SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended July 27, 1996
Commision File No. 0-25686
VERMONT PURE HOLDINGS, LTD
(Exact name of registrant as specified in its charter)
Delaware 06-1325376
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Route 66; PO Box C; Randolph, VT 05060
(Address of principal executive offices) (Zip Code)
(802)728-3600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding at
Class September 10, 1996
Common Stock, $.001 Par Value 9,678,268
<PAGE>
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY
INDEX
<TABLE>
<CAPTION>
Page Number
<S> <C>
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet as at
July 27, 1996 (unaudited) and
October 28, 1995 3
Consolidated Statement of Operations
(unaudited) for the Three Months and Nine Months
ended July 27, 1996 and July 29, 1995 4
Consolidated Statement of Cash Flows
(unaudited) for the Nine Months Months ended
July 27, 1996 and July 29, 1995 5
Notes to Consolidated Financial Statements
(unaudited) 6 - 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operation 9 - 11
Part II - Other Information 12
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signature 13
</TABLE>
<PAGE>
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS
July 27, October 28,
1996 1995
----------------- ----------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $807,545 $1,543,260
Accounts receivable 1,974,505 800,881
Inventory 904,656 949,570
Other current assets 189,076 144,162
----------------- ----------------
TOTAL CURRENT ASSETS 3,875,782 3,437,873
----------------- ----------------
PROPERTY AND EQUIPMENT- net of accumulated depreciation 5,838,969 5,659,191
----------------- ----------------
OTHER ASSETS
Intangible assets - net of accumulated amortization 1,304,355 68,900
Other assets 102,464 100,580
----------------- ----------------
1,406,819 169,480
----------------- ----------------
$11,121,570 $9,266,544
================= ================
LIABILITIES AND STOCK HOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $975,221 $622,147
Accrued Expenses 635,617 382,791
Deposits 591,053 154,160
Line of credit 530,303 0
Current portion of long term debt 323,420 210,216
Current portion of obligations under capital lease 229,908 221,250
----------------- ----------------
TOTAL CURRENT LIABILITIES 3,285,522 1,590,564
Long term debt 2,615,296 1,679,589
Obligations under capital lease 337,227 202,565
----------------- ----------------
TOTAL LIABILITIES 6,238,045 3,472,718
----------------- ----------------
STOCKHOLDERS' EQUITY
Common stock - $.001 par value, authorized 9,678 9,678
20,000,000 shares, 9,678,268 issued and outstanding
at October 28, 1995 and July 27, 1996
Paid in capital 21,399,420 21,399,420
Accumulated deficit (16,525,573) (15,615,272)
----------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 4,883,525 5,793,826
----------------- ----------------
$11,121,570 $9,266,544
================= ================
</TABLE>
3
See notes to financial statements
<PAGE>
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended Three months ended
---------------------------------------------------------------------------
July 27, July 29, July 27, July 29,
1996 1995 1996 1995
---------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
SALES $8,410,563 $6,020,576 $4,825,442 $2,940,536
COST OF GOODS SOLD 4,421,337 3,588,450 2,303,620 1,738,750
---------------- ---------------- ---------------- -----------------
GROSS PROFIT 3,989,226 2,432,126 2,521,822 1,201,786
---------------- ---------------- ---------------- -----------------
OPERATING EXPENSES:
Selling, general and administrative expense 2,990,499 2,505,638 1,344,757 860,940
Advertising expenses 1,685,576 2,027,144 744,275 706,893
Amortization 105,819 68,553 60,117 22,851
---------------- ---------------- ---------------- -----------------
TOTAL OPERATING EXPENSES 4,781,894 4,601,335 2,149,149 1,590,684
---------------- ---------------- ---------------- -----------------
PROFIT (LOSS) FROM OPERATIONS (792,668) (2,169,209) 372,673 (388,898)
---------------- ---------------- ---------------- -----------------
OTHER INCOME (EXPENSE):
Interest - net (119,572) (133,446) (65,725) (31,452)
Miscellaneous 1,939 (27,840) (1,261) (2,992)
---------------- ---------------- ---------------- -----------------
TOTAL OTHER INCOME (EXPENSE) (117,633) (161,286) (66,986) (34,444)
---------------- ---------------- ---------------- -----------------
NET INCOME (LOSS) ($910,301) ($2,330,495) $305,687 ($423,342)
================ ================ ================ =================
NET INCOME (LOSS) PER SHARE ($0.09) ($0.25) $0.03 ($0.04)
================ ================ ================ =================
Weighted Average Shares Used in Computation 9,678,268 9,233,823 9,678,268 9,678,268
================ ================ ================ =================
</TABLE>
4
See notes to financial statements
<PAGE>
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
------------------------------------
July 27, July 29,
1996 1995
----------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($910,301) ($2,330,495)
Adjustments to reconcile net loss to net cash from operating activities:
Depreciation 448,590 317,772
Amortization 105,819 68,553
Loss on disposal of property and equipment 2,366 4,869
Non cash imputed stock compensation 0 (9,548)
----------------- ----------------
(353,526) (1,948,849)
Changes in assets and liabilities (net of effects of acquisition):
(Increase) Decrease in accounts receivable (947,393) (1,170,282)
(Increase) Decrease in inventory 68,416 224,242
(Increase) Decrease in other current assets (44,914) 98,007
(Increase) Decrease in other assets 48,114 44,685
(Decrease) Increase in accounts payable 272,511 (73,448)
(Decrease) Increase in accrued expenses 243,569 (240,809)
(Decrease) Increase in deposits 227,169 38,979
----------------- ----------------
CASH USED IN OPERATING ACTIVITIES (486,054) (3,027,475)
----------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (318,281) (362,954)
Proceeds from sale of fixed assets 42,116 9,100
Cash expended for acquisition (1,240,677) 0
----------------- ----------------
CASH USED IN INVESTING ACTIVITIES (1,516,842) (353,854)
----------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit 530,304 102,445
Proceeds from debt 1,290,000 0
Principal payments of debt (553,123) (330,585)
Sale of common stock 0 4,315,208
Repurchase of stock options 0 (96,750)
----------------- ----------------
CASH PROVIDED BY FINANCING ACTIVITIES 1,267,181 3,990,318
----------------- ----------------
NET INCREASE (DECREASE) IN CASH (735,715) 608,989
CASH - Beginning of period 1,543,260 1,019,709
----------------- ----------------
CASH - End of period $807,545 $1,628,698
================= ================
Cash paid for interest $177,485 $188,055
================= ================
</TABLE>
5
See notes to financial statements
<PAGE>
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying unaudited consolidated financial statements have been
prepared in accordance with Form 10-Q instructions and in the opinion
of management contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position,
results of operations, and cash flows for the periods presented. The
results have been determined on the basis of generally accepted
accounting principles and practices applied consistently with the Form
10-K for the year ended October 28, 1995.
Certain information and footnote disclosures normally included in the
financial statements presented in accordance with generally accepted
accounting principles have been condensed or omitted. The accompanying
consolidated financial statements should be read in conjunction with
the financial statements and notes thereto incorporated by reference
from the Company's Form 10-K and Annual Report for the year ended
October 28, 1995.
2. CONTINGENCIES
A. Former Distributor
In August 1994, an action was brought by a former distributor alleging
that the Company breached an oral distribution arrangement by
terminating its relationship, refusing to continue to supply it with
the Company's products and by allowing another distributor to sell the
Company's product within its alleged territory. The distributor is
seeking monetary damages and injunctive relief. The Company has certain
defenses against the claim and counterclaims which it will assert
against the distributor at the appropriate time.
B. Former Employees
On March 1, 1996 the Company brought suits against two former employees
alleging that they had breached their agreements with the Company. The
suits seek permanent injunctive relief and damages. On April 1, 1996
the Company was granted a preliminary injunction by the Vermont
Superior Court preventing them from pursuing ventures competitive to
the Company. A future hearing will address the permanency of the
injunction. Subsequently, both defendants filed counterclaims against
the Company seeking monetary damages. The Company has defenses to these
counterclaims arising out of its claims against the defendants that it
will assert.
6
<PAGE>
3. ACQUISITION
On May 1, 1996 the Company completed the acquisition of selected assets
and liabilities of the Happy Ice Corporation in Buffalo, NY. The
general terms of the acquisition were outlined in Form 8-K, under item
2, filed on May 15, 1996. The transaction was governed by an Asset and
Purchase Agreement which was filed with Form 8-K.
The following table summarizes the acquisition in financial terms:
<TABLE>
<CAPTION>
<S> <C>
Purchase Price $1,450,000
Acquisition Costs 90,677
Fair Value of Tangible and Identifiable Intangible Assets Acquired (742,657)
Liabilities Assumed 340,324
Goodwill $1,138,344
</TABLE>
Goodwill is amortized over a 30 year term. Identifiable intangible
assets consist of customer lists valued at $252,929 and are amortized
over 3 years.
The assets purchased had been used by Happy Ice to distribute spring
water and ancillary products in the Buffalo and Rochester areas of
Western New York. The Company plans to continue to use the assets to
distribute its Vermont Pure Spring Water brand to homes and offices
throughout the region. On August 8, 1996 the Company commenced changing
the water distributed in that area from the Happy to Vermont Pure
brand. Sales of Happy Spring Water for 1995 were $2.1 million. Sales
attributable to the acquired division for the quarter were $543,181.
Liabilities assumed in the acquisition included accounts payable and
customer deposits. Additionally, the Company entered into agreements at
the date of purchase to assume leases from the seller with various
terms for buildings and equipment used in the normal course of
business.
4. LONG TERM DEBT
On April 26, 1996, the Company entered into a note with the Chittenden
Bank to borrow up to $1,250,000 to purchase assets from the Happy Ice
Corporation . The note requires monthly principal payments of $10,420
plus accrued interest at the prime rate plus 1.75% per annum with the
balance of $875,000 due on May 1, 1999. The Company borrowed $1,150,000
on the note on May 1, 1996 and expects to borrow the balance at a
future date. In addition, the Company entered into three notes with the
seller, one for $100,000 due in full on June 30, 1996 with no interest,
a second for $200,000, at 8% annual interest, with equal principal
payments due on May 1, 1997-2000, and a third for up to $200,000 (based
on the performance of the acquired assets) due in full on May 1, 1999
with accrued interest at 8% per annum. As of September 10, 1996 only
$50,000 of the note due to the seller on June 30 had been paid because
certain contingencies, as stated in the Asset and Purchase Agreement
had not yet been met.
7
<PAGE>
5. STOCK OPTIONS
During the current fiscal year, the company has granted 225,000 stock
options to officers and directors, 155,000 under the 1993 Performance
Equity Plan and 70,000 outside the plan. These options were issued at
the market price on the date of grant and have various vesting
schedules ranging from 1996 through 1999. No other options have been
granted during the year.
6. INCOME/(LOSS) PER SHARE
Income/(Loss) per share is based on the weighted average of common
shares and dilutive common share equivalents outstanding during the
respective period.
8
<PAGE>
PART I - Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto as filed in the Company's Form 10-K for
the year ended October 28, 1995. Reference is also made to the Company's Form
8-K filed May 15, 1996.
Results of Operations
Sales for the first nine months of 1996 were $8,410,563, an increase of
$2,389,987 or 40%, over the $6,020,576 reported for the same period last year.
Sales for the three month period ended July 27, 1996 increased $1,884,906 or
64%, from $2,940,536 to $4,825,442. Part of the increase in sales was
attributable to the acquisition of a new home and office delivery business in
western New York at the beginning of the quarter. Total sales for the new
division for the quarter were $543,181. Excluding these sales, the increase in
sales for the year to date and quarter in 1996 over the prior year were 31% and
46%, respectively. In addition to the acquisition, the Company has been
successful in expanding home and office distribution to new markets in New
England through outside distributors. Otherwise, the increase in sales was
attributable to greater consumer awareness in existing core markets, development
of a secondary label, and expansion into new markets with retail- size products.
For the first nine months, Cost of Goods Sold increased from $3,588,450 in 1995
to $4,421,337 in 1996 resulting in gross margins of $2,432,126, or 40% of sales,
and $3,989,226, or 47% of sales for the respective periods. Cost of goods sold
for the third quarter of 1996 compared to the same period a year ago were
$2,303,620 and $1,738,750, respectively, and gross profit was $2,521,822 or 52%
of sales and $1,201,786 or 41% of sales, respectively. The increases in gross
profit of $1,557,100 and $1,320,036 are due to increased volume which lowers the
per unit production cost of the product and lower raw material costs,
specifically for PETE bottles. Although the Company has benefited from a
considerable decrease in raw material pricing over the last 9-12 months, the
market remains volatile and the stability of these costs cannot be guaranteed.
Significant price fluctuations in the future could result in corresponding
positive or negative effects on cost of goods sold and gross margin.
For the nine month period ended July 27, 1996 compared to the same period in
1995, total operating
9
<PAGE>
expenses were $4,781,894 and $4,601,335, respectively, an increase of $180,559,
or 4%. For the three month periods ending the same times, operating expenses
were $2,149,149 and $1,590,684, respectively, an increase of $558,465, or 35%.
Exclusive of the acquisition made in the quarter, total operating expenses
decreased by 7% for the year and increased by 4% for the quarter. Selling,
general and administrative expenses increased by $484,861 for the first nine
months and increased $483,817, or 56%, for the third quarter. The increase in
these costs were due to the operation of the new division in western New York.
In addition to ongoing selling and administration expenses, there were
additional startup and conversion costs for the organization of the new
division. Total selling, general, and administrative expenses associated with
this division were $492,065 for the quarter. Exclusive of this amount, selling,
general, and administrative expenses decreased by 1% for the year to date and
quarter, respectively. Advertising expenses decreased by $341,568, or 17%, for
the first nine months and increased $37,382, or 5%, for the quarter. Reduced
event sponsorship costs and media costs accounted for the most significant
portion of the decrease for the year to date. Promotional costs related to
increased volume were responsible for increased costs for the quarter. The
Company anticipates however, that it will continue to spend significant amounts
in the future for advertising and promotion as it continues to develop brand
recognition and increase market penetration.
Loss from operations for the nine month period ended July 27, 1996 was $792,668,
as compared to $2,169,209 for the same period last year, a decrease of
$1,376,541 or 63%. For the quarter, the Company had a profit from operations of
$372,673 compared to a loss of $388,898 for the third quarter of 1995, an
improvement of $761,571. The profit for the quarter is attributable to a 64%
increase in sales coupled with a decrease in packaging and advertising costs.
The profit for the quarter and loss for the year to date are a reflection of the
seasonality of the business. To become profitable for an entire year the Company
must continue to grow sales, especially in the traditionally lower volume winter
months. To do this, the Company plans to continue to create greater consumer
awareness and to find alternate distribution channels for its retail product and
expand its home and office distribution which is a higher margin, less cyclical
business. No assurance can be given that this plan will be successful.
The Company's net loss for the first nine months of 1996 was $910,301 compared
to $2,330,495 for the same period last year, an improvement of $1,420,194 or
61%. The net income for the three months ending July 27, 1996 was $305,687
compared to a loss of $423,342 for the comparable period last year, an
improvement of $729,029. Net interest expense decreased for the nine months from
a year earlier as a result of decreased borrowing to fund operations through a
bank line of credit and lower borrowing rates and an increase in interest income
because of higher investment yields. Interest expense increased for the quarter
as a result of the increased debt associated with the acquisition during the
quarter.
Liquidity and Capital Resources
As of July 27, 1996, the Company had working capital of $590,260 compared
to $1,847,309 at the end of its fiscal year on October 28, 1995. Largely as a
result of the reduction in the net loss for the nine months ending July 27,
1996, cash flow from operations showed a significant improvement in the 1996
nine month period as compared to the same period in 1995. The net cash outflow
improved to $486,054 from $3,027,475 for those respective periods. The Company's
primary requirements for capital continue
10
<PAGE>
to be for the marketing and promotional activities needed to effect market
penetration and expand sales and acquire operating assets needed to accommodate
the growth of the business. These requirements will result in continued net cash
outflows until sales increase sufficiently to offset the Company's operating
costs.
The decrease in working capital of $1,257,049 reflects the use of cash to fund
the operating loss and purchase equipment as well as short term classification
of scheduled debt repayment. Specifically, working capital needs for the current
quarter were required to cover receivables increases driven by the increase in
sales and to purchase and re-start the new division. On July 27, 1996 the
Company had borrowed $530,304 on its line of credit. The maximum available to
borrow as of that date was $902,690, based on the level of receivables and
inventory. The Company pays interest on any outstanding principal at the prime
rate as published in the Wall Street Journal plus 1.75%, which is currently
10.00% per annum. The loan facility is secured by all the inventory, receivables
and intangible assets of the Company. It was renewed on April 26, 1996 under the
terms of the original agreement and expires June 1, 1997. The Company made a
commitment to borrow up to $1,250,000 to make the acquisition of the assets of
the spring water division of the Happy Ice Corporation in Western New York. As
of September 10, 1996, the Company had drawn down $1,200,000 from this loan. The
note matures May 1, 1999 and requires principal payments of $10,420 a month,
plus accrued interest at the prime rate plus 1.75% per annum, with the balance
of $875,000 due on the date of maturity. It is secured by substantially all of
the acquired assets as well as the collateral for the line of credit discussed
above. The total purchase price of the business under the agreement was up to
$1,650,000, a certain portion of which is contingent on the performance of the
acquired assets. The balance of the purchase price was financed through notes to
the Happy Ice Corporation, one for $100,000 due in full on June 30, 1996 with no
interest, a second for $200,000, at 8% annual interest, with equal principal
payments due on May 1, 1997-2000, and a third for up to $200,000 (based on the
performance of the acquired assets) due in full on May 1, 1999 with accrued
interest at 8% per annum. As of September 10, 1996 only $50,000 of the note due
to the seller on June 30 had been paid because certain contingencies, as stated
in the Asset and Purchase Agreement had not yet been met
The Company anticipates that it has adequate working capital for at least the
next year. Although the Company has reduced its cash usage considerably over the
last year, it may become necessary for it to seek additional sources of working
capital later in 1996. If this is the case, no assurances can be given that the
Company will find a source to provide additional working capital under terms
acceptable to the Company.
11
<PAGE>
PART II - Other Information
Item 1 - Legal Proceedings
None
Item 2 - Changes in Securities
None
Item 3 - Defaults upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
On May 15, 1996, the Company filed a report on Form 8-K to report,
under Item 2, the acquisition of certain assets of the Happy Ice
Corporation in Buffalo, New York.
12
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: September 10, 1996
Randolph, Vermont
VERMONT PURE HOLDINGS, LTD.
By: Bruce S. MacDonald
-----------------------
Bruce S. MacDonald
Vice President, Chief Financial Officer
(Principal Accounting Officer and Principal
Financial Officer)
13
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000885040
<NAME> VERMONT PURE HOLDINGS LTD
<MULTIPLIER> 1
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-27-1996
<PERIOD-START> OCT-29-1995
<PERIOD-END> JUL-27-1996
<EXCHANGE-RATE> 1
<CASH> 807,545
<SECURITIES> 0
<RECEIVABLES> 2,153,544
<ALLOWANCES> (179,039)
<INVENTORY> 904,956
<CURRENT-ASSETS> 3,875,782
<PP&E> 7,537,656
<DEPRECIATION> (1,698,687)
<TOTAL-ASSETS> 11,121,570
<CURRENT-LIABILITIES> 3,285,522
<BONDS> 0
0
0
<COMMON> 9,678
<OTHER-SE> 4,873,847
<TOTAL-LIABILITY-AND-EQUITY> 11,121,570
<SALES> 8,410,563
<TOTAL-REVENUES> 8,410,563
<CGS> 4,421,337
<TOTAL-COSTS> 4,421,337
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 119,572
<INCOME-PRETAX> (910,301)
<INCOME-TAX> 0
<INCOME-CONTINUING> (910,301)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (910,301)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> 0
</TABLE>
