<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to _________
Commission file number __________________
SPARKLING SPRING WATER GROUP LIMITED
(Exact name of Registrant as specified in its charter)
Province of Nova Scotia, Canada
(Jurisdiction of incorporation or organization)
19 Fielding Avenue
Dartmouth, Nova Scotia
B3B 1C9
(902) 468-8430
(Address of principal executive offices)
For information regarding Additional Registrants, see "Table of Additional
Registrants."
Securities registered or to be registered pursuant to Section 12(b) of the Act.
None
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
11.5% Senior Subordinated Notes due 2007 and Guarantees
of 11.5% Senior Subordinated Notes due 2007
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
N/A
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 Item 18 X
--- ---
<PAGE>
TABLE OF ADDITIONAL REGISTRANTS
<TABLE>
<CAPTION>
PRIMARY STANDARD
INDUSTRIAL
STATE OR OTHER JURISDICTION OF CLASSIFICATION CODE
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER INCORPORATION OF ORGANIZATION NUMBER
- ---------------------------------------------------- ----------------------------- ------
<S> <C> <C>
Sparkling Spring Water Limited Nova Scotia 5149
Spring Water, Inc. Delaware 5149
Cullyspring Water Co., Inc. Washington 5149
Crystal Springs Acquisition, Inc. Delaware 5149
Canadian Springs Water Company Limited Nova Scotia 5149
Sparkling Spring Water UK Limited England 5149
Aquaporte (UK) Limited England 5149
Krystal Fountain Water Co. Limited England 5149
Marlborough Employment Limited Scotland 5149
Water at Work Limited Scotland 5149
Natural Water Limited Scotland 5149
</TABLE>
The address and telephone number of the principal executive offices of
each of the Additional Registrants is the same as for Sparkling Spring Water
Group Limited, as set forth on the facing page of this Report.
<PAGE>
EXCHANGE RATE DATA
The following table sets forth for both Canadian dollars and British
pounds sterling for the periods indicated, the high and low exchange rates
(i.e., the highest and lowest exchange rate at which each currency was sold),
the average exchange rate (i.e., the average of each exchange rate on the last
business day of each month during the year) and the year end exchange rate of
each currency in exchange for the U.S. dollar, as calculated from the inverse of
the exchange rates reported by the Federal Reserve Bank of New York for cable
transfers payable in Canadian dollars and British pounds sterling for customs
purposes.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CANADIAN DOLLAR
High for the year .... 0.764 0.753 0.753 0.749 0.710
Low for the year ..... 0.710 0.710 0.721 0.695 0.634
End of year .......... 0.713 0.733 0.730 0.700 0.650
Average for the year . 0.732 0.728 0.733 0.722 0.674
BRITISH POUND STERLING
High for the year .... 1.643 1.641 1.711 1.712 1.722
Low for the year ..... 1.460 1.527 1.497 1.580 1.611
End of year .......... 1.564 1.552 1.705 1.642 1.663
Average for the year . 1.531 1.578 1.560 1.638 1.657
</TABLE>
<PAGE>
SPARKLING SPRING WATER GROUP LIMITED
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I
ITEM 1. DESCRIPTION OF BUSINESS............................................................2
ITEM 2. DESCRIPTION OF PROPERTY...........................................................17
ITEM 3. LEGAL PROCEEDINGS.................................................................18
ITEM 4. CONTROL OF REGISTRANT.............................................................19
ITEM 5. NATURE OF TRADING MARKET..........................................................21
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS
AFFECTING SECURITY HOLDERS........................................................21
ITEM 7. TAXATION..........................................................................21
ITEM 8. SELECTED FINANCIAL DATA...........................................................22
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.....................................24
ITEM 9A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK.....................................................32
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT..............................................33
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS............................................36
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM
REGISTRANT OR SUBSIDIARIES........................................................36
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS....................................37
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED
(INTENTIONALLY OMITTED)..........................................................N/A
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES...................................................39
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY
FOR REGISTERED SECURITIES AND USE OF PROCEEDS.....................................40
PART IV
ITEM 17. FINANCIAL STATEMENTS
(INTENTIONALLY OMITTED)..........................................................N/A
ITEM 18. FINANCIAL STATEMENTS..............................................................40
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS.................................................41
</TABLE>
<PAGE>
PART I
UNLESS INDICATED OTHERWISE, ALL REFERENCES IN THIS REPORT TO THE
COMPANY REFER COLLECTIVELY TO SPARKLING SPRING WATER GROUP LIMITED AND ITS
DIRECT AND INDIRECT SUBSIDIARIES.
FOR PURPOSES OF THIS ANNUAL REPORT, ALL REFERENCES TO DOLLAR AMOUNTS
ARE EXPRESSED IN UNITED STATES DOLLARS UNLESS OTHERWISE SPECIFIED. ALL
REFERENCES IN THIS REPORT TO "EBITDA" MEAN OPERATING PROFIT PLUS DEPRECIATION,
AMORTIZATION AND INTEGRATION AND RELATED EXPENSES AND REFERENCES TO "CAGR" MEAN
COMPOUND ANNUAL GROWTH RATE. UNLESS OTHERWISE INDICATED, ALL STATISTICAL DATA
AND INFORMATION CONTAINED IN THIS REPORT IS AS OF DECEMBER 31, 1998.
Statements included in this Report that do not relate to present or
historical conditions are "forward-looking statements" within the meaning of the
Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995
(the "1995 Reform Act"). Additional oral or written forward-looking statements
may be made by the Company from time to time and such statements may be included
in documents other than this Report that are filed with the SEC. Such
forward-looking statements involve risks and uncertainties that could cause
results or outcomes to differ materially from those expressed in such
forward-looking statements. Forward-looking statements in this Report and
elsewhere may include, without limitation, statements relating to the Company's
plans, strategies, objectives, expectations, intentions and adequacy of
resources and are intended to be made pursuant to the Safe Harbor provisions of
the 1995 Reform Act irrespective of whether the 1995 Reform Act is applicable to
the Company as a "foreign private issuer." See Item 9 - Management's Discussion
and Analysis of Financial Condition and Results of Operations.
INTRODUCTION
Sparkling Spring Water Group Limited ("Sparkling Spring" and together
with the Additional Registrants named herein, the "Company") is incorporated
under the laws of the Province of Nova Scotia, Canada and provides containered
water and rental water coolers to home and office markets in British Columbia
and the Maritime Provinces of Canada, England, Scotland and the Pacific
Northwestern United States.
On December 23, 1997, Sparkling Spring filed a Registration Statement
on Form F-4 (Registration No. 333-43061) (the "Registration Statement") with the
Securities and Exchange Commission (the "SEC") with respect to the registration
of its 11.5% Senior Subordinated Notes due 2007 (the "Notes") and the
registration of the Guarantees ("Guarantees") on a subordinated basis by
Sparkling Spring's existing and future subsidiaries (the "Subsidiary
Guarantors"). The Registration Statement was declared effective on April 1,
1998. The Company is a "foreign private issuer" within the meaning of Rule 405
under the Securities Act of 1933, as amended (the "Securities Act").
1
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ITEM 1. DESCRIPTION OF BUSINESS
BACKGROUND
Sparkling Spring Water Limited ("SSWL"), a wholly owned subsidiary of
Sparkling Spring, was founded in 1971 in Halifax, Nova Scotia to operate in the
bottled water industry. In 1988, a controlling interest in the Company was
acquired by Maritime Beverages Limited ("MBL"), a Pepsi-Cola bottler, which was
managed by G. John Krediet, Kent Dillon Schickli, and Stephen L. Larson,
principals of C.F. Capital Corporation ("CFCC"), an investment and management
company. When MBL sold its soft drink bottling holdings to Pepsi-Cola Canada
Limited in 1992, Messrs. Krediet and Larson retained their ownership of SSWL.
Mr. Schickli left CFCC in 1992 and rejoined the Company as Chief Financial
Officer on April 3, 1998.
Sparkling Spring is one of the world's largest providers of bottled
water delivered directly to residential and commercial markets. The Company's
primary focus is on the bottling and delivery of high quality drinking water in
five-gallon and six-gallon bottles to homes and offices, and the rental of water
coolers. The Company's strategy has been to achieve significant market positions
in a number of markets and thereby realize the operating leverage that can be
obtained once a distribution system is established. Based upon its own internal
estimates, the Company believes it has the following market shares of rental
cooler locations: 60% market share in British Columbia, 70% in the Canadian
Maritime Provinces, 29% in the United Kingdom (England and Scotland combined),
43% in Oregon and 15% in Washington. The Company believes it is the market share
leader in each of these markets, except Washington where it believes it has the
third largest customer rental location base. By virtue of its leadership
position in its markets, the Company benefits from several competitive
advantages over smaller operators, including more efficient distribution
operations, purchasing synergies, quality customer service and well-established
infrastructure. Management believes the Company's leadership in each of its
served markets creates a significant barrier to entry for prospective
competitors.
Company sales by geographic market for each of the past three fiscal
years are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Canada $15,363,998 $19,416,108 $22,067,384
United Kingdom 11,962,351 17,658,190 23,005,889
United States -- 4,999,586 11,973,379
----------- ----------- -----------
$27,326,349 $42,073,884 $57,046,652
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The Company delivers bottled water to a base of approximately 155,000
water cooler customer locations in its served markets consisting of
approximately 123,400 customer locations that contain water coolers rented from
the Company and 31,600 customers who own their coolers. Rental customers
typically sign a one-year contract, providing the Company with a stream of
relatively stable revenue from both a monthly cooler rental charge and the sale
of bottled water. Water only customers generate revenue through the sale of
bottled water and ancillary services such as cooler repairs. The Company
believes that direct delivery water cooler companies enjoy several advantages
over retailers of bottled water. Customers suffer inconvenience and potentially
incremental cost if they choose to switch from
2
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one water cooler company to another. In addition, direct delivery water cooler
operators such as the Company have made significant capital investments in
inventories of water coolers and bottles, a truck fleet and bottling facilities.
Management believes the capital intensity of the water cooler business and the
complexity of direct delivery provide a second significant barrier to entry.
The Company has a history of completing and integrating acquisitions,
having made sixteen acquisitions since 1993. These acquisitions have enabled the
Company to rapidly expand into attractive markets and increase production
capacity. In addition to completing the acquisitions of fast-growing bottled
water companies, management has improved the operations and profitability of
most of the acquired companies. Since January 1, 1997, the Company has completed
eleven acquisitions through which it entered the attractive U.S. bottled water
market and expanded its leadership positions in Canada and the United Kingdom.
The results of both significant internal growth and the execution of
the Company's acquisition strategy are evidenced by the growth in the Company's
revenue and EBITDA over the past five years. Revenue increased at a CAGR of 71%
from $3.9 million in 1993 to $57.0 million in 1998. Over the same period, EBITDA
increased at a CAGR of 90% from $0.5 million to $12.3 million (exclusive of
integration and related expenses in 1998 of $1.8 million), with EBITDA margins
increasing from 14.3% to 21.6%. See Item 9 - Management's Discussion and
Analysis of Financial Condition and Results of Operations.
The Company is led by a senior management team whose members average
more than 15 years in the beverage industry. A trust for the benefit of G. John
Krediet, the Chairman of Sparkling Spring, and his children, owns 50.9% of the
common stock ("Common Stock") of Sparkling Spring Water Holdings Limited which
owns 100% of the outstanding shares of Sparkling Spring after giving effect to
the reorganization (the "Reorganization") described later in this Report. See
Item 13 - Interest of Management in Certain Transactions - Share Reorganization.
Mr. Krediet successfully executed a consolidation of Canadian Pepsi-Cola
bottlers and, together with other senior management, identified the bottled
water consolidation opportunity. Mr. Schickli, Sparkling Spring's Chief
Financial Officer, assisted Mr. Krediet in the Canadian Pepsi-Cola consolidation
in the late 1980's and early 1990's and has significant previous experience in
the acquisition of beverage businesses and as chief financial officer of mid
size beverage companies in the United States. Stewart E. Allen, President of
Sparkling Spring since 1992, has managed the operations of the business focusing
on profitably increasing the penetration levels in each of its markets. Mr.
Allen previously served as Vice President of Sales and Marketing for Maritime
Beverages Limited, the Pepsi-Cola business, prior to assuming the Presidency of
Sparkling Spring. See Item 10 Directors and Officers of Registrant.
INDUSTRY OVERVIEW
Bottled water continues to be one of the fastest growing segments of
the U.S. beverage industry for the past ten years, generating nearly $4 billion
of sales in 1997. According to BEVERAGE MARKETING CORPORATION, the U.S. bottled
water market experienced a CAGR of 8.5% from 1986 to 1996, and is projected to
grow at a slightly lower CAGR of 7.3% between 1996 and 2001. Bottled water
volume in the U.S. increased from 629.7 million gallons in 1980 to 3.1 billion
gallons in 1996, and is projected to
3
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reach 4.4 billion gallons in 2001. Furthermore, per capita bottled water
consumption quadrupled from 1980 to 1996 with annual consumption in the U.S.
increasing from 2.8 gallons per capita in 1980 to 11.7 gallons per capita in
1996. The projected per capita consumption is expected to reach 15.8 gallons in
the U.S. by the year 2001. The water cooler segment generated approximately $1.2
billion of sales in 1996 or 1.2 billion gallons, representing 38.5% of the total
U.S. bottled water market. The U.S. water cooler market experienced a CAGR of
3.9% between 1990 and 1996, and is projected to grow at an annual rate of 6.5%
from 1996 to 2001, reaching 1.6 billion gallons by 2001.
According to ZENITH INTERNATIONAL LTD.("ZENITH"), the bottled water
market in the U.K. generated over (pound)437 million of sales in 1998,
experienced a CAGR of 11.3% from 1992 to 1998, and is projected to grow at an
annual rate of 6.3% between 1998 and 2002. Bottled water volume has increased
from 420 million litres in 1990 to approximately 945 million litres in 1998 and
is projected to reach 1.39 billion litres by the year 2002. Annual consumption
of bottled water in the U.K. has increased from 7.2 litres per capita in 1990
and is projected to grow to 19.3 litres per capita by the year 2000. The water
cooler segment generated approximately (pound)71 million or 145 million litres
in 1998 up 19.8% from an estimated 121 million liters in 1997. It is estimated
that the water cooler segment represented 16.2% of the total U.K. bottled water
market in 1998 - nearly two and one-half times its estimated share in 1992. In
addition, the U.K. water cooler market experienced a CAGR of 30% in units
between 1992 and 1998, and is projected to grow at a CAGR of 13.3% from 1998 to
2002. ZENITH estimates that total water consumption through coolers will grow at
a CAGR of approximately 11.6% over the same period reaching 225 million liters
by the year 2002.
In Canada, industry figures compiled by the Canadian Bottled Water
Association indicate that bottled water consumption totaled 643 million litres
in 1997. According to HIDELL-EYSTER TECHNICAL SERVICES INC., the estimated
growth in the Canadian bottled water market was 10% in 1997, with the home and
office delivery business growing at 5%. It is estimated that there are 500,000
coolers in Canada or 1.6 coolers for every 100 people. Consumption of bottled
water in 1997 was estimated to be 21.2 litres per capita.
Management believes the strong industry growth has been and will
continue to be driven by: (i) concerns related to the quality of tap water
sources, (ii) consumer preferences for healthy products, (iii) taste preferences
over tap water and other refreshment beverages and (iv) favorable demographics.
TAP WATER CONCERNS. The aging of the tap water supply infrastructure
and the high cost of adequately maintaining or replacing existing water delivery
systems have resulted in an increase of tap water contamination incidences in
recent years. Consequently, there has been a decrease in consumers' confidence
in the quality of tap water, accompanied by an increase in consumption of
bottled water. Management believes that this trend will continue.
HEALTHY PRODUCTS. There is a movement toward a healthier lifestyle and
the consumption of healthy products. Within the "healthy products" segment,
clear or natural colored products are experiencing significant growth. Bottled
water is perceived as a product with strong health and fitness appeal.
4
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TASTE PREFERENCES. The taste of tap water is affected by cleaning
substances used to filter water. The products used to sterilize tap water, such
as chlorine, are safe but often produce an undesirable after-taste and,
consequently, many people prefer to drink bottled water.
FAVORABLE DEMOGRAPHICS. Consumption of bottled water is much more
prevalent among younger consumers. According to Beverage Marketing Corporation,
adults between the ages of 25 and 34 comprise the demographic group most likely
to consume bottled water. The Company believes that, as younger consumers age
and their purchasing power increases, sales of bottled water will continue to
grow.
The bottled water industry is highly fragmented in North America. The
bottled water market is comprised of approximately 2,500 companies generating
approximately $4 billion of sales. Of these companies, the five largest
companies account for approximately 55% of the total market, with the remainder
comprised of hundreds of small regional companies. Management believes that the
industry will continue to consolidate as (i) operating leverage of the larger
companies makes the smaller companies uncompetitive, (ii) succession issues at
many smaller, family owned companies lead a number of independent companies to
exit the industry, and (iii) pressure to meet improving water quality standards
eliminates low quality producers.
The Company believes that the competitive structure of the water cooler
segment favors a larger operator with a successful consolidation track record.
As a market leader in the majority of its geographic markets, the Company
believes that it is well positioned to benefit from the growth and consolidation
trends in the industry.
BUSINESS AND PRODUCTS
The Company generated approximately 81% of its 1998 revenue from rental
of water coolers and sale of bottled water dispensed through water coolers.
Approximately 6% of its revenue is generated from the sale of bottled water in
smaller retailed sized packages and 13% of its revenue is from related
activities including the sale of paper cups, coffee, water filtration devices,
water through vending machines and cooler sanitation services.
BOTTLED WATER. The Company generated approximately 57% of its 1998
revenue from the sale of bottled water used in water coolers. Bottled water for
water coolers is primarily sold in two sizes: a five-gallon (18 litre) bottle
and a six-gallon (22 litre) bottle. In each market, a smaller package (3 gallon
or 11 litre) exists for customers who may not be capable of lifting the five or
six-gallon product or who may have storage constraints. The Company offers water
bottles in plastic packaging that facilitates storage, and has non-spill caps.
While its pricing varies from market to market and the Company frequently offers
promotional discounts in certain markets, the Company charges on average
approximately $5.50 for a five-gallon bottle of water.
The Company also sells water in smaller retail sized containers such as
one gallon, 1.5 litre and 500 ml sizes. In 1998, the Company generated
approximately 6% of its total revenue from these smaller sized packages.
5
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The Company primarily markets four types of water: spring, premium
drinking, steam-distilled, and fluoridated. The sale of steam-distilled water
and fluoridated water accounted for less than 1% of the Company's revenue in
1998. Descriptions of each type of water follow:
SPRING WATER. Water, which has been naturally filtered by its passage
through various geological layers, is drawn from a protected underground
reservoir called an aquifer. It can then be either bottled at the source or
transported in stainless steel tankers to a more strategically located bottling
facility.
Before bottling, spring water is passed through a micron filter, which
removes sediment while retaining the natural mineral content of the water. The
water is then purified through an industry standard purification process known
as ozonation. This sterilization process is over 400 times more effective than
chlorination and does not leave a residual taste.
PREMIUM DRINKING WATER. This water is drawn from local municipal
sources. It is passed through a series of carbon and sand filters, processed by
either reverse osmosis or deionization, ozonated and then bottled. Premium
drinking water has 99.9% of all impurities removed from it, including its
natural mineral content.
STEAM-DISTILLED WATER. This water can be obtained from either a spring
or municipal source. The water is then converted to steam. Once the steam
condenses it is then ozonated and bottled. Steam-distilled water is similar to
premium drinking water since it has 99.9% of all impurities removed.
FLUORIDATED WATER. Fluoridated water is premium drinking water that has
one part per million of fluoride added. It is a niche market product that
appeals to families with young children.
The following table summarizes the Company's operations in its existing markets:
<TABLE>
<CAPTION>
REGION PRINCIPAL PRODUCTS BRAND NAMES
------ ------------------ -----------
<S> <C> <C>
British Columbia Spring Water Canadian Springs
Premium Drinking Water Springfield
Steam-Distilled Water
Maritime Provinces Spring Water Sparkling Springs
Steam-Distilled Water
United Kingdom Spring Water Nature Springs
Water At Work
United States Spring Water Crystal Springs
Premium Drinking Water Cully Spring
Steam-Distilled Water
Fluoridated Drinking Water
</TABLE>
6
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WATER COOLERS. In 1998 the Company generated approximately 24% of its
revenue from the rental of water coolers. The Company has a base of
approximately 155,000 water cooler locations in its served markets consisting of
approximately 123,400 customer locations that contain Company owned rental
coolers and 31,600 customers who own their coolers and or buy other products
from the Company. Customers who have rental coolers typically sign a one-year
contract, providing the Company with a stream of relatively stable revenue from
either a monthly, quarterly or annual cooler rental charge and the sale of
bottled water. The Company's large installed customer location base creates
operating efficiencies by supporting a level of infrastructure that can be
leveraged to support incremental cooler installations at an attractive marginal
profitability rate. While its pricing varies from market to market and depends
on the water cooler selected by the customer, the Company's current average
monthly rental charge for its coolers is approximately $10.
The following table presents management estimates of certain
information relating to the Company's cooler location base as of December 31,
1998:
<TABLE>
<CAPTION>
UNITED UNITED
CANADA KINGDOM STATES
------ ------- ------
<S> <C> <C> <C>
Rental Coolers at Customer Locations 66,800 30,600 26,000
Total Rental Cooler Locations and Other Customers 91,800 34,000 29,200
Estimated % Residential Customers 58% 2% 40%
Estimated % Commercial Customers 42% 98% 60%
</TABLE>
The Company purchases its water coolers from one of three preferred
suppliers and maintains a stock of spare parts at delivery depots. The Company
strips down, cleans, and redeploys returned water coolers prior to all new
installations. The Company's average cost per water cooler is approximately
$150, and the Company estimates that the average life of a water cooler is ten
years. The typical pay back period on a water cooler investment (assuming only
rental revenue) is approximately 20 months. In the event of termination of the
rental agreement, water coolers can be readily redeployed at a relatively low
cost to the Company. In addition, in certain markets the Company charges a water
cooler collection fee when a customer opts to discontinue purchasing water.
OTHER. The remaining 13% of the Company's 1998 revenue was generated
through the sale of paper cups, cooler sanitation services, coffee delivery, the
sale of water filtration devices and the sale of water through vending machines.
BUSINESS STRATEGY
Bottled water continues to be the fastest growing segment of the
beverage industry, growing at a CAGR of 10.5% since 1980 according to BEVERAGE
MARKETING CORPORATION. Management believes this growth stems primarily from two
sources: (i) consumer dissatisfaction with tap water and (ii) increased consumer
health consciousness resulting in the substitution of water for other
less-healthy beverages. The Company expects to benefit from the growing demand
for quality drinking water by increasing its installed base of water coolers,
increasing the water and related products offered through its established
distribution system, and continuing to be a leader in the consolidation of the
highly fragmented bottled
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water industry. In particular, the Company expects to continue to pursue the
following business strategies:
FOCUS ON THE WATER COOLER SEGMENT WITHIN THE GROWING "ALTERNATIVE TO
TAP WATER" MARKET. Management believes that the overall growth of the bottled
water industry and the relatively low level of water cooler penetration in the
Northwestern United States and the U.K., in particular, provide the Company with
significant growth opportunities. The Company believes that health concerns and
problems with the taste and odor of tap water have generated consumer demand for
an "alternative to tap water," driving consumers to increasingly rely on bottled
water and filtration systems in order to satisfy their drinking water needs. The
Company intends to take advantage of this growth in demand by offering a premium
product through multiple channels (i.e., direct delivery, retail and filtration
systems), with a specific focus on the "direct delivery" water cooler segment.
Management believes that the water cooler business enjoys higher
margins, less competition and greater operating leverage than either the retail
bottled water or the water filter businesses. Sales in this segment are
generally less price sensitive than retail sales of bottled water because the
customer is generally more concerned with service and convenience. In addition,
there are inconvenience factors and potentially increased costs associated with
switching suppliers. Furthermore, water cooler companies generally have lower
advertising costs than companies pursuing retail sales of bottled water because
consumers generally do not select a water cooler provider on the basis of brand
name. The water cooler business is also generally less competitive than other
segments of the bottled water industry due to the relative capital intensity of
the operations and direct delivery distribution requirements for its business.
Finally, the significant growth potential in the water cooler market and the low
levels of water cooler penetration allow industry participants to focus on
attracting new customers rather than on capturing market share from competitors.
LEVERAGE EXISTING INFRASTRUCTURE. Due to the significantly fixed
distribution system associated with the direct delivery of bottled water in a
geographic area, additional operating leverage can be achieved by increasing
route density through incremental market penetration. In addition to increasing
the overall customer base, the Company expects to continue to benefit as per
capita consumption continues to climb with each existing customer consuming more
water. Finally, the Company utilizes its route systems to offer products which
are complementary to bottled water, including cups, cooler sanitation services,
coffee and related products.
In addition to benefiting from internal growth in its markets, the
Company leverages its infrastructure with each acquisition in adjacent or
overlapping territories. Specific operating initiatives employed by the Company
typically include: (i) maximizing distribution route efficiencies, (ii)
consolidating bottling facilities, (iii) eliminating duplicative administrative
costs and (iv) utilizing favorable purchasing opportunities. The Company's
existing infrastructure and scale of operations provide an attractive
opportunity to continue to add incremental customers at a higher marginal
profitability rate.
PURSUE STRATEGIC ACQUISITIONS. The Company has pursued an acquisition
strategy to create value by taking advantage of the consolidation of the highly
fragmented bottled water industry. The Company has developed and implemented a
"hub and spoke" approach to acquiring companies in new markets by
8
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identifying one of the largest bottled water companies as a platform
acquisition, and complementing it with smaller fill-in acquisitions in
neighboring or overlapping geographic territories. The Company is generally
unwilling to enter a market through an acquisition unless the company being
acquired is both one of the market share leaders and provides the critical mass
and local management talent necessary to act as a platform in that market. While
the purchase price paid for a platform company is typically higher than that for
a fill-in acquisition (as measured using multiples of first year EBITDA), the
Company is able to reduce its average acquisition multiple by opportunistically
acquiring "spoke" distribution routes. These spoke acquisitions can be acquired
at more attractive prices due to the limited strategic options available to
these smaller operators and synergies to be gained by Sparkling Spring from
consolidating these companies into the `platform' business. During 1998 the
Company's earnings were adversely affected by $1.8 million in charges arising
from increased accounts receivable and inventory reserves. Because the Company
believes that these charges related, in part, to the Company's rapid expansion
by acquisition during 1997 and 1998, the Company has announced that it will be
slowing its growth by acquisition in 1999.
PROVIDE OUTSTANDING CUSTOMER SERVICE. The Company believes quality of
service and reliability of delivery are the primary competitive factors in the
water cooler business. The quality of service is measured by the Company's
ability to: (i) reliably deliver bottled water on schedule, (ii) meet customer
shortages with the quick delivery of refills, (iii) provide regular maintenance
and sanitation of water coolers and (iv) effectively address any other needs of
a customer. Management monitors on a monthly basis the Company's customer
"retention" rate (its renewal rate with respect to its water cooler rental
agreements) in an effort to continually monitor customer service. The Company's
average retention rate was approximately 80% in 1997 and 1998. Management
believes its customer retention rate is higher than the industry average.
SUMMARY OF BUSINESS STRATEGY. All four of the above business strategies
are presently being pursued by the Company and will continue to be pursued for
the foreseeable future. The Company believes that all four business strategies
are important to its success, but that leveraging its existing infrastructure
and focusing on the "Alternative to Tap Water" market are of the most
significance.
ACQUISITIONS
The Company has expanded its operations through a number of
acquisitions designed to consolidate existing markets or enter new markets. The
Company has been successful in integrating acquired companies into its existing
operations and increasing the profitability of acquired companies through the
elimination of duplicative overhead functions, realization of operating and
purchasing efficiencies and implementation of the Company's management systems.
As a result of these acquisitions, the Company has expanded its leadership
position in Canada, entered the attractive U.S. water cooler market and further
bolstered its leading presence in the U.K.
On April 14, 1993, the Company acquired Crystal Springs Limited
("CSL"). CSL served the Cape Breton, Nova Scotia bottled water and cooler rental
market. CSL was subsequently merged into SSWL.
On June 8, 1994, the Company acquired the water cooler division of
Buxton Mineral Water Company Limited through Sparkling Spring Water UK Limited
("SSWUK"), a wholly-owned
9
<PAGE>
subsidiary of SSWL. The water cooler industry in the U.K. was identified as
being much less developed than the North American market and, thus, having a
significant growth potential.
On April 26, 1995, the Company acquired Aquaporte (UK) Limited
("Aquaporte UK"). Aquaporte UK had a predominantly London-based customer list
and a depot close to central London. The operation was merged with SSWUK and the
combined businesses became the largest water cooler company serving the
commercial market in the U.K.
On January 18, 1996, the Company acquired Canadian Springs Water
Company Limited ("Canadian Springs"). Canadian Springs is the leading home and
office water cooler company in British Columbia, with operations in Vancouver,
Victoria, Kelowna and Nanaimo. The acquisition served to consolidate the
Company's position in Canada while providing it with access to the fastest
growing bottled water market in Canada.
On May 19, 1996, the Company acquired Water Jug Enterprises Limited
("Water Jug"). The acquisition of Water Jug, which serves the Kamloops area in
British Columbia, further solidified the Company's market position in British
Columbia.
On January 2, 1997, the Company acquired D & D and Company, Inc., doing
business as Mountain Fresh Bottled Water Co. ("Mountain Fresh"). Mountain Fresh
is headquartered in Portland, Oregon, and holds the number three position in the
Oregon market.
On January 28, 1997, the Company acquired Withey's Water Softening &
Purification Limited ("Withey's Water"). Withey's Water is headquartered in
Prince George, British Columbia, and is the dominant supplier of bottled water
and filtration systems in the rural market of upper British Columbia. Withey's
Water represents a fill-in acquisition, strengthening the Company's already
leading presence in the home and office water cooler market in British Columbia.
On January 30, 1997, the Company acquired High Valley Water Limited
("High Valley"). High Valley is headquartered in Kelowna, British Columbia and
is comprised of four bottled water distributors.
On February 5, 1997, the Company acquired Marlborough Employment
Limited doing business as "Water At Work". Water at Work is headquartered in
Glasgow, Scotland, and is Scotland's largest water cooler company and the fourth
largest in the U.K., serving both the Glasgow and Edinburgh markets. The
acquisition of Water At Work further bolstered the Company's leadership position
in the U.K. market and established its leading presence in the attractive
Scottish market.
On June 4, 1997, the Company acquired the water cooler operations of
Soja Enterprises, Inc. ("Soja"). Soja serves the commercial community of
Portland, Oregon.
On June 23, 1997, the Company acquired Crystal Springs Bottled Water
Co., Inc. ("Crystal Springs"). Crystal Springs is the second largest five-gallon
distributor serving Oregon and is based in Portland. This acquisition provided
the Company with greater route density in its established Portland market.
10
<PAGE>
On October 23, 1997, the Company acquired Cullyspring Water Co., Inc.
Cullyspring is a Seattle, Washington based bottled water company focusing on the
direct delivery of five-gallon containers to homes and offices and the rental of
water coolers.
On December 17, 1997, the Company purchased all of the outstanding
capital stock of Crystal Springs Drinking Water, Inc. ("CSD"). CSD is a
Seattle-based bottled water company focusing on the direct delivery of
five-gallon containers to homes and offices and the rental of water coolers.
On February 24, 1998, the Company purchased all of the outstanding
capital stock of Coastal Mountain Water Corp. ("Coastal"). Coastal is based in
Vancouver, British Columbia and focuses on the direct delivery of eighteen litre
containers of water to residential and commercial customers and the rental of
water coolers.
On May 16, 1998 the Company purchased all of the outstanding capital
stock of Krystal Fountain Water Co. Limited ("Krystal Fountain"). Krystal
Fountain operates primarily in the M25 area in London, England.
On August 31, 1998 the Company purchased all of the assets of the
Springfield Water Division of Brio Beverages, Inc. ("Springfield"). Springfield
is based in Vancouver, British Columbia and focuses on the direct delivery of
eighteen litre containers of spring water to residential and commercial
customers and the rental of water coolers.
THE BOTTLING PROCESS
The Company draws its spring water from local sources. The spring water
is bottled at the source, in the case of the Maritime Provinces, or transported
to a Company bottling facility by stainless steel tanker in other locations.
Prior to final bottling, the spring water is filtered and ozonated. Ozonation is
a process whereby impurities not removed through ordinary filtration are removed
through the injection of oxygen. The process involves a special form of oxygen,
ozone, which is the strongest disinfectant and oxidizing agent available for
water treatment. The added oxygen quickly dissipates and results in tasteless
and odorless purification as compared to chlorination. This process is designed
to prevent bacteria and other contaminants from being transferred from the
spring or the tanker to the finished product.
In addition to spring water, the Company also produces premium drinking
water. The Company accesses local, publicly-available water supplies and
processes and purifies the product through reverse osmosis to remove chlorine
and other chemicals frequently found in tap water. The product then goes through
the ozonation process prior to bottling as premium drinking water.
The Company has ten bottling facilities located throughout British
Columbia, the Maritime Provinces of Canada, England, Scotland and the Pacific
Northwestern United States.
BRITISH COLUMBIA. The Company operates five bottling facilities, two
are located in Vancouver, and one each in Victoria, Kamloops and Prince George,
British Columbia. The Vancouver and Prince George facilities produce both
premium drinking water and spring water. The Company transports the spring water
from sources located in the Coastal Mountains pursuant to a non-exclusive
contract without
11
<PAGE>
a fixed term. The bottling line in Victoria is capable of producing both spring
water and premium drinking water but currently only produces premium drinking
water. The Company is currently planning to consolidate its two Vancouver
facilities into a new plant that should be ready by the early summer of 1999.
The Company has purchased a new high speed filler to be installed in this new
leased facility that is expected to reduce variable production costs.
MARITIME PROVINCES. The Company's bottling line is located in Valley,
Nova Scotia, which is also the site of a spring owned by the Company. Water is
bottled at the source, processed and distributed to the Company's five depots
and distributors in Nova Scotia, New Brunswick and Prince Edward Island. The
Company also produces smaller size retail packages at this facility.
ENGLAND. The Company operates its bottling operations in a production
facility adjacent to its second largest distribution depot, in Buckinghamshire,
England. Spring water is purchased from various sources and transported to the
bottling line for processing.
SCOTLAND. The Company operates a bottling line which processes water
drawn from a 100-year old spring water source in Dumfries, Scotland. The water
is processed and bottled in a bottling line operated by Natural Water Limited, a
wholly-owned subsidiary of Sparkling Spring.
UNITED STATES. From its Portland, Oregon facilities, the Company
processes premium drinking water, as well as spring water shipped from a source
in the Cascade Mountains pursuant to a non-exclusive contract without a fixed
term. From its Seattle, Washington facility, the Company processes premium
drinking water and spring water. In addition, the Company also produces 1 gallon
and 2 1/2 gallon retail packages at the Seattle facility which are sold
throughout the pacific northwest.
The following table provides certain information regarding the
Company's bottling facilities:
<TABLE>
<CAPTION>
LOCATION TYPE OF WATER BOTTLING CAPACITY
-------- ------------- -----------------
<S> <C> <C>
Vancouver, British Columbia Premium Drinking 490 bottles per hour
Spring
Steam Distilled
Vancouver, British Columbia Spring 225 bottles per hour
Victoria, British Columbia Premium Drinking 225 bottles per hour
Kamloops, British Columbia Premium Drinking 300 bottles per hour
Prince George, British Columbia Premium Drinking 125 bottles per hour
Spring
Valley, Nova Scotia Spring 485 bottles per hour
Steam Distilled
Buckinghamshire, England Spring 1,200 bottles per hour
Glasgow, Scotland Spring 300 bottles per hour
</TABLE>
12
<PAGE>
<TABLE>
<S> <C> <C>
Portland, Oregon Premium Drinking 600 bottles per hour
Fluoridated Drinking
Spring
Seattle, Washington Premium Drinking 450 bottles per hour
Spring
Steam Distilled
</TABLE>
SALES AND MARKETING
The Company markets its products principally through telephone
directory yellow page advertisements, newspaper advertisements, mall shows,
coupons, product sponsorship programs, direct mail, radio commercials and
various referral programs which are supported by the efforts of approximately
129 salaried sales and marketing personnel. Almost half of the Company's new
customers are derived from incoming telephone calls resulting from yellow page
advertisements, the key advertising vehicle for the Company. To supplement this
effort, the Company's marketing team solicits potential new customers in
specific geographical areas in which the Company desires to increase the density
of existing routes or in which it desires to establish new routes. A potential
new customer may be offered various introductory promotions including a free
trial offer. The Company's marketing activity emphasizes the benefits of bottled
water, the convenience of a water cooler as well as the associated regular
delivery of bottled water and, to a lesser extent, the creation of brand
awareness.
An important part of the Company's sales, marketing and customer
service strategy is its focus on retaining customers. The Company experienced a
relatively high retention rate of its water cooler rental agreements of 98.3%
per month in 1998, which management believes is higher than the industry
average. Generally, the Company has also increased the retention rate of the
businesses it has acquired. In 1999, the Company expects its retention rate to
decrease as a direct result of high cooler placement rates in 1998 and stricter
enforcement of its accounts receivable policies. Its' primary strategy for
maximizing its retention rate is to focus on outstanding customer service. In
addition, the Company employs certain strategies to retain customers who
indicate they wish to discontinue receiving bottled water. Customer service
representatives are compensated for the customers they help to retain.
DISTRIBUTION
As of December 31, 1998, the Company owned or leased approximately 195
beverage trucks and employed 284 people in its distribution operations. The
average cost per new truck is approximately $65,000, and the Company generally
delivers to neighborhoods within a ninety minute drive from its distribution
centers. Each truck has a useful life of 7 to 12 years and can hold 120 to 300
five- or six-gallon bottles. The Company's drivers are generally paid on a
per-delivered-bottle basis, promoting efficiency and higher utilization of the
delivery trucks. On average, a truck driver services approximately 800
customers. The average customer typically receives delivery once every two
weeks. In addition, the Company's drivers actively generate sales and are
compensated for each new customer contract they originate.
13
<PAGE>
Management believes that one of the most important success factors in
the delivered bottled water business is delivery route efficiency. Route
efficiency is the critical cost factor in the water cooler business, as the
average cost of local delivery per bottle is over four times the cost of
preparing one bottle for distribution. However, the marginal distribution cost
of an additional bottle on an existing route is relatively low.
COMPETITION
The Company competes in the "alternative to tap water" market in two
areas. First, it competes directly with other home and office delivery bottled
water companies in its geographic markets. This segment is highly fragmented
with the vast majority of the companies being operated as small entrepreneurial
and family-owned businesses. The Company believes it has a leading market share
position in the United Kingdom, British Columbia and the Maritime Provinces of
Canada, and Oregon in the U.S. Furthermore, management believes it has a third
market share position in the state of Washington. Management believes that its
access to capital, professional management, and reporting and accounting systems
are equal to or greater than those of its local competitors in these markets.
The Company believes quality of service and reliability of delivery are the
primary competitive factors in the water cooler business. Additionally, the
Company believes that the capital intensity of its operations creates
significant barriers to entry.
The Company also competes indirectly with companies that distribute
water through retail stores and vending machines. Management believes that the
competitive advantage of water coolers over these alternative distribution
channels is primarily based on the convenience of home or office delivery and,
to a lesser extent, price. Similarly, the Company competes with providers of
on-premises water filtration systems, including systems distributed through
retail outlets, which the Company believes are aimed at less affluent consumers.
In certain markets the Company itself markets and provides on-premises water
filtration systems.
The "alternative to tap water" industry also includes a number of
well-established, well-capitalized companies, most of which do not currently
compete directly in the Company's markets. These include Nestle S.A., which owns
Perrier and the Perrier Group of America. Perrier Group of America operates the
Arrowhead, Poland Spring, Zephyrills, Ozarka, Oasis and Great Bear brands.
Suntory owns Belmont Springs, Hinkley & Schmitt, Crystal, Kentwood, and Polar
and competes with the Company in the Pacific Northwest United States. BSN Group
owns the Evian and Dannon brands and also operates the Crystal Spring (Toronto),
Spring Valley, and Laurentian businesses home and office water cooler operations
in Ontario and Quebec, Canada. McKesson Corporation operates the Sparkletts
business and competes with the Company in Washington. Ionics Incorporated
operates the Aquacool businesses and competes with the Company in England. In
addition, United States Filter Corp., which purchased Culligan Water
Technologies Inc. in 1998, competes in the home and office water cooler business
and water filtration segments either directly or indirectly through franchisees
in most of its markets.
CUSTOMERS
The Company has grown from a base of approximately 8,000 water coolers
in 1991 to a base of approximately 123,400 rental water coolers and 155,000
total customer locations as of December 31,
14
<PAGE>
1998. No customer accounted for more than 1% of the Company's revenue in 1998.
Approximately 60% of the Company's revenue in 1998 was derived from sales to
commercial establishments, with the balance attributable to residential
customers. Substantially all of the Company's United Kingdom customers are
commercial establishments. The Company's commercial customers include both large
established businesses and smaller regional and local shops, offices, warehouses
and production facilities. The Company's customers include the British Airport
Authority and the Royal Bank of Scotland in the United Kingdom, Toronto Dominion
Bank and The Hong Kong Bank in Canada and Reynold Metals in the United States.
Management believes that the diversity of its customer base protects the Company
from reliance on any one customer or a particular industry segment. In addition,
the Company has a number of short term bottling contracts with independent
beverage companies, including Pepsi-Cola in Canada, as well as with supermarkets
such as Fred Meyer, Inc. and Safeway, Inc. in the United States.
EMPLOYEES
As of December 31, 1998, the Company had approximately 629 full-time
employees, of which 129 were in sales and services, 284 in distribution, 92 in
production and warehouse and 124 in administration. The workforce is not subject
to collective bargaining agreements and temporary workers are used during peak
demand periods. The Company believes that it enjoys good relations with its
employees.
SEASONALITY
Bottled water sales are subject to seasonal variations with decreased
sales during cold weather months and increased sales during warm weather months.
Water cooler rentals are typically paid monthly and mitigate the seasonal effect
of water sales.
FOREIGN OPERATIONS
For the year ended December 31, 1998, approximately 39% of the
Company's revenue was generated in Canada in Canadian dollars, 40% of the
Company's revenue was generated in the United Kingdom in Pounds Sterling and 21%
of the Company's revenue was generated in the U.S. in U.S. dollars. In addition,
a substantial portion of the expenses incurred by the Company during that period
were denominated in currencies other than U.S. dollars. Foreign operations are
subject to a number of special risks, including, but not limited to, risks with
respect to fluctuations in currency exchange rates, regional and national
economic conditions, economic and political destabilization, other disruptions
of markets, restrictive actions by foreign governments (such as restrictions on
transfer of funds and unexpected changes in regulatory environments), changes in
foreign laws regarding trade and investment and foreign tax laws.
The Company generally does not engage in transactions in the ordinary
course of its business to hedge itself against exposure to currency risks.
However, on December 2, 1997, the Company entered into cross currency swap
transactions in Canadian dollars (notional amount of $28 million) and British
Pounds Sterling (notional amount of $30 million) for the purpose of managing
risks associated with future foreign currency fluctuations. The Canadian dollar
swap was terminated in October, 1998 realizing cash proceeds of $3.4 million.
The Company occasionally enters into short term foreign
15
<PAGE>
currency forward transactions to hedge known payments denominated in one of its
other currencies or future cash flows from the Company's operations.
REGULATION
The Company's operations are 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 jurisdictions
have regulations that require the Company to obtain certification for its
bottled water. The Company believes that it is currently in substantial
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 government laws and regulations is material to its
business. However, any failure by the Company to comply with existing and future
laws and regulations could subject it to significant penalties. Further,
governmental laws and regulations are subject to change and there can be no
assurance that such laws or regulations will not be modified in a manner that
imposes additional costs on the Company or otherwise has a material adverse
effect on the Company's financial position or results of operations.
Each of the Company's operating subsidiaries employs a Quality Control
Manager or certified plant operator and follows internal, industry and
government testing requirements. In addition, all water is ozonated to ensure
the safety and quality of the Company's product. Ozonation is the government and
industry standard for the treatment of water prior to bottling.
CANADA. In Canada, bottled water is considered a food product and, as
such, is governed by the Federal Department of Health and Welfare--Health
Protection Branch under the Food and Drug Act. Packaged waters in Canada are
also subject to Health Canada's "Division 12- Regulation for Packaged Water and
Ice" and the "Guidelines for Canadian Water Quality". The Company's production
sites are audited annually according to the Good Manufacturing Practices (the
"GMP") governing such plants. This inspection is performed by Food Protection
Branch. In addition to the government plant audits, the Company's bottling
facilities are subject to annual unannounced plant audits by the National
Sanitation Foundation (the "NSF"). The NSF is an independent inspection and
auditing firm under contract by the industry to further ensure the GMP and
quality of bottled water in Canada, the United States and Europe.
The Company is in good standing with the International Bottled Water
Association (the "IBWA") and the Canadian Bottled Water Association (the
"CBWA"). The IBWA mandates compliance with strict quality control standards on a
global basis. The CBWA is the Canadian chapter of the IBWA.
UNITED KINGDOM. In the United Kingdom, bottled water is governed by the
European Union's Mineral Water Directive and Drinking Water in Containers
Regulations. In addition, the Company is a member of the Bottled Water Cooler
Association (the "BWCA") and the IBWA, both of which play a major role in
setting industry standards. The BWCA requires its members to adhere to a Code of
Practice and pass an annual quality inspection conducted by an independent
third-party organization. The current BWCA plant inspection program is
administered by the NSF. The Company believes that it is in good standing with
the BWCA.
16
<PAGE>
UNITED STATES. In the United States, bottled water is regulated by the
Federal Food and Drug Administration (the "FDA") and follows the Quality
Standards, Standards of Identity and Current Good Manufacturing Practices
guidelines under the Code of Federal Regulations. In all of the states where the
Company operates, its plants are under the control and regulation of various
health departments for manufacturing practices, hygiene and product quality. As
in the case of Canada and the U.K., inspections of the Company's production
sites in the U.S. are conducted annually by the NSF.
ENVIRONMENTAL MATTERS
The Company's operations and properties are subject to a wide variety
of federal, state, local and international laws and regulations, including those
governing the use, storage, handling, generation, treatment, emission, release,
discharge and disposal of certain materials, substances and wastes and the
health and safety of employees (collectively, "Environmental Laws"). Such laws,
including but not limited to, those under the Comprehensive Environmental
Response, Compensation and Liability Act may impose joint and several liability
and may apply to conditions at properties presently or formerly owned or
operated by an entity or its predecessor as well as to conditions of properties
at which wastes or other contamination attributable to an entity or its
predecessor have been sent or otherwise come to be located. Based upon its
experience to date, the Company believes that it is in substantial compliance
with existing Environmental Laws and that any liability for known environmental
claims pursuant to such Environmental Laws will not have a material adverse
effect on the Company's financial position or results of operations and cash
flows. However, future events, such as new information, changes in existing
Environmental Laws or their interpretation, and more vigorous enforcement
policies of regulatory agencies, may give rise to additional expenditures or
liabilities.
RECENT DEVELOPMENTS
As at December 31, 1998, the Company was in violation of a financial
covenant under its Senior Credit Facility. On May 5, 1999, the Company reached
agreement with its lenders to amend the Senior Credit Facility such that the
Company is now in compliance with the financial covenants of the amended Senior
Credit Facility. See Item 9 - Management's Discussion and Analysis of Financial
Condition and Results of Operations - Senior Credit Facility.
ITEM 2. DESCRIPTION OF PROPERTY
The Company maintains corporate headquarters in Dartmouth, Nova Scotia.
The following table sets forth certain information relating to each of the
Company's facilities:
<TABLE>
<CAPTION>
SIZE OWNED/ LEASE
LOCATION SQ. FT. PURPOSE LEASED EXPIRATION
- -------- ------- ------- ------ ----------
<S> <C> <C> <C> <C>
CANADA:
Dartmouth, Nova Scotia 14,000 Corporate Headquarters,
Distribution Leased June 2002
Valley, Nova Scotia 14,500 Bottling, Distribution, Spring Site Owned N/A
Sydney, Nova Scotia 4,500 Offices, Distribution Leased May 1999
Moncton, New Brunswick 3,700 Office, Distribution Leased June 2001
Saint John, New Brunswick 4,300 Offices, Distribution Leased May 2003
</TABLE>
17
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Vancouver, British Columbia 45,000 Offices, Bottling, Distribution Leased May 2011
(Under Construction)
Vancouver, British Columbia 19,600 Offices, Bottling, Distribution Leased Oct. 1999
Vancouver, British Columbia 5,000 Offices, Bottling, Distribution Leased June 1999
North Vancouver, British Columbia 10,000 Offices, Warehouse Leased May 2002
(Sub-leased to third party)
Victoria, British Columbia 7,250 Offices, Bottling, Distribution Leased Feb. 2003
Nanaimo, British Columbia 1,300 Distribution Leased Monthly
Kamloops, British Columbia 10,000 Offices, Bottling, Distribution Leased Feb. 2003
2,500 Surplus Leased May 1999
Prince George, British Columbia 7,800 Bottling, Distribution Leased June 2002
UNITED KINGDOM:
Tewkesbury, England 8,600 Offices, Distribution Leased Apr. 2008
High Wycombe, England 18,000 Offices, Distribution Leased Dec. 2006
High Wycombe, England 18,000 Bottling Leased Dec. 2006
Warrington, England 4,000 Offices, Distribution Leased Dec. 2002
Arklo Road, England 8,000 Offices, Distribution Leased Oct. 2006
Glasgow, Scotland 4,500 Offices, Distribution Leased June 2004
Dumfries, Scotland 4,000 Bottling Leased June 2009
Dundee, Scotland 2,000 Offices, Distribution Leased Feb. 2000
Broxburn 5,000 Offices, Distribution Leased April 2003
UNITED STATES:
Portland, Oregon 30,000 Bottling, Distribution, Offices Leased Oct. 2007
Portland, Oregon 10,000 Distribution (For Sub-lease) Leased June 2000
7,000 Bottling, Offices (For Sub-lease) Leased June 2002
Seattle, Washington 25,000 Bottling, Distribution, Offices Leased Oct. 2002
</TABLE>
All of the Company's bottling and distribution facilities, in the
opinion of the Company's management, have been adequately maintained, are in
fair to good operating condition and generally have sufficient capacity to
handle present sales volume and expected volume through the end of 1999. The
Company is currently evaluating upgrading its production facilities in Scotland
in the year 2000 or 2001.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any litigation other than routine legal
proceedings incidental to its business. Management does not expect that these
proceedings will have a material adverse effect on the Company.
18
<PAGE>
ITEM 4. CONTROL OF REGISTRANT
During the third quarter of 1998 Sparkling Spring Water Holdings
Limited ("Holdings") was formed with all of the shareholders of Sparkling Spring
exchanging their shares and options to acquire shares of Sparkling Spring for an
equal number of shares and options to acquire shares of Holdings (the
"Reorganization"). As of December 31, 1998 warrants to purchase 51,100 shares of
Sparkling Spring were outstanding to an unrelated third party.
Gaspar Limited ("Gaspar"), a Barbados corporation wholly-owned by a
trust for the benefit of Mr. Krediet and his children, owns 50.9% of the
outstanding Common Stock of Holdings. Clairvest Group, Inc., a Canadian
corporation, is the holder of 30.4% of the outstanding Common Stock of Holdings.
To the Company's knowledge, the Company is not directly or indirectly owned or
controlled by any foreign government.
Sparkling Spring, Gaspar, Clairvest, Stephen L. Larson, Lucy Stitzer,
Stewart E. Allen, K. Dillon Schickli and certain other shareholders of the
Company are parties to a Shareholder Agreement, dated October 27, 1998 (the
"Shareholder Agreement") which sets forth various arrangements, the operation of
which could at a subsequent date, result in a change of control of the Company.
For a more detailed discussion of the provisions of the Shareholder Agreement,
see Item 13 - Interest of Management in Certain Transactions - Shareholder
Agreement.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as at December 31, 1998 certain
information regarding the ownership of Common Stock of Holdings with respect to
(i) each person known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) each of Sparkling Spring's directors,
(iii) each person named in the Summary Compensation Table and (iv) all directors
and officers as a group. Except as otherwise indicated, each of the shareholders
has sole voting and investment power with respect to the shares of Common Stock
beneficially owned. Unless otherwise indicated, the address for each shareholder
is in care of the Company, 19 Fielding Avenue, Dartmouth, Nova Scotia, Canada
B3B 1C9.
After giving effect to the Reorganization, there were outstanding an
aggregate of 1,394,188 shares of Common Stock and an aggregate of 152,310
options to purchase shares of Common Stock. All shares of Common Stock issuable
upon exercise of options and warrants are not entitled to vote on matters
submitted to a vote of the shareholders of Holdings.
19
<PAGE>
BENEFICIAL OWNERSHIP (1)
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER SHARES OF COMMON STOCK PERCENT
- ------------------------ ---------------------- -------
<S> <C> <C>
Gaspar Limited
Bridgetown, Barbados 713,300(2) 50.9%
Clairvest Group Inc.
Toronto, Ontario 423,190 30.4%
G. John Krediet 8,250(3) *
Stephen L. Larson 125,209(4) 8.9%
Stewart E. Allen 110,378(5) 7.4%
Lucy M. Stitzer 94,010 6.7%
Michael Bregman --(6) --
Kenneth B. Rotman --(7) --
C. Sean Day 8,994 *
K. Dillon Schickli 7,000(8) *
All Directors and Executive Officers 1,058,891 69.8%
as a Group (8 persons)
</TABLE>
- ----------
* Less than one percent
(1) Shares of Common Stock which an individual or group has a right to
acquire at any time pursuant to the exercise of options or warrants,
whether or not currently vested or exercisable, are deemed to be
outstanding for the purpose of computing the percentage ownership of
that individual or group, but are not deemed to be outstanding for the
purpose of computing the percentage ownership of any other person shown
in the table. Information in this Report regarding the ownership of the
Common Stock of Holdings is calculated in accordance with the foregoing
methodology.
(2) Gaspar Limited is a Barbados corporation wholly-owned by a trust
organized for the benefit of G. John Krediet and his children. Includes
8,250 shares of Common Stock issuable upon exercise of options held by
Mr. Krediet.
(3) Includes 8,250 shares of Common Stock issuable upon exercise of
options. Does not include shares owned by Gaspar Limited or shares
owned by Mr. Larson subject to a Voting Agreement (see note 4) with
respect to which Mr. Krediet disclaims beneficial ownership.
(4) Includes 6,000 shares of Common Stock issuable upon exercise of options
and shares subject to a Voting Agreement between Mr. Larson and Mr.
Krediet.
(5) Includes 104,706 shares of Common Stock issuable upon exercise of
options.
(6) Excludes 423,190 shares held by Clairvest Group Inc., of which Mr.
Bregman, a Director of Sparkling Spring, is the Vice Chairman and a
Director, and with respect to which Mr. Bregman disclaims beneficial
ownership.
(7) Excludes 423,190 shares held by Clairvest Group Inc., of which Mr.
Rotman, a Director of Sparkling Spring, is Co President and a Managing
Director, and with respect to which Mr. Rotman disclaims beneficial
ownership.
(8) Includes 3,500 shares of Common Stock issuable upon exercise of
options.
20
<PAGE>
ITEM 5. NATURE OF TRADING MARKET
As of the date of this Report, there is no principal non-United States
or United States trading market for the Notes. As at April 30, 1999,
approximately $100 million principal amount of the Notes were held by
approximately 15 record holders in the United States and were trading at an
approximate aggregate value of $78 million.
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
As of the date of this Report, there are no governmental laws, decrees
or regulations in Canada that restrict the remittance of interest or other
payments to non-resident holders of the Notes.
ITEM 7. TAXATION
The following summary describes the principal Canadian federal income
tax consequences generally applicable to a holder of a Note who for purposes of
the Income Tax Act (Canada) (the "Canadian Tax Act"), and at all relevant times,
is a non-resident of Canada, deals at arm's length with the Company, and does
not use or hold and is not deemed to use or hold the Note in the course of
carrying on a business in Canada and is not an insurer that carries on an
insurance business in Canada and elsewhere.
This summary is based on the current provisions of the Canadian Tax Act
and the regulations thereunder (the "Regulations") in force on the date hereof,
the Company's understanding of the current published administrative and
assessing practices and policies of Revenue Canada, and all specific proposals
to amend the Canadian Tax Act and the Regulations publicly announced by the
Minister of Finance (Canada) prior to the date of this Report (the "Proposed
Amendments"). This summary is not exhaustive of all possible Canadian federal
tax consequences and, except for the Proposed Amendments, does not take into
account or anticipate changes in the law or the administrative or assessing
practices of Revenue Canada, whether by judicial, governmental or legislative
action or interpretation, nor does it take into account provincial, territorial
or foreign tax legislation or considerations.
The payment by Sparkling Spring of interest, principal or premium, if
any, on the Notes (and payments under the Guarantees by a Guarantor that is a
resident of Canada for purposes of the Canadian Tax Act) will be exempt from
withholding tax under the Canadian Tax Act.
No other tax on income (including taxable capital gains) will be
payable under the Canadian Tax Act in respect of the holding, sale, redemption
or other disposition of the Notes or the receipt of interest, principal or
premium, if any, thereon.
THIS SUMMARY IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO BE, AND
SHOULD NOT BE INTERPRETED AS, LEGAL OR TAX ADVICE TO ANY PARTICULAR HOLDER OF A
NOTE. ACCORDINGLY, HOLDERS OF THE NOTES ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS WITH RESPECT TO THEIR PARTICULAR CIRCUMSTANCES.
21
<PAGE>
ITEM 8. SELECTED FINANCIAL DATA
The following selected historical consolidated financial data of the
Company for the five years ended December 31, 1998 has been derived from the
consolidated financial statements of the Company which have been audited by
Ernst & Young LLP, independent public accountants. The information set forth
below should be read in conjunction with Item 9 - Management's Discussion and
Analysis of Financial Condition and Results of Operations, and the Consolidated
Financial Statements of the Company including the notes thereto, included in
Item 18 of this Report.
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue ..................................... $ 8,725 $ 15,349 $ 27,326 $ 42,074 $ 57,047
Cost of sales ............................... 1,755 2,863 4,676 7,992 10,020
Selling, delivery and administrative expenses 5,356 9,041 15,756 22,869 34,677
Depreciation and amortization ............... 1,095 1,465 3,842 5,692 8,880
Interest expense ............................ 625 1,294 2,481 5,018 9,714
Net income (loss) before
extraordinary items ...................... (94) 411 166 (4,525) (8,073)
Net (loss) income ........................... (238) 19 (307) (5,358) (8,073)
OTHER DATA:
EBITDA (1) .................................. $ 1,614 $ 3,445 $ 6,894 $ 11,212 $ 12,349
EBITDA margin ............................... 18.5% 22.4% 25.2% 26.7% 21.6%
Ratio of EBITDA to interest expense ......... 2.58 2.66 2.78 2.23 1.27
Cash provided by (used in) operating
activities ............................... 1,029 1,491 3,216 (495) 2,661
Cash used in investing activities ........... 7,579 4,219 24,168 33,899 24,662
Cash provided by financing activities ....... 5,926 3,551 22,669 60,005 5,178
Net capital expenditures .................... 1,257 2,287 6,736 6,038 8,138
Water cooler location base .................. 23,838 30,344 68,614 115,037 155,000
BALANCE SHEET DATA:
Cash and cash equivalents ................... $ 67 $ 860 $ 2,231 $ 27,507 $ 9,728
Total assets ................................ 13,835 18,521 44,409 106,999 107,633
Long-term debt (2) .......................... 7,623 11,309 30,474 104,799 112,316
Common shareholders' equity (deficit) ....... 2,331 2,207 6,772 (8,960) (19,789)
</TABLE>
- ----------
(1) "EBITDA" means operating profit plus depreciation, amortization and
integration and related expenses. For 1998, EBITDA reported in the
Table is prior to deduction of integration and related expenses of $1.8
million. EBITDA is presented because it is a widely accepted financial
indicator of a company's ability to service and/or to incur
indebtedness. However, EBITDA should not be considered as an
alternative to net income as a measure of operating results or to cash
flow from operations as a measure of liquidity in accordance with
generally accepted accounting principles.
(2) Includes amounts due under capital lease obligations, other debt,
Senior Bank Debt (including current maturities) and the Notes.
22
<PAGE>
The above financial information includes the results of operations of
the following companies from their dates of acquisition as follows: Crystal
Springs Limited: April 14, 1993; Water Cooler Division of Buxton Mineral Water
Company Limited: June 8, 1994; Aquarporte (UK) Ltd.: April 26, 1995; Canadian
Springs Water Company Limited: January 18, 1996; Water Jug Enterprises Limited:
May 19, 1996; D&D and Company, Inc.: January 2, 1997; Withey's Water Softening &
Purification Limited: January 28, 1997; High Valley Water Limited: January 30,
1997; Marlborough Employment Limited: February 5, 1997; Soja Enterprises, Inc.:
June 4, 1997; Crystal Springs Bottled Water Co., Inc.: June 23, 1997;
Cullyspring Water Co., Inc.: October 23, 1997; Crystal Springs Drinking Water
Inc.: December 17, 1997; Coastal Mountain Water Corp: February 24, 1998; Krystal
Fountain Water Co. Limited: May 16, 1998, and the Springfield Water Division of
Brio Beverages, Inc.: August 31, 1998.
EXCHANGE RATE DATA
The following table sets forth for both Canadian dollars and British
pounds sterling for the periods indicated, the high and low exchange rates
(i.e., the highest and lowest exchange rate at which each currency was sold),
the average exchange rate (i.e., the average of each exchange rate on the last
business day of each month during the year) and the year end exchange rate of
each currency in exchange for the U.S. dollar, as calculated from the inverse of
the exchange rates reported by the Federal Reserve Bank of New York for cable
transfers payable in Canadian dollars and British pounds sterling for customs
purposes.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CANADIAN DOLLAR
High for the year.................. 0.764 0.753 0.753 0.749 0.710
Low for the year................... 0.710 0.710 0.721 0.695 0.634
End of year........................ 0.713 0.733 0.730 0.700 0.650
Average for the year............... 0.732 0.728 0.733 0.722 0.674
BRITISH POUND STERLING
High for the year.................. 1.643 1.641 1.711 1.712 1.722
Low for the year................... 1.460 1.527 1.497 1.580 1.611
End of year........................ 1.564 1.552 1.705 1.642 1.663
Average for the year............... 1.531 1.578 1.560 1.638 1.657
</TABLE>
23
<PAGE>
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS OF
THE COMPANY SHOULD BE READ IN CONJUNCTION WITH ITEM 8 - SELECTED FINANCIAL DATA
AND THE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY, AND THE NOTES THERETO,
INCLUDED ELSEWHERE IN THIS REPORT.
GENERAL
The Company is one of the world's largest providers of bottled water
delivered directly to commercial and residential customers in Canada, the United
Kingdom and the United States. The Company's revenue is primarily generated from
two relatively stable and recurring sources: bottled water sales and the rental
and service of water coolers. Additionally, the Company engages in certain
related activities. The Company's revenue growth in recent years is primarily
attributable to increased water cooler penetration, strategic acquisitions in
existing and new geographic territories and higher sales of ancillary products
sold through the Company's established distribution channels.
In 1998, the Company generated approximately 24% of its total revenue
from the rental of water coolers. The Company typically charges its customers a
monthly, quarterly or annual water cooler rental charge. Total rental revenue is
a function of the size of the Company's water cooler base and the monthly cooler
rental charge. From December 31, 1995 to December 31, 1998, the Company's water
cooler customer location base increased by 411% from 30,344 to 155,000. The
Company's average monthly cooler rental charge remained relatively stable during
this period.
Revenue from the sale of bottled water to commercial and residential
markets, which accounted for approximately 63% of the Company's total revenue in
1998, is driven by a number of factors, including the water cooler base,
consumption of bottled water per customer and the price charged per bottle of
water. Approximately 90% of the water sales were in 5-gallon, 6-gallon or
3-gallon returnable containers made for dispensing through water coolers and the
remaining 10% (or 6% of total revenues) of the sale of bottled water was from
the sale of water in smaller retail packages primarily to wholesalers and
retailers.
The remaining 13% of the Company's total revenue in 1998 was generated
from related activities, including the sale of paper cups, cooler sanitation
services, coffee, water filtration devices and water through vending machines.
The Company plans to continue these ancillary activities to maximize the
profitability of its established distribution system.
Since 1994, the Company has substantially improved its sales and EBITDA
by increasing its base of water coolers through internal growth and
acquisitions. The Company's operations are characterized by relatively high
fixed costs due to the significant investment required to establish a bottling
and distribution infrastructure. As the Company grows its revenue base by
acquiring and consolidating new routes within its existing route structure,
operating costs decline as a percentage of revenue. This operating leverage is
driven by the following factors: (i) improved route efficiency; (ii)
consolidation of production and distribution facilities; (iii) realization of
savings from greater purchasing volume; (iv) elimination of duplicative
administrative costs; (v) improved management
24
<PAGE>
control through centralized accounting and reporting systems; and (vi) enhanced
marketing efficiency. As a result, positive changes in revenue tend to have a
larger corresponding impact on EBITDA and operating income. The continued
consolidation of production and distribution capabilities is a key component of
the Company's business strategy both within its current markets and in any new
markets it may enter. Consequently, the Company expects operating expenses to
grow at a rate less than that of anticipated revenue growth.
For certain financial information relating to each of the geographic
regions in which the Company operates, see Note 23 to the Notes to Consolidated
Financial Statements of Sparkling Spring Water Group Limited included in Item 18
of this Report.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
statement of operations and other data of the Company.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Revenue 100% 100% 100%
Cost of sales 17.1 19.0 17.6
Selling, delivery and administrative
expenses 57.7 54.3 60.8
EBITDA 25.2 26.7 21.6
Depreciation and amortization 14.1 13.5 15.6
Interest expense 9.1 11.9 17.0
Net income (loss) before
extraordinary items 0.6 (10.8) (14.2)
Net income (loss) (1.1) (12.7) (14.2)
</TABLE>
YEAR ENDED DECEMBER 31, 1998 TO YEAR ENDED DECEMBER 31, 1997
REVENUE. Revenue increased $15.0 million, or 35.6%, to $57.1 million in
1998 compared to $42.1 million in 1997. Of this increase, approximately $3.9
million or 9.2% resulted from the inclusion of revenue from the following
acquisitions completed in 1998: (i) Coastal Mountain Water Corp., acquired in
February 1998, contributed $1.5 million in revenue and 6,600 water cooler
customers (ii) Krystal Fountain Water Co. Limited, acquired in May 1998,
contributed $1.8 million in revenue and 5,260 water cooler customers and (iii)
the Springfield Water Division of Brio Beverages, Inc.
25
<PAGE>
contributed $0.6 million in revenue and 9,330 water cooler customers.
Acquisitions completed in 1997 but for which a full year of revenue was
recognized in 1998 accounted for approximately $7.7 million or 18.3% of the
increase. The decline in the Canadian dollar was offset slightly by an increase
in the Pound Sterling, reducing revenues by $1.3 million or 3.0%. The remaining
$4.7 million, or 11.1%, was due to additional water coolers installed in the
Company's existing territories.
COST OF SALES. Cost of sales increased $2.0 million, or 25.4%, to $10.0
million in 1998 compared to $8.0 million in 1997 largely as a result of
acquisitions completed in 1997 and 1998. Cost of sales as a percentage of
revenue decreased to 17.6% in 1998 from 19.0% in 1997 based on the elimination
of duplicate expenses in connection with the Company's acquisitions and
economies of scale realized from an increase in volume, growth in higher margin
home and office water and cooler rental revenues and a decrease in the Company's
revenues from lower margin products..
SELLING, DELIVERY AND ADMINISTRATIVE EXPENSES. Selling, delivery and
administrative expenses increased $11.8 million, or 51.6%, to $34.7 million in
1998 compared to $22.9 million in 1997 as a result of acquisitions completed in
1997 and 1998. Operating costs as a percentage of revenue increased 6.5% to
60.8% in 1998 from 54.3% in 1997. Approximately 3.2% or 49% of this increase is
attributable to $1.8 million of charges arising from increased accounts
receivable and inventory reserves. The remaining increase is primarily due to
increased corporate overhead and staffing costs associated with the increased
growth in the Company's operations and costs related to the Company now being an
SEC reporting entity.
EBITDA. For the reasons stated above, EBITDA in 1998 increased by $1.1
million, or 10.1%, to $12.3 million from $11.2 million in 1997. As a percentage
of revenue, EBITDA decreased to 21.6% in 1998 from 26.7% in 1997, primarily due
to increased accounts receivable and inventory reserves as discussed above.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $3.2 million or 56.0% to $8.9 million in 1998 from $5.7 million in
1997. This increase was due to significant increases in the fixed assets and
goodwill as a result of acquisitions consummated in 1997 and 1998 and the
standard levels of capital expenditures for ongoing operations.
INTEREST EXPENSE. Interest expense increased $4.7 million, or 93.6%, to
$9.7 million in 1998 from $5.0 million in 1997. This increase was due
principally to the Company's Subordinated Notes Payable being outstanding for a
full year in 1998 versus only two months in 1997. Interest expense in 1998 was
reduced by $3.4 million related to the cash proceeds received from the
termination of the Company's Canadian dollar swap. Interest expense was
increased by a non cash charge of $891,000 related to the mark to market
adjustment on the Company's Pound Sterling swap.
NET LOSS. Net loss increased $2.7 million or 50.7% from $5.4 million in
1997 to $8.1 million in 1998 due principally to increased expenses as noted
above which were only partially offset by expenses incurred in 1997 of $4.6
million related to redemption of common stock options and an extraordinary item
of $0.8 million related to the restructuring of the Company's long term
financing agreement.
26
<PAGE>
YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31, 1996
REVENUE. Revenue increased $14.8 million, or 54.0%, to $42.1 million in
1997 compared to $27.3 million in 1996. The water cooler base increased by
46,423 or 67.7% to 115,037 compared to 68,614 in 1996. Acquisitions completed in
fiscal 1997 provided an increase in the water cooler base of 34,375 and
accounted for approximately $11.6 million or 78.7% of the total increase in
revenue. The remaining increase in water coolers of 12,048 and revenue of $3.2
million was primarily the result of additional water cooler rentals and bottled
water sales in the Company's existing territories and a full year of revenue
being recognized in 1997 for the 1996 acquisitions.
COST OF SALES. Cost of sales increased $3.3 million, or 70.9%, to $8.0
million in 1997 compared to $4.7 million in 1996 largely as a result of the
acquisitions completed in 1996 and 1997. Cost of sales as a percentage of
revenue increased to 19.0% in 1997 from 17.1% in 1996.
SELLING, DELIVERY AND ADMINISTRATIVE EXPENSES. Selling, delivery and
administrative expenses increased $7.1 million or 45.1% to $22.9 million in 1997
compared to $15.8 million in 1996 as a result of the acquisitions completed in
1996 and 1997. Operating expenses as a percentage of revenue decreased to 54.3%
in 1997 from 57.7% in 1996. This decrease as a percentage of revenue was the
result of incremental sales volumes being applied to relatively fixed
distribution costs; specifically, more efficient utilization of the existing
route fleet through increased route density.
EBITDA. For the reasons stated above, EBITDA in 1997 increased by $4.3
million, or 62.6%, to $11.2 million from $6.9 million in 1996. As a percentage
of revenue, EBITDA in 1997 increased to 26.7% from 25.2% in 1996.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $1.9 million or 48.2% to $5.7 million in 1997 from $3.8 million in
1996. This increase was due to significant increases in fixed assets as a result
of the acquisitions consummated in the period, the higher depreciation expense
associated with the increased water cooler base, and the standard levels of
capital expenditures for existing operations.
INTEREST EXPENSE. Interest expense increased $2.5 million or 102.2% to
$5.0 million in 1997 from $2.5 million in 1996. This increase was a result of
increased borrowings made to fund acquisitions and the issuance of $100 million
of Senior Subordinated Notes bearing interest at a rate of 11.5%.
NET LOSS. Net loss increased $5.1 million from $0.3 million in 1996 to
$5.4 million in 1997 due to expenses of $4.6 million incurred related to the
redemption of common stock options, an increase in the Company's extraordinary
item from 1996 to 1997 of $0.4 million and the other items noted above.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has funded its capital and operating
requirements with a combination of cash flow from operations, borrowings under
bank credit facilities and equity investments from shareholders. The Company has
utilized these sources of funds to make acquisitions, to fund significant
capital expenditures at its properties, to fund operations and to service debt.
The Company presently expects to fund its future capital and operating
requirements at its existing operations through a
27
<PAGE>
combination of cash generated from operations, and borrowings under the Senior
Credit Facility (see below).
Net cash provided by operating activities was $2.7 million for the year
ended December 31, 1998 and $4.1 million for the year ended December 31, 1997
(excluding funds of approximately $4.6 million used in 1997 to repurchase
options to acquire common shares of the Company). Net cash used in investment
activities was $24.7 million for the year ended December 31, 1998 and $33.9
million for the year ended December 31, 1997. These amounts relate primarily to
three acquisitions completed in the year ended December 31, 1998 for $16.5
million and eight acquisitions completed in the year ended December 31, 1997 for
$27.9 million. Capital expenditures include expenditures related to the addition
of bottling lines at existing facilities, construction of new bottling
facilities, and the purchase of water bottles, water coolers and delivery
trucks. The Company made net capital expenditures of $8.1 million in the year
ended December 31, 1998 and $6.0 million in 1997. Based on the Company's
existing operations, management expects that the Company's capital expenditures
will total approximately $9.3 million in 1998.
The Company believes that existing cash balances together with cash
generated from operations and available borrowings under the Senior Credit
Facility (See "Senior Credit Facility") will be sufficient to finance the
Company's working capital and capital expenditure requirements for 1999 as well
as some small acquisitions. However, there can be no assurance that such
resources will be sufficient to meet the Company's anticipated requirements or
that capital will be available to the Company on terms and conditions acceptable
to the Company.
THE NOTES
Pursuant to a Purchase Agreement dated November 14, 1997, Sparkling
Spring sold unregistered 11.5% Senior Subordinated Notes due 2007 (the "Private
Notes") in an aggregate principal amount of $100 million to BT Alex. Brown
Incorporated and NatWest Capital Markets Limited (the "Initial Purchasers") in a
transaction not registered under the Securities Act in reliance upon the private
offering exemption under Section 4(2) of the Securities Act. Pursuant to a
Prospectus dated April 1, 1998, under a Registration Statement declared
effective on that date under the Securities Act, Sparkling Spring commenced an
offer (the "Exchange Offer") to exchange $1,000 principal amount of its
registered 11.5% senior subordinated notes due 2007 (the "Exchange Notes") for
each $1,000 principal amount of the Private Notes. The form and terms of the
Exchange Notes are identical in all material respects to those of the Private
Notes, except for certain transfer restrictions and registration rights relating
to the Private Notes and except for certain interest provisions relating to such
registration rights. The Exchange Notes also have the same redemption terms as
the Private Notes. The Exchange Notes evidence the same indebtedness as the
Private Notes and were issued pursuant to, and entitled to the benefits of, an
Indenture, dated as of November 19, 1997 governing the Private Notes and the
Exchange Notes (the "Indenture").
The Notes are redeemable at Sparkling Spring's option, in whole or in
part, on and after November 15, 2002 at specified redemption prices, plus
accrued and unpaid interest to the date of redemption. In addition, at any time
on or prior to November 15, 2000, Sparkling Spring, at its option, may redeem up
to $30.0 million of the aggregate principal amount of the Notes originally
issued with
28
<PAGE>
the net cash proceeds of one or more Public Equity Offerings, at a redemption
price equal to 111.50% of the principal amount thereof, plus accrued and unpaid
interest to the date of redemption, provided that at least $70.0 million of the
aggregate principal amount of the Notes originally issued remains outstanding
immediately following any such redemption.
The Notes are general unsecured obligations of Sparkling Spring and are
subordinated in right of payment to all existing and future Senior Indebtedness
(as defined in the Indenture). The Notes rank pari passu in right of payment
with any future senior subordinated indebtedness of Sparkling Spring and will
rank senior in right of payment to all other subordinated obligations of
Sparkling Spring. The Notes are fully and unconditionally guaranteed on a senior
subordinated basis by the Subsidiary Guarantors. The Guarantees are general
unsecured obligations of the Subsidiary Guarantors and are subordinated in right
of payment to all existing and future Guarantor Senior Indebtedness (as defined
in the Indenture). The Guarantees rank PARI PASSU with any future senior
subordinated indebtedness of the Subsidiary Guarantors and rank senior in right
of payment to any other subordinated obligations of the Subsidiary Guarantors.
Under the Indenture, Sparkling Spring has the ability to incur
additional indebtedness and in May 1998, the Company entered into a Senior
Credit Agreement (the "Senior Credit Facility") with Toronto-Dominion Bank,
Toronto-Dominion (Texas), Inc. and The Toronto-Dominion Bank, London Branch
(collectively "Toronto Dominion") which was subsequently revised and now
provides up to $30 million of secured senior debt. See - Senior Credit Facility
(below).
The Indenture contains certain covenants with respect to Sparkling
Spring and its subsidiaries that restrict, among other things, (a) the
incurrence of additional indebtedness, (b) the payment of dividends and other
restricted payments, (c) the creation of liens, (d) the sale or other transfer
of assets and subsidiary stock, (e) the existence of limitations on
distributions from subsidiaries, (f) transactions with affiliates and (g) the
issuance of preferred stock by subsidiaries. The Indenture also restricts the
ability of Sparkling Spring and the Subsidiary Guarantors to consolidate or
merge with or into, or to transfer all or substantially all of its assets to,
another person. In addition, under certain circumstances, Sparkling Spring will
be required to offer to purchase Notes, in whole or in part, at a purchase price
equal to 100% of the principal amount thereof plus accrued interest to the date
of repurchase, with the proceeds of certain Asset Sales (as defined in the
Indenture).
SENIOR CREDIT FACILITY
In addition to cash from operations and equity investment from
shareholders, the Company's principal source of liquidity is the Senior Credit
Facility which provides funds for general corporate purposes including working
capital, acquisitions and capital expenditure financing.
As at December 31, 1998, the Company was in violation of a financial
covenant under the Senior Credit Facility. On May 5, 1999, the Company reached
agreement with its lenders to amend the Senior Credit Facility (the "Amended
Facility"). The Amended Facility will provide the Company with increased
operating flexibility and restore the Company's compliance with all financial
covenants.
The Amended Facility will be structured as a multi- currency facility
and provides for a $15 million operating line which is renewable annually by
April 30th, a $5 million five year acquisition line
29
<PAGE>
and a $10 million short term credit line expiring October 31, 1999 that provides
the Company with flexibility to repurchase, at its discretion, certain of the
Company's outstanding Exchange Notes. The Company's payment obligation under the
Amended Facility is secured by a first priority security interest over
substantially all of the assets of the Company; obligations under the Amended
Facility rank senior to the payment of the Notes. The definition of EBITDA in
the Amended Facility is defined to exclude $1.8 million of integration and
related expenses and $3.3 million of increased accounts receivable and inventory
reserves and special charges incurred in 1998 ("Adjusted EBITDA").
Amounts outstanding under the Amended Facility will bear interest at
specified rates based on the Canadian prime, U.S. prime, London inter-bank
market and Bankers' Acceptances rates. As of April 30, 1999, the Company had
approximately $5.2 million and $3 million in letters of credit outstanding under
the $15 million operating line and no amounts outstanding under the acquisition
and Note repurchase facilities.
The Amended Facility contains covenants, customary for transactions of
this type, including, without limitation, (i) restrictions on the incurrence of
indebtedness, leases, liens and contingent obligations, other than indebtedness
represented by the Notes, indebtedness under the Amended Facility and liens
incurred in the normal course of business, (ii) restrictions on mergers,
acquisitions, sales of assets, investments and transactions with affiliates,
(iii) restrictions on dividends and other payments with respect to shares of the
Company's capital stock and (iv) restrictions on capital expenditures.
Additionally, the Amended Facility contains, among others, the following
financial covenants and coverage tests: (i) the ratio of senior debt (consisting
of amounts outstanding under the Amended Facility, vendor debt, capital leases
and permitted encumbrances) to Adjusted EBITDA (on a rolling four quarter basis)
shall not exceed 2.5:1.0; (ii) Adjusted EBITDA (on a rolling four quarter basis)
shall not be less than 135% of total interest expense less amortization of
non-cash interest amounts (iii) Adjusted EBITDA (on a rolling four quarter
basis) less capital expenditures less income taxes paid shall not be less than
120% (110% as of September 30, 1999) of the amount of interest due under the
Amended Facility plus payments of principal under the Amended Facility and
permitted encumbrances and (iv) the ratio of total debt (consisting of senior
debt and the Subordinated Notes Payable) to Adjusted EBITDA (on a rolling four
quarter basis) shall not exceed 7.0:1.0.
The Company believes its existing cash, cash from operations and cash
under the Amended Facility will be sufficient to cover the Company's future cash
requirements for the next twelve months.
YEAR 2000
The Year 2000 issue arises due to computer programs using two digits
rather than four to define an applicable year. Computer programs may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
system failures or miscalculations leading to disruptions in the Company's
operations. If the Company or its significant customers or suppliers fail to
adequately address the Year 2000 issue, such failure could have an adverse
impact on the Company's ability to operate its business.
Sparkling Spring has taken action to address and complete the work
associated with the Year 2000. Each of the Company's business locations has
established a team to identify and correct Year 2000 issues. The Company's
principal financial and operational computer systems utilize software
30
<PAGE>
developed and supported by an outside computer software supplier. It is the
Company's understanding that this supplier has completed an analysis of the
changes required to accommodate the Year 2000 and that these changes are
incorporated in the most recent software upgrades provided to the Company. To
date the Company has installed these software upgrades at two of its locations
and intends to complete the installation and testing of these upgrades at all of
its remaining locations by the end of August 1999. In addition, the impact of
Year 2000 on manufacturing plants and building facilities is also being
addressed. The Company is also investigating the Year 2000 capabilities of
suppliers, customers and other external entities, and developing contingency
plans where necessary.
There has been wide publicity in the media regarding potential
shortages of potable water if the computer systems controlling the municipal
water supplies fail to function. Accordingly, some individuals may stock up on
water and utilize the Company's 5 and 6 gallon returnable containers to store
water. If this occurs on a widespread basis it could result in the Company
having to significantly increase its investment in returnable containers. In
addition, shortages of returnable containers could result and this would have a
disruptive effect on the Company's operations.
The Company estimates that the total cost of addressing and completing
the work associated with the Year 2000 issue will be approximately $150,000
exclusive of expenditures for software and telephone system upgrades required to
accommodate the Company's growth and anticipated future requirements. This
expectation is based on the assumption that the Company has contemplated all
significant actions required and that significant costs related to Year 2000
will not be incurred on behalf of the Company's customers or suppliers.
IMPACT OF INFLATION
The Company does not believe that inflation has had a material impact
on its revenue or results of operations.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Statements included in this Report that do not relate to present or
historical conditions are "forward looking statements" within the meaning of the
Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995
(the "1995 Reform Act"). Additional oral or written forward-looking statements
may be made by the Company from time to time, and such statements may be
included in documents other than this Report that are filed with the SEC. Such
forward-looking statements involve risks and uncertainties that could cause
results or outcomes to differ materially from those expressed in such
forward-looking statements. Forward-looking statements in this Report and
elsewhere may include without limitation, statements relating to the Company's
plans, strategies, objectives, expectations, intentions and adequacy of
resources and are intended to be made pursuant to the safe harbor provisions of
the 1995 Reform Act. Words such as "believes," "forecasts," "intends,"
"possible," "expects," "estimates," "anticipates," or "plans" and similar
expressions are intended to identify forward-looking statements. Investors are
cautioned that such forward-looking statements involve risks and uncertainties
including without limitation the following: (i) the Company's plans, strategies,
objectives, expectations and intentions are subject to change at any time at the
discretion of the Company; (ii) the Company's ability to expand by acquisitions
is dependent upon, and may be limited by, the availability of suitable
acquisition candidates and the availability of financing therefor on suitable
terms; (iii) the Company's
31
<PAGE>
ability to obtain financing will be affected by restrictions contained in the
Indenture and the Company's other existing and future financing arrangements;
(iv) the Company's proposed expansion strategy will be substantially dependent
upon the Company's ability to hire and retain skilled management, financial,
marketing and other personnel; (v) the Company's plans and results of operations
will be affected by the Company's ability to successfully manage growth
(including monitoring operations, controlling costs and maintaining effective
quality and inventory controls); (vi) the market for attractive acquisitions in
the bottled water industry is becoming increasingly competitive, which could
make the Company's acquisition strategy more difficult to achieve; (vii) the
Company's operations are subject to the jurisdiction of various governmental and
regulatory agencies which regulate the quality of drinking water and other
products and any failure by the Company to comply with existing and future laws
and regulations could subject the Company to significant penalties or impose
additional costs on the Company or otherwise have a material adverse affect on
its financial position or results of operations; (viii) any interruption in the
availability of water to the Company from municipal sources and local natural
springs could have a material adverse affect on the Company's operations until
suitable replacement sources are located; (ix) risks associated with issues
surrounding Year 2000 for the Company, its customers and suppliers; and (x)
other risks and uncertainties indicated from time to time in the Company's
filings with the SEC.
ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company generally does not engage in transactions in the ordinary
course of its business to hedge itself against exposure to currency risks.
However, on December 2, 1997, the Company entered into cross currency swap
transactions in Canadian dollars (notional amount of $28 million) and British
Pounds Sterling (notional amount of $30 million) for the purpose of managing
risks associated with future foreign currency fluctuations.
The value of these swaps is marked-to-market. At December 31, 1998 the
Pound Sterling swap had a value of $836,000 in favor of the bank of which
$777,000 has been recorded as an increase in interest expense during 1997 and
1998 and $59,000 has been recorded as an increase in the cumulative translation
adjustment account included in the shareholder's equity section of the Company's
balance sheet. The Canadian dollar swap was terminated in October 1998 realizing
cash proceeds of $3.4 million which was recorded as a reduction in 1998 interest
expense. The Company occasionally enters into short term foreign currency
forward transactions to hedge known payments denominated in one of its other
currencies or future cash flows from the Company's operations.
32
<PAGE>
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT
The following table sets forth certain information as of April 30, 1999
with respect to each of the directors, executive officers and key management
personnel of Sparkling Spring.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH SPARKLING SPRING
- ---- --- ------------------------------
<S> <C> <C>
G. John Krediet 48 Chairman of the Board of Directors
and Chief Executive Officer
Kent Dillon Schickli 46 Chief Financial Officer
Stewart E. Allen 40 President and Director
Michael Bregman 44 Director
C. Sean Day 49 Director
Stephen L. Larson 40 Director
Kenneth B. Rotman 32 Director
Lucy M. Stitzer 38 Director
</TABLE>
G. JOHN KREDIET has been Chairman of the Board of Directors and Chief
Executive Officer of Sparkling Spring since January 1991. From 1988 until 1992
he served as Chairman of the Board of MBL, the Pepsi-Cola franchisee and former
parent company of SSWL. From September 1988 through November 1990 he also served
as Chairman of the Board of Eastern Beverages Ltd., the Pepsi-Cola franchise for
the territory in and around Ottawa, Ontario, Canada. Mr. Krediet initiated and
managed the consolidation of the eastern Canadian Pepsi-Cola bottling business
and arranged its sale to Pepsi-Cola Corporation in 1992. Mr. Krediet was the
founder of CFCC in 1987 and, together with Mr. Larson, obtained direct control
of SSWL in 1992 to use it as an acquisition vehicle for consolidating the
bottled water industry. Mr. Krediet is a citizen of the Netherlands and received
his graduate degree in economics from Erasmus University in Rotterdam.
KENT DILLON SCHICKLI replaced Stephen L. Larson as Chief Financial
Officer of Sparkling Spring effective April 3, 1998. Effective the same date Mr.
Schickli became President of CFCC, a position he previously held from 1987 to
1992. Mr. Schickli has over 15 years of beverage industry experience including
serving as a member of the Board of Directors and of the Executive Committee of
MBL from 1987 to 1992 and Chief Financial Officer of a large Pepsi-Cola
franchise bottler from 1981 to 1986. From 1997 to April 1998, Mr. Schickli was
Chief Executive Officer and co-owner of Affinity Development Group, Inc., a
consulting firm. In 1996 Mr. Schickli served as President and a member of the
Board of Directors of Ivid Communications, Inc., a leading multimedia training
company. From 1993 to 1995 Mr. Schickli was Chief Operating Officer and a member
of the Board of Directors of Affinity Group, Inc., a leading database marketing
and membership management company. Mr. Schickli
33
<PAGE>
earned a M.B.A. in Accounting from the University of Chicago, a B.A. from
Carleton College and received a C.P.A. from the State of Illinois.
STEWART E. ALLEN has been President of Sparkling Spring since 1992. Mr.
Allen has been responsible for overseeing the daily operations of the Company,
including integrating acquired companies and corporate strategic planning. Mr.
Allen is Past President of the Canadian Bottled Water Association, a member of
the Board of Directors of the International Bottled Water Association and Vice
Chairman of the International Bottled Water Association's International Council.
Mr. Allen has over 20 years of experience in the beverage industry. He
served as Vice President of Sales and Marketing for MBL from 1988 to 1992. Mr.
Allen was primarily responsible for consolidating two other bottlers into MBL
and for major cost management initiatives, including a reduction in salaried
employees, closure of four warehouses and three wage freezes with unionized
employees. Prior to joining MBL, Mr. Allen spent fifteen years with Crush Canada
and Pepsi-Cola Canada.
MICHAEL BREGMAN has served as a member of the Board of Directors of
Sparkling Spring since October 1997. Mr. Bregman is Vice Chairman of the Board
of Directors of Clairvest, a Toronto-based, publicly traded merchant bank with a
portfolio in excess of $100 million, where his primary responsibilities include
assessing investment transactions, with an emphasis on the retail food and
beverage industries. Mr. Bregman is the Chairman and Chief Executive Officer and
a major shareholder of The Second Cup Ltd., a coffee retailer in North America.
Mr. Bregman is also a member of the Board of Directors of Signature Security
Group, Inc. and Vincor International Inc. In addition, Mr. Bregman was the
founder of the now-divested Mmmuffins Inc., a specialty baking company in
Canada. Mr. Bregman received his M.B.A. degree in 1977 from Harvard Business
School and earned a B.S. in Economics from The Wharton School at the University
of Pennsylvania.
C. SEAN DAY has served as a member of the Board of Directors of
Sparkling Spring since March, 1997. From 1989 until February, 1999, Mr. Day
served as President and Chief Executive Officer of Navios Corporation, a company
engaged in the worldwide operation of ocean going bulkships. Mr. Day has a wide
range of experience in the shipping, finance and industrial sectors. Prior to
joining Navios Corporation, Mr. Day's prior experience included positions with
Citicorp Venture Capital Ltd. in New York, Fednav Ltd. in Montreal and Jardine,
Matheson & Co., Ltd. in Hong Kong and Taiwan. Mr. Day is also a member of the
Board of Directors of Kirby Corporation and Teekay Shipping Corporation. Mr. Day
is a graduate of University of Cape Town and Oxford University.
STEPHEN L. LARSON, has served as a member of the Board of Directors of
Sparkling Spring since 1992 and was its Chief Financial Officer from 1992 until
April, 1998. Mr. Larson also served as a managing director of CFCC from 1990
until his resignation in April, 1998 and had been with CFCC since 1987. Mr.
Larson left Sparkling Spring to become a Managing Director in Cornerstone Equity
Investors L.L.C., a private equity investor group located in New York City. Mr.
Larson earned an MBA in Finance from the University of Chicago and a Bachelor of
Science in Accounting from the University of Illinois. Mr. Larson is a C. P. A.
and a member of both the American Institutes of Certified Public Accountants and
the Accounting Research Association.
34
<PAGE>
KENNETH B. ROTMAN has served as a member of the Board of Directors of
Sparkling Spring since January 1996. Mr. Rotman is Co President and a Managing
Director of Clairvest, a Toronto-based, publicly traded merchant bank with a
portfolio in excess of $100 million. Mr. Rotman's role with Clairvest involves
the sourcing and execution of transactions and working closely with the
management of companies in which Clairvest has invested. Mr. Rotman also serves
on the Board of Directors of Consoltex Group Inc., NRI Industries and Signature
Security Group Inc. Mr. Rotman is a volunteer director of The Power Plant art
gallery of Toronto and the Empire Club of Canada. Prior to joining Clairvest in
October, 1993, Mr. Rotman worked in the Venture Banking Division of E.M.
Warburg, Pincus & Co. in New York. Mr. Rotman received a B.A. in Economics from
Tufts University, an M.Sc. from the London School of Economics, and an M.B.A.
from New York University's Stern School of Business.
LUCY M. STITZER has served as a member of the Board of Directors of
Sparkling Spring since January 1994. Ms. Stitzer served on the Board of
Directors of Cargill Inc. from 1992 to 1998. From 1990 to 1992, Ms. Stitzer was
employed as an associate at Sandler O'Neill and Partners, an investment bank.
Ms. Stitzer received a B.A. from Hollins College.
35
<PAGE>
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS
DIRECTORS AND EXECUTIVE COMPENSATION
The following table sets forth a summary of the compensation of each
executive officer of Sparkling Spring who earned in excess of $100,000 in annual
salary and bonus during Sparkling Spring's year ended December 31, 1998. The
Summary Compensation Table reflects all compensation paid by Sparkling Spring to
its executive officers. Directors of Sparkling Spring receive no compensation
for their services as Directors. Messrs. Krediet and Schickli are compensated
for their services as executive officers of Sparkling Spring directly by CFCC.
See Item 13 - Interest of Management in Certain Transactions - Management
Agreement. Sparkling Spring provides a defined contribution pension plan for all
of its employees, including its executive officers but no other pension,
retirement or similar benefits to its executive officers or Directors.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
NAME AND ANNUAL COMPENSATION SECURITIES
PRINCIPAL ------------------------------- OTHER ANNUAL UNDERLYING ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION OPTIONS/SARS COMPENSATION
-------- ---- ------ ----- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Stewart E. Allen,
President 1998 $186,000 -- $17,227 (1) -- $23,266 (2)
1997 $141,744 $ 36,117 $18,599 (1) -- $18,051 (2)
1996 $129,070 -- $15,576 (1) -- $16,957 (2)
</TABLE>
(1) Includes a housing allowance of $16,177, 17,336 and $13,926 in 1998, 1997
and 1996 respectively.
(2) Consists of contributions of $22,324, $17,109 and $16,015 to a defined
contribution pension plan and annual premiums of $942 in connection with a group
life insurance policy for Mr. Allen.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
No options to purchase the Notes are outstanding. As of December 31,
1998, 196,097 options to purchase shares of common stock of Sparkling Spring
were outstanding, and all were held by Holdings. See Item 4 - Control of
Registrant - Security Ownership of Certain Beneficial Owners and Management, and
Item 13 - Interest of Management in Certain Transactions - Share Reorganization.
36
<PAGE>
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
MANAGEMENT AGREEMENT
Pursuant to the Management Agreement dated December 16, 1993, as
amended and restated (the "Management Agreement"), between Sparkling Spring,
CFCC, G. John Krediet and K. Dillon Schickli, CFCC has agreed to perform certain
management services for the Company through December 31, 2002. These services
include managing the operations of the Company and negotiating contracts,
financial agreements and other arrangements. The Management Agreement provides
that CFCC shall not take any action with respect to certain extraordinary
transactions without the approval of the Board of Directors of Sparkling Spring,
including material acquisitions and capital expenditures, issuances of
securities, sale or disposition of a material portion of the business of the
Company, compensation of CFCC, merger of the Company, liquidation and
declaration of dividends.
The Management Agreement provides that CFCC shall receive annual
compensation for its services in the form of a base fee of $750,000 for the
fiscal year ended December 31, 1998. An annual bonus calculated as a percentage
of the base fee is due to CFCC each year in the event that the Company achieves
certain targeted levels of per share earnings before depreciation, amortization
and integration and related expenses. In the event such targets are not met,
lesser amounts may be paid. During the year the Company paid management fees of
$750,000 (1997 - $951,500; 1996 - $600,000) to CFCC. No bonus was earned in
1998.
The Company has also agreed to pay CFCC a fee in respect of its
investment banking advisory services rendered to the Company in connection with
successful acquisitions. During the year the Company paid CFCC $213,500 (1997 -
$518,700; 1996 - $239,600) for investment banking advisory services.
The Company may also pay to Mr. Krediet and Mr. Schickli non-cash
options, incentives or other remuneration, consistent with industry standards.
The Company is also responsible for reasonable disbursements and office expenses
incurred by CFCC.
In the opinion of management of the Company, the terms and
conditions of the Management Agreement are no less favorable to the Company than
those which could be obtained in the open market in an arm's length transaction.
SHAREHOLDER AGREEMENT
Sparkling Spring, Clairvest Group, Inc. ("Clairvest"), a
holder of 30.4% of the outstanding Common Stock of Holdings after giving effect
to the Reorganization, Gaspar Limited ("Gaspar"), a Barbados corporation
wholly-owned by a trust organized for the benefit of G. John Krediet and his
children, Stephen L. Larson, Lucy Stitzer, Stewart E. Allen and certain other
shareholders of Holdings are parties to a shareholder agreement, dated as of
October 27, 1998 (the "Shareholder Agreement"), which provides, among other
things, for preemptive rights in favor of the shareholders under certain
circumstances if Holdings issues additional securities and for certain
registration rights. The Shareholder Agreement also includes restrictions on the
transfer of shares of the capital stock of
37
<PAGE>
Holdings, rights of first refusal, and rights of certain shareholders to require
all other shareholders to join with them in the sale of their shares in the
capital stock of Holdings. The Shareholder Agreement fixes the number of
directors comprising Holdings' and the Company's Boards of Directors at seven,
and provides that Gaspar Limited shall be entitled to nominate four directors,
Clairvest shall be entitled to nominate two directors and Lucy Stitzer and her
affiliates shall be entitled to nominate one director. Certain actions by the
Company require the approval of at least one of the Clairvest nominees (which
approval shall not be unreasonably withheld). These actions include, among other
things, any acquisition by Holdings or the Company in excess of Cdn $5.0
million, the making of certain capital expenditures, the issuance by Holdings or
the Company of debt or equity securities, the disposition by Holdings or the
Company of a material part of its business, any change in management
compensation, the declaration of dividends by Holdings or the Company and the
approval of Holdings' and the Company's annual budgets. In addition, under the
Shareholder Agreement, if no liquid public market (as defined in the Shareholder
Agreement) then exists, Clairvest may, any time after March 31, 2003, offer all
of its shares of capital stock of Holdings for sale to Holdings. If Holdings
does not then repurchase those shares, Clairvest may, under certain
circumstances, require the other parties to the Shareholder Agreement to join
with Clairvest in selling to a third party all of their shares of Common Stock
of Holdings, which could cause a change of control.
SHARE REORGANIZATION
The shareholders of Sparkling Spring approved a reorganization (the
"Reorganization") which was completed in October 1998. Under the Reorganization,
the former shareholders of Sparkling Spring exchanged their shares and options
to acquire shares of Sparkling Spring for shares and options to acquire shares
of Holdings on a one-for-one basis. Coincident with the Reorganization, shares
and options owned by certain former employees were acquired by Holdings
resulting in Holdings owning 100% of the issued and outstanding shares of
Sparkling Spring as at December 31, 1998.
SUBSIDIARY REORGANIZATION
During 1998, the Company initiated the amalgamation of certain Canadian
operating subsidiaries and the merger of certain United States operating
subsidiaries in order to maximize operating efficiencies and streamline
accounting and reporting processes.
Effective January 1, 1999, Canadian Springs Water Company Limited,
3003969 Nova Scotia Limited, Water Jug Enterprises Limited, High Valley Water
Limited, Aqua Care Water Softening & Purification Inc., Withey's Water Softening
& Purification Ltd. and Coastal Mountain Water Corp. (collectively the
"Predecessor Companies") were amalgamated into one company - Canadian Springs
Water Company Limited (the "Amalgamated Company"). The Amalgamated Company
possesses all the property rights and privileges and is subject to all the
liabilities, contracts and debts of the Predecessor Companies.
Also effective January 1, 1999, Cullyspring Water Co., Inc, Crystal
Springs of Seattle, Inc., and Crystal Springs Drinking Water, Inc. were
amalgamated into one company - Cullyspring Water Co., Inc and Crystal Springs
Acquisition, Inc. and Mountain Fresh Acquisition Corp. were amalgamated to form
Crystal Springs Acquisition, Inc. As above, the amalgamated companies possess
38
<PAGE>
all of the property rights and privileges and are subject to all of the
liabilities, contracts and debts of the companies amalgamated.
During 1998 the Company initiated the windup of two inactive
subsidiaries in the United Kingdom - Aquaporte (UK) Limited and Marlborough
Employment Limited. It is anticipated that these companies will be formally
wound up by June 1999.
OTHER TRANSACTIONS
In connection with the purchase of shares of common stock of the
Company, promissory notes of $122,000 and $108,000 were received from Stephen L.
Larson and Stewart E. Allen respectively. The promissory notes bore interest at
a rate of 7% and were scheduled to mature on January 31, 1998 with principal and
interest due on that date. The promissory notes were canceled by the Company and
replaced with promissory notes from Mr. Larson and Mr. Allen of $131,600 and
$116,300 respectively which bear interest at a rate of 6% and mature on January
31, 1999 with principal and interest due on that date. On January 31, 1999 Mr.
Larson repaid his note in full and Mr. Allen paid interest due of $6,978. The
maturity of Mr. Allen's promissory note was extended to January 31, 2000 with
interest accruing at 6%. The common shares purchased by Mr. Allen are pledged as
security for the promissory note.
Effective April 3, 1998, Stephen L. Larson, resigned from his positions
as Vice Chairman of the Board of Directors and Chief Financial Officer of
Sparkling Spring and as an officer and director of each of its subsidiaries to
pursue other business interests. At the time of his resignation, Mr. Larson
surrendered 47,787 options to purchase shares of common stock of Sparkling
Spring to Holdings for cash proceeds $1,177,281 which was the amount determined
by the Holdings Board of Directors to be the difference between the fair market
value of the shares subject to the options and the exercise price of the
options.
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED (INTENTIONALLY OMITTED)
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES
As at December 31, 1998, the Company was in violation of a financial
covenant under the Senior Credit Facility. On May 5, 1999, the Company reached
agreement with its lenders to amend the Senior Credit Facility (the "Amended
Facility"). The Amended Facility will provide the Company with increased
operating flexibility and restores the Company's compliance with all financial
covenants. See Item 9 - Management's Discussion and Analysis of Financial
Condition and Results of Operations - Senior Credit Facility.
39
<PAGE>
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED SECURITIES
AND USE OF PROCEEDS
There have been no modifications to the Exchange Notes or in the
Guarantees securing the Exchange Notes. Certain guarantors of the Exchange Notes
were merged or amalgamated with certain other guarantors of the Exchange Notes
during 1998. See Item 13. - Interest of Management in Certain Transactions -
Subsidiary Reorganization.
Sparkling Spring did not receive any cash proceeds from issuing the
Exchange Notes. In consideration for issuing the Exchange Notes as contemplated
in its Prospectus, Sparkling Spring received in exchange, the Private Notes in
like principal amounts, which were retired.
USE OF PROCEEDS
The effective date of the Registration Statement in which the
Prospectus was included was April 1, 1998 and the SEC File number assigned to
that Registration Statements was 333-43061. All of the Exchange notes covered by
the Registration Statement have been issued and the offering thereunder has been
terminated.
Sparkling Spring did not engage an underwriter or other third party in
connection with the issuance and distribution of the Exchange Notes and as a
result did not incur directly any underwriting discounts or commissions, finders
fees or other similar expenses. However, Exchange Notes received by
broker-dealers for their own account pursuant to the Exchange Offer and sold by
such broker-dealers to purchasers or to or through other broker-dealers who
received compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such Exchange Notes were or could
have been deemed to be "underwriters" within the meaning of the Securities Act
and any profit on any such resale of Exchange Notes and any commissions or
concessions received by any such person were or could have been deemed to be
underwriting compensation under the Securities Act.
In connection with the issuance of the Exchange Notes, Sparkling Spring
incurred accounting, legal, printing and related expenses, which taken together
were not material. No payments were made to any directors or officers of
Sparkling Spring or their associates or to any persons owning 10% or more of any
class of equity securities of Sparkling Spring or to any other affiliates of
Sparkling Spring. None of the expenses represents material changes in the
information set forth in the Prospectus.
PART IV
ITEM 17. FINANCIAL STATEMENTS (INTENTIONALLY OMITTED)
ITEM 18. FINANCIAL STATEMENTS
The financial statements required by Item 18 are listed in the Index to
Consolidated Financial Statements appearing on Page F-1.
40
<PAGE>
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
a) Financial Statements
See Index to Financial Statements on page F-1 hereof.
b) Exhibits
None
41
<PAGE>
SPARKLING SPRING WATER GROUP LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheets as at December 31, 1998 and 1997 F-3
Consolidated Statements of Operations for the years ended December
31, 1998, 1997 and 1996 F-4
Consolidated Statements of Shareholders Equity (Deficit) for the
years ended December 31, 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the years ended December
31, 1998, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE>
AUDITORS' REPORT
To the Shareholder of
Sparkling Spring Water Group Limited
We have audited the consolidated balance sheets of Sparkling Spring
Water Group Limited as at December 31, 1998 and 1997 and the consolidated
statements of operations, shareholder's equity (deficit) and cash flows for each
of the years in the three year period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly,
in all material respects, the financial position of the Company as at December
31, 1998 and 1997 and the results of its operations and its cash flows for each
of the years in the three year period ended December 31, 1998 in accordance with
accounting principles generally accepted in the United States.
Halifax, Canada
March 12, 1999 Chartered Accountants
F-2
<PAGE>
SPARKLING SPRING WATER GROUP LIMITED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(in U.S. dollars) AS AT DECEMBER 31
1997 1998
------------- -------------
<S> <C> <C>
ASSETS [NOTES 12 AND 13]
Current
Cash and cash equivalents $ 27,507,257 $ 9,728,373
Accounts receivable (net of allowance
for doubtful accounts of $1,915,872;
1997-$387,247[NOTE 5]) 7,843,956 10,983,492
Inventories [NOTE 6] 1,751,562 1,340,350
Prepaid expenses 1,536,755 1,320,054
------------- -------------
Total current assets 38,639,530 23,372,269
Deferred taxes [NOTE 18] 1,379,736 854,240
Fixed assets [NOTE 7] 23,307,315 31,136,458
Goodwill and deferred charges [NOTE 8] 43,248,972 51,162,360
Other assets [NOTES 9 AND 13] 423,359 1,108,000
------------- -------------
Total assets $ 106,998,912 $ 107,633,327
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Current
Accounts payable and accrued liabilities $ 6,721,040 $ 9,107,830
Income tax payable 1,042,567 130,000
Customer deposits 3,396,466 5,032,841
Debt due within one year [NOTE 10] 1,189,868 1,399,116
------------- -------------
Total current liabilities 12,349,941 15,669,787
------------- -------------
Obligations under capital leases and
other debt [NOTE 11] 3,608,821 3,252,032
Senior bank debt [NOTE 12] -- 7,664,961
Subordinated notes payable [NOTE 13] 100,000,000 100,000,000
Other liabilities [NOTE 13] -- 835,998
------------- -------------
Total long-term liabilities 103,608,821 111,752,991
------------- -------------
Shareholder's equity (deficit) [NOTES 2 AND 14]
Capital Stock
Authorized
11,383,328 Class D Voting Common
Shares, without nominal or par value
9,993,500 Class E Non-Voting
Common Shares, without nominal or par value
10,000,000 Special Preferred
Shares, par value Cdn $1.00, issuable in series
Issued and outstanding:
Class D Common Shares - 1,383,328
(1997-1,383,328; 1996-1,720,746) 6,269,204 5,769,132
Class E Common Shares - 5,860 (Nil, 1996 and 1997) -- 164,080
Less: Subscriptions receivable (230,003) (230,003)
------------- -------------
6,039,201 5,703,209
Cumulative translation adjustment (770,729) (3,180,597)
Deficit (14,228,322) (22,312,063)
------------- -------------
Total shareholder's equity (deficit) (8,959,850) (19,789,451)
------------- -------------
Total liabilities and
shareholder's equity (deficit) $ 106,998,912 $ 107,633,327
------------- -------------
------------- -------------
</TABLE>
Commitments [NOTES 11 AND 17]
SEE ACCOMPANYING NOTES
F-3
<PAGE>
SPARKLING SPRING WATER GROUP LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(in U.S. dollars) YEAR ENDED DECEMBER 31
--------------------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Revenue:
Water $ 16,809,749 $ 25,506,684 $ 36,196,369
Rental 7,347,386 10,346,344 13,714,655
Other 3,169,214 6,220,856 7,135,628
------------ ------------ ------------
Total revenue 27,326,349 42,073,884 57,046,652
------------ ------------ ------------
Cost of sales:
Water 3,400,298 5,293,987 6,548,116
Other 1,275,321 2,698,240 3,472,385
------------ ------------ ------------
Total cost of sales 4,675,619 7,992,227 10,020,501
------------ ------------ ------------
Gross profit 22,650,730 34,081,657 47,026,151
Expenses:
Selling, delivery and administrative
[NOTES 19 AND 20] 15,756,452 22,869,198 34,677,260
Integration and related expenses [NOTE 21] -- -- 1,828,636
Depreciation and amortization 3,841,614 5,691,609 8,879,899
------------ ------------ ------------
Operating profit 3,052,664 5,520,850 1,640,356
Interest and related expenses [NOTE 22] 2,481,005 5,017,631 9,713,842
Redemption of common stock options [NOTE 14] -- 4,588,502 --
------------ ------------ ------------
Income (loss) before the following 571,659 (4,085,283) (8,073,486)
Provision for income taxes [NOTE 18] 398,325 439,377 --
------------ ------------ ------------
Net income (loss) before non-controlling
interest and extraordinary item 173,334 (4,524,660) (8,073,486)
Non-controlling interest 6,894 -- --
------------ ------------ ------------
Net income (loss) before extraordinary item 166,440 (4,524,660) (8,073,486)
Extraordinary item [NOTE 15] (473,436) (833,706) --
------------ ------------ ------------
Net loss (306,996) (5,358,366) (8,073,486)
Other comprehensive loss:
Foreign currency translation adjustment (448,799) (407,794) (2,409,868)
------------ ------------ ------------
Comprehensive loss $ (755,795) $ (5,766,160) $(10,483,354)
------------ ------------ ------------
------------ ------------ ------------
Basic earnings (loss) per share
before extraordinary item $ 0.11 $ (2.69) $ (5.80)
------------ ------------ ------------
------------ ------------ ------------
Diluted earnings (loss) per share
before extraordinary item $ 0.10 $ (2.69) $ (5.80)
------------ ------------ ------------
------------ ------------ ------------
Basic and diluted loss per share $ (0.21) $ (3.18) $ (5.80)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES
F-4
<PAGE>
SPARKLING SPRING WATER GROUP LIMITED
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
(in U.S. dollars) FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
-------------------------------------------------------------------------------------------
COMMON SHARE
COMMON STOCK PURCHASE WARRANTS CUMULATIVE
---------------------------- ---------------------------- TRANSLATION
SHARES AMOUNT WARRANTS AMOUNT ADJUSTMENT DEFICIT
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1995 1,216,308 $ 1,607,218 165,767 $ 1,136,730 $ 85,864 $ (622,947)
as restated [note 3]
Comprehensive loss (448,799) (306,996)
Redemption of Class D common
share purchase warrants
[NOTE 14] (345,878) (165,767) (1,136,730)
Class D shares issued for cash 504,438 7,077,716
Subscriptions receivable
[NOTE 19] (230,003)
Foreign currency translation (43,886)
------------ ------------ ------------ ------------ ------------ ------------
Balance December 31, 1996 1,720,746 8,065,167 -- -- (362,935) (929,943)
Comprehensive loss (407,794) (5,358,366)
Redemption of Class D
common shares [NOTE 14] (344,918) (1,717,691) (7,940,013)
Class D shares issued for cash 7,500 32,445
Foreign currency translation (340,720)
------------ ------------ ------------ ------------ ------------ ------------
Balance December 31, 1997 1,383,328 6,039,201 -- -- (770,729) (14,228,322)
Comprehensive loss (2,409,868) (8,073,486)
Class E shares issued for cash 12,360 304,080
Redemption of Class E
shares [NOTE 14] (6,500) (140,000) (10,255)
Foreign currency translation (500,072)
------------ ------------ ------------ ------------ ------------ ------------
Balance December 31, 1998 1,389,188 $ 5,703,209 -- $ -- $ (3,180,597) $(22,312,063)
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES
F-5
<PAGE>
SPARKLING SPRING WATER GROUP LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(in U.S. dollars) YEAR ENDED DECEMBER 31,
-----------------------------------------------
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (306,996) $ (5,358,366) $ (8,073,486)
Items not requiring cash
Depreciation and amortization 3,841,614 5,691,609 8,879,899
Deferred taxes (293,390) (843,199) 525,496
Non-controlling interest 6,894 -- --
Amortization of deferred financing costs -- 54,789 503,142
Cross currency swap [NOTE 13] -- (114,556) 891,198
------------- ------------- -------------
3,248,122 (569,723) 2,726,249
Net change in non-cash working capital
balances [NOTE 16] (32,178) 74,224 (65,145)
------------- ------------- -------------
Cash provided by (used in)
operating activities 3,215,944 (495,499) 2,661,104
------------- ------------- -------------
INVESTING ACTIVITIES
Purchase of fixed assets (7,272,814) (6,769,301) (8,643,126)
Sale of fixed assets, net 536,627 730,898 505,212
Acquisitions [NOTE 4] (17,432,167) (27,860,306) (16,524,150)
------------- ------------- -------------
Cash used in investing activities (24,168,354) (33,898,709) (24,662,064)
------------- ------------- -------------
FINANCING ACTIVITIES
Increase in long-term debt 20,893,151 30,593,657 8,550,881
Repayment of long-term debt (1,239,400) (57,053,075) (1,617,917)
Issuance of common shares 6,847,713 32,445 304,080
Redemption of common shares -- (9,657,704) (150,255)
Issuance of subordinated notes payable -- 100,000,000 --
Redemption of common share warrants (1,482,608) -- --
Redemption of subordinated notes payable (2,159,777) -- --
Increase in deferred charges (190,462) (3,909,827) (800,842)
Increase in due from parent company -- -- (1,108,000)
------------- ------------- -------------
Cash provided by financing activities 22,668,617 60,005,496 5,177,947
------------- ------------- -------------
Effect of foreign currency translation
on cash (345,770) (334,766) (955,871)
------------- ------------- -------------
Increase (decrease) in cash and
cash equivalents during the year 1,370,437 25,276,522 (17,778,884)
Cash and cash equivalents, beginning
of year 860,298 2,230,735 27,507,257
------------- ------------- -------------
Cash and cash equivalents, end of year $ 2,230,735 $ 27,507,257 $ 9,728,373
------------- ------------- -------------
------------- ------------- -------------
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid $ 2,553,882 $ 3,597,458 $ 12,259,078
------------- ------------- -------------
------------- ------------- -------------
Income taxes paid $ 32,046 $ 227,191 $ 322,756
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES
F-6
<PAGE>
SPARKLING SPRING WATER GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. DESCRIPTION OF BUSINESS
Sparkling Spring Water Group Limited ("Sparkling Spring") is
incorporated under the laws of the Province of Nova Scotia, Canada and provides
containered water to home and office markets in British Columbia and the
Maritime provinces of Canada, England, Scotland and the Pacific Northwestern
United States.
2. SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared on a historic cost basis
by management in accordance with accounting principles generally accepted in the
United States ("US GAAP"), the more significant of which are as follows:
BASIS OF PRESENTATION
On November 19, 1997 the shareholders of Sparkling Spring and Sparkling
Spring Water Limited ("SSWL") approved a reorganization whereby the former
shareholders of SSWL exchanged their shares of SSWL for shares of Sparkling
Spring. As a part of this reorganization, certain shareholders of SSWL,
including certain principal shareholders, directors and executive officers of
Sparkling Spring, reduced, at their discretion, their interest in Sparkling
Spring by exchanging their shares of common stock and options to acquire shares
of common stock of SSWL for a combination of shares of common stock and options
to acquire shares of common stock of Sparkling Spring plus cash. The exchange
was completed as a method of providing cash to the previous shareholders of
SSWL. The shareholders of SSWL exchanged, on an aggregate basis, 1,728,246
shares of common stock and 442,993 options to acquire shares of common stock of
SSWL for 1,383,328 shares of common stock and 252,197 options to acquire shares
of common stock of Sparkling Spring plus $14,169,784 in cash. Those shareholders
reducing their interest in Sparkling Spring received cash of $28 per share for
each share by which their holdings of shares of common stock were reduced. Those
shareholders surrendering options to acquire shares of common stock received
$28, less the option's exercise price, for each option surrendered. The amount
of $28 per share was the Company's estimate of the fair value of its shares at
the time of the reorganization as negotiated by all shareholders. Subsequent to
the reorganization, Sparkling Spring owned 100% of the issued and outstanding
shares of SSWL.
Control of the Company did not change with the reorganization.
Accordingly, the reorganization was accounted for using the reorganization under
common control method of accounting whereby the consolidated financial
statements reflect the consolidated historical carrying value of the assets,
liabilities and shareholder's equity, and the consolidated historical operating
results of SSWL for each of the periods presented. Sparkling Spring was
incorporated on October 22, 1997 and, accordingly, had no assets, liabilities or
shareholders' equity or historical operating results prior to this date.
BASIS OF CONSOLIDATION
These consolidated financial statements include the accounts of
Sparkling Spring and its wholly-owned subsidiaries, principally SSWL, Sparkling
Spring Water U.K. Limited ("SSWUK"), Canadian Springs Water Company Limited
("Canadian Springs"), Spring Water Inc. and the subsidiaries referred to in note
4 (collectively referred to as the "Company").
F-7
<PAGE>
FOREIGN CURRENCY TRANSLATION
The Company uses the U.S. dollar as its reporting currency. Balance
sheet accounts of all non U.S. entities are translated into U.S. dollars at the
exchange rates in effect at the balance sheet date. Income statement accounts of
all non U.S. entities are translated into U.S. dollars at average exchange rates
prevailing during the year. Gains and losses on translation are included in a
separate component of shareholder's equity titled "cumulative translation
adjustment".
Balance sheet accounts denominated in foreign currencies and translated
at year-end exchange rates have been translated to U.S. dollars at the following
rates:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Canadian Dollars $0.730 $0.700 $0.650
U.K. Pounds Sterling $1.705 $1.642 $1.663
</TABLE>
CASH EQUIVALENTS
The Company considers all highly-liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
INVENTORIES
Inventories are valued at the lower of cost, determined on a first-in,
first-out basis, and net realizable value.
FIXED ASSETS
Fixed assets are recorded at cost less related government grants and
investment tax credits. Depreciation is provided on the declining balance basis
at the following annual rates:
<TABLE>
<S> <C>
Well and buildings 5%
Roadways 8%
Machinery, equipment and coolers 10-20%
Motor vehicles 30%
Returnable bottles 20%
</TABLE>
Leasehold improvements are amortized on a straight-line basis over the
term of the related lease.
ACQUISITIONS, GOODWILL, NON-COMPETE AGREEMENTS
On the acquisition of businesses, the excess of the purchase price over
the fair value of the underlying net identifiable assets acquired is recognized
as goodwill. Goodwill is amortized on a straight-line basis over 40 years. The
method used to assess if there has been a permanent impairment in the value of
goodwill is based on projected and discounted cash flows. Amounts payable
pursuant to non-compete agreements are amortized on a straight-line basis over
the life of the agreements.
DEFERRED FINANCING COSTS
Deferred financing costs represent professional fees and other related
costs incurred in relation to long-term financing agreements. These costs are
amortized on a straight-line basis over the term of the related financing and
charged to interest expense.
COOLER RENTAL REVENUE
The Company records income from water cooler rentals, less a reserve
for estimated future refunds, when billed.
F-8
<PAGE>
ADVERTISING
Advertising expenditures are expensed as incurred.
FINANCIAL INSTRUMENTS
The Company's primary financial instruments consist of cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities,
income taxes payable, customer deposits and long-term debt. The difference
between the carrying values and the fair market values of the Company's primary
financial instruments are not material due to the short-term maturities and, or
the credit terms of those instruments, except as disclosed in note 13.
The Company has at any one time a significant number of commitments to
extend credit. The accounts receivable are owed from a large number of customers
on normal credit terms and therefore there is minimal customer concentration.
CROSS CURRENCY SWAPS
The Company enters into cross currency swaps to hedge net assets and
expected future cash flows of operations denominated in currencies other than
the US dollar. To the extent cross currency swaps hedge net assets in currencies
other than the US dollar, unrealized gains or losses arising from changes in
forward foreign exchange rates are recorded as an adjustment to the cumulative
translation adjustment account with a corresponding entry to other assets or
liabilities, as appropriate.
To the extent cross currency swaps are entered into to hedge future
expected cash flows of subsidiaries operating outside of the US, unrealized
gains or losses resulting from changes in forward foreign exchange rates are
recognized in income as a decrease or increase in interest expense and offset
with a corresponding entry to assets or liabilities, as appropriate. The initial
premium or discount associated with cross currency swaps of this nature is
recorded as an other asset or liability, as appropriate, and amortized to income
over the life of the swap. To the extent that cross currency swaps are
terminated prior to maturity, gains or losses realized upon termination are
recognized in income.
EARNINGS PER SHARE
Basic and diluted earnings per share are calculated using the weighted
average number of common shares outstanding during the period adjusted for the
effect of the exercise of all outstanding options and warrants in accordance
with SFAS 128 applied retroactively. The weighted average shares calculated
under this method for basic and diluted earnings per share are 1,392,688 (1997 -
1,685,131, 1996 - 1,468,527) and 1,392,688 (1997 - 1,685,131, 1996 - 1,758,022),
respectively.
LEASES
Leases are classified as capital or operating leases. Capital leaseas
are recorded as assets when the substantial benefits and risks of ownership have
been transferred to the Company. Obligations recorded under capital leases are
reduced by lease payments, net of imputed interest.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from these estimates.
F-9
<PAGE>
INCOME TAXES
The Company records income taxes in accordance with SFAS 109,
"Accounting for Income Taxes". Under SFAS 109, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse.
The Company and its subsidiaries file separate federal, state, and
foreign income tax returns and, accordingly, provide for such income taxes on a
separate company basis.
NEW ACCOUNTING STANDARDS
During the current fiscal year, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income", issued
in June 1997. SFAS 130 requires the reporting and display of comprehensive
income, which is composed of net income and other comprehensive income or loss
items, in a full set of general purpose financial statements. Other
comprehensive income or loss items are revenues, expenses, gains and losses that
under generally accepted accounting principles are excluded from net income and
reflected as a component of equity, such as currency translation adjustments.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The new statement requires all derivatives
to be recorded on the balance sheet at fair value and establishes new accounting
rules for hedging instruments. The statement is effective for years beginning
after June 15, 1999. The impact of this statement on the consolidated financial
statements has not yet been determined.
3. CHANGES IN ACCOUNTING POLICIES
As a result of increased business activity in the United States, the
Company retroactively changed its reporting currency from Canadian dollars to
U.S. dollars and its accounting policies from Canadian generally accepted
accounting principles to United States generally accepted accounting principles,
effective January 1, 1997.
In order to comply with accounting principles generally accepted in the
United States the following accounting policies were changed:
EXPORT DEVELOPMENT COSTS
Costs to develop export markets were previously deferred and amortized
over five years. The Company has changed its accounting policy to expense these
items in the period in which the expenditures are incurred.
FOREIGN CURRENCY
The Company previously deferred and amortized unrealized foreign
exchange gains and losses on long-term monetary items over the remaining term of
the item. These gains and losses are now charged to income during the period of
the unrealized gain or loss.
INCOME TAXES
The Company now follows SFAS 109 for accounting for income taxes which
requires an assets and liabilities approach, subject to a valuation allowance
for deferred tax assets. The Company previously followed the deferral method.
F-10
<PAGE>
The effect of the changes to these accounting policies had the
following impact on net assets, net income after extraordinary items and
cumulative translation adjustment:
<TABLE>
<CAPTION>
1996
-----------
<S> <C>
Goodwill and deferred charges $ (217,280)
Deferred taxes, asset 147,530
-----------
NET ASSETS DECREASE $ (69,750)
-----------
-----------
Selling, delivery and administrative expenses $ (406,361)
Depreciation and amortization 61,186
Provision for income taxes (529,301)
Extraordinary item (473,436)
Unusual items 1,111,049
-----------
NET INCOME DECREASE $ (236,863)
-----------
-----------
CUMULATIVE TRANSLATION ADJUSTMENT DECREASE $ 5,163
-----------
-----------
</TABLE>
Unusual items include previously deferred financing costs of $907,674
which were expensed as a result of repayment of the then existing financing
facility and have been reclassified as extraordinary items (net of applicable
income taxes) as a result of the change in accounting policy from Canadian
generally accepted accounting principles to United States generally accepted
accounting principles. Unusual items also includes $203,375 related to an
employee buyout package.
The retroactive application of the changes in accounting policies
described above also had the effect of reducing the deficit at January 1, 1996
from $784,897 to $622,947.
4. ACQUISITIONS
The acquisitions described below have been accounted for under the purchase
method of accounting and accordingly the results of operations since the dates
of acquisition have been included in the consolidated statement of operations.
1998
During 1998 the Company completed the following acquisitions:
<TABLE>
<CAPTION>
Acquisition Interest Acquisition
Company Location Date Acquired Cost
------- -------- ---- -------- ----
(000'S)
<S> <C> <C> <C> <C>
Coastal Mountain Water Corp................. Vancouver,
British Columbia February, 1998 100% $ 4,269
Krystal Fountain Water Co. Limited.......... London, England May, 1998 100% 7,366
Springfield Water Division of Brio Vancouver,
Industries Inc.............................. British Columbia August, 1998 100% 3,850
-------
15,485
Final adjustment for acquisitions completed in
1997 1,039
-------
$16,524
-------
-------
The following summarizes the transactions (in thousands):
Net working capital $ (628)
Fixed assets 7,383
Assumption of debt obligations (698)
Goodwill 10,467
-------
Total cash consideration $16,524
-------
-------
</TABLE>
F-11
<PAGE>
1997
During 1997 the Company completed the following acquisitions:
<TABLE>
<CAPTION>
Acquisition Interest Acquisition
Company Location Date Acquired Cost
------- -------- ---- -------- ----
(000'S)
<S> <C> <C> <C> <C>
D&D and Company, Inc. ............................ Portland, Oregon January, 1997 100% $ 3,972
High Valley Water Limited ........................ Kelowna,
British Columbia January, 1997 100% 2,329
Withey's Water Softening and ..................... Prince George,
Purification Limited ........................... British Columbia January, 1997 100% 1,568
Marlborough Employment Limited ................... Glasgow, Scotland February, 1997 100% 6,878
Soja Enterprises, Inc. ........................... Portland, Oregon June, 1997 100% 252
Crystal Spring Bottled Water Co., Inc. ........... Portland, Oregon June, 1997 100% 4,403
Cullyspring Water Co., Inc. ...................... Seattle, Washington October, 1997 100% 7,039
Crystal Springs Drinking Water Inc. .............. Seattle, Washington December, 1997 100% 1,419
--------
$ 27,860
--------
--------
The following summarizes the transactions (in thousands):
Net working capital $ 196
Fixed assets 6,919
Assumption of debt obligations (1,160)
Goodwill 21,905
--------
Total cash consideration $ 27,860
--------
--------
</TABLE>
1996
During 1996 the Company completed the following acquisitions:
<TABLE>
<CAPTION>
Acquisition Interest Acquisition
Company Location Date Acquired Cost
------- -------- ---- -------- ----
(000'S)
<S> <C> <C> <C> <C>
Canadian Springs Water Company Limited .......... Vancouver,
British Columbia January, 1996 100% $15,614
Water Jug Enterprises Limited ................... Kamloops,
British Columbia May, 1996 100% 1,101
-------
$16,715
-------
-------
The following summarizes the transactions (in thousands):
Net working capital $ 262
Fixed assets 3,337
Assumption of debt obligations (849)
Goodwill 13,965
-------
Total cash consideration $16,715
-------
-------
</TABLE>
During 1996, the Company also acquired the non-controlling interest in
SSWUK from the minority shareholder for cash consideration of $717,135,
including goodwill of $391,024.
F-12
<PAGE>
The following unaudited pro forma information presents a summary of
consolidated results of operations as if the acquisitions of Coastal Mountain
Water Corp., Krystal Fountain Water Co. Limited and the Springfield Water
Division of Brio Industries Inc. had occurred at January 1, 1998 and January 1,
1997 and as if the acquisitions of D&D and Company, Inc., High Valley Water
Limited, Withey's Water Softening and Purification Limited, Marlborough
Employment Limited, Soja Enterprises, Inc., Crystal Spring Bottled Water Co.,
Inc., Cullyspring Water Co., Inc. and Crystal Springs Drinking Water Inc. had
occurred at January 1, 1997. Balances of non U.S. entities are translated into
U.S. dollars at the average exchange rates prevailing in each of the respective
years.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1997 1998
---- ----
<S> <C> <C>
Total revenue ..................... $ 56,604,884 $ 59,962,975
Net loss .......................... (8,820,366) (7,957,459)
Extraordinary item ................ (833,706) --
Basic loss per share .............. (6.33) (5.72)
</TABLE>
5. ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<S> <C> <C>
Balance January 1, 1996 ........... $ 471,824
Additions ......................... 116,444
Write-offs ........................ (378,210)
------------
Balance December 31, 1996 ......... 210,058
Additions ......................... 267,684
Write-offs ........................ (90,495)
------------
Balance December 31, 1997 ......... 387,247
Additions ......................... 1,777,896
Write-offs ........................ (249,271)
------------
Balance December 31, 1998 ......... $ 1,915,872
------------
------------
</TABLE>
6. INVENTORIES
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Packaging materials $ 973,583 $ 598,985
Goods for resale .. 502,608 482,733
Cooler parts ...... 151,208 142,695
Other ............. 124,163 115,937
---------- ----------
$1,751,562 $1,340,350
---------- ----------
---------- ----------
</TABLE>
F-13
<PAGE>
7. FIXED ASSETS
<TABLE>
<CAPTION>
1997 1998
----------------------------- ------------------------------
ACCUMULATED ACCUMULATED
COST DEPRECIATION COST DEPRECIATION
---- ------------ ---- ------------
<S> <C> <C> <C> <C>
Land and well $ 312,120 $ 4,292 $ 421,453 $ 12,842
Buildings and roadways 792,444 198,274 754,090 208,101
Coolers 15,967,041 7,813,592 25,629,726 11,332,885
Machinery and equipment 10,947,082 4,548,844 10,725,813 5,529,242
Equipment and computer
hardware under capital lease 1,447,572 830,435 2,232,199 931,984
Motor vehicles 1,658,382 1,057,127 2,452,743 1,345,084
Motor vehicles under capital lease 4,633,516 1,887,790 6,469,945 3,465,625
Leasehold improvements 1,285,553 458,309 1,839,814 825,001
Returnable bottles 4,636,423 1,574,155 6,477,209 2,215,770
---------- ---------- ---------- ----------
41,680,133 $18,372,818 57,002,992 $25,866,534
Accumulated depreciation 18,372,818 25,866,534
---------- ----------
Net book value $23,307,315 $31,136,458
---------- ----------
---------- ----------
</TABLE>
8. GOODWILL AND DEFERRED CHARGES
<TABLE>
<CAPTION>
1997 1998
------------------------------ -------------------------------
ACCUMULATED ACCUMULATED
COST AMORTIZATION COST AMORTIZATION
---- ------------ ---- ------------
<S> <C> <C> <C> <C>
Goodwill $38,602,367 $1,458,392 $47,915,295 $2,535,719
Non-Compete Agreements 2,125,000 29,057 2,125,000 671,250
Deferred financing costs 3,911,380 54,789 4,628,760 521,762
Other 161,273 8,810 276,224 54,188
---------- --------- ---------- ---------
44,800,020 1,551,048 54,945,279 3,782,919
Accumulated amortization 1,551,048 3,782,919
---------- ----------
Net book value $43,248,972 $51,162,360
---------- ----------
---------- ----------
</TABLE>
9. OTHER ASSETS
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Unsecured loan to parent company maturing September 2003, bearing interest at
13%, interest payable annually, principal due
at maturity [NOTE 19] $ -- $1,108,000
Unrealized gain on cross currency swap
[NOTE 13] 423,359 --
---------- ----------
$ 423,359 $1,108,000
---------- ----------
---------- ----------
</TABLE>
10. DEBT DUE WITHIN ONE YEAR
<TABLE>
<CAPTION>
T
1997 1998
---- ----
<S> <C> <C>
Current portion of obligations
under capital leases [NOTE 11] $ 967,467 $1,157,305
Current portion of other debt [NOTE 11] 222,401 241,811
---------- ----------
$1,189,868 $1,399,116
---------- ----------
---------- ----------
</TABLE>
F-14
<PAGE>
11. OBLIGATIONS UNDER CAPITAL LEASES AND OTHER DEBT
The obligations under capital leases are recorded net of the related
imputed interest calculated at an average rate of 10%. Total minimum annual
lease commitments are as follows:
<TABLE>
<S> <C>
1999 $1,626,377
2000 1,016,708
2001 746,896
2002 593,340
2003 411,052
Thereafter in aggregate 268,473
----------
4,662,846
Less imputed interest 1,131,081
----------
3,531,765
Less current portion 1,157,305
----------
$2,374,460
----------
----------
</TABLE>
Other debt consists of the following:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Term loans bearing interest at 11 3/8% repayable
in monthly installments of principal and interest of
$2,893 maturing in varying amounts to 1999 96,018 77,488
Term loan bearing interest at 9%, repayable in
annual installments of principal and interest of
$321,000, maturing 2002 1,250,000 1,041,895
---------- ----------
1,346,018 1,119,383
Less portion due within one year 222,401 241,811
---------- ----------
$1,123,617 $ 877,572
---------- ----------
---------- ----------
</TABLE>
The following repayment schedule represents the required annual
principal repayments of other debt.
<TABLE>
<S> <C>
1999 $241,811
2000 263,994
2001 284,207
2002 305,775
2003 9,942
Thereafter in aggregate 13,654
----------
$1,119,383
----------
----------
</TABLE>
12. SENIOR BANK DEBT
The Company has available a $40 million senior credit multi currency
facility for purposes of financing future capital investments, working capital,
business acquisitions and general corporate purposes. The loan facility is
subject to annual renewal by the bank and has a maturity date of December 2005
which may be extended by the bank at its discretion. The loan is an extendible
revolver with principal payments to maturity to be determined by the bank upon
conversion of the facility to a term loan based on outstanding balances at the
time of conversion. The Company has pledged as collateral a first priority
security interest granted in favor of the lenders over substantially all of the
assets of the Company. The Company's obligations under the credit facility rank
senior to the payment of the Company's subordinated notes payable. The average
effective rate on the Company's Senior Bank Debt for 1998 was approximately
7.75%.
Amounts outstanding at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
FACILITY INTEREST RATE
-------- -------------
<S> <C> <C>
Canadian $ Canadian Prime + 1% $1,062,961
Canadian $ Canadian BA's + 2% 2,276,400
US $ US Prime + 1% 1,000,000
Pound Sterling Libor + 2% 3,325,600
----------
$7,664,961
----------
----------
</TABLE>
F-15
<PAGE>
As at December 31, 1998, the Company was in violation of a loan
covenant under the credit facility. Subsequent to year end the bank agreed to
amend the covenant such that the Company is not in violation and has waived its
right to call the debt as a result of this violation.
13. SUBORDINATED NOTES PAYABLE
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Senior subordinated notes payable maturing November 2007, bearing interest at
11.5%, interest payable semi-annually, principal
due at maturity $100,000,000 $100,000,000
------------ ------------
------------ ------------
</TABLE>
On November 19, 1997, the Company completed a $100 million private
placement of 11 1/2% Senior Subordinated Notes due 2007. The Company used a
portion of the net proceeds of this offering to repay $54.7 million of its
previously outstanding credit facility and to pay $14.2 million to certain
shareholders (see note 2).
The approximate fair market value of the Subordinated Notes Payable was
$90 million at December 31, 1998 based on quoted market prices.
Each of the Company's subsidiary guarantors has fully and
unconditionally guaranteed, on a senior subordinated basis, jointly and
severally, to each holder of the notes and the trustee under the indenture
pursuant to which the notes were issued, the full and prompt performance of the
Company's obligations under the indenture and the notes, including the payment
of principal and interest on the notes. The guarantees are subordinated to
guarantor senior indebtedness (as defined in the indenture). As of December 31,
1998, the subsidiary guarantors had approximately $12.3 million of guarantor
senior indebtedness outstanding.
Separate audited financial statements of the guarantor subsidiaries
have not been provided as Sparkling Spring has no subsidiaries which are
nonguarantor subsidiaries and does not believe that this information would be
meaningful to investors. Sparkling Spring is a holding company and has no
operations or assets independent of its investment in its subsidiaries. All of
Sparkling Spring's subsidiaries are wholly-owned. There are no restrictions as
to the payment of dividends or loans by Sparkling Spring's subsidiaries to
Sparkling Spring or as to the granting of any upstream guarantees not
constituting a fraudulent conveyance or fraudulent transfer under applicable
law.
In 1997, the Company entered into two cross currency interest rate
swaps to more closely match the interest requirements of the above notes with
the cash flows earned by the Company's Canadian and UK subsidiaries. Under the
terms of the first swap which was to mature November 15, 2002, the Company was
to receive 11.5%, payable semiannually, on a $28 million US dollar notional
amount in return for paying 10.83%, payable semiannually, on a $39.872 million
Canadian notional amount. The terms of the agreement also called for the Company
to receive $28 million US in exchange for $39.872 million Canadian on November
15, 2002. In October 1998, the Company closed out this swap , realizing cash
proceeds of $3.4 million which has been recorded as a reduction in interest
expense.
Under the terms of the second swap, maturing November 15, 2003, the
Company will receive 11.5%, payable semiannually, on a $30 million US dollar
notional amount in return for paying 12.61%, payable semiannually, on a 17.857
million Great Britain pounds notional amount. The terms of the agreement also
call for the Company to receive $30 million US in exchange for 17.857 million
Great Britain pounds on November 15, 2003.
F-16
<PAGE>
Both of the above noted swaps were transacted with a US bank with a
counter party credit rating of "A" (Standard & Poors). At December 31, 1998 the
aggregate fair value of the outstanding swap was $835,998 US dollars in favor of
the US bank (1997 - $423,359 US dollars in favor of the Company) of which
$891,198 (1997 -$114,556) has been recorded as an increase (decrease) in
interest expense with the remaining balance of $59,356 (1997 - $308,803)
recorded as an increase (decrease) in the cumulative translation adjustment.
14. CAPITAL STOCK
During 1994, the Company issued 165,767 Class D common share purchase
warrants to the holders of subordinated notes payable. The warrants were
exercisable at $0.01 per share upon repayment of the notes or in the event of
default of interest payments required on these notes. The warrants were assigned
a value of $1,136,730 representing the estimated fair value of the warrants at
the date of issuance. During 1996 the subordinated notes were redeemed together
with the related common share purchase warrants for cash consideration of $4.7
million representing a $1,253,552 excess over the book value of the debt and
warrants. The present value of interest payments foregone by the noteholders of
$907,674 was expensed in 1996 as described in note 15. The remaining excess of
$345,878 was allocated to the warrants and has been reflected as a reduction of
paid in capital.
As described in note 2, the Company completed a reorganization in 1997
whereby the shareholders of SSWL exchanged, on an aggregate basis, 1,728,246
shares of common stock and 442,993 options to acquire shares of common stock of
SSWL for 1,383,328 shares of Class D common stock and 252,197 options to acquire
shares of Class E common stock of Sparkling Spring plus $14,169,784 in cash. A
total of $4,512,080 was expensed in the 1997 financial statements representing
cash used to repurchase options to acquire shares of common stock. The remaining
cash paid to shareholders of $9,657,704 was charged to share capital and
retained earnings based on the number of shares of SSWL redeemed using the
average carrying value per share. A further $76,422 was expensed in the 1997
financial statements related to the repurchase of stock options from a former
employee.
During the year, the Company redeemed 6,500 Class E common shares with
a book value of $140,000 for cash consideration of $150,255. The excess of
$10,255 over book value has been charged to the deficit.
The Company maintains a stock option plan for management and directors
where options to acquire Class E common shares are issued with strike prices
approximating the estimated value of the shares at the date of issuance.
The Company accounts for stock options in accordance with APB Opinion
No. 25 and accordingly, no compensation costs have been recognized on the
granting of stock options. Had the Company determined compensation cost in 1996
(there were no stock options granted during 1997 and 1998) based on the fair
value at the grant date for its stock options under SFAS No. 123, the Company's
net income and net income per share in 1996 would have been reduced to the pro
forma amounts as follows:
<TABLE>
<CAPTION>
1996
$
--------
<S> <C>
Net loss, as reported (306,996)
Net loss, pro forma (415,332)
Net loss per share, as reported (0.21)
Net loss per share, pro forma (0.28)
</TABLE>
The per share weighted average fair value of stock options granted in
1996 was $4.77 at the date of grant, using the minimum value approach as
permitted by SFAS 123 for non-public companies and an assumed risk free interest
rate of 5%.
F-17
<PAGE>
Upon completion of the reorganization of Sparkling Spring (see note
19), all common shares and options to acquire shares of Sparkling Spring are
owned by Sparkling Spring Water Holdings Limited.
Warrants for 51,100 shares of Sparkling Spring have been granted and
remain outstanding. The warrants are exercisable for cash consideration of $0.01
each and have no expiry date.
The following summarizes the status of the option plan. To the extent
that options are exercisable in Canadian dollars, exercise prices have been
translated at the exchange rate as of December 31, 1998:
<TABLE>
<CAPTION>
NUMBER OF RANGE OF AVERAGE
OPTIONS EXERCISE PRICE EXERCISE PRICE
------- -------------- --------------
<S> <C> <C> <C>
OUTSTANDING AT DECEMBER 31, 1995.................................. 365,893 $ 1.18 - 4.326 $ 3.49
Granted .......................................................... 53,500 $10.27 - 20.00 $ 18.53
Cancelled ........................................................ (20,000) $ 4.326 $ 4.326
-------- -------------- ----------
OUTSTANDING AT DECEMBER 31, 1996 ................................. 399,393 $ 1.18 - 20.00 $ 5.63
Exercised ........................................................ (7,500) $ 4.326 $ 4.326
Repurchased ...................................................... (190,796) $ 1.18 - 20.00 $ 4.351
-------- -------------- ----------
OUTSTANDING AT DECEMBER 31, 1997 ................................. 201,097 $ 1.18 - 20.00 $ 6.58
Cancelled ........................................................ (2,000) $ 14 $ 14
Exercised ........................................................ (3,000) $ 14 $ 14
-------- -------------- ----------
OUTSTANDING AT DECEMBER 31, 1998 ................................. 196,097 $ 1.18 - 20.00 $ 6.39
-------- -------------- ----------
EXERCISABLE AT DECEMBER 31, 1998 ................................. 190,680 $ 1.18 - 20.00 $ 6.24
-------- -------------- ----------
</TABLE>
Information with respect to options outstanding and exercisable at
December 31, 1998 is as follows:
OPTIONS OUTSTANDING
<TABLE>
<CAPTION>
REMAINING
NUMBER CONTRACTUAL
EXERCISE PRICE OUTSTANDING LIFE
-------------- ----------- ----
<S> <C> <C>
$1.18 55,111 2.8 years
$3.58 5,000 2.8 years
$4.326 95,736 2.8 years
$10.27 5,000 4.0 years
$20.00 35,250 2.8 years
-------
196,097
-------
-------
OPTIONS EXERCISABLE
$1.18 55,111 2.8 years
$3.58 5,000 2.8 years
$4.326 94,486 2.8 years
$10.27 2,500 4.0 years
$20.00 33,583 2.8 years
-------
190,680
-------
-------
</TABLE>
At December 31, 1996 and 1997 the number of options exercisable were
235,390 and 168,263 respectively, and the weighted average exercise prices were
$3.58 and $4.59 respectively.
F-18
<PAGE>
15. EXTRAORDINARY ITEM
The Company restructured and replaced its long-term financing
agreements in 1996 and 1997. Costs incurred related to new loan financing
arrangements have been deferred in accordance with the Company's accounting
policy for deferred financing costs. In 1997 costs, in the amount of $833,706
(1996 - $473,436) related to debt that was restructured were expensed, net of
applicable income tax recoveries of $398,724 (1996 - $434,238).
16. NET CHANGE IN NON-CASH WORKING CAPITAL BALANCES
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
(Increase) decrease in
Accounts receivable $(1,672,299) $(3,044,876) $(3,139,536)
Inventories (313,116) (885,501) 411,212
Prepaid expenses (759,560) (183,766) 216,701
----------- ----------- -----------
(2,744,975) (4,114,143) (2,511,623)
----------- ----------- -----------
Increase (decrease) in
Accounts payable and accrued liabilities 1,867,327 2,255,400 2,386,790
Unearned revenue (223,376) -- --
Income taxes payable 76,890 965,677 (912,567)
Customer deposits 742,951 775,971 1,636,375
----------- ----------- -----------
2,463,792 3,997,048 3,110,598
----------- ----------- -----------
Net change in non-cash working
capital balances (281,183) (117,095) 598,975
Less net working capital acquired
on acquisitions [NOTE 4] 262,344 195,908 (628,380)
Effect of translation (13,339) (4,589) (35,740)
----------- ----------- -----------
$ (32,178) $ 74,224 $ (65,145)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Net working capital acquired on acquisitions has been excluded from
cash flows from operations as it has been included in acquisitions in investing
activities.
17. OPERATING LEASE COMMITMENTS
The Company is committed under operating leases for premises and
vehicles extending for various periods to 2008. Future minimum lease payments
are as follows:
<TABLE>
<S> <C>
1999 $1,611,988
2000 1,331,189
2001 1,101,771
2002 958,763
2003 655,575
Thereafter in aggregate 1,871,764
---------
$7,531,050
----------
----------
</TABLE>
Lease costs of $1,093,386 (1997 - $1,291,043; 1996 - $896,000) have
been expensed during the year.
F-19
<PAGE>
18. INCOME TAXES
A reconciliation of the provision for income taxes based on the
combined federal and provincial income tax rates of 45% is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Provision for (recovery of) income taxes
at statutory rates $ 254,144 $(1,832,754) $(3,621,766)
Non deductible amortization 132,910 302,059 361,257
Non taxable portion of net gain of swaps -- -- (284,490)
Redemption of common stock options -- 2,030,436 --
Unrecorded deferred tax asset -- -- 3,160,073
Difference in foreign tax rates 14,414 (62,980) 384,926
Other (3,143) 2,616 --
----------- ----------- -----------
$ 398,325 $ 439,377 $ --
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The provision for income taxes includes:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Current income taxes-Canada . $ 90,000 $ 804,385 $ 130,000
-Foreign -- 315,877 --
----------- ----------- -----------
90,000 1,120,262 130,000
----------- ----------- -----------
Deferred income taxes-Canada 357,325 (550,968) (130,000)
-Foreign (49,000) (129,917) --
----------- ----------- -----------
308,325 (680,885) (130,000)
----------- ----------- -----------
$ 398,325 $ 439,377 $ --
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The deferred tax asset is comprised of the following timing
differences:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Excess accounting expenses over tax $ 345,168 $ 125,530
Non capital loss carryforwards 1,214,849 835,357
Excess of tax over book depreciation (177,533) (106,647)
Other differences (2,748) --
----------- -----------
$ 1,379,736 $ 854,240
----------- -----------
----------- -----------
</TABLE>
The Company has non-capital losses available for carryforward that expire as
follows:
<TABLE>
<S> <C>
2004 $ 630,245
2005 8,239,810
2017 475,285
2018 2,149,789
No expiry 881,891
</TABLE>
F-20
<PAGE>
19. RELATED PARTY TRANSACTIONS
The Company has entered into a Management Agreement with CF Capital
Corporation (CFCC), a company affiliated by common significant shareholdings,
and two of CFCC's shareholders who are also shareholders of the Company. Under
the terms of the Agreement, CFCC manages the operations of the Company and
negotiates contracts, financial agreements and other arrangements. The
Management Agreement provides that CFCC shall receive a base fee, which is
adjusted yearly based on annual Company revenues. An annual bonus, calculated as
a percentage of the base fee, is due to CFCC in the event the Company achieves
certain targeted levels of per share earnings before depreciation, amortization
and income taxes. During the year the Company paid fees of approximately
$750,000 (1997 - $951,500; 1996 - $600,000) to CFCC which have been included in
selling, delivery and administrative expenses. No bonus was earned in 1998.
CFCC also receives fees for investment banking advisory services
rendered to the Company in connection with successful acquisitions. In 1998, the
Company paid CFCC $213,500 (1997 - $518,700; 1996 - $239,600) for investment
banking advisory services.
As at December 31, 1998 accounts payable includes $153,220 (1997 -
$708,100) due to CFCC.
In connection with the purchase of shares of common stock of the
Company, promissory notes totaling $230,003 have been issued by certain officers
of the Company. The promissory notes bore interest at a rate of 7% and were
scheduled to mature on January 31, 1998 with principal and interest due on that
date. The promissory notes were cancelled by the Company and replaced with
promissory notes which bear interest at a rate of 6% and mature on January 31,
1999 with principal and interest due on that date. Notes totalling $122,019 were
repaid in January 1999. The remaining notes were extended until January 31, 2000
with interest and principal due on that date. The common shares purchased by the
officers are pledged as security for the promissory notes.
The Board of Directors approved a reorganization of Sparkling Spring
which became effective August 31, 1998. In this reorganization, shareholders and
option holders of Sparkling Spring exchanged their shares and options to acquire
common stock of Sparkling Spring for shares and options to acquire common stock
of a new holding company, Sparkling Spring Water Holdings Limited ("Holdings").
Holdings was formed to increase corporate flexibility and provide additional
access to capital markets. The Company has advanced $1.1 million to Holdings
(see note 9) for administrative expenses and to provide partial payment to
purchase stock options previously issued by the Company to an executive officer
who resigned in March 1998. This advance is in the form of a loan with interest
at 13% per annum.
20. SELLING, DELIVERY AND ADMINISTRATIVE EXPENSES
Selling, delivery and administration expenses include advertising and
promotional expenses of $1,339,299 (1997 - $1,238,000; 1996 - $1,206,000).
F-21
<PAGE>
21. INTEGRATION AND RELATED EXPENSES
The Company completed three acquisitions in 1998 (see note 4). In
integrating these acquisitions into the Company's existing business,
non-recurring costs were incurred to reduce and relocate staff, convert the
acquired business' computer systems, close acquired facilities and blend
acquired customers into the Company's existing routes. Further costs were
incurred in connection with a potential acquisition which will not be completed.
The components of the acquisition, integration and related charges are as
follows:
<TABLE>
<S> <C>
Write-off of costs associated with an
acquisition which did not close $ 181,264
Severance, relocation and related costs 327,975
Conversion of computer systems 128,193
Route blending 633,800
Facility closure and other integration costs 557,404
----------
$1,828,636
----------
----------
</TABLE>
22. INTEREST AND RELATED EXPENSES
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Interest on long-term debt $ 2,481,005 $ 5,077,398 $ 11,739,502
Amortization of deferred financing costs -- 54,789 503,142
Gain on closing of swap -- -- (3,420,000)
Unrealized (gain) loss on swap -- (114,556) 891,198
------------ ------------ ------------
$ 2,481,005 $ 5,017,631 $ 9,713,842
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
23. SUMMARY OF BUSINESS SEGMENTS
During the current fiscal year, the Company adopted Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information". This standard requires companies to
disclose selected financial data by business segment. The Company has identified
three primary business segments: Canada, the United Kingdom and the United
States. Segment selection was based upon internal organizational structure, the
way in which these operations are managed and their performance evaluated by
management, and materiality considerations. The accounting policies of the
segments are the same as those described in note 2 - Significant Accounting
Policies.
Segment Products and Services
The Company's business segments derive substantially all their revenues
from the sale of bottled water and the rental of water coolers.
Method of Determining Segment Profit or Loss
Management evaluates the performance of its business segments
separately to individually monitor the different factors affecting financial
performance. Segment profit or loss includes all of the segment's cost of sales,
selling, delivery and administrative expenses.
F-22
<PAGE>
Segment detail is summarized as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Revenue
Canada $ 15,363,998 $ 19,416,108 $ 22,067,384
United Kingdom 11,962,351 17,658,190 23,005,889
United States -- 4,999,586 11,973,379
------------ ------------ ------------
$ 27,326,349 $ 42,073,884 $ 57,046,652
------------ ------------ ------------
------------ ------------ ------------
Net income before depreciation,
interest, income taxes,
non-controlling interest and
extraordinary item
Canada $ 3,838,485 $ 4,388,368 $ 3,105,849
United Kingdom 3,055,793 5,326,453 6,686,993
United States -- 1,497,638 727,413
------------ ------------ ------------
$ 6,894,278 $ 11,212,459 $ 10,520,255
------------ ------------ ------------
------------ ------------ ------------
Total assets
Canada $ 27,177,107 $ 31,345,420 $ 38,307,830
United Kingdom 17,232,061 25,866,401 34,546,003
United States -- 49,787,091 34,779,494
------------ ------------ ------------
$ 44,409,168 $106,998,912 $107,633,327
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
24. COMPARATIVE FIGURES
Certain of the comparative figures have been reclassified to conform
with the presentation adopted in the current year.
F-23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, on this 12th day of May, 1999.
SPARKLING SPRING WATER GROUP
LIMITED
By: /s/ Kent Dillon Schickli
-----------------------------------------
Kent Dillon Schickli
Chief Financial Officer
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, on this 12th day of May, 1999.
SPARKLING SPRING WATER LIMITED
By: /s/ Kent Dillon Schickli
-----------------------------------------
Kent Dillon Schickli
Chief Financial Officer
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, on this 12th day of May, 1999.
SPRING WATER, INC.
By: /s/ Kent Dillon Schickli
-----------------------------------------
Kent Dillon Schickli
Chief Financial Officer
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, on this 12th day of May, 1999.
CULLYSPRING WATER CO., INC.
By: /s/ Kent Dillon Schickli
-----------------------------------------
Kent Dillon Schickli
Chief Financial Officer
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, on this 12th day of May, 1999.
CRYSTAL SPRINGS ACQUISITION, INC.
By: /s/ Kent Dillon Schickli
-----------------------------------------
Kent Dillon Schickli
Chief Financial Officer
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, on this 12th day of May, 1999.
KRYSTAL FOUNTAIN WATER CO. LIMITED
By: /s/ Kent Dillon Schickli
-----------------------------------------
Kent Dillon Schickli
Chief Financial Officer
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, on this 12th day of May, 1999.
CANADIAN SPRINGS WATER
COMPANY LIMITED
By: /s/ Kent Dillon Schickli
-----------------------------------------
Kent Dillon Schickli
Chief Financial Officer
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, on this 12th day of May, 1999.
SPARKLING SPRING WATER (UK)
LIMITED
By: /s/ Kent Dillon Schickli
-----------------------------------------
Kent Dillon Schickli
Chief Financial Officer
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, on this 12th day of May, 1999.
AQUAPORTE (UK) LIMITED
By: /s/ Kent Dillon Schickli
-----------------------------------------
Kent Dillon Schickli
Chief Financial Officer
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, on this 12th day of May, 1999.
MARLBOROUGH EMPLOYMENT
LIMITED
By: /s/ Kent Dillon Schickli
-----------------------------------------
Kent Dillon Schickli
Chief Financial Officer
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, on 12th day of May, 1999.
WATER AT WORK LIMITED
By: /s/ Kent Dillon Schickli
-----------------------------------------
Kent Dillon Schickli
Chief Financial Officer
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, on this 12th day of May, 1999.
NATURAL WATER LIMITED
By: /s/ Kent Dillon Schickli
-----------------------------------------
Kent Dillon Schickli
Chief Financial Officer
