<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
[ ] 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, 1999
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
EXACT NAME OF REGISTRANT AS STATE OR OTHER JURISDICTION OF CLASSIFICATION
SPECIFIED IN ITS CHARTER INCORPORATION OF ORGANIZATION CODE 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
Nature Springs Water Company Limited England 5149
Krystal Fountain Water Co. Limited England 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.
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
CANADIAN DOLLAR
High for the year .... 0.753 0.753 0.749 0.710 0.693
Low for the year ..... 0.710 0.721 0.695 0.634 0.654
End of year .......... 0.733 0.730 0.700 0.650 0.693
Average for the year . 0.728 0.733 0.722 0.674 0.673
BRITISH POUND STERLING
High for the year .... 1.641 1.711 1.712 1.722 1.677
Low for the year ..... 1.527 1.497 1.580 1.611 1.552
End of year .......... 1.552 1.705 1.642 1.663 1.615
Average for the year . 1.578 1.560 1.638 1.657 1.617
<PAGE>
SPARKLING SPRING WATER GROUP LIMITED
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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PART I
ITEM 1. DESCRIPTION OF BUSINESS............................................................2
ITEM 2. DESCRIPTION OF PROPERTY...........................................................16
ITEM 3. LEGAL PROCEEDINGS.................................................................17
ITEM 4. CONTROL OF REGISTRANT.............................................................17
ITEM 5. NATURE OF TRADING MARKET..........................................................19
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS
AFFECTING SECURITY HOLDERS........................................................19
ITEM 7. TAXATION..........................................................................19
ITEM 8. SELECTED FINANCIAL DATA...........................................................20
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.....................................22
ITEM 9A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK.....................................................28
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT..............................................29
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS............................................30
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM
REGISTRANT OR SUBSIDIARIES........................................................31
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS....................................31
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED
(INTENTIONALLY OMITTED)..........................................................N/A
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES...................................................33
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY
FOR REGISTERED SECURITIES AND USE OF PROCEEDS.....................................34
PART IV
ITEM 17. FINANCIAL STATEMENTS
(INTENTIONALLY OMITTED)..........................................................N/A
ITEM 18. FINANCIAL STATEMENTS..............................................................34
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS.................................................34
</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, 1999.
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 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 and Kent Dillon Schickli, 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, Mr. Krediet
retained his ownership of SSWL. Mr. Schickli left CFCC at the end of 1992 and
rejoined the Company as Chief Financial Officer in April 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
three-gallon, 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,
84% in the Canadian Maritime Provinces, 28% 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 in the UK and
Washington markets where it believes it has the second and third largest
customer rental location bases, respectively. 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:
1997 1998 1999
---- ---- ----
Canada $19,416,000 $22,068,000 $25,199,000
United Kingdom 17,658,000 22,368,000 25,002,000
United States 5,000,000 11,974,000 13,717,000
----------- ----------- -----------
$42,074,000 $56,410,000 $63,918,000
=========== =========== ===========
2
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The Company delivers bottled water to a base of approximately 160,300 water
cooler customer locations in its served markets consisting of approximately
125,500 customer locations that contain water coolers rented from the Company
and 34,800 customers who own their coolers and purchase other products. 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 cleanings, cup and
coffee sales. 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 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 seventeen 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
twelve 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 49%
from $8.7 million in 1994 to $63.9 million in 1999. Over the same period, EBITDA
increased at a CAGR of 60% from $1.6 million to $17.1 million (exclusive of
integration and related expenses), with EBITDA margins increasing from 18.5% to
26.8%. 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 17 years in the beverage industry. G. John Krediet, the Chairman of
Sparkling Spring, owns 51.1% of the common stock ("Common Stock") of Sparkling
Spring Water Holdings Limited which owns 100% of the outstanding shares of
Sparkling Spring. Mr. Krediet successfully executed a consolidation of Canadian
Pepsi-Cola bottlers and, together with their 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
and Chief Operating Officer 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.
3
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INDUSTRY OVERVIEW
Bottled water continues to be one of the fastest growing segments of the
U.S. beverage industry, generating an estimated $4.9 billion of sales in 1999.
According to BEVERAGE MARKETING CORPORATION, the U.S. bottled water market
experienced a CAGR of 9.6% from 1994 to 1999, and is projected to grow at a
slightly lower CAGR of 6-7% between 1999 and 2005. Bottled water volume in the
U.S. increased from 8.3 billion litres in 1990 to an estimated 16.3 billion
litres in 1999, and is projected to reach 23.8 billion litres in 2005.
Furthermore, per capita bottled water consumption increased over 75% from 1990
to 1999 with annual consumption in the U.S. increasing from 33.3 litres per
capita in 1990 to an estimated 58.7 litres per capita in 1999. The projected per
capita consumption is expected to reach 81.4 litres in the U.S. by the year
2005. The water cooler segment generated approximately $1.4 billion of sales in
1998 or 5.3 billion litres, representing 33% of the total U.S. bottled water
market. The U.S. water cooler market experienced a CAGR of 2.9% between 1990 and
1998.
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 1.2 billion litres in 1999 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 estimated sales of 195 million litres in 1999 up 31.7% from an
estimated 148 million liters in 1998. It is estimated that the water cooler
segment represented 16.4% of the total U.K. bottled water market in 1999 - over
two times its estimated share in 1993. In addition, the U.K. water cooler market
experienced a CAGR of 30% in units between 1995 and 1999, and is projected to
grow at a CAGR of 13.3% from 1999 to 2004. ZENITH estimates that total water
consumption through coolers will grow at a CAGR of approximately 13.3% over the
same period reaching 364 million liters by the year 2004.
In Canada, industry figures compiled by the Canadian Bottled Water
Association indicate that bottled water consumption totaled 703 million litres
in 1998. According to HIDELL-EYSTER TECHNICAL SERVICES INC., the estimated
growth in the Canadian bottled water market was 10% in 1998, with the home and
office delivery business growing at an estimated 8%. It is estimated that there
are 540,000 coolers in Canada or 1.8 coolers for every 100 people. Consumption
of bottled water in 1998 was estimated to be 23.6 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 2,000 companies generating
over $4 billion of sales. Of these companies, the five largest companies account
for approximately 60% 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 less competitive, (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 82% of its 1999 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 retail sized packages and 12% 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 59% of its 1999 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. Sales of this smaller
package are growing more rapidly than the larger sizes. 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 $5.65 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 1999, the Company generated approximately
6% of its total revenue from these smaller sized packages.
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
1999. 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.
5
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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 Canadian Spring
Fluoridated Drinking Water
</TABLE>
WATER COOLERS. In 1999 the Company generated approximately 23% of its
revenue from the rental of water coolers. The Company has a base of
approximately 160,300 water cooler locations in its served markets consisting of
approximately 125,500 customer locations that contain Company owned rental
coolers and 34,800 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.
6
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The following table presents management estimates of certain information
relating to the Company's cooler location base as of December 31,1999:
<TABLE>
<CAPTION>
UNITED UNITED
CANADA KINGDOM STATES
------ ------- ------
<S> <C> <C> <C>
Rental Coolers at Customer Locations 64,100 32,900 28,500
Total Rental Cooler Locations and Other Customers 90,400 36,000 33,900
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 re-deploys returned water coolers prior to all new
installations. The Company's average cost per water cooler is approximately
$120, 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 12% of the Company's 1999 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% 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 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
7
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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 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. In 1999 the Company slowed its rate of
growth, especially through acquisition, as it focused on improving internal
operations. The Company plans to increase its focus on customer growth, both
organically and through acquisitions in 2000.
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. Management
believes its customer retention rate historically has been higher than the
industry average. However, the Company's average retention rate declined to
approximately 70% in 1999, about equal to the industry average. This decline was
partially caused by a tightening of its definition of what qualified as a
customer.
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
8
<PAGE>
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 Nature Springs Water Company Limited
("Nature Springs"), a wholly-owned 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 Nature Springs 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
has its headquarters in Portland, Oregon, and held 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
9
<PAGE>
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.
On October 23, 1997, the Company acquired Cullyspring Water Co., Inc.
("Cullyspring"). 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.
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.
On November 27, 1999 the Company purchased all of the assets of the Misty
Mountain Water Division of Baxter Foods Limited ("Misty"). Misty is based in the
Maritime Provinces of Canada and focuses on the direct delivery of both eighteen
litre bottles of spring water and small pack containers.
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.
10
<PAGE>
The Company has nine bottling facilities located throughout British
Columbia, the Maritime Provinces of Canada, England, Scotland and the Pacific
Northwestern United States.
BRITISH COLUMBIA. The Company operates four bottling facilities, one each
in Vancouver, Victoria, Kamloops and Prince George, British Columbia. The
Vancouver facility produces 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 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.
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 that 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. The Company is currently planning
to relocate its production facilities to a new location during the next two
years to meet future production requirements.
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 1,600 bottles per hour
Spring
Steam Distilled
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
Portland, Oregon Premium Drinking 600 bottles per hour
Fluoridated Drinking
Spring
Seattle, Washington Premium Drinking 450 bottles per hour
Spring
Steam Distilled
</TABLE>
11
<PAGE>
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 136
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 has historically
experienced a relatively high retention rate (75-80%) of its water cooler rental
agreements. In 1999 the Company's retention rate decreased to 70% on an annual
basis (which management believes is about equal to the industry average) as the
Company tightened its definition of what qualifies as a customer. The Company
expects to improve upon this rate in 2000. Generally, the Company has also
increased the customer retention rate of the businesses it has acquired. The
Company's 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, 1999, the Company owned or leased approximately 215
beverage trucks and employed 317 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.
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 five 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 British Columbia and the Maritime Provinces of Canada, and Oregon in
the U.S. Furthermore, management believes it has the second and third largest
market share position in the UK and Washington markets respectively. 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
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<PAGE>
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. Group
Danone owns the Evian, Danone and Sparkletts brands and operates the Sparkletts
home and office business in the United States and Crystal Spring (Toronto),
Spring Valley, and Laurentian businesses home and office operations in Ontario
and Quebec, Canada. A. S. Watson, a division of Hutchinson Whampoa Limited, is a
large Hong Kong trading company that has recently purchased a number of Home and
Office businesses in the UK and is now number one in that market. Ionics
Incorporated operates the Aquacool businesses and competes with the Company in
England. In addition, Vivendi S. A., a French company which acquired United
States Filter Corporation and its Culligan operations competes in the home and
office water cooler business and water filtration segments either directly or
indirectly through franchisees in most of the Company's markets.
CUSTOMERS
The Company has grown from a base of approximately 8,000 water coolers in
1991 to a base of approximately 125,500 rental water coolers and 160,300 total
customer locations as of December 31, 1999. No customer accounted for more than
1% of the Company's revenue in 1999. Approximately 60% of the Company's revenue
in 1999 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 companies such as the British Airport Authority, British
Telecom and the Royal Bank of Scotland in the United Kingdom, Canadian Forest
Products, HSBC Bank Canada and Toronto Dominion Bank in Canada and Reynold
Metals and United Parcel Service 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, 1999, the Company had approximately 690 full-time
employees, of which 136 were in sales and services, 317 in distribution, 105 in
production and warehouse and 132 in administration. Except for approximately 125
employees in Western Canada, 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.
13
<PAGE>
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, 1999, on a currency adjusted basis,
approximately 40% of the Company's revenue was generated in Canada in Canadian
dollars, 39% 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. 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. The Company also regularly changes the denomination of its senior
debt between currencies in an attempt to minimize its borrowing costs. These
transactions may result in gains or losses on foreign currency transactions.
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.
14
<PAGE>
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.
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.
15
<PAGE>
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 Monthly
Moncton, New Brunswick 3,700 Offices, Distribution Leased June 2001
Saint John, New Brunswick 4,300 Offices, Distribution Leased May 2003
Vancouver, British Columbia 45,000 Offices, Bottling, Distribution Leased May 2011
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
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 2,500 Offices, Distribution Leased Feb. 2005
Broxburn 5,000 Offices, Distribution Leased Apr. 2003
UNITED STATES:
Portland, Oregon 30,000 Bottling, Distribution, Offices Leased Oct. 2007
Portland, Oregon 7,000 Distribution (For Sub-lease) Leased June 2007
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 2000. The Company is
currently evaluating upgrading its production facilities in Scotland during the
next two years in order to meet future production requirements.
16
<PAGE>
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.
ITEM 4. CONTROL OF REGISTRANT
Sparkling Spring Water Holdings Limited ("Holdings") owns all of the
outstanding shares of Sparkling Spring. Mr. Krediet, Chairman and CEO, owns
51.1% of the outstanding Common Stock of Holdings. Clairvest Group, Inc., a
Canadian corporation, is the holder of 30.6% 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, G. John Krediet, Clairvest, Stephen L. Larson, Lucy
Stitzer, Stewart E. Allen, K. Dillon Schickli and certain other shareholders of
Holdings 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 Holdings. 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, 1999 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.
As at December 31, 1999 there were outstanding an aggregate of 1,420,188
shares of Common Stock and an aggregate of 22,000 warrants and 183,310 options
to purchase shares of Common Stock. All shares of Common Stock issuable upon
exercise of options are not entitled to vote on matters submitted to a vote of
the shareholders of Holdings.
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<PAGE>
BENEFICIAL OWNERSHIP (1)
NAME OF BENEFICIAL OWNER SHARES OF COMMON STOCK PERCENT
- ------------------------ ---------------------- -------
G. John Krediet 735,726(2) 51.1%
Clairvest Group Inc.
Toronto, Ontario 436,650(3) 30.6%
Stephen L. Larson 128,969(4) 9.0%
Stewart E. Allen 113,558(5) 7.4%
Lucy M. Stitzer 97,000(6) 6.8%
Michael Bregman --(7) --
Kenneth B. Rotman --(8) --
K. Dillon Schickli 26,000 (9) 1.8%
C. Sean Day 11,280 (10) *
All Directors and Executive Officers 983,564 62.7%
as a Group (7 persons)
- ----------
* 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) Includes 8,250 and 11,213 shares of Common Stock issuable upon exercise of
options and warrants respectively held by Mr. Krediet. Does not include
shares owned by Mr. Larson subject to a Voting Agreement (see note 4) with
respect to which Mr. Krediet disclaims beneficial ownership.
(3) Includes 6,730 shares of Common Stock issuable upon exercise of warrants.
(4) Includes 6,000 shares and 1,880 shares of Common Stock issuable upon
exercise of options and warrants respectively. The shares are subject to a
Voting Agreement between Mr. Larson and Mr. Krediet.
(5) Includes 106,296 shares of Common Stock issuable upon exercise of options
and warrants.
(6) Includes 1,495 shares of Common Stock issuable upon exercise of warrants.
(7) Excludes 436,650 shares and warrants 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.
(8) Excludes 436,650 shares and warrants for 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.
(9) Includes 21,000 shares of Common Stock issuable upon exercise of options.
(10) Includes 1,143 shares of Common Stock issuable upon exercise of options and
warrants.
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<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 December 31, 1999,
approximately $88.1 million principal amount of the Notes were held by
approximately 20 record holders in the United States and were trading at an
approximate aggregate value of $71.8 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 the Canada Customs and Revenue Agency ("CCRA"), 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 the CCRA, 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.
19
<PAGE>
ITEM 8. SELECTED FINANCIAL DATA
The following selected historical consolidated financial data of the
Company for the five years ended December 31, 1999 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,
----------------------------------------------------------------
1995 1996 1997 1998 (3) 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue ................................ $ 15,349 $ 27,326 $ 42,074 $ 56,410 $ 63,918
Cost of sales .......................... 2,863 4,676 7,992 10,658 11,585
Selling, delivery and administrative
expenses............................. 9,041 15,756 22,869 34,040 35,196
Depreciation and amortization .......... 1,465 3,842 5,692 8,880 10,319
Interest expense........................ 1,294 2,481 5,018 9,714 11,661
Net income (loss) before extraordinary
items and cumulative effect
of a change in depreciation policy.... 411 166 (4,524) (8,711) (4,473)
Net income (loss)....................... 19 (307) (5,358) (8,711) (1,769)
OTHER DATA:
EBITDA (1).............................. $ 3,445 $ 6,894 $ 11,213 $ 11,712 $ 17,137
EBITDA margin .......................... 22.4% 25.2% 26.7% 20.8% 26.8%
Ratio of EBITDA to interest expense .... 2.66 2.78 2.23 1.21 1.47
Cash provided by (used in)
operating activities................. 1,491 3,216 (495) 1,979 5,273
Cash used in investing activities....... 4,219 24,168 33,898 24,618 11,156
Cash provided by (used in)
financing activities................. 3,551 22,669 60,005 5,178 (3,381)
Net capital expenditures ............... 2,287 6,736 6,038 8,094 9,372
Water cooler customer location base..... 30,344 68,614 115,037 149,000 160,300
BALANCE SHEET DATA:
Cash and cash equivalents ............... $ 860 $ 2,231 $ 27,507 $ 9,728 $ 567
Total assets ............................ 18,521 44,409 106,998 107,863 103,061
Long-term debt (2) ...................... 11,309 30,474 104,799 112,316 107,303
Common shareholder's equity (deficiency). 2,207 6,772 (8,960) (19,560) (19,839)
</TABLE>
- ----------
(1) "EBITDA" means operating profit plus depreciation, amortization and
integration and related expenses. For 1999, EBITDA reported in the Table is
prior to deduction of integration and related expenses of $93,427 (1998 -
$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.
(3) Revenue, net income (loss) before extraordinary items and cumulative effect
of a change in depreciation policy, net income (loss), EBITDA and cash
provided by (used in) operating activities have been reduced by $637,000
compared to
20
<PAGE>
the balances reported in 1998 to adjust for a misclassification in the 1998
financial statements between water revenue and the cumulative translation
adjustment account balances. Total shareholder's equity as of December 31,
1998 and comprehensive loss for the year then ended did not change as a
result of this reclassification - See Note 24 to the Notes to Consolidated
Financial Statements of Sparkling Spring Water Group Limited included in
Item 18 of this Report.
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; Aquaporte (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, the Springfield Water Division of Brio
Beverages, Inc.: August 31, 1998 and the Misty Mountain Water Division of Baxter
Foods Limited: November 27, 1999.
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.
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
CANADIAN DOLLAR
High for the year.................. 0.753 0.753 0.749 0.710 0.693
Low for the year................... 0.710 0.721 0.695 0.634 0.654
End of year........................ 0.733 0.730 0.700 0.650 0.693
Average for the year............... 0.728 0.733 0.722 0.674 0.673
BRITISH POUND STERLING
High for the year.................. 1.641 1.711 1.712 1.722 1.677
Low for the year................... 1.527 1.497 1.580 1.611 1.552
End of year........................ 1.552 1.705 1.642 1.663 1.615
Average for the year............... 1.578 1.560 1.638 1.657 1.617
21
<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 1999, the Company generated approximately 23% 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, 1994 to December 31, 1999, the Company's
customer location base increased over 570% from 23,800 to 160,300. 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 65% of the Company's total revenue in
1999, 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 91% of the water sales were in 5-gallon, 6-gallon or
3-gallon returnable containers made for dispensing through water coolers and the
remaining 9% (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 12% of the Company's total revenue in 1999 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
should 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 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
22
<PAGE>
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. The table and the
analyses below comparing results for the year ended December 31, 1999 to the
year ended December 31, 1998 and results for the year ended December 31, 1998 to
the year ended December 31, 1997, have been adjusted to reflect a
reclassification in the 1998 financial statements of $637,000 between revenue
and the cumulative translation adjustment account balances - See Note 24 to the
Notes to Consolidated Financial Statements of Sparkling Spring Water Group
Limited included in Item 18 of this Report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenue 100% 100% 100%
Cost of sales 19.0 18.9 18.1
Selling, delivery and administrative
expenses (excludes acquisition charges) 54.3 60.3 55.1
EBITDA 26.7 20.8 26.8
Depreciation and amortization 13.5 15.7 16.1
Interest expense 11.9 17.2 18.2
Net income (loss) before
extraordinary items (10.8) (15.4) (7.0)
Net income (loss) (12.7) (15.4) (2.8)
</TABLE>
YEAR ENDED DECEMBER 31, 1999 TO YEAR ENDED DECEMBER 31, 1998
REVENUE. Revenue increased $7.5 million, or 13.3%, to $63.9 million in 1999
compared to $56.4 million in 1998. Of this increase, approximately $0.2 million
or 0.3% resulted from the inclusion of revenue from the acquisition of Misty
Mountain acquired in November 1999 and $2.2 million or 3.9% from inclusion of
full year results for the Springfield, Krystal and Coastal Mountain businesses
acquired during 1998. The decline in the pound sterling and a slight decline in
the Canadian dollar reduced revenues by $0.7 million or 1.2%. The remaining $5.8
million increase, or 10.3%, was due to growth in the Company's Home and Office
business in its existing territories.
COST OF SALES. Cost of sales increased $0.9 million, or 8.7%, to $11.6
million in 1999 compared to $10.7 million in 1998. Cost of sales as a percentage
of revenue decreased to 18.1% in 1999 from 18.9% in 1998 primarily driven by the
increased percentage in the Company's higher margin 5-gallon direct Home and
Office delivery business.
SELLING, DELIVERY AND ADMINISTRATIVE EXPENSES. Selling, delivery and
administrative expenses increased $1.2 million, or 3.4%, to $35.2 million in
1999 compared to $34.0 million in 1998. Selling, delivery and administrative
operating costs as a percentage of revenue decreased 5.2% to 55.1% in 1999
from 60.3% in 1998. This decrease is
23
<PAGE>
attributable to reduced charges for bad debts and also the spreading of
incremental sales volume over relatively fixed selling, delivery and
administrative expenses.
EBITDA. For the reasons stated above, EBITDA in 1999 increased by $5.4
million, or 46.3%, to $17.1 million from $11.7 million in 1998. As a percentage
of revenue, EBITDA increased to 26.8% in 1999 from 20.8% in 1998 as the Company
was able to grow its revenue faster than its cost of sales and selling, general
and administrative expenses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $1.4 million or 16.2% to $10.3 million in 1999 from $8.9 million in
1998. This increase was due to significant increases in the fixed assets and
goodwill as a result of both the acquisitions consummated in 1998 and 1999 and
also the Company's capital expenditure program. The Company changed its
depreciation method from declining balance to straight line in 1999. Although
this accounting change contributed to a slight decrease in 1999 depreciation
expense, a gain of $1.7 million, net of income taxes, was recorded in 1999
representing the cumulative effect of this accounting change on prior years
through December 31, 1998.
INTEREST EXPENSE. Interest expense increased $2.0 million, or 20.0%, to
$11.7 million in 1999 from $9.7 million in 1998. Of this increase, $1.4 million
related to reduced benefits in 1999 from the Company's foreign currency swap. In
1998 the company recorded a $3.4 million gain on the close-out of its Canadian
dollar swap and a $0.9 million expense on the mark to market of its Pound
Sterling swap. In 1999, the Company recorded a $1.1 million reduction in
interest expense related to the mark to market adjustment on the Company's
Pound Sterling swap. The Company's cash interest expense increased $0.4
million in 1999 due to higher borrowings for its acquisitions and capital
expenditures offset partially by a lower blended interest rate due to the
repurchase of $11.9 million of the Company's higher interest rate Senior
Subordinated Notes.
NET LOSS. Net loss decreased $6.9 million or 79.7% from $8.7 million in
1998 to $1.8 million in 1999 due principally to the Company's improved
operating performance, an extraordinary gain of $1.0 million on the
repurchase of outstanding Senior Subordinated Notes and a $1.7 million gain
related to the cumulative effect to December 31, 1998 of the Company's change
in depreciation method.
YEAR ENDED DECEMBER 31, 1998 TO YEAR ENDED DECEMBER 31, 1997
REVENUE. Revenue increased $14.3 million, or 34.1%, to $56.4 million in
1998 compared to $42.1 million in 1997. Of this increase, approximately $3.9
million or 9.3% 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. 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 3.1%. The remaining $4.0 million, or 9.6%, was due
to additional water coolers installed in the Company's existing territories.
COST OF SALES. Cost of sales increased $2.7 million, or 33.3%, to $10.7
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 18.9% 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.
24
<PAGE>
SELLING, DELIVERY AND ADMINISTRATIVE EXPENSES. Selling, delivery and
administrative expenses increased $11.1 million, or 48.8%, to $34.0 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 6.0% to
60.3% in 1998 from 54.3% in 1997. Approximately 3.2% or 53% 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.
EBITDA. For the reasons stated above, EBITDA in 1998 increased by $0.5
million, or 4.5%, to $11.7 million from $11.2 million in 1997. As a percentage
of revenue, EBITDA decreased to 20.8% 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 upon termination
of the Company's Canadian dollar swap. Interest expense was increased by a non
cash charge of $0.9 million related to the mark to market adjustment on the
Company's Pound Sterling swap.
NET LOSS. The net loss increased $3.3 million or 62.6% from $5.4 million in
1997 to $8.7 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 loss
of $0.8 million related to the restructuring of the Company's long term
financing agreement.
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 combination of cash generated from
operations, and borrowings under an existing credit facility.
Net cash provided by operating activities was $5.3 million for the year
ended December 31, 1999 and $2.0 million for the year ended December 31, 1998.
Net cash used in investment activities was $11.2 million for the year ended
December 31, 1999 and $24.6 million for the year ended December 31, 1998. The
1999 amount includes $1.4 million related to the acquisition of Misty Mountain
and $0.4 million from adjustment of acquisition costs for companies acquired
prior to 1999. The 1998 amount includes $16.5 million related to the completion
of three acquisitions. 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 $9.4 million in the year
ended December 31, 1999 and $8.1 million in 1998. Based on the Company's
existing operations, management expects that the Company's capital expenditures
will total approximately $8.0 million in 2000. This estimate excludes
approximately $4.0 million that may be spent on a new plant in Scotland that is
currently under evaluation.
The Company believes that existing cash balances together with cash
generated from operations and available borrowings under its existing credit
25
<PAGE>
facility will be sufficient to finance the Company's working capital and capital
expenditure requirements for 2000 as well as some acquisitions. However, there
can be no assurance that such resources will be sufficient to meet the Company's
anticipated requirements or that additional 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"). As of December 31, 1999 the principal amount of outstanding
Notes was $88.1 million.
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
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 a secured
senior credit facility of approximately $30 million. See - Senior Credit
Facility.
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
26
<PAGE>
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, 1999, the Company was in compliance with all of the
financial covenants under the Senior Credit Facility. The Senior Credit Facility
provides the Company with operating flexibility and is structured as a multi-
currency facility. The Senior Credit Facility provides for a $15 million
operating line which is renewable annually by April 30th, a $5 million five year
acquisition facility and a $10 million term facility that was used to repurchase
$11.9 million of principal amount of Senior Subordinated Notes in 1999. The
Company's payment obligation under the Senior Credit Facility is secured by a
first priority security interest in substantially all of the assets of the
Company. Obligations under the Senior Credit Facility rank senior to the payment
of the Notes. Subsequent to year end, the Company received approval from Toronto
Dominion to extend the maturity of its operating line to April 30, 2001.
Amounts outstanding under the Senior Credit Facility bear interest at
specified rates based on the Canadian prime, U.S. prime, London inter-bank
market and Bankers' Acceptances rates. As of December 31, 1999, the Company had
approximately $4.5 million in direct borrowings and $2.2 million in letters of
credit outstanding under the $15 million operating line, $1.2 million
outstanding under the acquisition facility and $10.2 million outstanding under
the $10.0 million Term Facility used for the Note repurchases. The outstanding
amount under the Term Facility exceeded the Facility limit due to the increase
in value of the Canadian dollar at year-end. Subsequent to year-end, the Company
paid down the Term Facility to $10 million using funds available from its
operating line.
The Senior Credit 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 Senior Credit
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 Senior Credit Facility contains, among others,
the following financial covenants and coverage tests in 2000: (i) the ratio of
senior debt (consisting of amounts outstanding under the Facility, vendor debt,
capital leases and permitted encumbrances) to Adjusted EBITDA (on a rolling four
quarter basis) shall not exceed 3.0:1.0; (ii) Adjusted EBITDA (on a rolling four
quarter basis) shall not be less than 150% 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% of the amount of interest due under the Senior Facility plus
payments of principal under the Senior Credit 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 6.5:1.0.
27
<PAGE>
The Company believes its existing cash, cash from operations and cash under
the Senior Credit Facility will be sufficient to cover the Company's future cash
requirements for the next twelve months.
YEAR 2000
Sparkling Spring took action in 1999 to address issues related to potential
Year 2000 problems. The work was completed prior to year-end 1999 and the
Company did not experience any material problems when it entered the new
millennium.
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 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; and (ix) 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
28
<PAGE>
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, 1999 the
Pound Sterling swap had a value of $318,000 in favor of the Company of which
$1,072,000 has been recorded as an decrease in interest expense during 1999 and
$82,000 has been recorded as a decrease 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.
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT
The following table sets forth certain information as of March 15, 2000
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 49 Chairman of the Board of Directors
and Chief Executive Officer
Stewart E. Allen 40 President and Director
Kent Dillon Schickli 46 Chief Financial Officer and Director
Michael Bregman 45 Director
C. Sean Day 50 Director
Kenneth B. Rotman 33 Director
Lucy M. Stitzer 39 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 founded
CFCC in 1987 and 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.
STEWART E. ALLEN has been President and Chief Operating Officer of
Sparkling Spring since 1992. Mr. Allen has been responsible for overseeing the
daily operations of the Company, 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 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. Prior to joining MBL, Mr. Allen spent fifteen years with Crush Canada
and Pepsi-Cola Canada.
KENT DILLON SCHICKLI joined the Company as Chief Financial Officer of
Sparkling Spring in April 1998 and joined the Board of Directors in March 2000.
Mr. Schickli also serves as 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
29
<PAGE>
from 1987 to 1992 and Chief Financial Officer of a large Pepsi-Cola franchise
bottler from 1981 to 1986. 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. 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 1997 to April
1998, Mr. Schickli was Chief Executive Officer and co-owner of Affinity
Development Group, Inc., a consulting firm. Mr. Schickli earned an MBA in
Accounting from the University of Chicago, a BA from Carleton College and a CPA
from the State of Illinois.
MICHAEL BREGMAN has served as a member of the Board of Directors of
Sparkling Spring since October 1997. Mr. Bregman is a principal at XDL Intervest
Capital Corp., a venture capital fund specializing in e-commerce and internet
investments. Mr. Bregman also is Vice Chairman of the Board of Directors of
Clairvest Group, Inc., a Toronto-based, publicly traded merchant bank with a
portfolio in excess of $100 million which invests in industries undergoing
consolidation. He is the Chairman and a major shareholder of The Second Cup
Ltd., a publicly traded company that is Canada's largest specialty coffee
retailer. Mr. Bregman is also a member of the Board of Directors of Vincor
International Inc. and Vitamins.com. Mr. Bregman received his MBA degree in 1977
from Harvard Business School and earned a BS 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. Mr. Day currently serves as Chairman of TeeKay Shipping
Corporation (NYSE: TK). From 1989 until 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 (NYSE: KEX), Oceanic Bank and Trust Limited, The
Compass Group and Transmarine Navigation Corp. Mr. Day is a graduate of
University of Cape Town and Oxford University.
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 which invests in industries undergoing
consolidation. Mr. Rotman's role with Clairvest includes 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 NRI Industries and Signature Security Group Inc. 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 BA in Economics
from Tufts University, a M.Sc. from the London School of Economics, and an MBA
from New York University.
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.
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, 1999. The
Summary Compensation Table reflects all compensation paid by Sparkling Spring to
its executive officers. Directors of Sparkling Spring receive no compensation
for their
30
<PAGE>
services as Directors. Messrs. Rotman and Day are members of the Audit Committee
and are paid $1,000 for each Audit Committee meeting attended. 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 1999 $270,000 $117,500 $50,800 (1) -- $61,600 (2)
1998 $186,000 -- $17,200 (1) -- $23,200 (2)
1997 $141,744 $ 36,117 $18,600 (1) -- $18,000 (2)
</TABLE>
(1) Includes a housing allowance of $29,100, $16,200 and $17,300 in 1999, 1998
and 1997 respectively and a car allowance of $20,700 in 1999.
(2) Consists of contributions of $27,000, $22,300 and $17,100 to a defined
contribution pension plan and annual premiums of $900 in connection with a group
life insurance policy for Mr. Allen. The 1999 year also includes a relocation
allowance of $33,700.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
No options to purchase the Notes are outstanding. As of December 31, 1999,
47,787 options and 51,100 warrants 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.
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, 1999. 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 income taxes. In the event such targets are not met, lesser amounts may be
paid. During 1999 the
31
<PAGE>
Company expensed management fees of $950,000 (1998 - $750,000; 1997 - $951,500)
to CFCC.
The Company has also agreed to pay CFCC a fee in respect of its investment
banking advisory services rendered in connection with successful acquisitions.
During 1999 the Company paid CFCC $27,200 (1998 - $213,500; 1997 - $518,700) 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 30.6% of
the outstanding Common Stock of Holdings, G. John Krediet, Stephen L. Larson,
Lucy Stitzer, Stewart E. Allen, Dillon Schickli 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 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 G. John Krediet 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.
32
<PAGE>
SUBSIDIARY REORGANIZATION
During 1999, the Company initiated the amalgamation of two Canadian
operating subsidiaries, Canadian Springs and Sparkling Spring Water Limited, in
order to maximize operating efficiencies and streamline accounting and reporting
processes. Effective January 1, 2000, Canadian Springs and Sparkling into one
company Sparkling Spring Water 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.
During 1998 the Company initiated the windup of two inactive subsidiaries
in the United Kingdom - Aquaporte (UK) Limited and Marlborough Employment
Limited. These companies were formally wound up in 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 bore interest at a rate of 6% and were due to mature
on January 31, 1999 with principal and interest due on that date. On January 31,
1999 Mr. Larson paid 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%. On January 31, 2000, the promissory note issued by
Mr. Allen was cancelled by the Company, Mr. Allen paid interest of $6,978 in
cash, and the balance with a new promissory note in the amount of $116,300 which
bears interest at a rate of 6% and will mature on January 31, 2001, with
principal and interest due on that date. The common shares of the Company
purchased by Mr. Allen were exchanged for shares of Holdings as part of the
Reorganization, and these shares of Holdings are now pledged to secure payment
of 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 of $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 Senior
Credit Facility provides the Company with increased operating flexibility and
restored the Company's compliance with all financial covenants.
As of December 31, 1999, the Company is in compliance with all financial
covenants under the Senior Credit Facility.
33
<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 Note 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.
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.
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
a) Financial Statements
See Index to Financial Statements on page F-1 hereof.
b) Exhibits
None
34
<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, 1999 and 1998 F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Shareholder's Equity (Deficiency) for
the years ended December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 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, 1999 and 1998 and the consolidated statements
of operations, shareholder's equity (deficiency) and cash flows for each of the
years in the three year period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in Canada. 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,
1999 and 1998 and the results of its operations and its cash flows for each of
the years in the three year period ended December 31, 1999 in accordance with
accounting principles generally accepted in the United States.
Halifax, Canada
March 3, 2000 Chartered Accountants
F-2
<PAGE>
SPARKLING SPRING WATER GROUP LIMITED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(in thousands of U.S. dollars) AS AT DECEMBER 31
1998 1999
---- ----
<S> <C> <C>
ASSETS [NOTES 12 AND 13]
Current
Cash and cash equivalents $ 9,728 $ 567
Accounts receivable (net of allowance
for doubtful accounts of $970;
1998 - $1,915 [NOTE 5]) 10,983 11,491
Inventories [NOTE 6] 1,385 1,482
Prepaid expenses 1,320 1,453
--------- ---------
Total current assets 23,416 14,993
Deferred taxes [NOTE 18] 854 -
Fixed assets [NOTE 7] 31,093 36,207
Goodwill and deferred charges [NOTE 8] 51,127 50,227
Other assets [NOTE 9] 1,373 1,634
--------- ---------
Total assets $ 107,863 $103,061
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIENCY)
Current
Accounts payable and accrued liabilities $ 9,108 $ 10,028
Income tax payable 130 103
Customer deposits 5,033 5,466
Debt due within one year [NOTE 10] 1,399 2,963
--------- ---------
Total current liabilities 15,670 18,560
--------- --------
Obligations under capital leases and
other debt [NOTE 11] 3,252 2,267
Senior bank debt - term loan [NOTE 12] 7,665 13,973
Subordinated notes payable [NOTE 13] 100,000 88,100
Other liabilities [NOTE 13] 836 -
---------- -------
Total long-term liabilities 111,753 104,340
---------- -------
Shareholder's equity (deficiency)
Capital Stock [NOTE 14]
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 5,769 6,241
Class E Common Shares - 5,860 (1998 - 5,860; 1997 - Nil) 164 177
--------- -------
5,933 6,418
Cumulative translation adjustment (2,543) (1,538)
Deficit (22,950) (24,719)
--------- -------
Total shareholder's equity (deficiency) (19,560) (19,839)
--------- -------
Total liabilities and
shareholder's equity (deficiency) $107,863 $103,061
======== ========
Commitments [NOTES 11 AND 17]
</TABLE>
SEE ACCOMPANYING NOTES
F-3
<PAGE>
SPARKLING SPRING WATER GROUP LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(in thousands of U.S. dollars) YEAR ENDED DECEMBER 31
----------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenue:
Water $ 25,507 $ 35,559 $ 41,220
Rental 10,346 13,715 14,960
Other 6,221 7,136 7,738
-------- ------- -------
Total revenue 42,074 56,410 63,918
-------- ------- -------
Cost of sales:
Water 5,294 7,544 8,682
Other 2,698 3,114 2,903
-------- ------- -------
Total cost of sales 7,992 10,658 11,585
-------- ------- -------
Gross profit 34,082 45,752 52,333
Expenses:
Selling, delivery and administrative
[NOTES 19 AND 20] 22,869 34,040 35,196
Integration and related expenses [NOTE 21] - 1,829 93
Depreciation and amortization 5,692 8,880 10,319
-------- -------- -------
Operating profit 5,521 1,003 6,725
Interest and related expenses [NOTE 22] 5,018 9,714 11,661
Redemption of common stock options [NOTE 14] 4,588 - -
-------- -------- -------
Income (loss) before the following (4,085) (8,711) (4,936)
Provision for income taxes [NOTE 18] 439 - (463)
-------- -------- -------
Net loss before extraordinary items
and cumulative effect of a change in
accounting principle (4,524) (8,711) (4,473)
Extraordinary items [NOTE 15] (834) - 1,004
Cumulative effect on prior years (to
December 31, 1998) of changing to a
different depreciation method [NOTE 3] - - 1,700
------- ------- -------
Net loss (5,358) (8,711) (1,769)
Other comprehensive income (loss):
Foreign currency translation adjustment (408) (1,772) 1,005
------- ------- -------
Comprehensive loss $(5,766) $(10,483) $ (764)
======= ======= ========
Basic and diluted earnings (loss) per
share before extraordinary items and
cumulative effect of a change in
accounting principle $ (2.69) $ (6.25) $ (3.22)
Extraordinary items (0.49) - 0.72
Cumulative effect on prior years (to
December 31, 1998) of changing to a
different depreciation method - - 1.23
--------- --------- ---------
Net income (loss) $ (3.18) $ (6.25) $ (1.27)
========= ========= =========
</TABLE>
SEE ACCOMPANYING NOTES
F-4
<PAGE>
SPARKLING SPRING WATER GROUP LIMITED
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
(in thousands of U.S. dollars) FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
-----------------------------------------------------------------------
CUMULATIVE
COMMON STOCK TRANSLATION
SHARES AMOUNT ADJUSTMENT DEFICIT
------ ------ ----------- -------
<S> <C> <C> <C> <C>
Balance December 31, 1996 1,720,746 $8,065 $ (363) $ (931)
Comprehensive loss (408) (5,358)
Redemption of Class D
common shares [NOTE 14] (344,918) (1,718) (7,940)
Class D shares issued for cash 7,500 32
Foreign currency translation (340)
--------- -------- --------- --------
Balance December 31, 1997 1,383,328 6,039 (771) (14,229)
Comprehensive loss (1,772) (8,711)
Class E shares issued for cash 12,360 304
Redemption of Class E
shares [NOTE 14] (6,500) (140) (10)
Reclassification of subscriptions
receivable to other assets [NOTE 19] - 230
Foreign currency translation (500) _
--------- -------- ---------- --------
Balance December 31, 1998 1,389,188 5,933 (2,543) (22,950)
Comprehensive income (loss) 1,005 (1,769)
Foreign currency translation 485
--------- ------ ---------- ---------
Balance December 31, 1999 1,389,188 $6,418 $(1,538) $(24,719)
========= ====== ======= ========
</TABLE>
SEE ACCOMPANYING NOTES
F-5
<PAGE>
SPARKLING SPRING WATER GROUP LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(in thousands of U.S. dollars) YEAR ENDED DECEMBER 31,
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (5,358) $ (8,711) $ (1,769)
Items not requiring cash
Depreciation and amortization 5,692 8,880 10,319
Deferred taxes (843) 525 (599)
Amortization of deferred financing costs 55 503 623
Cumulative effect of change in
depreciation policy [NOTE 3] - - (1,700)
Extraordinary item - - (1,004)
Cross currency swap [NOTE 13] (115) 891 (1,072)
------- ------ -------
(569) 2,088 4,798
Net change in non-cash working capital
balances [NOTE 16] 74 (109) 475
------- ------ ------
Cash provided by (used in)
operating activities (495) 1,979 5,273
------- ------ ------
INVESTING ACTIVITIES
Purchase of fixed assets (6,769) (8,599) (9,560)
Sale of fixed assets, net 731 505 188
Acquisitions [NOTE 4] (27,860) (16,524) (1,784)
------- ------- -------
Cash used in investing activities (33,898) (24,618) (11,156)
------- ------- -------
FINANCING ACTIVITIES
Increase in long-term debt 30,594 8,551 8,486
Repayment of long-term debt (57,053) (1,618) (1,703)
Issuance of common shares 32 304 -
Redemption of common shares (9,658) (150) -
Issuance of subordinated notes payable 100,000 - -
Redemption of subordinated notes payable - - (9,963)
Increase in deferred charges (3,910) (766) (258)
Decrease in other assets - - 122
Increase in due from parent company - (1,143) (65)
-------- ------ -------
Cash provided by financing activities 60,005 5,178 (3,381)
-------- ------ -------
Effect of foreign currency translation
on cash (336) (318) 103
------- ------- ------
Increase (decrease) in cash and
cash equivalents during the year 25,276 (17,779) (9,161)
Cash and cash equivalents, beginning
of year 2,231 27,507 9,728
-------- ------- ------
Cash and cash equivalents, end of year $ 27,507 $ 9,728 $ 567
======== ======= ======
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid $ 3,597 $ 12,259 $12,392
======== ======== ======
Income taxes paid $ 227 $ 323 $ 181
======= ======== ========
</TABLE>
SEE ACCOMPANYING NOTES
F-6
<PAGE>
SPARKLING SPRING WATER GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
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 CONSOLIDATION
These consolidated financial statements include the accounts of Sparkling
Spring and its wholly-owned subsidiaries, principally Sparkling Spring Water
Limited, Nature Springs Water Company Limited, Canadian Springs Water Company
Limited , Spring Water Inc. and the subsidiaries referred to in note 4
(collectively referred to as the "Company").
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:
1997 1998 1999
---- ---- ----
Canadian Dollars $0.700 $0.650 $0.693
U.K. Pounds Sterling $1.642 $1.663 $1.615
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 calculated on a straight-line basis
(note 3) over the estimated useful lives of the assets as follows:
Well, buildings and roadways 40 years
Coolers 10 years
Machinery and equipment 10 years
Computer equipment and software 3 years
Furniture and fixtures 10 years
Motor vehicles 5-10 years
Returnable bottles 3-4 years
Leasehold improvements are amortized on a straight-line basis over the term
of the related lease.
F-7
<PAGE>
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.
ADVERTISING
Advertising expenditures are expensed as incurred.
FINANCIAL INSTRUMENTS
The Company's primary financial instruments consist of cash and cash
equivalents, accounts receivable, current liabilities 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. 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 U.S. dollar. To the extent cross currency swaps hedge net assets in
currencies other than the U.S. 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 U.S., 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 1,389,188 (1998 -
1,392,688, 1997 - 1,685,131).
LEASES
Leases are classified as capital or operating leases. Capital leases 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.
F-8
<PAGE>
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.
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
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, 2000. The impact of this statement on the consolidated financial
statements has not yet been determined.
3. CHANGE IN DEPRECIATION METHOD
Depreciation of fixed assets has been computed using the straight line
method in 1999. Depreciation of fixed assets in prior years was computed using
the declining balance method. The new method of depreciation was adopted to more
appropriately amortize the cost of fixed assets over their estimated useful
lives. The change in depreciation method has been applied retroactively. The
effect of the change in 1999 was to increase income before extraordinary items
by approximately $141,000 ($0.10 per share). The adjustment of $1.7 million
(after reduction for income taxes of $0.9 million) to apply retroactively the
new method is included in income in 1999. The pro forma amounts shown below have
been adjusted for the effect of retroactive application of the new depreciation
policy net of related income taxes.
<TABLE>
<CAPTION>
(thousands of dollars except per share amounts) 1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Pro forma income assuming new depreciation
method is applied retroactively:
Loss before extraordinary items $(4,794) $(9,842) $(4,473)
Earnings (loss) per common share - basic and diluted (2.84) (7.07) (3.22)
Net loss (5,628) (9,842) (3,469)
Earnings (loss) per common share - basic and diluted (3.34) (7.07) (2.50)
</TABLE>
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.
F-9
<PAGE>
1999
During 1999 the Company purchased the assets of the Misty Mountain Water
division of Baxter Foods Limited located in the Maritime Provinces or Canada.
The following summarizes the transaction (in thousands):
<TABLE>
<S> <C>
Net working capital $ (94)
Fixed assets 1,114
Goodwill 332
------
Total cash consideration 1,352
Adjustment for acquisitions completed prior to 1999 432
------
$1,784
======
</TABLE>
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
Adjustment for acquisitions completed prior to 1998 1,039
-------
$16,524
=======
</TABLE>
The following summarizes the transactions (in thousands):
<TABLE>
<S> <C>
Net working capital $ (628)
Fixed assets 7,383
Assumption of debt obligations (698)
Goodwill 10,467
-------
Total cash consideration $16,524
=======
</TABLE>
1997
During 1997 the Company completed the following acquisitions:
<TABLE>
<CAPTION>
ACQUISITION INTEREST ACQUISITION
COMPANY LOCATION DATE ACQUIRED COST
------- -------- ----------- -------- -----------
<S> <C> <C> <C> <C>
(000'S)
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
=======
</TABLE>
F-10
<PAGE>
The following summarizes the transactions (in thousands):
<TABLE>
<S> <C>
Net working capital $ 196
Fixed assets 6,919
Assumption of debt obligations (1,160)
Goodwill 21,905
------
Total cash consideration $27,860
=======
</TABLE>
The following unaudited pro forma information presents a summary of
consolidated results of operations as if the acquisitions of the Misty Mountain
Water division of Baxter Foods Limited, Coastal Mountain Water Corp., Krystal
Fountain Water Co. Limited and the Springfield Water Division of Brio Industries
Inc. had occurred at January 1, 1998. 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,
1998 1999
---- ----
(thousands of dollars except per share amounts)
<S> <C> <C>
Total revenue $61,749 $65,870
Net loss before extraordinary items and cumulative
effect of a change in accounting principle (8,545) (4,356)
Net loss (8,545) (1,652)
Basic loss per share (6.13) (1.19)
</TABLE>
5. ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
(thousands of dollars)
<S> <C>
Balance January 1, 1997 $ 210
Additions 267
Write-offs (90)
-------
Balance December 31, 1997 387
Additions 1,777
Write-offs (249)
-------
Balance December 31, 1998 1,915
Additions 1,231
Write-offs (2,176)
-------
Balance December 31, 1999 $ 970
=======
</TABLE>
6. INVENTORIES
<TABLE>
<CAPTION>
1998 1999
---- ----
(thousands of dollars)
<S> <C> <C>
Packaging materials $ 417 $ 339
Coolers not yet in service 226 327
Goods for resale 483 417
Cooler parts 143 246
Other 116 153
----- -----
$1,385 $1,482
===== =====
</TABLE>
F-11
<PAGE>
7. FIXED ASSETS
<TABLE>
<CAPTION>
1998 1999
---------------------------- -------------------------
ACCUMULATED ACCUMULATED
COST DEPRECIATION COST DEPRECIATION
(thousands of dollars)
<S> <C> <C> <C> <C>
Land and well $ 421 $ 13 $ 516 $ 15
Buildings and roadways 754 208 786 143
Coolers 25,404 11,333 28,713 13,894
Machinery and equipment 11,425 5,906 13,665 5,675
Equipment and computer
hardware under capital lease 1,533 555 1,571 1,213
Motor vehicles 3,149 1,908 6,657 2,225
Motor vehicles under capital lease 5,774 2,903 4,496 1,838
Leasehold improvements 1,840 825 2,282 1,054
Returnable bottles 6,660 2,216 8,404 4,826
------ ------ ------ ------
56,960 25,867 67,090 30,883
Accumulated depreciation 25,867 30,883
------ ------
Net book value $31,093 $36,207
====== ======
</TABLE>
8. GOODWILL AND DEFERRED CHARGES
<TABLE>
<CAPTION>
1998 1999
---------------------------- -------------------------
ACCUMULATED ACCUMULATED
COST AMORTIZATION COST AMORTIZATION
(thousands of dollars)
<S> <C> <C> <C> <C>
Goodwill $48,038 $2,570 $49,660 $3,869
Non-compete agreements 2,125 671 2,125 1,110
Deferred financing costs 4,629 522 4,434 1,075
Other 118 20 98 36
------ ------ ----- -----
54,910 3,783 56,317 6,090
Accumulated amortization 3,783 6,090
------- -------
Net book value $51,127 $50,227
====== ======
</TABLE>
9. OTHER ASSETS
<TABLE>
<CAPTION>
1998 1999
---- ----
(thousands of dollars)
<S> <C> <C>
Unsecured loan to parent company maturing
September 2003, bearing interest at 13%,
interest payable annually, principal due
at maturity $1,143 $1,208
Cross currency swap [NOTE 13] - 318
Promissory notes [NOTE 19] 230 108
------ ------
$1,373 $1,634
====== ======
</TABLE>
The loan to parent company excludes accrued interest of $171,000 (1998 -
$55,000) which is included in accounts receivable.
10. DEBT DUE WITHIN ONE YEAR
<TABLE>
<CAPTION>
1998 1999
---- ----
(thousands of dollars)
<S> <C> <C>
Current portion of obligations
under capital leases [NOTE 11] $1,157 $ 665
Current portion of other debt [NOTE 11] 242 248
Current portion of Note Buyback Facility [NOTE 12] - 2,050
-------- -------
$1,399 $2,963
======== =======
</TABLE>
F-12
<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 (thousands of dollars):
2000 $ 989
2001 818
2002 565
2003 399
2004 183
Thereafter in aggregate 74
------
3,028
Less imputed interest 663
------
2,365
Less current portion 665
------
$1,700
======
Other debt consists of the following (thousands of dollars):
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Term loans bearing interest at 11 3/8% $ 77 $ -
Term loan bearing interest at 9%, repayable in
annual installments of principal and interest of
$321,000, maturing 2002. 1,042 815
----- ----
1,119 815
Less portion due within one year 242 248
----- ----
$ 877 $ 567
===== ====
</TABLE>
The following repayment schedule represents the required annual principal
repayments of other debt (thousands of dollars).
2000 $248
2001 270
2002 297
12. SENIOR BANK DEBT
The Company has available a $30 million multi - currency facility that
provides for a $15 million operating line (the "Operating Line Facility") which
is renewable annually by April 30th, a $5 million five year acquisition line
(the "Acquisition Facility") and a $10 million short term credit line (the "Note
Buyback Facility") that was available until October 31, 1999 that provided the
Company with flexibility to repurchase, at its discretion, certain of the
Company's outstanding Subordinated Notes Payable. Subsequent to year end, the
Company's Operating Line Facility was renewed to April 30, 2001. Amounts
outstanding as at October 31, 1999 under the Note Buyback Facility will be
repaid in equal annual amounts over a five-year period commencing October 31,
2000. 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 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 1999 was approximately
8.0% (1998 - 7.75%). Amounts outstanding at December 31, 1999 are as follows
(thousands of dollars):
<TABLE>
<CAPTION>
FACILITY INTEREST RATE
<S> <C> <C>
Operating Line Canadian Prime + 1 1/4% $ 816
Operating Line US Prime + 1 1/4% 15
Operating Line Sterling Libor + 2 3/4% 3,714
Acquisition Canadian Prime + 1 1/4% 1,229
Note Buyback Canadian Prime + 2% 10,249
-------
16,023
Less: Current portion of Note Buyback Facility 2,050
-------
$13,973
=======
</TABLE>
F-13
<PAGE>
13. SUBORDINATED NOTES PAYABLE
<TABLE>
<CAPTION>
1998 1999
---- ----
(thousands of dollars)
<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 $88,100
======== =======
</TABLE>
In 1999, the Company repurchased, in the public market, $11.9 million face
value of its outstanding Subordinated Notes Payable. A gain of $1.0 million
related to the repurchase of the Notes has been recorded, net of applicable
income taxes (note 15).
The approximate fair market value of the Subordinated Notes Payable was
$71.8 million at December 31, 1999 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, 1999, the
subsidiary guarantors had approximately $19.2 million of guarantor senior
indebtedness outstanding including $16.0 million of outstanding Senior Bank
Debt.
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 U.S. 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 U.S. 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.
Under the terms of the second swap, maturing November 15, 2003, the Company
will receive 11.5%, payable semiannually, on a $30 million U.S. 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 U.S. in exchange for 17.857 million Great
Britain pounds on November 15, 2003.
Both of the above noted swaps were transacted with a U.S. bank with a
counter party credit rating of `A' (Standard & Poors). At December 31, 1999 the
aggregate fair value of the outstanding swap was $0.3 million U.S. dollars in
favor of the Company (1998 - $0.8 million U.S. dollars in favor of the U.S.
bank) of which $1.1 million has been recorded as a decrease in interest expense
(1998 - $0.9 million increase) with the remaining balance of $82,000 recorded as
a decrease in the cumulative translation adjustment (1998 - $59,000 increase).
14. CAPITAL STOCK
In 1997, the Company completed a reorganization 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 $14.1 million in cash. A total of $4.5 million
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 $9.6 million 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 $76,000 was expensed in the 1997 financial statements
related to the repurchase of stock options from a former employee.
During 1998, the Company redeemed 6,500 Class E common shares with a book
value of $140,000 for cash consideration of $150,000. The excess of $10,000 over
book value has been charged to the deficit.
F-14
<PAGE>
In 1998, the Board of Directors approved a reorganization of Sparkling
Spring. As part of 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"). Upon completion
of the reorganization, all common shares and options to acquire shares of
Sparkling Spring are owned by Holdings. Subsequent to the reorganization,
148,310 options to acquire common shares of Sparkling Spring were cancelled.
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. All outstanding warrants are owned by Holdings.
The following summarizes the status of the Company's option plan.
All outstanding options to acquire shares of Sparkling Spring are owned by
Holdings. To the extent that options are exercisable in Canadian dollars,
exercise prices have been translated at the exchange rate as of December 31,
1999:
<TABLE>
<CAPTION>
NUMBER OF RANGE OF AVERAGE
OPTIONS EXERCISE PRICE EXERCISE PRICE
<S> <C> <C> <C>
OUTSTANDING AT DECEMBER 31, 1996........................ 399,393 $1.26 - 20.00 $5.48
Exercised............................................... (7,500) $4.326 $4.326
Repurchased............................................. (190,796) $1.26 - 20.00 $4.351
- ----------------------------------------------------------------------------------------------------------------------
OUTSTANDING AT DECEMBER 31, 1997........................ 201,097 $1.26 - 20.00 $6.61
Exercised............................................... (2,000) $14.00 $14.00
Repurchased............................................. (3,000) $14.00 $14.00
Reorganization.......................................... (148,310) $1.26 - 20.00 $6.46
- ----------------------------------------------------------------------------------------------------------------------
OUTSTANDING AND EXERCISABLE AT
DECEMBER 31, 1998 AND 1999.............................. 47,787 $4.326 - $20.00 $6.29
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Information with respect to options outstanding and exercisable at December
31, 1999 is as follows:
<TABLE>
<CAPTION>
REMAINING
NUMBER CONTRACTUAL
EXERCISE PRICE OUTSTANDING LIFE
<S> <C> <C>
$4.326 41,787 1.8 years
$20.00 6,000 1.8 years
-------
47,787
=======
</TABLE>
At December 31, 1997 the number of options exercisable was 168,263 and the
weighted average exercise price was $4.59.
Holdings maintains a stock option plan for management and directors where
options to acquire common shares are issued with strike prices approximating the
estimated value of the shares at the date of issuance.
15. EXTRAORDINARY ITEMS
The Company restructured and replaced its long-term financing agreements in
1997. Costs incurred related to new loan financing arrangements were deferred in
accordance with the Company's accounting policy for deferred financing costs. In
1997, costs in the amount of $0.8 million related to debt that was restructured
were expensed, net of applicable income tax recoveries of $0.4 million.
In 1999, the Company paid $9.9 million to repurchase $11.9 million face
value of its outstanding Subordinated Notes Payable. A gain of $1.0 million
related to the repurchase of the Subordinated Notes has been recorded, net of
applicable income taxes of $0.5 million and costs of $0.5 million representing a
write off of a proportionate amount of deferred charges incurred in connection
with the issuance of the Subordinated Notes in November of 1997.
F-15
<PAGE>
16. NET CHANGE IN NON-CASH WORKING CAPITAL BALANCES
<TABLE>
<CAPTION>
(thousands of dollars) 1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
(Increase) decrease in
Accounts receivable $(3,045) $(3,140) $(508)
Inventories (886) 367 (97)
Prepaid expenses (184) 217 (133)
----- ----- ----
(4,115) (2,556) (738)
----- ------ ----
Increase (decrease) in
Accounts payable and accrued liabilities 2,255 2,387 920
Income taxes payable 966 (912) (27)
Customer deposits 776 1,636 433
----- ----- -----
3,997 3,111 1,326
----- ----- -----
Net change in non-cash working
capital balances (118) 555 588
Less net working capital acquired
on acquisitions [NOTE 4] 196 (628) (94)
Effect of translation (4) (36) (19)
----- ------ -----
$ 74 $ (109) $ 475
===== ======= =====
</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 2011. Future minimum lease payments are as
follows:
(thousands of dollars)
2000 $1,600
2001 1,452
2002 1,340
2003 1,052
2004 1,017
Thereafter in aggregate 4,006
-------
$10,467
=======
Lease costs of $1.5 million (1998 - $1.4 million; 1997 - $1.3 million) have
been expensed during the year.
F-16
<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 (thousands of
dollars):
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Provision for (recovery of) income taxes
at statutory rates $(1,833) $(3,920) $(2,221)
Non deductible amortization 302 361 385
Non taxable portion of net gain on swaps - (284) (482)
Redemption of common stock options 2,030 - -
Unrecorded deferred tax asset - 3,458 2,069
Difference in foreign tax rates (60) 385 (214)
------- ------ -------
$ 439 $ - $ (463)
======= ======= =======
</TABLE>
The provision for income taxes includes (thousands of dollars):
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Current income taxes - Canada $ 804 $ 130 $ 154
- Foreign 316 - 12
------ ------ ----
1,120 130 166
----- --- ---
Deferred income taxes - Canada (551) (130) (617)
- Foreign (130) - (12)
----- --- ----
(681) (130) (629)
----- --- ----
$ 439 $ - $(463)
===== ====== ====
</TABLE>
The deferred tax asset is comprised of the following timing differences
(thousands of dollars):
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Excess accounting expenses over tax $ 387 $ 44
Non capital loss carryforwards 5,157 7,123
Excess of tax over book depreciation (107) (1,343)
Other differences (261) (342)
------- ------
5,176 5,482
Valuation allowance (4,322) (5,482)
------- ------
$ 854 $ -
======= ========
</TABLE>
The Company has non-capital losses available for carryforward that expire
as follows (thousands of dollars):
2004 $ 96
2005 4,895
2006 7,599
2018 3,483
No expiry 908
F-17
<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 CFCC's shareholder and executive officer who is also a shareholder of
Holdings. 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
$950,000 (1998 - $750,000; 1997 - $951,500) to CFCC which have been included in
selling, delivery and administrative expenses.
CFCC also receives fees for investment banking advisory services rendered
to the Company in connection with successful acquisitions. In 1999, the Company
paid CFCC $27,200 (1998 - $213,500; 1997 - $518,700) for investment banking
advisory services.
As at December 31, 1999 accounts payable includes $287,000 (1998 -
$153,000) due to CFCC.
In connection with the purchase of shares of common stock of the Company,
promissory notes totaling $230,003 were issued by certain officers of the
Company. A note totaling $122,019 was repaid in January 1999. The remaining
promissory note bore interest at a rate of 6% and was scheduled to mature on
January 31, 2000 with principal and interest due on that date. The promissory
note was cancelled by the Company and replaced with a promissory note which
bears interest at a rate of 6% and matures on January 31, 2001 with principal
and interest due on that date. At the time of purchase, the common shares of
Sparkling Spring were pledged as security for the promissory notes. Upon
completion of the reorganization described in note 14, the common shares of
Sparkling Spring pledged as security for the promissory notes were exchanged for
common shares of Holdings, and the shares of Holdings acquired were pledged as
security for the outstanding promissory notes. Upon completion of this exchange,
the balance of promissory notes outstanding was reclassified from a reduction of
shareholder's equity to other assets (note 9).
20. SELLING, DELIVERY AND ADMINISTRATIVE EXPENSES
Selling, delivery and administration expenses include advertising and
promotional expenses of $1.1 million (1998 - $1.3 million; 1997 - $1.2 million).
21. INTEGRATION AND RELATED EXPENSES
The Company completed one acquisition in 1999 and three acquisitions in
1998 (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 1998 in connection with a potential acquisition which was not
successfully completed. The components of the acquisition, integration and
related charges are as follows:
<TABLE>
<CAPTION>
(thousands of dollars) 1998 1999
---- ----
<S> <C> <C>
Write-off of costs associated with an
acquisition which did not close $ 181 $ -
Severance, relocation and related costs 328 -
Conversion of computer systems 128 11
Route blending 634 30
Facility closure and other integration costs 558 52
----- ----
$1,829 $93
===== ====
</TABLE>
22. INTEREST AND RELATED EXPENSES
<TABLE>
<CAPTION>
(thousands of dollars) 1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Interest on long-term debt $5,078 $11,740 $12,110
Amortization of deferred financing costs 55 503 623
Gain on closing of swap - (3,420) -
Unrealized (gain) loss on swap (115) 891 (1,072)
------ ------- ------
$5,018 $ 9,714 $11,661
====== ====== ======
</TABLE>
F-18
<PAGE>
23. SUMMARY OF BUSINESS SEGMENTS
The Company operates in three primary business segments: Canada, the United
Kingdom and the United States. Segment selection is determined based upon
internal organizational structure, the way in which the Company's 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
direct monitor the different factors affecting financial performance. Segment
profit or loss includes all of the segment's direct cost of sales, selling,
delivery and administrative expenses and integration and related expenses.
Segment detail is summarized as follows:
<TABLE>
<CAPTION>
(thousands of dollars) 1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenue
Canada $19,416 $ 22,068 $ 25,199
United Kingdom 17,658 22,368 25,002
United States 5,000 11,974 13,717
------ ------ ------
$42,074 $ 56,410 $ 63,918
====== ====== ======
Net income before depreciation,
interest, income taxes, extraordinary
items and cumulative effect of a change
in accounting principle
Canada $ 4,389 $ 3,827 $ 6,720
United Kingdom 5,326 6,970 9,163
United States 1,498 1,048 3,514
Unallocated corporate overhead - (1,962) (2,353)
------- ------- ------
$11,213 $ 9,883 $ 17,044
====== ======= ======
Total assets
Canada $ 31,345 $ 38,308 $ 44,902
United Kingdom 25,866 34,546 32,676
United States 49,787 35,009 25,483
------- -------- -------
$106,998 $107,863 $103,061
======= ======= =======
</TABLE>
In 1997, corporate overhead was allocated to segment net income before
depreciation, interest, income taxes, extraordinary items and cumulative effect
of a change in accounting principle; in 1998 and 1999, corporate overhead was
not allocated to the Company's business segments.
24. COMPARATIVE FIGURES
Certain of the comparative figures have been reclassified to conform with
the presentation adopted in the current year including a reduction of $637,000
in both the 1998 water revenue and cumulative translation adjustment account
balances. Total shareholder's equity as at December 31, 1998 and comprehensive
loss for the year then ended did not change as a result of this
reclassification.
F-19
<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 3rd day of April, 2000.
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 3rd day of April 2000.
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 3rd day of April, 2000.
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 3rd day of April, 2000.
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 3rd day of April, 2000.
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 3rd day of April, 2000.
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 3rd day of April, 2000.
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 3rd day of April, 2000.
NATURE SPRING 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 3rd day of April, 2000.
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 3rd day of April, 2000.
NATURAL WATER LIMITED
By: /s/ Kent Dillon Schickli
--------------------------
Kent Dillon Schickli
Chief Financial Officer
