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 April 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 June 7, 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 Sheets as at
April 27, 1996 (unaudited) and
October 28, 1995 3
Consolidated Statements of Operations
(unaudited) for the Three Months and Six Months
ended April 27, 1996 and April 29, 1995 4
Consolidated Statement of Cash Flows
(unaudited) for the Six Months Months ended
April 27, 1996 and April 29, 1995 5
Notes to Consolidated Financial Statements
(unaudited) 6 - 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operation 8 - 10
Part II - Other Information 11
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 12
</TABLE>
2
<PAGE>
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
April 27, October 28,
1996 1995
---------------- ----------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $937,102 $1,543,260
Accounts receivable 1,021,012 800,881
Inventory 856,388 949,570
Other current assets 63,203 144,162
---------------- ----------------
TOTAL CURRENT ASSETS 2,877,705 3,437,873
---------------- ----------------
PROPERTY AND EQUIPMENT - net of accumulated depreciation 5,679,395 5,659,191
---------------- ----------------
OTHER ASSETS:
Intangible assets - net of accumulated amortization 23,198 68,900
Other assets 113,539 100,580
---------------- ----------------
136,737 169,480
---------------- ----------------
$8,693,837 $9,266,544
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $839,327 $622,147
Customer deposits 178,839 154,160
Accrued expenses 383,048 382,791
Line of credit 577,588 0
Current portion of long term debt 130,216 210,216
Current portion of obligations under capital lease 221,250 221,250
---------------- ----------------
TOTAL CURRENT LIABILITIES 2,330,268 1,590,564
Long term debt 1,564,480 1,679,589
Obligations under capital lease 221,250 202,565
---------------- ----------------
TOTAL LIABILITIES 4,115,998 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 April 27, 1996
Paid in capital 21,399,420 21,399,420
Accumulated deficit (16,831,259) (15,615,272)
---------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 4,577,839 5,793,826
---------------- ----------------
$8,693,837 $9,266,544
================ ================
</TABLE>
3
<PAGE>
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended Three months ended
---------------------------------------------------------------------------
April 27, April 29, April 27, April 29,
1996 1995 1996 1995
---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
SALES $3,585,121 $3,080,040 $2,315,090 $2,016,457
COST OF GOODS SOLD 2,117,717 1,849,700 1,326,482 1,163,707
---------------- ----------------- ---------------- -----------------
GROSS PROFIT 1,467,404 1,230,340 988,608 852,750
---------------- ----------------- ---------------- -----------------
OPERATING EXPENSES:
Selling, general and administrative expense 1,645,742 1,654,246 859,586 837,095
Advertising expenses 941,301 1,320,251 537,457 644,114
Amortization 45,702 45,702 22,851 22,851
Non-cash imputed stock compensation 0 (9,548) 0 (9,422)
---------------- ----------------- ---------------- -----------------
TOTAL OPERATING EXPENSES 2,632,745 3,010,651 1,419,894 1,494,638
---------------- ----------------- ---------------- -----------------
(LOSS) FROM OPERATIONS (1,165,341) (1,780,311) (431,286) (641,888)
---------------- ----------------- ---------------- -----------------
OTHER INCOME (EXPENSE):
Interest - net (53,847) (101,994) (31,578) (40,193)
Miscellaneous 3,200 (24,848) 4,035 (17,688)
---------------- ----------------- ---------------- -----------------
TOTAL OTHER INCOME (EXPENSE) (50,647) (126,842) (27,543) (57,881)
---------------- ----------------- ---------------- -----------------
NET (LOSS) ($1,215,988) ($1,907,153) ($458,829) ($699,769)
================ ================= ================ =================
NET (LOSS) PER SHARE ($0.13) ($0.21) ($0.05) ($0.07)
================ ================= ================ =================
Weighted Average Shares Used in Computation 9,678,268 9,011,601 9,678,268 9,678,268
================ ================= ================ =================
</TABLE>
4
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VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended
------------------------------------
April 27, April 29,
1996 1995
---------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($1,215,988) ($1,907,153)
Adjustments to reconcile net loss to net cash from operating activities:
Depreciation 284,204 211,849
Amortization 45,702 45,702
(Gain) loss on disposal of property and equipment (4,205) 2,435
Non cash imputed stock compensation 0 (9,422)
---------------- -----------------
(890,287) (1,656,589)
Changes in assets and liabilities:
(Increase) Decrease in accounts receivable (220,131) (749,998)
(Increase) Decrease in inventory 93,182 163,013
(Increase) Decrease in other current assets 80,959 85,114
(Increase) Decrease in other assets (12,959) 26,944
(Decrease) Increase in accounts payable 217,180 (124,413)
(Decrease) Increase in customer deposits 24,679 24,202
(Decrease) Increase in accrued expenses 257 (421,808)
---------------- -----------------
CASH USED IN OPERATING ACTIVITIES (707,120) (2,653,535)
---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (210,692) (284,856)
Proceeds from sale of fixed assets 5,117 5,500
---------------- -----------------
CASH USED IN INVESTING ACTIVITIES (205,575) (279,356)
---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit 577,588 (21,400)
Proceeds from debt 140,000 0
Principal payments of debt (411,051) (216,361)
Sale of common stock 0 4,315,208
Repurchase of stock options 0 (96,750)
---------------- -----------------
CASH PROVIDED BY FINANCING ACTIVITIES 306,537 3,980,697
---------------- -----------------
NET INCREASE (DECREASE) IN CASH (606,158) 1,047,806
CASH - Beginning of period 1,543,260 1,019,709
---------------- -----------------
CASH - End of period $937,102 $2,067,515
================ =================
Cash paid for interest $101,846 $134,026
================ =================
</TABLE>
5
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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
In March 1, 1996 the Company brought suits against two former employees
alleging that they had breached their contracts with the Company. The
suits seek injunctive relief and damages. On April 1, 1996 the Company
was granted a preliminary injunction in Vermont Superior Court that
prevented these employees from pursuing a competitive venture with the
Company. A future hearing will address the permanency of the induction.
Subsequently, both employees filed counterclaims against the Company
seeking monetary damages. The Company has certain defenses arising out
of its claims against the employees that it will assert when necessary.
6
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3. LONG TERM DEBT
On April 26, 1996 the Company renewed its line of credit with the
Chittenden Bank which was scheduled to expire on May 31, 1996. The
terms and conditions were substantially unchanged from the previous
agreement. On the same date, the Company entered into a note with
Chittenden 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 due of $875,000 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.
4. SUBSEQUENT EVENT
On May 1, 1996 Vermont Pure Springs completed the purchase of the
assets of the Happy Spring Water division of the Happy Ice Corporation
based in Buffalo, New York, a company that offers Home and Office
delivery of spring water and related products throughout the Western
New York area. The Company plans to distribute its Vermont Pure Natural
Spring Water through these existing channels. Sales for the division
were $2.1 million in 1995.
7
<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.
Results of Operations
Sales for the first half of 1996 were $3,585,121, 16% over the $3,080,040
reported for the same period last year. Sales for the three month period ended
April 27, 1996 increased 15% or $298,633 compared to same quarter in 1995, from
$2,016,457 to $2,315,090. The increase in sales was attributable to greater
consumer awareness in existing markets. The rate of sales growth in the
Metropolitan New York City market has been below the Company's expectations
because of a prolonged reorganization of the distribution system of its major
customer. The Company expects, but can give no assurances, that the distributor
will be successful in executing this change over the next year resulting in an
increase in the rate of sales growth in the area.
For the first six months, Cost of Goods Sold increased from $1,849,700 in 1995
to $2,117,717 in 1996 resulting in gross margins of $1,230,340, or 40% of sales,
and $1,467,404, or 41% of sales for the respective periods. Cost of goods sold
for the second quarter of 1996 compared to the same period a year ago were
$1,326,482 and $1,163,707, respectively, and gross profit was $988,608 or 43% of
sales and $852,750 or 42% of sales, respectively. The increase in gross profit
of $237,064 and $135,858 is 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 half of 1996, 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 six month period ended April 27, 1996 compared to the comparable period
in 1995, total operating expenses were $2,632,745 and $3,010,651, respectively,
a decrease of $377,906, or 13%. For the three month periods ending the same
times operating expenses were $1,419,894 and $1,494,638, a decrease of $74,744,
or 5%, respectively. Selling, general and administrative expenses decreased by
$8,504 for the first half and increased $22,491 for the second quarter as a
result of consolidation of administrative expenses while supporting increasing
sales volume. Advertising expenses decreased by $378,950, or 29%, for the first
six months and $106,657, or 17%, for the quarter. Reduced event sponsorship
costs and media costs accounted for the most significant portion of this
decrease. 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.
8
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Loss from operations for the six month period ended April 27, 1996 was
$1,165,341, as compared to $1,780,311 for the same period last year, a decrease
of $614,970 or 35%. For the quarter, loss from operations decreased $210,602, or
33%, from $641,888 to $431,286. The losses are attributable to the continuing
high level of expenses associated with penetration of new markets and
establishing brand recognition. These expenses exceed the margin the Company
makes on its sales, particularly during the winter months. The significantly
reduced losses from a year earlier was a direct result of a decrease in
administrative, selling, and advertising expenses.
The Company's net loss for the first half of 1996 was $1,215,988 compared to
$1,907,153 for the same period last year, a decrease of $691,165 or 36%. The net
loss for the three months ending April 27, 1996 was $458,829 compared to
$699,769 for the comparable period last year. Net interest expense decreased
significantly 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.
Liquidity and Capital Resources
As of April 27, 1996, the Company had working capital of $547,437 compared to
$1,847,309 at the end of its fiscal year on October 28, 1995. The Company's
primary requirements for capital continue 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 $1,299,872 reflects the use of cash to fund
the operating loss. On April 27, 1996 the Company had borrowed $577,588 on its
line of credit. The maximum available to borrow as of that date was $763,047,
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. In addition, during the quarter the Company made a
commitment to borrow up to $1,250,000 to make an acquisition of the assets of
the spring water division of the Happy Ice Corporation in Western New York. 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 was up to $1,650,000 based on
the performance of the acquired assets. On May 1, 1996 the Company borrowed
$1,150,000 on the Chittenden note and expects to draw down the balance in the
future. In addition, it arranged notes with the seller for up to $500,000
principal and interest payments at various dates from June 30, 1996 through May
1, 2000.
9
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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.
10
<PAGE>
PART II - Other Information
Item 1 - Legal Proceedings
In February 1996, the Company commenced an action entitled Vermont Pure
Springs, Inc vs. Robert Beattie and John Maguire in Orange Superior
Court in the State of Vermont. The court assigned the case Docket No.
S-33-2-96 Occv. The Company alleged that the defendants, who were
former employees of the Company, breached their contractual and common
law obligations concerning unfair competition and preservation of
Company trade secrets. The Company sought damages and injunctive
relief. On April 1, 1996, the Orange Superior Court entered a
preliminary injunction against both defendants prohibiting their
participation in a competing venture known as Montpelier Spring, or
disclosing any confidential information of the Company to a third
party. The court denied the Company's request for a writ of attachment.
Defendant Maguire has filed a counterclaim and a third party complaint
against the Company's president and Vermont Pure Holdings, LTD seeking
compensatory damages and punitive damages of not less than $250,000 and
attorney's fees for alleged breach of contract and unfair trade
competition. Defendant Beattie has filed a counterclaim seeking
unspecified damages and attorney's fees. The case is in the discovery
phase and it is unclear when it will proceed to a trial on the merits.
The Company does not believe that the counterclaims have any merit and
intends to pursue the litigation and defend itself vigorously.
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.
11
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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: June 7, 1996
Randolph, Vermont
VERMONT PURE HOLDINGS, LTD.
By: /s/ Bruce S. MacDonald
Bruce S. MacDonald
Vice President, Chief Financial Officer
(Principal Accounting Officer and Principal
Financial Officer)
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-27-1996
<PERIOD-END> APR-27-1996
<CASH> 937,102
<SECURITIES> 0
<RECEIVABLES> 1,165,051
<ALLOWANCES> (144,039)
<INVENTORY> 856,388
<CURRENT-ASSETS> 2,877,705
<PP&E> 7,187,276
<DEPRECIATION> (1,507,881)
<TOTAL-ASSETS> 8,693,837
<CURRENT-LIABILITIES> 2,330,268
<BONDS> 0
0
0
<COMMON> 9,678
<OTHER-SE> 4,568,161
<TOTAL-LIABILITY-AND-EQUITY> 8,693,837
<SALES> 3,585,121
<TOTAL-REVENUES> 3,585,121
<CGS> 2,117,717
<TOTAL-COSTS> 2,117,717
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 53,847
<INCOME-PRETAX> (1,215,988)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,215,988)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,215,988)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> 0
</TABLE>
