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FORM 10-KSB
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1996
COMMISSION FILE NUMBER: 333-16247
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PURO WATER GROUP, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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DELAWARE 11-325396-8
(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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56-45 58TH STREET, MASPETH, NEW YORK 11378
(Address of principal executive offices including zip code)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (718) 326-7000
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: None
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK, $.0063 PAR VALUE
(Title of class)
Indicate by check mark whether the issuer (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes / / No /X/(1)
Indicate by check mark if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B contained in this form, and no disclosure
will 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-KSB
or any amendment to this Form 10-KSB. /X/
The issuer's revenues for its most recent fiscal year were $10,627,590.
The aggregate market value of the voting stock held by non-affiliates of the
issuer, based upon the closing sale price of the issuer's common stock (the
"Common Stock") on February 28, 1997 as reported on the American Stock Exchange,
was $7,920,000. Shares of Common Stock held by each executive officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes. As of March 31, 1997, the issuer had outstanding 3,476,789
shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The issuer has incorporated by reference into Part III of this Form 10-KSB
those exhibits attached to its Registration Statement on Form SB-2 required to
be included herewith.
Transitional Small Business Disclosure Format (Check one): Yes / / No /X/
THE BUSINESS SECTION AND OTHER PARTS OF THIS ANNUAL REPORT ON FORM 10-KSB
CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE
ISSUER'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN
THE FORWARD-LOOKING STATEMENTS.
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(1) Issuer's Registration Statement on Form SB-2 was declared effective by the
Securities and Exchange Commission on February 7, 1997. Accordingly, the
issuer has not heretofore been required to file any reports.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY
Puro Water Group, Inc. (the "Company") is a leading bottler and distributor
of spring and purified drinking water, serving commercial and residential users
in the metropolitan New York area. The Company markets its drinking water under
the brand names Puro, American Eagle Spring Water, Nature's Best Spring Water
and Lectro-Still. The Company also rents and services water coolers, filtration
systems, and plumbed-in fountains numbering in excess of 25,000 located in
businesses, factories, and homes in the metropolitan New York area. The
Company's facilities consist of NSF (National Sanitation Foundation) certified
bottling plants in East Orange, New Jersey and Commack, Long Island, New York.
In addition, the Company is an authorized factory service center for all major
water cooler manufacturers and provides warranty repair coverage to many of its
competitors.
According to a study prepared by the Beverage Marketing Corporation, bottled
water has been the fastest growing segment of the beverage industry for the past
ten years. Total bottled water consumption in the United States has more than
tripled from 1983 to 1995. Annual consumption increased from 2.8 gallons per
capita in 1980 to 11.0 gallons per capita in 1995 and it is projected to reach
14.2 gallons per capita by the year 2000. Bottled water volume in the United
States has grown significantly, increasing from approximately 1.1 billion
gallons in 1984 to approximately 2.9 billion gallons in 1995; from approximately
$1.3 billion in sales in 1984 to over $3.3 billion in 1995. This growth has been
fueled by increasing public concern about the taste and safety of municipal
water supplies and the desire among today's increasingly diet and health
conscious consumers for an "ideal" beverage.
The Company's strategy is to capitalize on the growing demand for high
quality drinking water through the expansion of its existing customer base and
through the acquisition of regional bottlers and distributors in targeted
geographic markets. The bottled water distribution market is highly fragmented
and composed of many small regional companies, as well as a few larger companies
which own several brands, thus providing the Company with acquisition
opportunities. In addition, the Company continually seeks to grow revenues by
increasing route density through the acquisition and consolidation of new routes
within the existing route structure, thereby minimizing distribution and
administration costs. The continued consolidation of production and distribution
capabilities is a key component of the Company's operating plans, both within
its current markets and in any additional markets that it may enter.
The Company is also the manager of a cooperative buying group, Quality
Bottler's Cooperative, Inc. (the "Cooperative"). Membership consists of the
twelve leading regional bottled water companies located throughout the United
States which are similar in size to the Company. Members are contractually
required to purchase all of their coolers, bottles, closures, and other key
items on a group basis. The Company believes that the purchasing power of the
Cooperative permits the group to buy at prices that are no higher than those
charged the largest buyer in the industry, Nestle's Perrier group (whose brands
in the Company's markets include Poland Spring, Great Bear and Deer Park).
The Company was incorporated in January 1994 and represents the acquisition
of LSL Hydro Corp. and Puro Corporation of America. The Company is organized
under the laws of the State of Delaware. The Company's principal executive
offices are located at 56-45 58th Street, Maspeth, New York 11378 and its
telephone number is (718) 326-7000.
RECENT TRANSACTIONS
Consistent with its strategy of acquiring regional water bottlers and
distributors, on January 31, 1996, the Company purchased the assets and assumed
certain liabilities of American Eagle Water/Electrified Co., Inc.
("Electrified"). Electrified was a direct competitor of the Company in the
bottled water
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distribution and water cooler rental business in the New York City area. The
Company's acquisition of Electrified's modern high-speed production facility in
East Orange, New Jersey, together with its new bottling facility in Commack,
Long Island, New York, permits it to absorb additional bottling demand without a
commensurate increase in production costs.
On June 13, 1996, the Company entered into a long-term spring water supply
contract for its Commack, Long Island, New York, bottling facility with
Shawangunk Bulk Spring Water. The agreement provides for "most-favored-customer"
treatment with respect to pricing and priority water rights for the next
forty-five years to the Indian Camp Spring source which is owned by Shawangunk
Bulk Spring Water and located in the foothills of the Catskill Mountains in New
York.
On June 27, 1996, the Company entered into a long-term spring water supply
contract for its East Orange, New Jersey bottling facility with its primary bulk
spring water supplier, Mountainwood Spring Water Co., Inc. ("Mountainwood"). The
agreement provides for "most-favored-customer" treatment with respect to
priority water rights over a forty-three year period. Management believes that
Mountainwood's spring source, in the foothills of the Kittatinny Mountains near
the Delaware Water Gap, is considered the highest volume, free flowing certified
natural spring water source in the northeastern United States. Effective July 1,
1996, the Company also acquired Mountainwood's five-gallon bottled water direct
delivery and bottled water cooler rental routes.
In addition to the foregoing, during 1994 and 1995, consistent with its
acquisition strategy, the Company acquired six other regional water bottlers and
distributors.
INDUSTRY OVERVIEW
Bottled water has been the fastest growing segment of the beverage industry
for the last ten years. According to "Bottled Water in the United States, May
1996", a study prepared by the Beverage Marketing Corporation of New York (the
"BEVERAGE MARKET SURVEY"), total bottled water consumption in the United States
has more than tripled from 1983 to 1995. Annual consumption increased from 2.8
gallons per capita in 1980 to 11.0 gallons per capita in 1995, and it is
projected to reach 14.2 gallons per capita by the year 2000. Bottled water
volume in the United States has grown significantly, increasing from
approximately 1.1 billion gallons in 1984 to approximately 2.9 billion gallons
in 1995; from approximately $1.3 billion in sales in 1984 to over $3.3 billion
in 1995.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
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1995 U.S. BOTTLED WATER SALES
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(AMOUNTS IN MILLIONS)
GALLONS SOLD
NONSPARKLING 2,430.20 84.30%
IMPORTED 97.1 3.40%
SPARKLING 356.2 12.40%
TOTAL2,883.5
DOLLAR SALES
NONSPARKLING $2,121.20 62.90%
IMPORTED $425.00 12.60%
SPARKLING $828.80 24.60%
TOTAL$3,375.0
SOURCE: BEVERAGE MARKET SURVEY
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The bottled water market is comprised of three segments: non-sparkling
(domestic), sparkling (domestic) and imported water (both sparkling and
non-sparkling). Non-sparkling water, which is consumed as an alternative to tap
water, is the segment in which the Company competes, is the largest of the three
segments and represented 84.3% of the total market in terms of gallons of water
sold in 1995. Sparkling water contains carbonation and is positioned to compete
in the broad "refreshment beverage" category. In 1995, domestic sparkling water
accounted for approximately 12.4% of total bottled water consumption and the
remaining 3.4% consisted of imported bottled water brands.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
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NON-SPARKLING SPARKLING IMPORTS
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Millions of Gallons
1977 256.7 85.6 3.2
1978 352.9 113.5 13.4
1979 401.2 133.8 28.1
1980 463.1 155.2 11.4
1981 537.7 175.9 11.6
1982 614.0 196.5 12.9
1983 722.4 210.3 13.6
1984 843.3 230.3 16.5
1985 953.1 254.8 29.8
1986 1070.4 281.6 30.8
1987 1223.4 300.6 37.2
1988 1406.9 316.5 49.7
1989 1623.5 329.5 55.6
1990 1753.3 371.3 73.9
1991 1770.5 368.0 71.4
1992 1839.5 365.9 86.3
1993 1990.5 366.4 92.5
1994 2214.6 366.4 104.0
1995 2430.2 356.2 97.0
Source: Beverage Market Survey
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The Company believes this growth in bottled water consumption is largely a
function of two consumer trends. First, consumers have increasingly turned to
alternative sources of drinking water as a result of growing concerns about the
perceived decline in the quality of the tap water available in their homes and
offices. Second, an increasing diet and health consciousness among consumers has
led many consumers to seek a beverage choice which closely resembles the "ideal"
refreshment beverage. That is, one that has NO CALORIES, NO PRESERVATIVES, NO
ADDITIVES OR SUGAR, NO SODIUM AND NO ALCOHOL. High quality bottled drinking
water meets these demands.
According to the BEVERAGE MARKET SURVEY, the bottled water market has grown
at an average annual rate of 5.5% (1990-1995), and the Beverage Marketing
Corporation of New York projects that it will grow at a slightly higher rate of
6.5% between 1995 and 2000. Bottled water volume in the United States is
projected to grow from approximately 2.9 billion gallons in 1995 to
approximately 3.9 billion gallons by the year 2000. Per capita consumption is
projected to reach 14.2 gallons for every person in the United States by the
year 2000.
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PROJECTED U.S. BOTTLED WATER MARKET
1995-2000
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5 YEARS'
AVERAGE
MILLIONS OF ANNUAL GALLONS
YEAR GALLONS GROWTH PER CAPITA
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1995............................................... 2,883.5 5.5% 11.0
2000............................................... 3,943.2 6.5% 14.2
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SOURCE: BEVERAGE MARKET SURVEY
Bottled water channels of distribution consist of drinking water purchased
in pre-filled containers from retail locations (primarily supermarkets), water
delivered in pre-filled containers to residential or commercial establishments
and water sold through a self-service or "vended" format to retail consumers who
fill their own containers. The market share of each of these distribution
channels varies considerably by geographical area. According to the BEVERAGE
MARKET SURVEY, the total share of the national bottled water of these
distribution channels for 1995 was: retail (53.0%), home delivery (20.6%),
commercial delivery (18.4%) and vended (8.0%).
Further impetus for consumers' tap water concern took place on August 6,
1996 when President Clinton signed into law the Safe Drinking Water
Reauthorization Act of 1996. For the first time, federal law requires all local
water utilities to issue annual reports disclosing the chemicals and bacteria
that the tap water contains. The language must be simple and sent directly to
customers with their water utility bills. Especially important is a 24-hour
notification requirement when any contaminant poses a significant risk. The
Company believes that this change in the nation's law will increase the public's
concern over the quality and safety of public water supplies. Usage of high
quality bottled water and drinking water filtration systems can be expected to
benefit from this increased awareness.
BUSINESS STRATEGY
The bottled water distribution market is highly fragmented and composed of
many small regional companies as well as a few larger companies which own
several brands. The Company's strategy is to capitalize on the growing demand
for high quality drinking water resulting from the increasing public concern
about the taste and safety of municipal water supplies and the desire among
today's increasingly diet and health conscious consumers for an "ideal" beverage
through the expansion of its existing customer base and through the acquisition
of regional water bottlers and distributors in targeted geographic markets. In
addition, management continually seeks to grow revenues by increasing route
density through the acquisition and consolidation of new routes within its
existing route structure, thereby minimizing distribution and administration
costs. The continued consolidation of production and distribution capabilities
is a key component of the Company's operating plans, both within its current
markets and any additional markets it may enter.
In support of its growth strategy the Company is continuing to pursue the
acquisition of regional water bottlers and distributors, as well as mergers with
certain members of the Cooperative. As of the date of this filing, the Company
has thirteen companies under active review as candidates for acquisition or
merger, although the Company has no agreements, commitments or arrangements with
respect to any material proposed mergers or acquisitions. As consideration for
any future acquisitions, the Company may pay cash, incur indebtedness or issue
debt or equity securities. Such acquisitions could result in material changes in
the Company's financial condition and operating results. There can be no
assurance that suitable merger or acquisition opportunities will be available to
the Company or that the Company will be able to consummate any mergers or
acquisitions on satisfactory terms. In addition, there can be no assurance that
the Company will be able to integrate or manage successfully other acquired
businesses.
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BOTTLED WATER PROCESSING
The Company employs a broad spectrum of treatment technologies for its
various bottled waters, ranging from minimum treatment of its natural spring
waters to extensive treatment of public water sources for its distilled and
drinking waters. Manufacturing practices, quality standards and labeling of the
Company's bottled water products are regulated by the Federal Food and Drug
Administration ("FDA") as well as the states and some localities in which the
water is distributed. In addition, the Company participates in the International
Bottled Water Association's inspection program which incorporates quality
standards stricter than those prescribed by law.
NATURAL SPRING WATER: As "natural" waters, the Company's state-certified
spring sources may not be subjected to any treatment which alters the mineral
composition of the product. Spring water, by law, may not be derived from a
municipal system or public water supply, and must be derived from an underground
source, free of surface water influence, which flows continuously to the surface
under its own pressure. A hydrogeological report must validate the integrity of
the source and safety of the water-collection operations before any groundwater
source can be certified as a spring. Regular bacteriological and chemical
compliance monitoring of the Company's springs assures that these sources remain
uncontaminated.
The Company's water sources, at Mountainwood Spring and Indian Camp Spring,
are located in remote, pristine environments where each spring's recharge areas
have not been encroached by industry, agriculture or housing development.
Consequently, the spring water must be transported to the Company's plants by
stainless steel tanker trucks used solely for its water. At the spring source
the water is filtered and ozonated (see below) prior to loading. This disinfects
the spring water, and the residual ozone in the water disinfects the inside of
the tanker, thereby insuring that bacteria are not transferred from the spring
or the tanker to the Company's bottling plants. Samples for each tanker load are
tested for bacterial safety, consistency and ozone residual.
Sanitary bulk, stainless tanks at the Company's bottling plants protect the
spring water while it is again ozonated and finally filtered through one-micron
absolute filters immediately before being bottled in sanitized containers. The
Company employs this "multiple barrier" approach to protect its natural spring
water from contaminants, including dangerous protozoan cysts such as
Cryptosporidium which can survive municipal tap water disinfection with
chlorine.
DISTILLED WATER: The Company uses more extensive treatment techniques for
its processed waters. For example, the Company's distilled water is produced by
the recapture of condensed steam, one of the oldest water purification
mechanisms known. Automated distillation units at the Company's East Orange
bottling plant vaporize the local municipal water through heating, leaving
behind impurities of minerals and other compounds. The condensed water vapor
produces a water of extremely high purity and very low mineral content
(typically less than 10mg/liter of total dissolved solids). This level of purity
enables distilled water to be used for pharmaceutical purposes, photographic
processes, humidifiers and similar applications as well as for drinking.
DRINKING WATER: The processes involved in producing the Company's drinking
waters include particle filtration, carbon adsorption (molecular adhesion),
ultraviolet disinfection, deionization, one-micron absolute filtration and
ozonation. Public water is initially filtered using a five-micron filter to
remove sedimentation. The water is then processed through an activated carbon
bed to remove organic compounds and associated tastes and odors. This step also
removes chlorine which is added as a disinfectant to public supplies. The
by-products of chlorine disinfection, such as trihalomethanes, are also removed
by activated carbon adsorption. Ultraviolet treatment is a precaution against
any microbial contamination which might be transported further along in the
production line. Deionization is used at the Company's East Orange plant to
reduce dissolved minerals in the final drinking water. As is the case with all
of the Company's waters, a one-micron absolute filter is the final filtration
stage prior to ozonation and bottling.
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Ozonation involves a special form of oxygen, ozone (O(3)), which is the 3
strongest disinfectant and oxidizing agent available for water treatment. It is
the standard disinfectant for bottled water processing. A highly unstable gas,
ozone must be generated on site, prior to transport at the spring locations, and
at the Company's bottling plants. Because it is only partially soluble in water,
sufficient ozone contact with the water is established by special contact tanks
and mixing vessels. These extended contact times and the closely monitored ozone
concentrations are the reason that properly ozonated bottled water can be
assured to be free of chlorine-resistant organisms such as the recently
publicized parasitic cyst, Cryptosporidium. A special "hyperozonator" provides a
final disinfecting rinse of ozonated water in the bottle washing and sanitizing
machines at both of the Company's plants.
After the appropriate treatments, the product water is piped to the Clean
Room, which houses the automatic filling and capping equipment. Its design
mandated by the FDA, the Clean Room is totally enclosed with a positive-pressure
ventilation system which feeds filtered, sterilized air into the room. This room
and its equipment are sanitized every day. The final product, whether natural
spring water, distilled or drinking water, is a high quality, clean bottled
water that is one of the most strictly regulated and reliable pure food products
available to the American consumer.
WATER SUPPLY AGREEMENTS
SPRING WATER SUPPLIERS: On June 13, 1996, the Company entered into a
long-term spring water supply contract for its Commack, Long Island, New York
bottling facility with Shawangunk Bulk Spring Water. This agreement provides for
"most-favored-customer" treatment with respect to pricing and priority water
rights for the next forty-five years to the Indian Camp Spring source which is
owned by Shawangunk Bulk Spring Water and located in the foothills of the
Catskill Mountains in New York.
On June 27, 1996, the Company entered into a long-term spring water supply
contract for its East Orange, New Jersey bottling facility with its primary bulk
spring water supplier, Mountainwood. The agreement provides for
"most-favored-customer" treatment with respect to priority water rights over a
forty-three year period. Management believes that Mountainwood's spring source,
in the foothills of the Kittatinny Mountains near the Delaware Water Gap, is
considered the highest volume, free flowing certified natural spring water
source in the northeastern United States. Effective July 1, 1996, the Company
also acquired Mountainwood's five-gallon bottled water direct delivery and
bottled water cooler rental routes.
PURIFIED WATER SUPPLIERS: The Company obtains the water for distilled and
purified drinking water from public water sources. The public water source for
the Company's East Orange, New Jersey facility is the East Orange public water
supply and the public water source for the Company's Commack Long Island, New
York facility is the Suffolk County Water Authority.
DRINKING WATER SYSTEMS
In addition to the rapid growth in bottled water consumption, the past
decade has also seen the emergence of water treatment technologies which can
produce high quality water economically at the point of use (rather than
delivered in bottles). These technologies, including micron filtration, have had
a major impact on the growth and development of water processed at the point of
use. The Company's non-bottled water dispensing systems are equipped with
filtration systems which remove substantial amounts of the chlorine, dirt
particles, rust, lead and other objectionable materials from the source tap
water.
The Company believes that it is the only full-service provider in its market
able to provide its customers with a "one-stop" solution to drinking water
needs. If a customer has neither the space nor the budget for bottled water, the
Company can provide a wide variety of filtration and treatment units to meet any
drinking water needs. A staff of installers and plumbers will assume
responsibility for survey, equipment selection, installation, contract
maintenance and rental/service. As a factory authorized sales and service center
for all of the major types of drinking fountains and coolers, the Company can
offer the
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customer a complete choice of models: wall-hung, recessed, stand-alone,
handicapped, under the sink, drainless, counter-top, etc. A computerized
follow-up system insures that cartridge changes and routine service are
performed on a timely basis by the Company's field staff. This reliance upon the
Company for installation, equipment and maintenance is a firm basis for the
long-term relationship that the Company enjoys with its point of use customers.
Most of the Company's equipment is placed in the customer's home or office
under a standard two-year rental contract which is renewable thereafter on a
month to month basis and is terminable by either party upon 30 days notice. The
attachment of its point of use equipment to the plumbing makes it less likely
that a customer will request that the equipment be removed.
EQUIPMENT SUPPLY, ASSEMBLY AND RENTAL SERVICES
The Company purchases the various water treatment systems and bottled water
dispensers used in its home and office equipment from major suppliers such as
EBCO Manufacturing Company and Sunroc Corp. through the Cooperative. Once a
customer has chosen a water treatment system and a dispenser, the two components
are connected as a unit, tested and installed by the Company's service
personnel. The Company is not dependent on any single supplier for any of these
components.
The Company rents a broad range of water treatment and dispensing units to
commercial and residential customers. The Company generally rents such units to
customers at prices ranging from $6.00 to $45.00 per month depending on the
components selected. As of December 31, 1996, the Company had in excess of
25,000 water treatment and dispensing units in service, located in the
metropolitan New York area, which accounted for approximately 20.6% of the
Company's revenues. In addition, from time to time the Company has sold water
treatment and dispensing units to customers upon request; such outright sales
have accounted for less than 8% of revenues during the twelve months ended
December 31, 1996.
The Company uses its factory authorized warranty and repair facilities to
recondition most of the rental water coolers which have been returned from the
field. The cost associated with this refurbishment of returned rental units is
expensed on a current basis. The reconditioned units are available for rental
placement in the field at a cost lower than that of newly purchased coolers.
SALES AND MARKETING
The Company markets its commercial and residential water treatment and
dispensing units to commercial customers that are using or have used bottled
water coolers as an alternative to providing tap water to their employees and to
residential customers who have been introduced to the Company's water treatment
and bottled water units through the Company's commercial customers. The Company
markets its products principally through the effort of salaried and independent
sales personnel as well as through print advertising, telemarketing, trade
shows, its internet website, sponsored community events, field delivery/service
personnel and customer referrals. To date, the Company has concentrated its
marketing efforts on targeting commercial customers in the metropolitan New York
markets where demographic, economic and water consumption trends, as well as the
overall quality of municipal water supplies, indicate a growing demand for
affordable, high quality drinking water. The Company expects to increase its
marketing efforts, principally through increased print and broadcast media
advertising, additional sales personnel and attendance at additional
trade-shows.
CUSTOMERS
Since 1994, the Company has grown from approximately 5,000 water customers
to in excess of 25,000 currently served. The Company's customer base for its
bottled water and water treatment and dispensing units is currently comprised of
approximately 90% commercial accounts and approximately 10% residential
accounts. Through its American Eagle Spring and Lectro-Still retail brands the
Company markets one-
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gallon natural spring and distilled waters in supermarkets and pharmacies in the
northeastern United States.
In addition, the Company has been selected by several distributors to bottle
under their own label on a contract basis. Given the Company's ability to absorb
such additional volume at its plants with little marginal cost and no disruption
to existing business, management will continue to do such private label bottling
for selected accounts. In the past two years, such five-gallon private label
bottling relationships have resulted in the Company's ability to acquire a
number of the distributors' routes and blend them into the Company's route
structure. The East Orange, New Jersey facility will also continue to provide
one-gallon private label water bottling on a select basis for local supermarket
chains and health care stores so long as there is no adverse impact on the
Company's production of its own brands.
COMPETITION
The Company competes with numerous well-established companies, including
Nestle's Perrier group (whose brands in the Company's market include Poland
Spring, Great Bear and Deer Park), which distribute drinking water sold off the
shelf at retail (primarily supermarket) locations. Many of the Company's
competitors have achieved significant national, regional and local brand name
and product recognition and additional competitors have sought to enter the
drinking water market.
In recent years, several companies have introduced drinking water products
positioned to capitalize on the growing consumer preference for purified and
aesthetically pleasing water. It can be expected that the Company will be
subject to increasing competition from companies whose products or marketing
strategies address these consumer preferences. Some of the Company's competitors
and potential competitors possess substantially greater financial, personnel,
marketing and other resources than the Company and have established reputations
for success in the sale of purified water products. The Company believes that it
competes on the basis of quality of service, convenience and price.
SEASONALITY
The revenues of the Company have been subject to seasonal variations with
decreased revenues during cold weather months and increased revenues during the
hot weather months.
PATENTS AND TRADEMARKS
The Company holds two patents related to bacteriostatic carbon formulation
and production.
The Company has registered the Puro trademark and service mark in the United
States Patent and Trademark Office. The Company acquired the American Eagle
Spring Water trademark among others in its acquisition of the assets of
Electrified. The Company has no reason to believe that there are any conflicting
rights which might impair the Company's use of its marks outside the United
States; however, there can be no assurance that such conflicting rights do not
exist. The Company believes that the trademarks and service mark are valuable to
the operation of its business. The Company's policy is to pursue registration of
its marks whenever possible and to oppose vigorously any infringement of its
marks.
As is typically the case with drinking water treatment components, the
Company does not believe its business is materially dependent upon obtaining
patent protection for its various systems.
REGULATION
The Company's business is subject to various federal, state and local laws
and regulations which require the Company, among other things, to obtain
licenses for its business and equipment, to pay annual license and inspection
fees, to comply with certain detailed design and quality standards regarding the
Company's bottling plant and equipment and to continuously control the quality
and quantity of the water dispensed. Several states have regulations that
require the Company to obtain certification for its bottled
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water. The Company believes that it is currently in compliance with these laws
and regulations and has passed all regulatory inspections. In addition, the
Company does not believe that the cost of compliance with applicable
governmental laws and regulations is material to its business. However, recent
media attention has been given to the health and safety standards and to the
degree of governmental oversight in the drinking water industry. To the extent
that additional regulations are imposed as a result of these or other concerns
and such regulations are unreasonably burdensome, such regulations could
significantly increase the costs of compliance and reduce the ability of the
Company to maintain or increase its customer base.
PRODUCT LIABILITY AND INSURANCE
The Company is engaged in a business which could expose it to possible
claims for personal injury resulting from contamination of water produced by its
bottling plants or dispensing equipment. While the Company believes that through
regular testing it carefully monitors the quality of water produced by its
plants, it may be subject to exposure in the case of customer misuse of a cooler
or bottle storage. The Company maintains blanket "claims made" product liability
insurance against liability resulting from certain types of injuries in amounts
that it believes to be adequate. Additionally, the Company maintains an umbrella
policy that it believes to be adequate to cover claims above the limits of the
product liability insurance. Although no claims have been made against the
Company or any of its customers to date and the Company believes that its
current level of insurance is adequate for its present business operations,
there can be no assurance that such claims will not arise in the future or that
the proceeds of the Company's policy will be sufficient to pay such claims.
EMPLOYEES
As of December 31, 1996, the Company had 110 full-time employees, of which
five are in executive positions, 45 in distribution, 11 in maintenance and
service, five in sales, 14 in manufacturing and 30 in administration. Certain of
the Company's employees are represented by Teamsters, Chauffeurs, Warehousemen &
Helpers Local Union No. 560. The Company is a party to a collective bargaining
agreement expiring February 28, 1999. The Company considers its employee
relations to be satisfactory.
LITIGATION
The Company is not a party to any legal proceedings which individually or in
the aggregate are believed to be material to the Company's business.
BANKRUPTCY, RECEIVERSHIP OR SIMILAR PROCEEDING
The Company has never been involved in any bankruptcy, receivership or
similar proceeding.
MATERIAL RECLASSIFICATIONS, MERGERS
Consistent with its strategy of acquiring regional water bottlers and
distributors, on January 31, 1996, the Company purchased the assets and assumed
certain liabilities of Electrified. Electrified was a direct competitor of the
Company in the bottled water distribution and water cooler rental business in
the New York City area. The Company's acquisition of Electrified's modern
high-speed production facility in East Orange, New Jersey, together with its new
bottling facility in Commack, Long Island, New York, permits it to absorb
additional bottling demand without a commensurate increase in production costs.
On June 13, 1996, the Company entered into a long-term spring water supply
contract for its Commack, Long Island, New York, bottling facility with
Shawangunk Bulk Spring Water. The agreement provides for "most-favored-customer"
treatment with respect to pricing and priority water rights for the next
forty-five years to the Indian Camp Spring source which is owned by Shawangunk
Bulk Spring Water and located in the foothills of the Catskill Mountains in New
York.
10
<PAGE>
On June 27, 1996, the Company entered into a long-term spring water supply
contract for its East Orange, New Jersey bottling facility with its primary bulk
spring water supplier, Mountainwood. The agreement provides for
"most-favored-customer" treatment with respect to priority water rights over a
forty-three year period. Management believes that Mountainwood's spring source,
in the foothills of the Kittatinny Mountains near the Delaware Water Gap, is
considered the highest volume, free flowing certified natural spring water
source in the northeastern United States. Effective July 1, 1996, the Company
also acquired Mountainwood's five-gallon bottled water direct delivery and
bottled water cooler rental routes.
In addition to the foregoing, during 1994 and 1995, consistent with its
acquisition strategy, the Company acquired six other regional water bottlers and
distributors.
RESEARCH AND DEVELOPMENT
The Company has not spent any material amounts during either of the last two
fiscal years on research and development activities.
COMPLIANCE WITH ENVIRONMENTAL LAWS
The Company has not incurred any material costs in connection with
compliance with federal, state and local environmental laws.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's offices and plants are located in East Orange, New Jersey,
Commack, Long Island, New York and Maspeth, New York. The following table sets
forth certain information relating to the leased and owned space for each
location.
<TABLE>
<CAPTION>
APPROXIMATE
# OF
SQUARE FEET
LOCATION OF FACILITY OF SPACE LEASE TERM MONTHLY RENT EXPIRES
- ------------------------------------------------------------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
East Orange, New Jersey...................................... 48,000 10 years $ 10,000(1) 2007
Commack, Long Island, New York............................... 23,000 5 years $ 10,200(2) 2001
Maspeth, New York (3)........................................ 24,000 -- -- --
</TABLE>
- ------------------------
(1) Rent is fixed through January 31, 2001 and thereafter adjusts annually based
upon the change in the consumer price index.
(2) Commencing November 1, 1997, and continuing through the lease term, rent is
subject to periodic increases averaging approximately $550 per month.
(3) The Company owns this facility and is mortgagor with respect to a mortgage
covering this facility. This mortgage requires monthly payments of $9,941,
including interest at an annual rate of 10.75%. The mortgage provides for a
balloon payment of the entire principal, $886,873, on June 1, 1998.
At the East Orange, New Jersey facility, the Company bottles spring,
purified and distilled water in five and one-gallon sizes. This modern
production plant features high-speed sanitizing and filling equipment.
Management believes that this facility contains the only fully automatic
five-gallon bottle rack loader in the metropolitan New York area. Additional
bottling volume can be added at low incremental production cost for both the
five-gallon and one-gallon lines.
The Company's most recent 1996 plant inspection at East Orange resulted in a
sanitary compliance rating in excess of 97%, making the facility eligible to
receive the International Bottled Water Association's EXCELLENCE IN
MANUFACTURING recognition.
11
<PAGE>
In addition, the Company performs water cooler servicing and refurbishment
activities at this facility including warranty repairs, filtration system
installation and renovation of rental units for placement back in service in the
field. This facility services the Company's bottled water and water cooler
customers in Manhattan, the Bronx, Staten Island and New Jersey.
The Company's Long Island bottling plant in Commack was opened in the summer
of 1996 with a modern high-speed five-gallon sanitizing and filling line for
spring and purified drinking water. This facility, which replaced a smaller
plant in Port Jefferson, Long Island, New York, serves the Company's Brooklyn,
Queens and Long Island customers. Additional bottling volume can be added at low
incremental production costs.
The Company currently utilizes its Maspeth, New York facility for servicing
of water coolers, limited water distribution and corporate headquarters. The
Company is currently in negotiation to sell its facility in Maspeth, New York
and anticipates that transaction to be consummated in the second quarter of
1997. Upon such sale, the Company intends to move its corporate headquarters to
a smaller sales office in Queens, New York and the balance of its business
currently conducted from its Maspeth, New York facility will be allocated
between its Commack, Long Island, New York and East Orange, New Jersey
facilities. The Company believes its facilities are adequate for its present
needs.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On October 1, 1996, the following actions were ratified and authorized
by the unanimous consent of the shareholders of the Company:
(i) the execution and delivery of that certain Asset Purchase Agreement
by and between the Company, Downmorr Water Corporation, Glenn Downing and
Gary Downing dated August 26, 1994, and all supplements and amendments
thereto and all other documents related thereto or necessary or appropriate
to implement the transactions contemplated thereby; and
(ii) the execution and delivery of that certain Asset Purchase Agreement
by and between the Company, Bark Water Co. Ltd., and Kenneth Gelber dated
January 30, 1995, and all supplements and amendments thereto and all other
documents related thereto or necessary or appropriate to implement the
transactions contemplated thereby; and
(iii) the execution and delivery of that certain Asset Purchase Agreement
by and between the Company, Nature's Best Water Company, Inc., Peter
Nicholas and Anthony Bonventre dated April 28, 1995, and all supplements and
amendments thereto and all other documents related thereto or necessary or
appropriate to implement the transactions contemplated thereby; and
(iv) the execution and delivery of that certain Asset Purchase Agreement
by and between the Company, National Ozone Water Corp., Edward Worfler and
Rita Worfler dated April 28, 1995, and all supplements and amendments
thereto and all other documents related thereto or necessary or appropriate
to implement the transactions contemplated thereby; and
(v) the execution and delivery of that certain Asset Purchase Agreement
by and between the Company and Waters Filter & Cooler, Inc. dated October
31, 1995, and all supplements and amendments thereto and all other documents
related thereto or necessary or appropriate to implement the transactions
contemplated thereby; and
(vi) the execution and delivery of that certain Asset Purchase Agreement
by and between the Company and Rainbow Coffee Service, Inc. d/b/a Rainbow
Water Service, Brendon Murphy and Robert Murphy dated October 31, 1995, and
all supplements and amendments thereto and all other
12
<PAGE>
documents related thereto or necessary or appropriate to implement the
transactions contemplated thereby; and
(vii) the execution and delivery of that certain Asset Purchase Agreement
by and between the Company and Mountainwood Spring Water Co., Inc. and White
Mountain Company, Inc. dated June 27, 1996, and all supplements and
amendments thereto and all other documents related thereto or necessary or
appropriate to implement the transactions contemplated thereby.
(b) On October 31, 1996, the hiring of James G. Botti as Chief Financial
Officer of the Company was authorized by the unanimous consent of the
shareholders of the Company.
(c) On November 1, 1996, the hiring of Scott Levy as the Company's Chief
Executive Officer and Jack C. West as the Company's President was authorized by
the unanimous consent of the shareholders of the Company.
(d) On November 1, 1996, the issuance and sale in an underwritten public
offering of 1,350,000 shares of common stock of the Company, and all actions
attendant thereto, including, without limitation, the approval of the
Registration Statement on Form SB-2, the grant of an over-allotment option to
the underwriters of said offering, the qualification or registration, as
applicable, of such common stock with the applicable laws in each state for
which such qualification was necessary, the issuance to the underwriters of a
warrant to purchase common stock, the application for listing on the American
Stock Exchange, the appointment of Continental Stock Transfer and Trust Company
as transfer agent and registrar, a stock split of the Company's common stock
resulting in 10,000,000 authorized shares, approval of the 1996 Stock Option
Plan and a ratification of prior acts of the officers of the Company the
following actions were authorized by the unanimous consent of the shareholders
of the Company.
13
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the American Stock Exchange under
the symbol HHO. The Common Stock began trading upon the effectiveness of the
Company's Registration Statement of Form SB-2 on February 7, 1997. The following
table sets forth the range of the high and low prices for the quarter ended
March 31, 1997 as reported by the American Stock Exchange:
<TABLE>
<CAPTION>
HIGH LOW
--------- ---
<S> <C> <C>
1997: First Quarter............................................................. 6 15/16 5 1/4
</TABLE>
As of March 31, 1997, the approximate number of common stockholders of
record was 625. The Company has not paid any dividends since its inception and
does not intend to pay any cash dividends in the foreseeable future. Future cash
dividends, if any, shall be determined by the Board of Directors.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE SECTION AND OTHER PARTS OF THIS ANNUAL REPORT ON FORM 10-KSB CONTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE ISSUER'S
ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ
IN CONJUNCTION WITH THE COMPANY'S FINANCIAL STATEMENTS AND THE NOTES THERETO
INCLUDED ELSEWHERE IN THIS REPORT.
GENERAL BACKGROUND
The Company is a leading bottler and distributor of spring and purified
drinking water, serving commercial and residential users in the metropolitan New
York area. The Company also rents and services water coolers, filtration
systems, and plumbed-in fountains located in businesses, factories, and homes in
the metropolitan New York area.
The Company was formed in January 1994 and represents the acquisition of LSL
Hydro Corp. and Puro Corporation of America. Subsequently, the Company has
acquired eight additional distributors of high quality drinking water in the New
York City, New Jersey and Long Island markets. Since 1994, the Company has grown
from approximately 5,000 water customers to in excess of 25,000.
The Company's strategy is to capitalize on the growing demand for high
quality drinking water through the expansion of its existing customer base and
through the acquisition of regional water bottlers and distributors in targeted
geographic markets. The Company's acquisition of Electrified's modern high-speed
production facility enables it to absorb new bottling demand without a
commensurate increase in production costs. Similarly, the new bottling facility
in Commack, Long Island, New York can absorb additional volume with minimum
incremental cost. In addition, management continually seeks to grow revenues by
increasing route density through the acquisition and consolidation of new routes
within its existing route structure, thereby minimizing distribution and
administration costs. The continued consolidation of production and distribution
capabilities is a key component of the Company's operating plans, both within
its current markets and any additional markets it may enter.
RESULTS OF OPERATIONS
The Company derives its revenues from two major sources: bottled water sales
and the rental and service of water coolers, filtration systems and plumbed-in
fountains. While most other bottled water companies sell only pre-packaged
bottled water, the Company also rents water treatment equipment which processes
and dispenses drinking water at the point of use which enables the consumer to
enjoy quality drinking water with reduced contaminants.
14
<PAGE>
Additionally, in contrast to most other water treatment dealers and
distributors that have historically sold their water treatment equipment
outright, the Company creates long-term relationships with its own customers by
renting or placing the equipment under lease/service agreements. These
agreements result in revenue streams which provide the Company with a base of
recurring revenue.
The following table sets forth, for the periods indicated, the percentage
relationship to total revenues of certain items included in the Company's
Statement of Operations.
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(FEBRUARY 1, 1994) YEAR ENDED YEAR ENDED
THROUGH DECEMBER 31, 1994 DECEMBER 31, 1995 DECEMBER 31, 1996
--------------------------- ------------------- -------------------
<S> <C> <C> <C>
Revenue:
Bottled water sales and other revenue........... 72.0 75.9 79.4
Rental revenue.................................. 28.0 24.1 20.6
----- ----- -----
Total revenue............................... 100.0% 100.0% 100.0%
----- ----- -----
Costs and expenses:
Cost of goods sold (excluding depreciation)..... 28.3 29.4 33.0
Operating expenses (excluding depreciation and
amortization)................................. 29.5 23.7 17.9
General and administrative expenses............. 23.4 23.8 20.4
----- ----- -----
Total costs and expenses.................... 81.2 76.9 71.3
----- ----- -----
Depreciation and amortization:
Cost of goods sold.............................. 2.6 4.3 5.0
Operating expenses.............................. 2.8 3.9 4.3
----- ----- -----
Total depreciation and amortization......... 5.4 8.2 9.3
----- ----- -----
Income from operations.......................... 13.4 14.9 19.4
Other income (expense):
Interest expense................................ (3.2) (5.5) (7.2)
Other income (expense).......................... 1.1 2.2 0.3
Plant relocation charges(1)..................... 0.0 0.0 (2.4)
----- ----- -----
Total other expense......................... (2.1) (3.3) (9.3)
----- ----- -----
Income before provision for income taxes........ 11.3 11.6 10.1
Provision for income taxes...................... 5.0 4.2 4.2
----- ----- -----
Net income...................................... 6.3% 7.4% 5.9%
----- ----- -----
----- ----- -----
</TABLE>
- ------------------------
(1) Represents non-recurring charges of $250,000 related to the closing of two
of the Company's bottling plants and the relocation of such production
facilities to the Company's Commack, Long Island, New York and East Orange,
New Jersey facilities.
THE PERIOD FROM INCEPTION (FEBRUARY 1, 1994) TO DECEMBER 31, 1994, YEAR ENDED
DECEMBER 31, 1995 AND YEAR ENDED DECEMBER 31, 1996
REVENUES. Revenues for the year ended December 31, 1996 increased by 93% to
$10.6 million from $5.5 million for the year ended December 31, 1995. This
increase in revenues reflects the acquisition of Electrified's operations in
East Orange, New Jersey for eleven of the twelve months ended December 31, 1996
and the acquisition of the five-gallon routes from Mountainwood for the six
months beginning July 1, 1996 through December 31, 1996. Moreover, this increase
occurred notwithstanding an abnormally harsh winter in 1996 evidenced by a
record snow fall and unusually cold spring and summer seasons during the
15
<PAGE>
same year. This factor is even more significant when considering the
significantly higher than normal temperatures experienced in the summer of 1995.
Revenues in 1995 increased by 34% to $5.5 million from $4.1 million in the
period from inception (February 1, 1994) to December 31, 1994. The growth in
revenues was attributable to the increase in the number of coolers in operation
as well as the acquisition of smaller distributors in the Company's market area.
COST OF GOODS SOLD. Cost of goods sold (excluding depreciation) for the
year ended December 31, 1996 increased to $3.5 million from $1.6 million, or
118% over that incurred in 1995. This increase results principally from
increases in volume relating to the acquisitions referred to previously. Cost of
goods sold (excluding depreciation) as a percentage of revenues for the year
ended December 31, 1996 increased to 33% from 29% for the same period in 1995.
The increase reflects entry into the case goods product market which is
traditionally a more costly product due to packaging. Cost of goods sold
(excluding depreciation) increased by 45% to $1.6 million in 1995 from $1.1
million in the period from inception (February 1, 1994) to December 31, 1994.
Cost of goods sold (excluding depreciation) increased as a percentage of
revenues to 29% in 1995 from 28% in the period from inception (February 1, 1994)
to December 31, 1994. This increase is reflective of the trend to a higher
percentage of natural spring water sold compared to processed drinking water.
OPERATING EXPENSES. Operating expenses (excluding depreciation and
amortization) increased by 46% to $1.9 million for the year ended December 31,
1996 from $1.3 million for the year ended December 31, 1995. The increase
reflects the acquisition of Electrified's operations for eleven of the twelve
months ended December 31, 1996, and the acquisition of Mountainwood's delivery
routes for the six months from July 1, 1996 through December 31, 1996. However,
operating expenses (excluding depreciation and amortization) decreased as a
percentage of revenues to 18% for the year ended December 31, 1996 compared to
24% from the year ended December 31, 1995. This decrease was also due primarily
to the efficiencies achieved in the Company's bottling operations, route
delivery and servicing system. It was also reflective of entry into the case
goods product market, delivery costs of which are less intensive than the five
gallon market. Operating expenses (excluding depreciation and amortization)
increased by 8% to $1.3 million in 1995 from $1.2 million in the period from
inception (February 1, 1994) to December 31, 1994. However, operating expenses
(excluding depreciation and amortization) decreased as a percentage of revenues
to 24% in 1995 from 30% for the period from inception (February 1, 1994) to
December 31, 1994. This decrease was due to efficiencies achieved in the
Company's bottling operations, route delivery and servicing system--primarily
from the addition of new accounts in existing market areas.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by 69% to $2.2 million in the year ended December 31, 1996 from $1.3
million for the same period in 1995 due to the acquisitions referred to above.
However, such expenses decreased as a percentage of revenues to 20% for the year
ended December 31, 1996 from 24% for the same period in 1995. This decrease in
general and administrative expenses reflects efficiencies gained from the
Electrified and Mountainwood transactions with respect to office and clerical
staffing. General and administrative expenses increased by 44% to $1.3 million
in 1995 from $0.9 million in the period from inception (February 1, 1994) to
December 31, 1994. General and administrative expenses increased as a percentage
of revenues to 24% in 1995 from 23% in the period from inception (February 1,
1994) to December 31, 1994. This increase was the result of increased insurance
costs associated with an increase in the number of the Company's delivery
vehicles.
TOTAL DEPRECIATION AND AMORTIZATION. Total depreciation and amortization
for the year ended December 31, 1996 increased by 100% to $1.0 million from $0.5
million for the same period in 1995. Total depreciation and amortization
increased as a percentage of revenues to 9% for the year ended December 31, 1996
from 8% for the same period in 1995. This increase resulted primarily from the
Electrified acquisition, which included a modern high-capacity bottling facility
and the opening of a new bottling facility in Commack, Long Island, New York.
Total depreciation and amortization increased by 150% to $0.5 million in 1995
from $0.2 million in the period from inception (February 1, 1994) to December
31,
16
<PAGE>
1994. Total depreciation and amortization increased as a percentage of revenues
to 8% from 5% in the period from inception (February 1, 1994) to December 31,
1994. This increase was due primarily to the Company's continued investment in
new coolers and route acquisitions.
INCOME FROM OPERATIONS. Increases in income from operations for all periods
discussed above relate to increases in sales, the consolidation of production
facilities and an improvement in route densities and scheduling.
INTEREST EXPENSE. For the year ended December 31, 1996, interest expense
increased by 167% to $0.8 million for the same period in 1995. Interest expense
increased as a percentage of revenues to 7% for the year ended December 31, 1996
from 6% for the same period in 1995. This increase was due to additional
borrowings in connection with the acquisitions discussed previously.
Approximately $5.3 million of the $10.0 million total debt outstanding at
December 31, 1996 was repaid with proceeds from the Company's initial public
offering as further discussed below. Interest expense increased by 200% to $0.3
million in 1995 from $0.1 million in the period from inception (February 1,
1994) to December 31, 1994. Interest expense increased as a percentage of
revenues to 6% in 1995 from 3% in the period from inception (February 1, 1994)
to December 31, 1994. This increase was primarily due to increased borrowing in
order to fund the Company's expansion.
PLANT RELOCATION CHARGES. During the year ended December 31, 1996, the
Company relocated all bottled water production from its plants in Maspeth, New
York, and Port Jefferson, New York, to the Electrified facility in East Orange,
New Jersey, and the newly opened bottling plant in Commack, Long Island, New
York. The Maspeth and Port Jefferson bottling plants were subsequently closed.
Non-recurring plant relocation charges of $0.3 million or 2% of revenues for the
period ended December 31, 1996 were incurred.
PROVISION FOR INCOME TAXES. The effective income tax rate was 42% for the
year ended December 31, 1996 and 36% for the year ended December 31, 1995. The
increase in the effective rate in 1996 is primarily attributable to
non-recurring write-offs of certain accounts receivable for income tax purposes
in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity and capital resources have been
cash flow from operations, proceeds from the sale of equity securities to the
Company's current stockholders, purchase money financing for business
acquisitions and borrowings under the Company's bank agreement described below.
During 1996 and 1995, net cash provided by operating activities was $0.7 million
and $0.4 million, respectively. During 1996, the Company made capital
expenditures in the amount of $2.8 million. In addition, the Company acquired
the net assets of two of its competitors whose aggregate purchase price was $5.5
million. The equipment purchases and the acquisitions were funded by operations
as well as seller financing. In 1995, the Company made capital expenditures for
coolers, other equipment and routes aggregating $2.8 million, which was funded
by cash from operations, private equity placement, purchase money financing of
business acquisitions and borrowings under the Company's bank agreement. In
addition, in February 1997, the Company sold 1,350,000 shares of common stock to
the public for net proceeds of $6.1 million.
At December 31, 1996, cash totaled $0.2 million and no additional borrowing
was available under the Company's bank agreement. As of December 31, 1995, cash
totaled $0.7 million, and approximately $1.0 million of additional borrowings
were available under the Company's bank agreement.
The Company's bank agreement provides for aggregate long-term borrowings of
up to $3.0 million, approximately all of which was currently outstanding as of
December 31, 1996, maturing between May 31, 1997 and December 31, 2001, bearing
interest at prime plus .25%-.50% per annum, secured by substantially all of the
assets of the Company and guaranteed by certain stockholders of the Company. The
17
<PAGE>
Company has also borrowed $0.5 million from the same lender under another
agreement. These borrowings are also secured by certain stockholders of the
Company and were used for the acquisitions referred to above. In addition, the
bank agreement contains covenants that include requirements to maintain certain
working capital, debt coverage and other financial ratios and restrictions and
limitations on the payment of dividends, guaranty payments, additional
borrowings and the amount of compensation paid to employees who are
stockholders.
In February 1997, the Company completed an initial public offering of
1,350,000 shares of common stock raising net proceeds of $6.1 million. The
Company used substantially all of the proceeds to retire $5.3 million of debt
related primarily to the previously referred to acquisitions.
The Company's continued success is dependent upon the maintenance of its
delivery truck fleet and bottling equipment and its access to water sources.
These activities are currently funded through operations and bank financing. The
Company believes that it has sufficient sources of funding to achieve its
business objectives in the future.
ITEM 7. FINANCIAL STATEMENTS
The information required by Item 7 is incorporated by reference herein from
pages F-1 through F-17.
ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
18
<PAGE>
PART III
ITEM 9. DIRECTORS AND OFFICERS OF THE COMPANY
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's directors and executive officers, their ages and present
positions with the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------- --- -----------------------------------------
<S> <C> <C>
Peter T. Dixon............................... 66 Chairman of the Board
Scott Levy................................... 39 Chief Executive Officer and Director
Jack C. West................................. 55 President and Director
James G. Botti............................... 33 Chief Financial Officer
Stephen Edberg............................... 44 Director
Wilmer J. Thomas, Jr......................... 69 Director
Leonard D. Rosinski.......................... 45 Director
</TABLE>
All directors hold office until the next annual meeting of stockholders or
the election and qualification of their successors. The officers of the Company
are elected by and serve at the discretion of the Board of Directors until their
successors are duly chosen and qualified.
The following is a brief summary of the background of each director and
executive officer of the Company:
PETER T. DIXON
Mr. Dixon has served as Chairman of the Board of Directors of the Company
since January 1994. He was the Senior Executive Vice President of Loeb Partners
Corporation, a private investment banking firm from June 1986 to December 1993.
From 1981 to May 1986, Mr. Dixon was Senior Vice President of Shearson, Lehmann
Brothers, and, prior thereto, a partner in Loeb, Rhoades. Mr. Dixon was Chairman
of the Board of Directors and a principal stockholder of Glacier Water Services,
Inc., a public company traded on the American Stock Exchange under the Symbol
HOO, from February 1993 to May 1993, when he sold his stock in Glacier Water
Services, Inc.
SCOTT LEVY
Mr. Levy has been Chief Executive Officer of the Company since November 1,
1996 and a director of the Company since January 1994. From January 1994 to
October 1996, Mr. Levy was Co-President and Co-Chief Executive Officer of the
Company. In 1980, Mr. Levy founded LSL Hydro Systems, and was the President of
LSL Hydro Systems from 1980 to January 1994. LSL Hydro Systems specialized in
point-of-use drinking water systems sales, rentals, installation, service,
bottled water and plumbing contracting. The Company acquired LSL Hydro Systems,
Inc. in January 1994. Mr. Levy is active in the National Coffee Service
Association and instrumental in the administration of the Cooperative.
JACK C. WEST
Mr. West has been President of the Company since November 1, 1996 and a
director of the Company since January 1994. From January 1994 to October 1996,
Mr. West was Co-President and Co-Chief Executive Officer of the Company. Mr.
West was a principal stockholder and vice president of Puro Corporation of
America (New York) from 1979 to January 1994. He is a past president and
director of the International Bottled Water Association (IBWA). He is currently
Vice Chairman of the Drinking Water
19
<PAGE>
Research Foundation; Chairman of the New York Water Bottlers Committee; Chairman
of the IBWA Government Relations Committee; Vice President and Director of the
Cooperative; and Member of the Bottled Water Industry Forum of the National
Sanitation Foundation.
JAMES G. BOTTI, CPA
Mr. Botti has been Chief Financial Officer of the Company since October
1996. From October 1995 to October 1996 he was Chief Financial Officer of
Hampshire Securities Corp. in New York City, an investment bank and securities
broker dealer. From April 1992 to October 1995 he was Controller of Laidlaw
Holdings, Inc., an affiliate of Laidlaw Equities, Inc., one of the
Representatives. He was manager of Financial Reporting for Needham & Company,
Inc., from 1991 to 1992, and prior to that worked in the public accounting firms
of Anchin, Block & Anchin, and Pustorino, Puglisi and Co. as an accountant.
STEPHEN C. EDBERG, PHD
Dr. Edberg became a director of the Company upon consummation of the
Company's initial public offering. Since 1992, Dr. Edberg has been the Chairman
of the Education Policy and Curriculum Committee of the Yale University School
of Medicine where he is a professor in the Departments of Laboratory Medicine
and Internal Medicine. He also directs the Clinical Microbiology Laboratory of
Yale-New Haven Hospital. He is the inventor of Defined Substrate Technology, the
major iteration of which is Colilert, an EPA-approved test system for monitoring
of bacterial contamination in the nation's drinking water supplies. Since 1990,
Dr. Edberg has been a consultant to IDEXX, Inc., an invitro diagnostics company,
the common stock of which trades on the Nasdaq National Market under the symbol
IDXX. Dr. Edberg has been a Trustee of the Drinking Water Research Foundation
since 1991, and has authored more than 150 publications in the scientific
literature.
WILMER J. THOMAS, JR.
Mr. Thomas has been a director of the Company since December 1995. Mr.
Thomas has been a private investor for at least the past five years and is a
member of the Board of Directors of Great Dane Corp., Savannah, Georgia and of
Moore Medical Corp., New Britain, Connecticut.
LEONARD D. ROSINSKI
Mr. Rosinski became a director of the Company upon consummation of the
Company's initial public offering. Since March, 1996, Mr. Rosinski has been
President and Chief Executive Officer of In-Store Opportunities, Guilford,
Connecticut, a third-party merchandising firm specializing in frozen food. From
January 1994 to March 1996, Mr. Rosinski was Vice-President and Chief Operating
Officer of Pure Fill Corporation, a bottled water vending company in California
and Florida. From July 1990 to December 1993, Mr. Rosinski was the President of
National Water Services, Inc.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
No director, officer or beneficial owner of more than 10% of the Company's
Common Stock has failed to file on a timely basis any Securities and Exchange
Commission Form 3, 4 or 5.
20
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
of the Company's Chairman, Chief Executive Officer and President during the
fiscal year ended December 31, 1996 (collectively, the "Named Executive
Officers").
<TABLE>
<CAPTION>
SALARY COMPENSATION
NAME AND PRINCIPAL POSITION ANNUAL COMPENSATION ALL OTHER
- ----------------------------------------------------------------------------- -------------------- -------------
<S> <C> <C>
Peter T. Dixon, Chairman(1).................................................. $ 12,000 $ 0.00
Scott Levy, Chief Executive Officer.......................................... $ 187,000 $ 1,102.52(2)
Jack C. West, President...................................................... $ 100,000 $ 1,325.00(2)
Jame G. Botti, Chief Financial Officer....................................... $ 100,000 $ 0.00
</TABLE>
- ------------------------
(1) Mr. Dixon has a consulting agreement with the Company pursuant to which he
is paid $1,000 per month.
(2) Represents the dollar value of insurance premiums paid by the Company with
respect to term life insurance.
(3) Mr. Botti commenced employment with the Company on November 1, 1996.
EMPLOYMENT AND CONSULTING AGREEMENTS
The Company has entered into an employment agreement with each of Messrs.
West, Levy and Botti. Mr. West's agreement provides that he shall be employed as
President of the Company on a full time basis for a term of five years. Mr.
West's agreement may be extended at the sole discretion of the Board of
Directors upon the same terms and conditions. Mr. West receives an annual base
salary of $100,000 for the term of his agreement. In the event that the Board of
Directors does not extend the term of the agreement and a mutually acceptable
alternative agreement cannot be negotiated with the Board of Directors upon the
expiration of the agreement, Mr. West will be entitled to a severance payment
equal to two times his annual base salary. Mr. West's employment agreement
contains a covenant not to compete for a period ending one year after the
expiration or termination of such employment agreement along with
confidentiality and non-solicitation undertakings. Mr. West is required to
devote substantially all of his time and attention to the affairs of the Company
and is entitled to receive such benefits as are generally provided from time to
time by the Company to its senior management employees.
Mr. Levy's agreement provides that he shall be employed as Chief Executive
Officer of the Company on a full time basis for a term of five years. Mr. Levy's
agreement may be extended at the sole discretion of the Board of Directors upon
the same terms and conditions. Mr. Levy receives an annual base salary of
$187,000 for the term of his agreement. In the event that the Board of Directors
does not extend the term of the agreement and a mutually acceptable alternative
agreement cannot be negotiated with the Board of Directors upon the expiration
of the agreement, Mr. Levy will be entitled to a severance payment equal to
three times his annual base salary. Mr. Levy's employment agreement contains a
covenant not to compete for a period ending one year after the expiration or
termination of such employment agreement along with confidentiality and
non-solicitation undertakings. Mr. Levy is required to devote substantially all
of his time and attention to the affairs of the Company and is entitled to
receive such benefits as are generally provided from time to time by the Company
to its senior management employees.
Mr. Botti's agreement provides that he shall be employed as Chief Financial
Officer of the Company on a full time basis for a term continuing to October 31,
1997. Mr. Botti receives an annual base salary of $100,000 for the term of his
employment, subject to review of the Board of Directors. Mr. Botti will receive
stock options covering 35,000 shares of Common Stock subject to a five-year
vesting period. Mr. Botti's employment agreement contains a covenant not to
compete for a period ending one year after the expiration or termination of such
employment agreement along with confidentiality and non-solicitation
21
<PAGE>
undertakings. Mr. Botti is required to devote substantially all of his time and
attention to the affairs of the Company and is entitled to receive such benefits
as are generally provided from time to time by the Company to employees on a
comparable level.
On January 28, 1994, the Company entered into a consulting agreement with
Mr. Dixon pursuant to which Mr. Dixon provides certain consulting services to
the Company. The Company pays Mr. Dixon $1,000 per month pursuant to the
consulting agreement. The consulting agreement expires in January 1999.
1996 STOCK OPTION PLAN
In 1996, the Company's stockholders approved the Company's 1996 Stock Option
Plan (the "Stock Option Plan"). The purpose of the Stock Option Plan is to
promote the success of the Company by providing a method whereby eligible
employees of the Company may be awarded additional remuneration for services
rendered, thereby increasing their personal interest in the Company. The Stock
Option Plan is also intended to aid in attracting persons of suitable ability to
become employees of the Company and its subsidiaries.
The Stock Option Plan provides that the maximum number of shares of Common
Stock reserved for awards thereunder shall be 400,000. The Stock Option Plan
provides for the grant of incentive stock options (as defined in Section 422 of
the Internal Revenue Code of 1986, as amended) and nonstatutory stock options.
The exercise price of options granted under the Stock Option Plan may be more
than or equal to the fair market value of such shares on the date of grant. Any
options granted under the Stock Option Plan that shall expire, terminate or
otherwise be annulled for any reason without having been exercised shall again
be available for purposes of the Stock Option Plan.
The Stock Option Plan is to be administered by the Compensation Committee
(the "Committee"), each member of which shall be a member of the Company's Board
of Directors who during the one year period prior to service on the Committee
was not, and during such service is not, granted or awarded any equity
securities pursuant to the Stock Option Plan or any other plan of the Company if
such grant or award or participation on such Stock Option Plan would prevent
such member from being a "disinterested person" with respect to the Stock Option
Plan for purposes of Rule 16b-3 under the Exchange Act. The Committee will have
the power and authority to grant to eligible persons options to purchase shares
of the Company's Common Stock under the Stock Option Plan and to determine the
restrictions, terms and conditions of all such options granted as well as to
interpret the provisions of the Stock Option Plan, any agreements relating to
awards granted under the Stock Option Plan and to supervise the administration
of the Stock Option Plan.
Subject to the provisions of the Stock Option Plan with respect to death,
retirement and termination of employment, the term of each option shall be for
such period as the Committee shall determine as set forth in the applicable
option agreement, but not more than ten years from the date of grant.
DIRECTORS' COMPENSATION
Except for an option in favor of Edberg Associates L.P., of which Stephen C.
Edberg, who is a director of the Company is a partner, to purchase 49,284 shares
of Common Stock of the Company, directors of the Company do not receive fixed
compensation for their services as directors. However, the Board of Directors
may authorize the payment of a fixed sum to directors for their attendance at
regular and special meetings of the Board of Directors as is customary for
similar companies. Directors will be reimbursed for their reasonable
out-of-pocket expenses incurred in connection with their duties to the Company.
22
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information as of February 28, 1996 with
respect to the beneficial ownership of the Company's Common Stock by (i) each
person (including any group) known to the Company to be the beneficial owner of
more than 5% of the outstanding Common Stock, (ii) each director of the Company,
(iii) each executive officer of the Company and (iv) all directors and executive
officers of the Company as a group. Except as may be indicated in the footnotes
to the table, each such person has the sole voting and investment power with
respect to the shares owned, subject to applicable community property laws.
<TABLE>
<CAPTION>
AMOUNT AND
AMOUNT AND NATURE OF
NATURE OF BENEFICIAL
BENEFICIAL PERCENT OWNERSHIP PERCENT
OWNERSHIP (2) OF CLASS (3) AS OF OF CLASS
AS OF AS OF FEBRUARY 28, AS OF
NAME AND ADDRESS OF BENEFICIAL OWNER(1) DECEMBER 31, 1996 DECEMBER 31,1996 1997 FEBRUARY 28, 1997
- -------------------------------------------- ----------------- ------------------- ---------------- -------------------
<S> <C> <C> <C> <C>
Peter T. Dixon(4)........................... 1,084,926 49.3% 1,114,926 32.0
The Trusts Under Article 16 of the Will of
W. Palmer Dixon for the Benefit of Peter
T. and Palmer Dixon (the "Dixon
Trusts")(5)............................... 981,429 45.1% 981,429 28.0
Beth and Scott Levy......................... 425,814 20.0% 425,814 12.0
Jack C. West................................ 394,272 18.5% 394,272 11.0
Thomas Limited Partnership(6)............... 197,136 9.3% 197,136 6.0
Wilmer J. Thomas, Jr.(6).................... 197,136 9.3% 197,136 6.0
Edberg Associates Limited Partnership(7).... 147,852 6.8% 147,852 4.0
All directors and executive officers as a
group (5 persons)......................... 2,250,000 100.0% 2,280,000 65.0
</TABLE>
- ------------------------
(1) Unless otherwise indicated, the address of each beneficial owner is c/o the
Company, 56-45 58th Street, Maspeth, New York 11378.
(2) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect to
securities and includes options exercisable within 60 days of the date of
this filing. Except as indicated by footnote, and subject to community
property laws where applicable, the persons named in the table above have
sole voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them.
(3) The percentage of class is calculated in accordance with Rule 13d-3 under
the Exchange Act and assumes that the beneficial owner has exercised any
options or other rights to subscribe which are exercisable within 60 days
and that no other options or rights have been exercised by anyone else.
(4) These shares consist of (i) 108,856 shares of Common Stock held by Peter T.
Dixon, (ii) 932,145 shares of Common Stock held by the Dixon Trusts, and
(iii) 73,926 shares of Common Stock issuable upon the exercise of options
currently outstanding, of which options to purchase 24,642 shares of Common
Stock are held by Peter T. Dixon and options to purchase 49,284 shares of
Common Stock are held by the Dixon Trusts, which shares represent a
one-third interest in options in favor of Peter T. Dixon and the Dixon
Trusts, jointly.
(5) These shares consist of (i) 932,145 held by the Dixon Trusts, and (ii)
49,284 shares of Common Stock issuable upon the exercise of options
currently outstanding, which shares represent a two-thirds interest in
options in favor of Peter T. Dixon and the Dixon Trusts, jointly.
(6) Wilmer J. Thomas, Jr., a partner of Thomas Limited Partnership, is a
director of the Company.
(7) Dr. Stephen C. Edberg, a partner of Edberg Associates Limited Partnership,
is a director of the Company. These shares consist of (i) 98,568 shares of
Common Stock, and (ii) 49,284 shares of Common Stock issuable upon the
exercise of options currently outstanding.
23
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS
On January 28, 1994, the Dixon Trusts loaned the Company $300,000 to be used
for working capital. This loan is callable on demand and bears annual interest
at the rate of prime +.75%. This loan was repaid in full from the proceeds of
the Company's initial public offering. The founders of the Company are Peter T.
Dixon, the Trusts under Article 16 of the Will of Palmer Dixon for the benefit
of Peter T. and Palmer Dixon, Scott and Beth Levy, and Jack C. West. Peter T.
Dixon and the Dixon Trusts have purchased from the issuer shares of Common
Stock. In connection with the acquisition of LSL Hydro Systems, Inc., the
Company issued to Scott and Beth Levy 425,814 shares of Common Stock. In
connection with the acquisition of Puro Corporation of America (New York), the
Company issued to Jack West 394,272 shares of Common Stock. No assets were
acquired from any of the founders.
On January 28, 1994, the Company entered into a consulting agreement with
Peter T. Dixon, pursuant to which Mr. Dixon provides certain consulting services
to the Company. The Company pays Mr. Dixon $1,000 per month pursuant to the
consulting agreement. The consulting agreement expires in January 1999.
In connection with the Electrified transaction in January 1996, the Company
obtained a letter of credit in the amount of $3,500,000 from European American
Bank to secure seller financing of a like amount, $2.9 million of which was
repaid from the proceeds of the Company's initial public offering. Peter T.
Dixon secured the letter of credit with personal assets. In connection with the
Mountainwood transaction in June 1996, the Company obtained a letter of credit
in the amount $500,000 from European American Bank to secure seller financing of
a like amount. Mr. Dixon also secured that letter of credit with personal
assets. In consideration of pledging his personal assets as described above, the
Company issued to Mr. Dixon and the Dixon Trusts options to purchase 73,926
shares of Common Stock.
All future transactions and loans with officers, directors and principal
stockholders of the Company will be on terms no less favorable than could be
obtained from independent third parties and will be approved by a majority of
the disinterested directors of the Company.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
(i) Index of Exhibits.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
*3.1 Certificate of Incorporation of the Company, as amended.
*3.2 Amended and Restated By-laws of the Company.
*4.1 Specimen Certificate of the Company's Common Stock.
*5.1 Opinion of Lev, Berlin & Dale, P.C.
*10.1 Asset Purchase Agreement between the Company and Glenn Downing, Gary Downing and Downmorr Water
Corporation dated August 26, 1995.
*10.2 Amendment to Asset Purchase Agreement by Glenn Downing and Gary Downing dated November 12, 1996.
*10.3 Asset Purchase Agreement between the Company and Kenneth Gelber and Bark Water Company Ltd. d/b/a/
Nature's Way dated January 30, 1995.
*10.4 Amendment to Asset Purchase Agreement by Kenneth Gelber and Bark Water Company Ltd. dated November
12, 1996.
*10.5 Asset Purchase Agreement between the Company and Edward and Rita Worfler and National Ozone Water
Corp. dated April 28, 1995.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
*10.6 Asset Purchase Agreement between the Company and Peter Nicholas, Anthony Bonventure and Nature's Best
Water Company, Inc. dated April 28, 1995.
*10.7 Waiver of right to convert debt issued in connection with the Asset Purchase Agreement by Nature's
Best Water Company, Inc. dated November 8, 1996.
*10.8 Asset Purchase Agreement between the Company and Waters Filter & Cooler, Inc. and Transition
Agreement between Alan Waters and the Company, each dated October 31, 1995, as amended pursuant to
Amendment dated March 29, 1996, as revised pursuant to Revision dated May 23, 1996.
*10.9 Asset Purchase Agreement between the Company and Rainbow Coffee Service Inc. d/b/a Rainbow Water
Service dated October 31, 1995, as amended by Amendment dated March 29, 1996.
*10.10 Asset Purchase Agreement between the Company and Mountainwood Spring Water Co., Inc. and White
Mountain Co., Inc. dated as of June 30, 1995.
*10.11 Waiver of option granted in connection with the Asset Purchase Agreement by Mountainwood Spring Water
Co., Inc. and White Mountain Co., Inc. dated November 7, 1996.
*10.12 Asset Purchase Agreement between the Company and Robert Brundage, Lyle Brundage and Electrified
Companies, Inc. dated January 31, 1996.
*10.13 Net Lease, dated January 31, 1996, between the Company and R&L Properties Company covering premises
in East Orange, New Jersey.
*10.14 Employment Agreement between the Company and Jack West dated as of November 1, 1996.
*10.15 Employment Agreement between the Company and Scott Levy dated as of November 1, 1996.
*10.16 Employment Agreement between the Company and James Botti dated as of November 1, 1996.
*10.17 Lease, dated October 9, 1995, between the Company and Stabal Realty Corp. covering 76-78 Mall Drive,
Commack, Long Island, New York facility, as modified by Lease Modification dated February 15, 1996.
*10.18 Balloon Mortgage on the Maspeth, New York facility dated May 24, 1988, with Bond and Extension and
Consolidation Agreement of same date.
*10.19 Supply Agreement dated June 27, 1996 between the Company and Mountainwood Spring Water Co., Inc.
*10.20 Long-term Supply Agreement dated June 13, 1996 between the Company and Shawangunk Bulk Springwater
Corp.
*10.21 Stock Purchase Agreement dated as of December 29, 1995 between the Company and Thomas Limited
Partnership.
*10.22 Stock Purchase Agreement dated as of May 1, 1996 between the Company and Edberg Associates Limited
Partnership.
*10.23 Stock Purchase Agreement dated as of October 16, 1995 between the Company and Peter T. Dixon and the
Trusts under Article 16 of the Will of W. Palmer Dixon for the benefit of Peter and Palmer Dixon.
*10.24 Registration Rights Agreement dated as of December 29, 1995 between the Company and Thomas Limited
Partnership.
*10.25 Registration Rights Agreement dated as of May 1, 1996 between the Company and Edberg Associates
Limited Partnership.
*10.26 Registration Rights Agreement dated as of October 16, 1995 between the Company and Peter T. Dixon and
the Trusts Under Article 16 of the Will of W. Palmer Dixon for the benefit of Peter and Palmer Dixon.
*10.27 Registration Rights Agreement dated January 28, 1994 between the Company and the Trusts Under Article
16 of the Will of W. Palmer Dixon for the benefit of Peter and Palmer Dixon.
*10.28 Registration Rights Agreement dated January 28, 1994 between the Company and Jack C. West and Scott
and Beth Levy.
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
*10.29 Master Note in principal amount of $2 million with European American Bank dated September 13, 1996.
*10.30 Commercial Note in the original principal amount of $1.5 million with European American Bank dated
September 13, 1996.
*10.31 General Security Agreement with European American Bank dated July 31, 1996.
*10.32 Agreement of Subordination and Assignment dated as of January 31, 1996 between the Trusts under
Article 16 of the Will of W. Palmer Dixon for the benefit of Peter T. Dixon and Palmer Dixon, and the
Company in favor of European American Bank.
*10.33 Pledge Agreement dated January 31, 1996 between the Trusts under the Will of W. Palmer Dixon for the
benefit of Peter or of European American Bank.
*10.34 Guaranty of All Liability dated as of February 5, 1996, by Peter T. Dixon in favor of European
American Bank.
*10.35 Secured Note in original principal amount of $250,000 dated January 28, 1994 in favor of the Trusts
under Article 16 of the Will of W. Palmer Dixon for the benefit of Peter T. Dixon and Palmer Dixon.
*10.36 Standby Secured Note in original principal amount of $50,000 dated January 28, 1994 in favor of the
Trusts under Article 16 of the Will of W. Palmer Dixon for the benefit of Peter T. Dixon and Palmer
Dixon.
*10.37 Letter of Credit in the amount of $500,000 with European American Bank dated June 27, 1996.
*10.38 Letter of Credit in the amount of $4,000,000 with European American Bank dated January 31, 1996.
*10.39 Consulting Agreement between the Company and Peter T. Dixon dated January 28, 1994.
*10.40 Waiver of Transaction Fee by Peter T. Dixon dated November 14, 1996.
*10.41 Option to Purchase Common Stock dated November 9, 1996 in favor of Edberg Associates Limited
Partnership.
*10.42 Option to Purchase Common Stock dated November 9, 1996 in favor of Peter T. Dixon and the Trusts
under Article 16 of the Will of W. Palmer Dixon for the benefit of Peter T. Dixon and Palmer Dixon.
*10.43 Option to Purchase Common Stock dated November 9, 1996 in favor of Peter T. Dixon and the Trusts
under Article 16 of the Will of W. Palmer Dixon for the benefit of Peter T. Dixon and Palmer Dixon.
11.1 Supplemental Earnings Per Share Computation.
24.1 Powers of Attorney (included on the signature page to the Report on Form 10-KSB).
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* Filed with the Company's registration statement on Form SB-2.
(b) Reports on 8-K filed in the fiscal year ended December 31, 1996.
None.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: April 15, 1997 PURO WATER GROUP, INC.
By: /s/ JACK C. WEST
-----------------------------------------
Jack C. West
President
PURO WATER GROUP, INC.
By: /s/ SCOTT LEVY
-----------------------------------------
Scott Levy
Chief Executive Officer
KNOW ALL PERSON BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jack C. West and Scott Levy, jointly and
severally, his attorneys-in-fact, each with the power of substitution, for him
in any and all capacities, to sign any amendments to this Annual Report on Form
10-KSB, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ --------------------------------------- ----------------
<C> <S> <C>
/s/ JACK C. WEST
------------------------------------------- President and Director (principal April 15, 1997
Jack C. West executive officer)
/s/ SCOTT LEVY
------------------------------------------- Chief Executive Officer and Director April 15, 1997
Scott Levy
/s/ JAMES G. BOTTI
------------------------------------------- Chief Financial Officer (principal April 15, 1997
James G. Botti financial and accounting officer)
/s/ PETER T. DIXON
------------------------------------------- Director April 15, 1997
Peter T. Dixon
/s/ WILMER J. THOMAS
------------------------------------------- Director April 15, 1997
Wilmer J. Thomas
/s/ STEPHEN EDBERG
------------------------------------------- Director April 15, 1997
Stephen Edberg
/s/ LEONARD D. ROSINSKI
------------------------------------------- Director April 15, 1997
Leonard D. Rosinski
</TABLE>
27
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Puro Water Group, Inc.:
We have audited the accompanying balance sheet of Puro Water Group, Inc. (a
Delaware corporation) as of December 31, 1996, and the related statements of
operations, stockholders' equity and cash flows for each of the two years 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 audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Puro Water Group, Inc. as of
December 31, 1996, and the results of its operations and its cash flows for each
of the two years then ended, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
New York, New York
April 11, 1997
F-1
<PAGE>
PURO WATER GROUP, INC.
BALANCE SHEET
AS OF DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash......................................................................... $ 216,960
Accounts receivable, less allowance for doubtful accounts of $201,205........ 2,527,915
Inventory.................................................................... 550,243
Prepaid expenses............................................................. 211,282
----------
Total current assets................................................... 3,506,400
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of $940,969
(Note 4)..................................................................... 5,781,005
INTANGIBLE ASSETS, net of accumulated amortization of $712,734 (Note 5)........ 7,638,884
DEFERRED REGISTRATION COSTS.................................................... 729,934
OTHER ASSETS................................................................... 136,491
----------
TOTAL ASSETS......................................................... $17,792,714
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................................. $ 619,985
Accrued expenses and other current liabilities............................... 223,290
Accrued registration costs................................................... 454,647
Income taxes payable......................................................... 179,422
Deferred income.............................................................. 236,184
Short-term borrowings (Note 6)............................................... 2,100,000
Current portion of long-term debt (Note 7)................................... 2,040,361
Current portion of capital lease obligations (Note 10)....................... 201,649
----------
Total current liabilities.............................................. 6,055,538
LONG-TERM LIABILITIES:
Long-term debt (Note 7)...................................................... 5,903,120
Capital lease obligations (Note 10).......................................... 217,081
Deferred tax liability....................................................... 765,000
Other liabilities............................................................ 208,970
----------
Total long-term liabilities............................................ 7,094,171
COMMITMENTS (Note 13)
STOCKHOLDERS' EQUITY:
Common stock, $.0063 par value; 10,000,000 shares authorized; 2,126,789
shares issued and outstanding.............................................. 13,399
Additional paid-in capital................................................... 3,342,715
Retained earnings............................................................ 1,286,891
----------
Total stockholders' equity............................................. 4,643,005
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................... $17,792,714
----------
----------
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-2
<PAGE>
PURO WATER GROUP, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
REVENUE:
Bottled water sales and other revenue.............................................. $ 8,441,326 $ 4,175,395
Rental revenue..................................................................... 2,186,264 1,325,769
------------- ------------
10,627,590 5,501,164
COST OF GOODS SOLD:
Cost of goods sold (excluding depreciation)........................................ 3,506,321 1,615,228
Depreciation....................................................................... 530,814 237,518
------------- ------------
GROSS PROFIT......................................................................... 6,590,455 3,648,418
OPERATING EXPENSES:
Operating expenses (excluding depreciation and amortization)....................... 1,898,610 1,305,786
General and administrative expenses................................................ 2,172,039 1,309,478
Depreciation and amortization...................................................... 461,118 213,855
------------- ------------
Total operating expenses....................................................... 4,531,767 2,829,119
------------- ------------
INCOME FROM OPERATIONS............................................................... 2,058,688 819,299
OTHER INCOME/(EXPENSE):
Other income/(expense)............................................................. 28,299 118,577
Interest expense................................................................... (763,604) (302,973)
Plant relocation charges........................................................... (250,000) --
------------- ------------
(985,305) (184,396)
------------- ------------
INCOME BEFORE PROVISION FOR INCOME TAXES............................................. 1,073,383 634,903
PROVISION FOR INCOME TAXES........................................................... 446,220 231,000
------------- ------------
NET INCOME........................................................................... $ 627,163 $ 403,903
------------- ------------
------------- ------------
PER SHARE INFORMATION:
Earnings per share (Note 2)........................................................ $ 0.28 $ 0.21
------------- ------------
------------- ------------
Weighted average common shares outstanding (Note 2)................................ 2,237,679 1,927,662
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
PURO WATER GROUP, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------
<S> <C> <C> <C> <C> <C>
ADDITIONAL
NUMBER OF PAID-IN RETAINED
SHARES PAR VALUE CAPITAL EARNINGS TOTAL
---------- ----------- -------------- ------------ ------------
BALANCE, December 31, 1994................... 1,577,089 $ 9,936 $ 845,178 $ 255,825 $ 1,110,939
Issuance of common stock................... 394,272 2,484 1,997,516 -- 2,000,000
Net income................................. -- -- -- 403,903 403,903
---------- ----------- -------------- ------------ ------------
BALANCE, December 31, 1995................... 1,971,361 12,420 2,842,694 659,728 3,514,842
Issuance of common stock (Note 9).......... 98,568 621 499,379 -- 500,000
Exercise of stock warrants (Note 9)........ 56,860 358 642 -- 1,000
Net income................................. -- -- -- 627,163 627,163
---------- ----------- -------------- ------------ ------------
BALANCE, December 31, 1996................... 2,126,789 $ 13,399 $ 3,342,715 $ 1,286,891 $ 4,643,005
---------- ----------- -------------- ------------ ------------
---------- ----------- -------------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
PURO WATER GROUP, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................................ $ 627,163 $ 403,903
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization..................................................... 991,932 451,373
Deferred income taxes............................................................. 393,000 187,000
Provision for allowance for doubtful accounts..................................... 5,300 (11,026)
Changes In Assets And Liabilities--
Increase in accounts receivable................................................. (1,384,028) (535,069)
Increase in inventory........................................................... (201,283) (91,960)
Increase in prepaid expenses and other assets................................... (205,394) (36,516)
Increase (decrease) in accounts payable, accrued expenses and other
liabilities................................................................... 337,199 (1,363)
Increase in deferred income..................................................... 119,718 26,386
------------- -------------
Net cash provided by operating activities................................... 683,607 392,728
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment......................................... (2,802,887) (1,143,105)
Net assets acquired (Note 3)...................................................... (5,458,663) (1,683,135)
------------- -------------
Net cash used in investing activities....................................... (8,261,550) (2,826,240)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from /(repayment of) short-term borrowings, net.......................... 2,050,000 (100,000)
Repayment of capital lease obligations............................................ (192,758) (149,623)
Repayment long-term debt.......................................................... (727,384) (373,517)
Proceeds from long-term debt...................................................... 5,750,000 1,686,386
Proceeds from exercise of stock warrants.......................................... 1,000 --
Proceeds from sale of common stock................................................ 500,000 2,000,000
Increase in deferred offering costs............................................... (275,287) --
------------- -------------
Net cash provided by financing activities................................... 7,105,571 3,063,246
------------- -------------
NET (DECREASE) INCREASE IN CASH..................................................... (472,372) 629,734
CASH, beginning of period........................................................... 689,332 59,598
------------- -------------
CASH, end of period................................................................. $ 216,960 $ 689,332
------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest........................................................................ $ 719,410 $ 302,973
------------- -------------
Income taxes.................................................................... $ 56,520 $ 121,039
------------- -------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations incurred................................................ $ 127,803 $ 113,041
------------- -------------
Deferred offering costs not yet paid.............................................. $ 454,647 $ --
------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
PURO WATER GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996
1. ORGANIZATION AND BUSINESS:
Puro Water Group, Inc. (the "Company"), a Delaware corporation, is a bottler
and distributor of spring and purified drinking water, serving commercial and
residential users in the metropolitan New York area. The Company markets its
drinking water under the brand names Puro, American Eagle Spring Water, Nature's
Best Spring Water and Lectro-Still. The Company also rents and services water
coolers, filtration systems, and plumbed-in fountains located in businesses,
factories and homes in the metropolitan New York area.
On February 1, 1994, the Company, a holding company, completed the
acquisition of all of the outstanding common stock of Puro Corporation of
America, a New York Corporation ("Puro NY"), and LSL Hydro Systems, Inc.
("Hydro"). Immediately, prior to the acquisition, Puro NY and Hydro purchased
stock owned by certain stockholders which represented ownership of 50% of each
of the companies for cash of $1,000,000 and the issuance of $100,000 in notes
payable. The transaction was accounted for under the purchase method with the
purchase price deemed to be $1,500,000 based on the ultimate ownership and
management's estimate of fair value at the time of the acquisition. Because
Hydro and Puro NY had a common control group, that portion of the assets of the
Company attributable to the control group (approximately 26%), were accounted
for as having been acquired at a carryover historical basis of $31,000. The
purchase price has been allocated to the fair market value of the assets
acquired and liabilities assumed which resulted in goodwill of approximately
$1,200,000. This amount is being amortized over fifteen years.
2. SIGNIFICANT ACCOUNTING POLICIES:
MANAGEMENT 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.
INVENTORY
Inventory is stated at the lower of cost or market and cost is determined
using the first-in, first-out method. Inventory is comprised of water coolers
and parts, office refreshment supplies and water.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at historical cost. The Company's
building is depreciated utilizing the straight-line method over 40 years and
equipment is depreciated utilizing the straight-line method over the estimated
useful lives of 8 to 25 years. Equipment held under capital leases is amortized
utilizing the straight-line method over the lesser of the term of the lease or
estimated useful life of the asset in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 13 "Accounting for Leases".
F-6
<PAGE>
PURO WATER GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996
INTANGIBLE ASSETS
Intangible assets are recorded based on the value of certain assets obtained
in the acquisition of other companies and are amortized on the straight-line
method over the following periods:
<TABLE>
<S> <C>
15-30
Goodwill........................................................ years
Customer lists.................................................. 6 years
Covenants-not-to-compete........................................ 3-7 years
</TABLE>
Subsequent to its acquisitions, the Company continually evaluates whether
later events and circumstances have occurred that indicate the remaining
estimated useful life of the intangible assets may warrant revision or that the
remaining balance may not be recoverable. The Company has completed its first
year of operations with Electrified Companies, Inc. and Mountain Spring Water
Co., Inc. and White Mountain Company, Inc. (Note 3). Based on customer activity,
including retention rate, management believes that the useful life on the
goodwill related to these acquisitions should be 30 years. When factors indicate
that intangible assets should be evaluated for possible impairment, the Company
uses an estimate of the undiscounted cash flows over the remaining life of the
intangible assets in measuring whether it is recoverable.
REVENUE RECOGNITION
Revenue on sales of bottled water and coolers is recognized upon delivery.
Leases of water coolers and filters are accounted for under the operating method
and, accordingly, rental income is reported over the terms of the leases.
INCOME TAXES
The Company accounts for its income taxes under SFAS No. 109, "Accounting
for Income Taxes", which requires recognition of deferred tax liabilities and
assets for the estimated future tax effects of events that have been recognized
in the financial statements or income tax returns. Under this method, deferred
tax liabilities and assets are determined based on differences between the
financial accounting and income tax bases of assets and liabilities, and the use
of carryforwards, if any, using enacted tax rates in effect for the years in
which the differences and carryforwards are expected to reverse and be utilized.
EARNINGS PER SHARE
Earnings per share ("EPS") was computed by dividing net income by the
weighted average number of common share equivalents outstanding during the
respective periods, which includes for all periods, (i) the retroactive effect
of the April 1996 stock split (Note 9) and the reverse stock split, which
occurred upon the consummation of the Company's initial public offering (Note
14), (ii) the sale of 98,568 shares of common stock in May 1996 (Note 9), (iii)
the impact of options held by two stockholders, to purchase 123,210 shares of
Common Stock at $5.40 per share (Note 12) and (iv) the impact of the exercise of
56,860 warrants (Note 9).
NEW ACCOUNTING PRONOUNCEMENTS
During March 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 121, "Accounting for the Impairment of Long Lived Assets", which is
effective for fiscal years beginning after
F-7
<PAGE>
PURO WATER GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996
December 15, 1995. The adoption of this standard did not have an effect on the
Company's financial position or results of operations.
During October 1995, the FASB issued SFAS No. 123, "Accounting for Stock
Based Compensation". This statement establishes financial accounting and
reporting standards for stock-based employee compensation plans. SFAS No. 123
encourages entities to adopt a fair value based method of accounting for stock
compensation plans. However, SFAS No. 123 also permits the Company to continue
to measure compensation costs under pre-existing accounting pronouncements. If
the fair value based method of accounting is not adopted, SFAS No. 123 requires
pro forma disclosures of net income and net income per common share in the notes
to financial statements. The accounting requirements of SFAS No. 123 are
effective for transactions entered into in fiscal years that begin after
December 15, 1995. The disclosure requirements of SFAS No. 123 are effective for
financial statements for fiscal years beginning after December 15, 1995, or for
an earlier fiscal year for which SFAS No. 123 is initially adopted for
recognizing compensation cost.
Subsequent to December 31, 1996, the FASB issued SFAS No. 128, "Earnings Per
Share." This statement establishes standards for computing and presenting EPS,
replacing the presentation of currently required primary EPS with a presentation
of Basic EPS. For entities with complex capital structures, the statement
requires the dual presentation of both Basic EPS and Diluted EPS on the face of
the statement of operations. Under this new standard, Basic EPS is computed
based on weighted average shares outstanding and excludes any potential
dilution; Diluted EPS reflects potential dilution from the exercise or
conversion of securities into common stock or from other contracts to issue
common stock and is similar to the currently-required fully diluted EPS. SFAS
128 is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods, and earlier application is not
permitted. When adopted, the Company will be required to restate its EPS data
for all prior periods presented. If this statement had been adopted, the
Company's basic earnings per share, as defined in the statement, would have been
$0.30 and $0.23, respectively, for the years ended December 31, 1996 and 1995.
3. ACQUISITIONS:
During 1995, the Company acquired certain assets and assumed certain
liabilities of several companies operating in the bottled water industry. The
acquisitions were paid for with cash and the issuance of notes (Note 7). All
acquisitions have been accounted for under the purchase method and therefore
operations of the companies acquired have been included in the statement of
operations from their respective dates of acquisition. Although the individual
acquisitions were not material to the Company's financial position or results of
operations, the total purchase price for all of the Company's 1995 acquisitions
was approximately $2,200,000. Pro forma results of operations have not been
provided as the information was neither readily available nor material to the
Company's overall results of operations. Additionally, the Company incurred
certain non-recurring expenses resulting from the integration of these
acquisitions into the Company's operations which have been reflected in the
Company's statement of operations for the year ended December 31, 1995.
On January 31, 1996, the Company acquired the net assets of Electrified
Companies, Inc., a company operating in the bottled water industry. The purchase
agreement called for total payments to be made to the seller in the aggregate
amount of $5,000,000, payments totaling $437,801 to satisfy two bank loans of
the seller and certain consideration for other outstanding liabilities. The
$5,000,000 was paid through a cash payment of $1,000,000 at the closing and the
issuance of three note payables for $2,900,000, $600,000 and $500,000,
respectively, bearing interest at the prime rate (8.25% at December 31, 1996).
Interest payments, only, are due through February 1997, and then equal monthly
principal installments will be
F-8
<PAGE>
PURO WATER GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996
made from March 1997 through February 2000. Subsequent to December 31, 1996, and
in connection with the initial public offering of the Company's common stock
(Note 14), the Company paid the $2,900,000 note payable.
Summarized below is the unaudited pro forma results of operations of the
Company for the year ended December 31, 1995 as though this acquisition had
occurred on January 1, 1995. Adjustments have been made for pro forma income
taxes, amortization of intangible assets related to this acquisition and
interest expense as a result of this acquisition. Pro Forma results of
operations of the Company, for the year ended December 31, 1996, are not
provided as the information was not material to the Company's overall results of
operations.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1995
------------------
<S> <C>
(UNAUDITED)
Pro Forma:
Revenues................................................................ $ 10,659,418
Net income.............................................................. 91,000
Earnings per share...................................................... $0.05
</TABLE>
These pro forma results of operations are not necessarily indicative of the
actual results of operations that would have occurred had the acquisition been
made at the beginning of 1995, or of results which may occur in the future.
On June 27, 1996, the Company entered into an agreement to acquire certain
assets of Mountainwood Spring Water Co., Inc., and White Mountain Company, Inc.,
(collectively "Mountainwood") both operating in the bottled water industry.
Under the terms of the agreement, the acquisition was effective as of July 1,
1996. The purchase agreement called for total payments to be made to the seller
in the aggregate amount of $1,250,000 which was comprised of a cash payment of
$500,000 at the closing, and two separate notes payable for $500,000 and
$250,000 bearing interest at 8%. The $500,000 note will have interest payments
through July 1, 1999, at which time a $125,000 principal payment will be made.
Thereafter, and through July 1, 2003, monthly principal payments of $10,000 will
be paid. The principal and interest on the $250,000 note shall be paid through
monthly payments of interest only through June 30, 1999, at which time the
entire unpaid principal and interest is due (Note 7). The $500,000 cash payment
was borrowed from a bank, and secured by the Company's majority shareholder, and
is included in long-term debt (Note 7) on the accompanying balance sheet as of
December 31, 1996.
F-9
<PAGE>
PURO WATER GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are comprised of the following as of December
31, 1996:
<TABLE>
<S> <C>
Land and building............................................... $ 946,088
Building improvements........................................... 192,818
Rental equipment................................................ 2,324,508
Vehicles held under capital leases.............................. 805,917
Vehicles........................................................ 396,826
Bottles and crates.............................................. 483,634
Machinery and equipment......................................... 1,378,176
Furniture and fixtures.......................................... 194,007
---------
6,721,974
Less: Accumulated depreciation.................................. 940,969
---------
Property, plant and equipment, net.......................... $5,781,005
---------
---------
</TABLE>
Depreciation aggregated $555,925 and $262,074, respectively, for the years
ended December 31, 1996 and 1995.
5. INTANGIBLE ASSETS:
Intangible assets are comprised of the following as of December 31, 1996:
<TABLE>
<S> <C>
Goodwill........................................................ $7,749,071
Covenants-not-to-compete........................................ 338,333
Customer lists.................................................. 264,214
---------
8,351,618
Less: Accumulated amortization.................................. 712,734
---------
Intangible assets, net...................................... $7,638,884
---------
---------
</TABLE>
Amortization expense on intangible assets aggregated $427,115 and $189,299,
respectively, for the years ended December 31, 1996 and 1995.
6. SHORT-TERM BORROWINGS:
The Company has a line of credit available with a bank for $3,000,000 as of
December 31, 1996. No amounts were available under the $3,000,000 line of
credit, as the Company converted the outstanding amounts into a $1,550,000
short-term note, described below, and a $1,450,000 note payable which is
included in long-term debt in the accompanying balance sheet (Note 7).
F-10
<PAGE>
PURO WATER GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996
The outstanding amounts on short-term borrowings as of December 31, 1996 are
as follows:
<TABLE>
<S> <C>
Note payable with bank, bearing interest at prime plus .25%, due in full
on May 31, 1997, secured by a letter of credit of $1,500,000 issued by
the bank, which is guaranteed by the Company's principal
stockholder........................................................... $1,550,000
Promissory note payable to bank, bearing interest at prime plus .50%,
due in full in June 1997, secured by a letter of credit which is
guaranteed by the Company's principal stockholder..................... 500,000
Demand note with stockholder with interest at prime plus .75%........... 50,000
---------
Total short-term debt............................................... $2,100,000
---------
---------
</TABLE>
The prime rate was 8.25% as of December 31, 1996.
F-11
<PAGE>
PURO WATER GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996
7. LONG-TERM DEBT:
Long-term debt consists of the following as of December 31, 1996:
<TABLE>
<S> <C>
BANK FINANCING
Mortgage payable, due in monthly installments of $9,941
including interest at 10.75%, balloon payment of $886,873 due
June 1, 1998, secured by the land and building, with a net
book value of $897,613........................................ $ 921,611
Promissory note payable to bank, bearing interest at prime plus
.50%, due in monthly installments through September 2001,
secured by certain fixed assets of the Company................ 1,446,429
ACQUISITION FINANCING (NOTE 3)
Note payable to bank of $500,000, related to Mountainwood
acquisition, bearing interest at 8%, monthly interest payments
only through July 1, 1999, principal payment of $125,000 on
July 1, 1999 and then equal monthly installments through July
1, 2003....................................................... 500,000
Note payable to seller of $250,000, related to Mountainwood
acquisition, bearing interest at 8%, monthly interest payments
only through June 30, 1999 and then balloon payment of full
principal due on June 30, 1999................................ 250,000
Notes payable to seller of $2,900,000 and $600,000, related to
Electrified Companies, Inc. bearing interest at prime rate,
interest payments only due through February 1997, and then
equal monthly installments from March 1997 through February
2000.......................................................... 3,500,000
Notes payable associated with 1996 and 1995 acquisition
financing, bearing interest at rates ranging from 8-9%
(certain non-interest bearing notes include interest at rates
reflecting the Company's incremental borrowing rate), due in
monthly installments through January 2001..................... 1,036,786
STOCKHOLDER NOTES PAYABLE
Loan from stockholder, bearing interest at prime plus .75%, due
in equal monthly installments commencing April 1997 through
January 2001.................................................. 250,000
Other notes payable............................................. 38,655
---------
Total....................................................... 7,943,481
Less: current portion........................................... 2,040,361
---------
Long-term debt.................................................. $5,903,120
---------
---------
</TABLE>
F-12
<PAGE>
PURO WATER GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996
Maturities of long-term debt over the next five years are as follows:
<TABLE>
<S> <C>
Year Ended December 31,
1997.......................................................... $2,040,361
1998.......................................................... 2,924,691
1999.......................................................... 1,886,680
2000.......................................................... 587,487
2001 and thereafter........................................... 1,004,262
---------
$8,443,481
---------
---------
</TABLE>
8. INCOME TAXES:
Components of the income tax provision for the year ended December 31, 1996
and 1995 are as follows:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
---------- ---------- ----------
<S> <C> <C> <C>
1996:
Federal................................................................ $ 106,220 $ 207,000 $ 313,220
State and local........................................................ 45,000 88,000 133,000
---------- ---------- ----------
$ 151,220 $ 295,000 $ 446,220
---------- ---------- ----------
---------- ---------- ----------
1995:
Federal................................................................ $ 20,000 $ 152,000 $ 172,000
State and local........................................................ 24,000 35,000 59,000
---------- ---------- ----------
$ 44,000 $ 187,000 $ 231,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The actual tax expense differed from the "expected" amounts by applying the
U.S. Federal income tax rate of 34% as follows:
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
Federal income tax at statutory rate............................................ 34% 34%
Non-deductible goodwill amortization............................................ 2% --
Purchase accounting reversal.................................................... -- (3%)
State income taxes net of federal income tax benefit............................ 9% 6%
Other........................................................................... (3%) (1%)
-- --
Actual income tax provision............................................... 42% 36%
-- --
-- --
</TABLE>
The net deferred tax liability at December 31, 1996 and 1995 primarily
consists of the differences between depreciation recorded for tax and book
purposes and the allowance for doubtful accounts.
9. STOCKHOLDERS' EQUITY:
In October 1995, the Company entered into a Stock Purchase Agreement with
certain stockholders of the Company to purchase 394,272 shares of the Company's
stock for an aggregate purchase price of $2,000,000.
F-13
<PAGE>
PURO WATER GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996
STOCK SPLIT
In April 1996, the Company approved an increase in the amount of authorized
common stock from 2,000,000 to 10,000,000 shares and a change in the common
stock par value from $.01 to $.003125. Immediately thereafter, the Company
authorized a 3.2 for 1 stock split on all common stock outstanding. All
information in the accompanying financial statements has been retroactively
restated to give effect to the stock split.
SALE OF COMMON STOCK
On May 1, 1996, a third party investor purchased 98,568 shares of common
stock for an aggregate purchase price of $500,000. In November 1996, the
investor was also granted options to purchase 49,284 shares of the Company's
common stock at $5.40 per share. These options are still outstanding.
EXERCISE OF STOCK WARRANTS
In October 1996, certain entities, under the control of the Company's
principal stockholder, exercised stock warrants for an aggregate 2.5% of the
outstanding common stock and stock options of the Company, immediately after
said exercise, for a total of $1,000. Said warrants were issued on January 28,
1994, in connection with the initial capitalization of the Company and the
investment in the Company by the holder. The fair market value of the stock
underlying the warrants was $31,000 at the time of issuance. The warrants were
not subject to any restrictions. Pursuant to the exercise of the aforementioned
warrants, the stockholders received a total of 56,860 shares of common stock.
10. CAPITAL LEASE OBLIGATIONS:
The Company is the lessee of certain fixed assets under capital leases
expiring through 2000. The assets and liabilities under capital leases are
recorded at the lower of the present value of minimum lease payments or the fair
market value of the asset. The assets are depreciated over their estimated
useful lives. Interest rates on capital leases vary from 3.5% to 7.00%.
Future minimum payments under these lease agreements are as follows:
<TABLE>
<S> <C>
Year Ended December 31,
1997............................................................ $ 220,318
1998............................................................ 176,192
1999............................................................ 42,823
2000............................................................ 7,671
---------
Total minimum lease payments................................ 447,004
Less: Amount representing interest.............................. 28,274
---------
Present value of net minimum lease payments..................... $ 418,730
---------
---------
</TABLE>
11. BENEFIT PLANS:
The Company's noncontributory pension plan provides benefits upon the death
or retirement of eligible employees. The Company's policy is to fund the annual
amount deductible for Federal income tax purposes. During 1995, the Company
elected to freeze the plan and accordingly, no further voluntary contributions
will be made on behalf of the Company, however, the Company is required to make
certain
F-14
<PAGE>
PURO WATER GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996
payments in order to fund the plan. Such payments totalled approximately $10,000
and $12,000, respectively, for the years ended December 31, 1996 and 1995.
The Company maintains a defined contribution savings plan for eligible
employees pursuant to Section 401(k) of the Internal Revenue Code ("IRC").
Pursuant to the plan, employees can contribute a maximum established by the IRC.
Although the Company is not obligated to contribute to the plan, the Company
contributed approximately $10,000 and $2,500 for the years ended December 31,
1996 and 1995, respectively.
12. STOCK-BASED COMPENSATION:
During 1996, the Company adopted the 1996 Stock Option Plan (the "Stock
Option Plan") for the purpose of granting incentive stock options to employees
of the Company. The Company reserved 400,000 shares of common stock for issuance
under the Stock Option Plan.
In November 1996, the Company granted options to purchase 49,284 shares of
common stock and 24,642 shares of common stock, respectively, to a principal
stockholder of the Company, who is also a member of the Board of Directors, and
certain entities controlled by him. These options may be exercised 120 days
after the closing of the Company's intitial public offering over fifty-four and
fifty-seven month periods and are exercisable at $5.40 per share. Additionally,
in November 1996, the Company granted options to purchase 49,284 shares of the
Company's common stock at $5.40 per share to another stockholder, who is also a
member of the Board of Directors. These options may be exercised 120 days after
the closing of the Company's intitial public offering over fifty-four month
period. All of these options are still outstanding. No stock options were
granted during 1995.
The Company accounts for this plan under APB Opinion No. 25, under which no
compensation cost has been recognized.
Had compensation cost for this plan been determined consistent with SFAS No.
123, the Company's net income and net income per share would have been changed
to the following pro forma amounts:
<TABLE>
<CAPTION>
1996
----------
<S> <C> <C>
Net income: As Reported................................................................... $ 627,163
Pro Forma..................................................................... 444,884
Earnings per share: As Reported................................................................... $ 0.28
Pro Forma..................................................................... 0.20
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
F-15
<PAGE>
PURO WATER GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996
A summary of the status of the Stock Option Plan at December 31, 1996, and
changes during the year then ended, is presented in the table and narrative
below:
<TABLE>
<CAPTION>
1996
------------------------------------------
<S> <C> <C>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- -------------------------------
Outstanding at beginning of year.................... -- n/a
Granted............................................. 123,210 $ 5.40
Exercised........................................... -- --
Forfeited........................................... -- --
---------
Outstanding at end of year.......................... 123,210 5.40
---------
Exercisable at end of year.......................... -- n/a
---------
Weighted average fair value of options granted...... $ 1.48 n/a
---------
---------
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996: risk-free interest rates of 5.61%; expected
dividend yields of 0%; expected lives of 1 year; expected stock price volatility
of 64%.
13. COMMITMENTS:
LEASES
As of December 31, 1996, the Company had leased certain office and warehouse
space. Leases for this space expire through March 2001, and call for annual rent
with immaterial escalations through the end of the leases. The Company has also
entered into several operating leases for office equipment.
Future minimum payments for operating leases at December 31, 1996 are as
follows:
<TABLE>
<S> <C>
Year ended December 31,
1997............................................................ $ 282,407
1998............................................................ 261,764
1999............................................................ 253,843
2000............................................................ 259,310
2001 and thereafter............................................. 765,669
</TABLE>
Rental expense for the years ended December 31, 1996 and 1995 was $295,659
and $139,660, respectively.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with its President and
Chief Executive Officer. The President's agreement provides for an annual base
salary of $100,000 for a term of five years. The agreement may be extended at
the sole discretion of the Board of Directors upon the same terms and
conditions. In the event that the Board of Directors does not extend the term of
the agreement and a mutually acceptable alternative agreement cannot be
negotiated with the Board of Directors upon the expiration of this agreement,
the President will be entitled to a severance payment equal to two times his
annual base salary. The Chief Executive Officer's agreement will provide for an
annual base salary of
F-16
<PAGE>
PURO WATER GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996
$187,000 for a term of five years. The agreement may be extended at the sole
discretion of the Board of Directors upon the same terms and conditions. In the
event that the Board of Directors does not extend the term of the agreement and
a mutually acceptable alternative agreement cannot be negotiated with the Board
of Directors upon the expiration of this agreement, the Chief Executive Officer
will be entitled to a severance payment equal to three times his annual base
salary.
14. SUBSEQUENT EVENTS:
INITIAL PUBLIC OFFERING
On February 7, 1997, the Company completed an initial public offering of its
common stock. The offering resulted in the sale of 1,350,000 shares of common
stock at $6.00 per share, less underwriters discounts and commissions, for total
net proceeds of approximately $6,108,000. The Company used a portion of the
proceeds of the offering to repay approximately $5,300,000 of the acquisition
and bank financing, described in Note 7, outstanding at December 31, 1996. The
supplementary earnings per share for the year ended December 31, 1996, which
follows, gives supplemental effect to the issuance of 749,226 shares of common
stock for the entire period during which the acquisition and bank financing was
outstanding, which is the number of shares issued in the initial public
offering, the proceeds of which were used to repay approximately $5,300,000 of
debt outstanding at December 31, 1996, as well as to effect the reduction of
related interest expense for the year then ended. These shares are presumed
outstanding for supplementary purposes only, and were neither issued nor
outstanding for any purpose during the year ended December 31, 1996.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1996
------------------
<S> <C>
Supplementary earnings per share.......................................... $0.29
Supplementary weighted average common shares outstanding.................. 2,986,905
</TABLE>
REVERSE STOCK SPLIT AND RECAPITALIZATION
In connection with the initial public offering described above, the Company
effected a recapitalization whereby the presently outstanding common stock was
converted to shares of common stock on a .4928 to 1 share basis and the common
stock par value was converted from $.003125 to $.0063. All information contained
in the accompanying financial statements and footnotes has been retroactively
restated to give effect to these transactions.
F-17
<PAGE>
EXHIBIT 11.1
PURO WATER GROUP, INC.
SUPPLEMENTAL EARNINGS
PER COMMON SHARE COMPUTATION
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
DECEMBER 31, 1996
-----------------
<S> <C>
(UNAUDITED)
Calculation of Supplemental Shares Outstanding:
Debt repaid by offering proceeds............................................................... $ 5,283,333
Proceeds per share............................................................................. 6.00
-----------------
Additional shares assumed outstanding.......................................................... 880,556
-----------------
Additional weighted average common shares assumed outstanding.................................. 749,226
Weighted average common shares outstanding..................................................... 2,237,679
-----------------
Supplemental weighted average common shares outstanding........................................ 2,986,905
-----------------
-----------------
Supplemental Earnings Per Share:
Net income..................................................................................... $ 627,163
Pro forma impact of use of proceeds on interest expense, net of tax............................ 224,588
-----------------
Supplemental net income........................................................................ 851,751
Supplemental weighted average common shares outstanding........................................ 2,986,905
-----------------
Supplemental earnings per common share......................................................... $ 0.29
-----------------
-----------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PURO WATER
GROUP, INC. FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 AND FOR EACH OF THE
TWO YEARS ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 217
<SECURITIES> 0
<RECEIVABLES> 2,729
<ALLOWANCES> (201)
<INVENTORY> 550
<CURRENT-ASSETS> 3,506
<PP&E> 6,722
<DEPRECIATION> (941)
<TOTAL-ASSETS> 17,793
<CURRENT-LIABILITIES> 6,056
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 4,630
<TOTAL-LIABILITY-AND-EQUITY> 17,793
<SALES> 10,628
<TOTAL-REVENUES> 10,628
<CGS> 4,037
<TOTAL-COSTS> 4,037
<OTHER-EXPENSES> 4,753
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 764
<INCOME-PRETAX> 1,073
<INCOME-TAX> 446
<INCOME-CONTINUING> 627
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 627
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0
</TABLE>
