Home & 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, we sell our products directly to grocery store chains.
We distribute our Vermont Pure(R) brand using a number of distributors.
We are obligated to supply the distributors with their requirements of the
Vermont Pure(R) brand at established prices. Arrangements with the distributors
of the Hidden Spring(R) brand are, in general, less restrictive.
We ship our consumer products from our bottling facilities in Randolph,
Vermont by common carrier either directly to beverage distributors and 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.
8
We employ a sales force of eight persons for retail and distributor
coverage on a geographic basis. Our sales personnel act as a liaison among
distributors, customers and ourselves 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 recent years, our fastest growing products in the retail consumer
category have been private label products. We bottle private label products in
essentially the same sizes and configurations as for our branded products for
grocery, drug, and convenience store chains, using their label. As the retailers
have entered the market, they have preferred natural spring water for the
product that they market.
Contract packaging is a growing part of the retail consumer marketplace
and is very price competitive. We seek opportunities for contract packaging for
a variety of reasons, including the fact that it develops favorable
relationships with retail chains and provides volume to fill bottling capacity.
In fiscal years 2001 and 2002, contract packing represented the most significant
growth portion of our retail consumer product sales revenue - more than doubling
in 2002. Private label revenue was 20% of our total sales in 2002 compared to 9%
in 2001 and 7% in 2000.
We also package five gallon Home & Office containers, on a limited
basis, for third parties. These sales represented less than 2% of sales in the
most recent fiscal year.
Supplies
We currently source all of our raw materials from outside vendors. In
the retail PET business, we source 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, we have, at times, had difficulty procuring raw
materials. Supply shortages or subsequent increases in pricing of these
materials have historically had an adverse effect on our expense structure.
We recently entered into a new supply agreement for bottles effective
January 1, 2003 that enables us to further reduce the weight and cost of our
bottles. In recent years, we have effectively reduced our 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 our containers and the amount of plastic entering the waste stream by
over 1,000,000 pounds per year. Management is constantly undertaking further raw
material cost saving initiatives for caps, plastic, and corrugated packaging.
Notwithstanding these expectations, we may experience shortages or unscheduled
price increases that would adversely effect our cost of goods.
The merger of Crystal Rock and Vermont Pure has nearly doubled the size
of our operations in the Home & Office category and, as a result, afforded us
the opportunity to increase our combined buying power for such things as
bottles, dispensing equipment, supplies, and administrative services. We have
experienced some success in this area and, as one of the largest Home & Office
distributors in the country, we expect to capitalize on volume to continue to
reduce costs. We are a member of the Quality Bottlers Cooperative, or QBC, a
purchasing cooperative comprised of some of the largest independent Home &
Office water companies in the United States. QBC acts as a purchasing and
negotiating agent to acquire national pricing for the cooperative on common
materials such as bottles, water coolers, cups, and other supplies. QBC believes
that due to its size it can effectively purchase equipment and supplies at
levels competitive to larger national entities. We also believe that our
relationship with other QBC members can provide access to potential acquisition
targets.
9
In all aspects of our business, we rely on trucking and fuel to receive
raw materials and transport and deliver finished product. Consequently, the
price of fuel significantly impacts the cost of our products. We purchase our
own fuel for our Home & Office delivery and use third parties for transportation
of raw materials and retail consumer product. While volume purchases and hedging
can help control erratic fuel pricing, market conditions ultimately determine
the price. We have entered into some agreements with haulers and fuel vendors in
an effort to control costs, but substantial changes in fuel prices, including,
for example, increases due to hostilities in the Middle East, would likely
affect our profitability.
No assurance can be given that we will be able to obtain the supplies
we require on a timely basis or that we will be able to obtain them at prices
that allow us to maintain the profit margins we have had in the past. Any raw
material disruption or price increase may result in an adverse impact on our
financial condition and prospects.
Seasonality
Our business is seasonal, with the retail consumer portion of the
business being more seasonal than the Home & Office market. Coffee sales are
counter seasonal to water. The period from June to September represents the peak
period for sales and revenues due to increased consumption of beverages during
the summer months in our core Northeastern United States market. As the larger
share of total sales has trended toward the Home & Office category, our
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
that are offered in local supermarkets and other retail outlets in the smaller
consumer sizes and sold to the Home & Office markets in one gallon and multiple
gallon containers.
The bottled water market in this country is dominated by large
multi-national companies such as Nestle (Perrier Group), Groupe Danone, and the
Suntory Water Group. Perrier markets such regional brands as Poland Spring, Deer
Park, Ice Mountain, Great Bear, Arrowhead, Calistoga, Ozarka, Zephyr Hills, and
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. The entry of Pepsi Cola (Aquafina) and Coca-Cola (Dasani) into the PET
retail segment, leveraging their production and distribution infrastructure, has
significantly altered the bottled water industry. All of these global
competitors have greater resources and their brands are often better established
than our brands.
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We also face 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 affect our business. We also face
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 & 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, we compete 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.
With our Vermont Pure(R) brand, we compete on the basis of pricing,
customer service, quality of our products, the image of the State of Vermont,
attractive packaging, and brand recognition. With the Crystal Rock(R) brand, we
compete on the basis of the purity of the distilled product with minerals added
back for taste. We consider our trademarks, trade names and brand identities to
be very important to our competitive position and defend our brands vigorously.
We feel that installation of filtration units in the home or commercial
setting poses a competitive threat to the business. To address this, we make
available plumbed-in filtration units and servicing contracts on a limited
basis.
Trademarks
We sell our bottled water products under the trade names Vermont Pure
Natural Spring Water(R), Crystal Rock(R), Hidden Spring(R), and Stoneridge(R).
We have rights to other trade names, including Pequot Natural Spring Water(R),
Excelsior Spring Water(R), Happy Spring Water(R), Iceberg Springs(R), and
Vermont Naturals(R). Our trademarks as well as label design are registered with
the United States Patent and Trademark Office.
Government Regulation
The Federal Food and Drug Administration, or FDA, regulates bottled
water as a "food." Accordingly, our bottled water must meet FDA requirements of
safety for human consumption, of processing and distribution under sanitary
conditions and of production in accordance with the FDA "good manufacturing
practices." To assure the safety of bottled water, the FDA has established
quality standards that address the substances that may be present in water which
may be harmful to human health as well as substances that affect the smell,
color and taste of water. These quality standards also require public
notification whenever the microbiological, physical, chemical or radiological
quality of bottled water falls below standard. The labels affixed to bottles and
other packaging of the water are subject to FDA restrictions on health and
nutritional claims for foods under the Fair Packaging and Labeling Act. In
addition, all drinking water must meet Environmental Protection Agency standards
established under the Safe Drinking Water Act for mineral and chemical
concentration and drinking water quality and treatment which are enforced by the
FDA.
We are subject to the food labeling regulations required by the
Nutritional Labeling and Education Act of 1990. We believe we are in substantial
compliance with these regulations.
11
We are subject to periodic, unannounced inspections by the FDA. Upon
inspection, we must be in compliance with all aspects of the quality standards
and good manufacturing practices for bottled water, the Fair Packaging and
Labeling Act, and all other applicable regulations that are incorporated in the
FDA quality standards.
In May 1996, new FDA regulations became effective that redefined the
standards for the identification and quality of bottled water. We believe that
we meet the current regulations of the FDA, including the classification as
spring water.
We also must meet state regulations in a variety of areas. The
Department of Health of the State of Vermont regulates water products for
purity, safety and labeling claims. Bottled water sold in Vermont must originate
from an "approved source." The water source must be inspected and the water
sampled, analyzed and found to be of safe and wholesome quality. The water and
the source of the water are subject to an annual "compliance monitoring test" by
the State of Vermont. In addition, our bottling facilities are inspected by the
Department of Health of the State of Vermont.
Our product labels are subject to state regulation (in addition to the
federal requirements) in each state where the water products are sold. These
regulations set standards for the information that must be provided and the
basis on which any therapeutic claims for water may be made. We have received
approval from every state for which we have sought approval and can distribute
our brands in 49 states.
The bottled water industry has a comprehensive program of
self-regulation. We are a member of the International Bottled Water Association,
or IBWA. As a member, our facilities are inspected annually by an independent
laboratory, the National Sanitation Foundation, or NSF. By means of unannounced
NSF inspections, IBWA members are evaluated on their compliance with the FDA
regulations and the association's performance requirements, which in certain
respects are more stringent than those of the federal and various state
regulations.
Employees
As of January 10, 2003, we had 343 full-time employees and 26 part-time
employees. None of the employees belongs to a labor union. We believe that our
relations with our employees are good.
Our continued success will depend in large part upon the expertise of
senior management. On 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. John Baker's contract has a
"reduced employment" option starting in April 2002 which allows for part-time
employment at Mr. Baker's option. To date, Mr. Baker has not exercised this
option.
The departure or loss of Mr. Fallon or Mr. Peter Baker in particular
could have a negative effect on our business and operations.
12
Additional Available Information
Our principal Internet address is www.vermontpure.com. We make our annual,
quarterly and current reports, and amendments to those reports, available - free
of charge on www.vermontpure.com, as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC.
ITEM 2. DESCRIPTION OF PROPERTY.
We own office, bottling and warehouse properties and natural springs in
Randolph, Vermont. We also rent, on a monthly basis, an office in White Plains,
New York.
We rent public warehouse space in different locations from time to time
for the purpose of the trans-shipment of our bottled water products to our
distributors and retailers. This space is rented on a per pallet basis.
As part of our Home & Office delivery operations, we have entered into
or assumed various lease agreements for properties used as distribution points
and office space. The following table summarizes these arrangements:
Location Lease expiration Sq. Ft. Annual Rent
-------- ---------------- ------- -----------
Williston, VT July, 2003 8,500 $ 61,995
Wilmington, MA October, 2003 10,670 $ 97,273
Rochester, NY January, 2007 15,000 $ 89,400
Buffalo, NY September, 2005 10,000 $ 60,000
Syracuse, NY December, 2005 10,000 $ 33,420
Halfmoon, NY October, 2011 22,500 $ 125,043
Plattsburgh, NY August, 2004 3,640 $ 20,568
Watertown, CT October, 2010 67,000 $ 360,000
Stamford, CT October, 2010 22,000 $ 216,000
White River Junction, VT March, 2004 3,275 $ 16,211
Waterbury, CT June, 2007 19,360 $ 91,974
In conjunction with the Crystal Rock merger, we entered into ten-year
lease agreements to lease the buildings that it utilized for operations in
Watertown and Stamford, Connecticut. The landlord for the buildings is a trust
with which Henry, John, and Peter Baker, and Ross Rapaport are affiliated.
We sold our 9,000 square foot building in Randolph, Vermont in October,
2002. Previously we had moved the operations to our larger facility in Randolph.
We expect that these facilities will meet our needs for the next
several years.
ITEM 3. LEGAL PROCEEDINGS.
In March of 1999, we contracted with Descartes Systems Group, Inc., or
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 us as
a product that would provide computerized management of our direct distribution
through our delivery network, and associated billing and accounting.
13
On July 27, 2000, we 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. We sought monetary damages against Descartes and Endgame
in an amount exceeding $100,000 for our losses associated with failures of the
systems and services provided by the defendants. In addition, we sought a
declaratory judgment invalidating the defendant's demand for payments in the
amount of $411,841.
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 to be determined. We intend to vigorously defend our claim throughout this
process.
Effective August 30, 2002 the two parties executed a standstill
agreement of the arbitration in an effort to settle the matter. In doing so, the
parties also agreed to limit the respective recovery of claims to $400,000 for
us and $200,000 for Descartes. As of January 11, 2003 no settlement of the
matter has been reached.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the
quarter ended October 31, 2002.
14
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our Common Stock is traded on the American Stock Exchange, or AMEX,
under the symbol VPS. The table below indicates the range of the high and low
daily closing prices per share of Common Stock as reported by AMEX. Prior to May
18, 1999, our Common Stock traded on the NASDAQ SmallCap Market under the symbol
VPUR.
Fiscal Year Ended October 31, 2000 High Low
---------------------------------- ---- ---
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
Fiscal Year Ended October 31, 2002
First Quarter $5.50 $3.65
Second Quarter $5.36 $4.70
Third Quarter $4.99 $3.70
Fourth Quarter $4.89 $3.30
The last reported sale price of our Common Stock on AMEX on January
10, 2003 was $4.19 per share.
We had 363 record owners of our Common Stock as of January 10, 2003. As
of that date, we believe that there were in excess of 1,800 beneficial holders
of our Common Stock.
No dividends have been declared or paid to date on our Common Stock,
and we do not anticipate paying dividends in the foreseeable future. We follow a
policy of cash preservation for future use in the business.
15
Securities Sold and Exemption from Registration Claimed.
On January 2, 2002, the Corporation issued shares of the Company's
Common Stock, at a per share price of $4.33, to the following Directors of the
Company in lieu of the board fees owed them for calendar year 2001:
Director Number of Shares Aggregate Price
Carol Lintz 3,017 $13,100
Norman Rickard 3,592 $15,500
Beat Schlagenhauf 2,748 $11,900
Ross Rapaport 2,748 $11,900
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 our financial statements and footnotes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this report. The historical results are not necessarily
indicative of the operating results to be expected in the future.
Fiscal Years Ended
October 31, October 31, October 31, October 31, October 31,
2002 2001 2000 1999 1998
--------------- ---------------- ---------------- ---------------- ---------------
Net sales $ 71,720,145 $ 64,858,277 $ 32,972,481 $28,864,737 $26,473,171
Net income (loss) $ 2,509,455 $ 1,168,844 $ (2,382,678) $ 3,398,641 $ 2,858,750
Net income (loss)
per share-diluted $.11 $.06 $(.22) $.31 $.26
Total assets $109,334,071 $106,131,155 $110,825,640 $33,834,230 $26,173,503
Long term obligations $ 46,539,557 $ 47,851,386 $ 51,428,257 $13,733,268 $10,422,803
16
Note that we have adopted new accounting provisions that change the way
we account for promotional costs. Such costs are now deducted (as allowances)
from gross sales instead of being included in advertising and promotional
expense. This reclassification has been made in all years reported above for
comparability. It has no effect on operating income or net income. For further
discussion see Item 7 below.
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 our future filings with the
Securities and Exchange Commission, the words or phrases "will likely result",
"we expect", "will continue", "is anticipated", "estimated", "project", or
"outlook" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. We wish to caution readers not to place undue reliance on any such
forward-looking statements, each of which speak only as of the date made. Such
statements are subject to various risks and uncertainties that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. We have no obligation to publicly release the result
of any revisions which may be made to any forward-looking statements to reflect
anticipated or unanticipated events or circumstances occurring after the date of
such statements.
Change in Accounting for Promotional Activity
During fiscal year 2002, we changed the way that we accounted for
certain promotional activity related to the sale of our consumer retail packages
in response to provisions adopted by the Emerging Issues Task Force of the
Financial Accounting Standards Board. Starting in fiscal year 2002, we have
deducted most of the costs related to the promotion of the product from sales
instead of including them in operating costs as we have in prior years. The
effect of this change has been to reduce sales with a corresponding decrease in
promotional costs, resulting in no change in operating income. Complete
information regarding this change can be found in footnote 4 of our Consolidated
Financial Statements. For comparability, we have applied this change uniformly
to all of the years reported herein. Thus, sales revenues and operating costs
reported in the following discussion may differ from previous reports.
Results of Operations
Fiscal Year Ended October 31, 2002 Compared to Fiscal Year Ended
October 31, 2001
Sales for 2002 were $71,720,000 compared to $64,858,000 for 2001, an
increase of $6,862,000 or 11%.
Sales through our Home & Office distribution channel increased to
$49,068,000 in 2002 from $47,551,000 in 2001, an increase of $1,517,000 or 3%.
The increase was a result of an acquisition in our core southern New England
market. Sales were down 2%, exclusive of the acquisition, primarily due to a
decrease in sales of our non-water related products.
17
Home & Office sales were 68% of total sales in 2002, compared to 73% in
the previous year. Water sales totaled $24,738,000 in 2002 compared to
$23,027,000 in 2001, an increase of $1,711,000, or 7%. Coffee and other product
sales in this area were $15,581,000 in 2002 compared to $16,501,000 in 2001, a
decrease of $920,000 or 6%. Equipment rentals totaled $8,749,000 in 2002
compared to $8,023,000 in 2001, an increase of $726,000, or 9%. The increase in
water sales and equipment rentals was largely attributable to the acquisition
and growth in our northern New England and New York markets. Sales for the
category, in general, were negatively affected by poor economic growth
conditions, particularly in the southern New England market.
Sales of our consumer retail products increased to $22,652,000 in 2002
from $17,307,000 in 2001, an increase of $5,345,000, or 31%. The increase is
attributable to the private label brands which more than doubled from $6,893,000
in 2001 to $14,530,000 in 2002. This reflected growing market demand and the
addition of a major grocery chain and a national drug chain as customers during
the year. Vermont Pure(R) brand sales decreased 25% from $6,346,000 in 2001 to
$4,763,000 in 2002. Hidden Spring(R) brand sales decreased 17% from $4,068,000
in 2001 to $3,359,000 in 2002. We believe that the decrease in the branded
products for the year was due to the increasingly competitive nature of the
branded marketplace. Competition has affected both price and distribution
channels. As a consequence, there is no assurance that we can regain sales that
have been lost in the branded markets. Average selling price for the segment was
down 9% for 2002. We believe the reduction in average selling price was due to
competitive pressure for both branded and private label products. Furthermore,
in conjunction with new private label agreements, we added a one-gallon size
bottle during 2002, which is a lower priced product by volume compared to other
products.
Cost of goods sold for 2002 was $35,583,000, or 50% of sales, compared
to $29,803,000 or 46% of sales, for 2001. The increase in cost of goods sold, as
a percentage of sales, compared to the prior year was attributable to the
increase in consumer retail product costs and higher costs in the Home & Office
segment. Cost of goods sold was $19,059,000 in 2002 for the Home & Office
segment compared to $18,059,000 for the previous year. For the consumer retail
segment cost of goods sold was $16,524,000 in 2002 compared to $11,744,000 for
2001. Cost per unit of retail product remained stable from 2001 to 2002.
Gross profit increased to $36,137,000, or 50% of sales, in 2002 from
$35,055,000, or 54% of sales, in 2001. Gross profit as a percentage of sales
decreased by 4% as a result of lower average selling prices and higher costs.
The aggregate dollar increase was attributable to higher sales volume. Gross
profit for the Home & Office segment increased to $30,009,000, or 61% of sales,
in 2002 from $29,492,000, or 62% of sales, in 2001. The dollar increase in gross
profit was attributable to higher sales volume. The decrease in gross profit as
a percentage of sales was due to higher service costs in the segment. Gross
profit for the consumer retail segment increased to $6,128,000, or 27% of sales,
in 2002 from $5,563,000, or 32% of sales, in 2001. The dollar increase in gross
profit was attributable to higher sales volume. The decrease in gross profit as
a percentage of sales was due to lower average selling prices costs. Lower
average selling prices are attributable to a change in competitive pressures
affecting all products as well as a change in product mix - from branded to
private label.
18
Total operating expenses decreased to $27,024,000 in 2002 from
$28,178,000 in 2001, a decrease of $1,154,000, or 4%. Operating expenses for the
retail segment of the business increased to $6,304,000 in 2002 from $5,510,000
the previous year, an increase of $794,000, or 14%. Home & Office delivery
operating expenses decreased to $20,720,000 in 2002 from $22,668,000 the
previous year, a decrease of $1,948,000, or 9%.
Selling, general and administrative, or SG&A, expenses were $25,084,000
and $24,302,000 for 2002 and 2001, respectively, an increase of $782,000, or 3%.
SG&A expenses in the retail segment increased 16% to $5,569,000 in 2002 from
$4,824,000 the prior year. The increase was attributable to higher distribution
and storage costs associated with higher sales volume. For the Home & Office
segment, SG&A expenses increased $19,515,000 in 2002 from $19,478,000 the
prior year.
Advertising expenses increased 26% to $1,656,000 in 2002 from
$1,317,000 in 2001. Advertising for the consumer retail segment totaled $683,000
in 2002 compared to $670,000 in 2001. In the Home & Office segment, advertising
increased 51% to $973,000 in 2002 from $646,000 in 2001. The substantial
increase was due to an effort to offset poor economic conditions with increased
visibility.
Amortization decreased from $2,544,000 in 2001 to $232,000 in 2002
because at the beginning of 2002 we implemented Statement of Financial
Accounting Standards No. 142 which stipulates that goodwill will not be
amortized. The pronouncement also stipulates that goodwill will be assessed
periodically for impairment. We completed a valuation of goodwill in the second
quarter and determined that there is no impairment to the goodwill presently on
the balance sheet. An assessment of the value of goodwill will be completed
annually. Other intangible assets continue to be amortized. All amortization is
accounted for in the Home & Office segment.
Other compensation in fiscal year 2002 totaled $52,000 compared to
$16,000 in fiscal year 200. This expense is attributed to the exercise of stock
options.
Income from operations was $9,113,000 in 2002 compared to $6,877,000 in
2001, an increase of $2,236,000. The increase was a result of higher sales and
lower operating costs. Net interest expense decreased to $4,553,000 in 2002 from
$5,034,000 in 2001, a decrease of $481,000. This was reflective of lower market
interest rates on the variable portion of our senior debt and operating line of
credit. In 2002, we had a loss of $228,000 on sale of land and buildings in New
York and Vermont. As a result of the sale, we no longer own property in New
York. Also in 2002, we had miscellaneous expenses of $71,000 representing the
net of worker's compensation and tax settlements combined with income from the
sale of a trademark.
Income before taxes was $4,260,000 in 2002 compared to $1,849,000 in
2001, an improvement of $2,411,000. The increase is a result of higher sales and
lower amortization and interest.
19
We recorded net tax expense of $1,751,000 in 2002, reflecting an
effective tax rate of 41%, compared to $680,000 in 2001, an effective tax rate
of 37%. We had no deferred tax benefits available in 2002 since loss
carryforwards, for book purposes, have been fully utilized. Tax expense in 2001
was offset by a deferred tax benefit of $973,000. Our effective tax rate in 2001
was 37% compared to our assumed statutory rate of 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 19 to our Notes to the Consolidated Financial Statements.
Based on the weighted average number of shares of common stock
outstanding of 21,091,837 (basic) and 22,035,269 (diluted) during 2002, net
income was $.12 per share - basic and $.11 per share - diluted. This compares to
$.06 per share under both methods in 2001.
As discussed above, we periodically execute interest rate swaps as part
of our strategy to curtail our 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 is recognized as other
comprehensive income (loss) until the hedged item is recognized in earnings. We
did not enter into any new swap agreements during the year ended October 31,
2002. Cumulatively, the fair value of our three outstanding swaps increased
$131,000 during the year resulting in a net decrease in value of $843,000 over
the life of the instruments. This amount has been recognized as an adjustment to
net income to arrive at comprehensive income as defined by the applicable
accounting standards. Further, it has been recorded as a current liability and a
decrease in owners' equity on our balance sheet.
Fiscal Year Ended October 31, 2001 Compared to Fiscal Year Ended
October 31, 2000.
We completed a merger with Crystal Rock Spring Water Company in October
2000. This transaction had a significant impact on nearly all of our
quantitative results. For comparison purposes only, the tables below set forth,
for the respective reporting periods,
(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 our 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 our financial statements and those of 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 our combined operating results for the
respective reporting periods in fiscal year 2000. Certain expenses have been
reclassified from operating expense to cost of goods sold from our operating
statement of a year ago to provide consistency between the two companies and
comparison to 2001.
20
For the Fiscal Year Ended:
(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 $ 32,973 $ 24,536 $ 57,509 $ 64,858
Cost of Goods Sold 17,072 10,804 $ 16 27,892 29,803
---------------- -------------- --------------- ------------------- ----------------
Gross Profit (Loss) 15,901 13,732 (16) 29,617 35,055
Operating Expenses 16,849 11,318 1,298 29,465 28,178
---------------- -------------- --------------- ------------------- ----------------
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) (1,013) 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 (Loss) Per Share $ (.22) $ .06
=================== ================
Sales for 2001 were $64,858,000 compared to $57,509,000 for 2000, an
increase of $7,349,000 or 13%.
Sales through the Home & Office distribution channel were 73% of total
sales and increased in 2001 to $47,551,000 from $44,348,000 in 2000, an increase
of $3,203,000 or 7%. The growth represented market growth typical for the
industry category. Water sales totaled $23,000,000 in 2001 compared to
$20,117,000 in 2000, an increase of $2,883,000, 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 was 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 was due to the shift of the sale of some
our products to an outside distributor in the consumer retail channel.
Sales of consumer retail products were 27% of total sales and increased
to $17,307,000 in 2001 from $13,161,000 in 2000, an increase of $4,146,000, or
32%. The sales increase was attributable to increased sales volume for the
Vermont Pure(R) brand and other private label brands we bottle as well as new
private label relationships that we commenced during the year. In addition,
average selling prices stabilized from a decreasing trend over the prior 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(R) brand
sales increased 9% compared to 2000 as a result of strengthening existing
distributor relationships and market expansion. Hidden Spring(R) brand sales
decreased 3% for the year due to competitive activity in mature markets and the
loss of a major customer through bankruptcy. We continued to increase the
private label volume that we bottled in 2001, 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. Total case
sales of all consumer retail products were also up 18% in 2001.
21
Cost of goods sold for 2001 was $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 was attributable to production
efficiency and cost savings as a result of the merger with Crystal Rock. Higher
sales volume for both retail and Home & Office packages continue to enhance
efficiency and lower costs per unit. Material pricing was stable in 2001.
Although we decreased its bottle costs during the year, it experienced price
increases for other raw materials.
Gross profit increased to $35,055,000, or 54% of sales, in 2001 from
$29,617,000, or 51% of sales, in 2000. Overall, gross profit increased 18% from
the prior year. The increase was attributable to higher sales volume and selling
prices combined with lower cost of goods sold.
Total operating expenses decreased to $28,178,000 from $29,465,000 in
2000, a decrease of $1,287,000, or 4%. Of those amounts, 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 SG&A expenses was a result of the increase in
Home & Office sales. This category is characterized by higher selling expenses
than the consumer retail category. The relatively small increase in SG&A costs
as compared to the growth in our sales was attributable to savings realized as a
result of the Crystal Rock merger.
As a result of the merger with Crystal Rock, we owned and operated two
major delivery accounting systems in 2000. We 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 $1,317,000 in 2001 from $1,258,000 in
2000, an increase of $59,000, or 5%. The increase was 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 use of
different distribution channels that required less promotional support and our
strategy to compete with lower pricing instead of promotion.
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 was 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. We 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 with Crystal Rock, we wrote off
fees and expenses amounting to $406,000 related to the financing we closed with
First Union and Key Banks. We 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 we owned in New York State. There were no such charges in 2001. We
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
was an improvement of $7,217,000. The return to profitability was a result of
increased sales, including a higher percentage of Home & Office sales, and
effective integration of the Vermont Pure and Crystal Rock businesses to take
advantage of cost savings. During 2001, interest rates decreased to levels that
they had not been in many years. A significant portion of our debt is variable.
Our average interest 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.
22
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. We recorded net tax expense of
$680,000 in 2001 compared to $1,103,000 in 2000. Tax expense in both years was
offset by deferred tax benefits of $973,000 and $769,000 that was recognized
based on our profitability trends. Our effective tax rate in 2001 was 37%
compared to our assumed statutory rate of 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 19 to the 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
$.22 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 be accounted for using the purchase method of accounting and
outlines new criteria for purchase price allocation. We did not complete any
material transactions after June 30, 2001 during the fiscal year. We adopted
SFAS 142 in fiscal year 2002.
As discussed above, we periodically execute interest rate swaps as part
of our strategy to curtail our 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 our three outstanding swaps decreased $973,537
for 2001. This amount has been recognized as an adjustment to net income to
arrive at comprehensive income as defined by the applicable accounting
standards. Further, it has been recorded as a current liability and, as a
result, decreased owners' equity on our balance sheet.
Liquidity and Capital Resources
At October 31, 2002, we had working capital of $3,774,000. This
represents an decrease of $470,000 from the $4,244,000 of working capital on
October 31, 2001. The decrease is a reflection of the use of working capital to
fund plant and equipment acquisitions to grow our business. A considerable
portion of our expenses do not require cash. Depreciation, deferred taxes and
other items totaling $9,198,000 more than offset the usage of cash for changes
in assets and liabilities of $951,000. When combined with net income, these
items provide $8,248,000 of cash flow from operating activities compared to
$5,548,000 in 2001, an increase of $2,700,000. This demonstrates that our
consolidated Home & Office operations, which are capital intensive, continue to
generate cash.
23
Cash flows from investing activities had a net outflow of $9,409,000
due to the use of cash for the acquisition of Iceberg Springs in November, 2001
and capital equipment. Capital expenditures were predominantly for routine Home
& Office delivery items - bottles, coolers and brewers and a bottling line in
our retail bottling facility. During 2002, we had a net cash inflow from
financing activities of $714,000. This was primarily attributable to borrowing
$4,200,000 for the Iceberg acquisition, and from the sale of stock upon the
exercise of stock options and from purchases under our Employee Stock Purchase
Plan, totaling $704,000.
During 2002, we made scheduled debt repayments of $4,190,000 primarily
for our senior debt facility with Webster Bank. We borrowed and repaid
$3,865,706 from our operating line of credit under the same facility. We
routinely require this borrowing on a seasonal basis. The line of credit
currently expires on February 1, 2003. A two year extension to this facility is
currently being negotiated.
At October 31, 2002, we have recognized all available deferred tax
assets and recorded a deferred tax asset of $2,835,000 after application of a
portion of the asset to the current year's liability. We have recorded all
available deferred tax benefits. Based on historical pre-tax income and
projected profitability, the realization of such deferred tax asset is expected
to take place over the next one or two years. We have estimated that $2,356,000
will be applied in 2003 and $479,000 will be applied in 2004.
Our cash balance at October 31, 2002 decreased by a net amount of
$447,000 from October 31, 2001. The decrease in cash is a reflection of our
intention to minimize debt. Based on 2002 financial results as of and for the
fiscal year ended October 31, 2002, we are in compliance with all of our
financial covenants in our agreement with Webster Bank except the debt service
coverage covenant which the Bank has waived for the period. The debt service
coverage covenant is expected to be modified under the terms of the new
agreement with the Bank. As of October 31, 2002, under the expected terms, we
would have been in compliance with all the financial covenants.
On December 30, 2002, we executed a term sheet with Webster Bank to
refinance our senior debt. The refinancing serves three purposes: to modify the
amortization schedule of the existing term debt (at October 31, 2002:
$28,570,000); to provide up to $15 million of debt for acquisitions and
retirement of subordinated debt; and to increase and renew the expiring
operating line of credit.
The new agreement would amortize the payback of the existing debt over
seven years and would amortize the payback of the new acquisition debt for five
years after the first two years. During the first two years, interest only would
be paid on a monthly basis for amounts drawn down for acquisitions and
subordinated debt repayment. The operating line of credit would be renewed for
two years for a total of $6,500,000. Interest on all borrowings would be tied to
our financial performance but commence at the 30 day LIBOR plus 200 basis
points.
Use of the proceeds related to acquisitions and retirement of
subordinated debt would be based on our compliance with certain covenants and
requirements, and our attainment of certain projections.
24
We continue to pursue an active program of evaluating acquisition
opportunities. As a result, we anticipate using our capital resources and
financing from outside sources in order to complete any further acquisitions. We
have no other current arrangements with respect to, or sources of, additional
financing for our business or future plans. There can be no assurance that
financing will be available on acceptable terms or at all to execute future
plans.
Recent economic conditions have provided both opportunities and
challenges. As noted, poor economic conditions resulted in decreased sales in
the Home & Office segment. Continued negative economic changes in the
northeastern United States adversely affect our financial results in the future.
Inflation has had no material impact on our performance. Since we have relied on
debt to finance our acquisition strategy, low market interest rates have
significantly reduced our interest costs. While interest rates are expected to
stay low in the immediate future and until economic conditions improve, we
continue to be exposed to market rates. See item 7A for a discussion of interest
rate risk.
Critical Accounting Policies
The Securities and Exchange Commission has requested that filers report
their critical accounting policies. The SEC defines "critical accounting
policies" as those that require application of management's most difficult,
subjective or complex judgments, often as a result of the need to make estimates
about the effects of matters that are inherently uncertain and may change in
subsequent periods.
Our financial statements are prepared in accordance with generally
accepted accounting principles. Preparation of the statements in accordance with
these principles requires that we make estimates, using available data and our
judgment for such things as valuing assets, accruing liabilities, and estimates
expenses. The following is a list of what we feel are the most critical
estimations that we make when preparing our financial statements.
Accounts Receivable - Allowance for Doubtful Accounts
We routinely review our accounts receivable, by customer account aging, to
determine the collectibility of the amounts due based on information we receive
from the customer, past history, and economic conditions. In doing so, we adjust
our allowance accordingly to reflect the cumulative amount that we feel is
uncollectible. This estimate may vary from the proceeds that we actually
collect. If the estimate is too low we may incur higher bad debt expenses in the
future resulting in lower net income. If the estimate is too high, we may
experience lower bad debt expense in the future resulting in higher net income.
Fixed Assets - Depreciation
We maintain buildings, machinery and equipment, and furniture and fixtures to
operate our business. These assets have extended lives. We estimate the life of
individual assets to spread the cost over the expected life. The basis for such
estimates is use, technology, required maintenance, and obsolescence. We
periodically review these estimates and adjust them if necessary. Nonetheless,
if we overestimate the life of an asset(s), at a point in the future, we would
have to incur higher depreciation costs and consequently, lower net income. If
we underestimate the life of an asset(s) we would absorb too much depreciation
in the early years resulting in higher net income in the later years when the
asset is still in service.
25
Goodwill - Intangible Asset Impairment
We have acquired a significant number of companies. The difference between the
value of the assets and liabilities required, including transaction costs, and
the purchase price is recorded as goodwill. If goodwill is not impaired, it
remains as an asset on our balance sheet at the value acquired. If it is
impaired we are required to write down the asset to an amount that accurately
reflects its carrying value. We have had an independent valuation company value
our goodwill balance and have determined that it is not impaired. In providing
the valuation, the company has relied, in part, on projections of future cash
flows of the assets that we provided. If these projections change in the future
there may be a material impact on the valuation of goodwill and result in
impairment of the asset.
Deferred Tax Asset
We have recognized a deferred tax asset on our balance sheet to reflect
cumulative current benefit of future tax loss carryforwards. We expect that the
asset to be realized over the next two years and therefore have not provided a
valuation allowance related to this asset. We have relied on our estimated
financial results for future years. If we have over estimated earnings in future
years we may have, in turn, overestimated the deferred tax asset and may have to
provide a valuation allowance, decreasing net income. Conversely, it may take us
longer to realize the value of the asset.
To the extent that final SEC rules on this subject may require disclosures in
addition to those we already make, we intend to adopt such additional disclosure
requirements when the final rules have been adopted.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to our operations result primarily from changes
in interest rates and commodity prices, primarily the resin prices for PET
bottles.
Interest Rate Risks
At October 31, 2002 we had approximately $12,600,000 of long term debt
subject to variable interest rates. Under the loan and security agreement with
Webster Bank, we currently pay interest at a rate of LIBOR plus a margin of
1.50%. A hypothetical 100 basis point increase in the LIBOR rate would result in
an additional $126,000 of interest expense on an annualized basis. Conversely, a
decrease would result in a proportionate interest cost savings.
We use interest rate "swap" agreements to curtail interest rate risk.
On November 3, 2000, we entered into a swap agreement with Webster Bank to fix
$8,000,000 of our long term debt at 8.07% interest for three years based on the
current applicable margin. On April 2, 2001, we entered into a swap agreement
with Webster Bank to fix an additional $4,000,000 of our long term debt at 6.78%
interest for three years. On July 24, 2001, we entered into a swap agreement
with Webster Bank to fix an additional $4,000,000 of our long term debt at 6.50%
interest for three years.
In aggregate, we have fixed the interest rate on this $16,000,000 of
debt at 7.35% over the next one to two years. Currently, we believe that this is
above market rates though the agreements are based on three year rate
projections. They serve to stabilize our cash flow and expense but ultimately
may cost more or less in interest than if we had carried all of our debt at a
variable rate over the swap term. Since significantly increasing our debt in
October 2001, our strategy has been to keep the fixed and variable portions of
our senior debt approximately equal to offset and minimize the respective the
risk of rising and falling interest rates. Future low rates may compel us to fix
a higher portion to further stabilize cash flow and expenses as we monitor short
and long term rates and debt balances.
26
Commodity Price Risks
Plastic - PET
In December 2002, we executed a new four year agreement with our bottle
supplier. The contract allows the vendor 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 $.002 or, at current volume levels,
$200,000 a year.
Coffee
The cost of our coffee purchases are dictated by commodity prices. We
enter into contracts to mitigate market fluctuation of these costs by fixing the
price for certain periods. Currently we have fixed the price of our anticipated
supply through June 2003 at "green" prices ranging from $.61-$.74 per pound. We
are not insulated from price fluctuations beyond that date. At our existing
sales levels, an increase in pricing of $.10 per pound would increase our total
cost for coffee $75,000. In this case, competitors that had fixed pricing might
have a competitive advantage.
Diesel Fuel
We own and operate vehicles to deliver product to customers. The cost
of fuel to operate these vehicles fluctuates over time. During fiscal 2002 we
incurred $700,000 of fuel expense. During the year, we entered into a contract
fixing approximately the cost for 25% of the total fuel anticipated to be
purchased during fiscal 2003. The contract fixes fuel costs for the year (spread
evenly) at an average base cost before additives and taxes of $0.85 per gallon.
Based on last year's consumption, a $0.10 increase per gallon in fuel cost would
result in an increase to operating costs of $50,000.
We also pay for fuel indirectly by hiring carriers to deliver product
though we do not have contracts with them. While the impact of a change in
prices is less predictable because of the absence of a contractual arrangement,
we know that fuel prices affect freight rates. Based on experience and
estimates, a $.10 per gallon increase in fuel costs would result in additional
freight cost of $25,000 per year.
ITEM 8. FINANCIAL STATEMENTS AND OTHER SUPPLEMENTARY DATA
Financials statements and their footnotes are set forth on pages F-1
through F-26.
27
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Independent Auditors' Reports F-1 - F-2
Financial Statements:
Consolidated Balance Sheets,
October 31, 2002 and 2001 F-3
Consolidated Statements of Operations,
Fiscal Years Ended October 31, 2002, 2001, 2000 F-4
Consolidated Statements of Stockholders' Equity
Fiscal Years Ended October 31, 2002, 2001, 2000 F-5
Consolidated Statements of Cash Flows,
Fiscal Years Ended October 31, 2002, 2001, 2000 F-6
Notes to Consolidated Financial Statements F-7 - F-26
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Vermont Pure Holdings, Ltd.
Randolph, VT 05060
We have audited the accompanying consolidated balance sheet of Vermont
Pure Holdings, Ltd. and Subsidiaries as of October 31 2002 and the related
consolidated statements of operations, change in stockholders' equity and cash
flows for year then ended. 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 audit 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 audit provides 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, 2002, and the consolidated
results of their operations and their cash flows for year then ended, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ GRASSI & CO., CPAs, P.C.
GRASSI & CO., CPAs, P.C.
Certified Public Accountants
New York, New York
December 13, 2002
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Vermont Pure Holdings, Ltd.
Randolph, VT 05060
We have audited the accompanying consolidated balance sheet of Vermont
Pure Holdings, Ltd. and Subsidiaries as of October 31 2001, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the two 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 the consolidated
results of their operations and their cash flows for each of the two 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,
------------------------------------------
2002 2001
----------------- ----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 652,204 $ 1,099,223
Accounts receivable - net 7,547,444 7,384,877
Inventories 4,067,740 3,147,985
Current portion of deferred tax asset 2,356,000 2,313,000
Other current assets 1,202,064 2,297,358
----------------- ---------------
TOTAL CURRENT ASSETS 15,825,452 16,242,443
----------------- ---------------
PROPERTY AND EQUIPMENT - net of accumulated depreciation 21,676,520 21,231,954
----------------- ---------------
OTHER ASSETS:
Goodwill 70,427,887 65,854,795
Other intangible assets - net of accumulated amortization 648,089 245,917
Deferred tax asset 479,000 2,301,000
Other assets 277,123 255,046
----------------- ---------------
TOTAL OTHER ASSETS 71,832,099 68,656,758
----------------- ---------------
TOTAL ASSETS $ 109,334,071 $ 106,131,155
================= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long term debt $ 4,881,817 $ 3,560,128
Accounts payable 3,508,062 4,102,235
Accrued expenses 2,640,226 3,206,648
Current portion of customer deposits 178,937 155,943
Unrealized loss on derivatives 842,898 973,537
----------------- ---------------
TOTAL CURRENT LIABILITIES 12,051,940 11,998,491
Long term debt, less current portion 46,539,557 47,851,386
Customer deposits 2,803,340 2,443,100
----------------- ---------------
TOTAL LIABILITIES 61,394,837 62,292,977
----------------- ---------------
COMMITMENTS AND CONTINGENCY
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, 21,235,927 issued and outstanding
shares in 2002 and 20,767,670 in 2001 21,236 20,768
Additional paid in capital 57,023,093 55,562,599
Accumulated deficit (8,262,197) (10,771,652)
Accumulated other comprehensive loss (842,898) (973,537)
----------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 47,939,234 43,838,178
----------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 109,334,071 $ 106,131,155
================= ===============
The attached notes are an integral part of these consolidated financial statements.
F-3
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Year Ended October 31,
------------------------------------------------------
2002 2001 2000
-------------- ---------------- --------------
NET SALES $ 71,720,145 $ 64,858,277 $ 32,972,481
COST OF GOODS SOLD (Including depreciation of $3,460,066 in 2002,
$2,939,535 in 2001 and $2,025,564 in 2000) 35,583,157 29,803,176 14,682,361
-------------- ---------------- --------------
GROSS PROFIT 36,136,988 35,055,101 18,290,120
-------------- ---------------- --------------
OPERATING EXPENSES:
Selling, general and administrative expenses 25,083,758 24,301,564 16,424,730
Advertising expenses 1,655,829 1,316,990 601,402
Writedown of computer software - - 1,291,719
Amortization 232,201 2,543,820 801,695
Other compensation 52,400 15,752 118,670
-------------- ---------------- --------------
TOTAL OPERATING EXPENSES 27,024,188 28,178,126 19,238,216
-------------- ---------------- --------------
INCOME (LOSS) FROM OPERATIONS 9,112,800 6,876,975 (948,096)
-------------- ---------------- --------------
OTHER INCOME (EXPENSE):
Interest (4,553,179) (5,033,760) (1,893,087)
Debt exit fees and expenses - - (405,972)
Loss on disposal of property and equipment (228,025) - (180,837)
Miscellaneous (71,141) 5,836 276,150
-------------- ---------------- --------------
TOTAL OTHER EXPENSE, NET (4,852,345) (5,027,924) (2,203,746)
-------------- ---------------- --------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT) 4,260,455 1,849,051 (3,151,842)
INCOME TAX EXPENSE (BENEFIT) 1,751,000 680,207 (769,164)
-------------- ---------------- --------------
NET INCOME (LOSS) $ 2,509,455 $ 1,168,844 $ (2,382,678)
============== ================ ==============
NET INCOME (LOSS) PER SHARE - BASIC $ 0.12 $ 0.06 $ (0.22)
============== ================ ==============
NET INCOME (LOSS) PER SHARE - DILUTED $ 0.11 $ 0.06 $ (0.22)
============== ================= ==============
WEIGHTED AVERAGE SHARES USED IN COMPUTATION - BASIC 21,091,837 20,447,609 10,992,995
============== ================= ==============
WEIGHTED AVERAGE SHARES USED IN COMPUTATION - DILUTED 22,035,269 20,651,239 10,992,995
============== ================= ==============
The attached notes are an integral part of these consolidated financial statements.
F-4
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
Additonal Other
Common Stock Paid in Treasury Stock Accumulated Comprehensive Comprehensive
Shares Par Value Capital Shares Amount Deficit Loss Total Income (Loss)
-------- --------- ------- -------- ------- ----------- ------------- --------- ------------
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 96,181
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
---------
Common stock issued for
acquisition 213,912 214 704,413 704,627
Stock compensation 12,105 12 52,388 52,400
Exercise of stock options 179,500 179 482,859 483,038
Shares purchased under
employee stock plan 62,740 63 220,834 220,897
Net income 2,509,455 2,509,455 2,509,455
Unrealized gain (loss) on
derivatives 130,639 130,639 130,639
--------------------------------------------------------------------------------------------------------
Balance, October 31, 2002 21,235,927 $ 21,236 $57,023,093 - $ - $ (8,262,197) $ (842,898) $47,939,234 $ 2,640,094
========================================================================================================
The attached notes are an integral part of these consolidated financial statements.
F-5
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended October 31,
----------------------------------------------
2002 2001 2000
------------- ------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,509,455 $ 1,168,844 $ (2,382,678)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation 4,398,432 3,690,675 2,083,204
Amortization 232,203 2,543,820 801,695
Change in deferred tax asset 1,779,000 (60,000) (769,164)
Gain on settlement of note receivable - - (295,000)
Loss on disposal of property and equipment 228,025 56,962 101,499
Non cash compensation 52,400 15,752 118,670
Changes in assets and liabilities (net of effect of acquisitions):
Accounts receivable (245,816) (744,342) 93,831
Inventories (919,755) (369,450) 559,824
Other current assets 1,125,000 (1,152,046) (163,905)
Other assets (21,676) 160,821 80,218
Accounts payable (594,173) (432,883) 83,972
Accrued expenses (483,191) 574,839 1,043,446
Customer deposits 187,860 95,184 76,651
------------- ------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,247,764 5,548,176 1,432,263
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (4,692,785) (3,827,225) (3,680,793)
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 property and equipment 271,262 31,700 329,550
Collection of note receivable - - 1,270,000
Cash used for acquisitions - net of cash acquired (4,987,073) (328,550) (10,330,062)
-------------- ------------ -------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (9,408,596) 151,989 (19,155,300)
-------------- ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit borrowings 3,865,706 3,040,000 5,658,208
Proceeds from debt 4,200,000 - 35,067,765
Payments on line of credit (3,865,706) (3,500,000) -
Principal payments of debt (4,190,123) (5,872,482) (726,307)
Principal payment of debt relating to refinancing - - (21,246,739)
Exercise of stock options 483,039 227,200 -
Proceeds from sale of common stock 220,897 96,182 11,250
------------- ------------- -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 713,813 (6,009,100) 18,764,177
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (447,019) (308,935) 1,041,140
CASH AND CASH EQUIVALENTS - beginning of year 1,099,223 1,408,158 367,018
------------- ------------- -------------
CASH AND CASH EQUIVALENTS - end of year $ 652,204 $ 1,099,223 $ 1,408,158
============= ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 4,556,831 $ 4,421,322 $ 1,579,381
============= ============= =============
Cash paid for taxes $ 193,372 $ 301,000 $ 118,503
============= ============= =============
NON-CASH FINANCING AND INVESTING ACTIVITIES:
Equipment acquired under capital leases $ - $ - $ 145,844
============= ============= =============
Debt converted to common stock $ - $ 975,000 $ -
============= ============= =============
The attached notes are an integral part of these consolidated financial statements.
F-6
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS OF THE COMPANY
Vermont Pure Holdings, Ltd. and Subsidiaries (collectively, the
"Company") is engaged in the production, marketing and distribution of
bottled water. 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 Vermont Pure Holdings, Ltd. and its
wholly-owned subsidiaries, Vermont Pure Springs, Inc., Crystal
Rock Spring Water Company ("Crystal Rock"), Excelsior Spring Water
Company Co. Inc. and Adirondack Coffee Services. All material
inter-company profits, transactions, and balances have been
eliminated in consolidation.
b. Cash Equivalents - The Company considers all highly liquid
temporary cash investments, with an original maturity of three
months or less when purchased, to be cash equivalents. The Company
maintains a money market account with a local financial
institution. The balance as of October 31, 2002 was $253,825. This
amount was treated as a cash equivalent for financial reporting
purposes.
c. Accounts Receivable - Accounts receivable are presented net of an
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 forty years for
buildings and improvements.
f. Intangible Assets - The Company records goodwill in accordance
with SFAS No. 141 and SFAS No. 142 (see footnote 4). The values of
covenants not to compete are amortized over the terms of the
related agreements.
F-7
g. Securities Issued for Services - The Company follows the
accounting treatment prescribed by Accounting Principles Board
Opinion No. 25 ("Accounting for Stock Issued 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 under Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation"
("SFAS No.123") was adopted. Any stock-based compensation awards
to non-employees and non-directors 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 outstanding 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 antidilutive.
i. Advertising Expenses - The Company expenses advertising costs at
the time the advertising begins to run with the exception of
advertising from which it derives direct responses from customers.
The Company expenses direct response advertising, which consists
of Yellow 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, 2002 and
2001 was $272,000 and $287,000, respectively, and is included in
other current assets on the accompanying consolidated balance
sheet.
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 the Company's product will be carried
for any definite period of time. The Company pays for such fees
either in cash, by providing free goods, or by issuing credits for
previously sold goods. The cost of the slotting fees is valued at
the amount of cash paid, or the fair value of the goods provided
in exchange. The Company expenses slotting fees when the
obligation is incurred.
k. Customer Deposits - Customers receiving home or office delivery of
water pay the Company a deposit for the water bottle on receipt
that is refunded upon return. The Company uses an estimate (based
on historical experience) of the deposits it expects to refund
over the next 12 months to determine the current portion of the
liability and classifies the balance of the amount as a long term
liability.
F-8
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.
m. Use of Estimates - The preparation of financial statements in
conformity with Generally Accepted Accounting Principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities 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 consolidated balance sheet for cash, trade
receivables, accounts payable and accrued expenses approximate
fair value based on the short-term maturity of these instruments.
The carrying amount of the Company's borrowings also approximates
fair value.
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. The Company follows SFAS No. 144,
"Accounting for the Impairment or Disposal of Long Lived Assets."
At October 31, 2002, the Company believes that there has been no
impairment of its long-lived assets.
p. Revenue Recognition - The Company follows the guidance issued
under United States Securities and Exchange Commission Staff
Accounting Bulletin No. 101 ("SAB No. 101"), "Revenue Recognition
in Financial Statements." Revenue is recognized when products are
delivered to customers through the Company's home and office
distribution channel. For consumer retail products, revenue is
recognized upon shipment or delivery of the product based on the
F.O.B. arrangements with the customer.
q. Shipping and Handling Costs - The Company classifies shipping and
handling costs as a component of selling, general and
administrative expenses. Shipping and handling costs were
approximately $2,030,000, $1,403,000, and $1,108,000 for fiscal
years ended October 31, 2002, 2001 and 2000, respectively. The
Company does not charge these costs to its customers.
F-9
3. 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,
if the extinguishment of debt is a routine and recurring transaction by
the entity, as in a risk management strategy, then it should not 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," as it does not meet 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
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 versus the date an entity commits to an exit plan
under EITF 94-3. 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.
4. 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 (defined by SFAS No. 142 as the
period over which the asset is expected to contribute to the future
cash flows of the entity). Goodwill and other intangible assets not
F-10
subject to amortization are tested for impairment annually or more
frequently if events or changes in circumstances indicate that the
asset might be impaired. The amount of impairment for goodwill and
other intangible assets is measured as the excess of their carrying
values over their implied fair values. The Company hired an independent
consultant to conduct the initial test of the carrying value of its
goodwill as compared to its fair value 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 assessments 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 (loss) and basic and diluted
earnings per share are as follows:
Fiscal Year Ended October 31,
---------------------------------------------
2002 2001 2000
---- ---- ----
Net income (loss), as reported $2,509,455 $1,168,844 $(2,382,678)
------------- -------------- --------------
Goodwill amortization net of $0 tax - 2,360,112 612,036
------------- -------------- --------------
Net income (loss), pro forma $2,509,455 $3,528,956 $(1,770,642)
============= ============== ==============
Basic earnings (loss) per share:
Net income (loss) per share, as reported $.12 $.06 $(.22)
Goodwill amortization net of $0 tax - .11 .05
---- ---- -----
Net income (loss) per share, pro forma $.12 $.17 $(.17)
==== ==== =====
Diluted earnings (loss) per share:
Net income (loss) per share, as reported $.11 $.06 $(.22)
Goodwill amortization net of $0 tax - .11 .05
---- ---- -----
Net income (loss) per share, pro forma $.11 $.17 $(.17)
==== ==== =====
5. 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."
F-11
The effect of the adoption of EITF Issue No. 01-09 is as follows:
Fiscal Year Ended October 31,
--------------------------------
2002 2001 2000
---- ---- ----
Gross Sales $74,468,343 $67,170,895 $35,124,813
Promotion (2,748,198) (2,312,618) (2,152,332)
----------- ----------- -----------
Net Sales $71,720,145 $64,858,277 $32,972,481
=========== =========== ===========
In addition to reducing sales, the adoption of the EITF also resulted
in a reduction of advertising expenses by $2,748,198, $2,312,618 and
$2,152,332 for the fiscal years ended October 31, 2002, 2001 and 2000,
respectively. These reclassifications had no impact on operating
income.
6. SEGMENTS
Reorganization and integration of operations in fiscal year 2001 had
resulted in management's preparation of detailed information sufficient
to evaluate its operations on a segment basis. As a result, effective
for the first quarter of fiscal 2002, the Company started accounting
for its business in two separate segments, "Retail" and "Home and
Office."
The segments are identifiable based on the types of products and their
distribution channels.
Retail - Characterized by the sale of water in small, portable
containers that are constructed from clear polyethylene terephthalate
(PET) plastic. Bottle sizes range from 8 ounces to 1.5 liters. These
products are sold to wholesale beverage distributors, supermarkets and
convenience stores.
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.
The Company allocates costs to each segment, directly whenever possible
and uses various applicable allocation methods to allocate shared
costs. There are no inter-segment revenues for the periods reported.
Fiscal Year Ended October 31, 2002
----------------------------------
(000's $) Retail Home & Office Total
------ ------------- --------
Sales $22,652 $49,068 $ 71,720
Cost of Goods Sold 16,524 19,059 35,583
------- ------- --------
Gross Profit 6,128 30,009 36,137
Operating Expenses 6,304 20,720 27,024
------- ------- --------
Operating Income (Loss) (176) 9,289 9,113
Interest 303 4,250 4,553
Other (11) 310 299
------- ------- --------
Income (Loss) Before Taxes $ (468) $ 4,729 $ 4,261
======= ======= ========
F-12
Assets
------
Cash $ 196 $ 456 $ 652
Other current assets 5,267 9,906 15,173
Goodwill and Intangible assets - 71,076 71,076
Other non current assets 8,060 14,373 22,433
------- ------- --------
Total Assets $13,523 $95,811 $109,334
======= ======= ========
Liabilities
-----------
Payables and accruals $ 2,750 $ 4,420 $ 7,170
Short term debt 732 4,150 4,882
Long term debt 6,981 39,559 46,540
Other non current liabilities - 2,803 2,803
-------- -------- --------
Total Liabilities $ 10,463 $ 50,932 $ 61,395
======== ======== ========
Fiscal Year Ended October 31, 2001
------------------------------------
(000's $) Retail Home & Office Total
------ ------------- ---------
Sales $17,307 $47,551 $ 64,858
Cost of Goods Sold 11,744 18,059 29,803
------- ------- --------
Gross Profit 5,563 29,492 35,055
Operating Expenses 5,510 22,668 28,178
------- ------- --------
Operating Income 53 6,824 6,877
Interest 903 4,131 5,034
Other - (6) (6)
------- ------- --------
Income (Loss) Before Taxes $ (850) $ 2,699 $ 1,849
======= ======= ========
Assets
------
Cash $ 473 $ 626 $ 1,099
Other current assets 5,387 9,756 15,143
Goodwill and Intangible assets - 66,101 66,101
Other non current assets 7,292 16,496 23,788
------- ------- --------
Total Assets $13,152 $92,979 $106,131
======= ======= ========
Liabilities
-----------
Payables and accruals $ 4,002 $ 4,437 $ 8,439
Short term debt 534 3,026 3,560
Long term debt 7,178 40,673 47,851
Other non current liabilities - 2,443 2,443
------- ------- --------
Total Liabilities $11,714 $50,579 $ 62,293
======= ======= ========
F-13
Fiscal Year Ended October 31, 2000
--------------------------------------
(000's $) Retail Home & Office Total
------ ------------- --------
Sales $12,250 $20,722 $ 32,972
Cost of Goods Sold 8,423 6,259 14,682
------- ------- --------
Gross Profit 3,827 14,463 18,290
Operating Expenses 4,902 14,336 19,238
------- ------- --------
Operating Income (Loss) (1,075) 127 (948)
Interest 710 1,183 1,893
Other 333 (22) 311
------- ------- --------
Loss Before Taxes $(2,118) $(1,034) $ (3,152)
======= ======= ========
Assets
------
Cash $ 825 $ 583 $ 1,408
Other current assets 10,544 5,180 15,724
Goodwill and Intangible assets - 68,469 68,469
Other non current assets 7,769 17,456 25,225
------- ------- --------
Total Assets $19,138 $91,688 $110,826
======= ======= ========
Liabilities
-----------
Payables and accruals $ 4,826 $ 2,499 $ 7,325
Short term debt 1,092 6,198 7,290
Long term debt 7,712 43,717 51,429
Other non current liabilities - 2,453 2,453
------- ------- --------
Total Liabilities $13,630 $54,867 $ 68,497
======= ======= ========
7. MERGERS AND ACQUISITIONS
On November 1, 2001, Vermont Pure Holdings, Ltd. acquired
substantially all the assets of Iceberg Springs Water, Inc. and
merged it into the Company's home and office operations in Connecticut.
The purchase price paid for Iceberg Springs Water, Inc. was 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
===========
F-14
The stock price of the Company for purposes of the acquisition was
$3.294 per share, resulting in the number of Vermont Pure Holdings,
Ltd. common shares issued of 213,912. The stock price was determined by
using the average of the daily stock prices from October 12, 2001 to
October 25, 2001.
The following table summarizes the pro forma consolidated results of
operations (unaudited) of the Company for the fiscal years ended
October 31, 2002 and October 31, 2001 as though the acquisition had
been consummated at the beginning of the periods presented:
Fiscal Year Ended October 31,
-------------------------------------
2002 2001
---- ----
Total Revenue $71,720,145 $66,941,730
=========== ===========
Net Income $ 2,509,455 $ 1,503,883
=========== ===========
Net Income Per Share - Diluted $ 0.11 $ .07
====== =====
Weighted Average Common Shares
Outstanding - Diluted 22,050,880 20,865,151
========== ==========
8. ACCOUNTS RECEIVABLE
The Company reduces its receivables by an allowance for future
uncollectible accounts. The reconciliation of the allowance is as
follows:
October 31,
--------------------------------------------
2002 2001 2000
---- ---- ----
Beginning Balance $513,629 $732,133 $348,167
Additions Charged to Expenses 605,847 522,004 547,645
Deductions (520,595) (740,508) (163,779)
-------- -------- --------
Ending Balance $598,881 $513,629 $732,033
======== ======== ========
9. INVENTORIES
October 31,
--------------------------------
2002 2001
---- ----
Raw Materials $ 1,289,553 $ 937,858
Finished Goods 2,778,187 2,210,127
------------ -----------
Total Inventory $ 4,067,740 $ 3,147,985
============ ===========
F-15
10.PROPERTY AND EQUIPMENT
Useful October 31,
Life 2002 2001
------ ---- ----
Land - $ 603,538 $ 603,538
Buildings and improvements.....................10 - 40 yrs. 4,679,721 5,119,218
Machinery and equipment........................ 3 - 10 yrs. 28,305,566 24,358,545
------------ ------------
33,588,825 30,081,301
Less accumulated depreciation 11,912,305 8,849,347
------------ ------------
$ 21,676,520 $ 21,231,954
============ ============
Depreciation expense for the fiscal years ended October 31, 2002, 2001
and 2000 was $4,398,432, $3,690,675 and $2,083,204, respectively.
11. INTANGIBLE ASSETS
October 31,
-----------
2002 2001
---- ----
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
Amortized Intangible Assets:
Trademark $ 123,467 $ 78,937 $ 123,467 $ 77,188
Customer Lists and Covenants Not to
Compete 2,198,922 1,595,363 1,564,547 1,364,909
---------- ---------- ---------- ----------
Total $2,322,389 $1,674,300 $1,688,014 $1,442,097
========== ========== ========== ==========
Estimated Amortization Expense:
for the fiscal year ended...................October 31, 2003 $134,624
October 31, 2004 134,624
October 31, 2005 134,624
October 31, 2006 134,624
October 31, 2007 132,457
The changes in the carrying amount of goodwill for the fiscal year ended
October 31, 2002 are as follows:
Home and Office
---------------
Balance as of November 1, 2001 $65,854,795
Goodwill acquired during the year 4,573,092
-----------
Balance as of October 31, 2002 $70,427,887
===========
F-16
12. ACCRUED EXPENSES
October 31,
-----------
2002 2001
---- ----
Payroll and vacation $ 1,133,853 $ 1,343,533
Income taxes 71,854 300,000
Interest 798,573 810,413
Miscellaneous 635,946 752,702
----------- ------------
$ 2,640,226 $ 3,206,648
=========== ============
13. DEBT
a) Senior Debt - The Company entered into a loan agreement with Webster
Bank and Manufacturers and Traders Trust Company on 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, 2002 was $25,000,000.
On November 1, 2001 the lenders agreed to modify the loan agreement
with the Company in order to provide additional financing through a new
term note for $4,200,000 to facilitate the acquisition of Iceberg
Springs Water, Inc. The term of the note is five years with scheduled
monthly principal payments ranging from $52,500 to $70,000 over the
term. The balance as of October 31, 2002 was $3,570,000.
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,
2002. There is a separate limit within the line for letters of credit,
which expires February 2, 2003.
Interest on the original term loan and borrowings under the line of
credit is charged at the current 30 day LIBOR rate plus 150 basis
points (2.9% at October 31, 2002). The Iceberg term loan is priced 100
basis points higher and is secured by a lien against all of the assets
of the Company. 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 covenants that the Company must
achieve to comply with the agreement.
Under the current agreement with the bank, the Company was in
compliance with all of its debt covenants for the fiscal year ended
October 31, 2002, except for the debt service covenant which the bank
waived. The debt service covenant is being modified in the terms of the
new agreement described in Note 24.
b) Subordinated Debt - As part of the merger agreement with the former
shareholders of Crystal Rock, the Company issued notes in the amount of
$22,600,000. The notes have an effective date of October 5, 2000, are
for terms of seven years and bear interest at 12% per year. Scheduled
repayments are made quarterly and are interest only for the first three
years. Quarterly payments range from $678,000 the first year to
$2,062,000 the last year, and a principal payment of $6,600,000 is due
at maturity.
The notes are secured by all of the assets of the Company but
specifically subordinated, with a separate agreement between the debt
holders, to the senior debt described in Note 13. a) above.
F-17
c) Other Long Term Debt - The Company's other long term debt is as
follows:
October 31,
-------------
2002 2001
---- ----
Mortgage on property acquired in October 1993,
interest at 4.5%, secured (subordinated) by the
property............................................. $ 220,719 $ 254,732
Various unsecured notes ranging in amounts of
$7,000 to $31,000 with interest rates of 8.5% to
10%.................................................... 30,655 56,778
---------- -----------
251,374 311,510
Less current portion................................... 41,817 60,136
---------- -----------
$ 209,557 $ 251,374
========== ===========
d) Annual maturities of long term debt are summarized as follows:
Senior Subordinated Other Total
Current Portion $4,840,000 - $ 41,817 $4,881,817
---------- ----------- -----------
Fiscal Year Ending October 31,
2004 4,840,000 2,000,000 44,105 6,884,105
2005 5,340,000 3,000,000 46,537 8,386,537
2006 6,340,000 4,000,000 49,122 10,389,122
2007 7,210,000 7,000,000 44,159 14,254,159
2008 - 6,600,000 25,634 6,625,634
------------ ------------- ------------- ------------
Long Term Portion $ 23,730,000 $ 22,600,000 $ 209,557 $ 46,539,557
------------ ------------- ------------- ------------
Total Debt $ 28,570,000 $ 22,600,000 $ 251,374 $ 51,421,374
============ ============ ============= ============
14. 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
1.50% resulting in a total fixed rate of 8.07%, 6.78% and 6.50%
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.
F-18
b) The Company adopted Statements of Financial Accounting Standards
(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 increased $130,639 during the year resulting in a loss of
$842,898 as of October 31, 2002.
15. STOCK BASED COMPENSATION
a) Stock Option Plan
In November 1993, the Company's Board of Directors adopted the 1993
Performance Equity Plan (the "1993 Plan"). The 1993 plan authorizes the
granting of awards for up to 1,000,000 shares of common stock to key
employees, officers, directors and consultants. 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 2002, 2001, and 2000 there were
no options issued under this plan.
On April 2, 1998 the Company's shareholders approved the 1998 Incentive
and Non Statutory Stock Option Plan (the "1998 Plan"). The 1998 plan
was amended by shareholder approval on October 5, 2000. This plan
provides for issuance of up to 1,500,000 options to purchase the
Company's common stock under the administration of the compensation
committee of the Board of Directors. The intent of the plan is to
reward options to officers, employees, directors, and other individuals
providing services to the Company. During fiscal 2002, 2001 and 2000,
90,000, 193,103 and 870,000 options were issued under this plan,
respectively.
F-19
The following table illustrates the Company's issuances of stock
options and outstanding stock option balances during the last three
fiscal years:
Outstanding Weighted-
Options Average
(Shares) Exercise Price
-------------- -----------------
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 193,103 3.12
Exercised (100,000) 2.27
Expired (104,000) 1.94
-------------- -----------------
Balance at October 31, 2001 2,678,321 $2.70
Granted 90,000 4.36
Exercised (179,500) 2.73
Expired (5,000) 2.00
-------------- -----------------
Balance at October 31, 2002 2,583,821 $2.93
============== =================
The following table summarizes information pertaining to outstanding
stock options as of October 31, 2002:
Weighted
Average Weighted
Exercise Outstanding Remaining Average Exercisable Average
Price Options Contractual Exercise Options Exercise
Range (Shares) Life Price (Shares) Price
------------------ ----------------- ---------------- --------------- ---------------- ---------------
$1.81 - $2.60 1,198,000 3.12 $2.48 1,198,000 $2.48
------------------ ----------------- ---------------- --------------- ---------------- ---------------
$2.81 - $3.38 1,200,821 7.41 3.19 712,545 3.16
------------------ ----------------- ---------------- --------------- ---------------- ---------------
$3.50 - $4.25 130,000 7.37 3.84 95,000 3.91
------------------ ----------------- ---------------- --------------- ---------------- ---------------
$4.28 - $4.98 55,000 7.12 4.82 12,500 4.63
------------------ ----------------- ---------------- --------------- ---------------- ---------------
2,583,821 5.41 $2.93 2,018,045 $2.80
================= ================ =============== ================ ===============
Outstanding options and warrants include options issued under the 1993
Plan, the 1998 Plan and non-plan options and warrants. There were
2,018,045, 1,698,252, and 1,572,528 options exercisable for fiscal
years ended October 31, 2002, 2001 and 2000, respectively.
The weighted average fair value of the options granted in 2002, 2001,
and 2000 using the Black-Scholes option pricing model were $2.26,
$2.29, and $1.63 per share, respectively.
F-20
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 option's exercise price.
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees." Pro-forma
information regarding net income (loss) and net income (loss) per share
is presented below as if the Company had accounted for its employee
stock options under the fair value method using SFAS No. 123; such
pro-forma information is not necessarily representative of the effects
on reported net income (loss) for future years due primarily to option
vesting periods and to the fair value of additional options in future
years.
Had compensation cost for the options been determined using the
methodology prescribed under the Black-Scholes option pricing model,
the Company's net income (loss) and earnings (loss) per share would
have been $1,875,713 and $.09 in 2002; $455,660 and $.02 in 2001; and
($2,806,851) and ($.26) in 2000.
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: 54% in 2002, 91% in 2001,
and 51% in 2000.
b) 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 Company issued
62,740 and 62,415 common shares for the fiscal years ended October 31,
2002 and 2001 respectively.
16. 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 $ 114,000, $
94,000, and $44,000 for the fiscal years ended October 31, 2002, 2001,
and 2000, respectively.
F-21
17. COMMITMENTS AND CONTINGENCY
a. Operating Leases
The Company's operating leases consist of trucks, office equipment and
rental property.
Future minimum rental payments over the terms of various lease
contracts are approximately as follows:
Fiscal Year Ending October 31,
-----------------------------------------------
2003 $1,927,000
2004 1,681,000
2005 1,475,000
2006 1,229,000
Thereafter 3,563,000
Rent expense was $1,925,911, $1,003,479, and $533,974 for the fiscal
years ended October 31, 2002, 2001, and 2000, respectively.
b. Legal Proceedings
DesCartes/Endgame Systems
On July 27, 2000 the Company filed a lawsuit in Vermont Federal
District Court against Descartes Systems/Endgame Solutions for
non-performance under a professional services agreement. In the suit
the Company alleges that the 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 District Court is not the proper
jurisdiction due to the fact that Descartes is located in Ontario
Canada where the case should be arbitrated.
In an order dated April 11, 2001, the District Court granted Descartes'
Motion to dismiss the case. Subsequently, the parties agreed to limit
damages to $200,000 for the Company and $400,000 to Descartes and
agreed to binding arbitration. The Company has accrued the $200,000 as
a potential liability and is included in accrued expenses on the
accompanying consolidated balance sheet as of October 31, 2002.
18. RELATED PARTY TRANSACTIONS
a) Directors and Officers
Three of the Company's major shareholders (former Crystal Rock
shareholders) have employment contracts with the Company through
October 5, 2005. Two are also directors. One contract entitles the
shareholder to annual compensation of $25,000 as well as a leased
Company vehicle. The other two contracts entitle the respective
shareholders to annual compensation of $250,000 each and other bonuses
and prerequisites. The trustee of the Baker family trusts, which is a
major shareholder of the Company, is also a director. Such trustee is
also a principal in a law firm to which the Company incurred
approximately $10,000 of paid legal fees during fiscal year 2000.
F-22
In addition, the Company paid $22,000 in consulting fees to a director
that resigned in October, 2000.
The Company leases a 67,000 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 $232,200 $248,200
Watertown $387,000 $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 2000 totaling $2,031. During 2001 and 2002, the
Company paid $294,311 and $275,332 respectively, for service, software,
and hardware. As of October 31, 2002, the Company holds a note from CDS
dated August 1, 1998 for the principal amount of $120,000 with accrued
interest of $43,650. The note is scheduled to mature August 15, 2003.
During 2001, the Company's share of CDS losses decreased its equity
investment in the company to $14,000. During 2002 The Company's
investment was written down to $0.
19. INCOME TAXES
The Company has approximately $9 million of available net operating
loss carryforwards at October 31, 2002 expiring from 2005 through 2018.
The major deferred tax asset (liability) items at October 31, 2002 and
October 31, 2001 are as follows.
October 31,
-----------
2002 2001
-------------- -------------
Accounts receivable allowance................................. $ 240,000 $ 206,000
Amortization.................................................. 891,000 1,123,000
Depreciation.................................................. (1,867,000) (1,440,000)
Other......................................................... (57,000) 105,000
Net operating loss carryforwards.............................. 3,628,000 4,620,000
-------------- -------------
Deferred tax asset............................................ $ 2,835,000 $ 4,614,000
============== =============
F-23
The provision for income tax expense (benefit) differs from the amount
computed by applying the statutory tax rate to net income (loss) before
the income tax provision (benefit) as follows:
Fiscal Year Ended October 31,
--------------------------------------------
2002 2001 2000
---- ---- ----
Income tax expense (benefit) computed at
the statutory rate $1,449,000 $628,000 $(1,072,000)
Effect of permanent differences 64,000 35,000 22,000
Effect of temporary differences - 250,000 (5,000)
Losses for which no benefit recorded - - 1,055,000
Federal alternative minimum tax - 65,000 -
State income taxes 201,000 535,000 -
Other 37,000 140,000 -
Decrease in valuation allowance - (973,000) (769,000)
------------ ------------- ------------
Income tax expense (benefit) $1,751,000 $680,000 $ (769,000)
============ ============= ============
The following is the composition of income tax expense (benefit):
Fiscal Year Ended October 31,
-------------------------------------
2002 2001 2000
---- ---- ----
Current:
Federal $ (66,000) $ 66,000 $ -
State 38,000 674,000 -
------------ ---------- ---------
Total current $ (28,000) $ 740,000 $ -
============ ========== =========
Deferred:
Federal $ 1,513,000 $ (60,000) $(769,000)
State 266,000 - -
------------ ---------- ---------
Total deferred tax (expense) benefit $ 1,779,000 $ (60,000) $(769,000)
============ ========== =========
20. EARNINGS PER SHARE
As required by SFAS No. 128, the Company considers outstanding
"in-the-money" stock options as potential common stock in its
calculation of diluted earnings per share and uses the treasury stock
method to calculate the applicable number of shares. The following
calculation provides the reconciliation of the denominators used in the
calculation of basic and fully diluted earnings per share:
F-24
Fiscal Year Ended October 31,
------------------------------
2002 2001 2000
---- ---- ----
Net Income (Loss) $2,509,455 $1,168,844 $(2,382,678)
========== ========== ===========
Denominator:
Basic Weighted Average Shares
Outstanding 21,091,837 20,447,609 10,992,995
Effect of Stock Options 943,432 203,630 -
---------- ---------- ----------
Diluted Weighted Average Shares Outstanding 22,035,269 20,651,239 10,992,995
========== ========== ==========
Basic Earnings Per Share $.12 $.06 $(.22)
==== ==== =====
Diluted Earnings Per Share $.11 $.06 $(.22)
==== ==== =====
For the fiscal year ended October 31, 2000 potentially dilutive
securities have not been included in the calculation of the denominator
for the 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 would
amount to 402,401 in fiscal 2000.
21. UNAUDITED QUARTERLY FINANCIAL DATA
The Company's unaudited quarterly financial data for the last two
fiscal years is as follows:
Fiscal 2002 For the quarter ended:
----------------------
(000's of $ except earnings January 31, April 30, July 31, October 31,
per share) 2002 2002 2002 2002
---------------- --------------- -------------- ---------------
Net Sales $14,692 $17,531 $21,579 $17,918
Gross Profit $7,962 $8,833 $10,795 $8,547
Net Income $310 $630 $1,292 $277
Earnings per Share:
Basic and Diluted $.01 $.03 $.06 $.01
Fiscal 2001 For the quarter ended:
----------------------
(000's of $ except earnings January 31, April 30, July 31, October 31,
per share) 2001 2001 2001 2001
---------------- --------------- -------------- ---------------
Net Sales $13,963 $15,063 $18,172 $17,661
Gross Profit $7,736 $8,135 $9,683 $9,502
Net Income $24 $74 $1,009 $62
Earnings per Share:
Basic and Diluted $.00 $.00 $.05 $.00
F-25
22. CONCENTRATION OF CREDIT RISK
The Company maintains its cash accounts at various financial
institutions. The balances at times may exceed federally insured
limits. At October 31, 2002, the Company had cash in deposits exceeding
the insured limit by approximately $460,000.
23. 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.
24. SUBSEQUENT EVENT - Senior Debt Refinancing
On December 30, 2002, the Company executed a term sheet with Webster
Bank to refinance its senior debt. The refinancing serves three
purposes: to re-amortize the existing (at October 31, 2002) $28,570,000
term debt; provide up to $15,000,000 of debt for future acquisitions
and retirement of existing subordinated debt and increase and renew the
expiring operating line of credit. In addition to Webster and M&T
Banks, the agreement tentatively adds two other banks to the bank group
- BankNorth and Rabobank.
The new agreement amortizes the payback of the existing debt over seven
years and amortizes the payback of the new acquisition debt for five
years after the first two years. During the first two years, interest
only is paid on a monthly basis for amounts drawn down for acquisitions
and sub-debt repayment. The operating line of credit will be renewed
for two years for a total of $6,500,000. Interest on all borrowings
will be tied to the Company's performance but start off at the 30 day
LIBOR plus 200 basis points.
Use of the proceeds related to acquisitions and retirement of sub-debt
are restricted by the Company's attainment of certain covenants,
requirements, and projections.
F-26
ITEM 9. 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.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference from
the Proxy Statement for our Annual Meeting of Stockholders scheduled to be held
April 8, 2003.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference from
the Proxy Statement for our Annual Meeting of Stockholders scheduled to be held
April 8, 2003.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
Information required by this Item is incorporated by reference from the
Proxy Statement for our Annual Meeting of Stockholders scheduled to be held
April 8, 2003.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference from
the Proxy Statement for our Annual Meeting of Stockholders scheduled to be held
April 8, 2003.
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of management,
including the Chairman and Chief Executive Officer and the Chief Financial
Officer, of the effectiveness of the design and operation of our "disclosure
controls and procedures," which are defined under SEC rules as controls and
other procedures of a company that are designed to ensure that information
required to be disclosed by a company in the reports that it files under the
Exchange Act is recorded, processed, summarized and reported within required
time periods. Based upon that evaluation, the Chairman and Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective.
(b) Changes in Internal Controls
There were no significant changes in our internal controls or other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
28
ITEM 15. 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, 2002.
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.)
29
3.1 Certificate of Incorporation of the Company.
(Incorporated by reference to Exhibit B to Appendix A
to the Proxy Statement included in the S-4 Registration
Statement.)
3.2 Certificate of Amendment of Certificate of
Incorporation of the Company filed October 5, 3.2 2000.
(Incorporated by reference to Exhibit 4.2 of the Merger
8-K.)
3.3 By-laws of the Company. (Incorporated by reference from
Exhibit 3.3 to Form 10-Q for the Quarter Ending 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. f/k/a Platinum Acquisition
Corp.)
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.)
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.)
30
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.
10.13 Term Note from the Company to Webster Bank dated
October 5, 2000
10.14 Subordinated Note from the Company to Henry E. Baker
dated October 5, 2000. (Incorporated 10.14 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 10.18 by reference
to Exhibit 10.18 of Form 10-K for the year ending
October 31, 2000.)
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.)
31
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 10.24 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 ending October 31,
2001.)
10.24** Agreement between Vermont Pure Springs, Inc. and
Zuckerman-Honickman Inc. dated December 12, 2002.
10.25 Term Note from the Company to Webster Bank dated
November 1, 2001. (Incorporated by 10.24** reference to
Exhibit 10.27 of Form 10-K for the year ending October
31, 2001.)
10.26 Amended and Restated Revolving Line of Credit Note
between the Company and Webster Bank. 10.25
(Incorporated by reference to Exhibit 10.28 of Form
10-K for the year ending October 31, 2001.)
10.27*** Form of Indemnification Agreements, dated November 1,
2002, between the Company and the following Directors
and Officers:
Henry E. Baker
John B. Baker
Peter K. Baker
Phillip Davidowitz
Timothy G. Fallon
Robert C. Getchell
David Jurasek
Carol R. Lintz
Bruce S. MacDonald
David R. Preston
Ross S. Rapaport
Norman E. Rickard
Beat Schlagenhauf
21 Subsidiaries of the Registrant
23.1 Consent of Independent Auditors
32
99.1 Certification of Chief Executive Officer pursuant to
18 U.S.C.ss.1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley act of 2002.
99.2 Certification of Chief Financial Officer pursuant to
18 U.S.C.ss.1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley act of 2002.
* Relates to compensation
** Certain portions of this exhibit have been omitted pursuant to a
request for confidential treatment filed with the Securities and
Exchange Commission.
*** The form contains all material information concerning the agreement
and the only differences are the name and the contact information of
the director or officer who is party to the agreement.
33
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 24, 2003 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
Timothy G. Fallon Chief Executive Officer
and Chairman of the Board
of Directors January 24, 2003
/s/ Henry E. Baker Director, Chairman Emeritis January 24, 2003
Henry E. Baker
/s/ Peter K. Baker President and Director January 24, 2003
Peter K. Baker
/s/ Phillip Davidowitz Director January 24, 2003
Phillip Davidowitz
/s/ Robert C. Getchell Director January 24, 2003
Robert C. Getchell
/s/ Carol R. Lintz Director January 24, 2003
Carol R. Lintz
/s/ David R. Preston Director January 24, 2003
David R. Preston
/s/ Ross S. Rapaport Director January 24, 2003
Ross S. Rapaport
/s/ Norman E. Rickard Director January 24, 2003
Norman E. Rickard
/s/ Beat Schlagenhauf Director January 24, 2003
Beat Schlagenhauf
/s/ Bruce S. MacDonald
Bruce S. MacDonald Chief Financial Officer January 24,2003
and Secretary
34
CERTIFICATION
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Timothy G. Fallon, certify that:
1. I have reviewed this annual report on Form 10-K of Vermont Pure Holdings,
Ltd.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: January 24, 2003
/s/ Timothy G. Fallon
Timothy G. Fallon
Chief Executive Officer
35
CERTIFICATION
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Bruce S. MacDonald, certify that:
1. I have reviewed this annual report on Form 10-K of Vermont Pure Holdings,
Ltd.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: January 24, 2003
/s/ Bruce S. MacDonald
Bruce S. MacDonald
Chief Financial Officer
36
EXHIBITS TO VERMONT PURE HOLDINGS, LTD.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2002
Exhibits Filed Herewith
Exhibit
Number Description
10.24** Agreement between Vermont Pure Springs, Inc. and
Zuckerman-Honickman Inc. dated December 12, 2002.
10.27*** Form of Indemnification Agreements, dated November
1, 2002, between the Company and the following
Directors and Officers:
Henry E. Baker
John B. Baker
Peter K. Baker
Phillip Davidowitz
Timothy G. Fallon
Robert C. Getchell
David Jurasek
Carol R. Lintz
Bruce S. MacDonald
David R. Preston
Ross S. Rapaport
Norman E. Rickard
Beat Schlagenhauf
21 Subsidiaries of the Registrant
23.1 Consent of Independent Auditors
99.1 Certification of Chief Executive Officer pursuant
to 18 U.S.C.ss.1350 , as adopted pursuant to
Section 906 of the Sarbanes-Oxley act of 2002.
99.2 Certification of Chief Financial Officer pursuant
to 18 U.S.C.ss.1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley act of 2002.
** Certain portions of this exhibit have been omitted pursuant to a
request for confidential treatment filed with the Securities and
Exchange Commission. *** The form contains all material information
concerning the agreement and the only differences are the name and the
contact information of the director or officer who is party to the
agreement.
37
Exhibit 10.24
[**] = Omitted information filed separately with the Securities and Exchange
Commission pursuant to a confidential treatment request.
BOTTLE SUPPLY AGREEMENT
This bottle supply agreement is made this 12th day of December, 2002 by
and between Zuckerman-Honickman, Inc. ("Z-H") and Vermont Pure Springs, Inc.
("Vermont Pure"). In consideration of the mutual promises herein contained and
intending to be legally bound, both parties agree as follows:
1. Requirements: Vermont Pure agrees to purchase 100% of their
PET water bottle requirements from Z-H.
A. Bottle pricing:
BALL PLASTICS
SIZE GM WT. PACK FOB COST
----------- ---------- ------------ -----------------
8oz 13 Bulk $[**]
----------- ---------- ------------ -----------------
12oz 13 Bulk $[**]
----------- ---------- ------------ -----------------
500ml 15.2 Bulk $[**]
----------- ---------- ------------ -----------------
20oz 21 Bulk $[**]
----------- ---------- ------------ -----------------
750ml 21 Bulk $[**]
----------- ---------- ------------ -----------------
Liter 26.5 Bulk $[**]
----------- ---------- ------------ -----------------
1.5 Liter 36.2 Bulk $[**]
----------- ---------- ------------ -----------------
B. Freight: All pricing is FOB Ball's plant of manufacture. Presently,
all bottles are scheduled for production in Baldwinsville, NY except the 500ml,
which is scheduled to be produced in Delran, NJ. For all 500ml shipments out of
Delran, NJ, ZH will invoice Vermont no more than the freight costs Vermont would
incur for shipments from Baldwinsville, NY to Randolph, VT. At the time of this
contract, the freight rate will $[**] but is subject to increases or decreases
based on market fluctuations.
C. Price Increases and Decreases: Pricing is based on resin prices as
of September 1, 2002, and will increase or decrease with announced industry
resin changes and announced industry general cost increases. Any changes will be
preceded by 30 days notice.
38
The gram weight per bottle, multiplied by the conversion factor of
[**], equals the amount of each $.01 per pound increase or decrease in the PET
resin price. The following table illustrates the change in price to Vermont Pure
per 1,000 bottles for each such $.01 per pound increase or decrease.
Ball Plastic Current $.01 Change
Size Quoted Gram Weight (Increase or Decrease)
- ------------- --------------------------- ---------------------------
8oz 13 $[**]
- ------------- --------------------------- ---------------------------
12oz 13 $[**]
- ------------- --------------------------- ---------------------------
500ml 15.2 $[**]
- ------------- --------------------------- ---------------------------
20oz 21 $[**]
- ------------- --------------------------- ---------------------------
750ml 21 $[**]
- ------------- --------------------------- ---------------------------
Liter 26.5 $[**]
- ------------- --------------------------- ---------------------------
1.5 Liter 36.2 $[**]
- ------------- --------------------------- ---------------------------
Should Ball lower the gram weight of their containers, the price for such lower
gram weight containers shall nevertheless remain the same due to the fact that
all savings have already been passed on to Vermont Pure in Z-H's pricing.
D. Dunnage: All pallets, frames and tier sheets will be memo billed to
Vermont Pure and rectified on a quarterly basis. Vermont Pure shall be
responsible for the replacement of those pallets, frames and tier sheets lost or
damaged due to Vermont Pure's negligence.
2. Quality: Z-H agrees to supply Vermont Pure quality bottles that are
consistent with industry standards. If Z-H fails to supply Vermont Pure with
quality bottles, Vermont Pure will give Z-H notice in writing, detailing the
precise nature of the alleged lack of quality. Z-H will then have a thirty (30)
day period in which to cure the alleged lack of quality. If the bottles still
fail to meet industry standards at the conclusion of thirty (30) days, Vermont
Pure will be free to purchase from an alternative supplier.
3. Service: Vermont Pure agrees to supply in writing to Z-H a 90-day
rolling forecast of its requirements, updated the first week of each month. Z-H
agrees to supply Vermont Pure bottles on a timely basis consistent with Vermont
Pure's requirements as reflected in the 90-day forecast. Z-H will use its best
efforts to meet requests for additional bottles in excess of the 90-day
forecast, but cannot guarantee supply of the excess bottle. Z-H will utilize any
and all locations necessary to meet Vermont Pure's needs at no additional
expense to Vermont Pure.
4. Effectiveness and Term: This agreement will be effective for 48
months commencing January 1, 2003. Volume is to be a minimum of 600,000,000
bottles or preforms over the length of the contract with a +/- of 5%. Should
Vermont require bottles in excess of the 630,000,000, Z-H will have 30 days from
the time of notification to accept or decline the increased volume. Should ZH
decline, Vermont would be free to secure the additional bottles on the open
market. At the end of the term, Vermont Pure shall give Z-H the right to match
any bona fide written opportunity involving Vermont Pure and their P.E.T.
requirements, in which event Z-H shall continue to be the exclusive supplier of
PET bottles, consistent with such terms.
39
5. Self Manufacture: In the event Vermont Pure elects to
self-manufacture plastic containers, it may terminate this Agreement by
providing written notice to ZH at least one year prior to the commencement of
self-manufacture. In addition, if Vermont Pure elects to self-manufacture
containers with preforms purchased from third parties, ZH shall have a right of
first refusal to supply such preforms to Vermont Pure at the price and other
terms which are no less favorable than those offered by such third parties to
Vermont Pure.
6. Payment: Payment terms will be net 30 days. Interest will be charged
at Wall Street Journal "prime rate of interest" plus two (2%) percent per annum
on all invoices over thirty (30) days. Shipments from Z-H will stop on the 40th
day until all invoices are current.
7. Force Majeure: If either party to this Agreement is unable to
perform its obligations under this Agreement as a consequence of a delay or
failure from any cause or event beyond the control of such party, including but
not limited to war, riots, acts of God or public enemy, fire, explosion, flood,
earthquake, strikes, lockouts or other labor disturbance, embargo, actions or
any governmental authority, such party shall be excused from the performance of
such obligations for the period of and to the extent of any such cause or event.
On the cessation of any event of force majeure as defined above, the disabled
party shall notify the party whose performance has not been excused of such
cessation or termination, and the disabled party's performance under this
Agreement shall recommence subject to an allowance for a reasonable amount of
time to rebuild or repair any damage or injury caused by the event, if any,
which is necessary to the party's performance. If cessation hereunder persists
for a period of time greater than eight (8) weeks, then this Agreement will
terminate. Any cessation hereunder will not extend the term of the contract.
8. Confidentiality: The parties shall use reasonable efforts to cause
their respective employees, agents and other representatives to hold, in
confidence, all confidential information (as hereinafter defined), and the
parties shall use efforts to ensure that any other person having access to the
Confidential Information through time shall not disclose the same to any person
except in connection with this Agreement and otherwise as may be reasonably
necessary to carry out this Agreement and the transactions contemplated hereby
or to comply with applicable law. For purposes hereof, "Confidential
Information" means all information of any kind (including, without limitation,
sales and promotional results) obtained directly or indirectly from either
party's business, except information which constitutes readily ascertainable
public information. "Confidential Information" shall not include any information
which (I) is generally available to the public as of the date of this Agreement,
or (ii) becomes generally available to the public after the date of this
Agreement, provided that such public disclosure did not result, directly or
indirectly, from any act, omission or fault of either of the parties to this
agreement or any of their agents with respect to such information.
40
9. Assignment: This Agreement and all of the provisions hereof shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns. Neither party shall assign this Agreement
without the prior written consent of the other party, assign (I) this Agreement
to such party's subsidiary or affiliate, or (ii) such party's rights, but not
obligations, to any lender of such party. Subject to Obtaining the written
consent of Z-H, Vermont Pure agrees that in the event Vermont Pure conveys the
bulk of its business to a third party (whether pursuant to an asset sale, stock
sale or otherwise) during the term of this Agreement, Vermont Pure shall cause
the purchaser of such assets, stock or otherwise, as the case may be, to assume
the obligations of Vermont Pure under this Agreement.
10. Notices: Any notice or written communication regarding this
agreement should be sent by certified mail, returned receipt requested to:
Vermont Pure Springs, Inc., 70 West Red Oak Lane, White Plains, NY 10604-3602 or
Zuckerman-Honickman, Inc., 191 South Gulph Road, King of Prussia, PA 19406,
Attention: President, or to such other locations as the parties subsequently
direct. All notices shall be deemed to have been received three (3) business
days after mailing.
11. Entire Understanding Amendment: This Agreement contains the entire
understanding between the parties with respect to the subject matter hereof,
superseding all prior written oral understandings or agreements. This Agreement
may only be amended by a writing signed by both parties.
12. Jurisdiction and Venue: The parties agree that any action arising
out of this Agreement shall be exclusively brought in the Court of Common Pleas
of Montgomery County, Pennsylvania or the United States District Court for the
Eastern District of Pennsylvania; and the parties further agree to waive any
objection to the laying of venue for any such action in such courts.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the day and year first above written.
ZUCKERMAN-HONICKMAN, INC. VERMONT PURE SPRINGS, INC.
/s/ Benjamin R. Zuckerman /s/ Timothy Fallon
- -------------------------------- -------------------------------
Benjamin R. Zuckerman, President Timothy Fallon, President & CEO
41
Exhibit 10.27
VERMONT PURE HOLDINGS, LTD.
Route 66, P.O. Box C, Catamount Industrial Park
Randolph, Vermont 05060
November 1, 2002
(Director/Officer Name)
(Director/Officer Address)
(Director/Officer Phone Number)
(Director/Officer Facsimile Number)
Dear (Name of Director/Officer):
From time to time we have discussed with the officers and directors of
Vermont Pure Holdings, Ltd. ("VPUR") the substantial increase in corporate
litigation, which can subject officers and directors to expensive litigation
risks and large claims for damages. We have also discussed the uncertainties
involved in obtaining and maintaining directors' and officers' liability
insurance on a reasonable basis as well as the potentially limited scope (and
risk of non-renewal) of such insurance as can be obtained.
You have informed us that you are concerned about the level of
protection available to you as an officer or director of VPUR in the present
legal climate, and we understand that your willingness to serve or to continue
to serve as an officer or director of VPUR depends upon, among other things,
assurance of adequate protection on a long-term basis. You have also informed us
that you know of no pending or threatened claim against you relating to VPUR.
The certificate of incorporation of VPUR (the "Charter") provides that
VPUR will indemnify its corporate officers and directors to the full extent
permitted by the applicable statute, which is Section 145 of the Delaware
General Corporation Law. The statute, in turn, authorizes a Delaware corporation
to provide indemnification against expenses and certain other losses incurred by
a director or officer in any proceeding in which he or she is involved as a
result of serving, or having served, as a director, officer, or employee of VPUR
or, at VPUR's request, as a director, officer or employee of another corporation
or entity. In addition, VPUR has the power under Delaware law to enter into
arrangements for indemnification on any terms not prohibited by law that the
Board of Directors deems to be appropriate.
In order to attract and retain your services as an officer or director
of VPUR, VPUR has agreed to indemnify you to the fullest extent of its authority
to do so, subject to the limitations set forth herein. This letter agreement
("Agreement") is intended to supplement and confirm the indemnification
provisions contained in the Charter of VPUR.
42
VPUR and you (the "Indemnified Party") by this Agreement agree as
follows:
1. Indemnification. VPUR shall indemnify and hold harmless the Indemnified
Party if the Indemnified Party is or was a party or is threatened to be
made a party to, or is otherwise involved with, any Proceeding (as such
term is defined in Section 20(b)):
(i) by reason of the fact that the Indemnified Party is or was a
director, officer, employee or agent of VPUR or any subsidiary of VPUR,
(ii) by reason of any action or inaction on the part of the Indemnified
Party while a director, officer, employee or agent of VPUR or any subsidiary of
VPUR,
(iii)by reason of the fact that the Indemnified Party is or was serving
at the request of VPUR as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, or
(iv) by reason of the fact that the Indemnified Party is or was serving
at the request of VPUR in any capacity with respect to any employee benefit
plan, against expenses (including reasonable attorneys' fees), judgments,
penalties, fines and amounts paid in settlement (if such settlement is approved
in writing in advance by VPUR, which approval shall not be unreasonably withheld
or delayed) actually and reasonably incurred by the Indemnified Party in
connection with such Proceeding unless VPUR shall establish, in accordance with
the procedures and standards described in Section 4(e)(i) and Section 4(e)(ii)
of this Agreement, that the Indemnified Party was not entitled to
indemnification, as described in Section 2.
2. Limitation on Indemnification. Notwithstanding any other provision of
this Agreement, no indemnification shall be paid under this Agreement
with respect to claims involving acts or omissions as to which the
Indemnified Party is finally adjudicated (by court order or judgment
from which no right of appeal exists) not to have acted in good faith
in the reasonable belief that the Indemnified Party's action was in the
best interests of VPUR or, to the extent that such matter relates to
service with respect to an employee benefit plan, in the best interests
of the participants or beneficiaries of such employee benefit plan; and
no indemnification shall be paid under this Agreement with respect to
any criminal matter in which the Indemnified Party is finally
adjudicated (by court order or judgment from which no right of appeal
exists) to have had reasonable cause to believe that the Indemnified
Party's action was unlawful.
3. Notice of Resignation; No Employment Agreement. In consideration of the
protection afforded by this Agreement, the Indemnified Party agrees not
to resign voluntarily from the position now held by him with VPUR
without first giving to VPUR not less than three weeks' written notice
of his intention to resign. Nothing contained in this Agreement is
intended to create or shall create in the Indemnified Party any right
to employment (in the case of a director) or continued employment (in
the case of an employee).
43
4. Expenses; Indemnification Procedure.
(a) Advancement of Expenses. VPUR shall advance all reasonable expenses
incurred by the Indemnified Party in connection with the investigation,
defense, settlement or appeal of any Proceeding (but not amounts
actually paid in settlement of any such Proceeding, which amounts shall
be paid under Section 4(e)). The advances to be made hereunder shall be
paid by VPUR to the Indemnified Party within sixty (60) days following
delivery of a written request therefor by the Indemnified Party to
VPUR.
(b) Failure to Advance Expenses. If the Indemnified Party shall have
requested an advancement of expenses pursuant to Section 4(a) and if
such request shall not have been not paid in full by VPUR within sixty
(60) days after a written request by the Indemnified Party for payment
thereof was first received by VPUR, the Indemnified Party may, but need
not, at any time thereafter bring an action against VPUR to recover the
unpaid amount of the claim for advancement of expenses and, subject to
Section 18 of this Agreement, the Indemnified Party shall also be
entitled to be reimbursed for the expense (including reasonable
attorneys' fees) of bringing such action.
(c) Reimbursement to VPUR. The Indemnified Party by this Agreement
undertakes to repay such amounts advanced only if, and to the extent
that, it shall ultimately be determined that the Indemnified Party is
not entitled to be indemnified by VPUR as authorized by this Agreement.
(d) Notice; Cooperation by the Indemnified Party. The Indemnified Party
shall give VPUR prompt notice of the commencement of any Proceeding, or
the threat thereof against the Indemnified Party, for which
indemnification will or could be sought under this Agreement. In
addition, the Indemnified Party shall give VPUR such information and
cooperation as it may reasonably require and as shall be within the
Indemnified Party's power. If for any reason the Indemnified Party is
not an employee of VPUR at the time of any activities performed by the
Indemnified Party in connection with the defense of any Proceeding,
VPUR shall compensate the Indemnified Party on the basis of $350.00 per
day (or portion thereof) spent by the Indemnified Party on behalf of
such activities at the request of VPUR, and reimburse the Indemnified
Party for all related and reasonable out-of-pocket expenses, such
compensation and expense reimbursement to be advanced in the manner set
forth in Section 4(a).
(e) Procedure for Indemnification.
(i) Any amounts payable by VPUR pursuant to Section 1 shall be
paid no later than sixty (60) days after the resolution (by
judgment, settlement, dismissal or otherwise) of the claim to which
indemnification is sought. If a claim is brought by the Indemnified
Party under this Agreement, under any statute, or under any
provision of VPUR's Charter or By-Laws, as amended or restated from
time to time, which provision provides for indemnification, and if
such claim is not paid in full by VPUR within such time period, the
Indemnified Party may, but need not, at any time thereafter bring
an action against VPUR to recover the unpaid amount of the claim
and, subject to Section 18 of this Agreement, the Indemnified Party
shall also be entitled to be reimbursed for the expense (including
reasonable attorneys' fees) of bringing such action. It shall be a
44
defense to any such action that the Indemnified Party has not met
the standards of conduct which make it permissible under applicable
law for VPUR to indemnify the Indemnified Party for the amount
claimed. Section 4(e)(ii) shall apply to any such determination
and the burden of proving such defense shall be on VPUR. In
addition, the Indemnified Party shall be entitled to receive
interim payments of expenses pursuant to Section 4(a) unless and
until such defense shall be finally adjudicated by court order or
judgment from which no further right of appeal exists. VPUR shall
not be liable to indemnify the Indemnified Party under this
Agreement for any amounts paid in settlement of any action or claim
effected without its written consent, which consent shall not be
unreasonably withheld or delayed.
(ii) It is the parties' intention (which intention reflects
applicable law) that if VPUR contests the Indemnified Party's right
to indemnification, the question of the Indemnified Party's right
to indemnification shall be for the court to decide. The
termination of any action or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its
equivalent, shall not create a presumption that the Indemnified
Party was not entitled to indemnification under this Agreement. In
addition, neither the failure of VPUR to have made a determination
that indemnification of the Indemnified Party is proper under the
circumstances, nor any determination by VPUR that the Indemnified
Party has not met such applicable standard of conduct, shall create
a presumption that the Indemnified Party has or has not met the
applicable standard of conduct.
5. Notice to Insurers. If, at the time of the receipt of a notice of a
claim pursuant to Section 4(d) of this Agreement, VPUR has in effect
any insurance, including, without limitation, directors' and officers'
liability insurance, which may provide for payment of or reimbursement
for such claim, VPUR shall give prompt notice of the assertion of such
claim to each issuer of such insurance in accordance with the
procedures set forth in the respective policies. VPUR shall thereafter
(if it is appropriate to do so pursuant to the terms of the applicable
insurance policy) take all necessary or desirable action to cause such
insurers to pay, on behalf of the Indemnified Party, all amounts
payable as a result of such Proceeding in accordance with the terms of
such policies.
6. Other Sources of Indemnification. The Indemnified Party shall not be
required to exercise any rights against any other parties (for example,
under any insurance policy purchased by VPUR, the Indemnified Party or
any other person or entity) before the Indemnified Party enforces this
Agreement. However, to the extent VPUR actually indemnifies the
Indemnified Party or advances expenses, VPUR shall be subrogated to
(and shall be entitled to enforce) any such rights which the
Indemnified Party may have against third parties. Notwithstanding the
foregoing, VPUR shall have no right to seek reimbursement under
insurance policies maintained by the Indemnified Party personally or by
the employer of an Indemnified Party who is a non-employee director of
VPUR. The Indemnified Party shall assist VPUR in enforcing rights
against third parties if VPUR pays the Indemnified Party's reasonable
costs and expenses of doing so.
45
7. Selection of Counsel. In the event VPUR shall be obligated under
Section 4(a) of this Agreement to pay the expenses of any Proceeding
involving the Indemnified Party, VPUR shall be entitled to participate
in such Proceeding and, to the extent it shall wish, to assume the
defense of such Proceeding, with counsel chosen by VPUR and approved by
the Indemnified Party, which approval shall not be unreasonably
withheld or delayed. Upon the delivery to the Indemnified Party of
written notice of its election to assume such defense, approval of such
counsel by the Indemnified Party and retention of such counsel by VPUR,
VPUR will not be liable to the Indemnified Party under this Agreement
for any fees of counsel or other expenses subsequently incurred by the
Indemnified Party in connection with the defense of the same
Proceeding, except for fees and expenses incurred by the Indemnified
Party as a consequence of the Indemnified Party's obligation to
cooperate with VPUR in the defense of such matters (as set forth in
Section 4(d) of this Agreement). Notwithstanding the foregoing, the
reasonable fees and expenses of the Indemnified Party's counsel shall
be paid by VPUR only if (i) the employment of counsel by the
Indemnified Party has been previously authorized by VPUR, (ii) the
Indemnified Party shall have reasonably concluded that, under
applicable standards of professional responsibility applicable to
attorneys, there may be a material conflict of interest between VPUR
and the Indemnified Party in the conduct of such defense or that such
counsel and the Indemnified Party have fundamental and material
disagreements as to the proper method of managing the litigation, or
(iii) VPUR shall not, in fact, have employed counsel to assume the
defense of such Proceeding. The Indemnified Party shall have the right
to employ his own counsel in any such Proceeding at the Indemnified
Party's expense.
8. Additional Indemnification Rights; Nonexclusivity.
(a) Scope. In the event of any change, after the date of this
Agreement, in any applicable law, statute or rule which expands the
right of a Delaware corporation such as VPUR to indemnify a member of
its board of directors or an officer, such changes shall, without any
further action by VPUR, be included within the scope of the
indemnification provided to the Indemnified Party by, and VPUR's
obligations under, this Agreement. In the event of any change in any
applicable law, statute or rule that limits or restricts the right of
VPUR to indemnify a member of its Board of Directors or an officer,
such changes shall have no effect on this Agreement or the parties'
rights and obligations hereunder, except to the extent specifically
required by such law, statute or rule to be applied to this Agreement.
(b) Nonexclusivity. The indemnification provided by this Agreement
shall not be deemed exclusive of any rights to which the Indemnified
Party may be entitled under VPUR's Charter or By-Laws, any agreement,
any vote of disinterested directors, Delaware law, or otherwise, both
as to action in the Indemnified Party's official capacity and as to
action or inaction in another capacity while holding such office. The
indemnification provided under this Agreement shall continue as to the
Indemnified Party for any action taken or not taken while serving in an
indemnified capacity even though he may have ceased to serve in such
capacity at the time any covered Proceeding is commenced.
9. Partial Indemnification. If the Indemnified Party is entitled under any
provision of this Agreement to indemnification by VPUR for some or a
portion of the expenses, judgments, fines or penalties actually or
reasonably incurred by him in the investigation, defense, appeal or
settlement of any Proceeding, but not, however, for the total amount
thereof, VPUR shall nevertheless indemnify the Indemnified Party for
the portion of such expenses, judgments, fines or penalties to which
the Indemnified Party is entitled.
46
10. Mutual Acknowledgment. Both VPUR and the Indemnified Party acknowledge
that in certain instances, applicable law or applicable public policy
could be construed to prohibit VPUR from indemnifying its directors and
officers under this Agreement or otherwise. Nothing in this Agreement
is intended to require or shall be construed as requiring VPUR to do or
fail to do any act in violation of any applicable law. VPUR's
inability, as a result of a binding order of any court of competent
jurisdiction, to perform its obligations under this Agreement shall not
constitute a breach of this Agreement and VPUR's compliance with any
such order shall constitute compliance with this Agreement.
11. Directors' and Officers' Liability Insurance. VPUR shall, from time to
time, make the good faith determination whether or not it is
practicable for VPUR to obtain and maintain a policy or policies of
insurance with reputable insurance companies providing the officers and
directors of VPUR with coverage for losses from wrongful acts, or to
ensure VPUR's performance of its indemnification obligations under this
Agreement. Among other matters, VPUR may consider the costs of
obtaining such insurance coverage, the protection afforded by such
coverage and the restrictions or other terms required by such
insurance. In all policies of directors' and officers' liability
insurance, the Indemnified Party shall be named as an insured in such a
manner as to provide the Indemnified Party the same rights and benefits
as are accorded to the most favorably insured of VPUR's directors, if
the Indemnified Party is a director, or of VPUR's officers, if the
Indemnified Party is not a director of VPUR but is an officer, or of
VPUR's key employees, if the Indemnified Party is not an officer or
director but is a key employee. Notwithstanding the foregoing, VPUR
shall have no obligation to obtain or maintain such insurance if VPUR
determines in good faith that such insurance is not reasonably
available, if the premium costs for such insurance are disproportionate
to the amount of coverage provided, if the coverage provided by such
insurance is limited by exclusions so as to provide an insufficient
benefit, or if the Indemnified Party is covered by similar insurance
maintained by a subsidiary or parent of VPUR.
12. Severability. Nothing in this Agreement is intended to require or shall
be construed as requiring VPUR to do or fail to do any act in violation
of applicable law. The provisions of this Agreement shall be severable
as provided in this Section 12. If this Agreement or any portion of
this Agreement shall be invalidated on any ground by any court of
competent jurisdiction, then VPUR shall nevertheless indemnify the
Indemnified Party to the greatest extent permitted by any applicable
law or any applicable portion of this Agreement that shall not have
been invalidated, and the balance of this Agreement not so invalidated
shall be enforceable in accordance with its terms.
13. Exceptions. Any other provision herein to the contrary notwithstanding,
VPUR shall not be obligated pursuant to the terms of this Agreement:
47
(a) Excluded Acts. To indemnify the Indemnified Party for any acts or
omissions or transactions from which a director, officer, employee or
agent may not be relieved of liability under applicable Delaware law;
or
(b) Claims Initiated by the Indemnified Party. To indemnify or advance
expenses to the Indemnified Party with respect to proceedings or claims
initiated or brought voluntarily by the Indemnified Party and not by
way of defense, except (i) with respect to proceedings brought to
establish or enforce a right to advancement of expenses or
indemnification under this Agreement or any other statute or law and
(ii) declaratory judgment or similar proceedings brought to obtain a
judicial interpretation of an applicable statute or regulation,
provided that such indemnification or advancement of expenses may be
provided by VPUR in specific cases if the Board of Directors has
approved the initiation or bringing of such suit; or
(c) Lack of Good Faith. To indemnify the Indemnified Party for any
expenses incurred by the Indemnified Party with respect to any
proceeding instituted by the Indemnified Party to enforce or interpret
this Agreement, if a court of competent jurisdiction determines that
each of the material assertions made by the Indemnified Party in such
proceeding was not made in good faith or was frivolous; or
(d) Insured or Other Reimbursed Claims. To indemnify the Indemnified
Party for expenses or liabilities of any type whatsoever (including,
but not limited to, judgments, fines, ERISA excise taxes or penalties,
and amounts paid in settlement) which have been reimbursed directly to
the Indemnified Party, by an insurance carrier under a policy of
directors' and officers' liability insurance maintained by VPUR, or
otherwise by VPUR.
(e) Claims under Section 16(b). To indemnify the Indemnified Party for
expenses and the payment of profits arising from the purchase and sale
by the Indemnified Party of securities in violation of Section 16(b) of
the Securities Exchange Act of 1934, as amended ("Exchange Act"), or
any similar successor statute.
14. Sale of Assets. In case of (i) the sale or other disposition (excluding
mortgage or pledge) of all or substantially all of the assets of VPUR
to another corporation or entity, or (ii) the merger or other business
combination of VPUR with or into another corporation or entity pursuant
to which VPUR will not survive or will survive only as a subsidiary of
another corporation or entity, in either case with the stockholders of
VPUR prior to the merger or other business combination holding less
than 50% of the voting shares of the merged or combined companies or
entities after such merger or other business combination, or in the
event of any other similar reorganization involving VPUR, VPUR shall
to the extent possible cause the acquiring corporation or entity to
assume the obligations of VPUR under this Agreement with respect to the
Indemnified Party.
15. Duration of Agreement.
(a) This Agreement shall be effective as of the date set forth on the
first page and shall apply to acts or omissions of the Indemnified
Party which occurred prior to such date if the Indemnified Party was an
officer, director, employee or other agent of VPUR or any subsidiary,
or was serving at the request of VPUR or any subsidiary as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, at the time such act or omission
occurred.
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(b) This Agreement shall be effective for an initial term of two years
from and after the date of this Agreement ("Initial Term"). Thereafter,
for so long as the Indemnified Party remains an officer or director of
VPUR, this Agreement shall automatically renew for an additional period
("Renewal Term") of two years unless VPUR shall have given written
notice of non-renewal to the Indemnified Party not later than six
months before the end of the then current Term (either the Initial Term
or a Renewal Term, as applicable). VPUR's obligations under this
Agreement shall continuously, irrevocably and perpetually cover any and
all of the Indemnified Party's covered acts and omissions that occur
during the Initial Term or any Renewal Term. Such coverage shall apply
to Proceedings relating to acts or omissions occurring during the Term
even if such Proceeding is not initiated until after (or continues
beyond) the Term. VPUR's obligations under this Agreement shall
continue perpetually with regard to covered acts and omissions
occurring during the period covered by this Agreement (including the
Initial Term and any Renewal Term, as applicable), notwithstanding the
giving of any such notice of termination or any other circumstance
whatsoever. The indemnification provided under this Agreement shall
continue as to the Indemnified Party even though he may have ceased to
be a director, officer, employee or agent of VPUR.
16. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original.
17. Successors and Assigns. This Agreement shall be binding upon VPUR and
its successors and assigns, and shall inure to the benefit of the
Indemnified Party and the Indemnified Party's spouse, estate, heirs and
legal representatives.
18. Attorneys' Fees. In the event that any action is instituted by the
Indemnified Party under this Agreement to enforce or interpret any of
the terms of this Agreement, the Indemnified Party shall be entitled to
be paid all court costs and expenses, including reasonable attorneys'
fees, incurred by the Indemnified Party with respect to such action,
unless as a part of such action, a court of competent jurisdiction
determines that each of the material assertions made by the Indemnified
Party as a basis for such action was not made in good faith or was
frivolous. In the event of an action instituted by or in the name of
VPUR under this Agreement or to enforce or interpret any of the terms
of this Agreement, the Indemnified Party shall be entitled to be paid
all court costs and expenses, including attorneys' fees incurred by the
Indemnified Party in defense of such action (including with respect to
the Indemnified Party's counterclaims and cross-claims made in such
action), unless as a part of such action the court determines that each
of the Indemnified Party's material defenses to such was made in bad
faith or was frivolous.
19. Notices. All notices, requests, demands and other communications under
this Agreement shall be in writing and shall be deemed duly given if
delivered by hand, sent by facsimile transmission with confirmation of
receipt, sent via a reputable overnight courier service with
confirmation of receipt requested, or mailed by domestic certified or
registered mail with postage prepaid and return receipt requested, to
the Indemnified Party at the address on the first page of this
Agreement and to VPUR at the address below (or at such other address
for a party as shall be specified by like notice), and shall be deemed
given on the date on which delivered by hand or otherwise on the date
of receipt as confirmed:
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Vermont Pure Holdings, Ltd.
Route 66, P.O. Box C, Catamount Industrial Park
Randolph, Vermont 05060
Phone: 802-728-3600
Fax: 802-728-4614
Attention: Chairman and Chief Executive Officer
With copies to:
Vermont Pure Holdings, Ltd.
70 W. Red Oak Lane
White Plains, New York 10604
Phone: 914-697-4727
Fax: 914-697-4828
Attention: Chairman and Chief Executive Officer
Dean F. Hanley, Esq.
Foley Hoag LLP
155 Seaport Boulevard
Boston, Massachusetts 02210
Phone: 617-832-1000
Fax: 617-832-7000
20. Construction Of Certain Words and Phrases.
(a) The term "expense" shall include all attorneys' fees, retainers,
court costs, transcript costs, fees of experts, travel expenses,
duplicating costs, printing and binding costs, telephone charges,
postage, delivery service fees, and all other disbursements or expenses
of the types customarily incurred in connection with prosecuting,
defending, preparing to prosecute or defend or investigating a
Proceeding.
(b) "Proceeding" shall include any threatened, pending or completed
action, suit, arbitration, alternate dispute resolution mechanism,
investigation, administrative hearing or any other proceeding whether
civil, criminal, administrative or investigative, except one initiated
by the Indemnified Party.
(c) The "Term" of this Agreement shall include both the Initial Term
and any Renewal Term or Terms (as such terms are defined in Section
15(b)).
21. Choice of Law. This Agreement shall be governed by and its provisions
construed in accordance with the laws of the State of Delaware without
regard to its conflicts of law rules.
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22. Consent To Jurisdiction; Choice Of Venue. VPUR and the Indemnified
Party each by this Agreement irrevocably consents to the jurisdiction
of the courts of New York State and the federal courts within New York
State for all purposes in connection with any action or proceeding
which arises out of or relates to this Agreement and agree that any
such action or proceeding shall be brought only in a New York State
Court located in the County of New York or the County of Westchester,
or in the United States District Court, Southern District of New York.
If the foregoing correctly sets forth our understanding, I would
appreciate your executing the enclosed counterpart of this Agreement
and returning it to me. Upon your signature this letter agreement shall
constitute a binding agreement.
Vermont Pure Holdings, Ltd.
By: Signature of Company Representative
Title:
Accepted and agreed to:
Signature of Director/Officer
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EXHIBIT 21
Subsidiaries of the Registrant
All of the Company's subsidiaries are wholly owned by the registrant or a
subsidiary of the registrant:
Vermont Pure Springs, Inc. ("Springs") - incorporated in the State of Delaware.
Crystal Rock Spring Water Company ("Crystal Rock") - incorporated in the State
of Connecticut.
Excelsior Springs Water Company, Inc. - incorporated in the State of New York
and wholly owned by the Company's subsidiary, Springs.
Adirondack Coffee Services, Inc. - incorporated in the State of New York and
wholly owned by the Company's subsidiary, Springs.
Crystal-Waterville, Inc. - incorporated in the State of Connecticut and wholly
owned by the Company's subsidiary, Crystal Rock.
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EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and Stockholders
of Vermont Pure Holdings, Ltd.
Randolph, Vermont
We consent to the incorporation by reference in Registration Statements No.
333-95908, 333-64044, and 333-100310 on Form S-8 of Vermont Pure Holdings, Ltd.
of our report, dated December 13, 2002, appearing in the Annual Report on Form
10-K of Vermont Pure Holdings, Ltd. for the year ended October 31, 2002.
/s/ GRASSI & CO. P.C
New York, New York
December 13, 2002
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Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. ss.1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of Vermont Pure
Holdings, Ltd. (the "Company") for the year ended October 31, 2002, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
the undersigned Chief Executive Officer of the Company, certifies, to the best
knowledge and belief of the signatory, pursuant to 18 U.S.C. ss.1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents,
in all material respects, the financial condition and results of
operations of the Company.
/s/ Timothy G. Fallon
Timothy G. Fallon
Chief Executive Officer
Date: January 24, 2003
54
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. ss.1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of Vermont Pure
Holdings, Ltd. (the "Company") for the year ended October 31, 2002, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
the undersigned Chief Financial Officer of the Company, certifies, to the best
knowledge and belief of the signatory, pursuant to 18 U.S.C. ss.1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents,
in all material respects, the financial condition and results of
operations of the Company.
/s/ Bruce S. MacDonald
Bruce S. MacDonald
Chief Financial Officer
Date: January 24, 2003
55