SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (fee required) for the fiscal year ended October 26, 1996
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (no fee required) For the transition period from
___________ to ___________
Commission File Number 0-25686
VERMONT PURE HOLDINGS, LTD.
----------------------------
(Exact name of small business issuer in its charter)
Delaware 06-1325376
- - - - ----------------------------------- ------------------------------
(State or other jurisdiction of I.R.S. Employer Identification
incorporation or organization Number
P.O. Box C, Route 66, Catamount Industrial Park, Randolph, Vermont 05060
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(Address of principal executive offices and zip code)
Issuer's telephone number, including area code: (802) 728-3600
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
(Title of Class)
Check whether the Issuer: (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 [ ]
Check if no disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B is contained herein, and no disclosure will be contained, to the best of the
Issuer's knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-KSB or any amendment to this Form
10-KSB. Yes [ ] No [X]
The Issuer's revenues for the most recent fiscal year were $11,878,829.
Based on the last sale at the close of business on January 20, 1997, the
aggregate market value of the Issuer's common stock held by non-affiliates of
the Issuer was approximately $24,753,155.
The number of shares outstanding of the Issuer's Common Stock, $.001 par value,
was 9,678,268 on January 20, 1997.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
Documents incorporated by reference: None.
Exhibit Index is located on page 25
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ITEM 1. BUSINESS.
The Company bottles, markets and distributes natural spring water under the
"Vermont Pure(TM)" and "Hidden Spring(R)" brands to the consumer, natural foods
and home/office markets. The Company sells to the consumer and natural food
markets primarily in the New England, Mid-Atlantic and Mid-Western states while
it sells to the home/office market primarily in Vermont and parts of Northern
New York, Massachusetts and New Hampshire.
Industry Background
Bottled water has been the fastest growing segment of the beverage industry
for the last 10 years. According to the May 1996 edition of "Bottled Water in
the United States," a study prepared by the Beverage Marketing Corporation,
total bottled water consumption in the United States has more than tripled from
1983 to 1995. Annual consumption increased from 2.8 gallons per capita in 1980
to 11.0 gallons per capita in 1995, and it is projected to reach 14.2 gallons
per capita by the year 2000. Bottled water volume in the United States has grown
significantly, increasing from the approximately 1.1 billion gallons in 1984 to
approximately 2.9 billion gallons in 1995; from approximately $1.3 billion in
sales in 1984 to over $3.3 billion in 1995.
The bottled water market may be divided into two distinct categories:
non-sparkling (still or non-carbonated water) which accounts for approximately
80% of bottled water sales and sparkling (carbonated) which accounts for
approximately 20% of bottled water sales. All of the Company's natural spring
water products are in the non-sparkling category.
The Company believes that the development and continued growth of bottled
water markets since the early 1980's is in reaction to growing public awareness
of, and fears about, environmental pollution and of the effect on many municipal
water sources of lead, carcinogenic chemical by-products from over-chlorination,
toxic waste dumps, landfills and bacterial contamination. In addition, the
Company believes that consumers perceive bottled water as a healthy and
refreshing beverage alternative to beer, liquor, wine, soft drinks, coffee, tea,
juices and juice products. The Company anticipates that sales of bottled water
will continue to grow as increased health and fitness consciousness, alcohol
moderation and caffeine and sodium avoidance continue to influence consumer
choice.
Company Background
The Company acquired the business of Vermont's Hidden Spring, Inc., a local
Vermont bottled water company, in July 1991. The assets included one spring on
1.7 acres of land, a 10,000 square foot office facility and bottling plant in
Randolph, Vermont and the "Vermont's Hidden Spring" brand. Since the
acquisition, the Company acquired additional springs on approximately 65 acres
of land and built a second office, bottling and warehouse facility of 32,000
square feet in Randolph, Vermont.
Immediately after the acquisition of the business of Vermont's Hidden
Spring, Inc., the Company developed a new brand under the label, "Vermont
Pure(TM)." The "Vermont Pure(TM)" brand is positioned as a premium brand for the
general consumer market with a wide distribution in supermarkets, convenience
stores and other consumer outlets. The Company has focused on distributing the
"Vermont Pure(TM)" brand in the New England and Mid-Atlantic regions since 1991,
and more recently the Company has expanded its distribution into the Northern
Virginia - Washington, D.C. - Baltimore metropolitan and the Northern
Mid-Western markets.
The Company retained its original product tradename, "Vermont's Hidden
Spring," and subsequently modified it to "Hidden Spring(R)" The Company
currently uses this brand name for spring bottled water marketed to the natural
food market.
Because the home/office bottled water distribution industry is a fragmented
yet solid part of the bottled water market and generates margins and cash flows
that compare favorably with consumer bottled water, since the mid-1990's, the
Company has sought to expand home/office distribution in its home market of
Vermont and more recently developed and expanded a share of the Northern New
York, Massachusetts and New Hampshire home/office markets. In May 1996, the
Company through its wholly owned subsidiary, Vermont Pure Springs Inc.
("Springs"), purchased certain assets of the spring water division of Happy Ice
Corporation ("HIC") used in the bottling, sale and distribution of spring water
in three and five gallon bottles, the rental of water coolers and coffee
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dispensers and sale of coffee, tea and hot beverage supplies for home and office
customers. In addition, Springs assumed a lease for a distribution warehouse in
Buffalo, New York. The market and distribution area for these products is in
Buffalo, Syracuse, Rochester and Western New York.
Description of Water Sources
The primary sources of the natural spring water used by the Company are
springs located on the Company's properties in Randolph, Vermont. The springs
are in the Green Mountain Range, just east of the gradational contact between
the Waits River Formation and Gile Mountain Formation.
Percolation through the earth's surface is Nature's best filter of water.
The Company believes that the exceptionally long percolation period of natural
spring water in the central Vermont area and in particular its springs assures a
high level of purity. Moreover, the long percolation period permits the water to
become mineralized and Ph balanced. A report of Wagner, Heindel and Noyes, Inc.,
consulting geologists, in Burlington, Vermont dated July 17, 1991, states as
follows:
Because water from the Vermont Pure Springs is undoubtedly a mixture of
older waters and newer waters, the bracketed ages for water issuing from
the springs is likely to be 8 to 20 years. The dates indicate that
groundwater spends a substantial amount of time in the subsurface
environment before discharging at the spring.
Management believes that the age and extended percolation period of its
natural spring water provides the natural spring water with certain distinct
attributes: a purer water; noteworthy mineral characteristics including the fact
that the water is sodium free and has a naturally balanced Ph; and a light,
refreshing taste which contrasts to the heavy mineral taste of some imported
waters.
In addition to obtaining water from the springs it owns, the Company, from
time to time, obtains bulk quantities of water from natural springs owned or
operated by non-affiliated entities. The Company currently has a supply contract
with one such owner under which it may obtain natural spring water in the
quantities it needs, if and when required. All of such springs are approved
sources for natural spring water.
The Company is highly dependent on the integrity and existence of the
natural springs from which it obtains its spring water. Natural occurrences
beyond the control of the Company such as drought, earthquake, a change in the
chemical or mineral content or purity of the water or environmental pollution
may affect the amount and quality of the water emanating from the springs the
Company uses. Any such occurrence may have an adverse impact on the business of
the Company.
Products
The Company's natural spring water is sold under the "Vermont Pure(TM)" and
"Hidden Spring(R)" brands and is packaged in various bottle sizes ranging from
12 ounces to 1.5 liters and is sold in single units and plastic rings of six
bottles, depending on the market to which the product is targeted. The Company
has recently introduced a new bottle size of 750 ml (approximately 25 ounces)
which consumer feedback indicates is a preferred container size for bottled
water. The Company uses a sports cap on most of its product sizes. Consumer
sizes are bottled in clear PET (polyethylene terephthalate) recyclable bottles
which is perceived in the market place as a high quality package. The
home/office natural spring water products are sold in three and six gallon
bottles. In connection with the home/office accounts, the Company also
distributes coffee, tea and other hot beverage products and related supplies.
Marketing
The Company generally markets its "Vermont Pure(TM)" products as "premium"
domestic bottled water products. A premium bottled water product is
distinguished from other available bottled water products by being packaged in
small portable containers, typically PET recyclable bottles and, by being
classified as a natural spring water by the FDA. The Company prices its "Vermont
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Pure(TM)" brand competitive to other domestic premium brands but lower than
imported premium water products. The "Hidden Spring(R)" products are similarly
packaged and marketed but specifically oriented to the natural food market.
The Company markets its products by highlighting the unique characteristics
of the Company's water, namely a natural spring source, purity, mineral
composition and desirable taste. The Company also uses the image of the State of
Vermont in its marketing and brand identification. The Company believes that
products originating from Vermont have the general reputation for being pure,
wholesome, trustworthy and natural. The State of Vermont also is nationally
recognized as an environmentally clean and health conscious state with strict
regulations protecting its natural resources.
The Company's premium products are bottled in sleek, clear plastic PET
recyclable bottles. The Company believes that this is the "ultimate" consumer
bottle package because it is clean, clear, light and recyclable and generally is
perceived by consumers to be upscale. The Company believes that the high quality
packaging of its products enhances their image as premium domestic bottled water
products.
The Company has focused its marketing and sales activities in the eastern
and mid-western United States. The Company currently distributes its products in
the New England, Mid-Atlantic and Northern Mid-Western states and the Northern
Virginia - Washington, D.C. - Baltimore metropolitan area. The Company also
distributes its products in Arizona and, through a distributor in Puerto Rico,
in the Caribbean.
The home/office sales are generated and serviced using directly operated
facilities, Company employees and Company designated distributors. The Company
generally uses the "Vermont Pure(TM)" brand for this market and maintains
distribution routes in its various market areas.
Slotting Fees
For the Company to achieve placement of its consumer products in certain
supermarket chains and individual supermarket stores, it is necessary for the
Company to purchase shelf space by paying slotting fees. Typically, supermarket
chains and prominent local supermarkets impose these charges as a one time
payment before the products are permitted in the store or chain. Slotting fees
are less frequently imposed by other types of retail outlets such as individual
convenience stores and delicatessens. The fees are negotiated on an individual
basis. The charges represent a substantial expense to the Company in advance of
any sales. No assurance can be given that the Company will be able to negotiate
satisfactory arrangements for shelf space or have the capital necessary to pay
slotting fees in supermarkets that would enhance its marketing and distribution
efforts. In addition, if the Company's products do not sell well in a particular
chain of stores or in a particular store, the chain or store may discontinue
stocking the Company's products in which case the slotting fees previously paid
will not be refunded. Thus, no assurance can be given that the payment of
slotting fees will guarantee permanent shelf space or result in increased sales
or market share.
Advertising and Promotion
The Company advertises its products primarily through television and radio
media. In connection with this advertising, the Company uses point of sale,
in-store displays, price promotions, store coupons, free-standing inserts and
cooperative and trade advertising. The Company also actively promotes its
products through sponsorship of various organizations and sporting events. In
each year from 1991 through 1995, the "Vermont Pure(TM)" brand was designated
the official water of the New York City Marathon and in 1994 and 1995, it was
designated the official water of the Boston Marathon. The Company terminated its
relationships with the New York City and Boston Marathons in 1996. In recent
years, the Company has also sponsored professional golf and tennis events, as
well as major ski areas and sports arenas.
During the winter of 1995 and 1996, the Company participated with Cabot
Creamery, the Vermont Ski Areas Association and the Vermont Department of Travel
& Tourism, to execute a joint television advertising campaign. This strategic
pooling of advertising dollars delivered a cost-effective media campaign in key
market areas. The association with picturesque images of Vermont worked well to
enhance the awareness of the "Vermont Pure(TM)" roots in the Green Mountains.
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The Company is similarly exploiting co-branding opportunities. During 1996 the
Company entered into an arrangement with Ben & Jerry's Homemade, Incorporated
under which the Company would supply its Vermont Pure water for use in Ben
& Jerry's(R) All Natural Sorbets. The "Vermont Pure(TM)" name is highlighted on
all Ben & Jerry's sorbet packaging. The Company believes that the relationship
proves that the quality of its water provides a "sales" opportunity to use
'Vermont Pure(TM)" as a value added ingredient in food manufacturing.
Distribution
The Company uses independent supermarket food brokers and beverage
distributors for the distribution of its consumer products. Using brokers and
distributors is typical in the beverage industry as an efficient use of capital
for maximum market penetration. Food brokers promote food and beverage products
and monitor product display and shelf space allocations in designated
supermarkets and are compensated on a commission basis. Beverage distributors
purchase the products of many companies and then wholesale them to retail chains
or make bulk retail sales. Brokers and distributors generally have established
relationships among local retail outlets for beverage products and facilitate
obtaining shelf space. Occasionally, the Company sells its products directly to
grocery store chains.
The Company has distribution agreements for the distribution of the
"Vermont Pure(TM)" brand with The Coca- Cola Bottling Company of New York, Inc.
("KONY") for parts of New York (including New York City), northern New Jersey,
Connecticut, western Massachusetts, southern New Hampshire and southern Vermont;
The Coca-Cola Bottling Company of Southeastern New England for Rhode Island and
for parts of eastern Connecticut; The Coca-Cola Bottling Company of Northern New
England for parts of New York, northern Vermont and Maine; The Coca-Cola
Bottling Company of Cape Cod for parts of eastern Massachusetts; L. Knife & Son,
Inc. for parts of eastern Massachusetts; and Select Beverages Incorporated, a
Chicago based beverage distributor for a 14 state region in the Mid-Western
states. Under each of the agreements, the Company is obligated to supply the
distributors with their requirements of the "Vermont Pure(TM)" brand at
established prices. In addition, under the KONY agreement, the Company is
obligated to participate in the creation and funding of various advertising and
marketing programs (in addition to other Company programs) and pay slotting fees
of the retail outlets where KONY determines to sell the "Vermont Pure(TM)"
brands. Each of the agreements is for a stated term of between one and five
years, but is terminable if either party does not fulfill certain obligations.
The Company is constantly evaluating its distribution arrangements and
plans to add beverage distributors to increase the size of its distribution
network to achieve greater market penetration. The Company also is seeking to
enter into additional regional and national distribution arrangements with
beverage distributors in order to be able to promote its products more
effectively as a national brand. No assurance can be given that the Company will
be able to create a sufficiently large network of distributors or enter into
national distribution arrangements adequate to achieve market penetration and
market share necessary to create a national brand of natural spring water or
adequate sales to generate sufficient revenues to sustain its operations.
The Company employs a sales force to oversee its food broker and beverage
distribution network and to act as liaisons between the food brokers and
beverage distributors and the Company for ordering product, facilitating
distribution and servicing retail outlets and warehouse operations. Sales
personnel actively seek to expand the number of retail outlets carrying the
Company's products, seek additional food brokers and beverage distributors and
generally implement the Company's marketing efforts.
The Company ships its consumer product from its bottling facilities in
Randolph, Vermont by common carrier either directly to beverage distributors,
retail outlets or to authorized warehouses for later distribution to beverage
distributors and retail outlets. Storage is charged on a per pallet basis and
transportation costs vary according to the distance of the shipment. Home/office
product distribution is made from its facilities in Randolph, Vermont and
Buffalo, New York, as well as through outside distributors in the Long Island
and northern areas of New York State and Boston and northwestern areas of
Massachusetts.
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Contract Packaging
The Company performs contract packaging of its natural spring water for
distributors of other brands of bottled water and grocery store chains for house
brands. Contract packaging is very price competitive and typically is performed
under short-term agreements usually of up to two years duration. The Company
intends to actively seek opportunities for contract packaging because it
improves the utilization of the Company's natural resources and plant facilities
at minimal cost.
Supplies
The Company does not manufacture any of the bottles or packaging in which
its products are sold. The Company purchases all of its PET bottles and the
plastic caps used thereon from major plastic bottle vendors. Because of the
intense demand for this form of bottle, from time to time the Company has
experienced delays in obtaining an adequate number of bottles. Moreover, in 1994
and 1995, the market for plastic bottles and corrugated packaging was volatile
and had an adverse impact on the cost of goods sold at that time. In 1996, resin
prices that dictate the cost of PET plastic dropped and industry capacity
increased. Consequently, the Company's cost for plastic bottles dropped
significantly. During this period, the Company negotiated a three-year contract
with a new bottle supplier for all of its needs. Purchase contracts, including
the new bottle supply contract, that the Company has with its suppliers for many
of its raw materials are priced by reference to market prices. Notwithstanding
its contracts, the Company may experience market instability in respect of raw
material supplies. No assurance can be given that the Company will be able to
obtain the supplies it requires on a timely basis or at all or that the Company
will be able to obtain them at prices that allow it to maintain the profit
margin it has had in the past. Any raw material disruption or price increase may
result in an adverse impact on the financial condition and prospects for the
Company.
Seasonality
The Company experiences some seasonality in its sales and revenues. The
period from June to September represents the peak period for sales and revenues
due to increased consumption of beverages during the summer months.
Significant Customer
Pursuant to the distribution agreement with KONY, the Company sold natural
spring water products to KONY which represented 39% and 35% of the Company's
total sales in the fiscal years ended October 28, 1995 and October 26, 1996.
Moreover, accounts receivable from KONY represented 26% and 14% of the total
accounts receivable of the Company at October 28, 1995 and October 26, 1996,
respectively.
Competition
Management believes that bottled natural spring water historically has been
a regional business in the United States. As a result there are numerous
operating springs within the United States producing a large number of branded
products which are offered in local supermarkets and other retail outlets in the
smaller consumer sizes and sold to the home and office markets in one gallon and
multiple gallon containers. More recently, national brands of natural spring
water have been developed. Dominating the national market are Evian and Perrier
and a recent brand introduction by Dannon Spring Water. Both Evian and Dannon
are owned by Group Danone, Geneva, Switzerland. Additionally, Perrier
distributes regional brands, such as Poland Spring, Deer Park, Great Bear and
Ice Mountain in the Northeast, Zepherhills in Florida, Ozarka and Utopia in
Texas, and Calestoga and Arrowhead in California. Perrier is a division of
Nestle. In addition, there are many other strong regional brands, such as Naya,
Crystal Geyser and Sparkletts. The Pepsi-Cola Company distributes a brand of
bottled spring water under the Avalon label and is in the process of introducing
a drinking water under the Aquafina trademark. Many of the Company's regional
and national competitors are well established companies with recognized brand
names and consumer loyalty. Moreover, these companies, as compared to the
Company, have substantially greater financial resources and have established
market positions, proprietary trademarks, distribution networks and bottling
facilities. The Company also faces competition from the fast growing "private
label" and contract packaged brands of natural spring water. These brands
compete on a low-price basis and often occupy premium shelf space because they
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are retailer brands. Additionally, the Company faces competition from Canadian
spring waters which price their product aggressively due to the exchange rate
differential between the Canadian and U.S. dollars.
The home and office distribution business faces competitive challenges from
national companies, such as Culligan, Perrier (Poland Spring, Great Bear and
Deer Park), as well as Belmont Springs (Suntory Group). There are also local
well established bottled water operators that compete with the Company.
Trademarks
The Company sells its natural spring water products under the tradenames
"Vermont Pure(TM)" Natural Spring Water" and "Hidden Spring(R)." The Company's
labels which include these tradenames are registered with the United States
Patent and Trademark Office.
Government Regulation
The Federal Food and Drug Administration ("FDA") regulates bottled water as
a "food." Accordingly, the Company's bottled water must meet FDA requirements of
safety for human consumption, of processing and distribution under sanitary
conditions and of production in accordance with the FDA "good manufacturing
practices." To assure the safety of bottled water, the FDA has established
quality standards that address the substances that may be present in water which
may be harmful to human health as well as substances that affect the smell,
color and taste of water. These quality standards also require public
notification whenever the microbiological, physical, chemical or radiological
quality of bottled water falls below standard. The labels affixed to bottles and
other packaging of the water are subject to FDA restrictions on health and
nutritional claims for foods under the Fair Packaging and Labeling Act. In
addition all drinking water must meet Environmental Protection Agency standards
established under the Safe Drinking Water Act for mineral and chemical
concentration and drinking water quality and treatment which are enforced by the
FDA.
The Company is subject to the food labeling regulations required by the
Nutritional Labeling and Education Act of 1990. The regulations, which are
administered by the Secretary of Health and Human Services through the FDA,
require all companies which offer food for sale and have annual gross sales of
more than $500,000, including the Company, to place uniform labels disclosing
the amounts of specified nutrients on all food products intended for human
consumption and offered for sale. The act contains exemptions and modifications
of labeling requirements for certain types of food products, such as those
served in restaurants and other institutions, bulk foods, foods in small
packages and foods containing insignificant amounts of nutrients. The act also
establishes the circumstances in which companies may place nutrient content
claims or health claims on labels. The Company believes it is in substantial
compliance with these regulations.
The Company is subject to periodic, unannounced inspections by the FDA.
Upon inspection, the Company must be in compliance with all aspects of the
quality standards and good manufacturing practices for bottled water, the Fair
Packaging and Labeling Act, and all other applicable regulations that are
incorporated in the FDA quality standards.
In May 1996, new FDA regulations become effective which redefine the
standards for the identification and quality of bottled water. The Company
believes that it meets the current regulations of the FDA, including the
classification as spring water.
The Company also must meet state regulation in a variety of areas. The
Department of Health of the State of Vermont regulates water products for
purity, safety and labeling claims. Bottled water sold in Vermont must originate
from an "approved source." The water source must be inspected and the water
sampled, analyzed and found to be of safe and wholesome quality. The water and
the source of the water is subject to an annual "compliance monitoring test" by
the State of Vermont. In addition the Company's bottling facilities are
inspected by the Department of Health of the State of Vermont.
The Company's product labels are subject to state regulation (in addition
to the federal requirements) in each state where the water products are sold.
These regulations set standards for the information that must be provided
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and the basis on which any therapeutic claims for water may be made. The Company
has received approval for its "Vermont Pure(TM)" brand from 49 states and its
"Hidden Spring(R)" brand from 17 states.
The bottled water industry has a comprehensive program of self-regulation.
The Company is a member of the International Bottled Water Association ("IBWA").
As a member of the IBWA, the Company's facilities are inspected annually by an
independent laboratory, the National Sanitation Foundation ("NSF"). Through the
unannounced NSF inspection, IBWA members are evaluated on their compliance with
the FDA regulations and the association's performance requirements which in
certain respects are more stringent than those of the federal and various state
regulations.
Nine states currently have "bottle bills" requiring manufacturers or
distributors of carbonated beverages to collect on behalf of the state a deposit
of $.05 per package unit from the consumer and pay to the state an additional
handling fee between $.02 and $.03 per package unit. Of these states, currently
only Maine applies the bottle deposit to still water and similar products in
addition to carbonated beverages. There are legislative initiatives in both
Vermont and Massachusetts that propose to extend the deposit applicable to
carbonated beverages to bottled still water. If the "bottle bills" in these two
states are amended, it is expected to increase the cost of a gallon of bottled
water sold there by approximately $.15. Any additional cost may have an adverse
impact on sales by the Company in these states or have a material adverse impact
on the financial results of the Company.
Employees
The Company currently has 74 full-time employees and four part-time
employees. None of the employees belongs to a labor union. The Company believes
that its relations with its employees are good.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company owns office, bottling and warehouse properties and natural
springs in Randolph, Vermont. The Company leases a 6,760 square foot office and
warehouse facility in Buffalo, New York at an annual rent of $44,616, which
expires in October 2000 and a 2,500 square foot warehouse space in Rochester,
New York at an annual rent of $19,140 which expires July 1998. See "Item 1.
Business - Company Background." The Company also rents on a month to month
basis, approximately 250 square feet of office space in White Plains, New York
at an annual rent of $20,640. The Company also owns a spring and recharge
acreage in Sharon Springs, New York. The Company currently does not intend to
use this spring.
The Company rents warehouse space in different locations from time to time
for the purpose of trans-shipment of its bottled water products to its
distributors and retailers. This space is rented on a per pallet basis.
ITEM 3. LEGAL PROCEEDINGS.
An action entitled, S&S Beverage Distributors v. Vermont Pure Springs,
Inc., was commenced by the plaintiff, S&S Beverage Distributors ("S&S"), in
August 1994 in the Supreme Court of the State of New York, Suffolk County, Index
No.: 94-20978 (the "S&S Action"). S&S alleges that the Company breached an oral
distribution arrangement by terminating its relationship with S&S, refusing to
continue to supply S&S with the Company's products and by allowing another
distributor to sell the Company's product within its alleged territory. S&S is
seeking monetary damages and injunctive relief. The Company opposed the
plaintiff's motion for a preliminary injunction asserting that: (i) the Company
properly terminated its relationship with S&S; (ii) S&S failed to properly
distribute the Company's products and service the Company's customers; (iii) S&S
failed to meet volume targets; (iv) S&S failed to make timely payment for goods
sold and delivered; and (v) S&S had not demonstrated that it would suffer
irreparable harm if the injunction were not granted. In December 1994, the Court
denied S&S' motion for a preliminary injunction. The Company has received an
extension of its time to answer the complaint. The Company has certain defenses
and counterclaims which it will assert against S&S at the appropriate time.
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In February 1996, the Company commenced an action entitled Vermont Pure
Springs, Inc. v. 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 Springs 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 the
Company seeking compensatory damages and punitive damages of not less than
$250,000 and attorneys' fees for alleged breach of contract and unfair trade
competition. Defendant Beattie has filed a counterclaim seeking unspecified
damages and attorneys' 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its annual meeting on September 6, 1996. The stockholders
elected Frank G. McDougall, Jr., Timothy G. Fallon, Robert C. Getchell, David R.
Preston, Norman E. Rickard, Beat Schlagenhauf and Richard Worth as directors.
The following is a tabulation of the votes cast for and against and abstentions
for each director:
Votes Cast
---------------------------
Name For Against Abstentions
---------- --------- -----------
Frank G. McDougall 7,333,712 35,931 0
Timothy G. Fallon 7,333,712 35,931 0
Robert C. Getchell 7,333,712 35,931 0
David R. Preston 7,333,712 35,931 0
Norman E. Rickard 7,333,712 35,931 0
Beat Schlagenhauf 7,333,712 35,931 0
Richard Worth 7,333,712 35,931 0
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock is traded on the Nasdaq SmallCap Market under the symbols
"VPUR". The table below indicates the range of the high and low bid prices of
the Common Stock as reported by Nasdaq. The amounts represent inter-dealer
quotations without adjustment for retail markups, markdowns or commissions and
do not represent the prices of actual transactions.
High Low
Fiscal Year Ended October 28, 1995
First Quarter .................... 3 1/4 2 7/16
Second Quarter ................... 2 3/4 1 7/8
Third Quarter .................... 2 1/2 1 13/16
Fourth Quarter ................... 2 1/8 1 3/8
Fiscal Year Ended October 26, 1996
First Quarter..................... 1 15/16 1 1/2
Second Quarter.................... 2 1/8 1 1/2
Third Quarter..................... 2 7/8 1 15/16
Fourth Quarter.................... 2 5/8 1 7/8
Fiscal Year Ended October 26, 1997
First Quarter (through January 20, 1997) 3 1 11/16
9
<PAGE>
The last reported sale price of the Common Stock on the Nasdaq SmallCap
Market on January 20, 1997 was $2.5625.
The Company has 167 record owners of the Common Stock. The Company believes
that as of January 20, 1997, there were in excess of 1,500 beneficial holders of
the Common Stock.
No dividends have been declared or paid to date on the Company's common
stock, and the Company does not anticipate payment of dividends in the
foreseeable future. The Company has adopted a policy of cash preservation for
future use in the business.
Sales of Unregistered Securities
During the past three years, the Company has granted options to employees
and consultants: those which are currently outstanding are described under Item
10, Executive Compensation -- Employment Arrangements and -- Stock Options.
10
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Forward-Looking Statements
When used in the Form 10-KSB and in future filings by the Company with the
Securities and Exchange Commission, the words or phrases "will likely result"
and "the Company expects," "will continue," "is anticipated," "estimated,"
"project," or "outlook" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements, each of which speak
only as of the date made. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The Company
has no obligation to publicly release the result of any revisions which may be
made to any forward-looking statements to reflect anticipated or unanticipated
events or circumstances occurring after the date of such statements.
Results of Operations
Year Ended October 26, 1996 Compared to Year Ended October 28, 1995
Sales for 1996 were $11,878,829 compared to $8,517,470 for 1995, an
increase of $3,361,359 or 39%. Included in 1996 sales are $1,060,072 for the
Company's Western New York home and office division which was acquired in May
1996. Net of the acquired business, sales for 1996 were $10,818,757, an increase
of $2,301,287 or 27% over 1995. The increase in sales in consumer-size products
is attributed to growth of the Vermont Pure brand in its core markets and
development of secondary labels to take advantage of opportunities in new
distribution channels. The Company introduced its Hidden Spring(R) brand during
1996, as well as increased its private label volume during the year. In
addition, the Company substantially expanded the home and office segment of its
business by acquiring the assets of HIC which services the Buffalo/Rochester
area of New York, by establishing relationships with several new distributors to
deliver Vermont Pure outside its existing market area, and by continuing to grow
this business in the core distribution areas of Vermont and New Hampshire. The
home and office delivery segment was 22% and 14% of the Company's total sales
for 1996 and 1995, respectively.
Cost of goods sold for 1996 were $6,162,903, or 52% of sales, compared to
$5,070,207, or 60% of sales, for 1995. The decrease of cost of goods sold as a
percentage of sales compared to the prior year is due to decreases in the cost
of raw materials during the year, most notably plastic bottles. Bottle pricing
started to decline mid-year and has continued to decline into early 1997. Lower
cost of goods sold were also the result of a higher percentage of home and
office business which has lower manufacturing and distribution costs.
Consequently, the gross profit was higher in 1996 than in 1995, at $5,715,926
and $3,447,263, respectively.
Total operating expenses increased from $6,050,662 in 1995 to $6,725,525 in
1996. Of these amounts, selling, general and administrative expenses were
$3,440,264 and $4,234,104 for 1995 and 1996, respectively. The 23% increase in
selling, general and administrative expenses was due to the acquisition of the
Western New York home and office division in May 1996. If the expenses
associated with this division are excluded for 1996, selling, general and
administrative expenses would have been $3,484,292 representing only a 1%
increase over the prior year. The small increase in these expenses for the
Company's pre-acquisition business was the result of the Company's program of
cost reduction and containment which it started in 1995. Advertising expense
decreased $184,370 from $2,532,697 in 1995 to $2,348,327 in 1996. Included in
advertising expense are promotional expenses. In 1996, the Company increased its
promotional expenses over those of 1995, but for the same period it reduced
advertising expense through the elimination of several large event sponsorships
and termination of a significant contract for outdoor advertising. The Company
anticipates spending significant amounts on product promotion in the next fiscal
year to stay competitive in the marketplace and continue its sales growth trend.
Amortization expense increased from $91,404 to $143,094 in 1995 and 1996,
respectively, as a result of the acquisition of the new home and office division
in Western New York. The Company had no stock compensation expense in 1996
compared to prior periods because of its policy of granting options only at or
greater than market price.
11
<PAGE>
Loss from operations was $1,009,599 for 1996 compared to $2,603,399 for
1995. Interest expense increased from $154,175 in 1995 to $196,630 in 1996. The
increase was a result of greater amounts borrowed during the period. Interest
income for cash invested did not fully offset the expense of the increased
borrowings. Miscellaneous expenses of $46,527 and $61,102 in 1995 and 1996,
respectively, were mostly attributable to losses on the sale of assets. The
decrease in the net loss from $2,804,101 in 1995 to $1,267,331 in 1996 was the
result of increased sales and decreased manufacturing and operating costs. These
losses were due to a significant level of fixed costs which, when combined with
variable costs, were not offset by sales of the Company's products. Based on the
weighted number of shares of Common Stock outstanding of 9,678,268 during 1996
and 9,344,935 for 1995, the net loss per share was $.13 and $.30, respectively.
Year Ended October 28, 1995 Compared to Year Ended October 29, 1994
For fiscal year 1995 compared to fiscal year 1994, sales increased by
$1,938,775 or approximately 29% to $8,517,470 from $6,578,695. A significant
portion of the increase in sales over the previous fiscal year is reflective of
changes in and additions to distribution channels for the Company's products and
greater consumer awareness. An increase in sales volume of consumer-size
products accounted for 22% of the sales increase for fiscal year 1995. Other
contributing factors to the increase in sales growth were an increase in average
selling price and strong growth in sales in the Company's home and office
products.
Cost of goods sold for fiscal year 1995 was $5,070,207, or 60% of sales, as
compared to $3,776,680, or 57% of sales for fiscal year 1994. The increase in
cost of goods sold as a percentage of sales was due to a significant increase in
the cost of plastic bottles and corrugated packaging during the year. The cost
increases were a result of supply shortages for resins used to manufacture
bottles and the increases affected all users of such bottles. Because of
competitive pressures in the marketplace, the Company could not recover the
increase in raw materials. By late in the year, prices had abated but not before
eroding margins significantly. Gross profits for fiscal year 1995 were
$3,447,263 as compared to $2,802,015 for fiscal year 1994.
For fiscal year 1995, total operating expenses were $6,050,662, or $814,404
less than total operating expenses for fiscal year 1994 of $6,865,066. Selling,
general and administrative expenses increased from $3,254,649 in fiscal year
1994 to $3,440,264 in fiscal year 1995. Advertising expenses decreased from
$2,612,684 in fiscal year 1994 to $2,532,697 in fiscal year 1995. However, the
Company anticipates that it will continue to spend significant amounts in the
future for advertising and promotion as it continues to develop brand name
recognition and increase market penetration. In general, as case volumes
increase, the Company expects that total operating expenses per case will
continue to decrease. Non-cash imputed stock compensation decreased as a result
of retirement of options due to employee terminations, voluntary forfeiture, and
the Company's repurchase of outstanding options. The effect of these
transactions was a decrease in expenses of $315,142 for fiscal year 1995 from
fiscal year 1994. The Company incurred $593,782 in nonrecurring restructuring
charges in fiscal year 1994.
Loss from operations for fiscal year 1995 was $2,603,399 as compared to
$4,063,051 for fiscal year 1994, a decrease of $1,459,652. The net loss for the
same years was $2,804,101 and $4,127,002, respectively. The losses are
attributable to the continuing high level of expenses associated with
penetration of new markets and establishing brand recognition. The decrease of
losses from fiscal year 1994 to fiscal year 1995 was due to a reduction of these
expenses on a per case basis, elimination of stock compensation costs and the
non-recurring nature of administrative restructuring charges in fiscal year
1994. Based on a weighted average number of shares of Common Stock outstanding
during the year of 9,344,935 and 8,375,768 for fiscal year 1995 and fiscal year
1994, net loss per share was $.30 and $.49, respectively.
Liquidity and Capital Resources
Since inception, the Company has financed its operations principally
through the sale of equity securities in private and public offerings. In 1991,
the Company sold 2,342,000 shares of Common Stock in a private placement
generating gross proceeds of $4,684,000. In July and August 1992, the Company
sold a total of 1,150,000 shares of Common Stock and 1,150,000 Common Stock
Purchase Warrants, generating gross proceeds of $5,750,000 in its initial public
offering. On June 30, 1993, the Company sold an additional 1,140,018 shares of
Common Stock on the exercise of the outstanding public warrants generating gross
proceeds of $6,840,108. On January 13, 1995, the
12
<PAGE>
Company sold 1,600,000 shares of Common Stock in an unregistered offering
for gross proceeds of $4,400,000. At October 26, 1996, the Company had working
capital of $318,641. This represents a decrease of $1,528,667 from the amount of
working capital on October 28, 1995. The Company believes that this amount is
adequate to fund its current day-to-day operations for at least the next year
because the Company anticipates that revenues will begin to cover operating
expenses in the 1997 fiscal year. Although the Company believes its working
capital and line of credit are adequate and revenues will cover expenses in the
future, no assurance can be given that this will be the case.
The Company has obtained a line of credit from The Chittenden Bank which
permits it to borrow from time to time up to a maximum of $1,250,000 to fund its
operations until the expiration of the loan facility on June 1, 1997. At October
26, 1996, the Company had borrowed $441,811 on its line of credit. The maximum
available to borrow as of that date was $774,000, based on the level of
receivables and inventory and as of January 4, 1997, the maximum available to
borrow was $891,669. 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.
In May 1996, the Company through its wholly owned subsidiary, Springs,
purchased certain assets of the spring water division of HIC used in the
bottling, sale and distribution of spring water in three and five gallon
bottles, the rental of water coolers and coffee dispensers and sale of coffee,
tea and hot beverage supplies for home and office customers. Under the terms of
the purchase agreement, Springs agreed to pay an aggregate purchase of up to
$1,650,000, and assumed the leases for a 6,760 square foot office and warehouse
facility in Buffalo, New York with a term until October 2000, at an annual lease
expense of $44,616 and a 2,500 square foot warehouse space in Rochester, New
York at an annual rent of $19,140, which expires July 1998.
In connection with the acquisition of the HIC assets, the Company borrowed
$1,250,000 under a term loan agreement with The Chittenden Bank which was paid
to the seller. This loan 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 of HIC, as well as the collateral for
the line of credit discussed above. The balance of the purchase price, $500,000,
was financed by three notes issued by Springs payable to HIC. Payment of the
principal due on these notes is contingent on the performance of the acquired
assets as set forth in the purchase agreement. The first of the notes is for
$100,000, which was due in full on June 10, 1996, with no interest and was fully
paid. The second of the notes is for $200,000 at 8% annual interest with equal
principal payments due on May 1, 1997-2000. The third note is for up to $200,000
(based on the performance of the acquired assets) payable in full on May 1, 1999
with accrued interest at 8% per annum.
In 1994, the Company constructed a bottling facility in Randolph, Vermont
at a cost of $2,565,000. The Company financed $1,400,000 with loans from several
institutional lenders and the town of Randolph, Vermont and approximately
$187,000 with a loan from the prior owner of the land on which the facility was
built. The loan on the land was paid in full in October 1996. Any further
expansion of this facility, including warehouse space, will be financed using a
combination of debt and working capital.
The Company is pursuing an active program of evaluating acquisition
opportunities. Although the Company successfully completed and has integrated
the HIC assets it acquired in May 1996, no assurance can be given that the
Company will be able to identify any other suitable acquisition opportunity,
successfully consummate it or integrate it in a profitable manner into the
existing business of the Company. To complete any acquisitions, the Company
anticipates using its capital resources and obtaining financing from outside
sources. Except for the current loan facilities discussed above, the Company has
no other current arrangements with respect to, or sources of, additional
financing for its business or future plans. Although the Company believes it
will be able to obtain any required financing, there can be no assurance given
that financing will be available to the Company on acceptable terms or at all.
Inflation has not had a material impact on the Company's operations to
date.
13
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Financial Statements.
Financial Statements: Page
----
Report on Audit of Financial Statements.................... F-2
Consolidated Balance Sheet................................. F-3
Consolidated Statement of Operations....................... F-4
Consolidated Statement of Changes in Stockholders' Equity.. F-5
Consolidated Statement of Cash Flows....................... F-6
Notes to Consolidated Financial Statements................. F-7
14
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Vermont Pure Holdings, Ltd.
Randolph, Vermont 05060
We have audited the accompanying consolidated balance sheets of Vermont
Pure Holdings, Ltd. and Subsidiary as of October 26, 1996 and October 28, 1995,
and the related statements of operations, changes in stockholders' equity and
cash flows for the years ended October 26, 1996, October 28, 1995 and October
29, 1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Vermont
Pure Holdings, Ltd. and Subsidiary as of October 26, 1996 and October 28, 1995,
and the results of their operations and their cash flows for the years ended
October 26, 1996, October 28, 1995 and October 29, 1994 in conformity with
generally accepted accounting principles.
\S\ FELDMAN RADIN & CO., P.C.
-----------------------------
Feldman Radin & Co., P.C.
Certified Public Accountants
New York, New York
December 13, 1996
F-2
<PAGE>
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
October 26, October 28,
1996 1995
------------ -----------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash $ 783,081 $1,543,260
Accounts receivable 1,159,806 800,881
Inventory 783,156 949,570
Other current assets 159,145 144,162
------------ -----------
TOTAL CURRENT ASSETS 2,885,188 3,437,873
------------ -----------
PROPERTY AND EQUIPMENT - net of accumulated depreciation 5,536,185 5,659,191
------------ -----------
OTHER ASSETS:
Intangible assets - net of accumulated amortization 1,317,082 68,900
Others 232,939 100,580
------------ -----------
1,550,021 169,480
------------ -----------
$9,971,394 $9,266,544
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $879,669 $622,147
Customer deposits 421,137 154,160
Accrued expenses 446,507 382,791
Line of credit 441,811 0
Current portion of long term debt 197,239 210,216
Current portion of obligations under capital lease 180,183 221,250
------------ -----------
TOTAL CURRENT LIABILITIES 2,566,546 1,590,564
Long term debt 2,779,408 1,679,589
Obligations under capital lease 98,945 202,565
------------ -----------
TOTAL LIABILITIES 5,444,899 3,472,718
------------ -----------
STOCKHOLDERS' EQUITY:
Common Stock - $.001 par value, authorized 9,678 9,678
20,000,000 shares, issued and outstanding 9,678,268 shares
at October 26, 1996 and October 28, 1995
Paid in capital 21,399,420 21,399,420
Unearned compensation 0 0
Accumulated deficit (16,882,603) (15,615,272)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 4,526,495 5,793,826
------------ ------------
$ 9,971,394 $9,266,544
============ ============
</TABLE>
F-3
See notes to financial statements
<PAGE>
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year ended
---------------------------------------------------------
October 26, October 28, October 29,
1996 1995 1994
----------------- ----------------- -----------------
<S> <C> <C> <C>
SALES $11,878,829 $8,517,470 $6,578,695
COST OF GOODS SOLD 6,162,903 5,070,207 3,776,680
----------------- ----------------- -----------------
GROSS PROFIT 5,715,926 3,447,263 2,802,015
----------------- ----------------- -----------------
OPERATING EXPENSES:
Selling, general and administrative expense 4,234,104 3,440,264 3,254,649
Advertising expenses 2,348,327 2,532,697 2,612,684
Amortization 143,094 91,404 102,512
Non-cash imputed stock compensation 0 (13,703) 301,439
Restructuring Charges 0 0 593,782
----------------- ----------------- -----------------
TOTAL OPERATING EXPENSES 6,725,525 6,050,662 6,865,066
----------------- ----------------- -----------------
(LOSS) FROM OPERATIONS (1,009,599) (2,603,399) (4,063,051)
----------------- ----------------- -----------------
OTHER INCOME (EXPENSE):
Interest - net (196,630) (154,175) (121,268)
Miscellaneous (61,102) (46,527) 57,317
----------------- ----------------- -----------------
TOTAL OTHER INCOME (EXPENSE) (257,732) (200,702) (63,951)
----------------- ----------------- -----------------
NET (LOSS) ($1,267,331) ($2,804,101) ($4,127,002)
================= ================= =================
NET (LOSS) PER SHARE ($0.13) ($0.30) ($0.49)
================= ================= =================
Weighted Average Shares Used in Computation 9,678,268 9,344,935 8,375,768
================= ================= =================
</TABLE>
F-4
See notes to financial statements
<PAGE>
VERMONT PURE HOLDINGS, LTD AND SUBSIDIARY
Consolidated Statement of Changes in Stockholder Equity
<TABLE>
<CAPTION>
Common Stock Paid in Unearned Accumulated
----------------------------
Shares Par Value Capital Compensation Deficit Total
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 30, 1993 8,373,268 $8,373 $18,099,211 ($1,207,180) ($8,684,169) $8,216,235
Sale of Common Stock 5,000 5 9,995 - - 10,000
Options Issued for Future Services - - 114,000 (114,000) - 0
Retirement of Options - - (376,000) 376,000 - 0
Amortization of Defered Compensation - - - 301,439 - 301,439
Net Loss - - - - (4,127,002) (4,127,002)
------------------------------------------------------------------------------------------
Balance, October 29, 1994 8,378,268 8,378 17,847,206 (643,741) (12,811,171) 4,400,672
Retirement of Common Stock (300,000) (300) 300 - - 0
Sale of Common Stock 1,600,000 1,600 4,298,607 - - 4,300,207
Retirement of Options - - (746,693) 543,724 - (202,969)
Amortization of Defered Compensation - - - 100,017 - 100,017
Net Loss - - - - 2,804,101) (2,804,101)
------------------------------------------------------------------------------------------
Balance, October 28, 1995 9,678,268 9,678 21,399,420 0 (15,615,272) 5,793,826
Net Loss - - - - (1,267,331) (1,267,331)
------------------------------------------------------------------------------------------
Balance, October 26, 1996 9,678,268 $9,678 $21,399,420 $0 ($16,882,603) $4,526,495
==========================================================================================
</TABLE>
F-5
See notes to financial statements
<PAGE>
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended
-----------------------------------------
October 26, October 28, October 29,
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) ($1,267,331) ($2,804,101) ($4,127,002)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation 633,283 525,525 392,153
Amortization 143,094 91,404 102,921
(Gain) loss on disposal of property and equipment 67,421 25,800 (24,984)
Non cash imputed stock compensation 0 (13,703) 301,439
------------ ------------ -----------
(423,533) (2,175,075) (3,355,473)
Changes in assets and liabilities (net of effects of acquisition):
(Increase) Decrease in accounts receivable (132,694) (582,663) 345,161
(Increase) Decrease in inventory 189,916 510,365 (749,239)
(Increase) Decrease in other current assets (14,983) 47,606 86,304
(Increase) Decrease in other assets (132,363) 44,685 20,486
(Decrease) Increase in accounts payable 176,959 (222,515) (421,820)
(Decrease) Increase in customer deposits 57,253 48,700 40,349
(Decrease) Increase in accrued expenses 54,459 (419,263) 706,542
------------- ----------- -----------
CASH USED IN OPERATING ACTIVITIES (224,986) (2,748,160) (3,327,690)
------------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (453,392) (492,887) 2,332,071)
Proceeds from sale of fixed assets 230,264 21,894 87,145
Cash expended for acquisition (1,340,677) - -
------------- ----------- -----------
CASH USED IN INVESTING ACTIVITIES (1,563,805) (470,993) (2,244,926)
------------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds (Paydown) of line of credit 441,811 (21,400) 21,400
Proceeds from debt 1,390,000 - 1,400,000
Payment of long term debt (523,991) (105,376) (413,071)
Payment of capital lease obligations (279,208) (341,479) (311,984)
Sale of common stock 0 4,315,209 10,000
Repurchase of stock options 0 (104,250) -
------------ ------------ -----------
CASH PROVIDED BY FINANCING ACTIVITIES 1,028,612 3,742,704 706,345
------------ ------------ -----------
NET INCREASE (DECREASE) IN CASH (760,179) 523,551 (4,866,271)
CASH - Beginning of period 1,543,260 1,019,709 5,885,980
------------ ------------ -----------
CASH - End of period $ 783,081 $1,543,260 $1,019,709
============ ============ ===========
Cash paid for interest $ 272,456 $ 239,210 $ 199,238
============ ============ ===========
NON-CASH FINANCING AND INVESTING ACTIVITIES:
Equipment acquired under capital leases $ 94,627 $ - $ 177,563
============ ============ ===========
</TABLE>
F-6
See notes to financial statements
<PAGE>
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS OF THE COMPANY
Vermont Pure Holdings, Ltd. (the "Company") is engaged in the bottling,
marketing and distribution of natural spring water obtained from Company-owned
properties in Randolph, Vermont. The Company's products are sold predominately
in the New England, Mid-Atlantic and Mid-Western states, Arizona and Puerto
Rico, through a network of independent beverage distributors.
2. SIGNIFICANT ACCOUNTING POLICIES
a. Basis of Presentation - The consolidated financial statements
include the accounts of the Company and its subsidiary, Vermont Pure
Springs, Inc. The Company's subsidiary is wholly-owned. All material
intercompany profits, transactions, and balances have been eliminated.
b. Fiscal Year-The Company operates on a "52-53 week" reporting
year. All the years presented are 52 week periods.
c. Cash Equivalents - The Company considers all highly liquid
temporary cash investments, with an original maturity of three months
or less when purchased, to be cash equivalents.
d. Accounts Receivable - Accounts receivable are presented net of
allowance for doubtful accounts. The allowance was $191,079 and
$119,000 at October 26, 1996, and October 28, 1995. Amounts charged to
expense were $123,667, $122,000 and $83,000 during the years ended
October 26, 1996, October 28, 1995 and October 29, 1994.
e. Inventories - Inventories consist primarily of the packaging
material, labor and overhead content of the Company's products. Such
inventories are stated at the lower of cost or market using average
costing.
f. Property and Equipment - Property and equipment are stated at
cost. Depreciation is calculated using the straight-line method over
the estimated useful lives of the assets, which range from three to
ten years for equipment, and from ten to forty years for buildings and
improvements.
F-7
<PAGE>
g. Intangible Assets - Goodwill recorded in connection with the
July 1991 acquisition of Vermont's Hidden Spring, Inc. is amortized
using the straight-line method over five years. Goodwill recorded in
connection with the May, 1996 acquisition of the Happy Spring Water
Company, which totaled $1,138,344, is amortized using the
straight-line method over thirty years. Identifiable intangible assets
acquired in the Happy acquisition consist of customer lists valued at
$252,929 and are amortized over three years. Amortization of goodwill
was $143,094, $91,404 and $102,512 for each of the years ended October
26, 1996, October 28, 1995 and October 29, 1994, respectively.
Accumulated amortization as of October 26, 1996 was $581,565 and as of
October 28, 1995 was $438,471.
The Company assesses the recoverability of goodwill by
determining whether the amortization of the goodwill balance over its
remaining life can be recovered through projected, undiscounted,
future cash flows of the acquirees.
h. Securities Issued for Services - The Company accounts for
stock and options issued for services by reference to the fair market
value of the Company's stock on the date of stock issuance or option
grant. Compensation expense is recorded for the fair market value of
the stock issued, or in the case of options, for the difference
between the stock's fair market value on the date of grant and the
option exercise price. In the event that recipients are required to
render future services to obtain to full rights in the securities
received, the compensation expense so recorded is deferred and
amortized as a charge to income over the period that such rights vest
to the recipient.
In 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"),
"Accounting for Stock Based Compensation". SFAS No. 123 permits
companies to choose to follow the accounting prescribed by SFAS No.
123 for securities issued to employees, or to continue to follow the
accounting treatment prescribed by Accounting Principles Board Opinion
No. 25 ("APB No. 25") along with the additional disclosure required
under SFAS No. 123 if the Company elects to continue to follow APB No.
25. The Company will adopt SFAS No. 123 for fiscal 1997, however, the
Company has not yet determined the manner in which SFAS No. 123 will
be adopted. As such the Company can not at this time determine the
impact on its financial statements.
i. Loss Per Share - Loss per share is based on the weighted
average number of common shares and dilutive securities outstanding
during the periods, after giving retroactive effect to the
recapitalization.
j. Slotting Fees - Slotting fees are paid to individual
supermarkets and supermarket chains to obtain initial shelf space for
new products. Fees vary from store to store, however, their payment
does not guarantee that a company's product will be carried for any
definite period of time. The Company pays for such fees by issuing a
check, providing free goods or issuing credits for previously sold
goods. The cost of the slotting fees is valued at the amount of cash
paid, or the cost to the Company of the goods provided in exchange.
The Company expenses slotting fees when the obligation is incurred.
F-8
<PAGE>
k. Income Taxes - During the year ended October 29, 1994, the
Company adopted Statement of ---- Financial Accounting Standards No.
109, "Accounting for Income Taxes" (SFAS 109). Pursuant to SFAS 109,
the Company accounts for income taxes under the liability method.
Under the liability method, a deferred tax asset or liability is
determined based upon the tax effect of the differences between the
financial statement and tax basis of assets and liabilities as
measured by the enacted rates which will be in effect when these
differences reverse. The change in method of accounting for income
taxes had no effect on the Company's financial position or results of
operations.
l. Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principals requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
m. Fair Value of Financial Instruments - Effective March 31, 1996
, the Company adopted Statement of Financial Accounting Standards No.
107, " Disclosures About Fair Value of Financial Instruments", which
requires disclosure of fair value information about financial
instruments whether or not recognized in the balance sheet. The
carrying amounts reported in the balance sheet for cash, trade
receivables, accounts payable and accrued expenses approximate fair
value based on the short-term maturity of these instruments.
3. PROPERTY AND EQUIPMENT
October 26, October 28,
1996 1995
-------------- -------------
Land, buildings and improvements............. $ 3,268,842 $ 3,308,529
Machinery and equipment...................... 3,043,750 2,460,663
Equipment held under capital lease........... 1,039,905 1,140,099
-------------- -------------
7,352,497 6,909,291
Less accumulated depreciation................ 1,816,312 1,250,100
-------------- -------------
$ 5,536,185 $ 5,659,191
================ =============
4. 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.
F-9
<PAGE>
The following table summarizes the acquisition in financial terms:
Purchase Price $1,450,000
Acquisition Costs 90,677
Fair Value of Tangible and Identifiable Intangible Assets Accquired (742,657)
Liabilities Assumed 340,324
-------------
Goodwill $1,138,344
=============
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
(unaudited). Sales attributable to the acquired division for the six months
subsequent to the acquisition were $1,060,072. Liabilities assumed in the
acquisition included accounts payable and customer deposits. The seller may be
due $200,000 under a note contingent upon the acquired business achieving
certain financial performance levels from October, 1996 through October, 1998.
In the event that the acquired business should achieve these targets any amounts
ultimately due under this formula would be payable May, 1999, added to goodwill,
and amortized. As of October 26, 1996, the acquired business was not performing
to levels that would result in additional liability.
The following table summarizes pro forma consolidated results of operations
(unaudited) of the Company and Happy Spring Water Company as though the
acquisition had been consummated at October 30, 1994. The pro forma amounts give
effect to the appropriate adjustments for the fair value of assets acquired and
amortization of goodwill, depreciation and the debt incurred and resulting
interest expense.
Years Ended
October 26, October 28,
1996 1995
------------- -------------
Total Revenue $12,833,369 $10,651,622
Net Loss $(1,334,155) $(2,996,727)
Net Loss per Share $ (0.14) $ (0.32)
Weighted Average Number of Shares 9,678,268 9,344,935
The Company also 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.
F-10
<PAGE>
5. ACCRUED EXPENSES
October 26, October 28,
1996 1995
------------ ------------
Advertising and promotion................ $ 266,565 $ 234,732
Payroll and vacation..................... 76,054 52,599
Taxes.................................... 21,799 --
Miscellaneous ........................... 82,089 95,460
------------ ------------
$ 446,507 $ 382,791
============ ============
6. LINE OF CREDIT
During the year ended October 29, 1994, the Company entered into a line of
credit agreement with a Vermont bank to borrow up to $1,250,000 to fund
operations. The line is secured by inventory, receivables, and intangible
assets. This agreement was renewed in 1995 and again in 1996. Availability of
funds under this line is based on a formula dependent on a certain percentage of
allowable receivables and inventories. At October 26, 1996 the Company had
borrowed and had a maximum availability of approximately $442,000 and $774,000,
respectively, on the credit line. A year earlier, the Company had no balance due
and a maximum availability of $915,000 on the same facility. The Company pays
interest on any unpaid balances at prime plus 1.75%. The line of credit expires
June 1, 1997 and is secured by all tangible and intangible assets of the
Company.
7. OBLIGATIONS UNDER CAPITAL LEASES
The Company leases certain equipment under capital lease arrangements
expiring through May 1998. Assets held under capital leases are included with
property and equipment.
The following is a schedule of future minimum lease payments under the
capital leases and the present value of net minimum lease payments as of October
26, 1996:
1997. . . . . . . . . .. . . . . . . . . . . . $202,133
1998. . . . . . . . . .. . . . . . . . . . . . 67,243
1999. . . . . . . . . . . . . . . . . . . . . 34,665
2000. . . . . . . . . . . . . . . . . . . . . 22,570
2001. . . . . . . . . . . . . . . . . . . . . 1,841
--------
Total minimum lease payments 328,452
Less amount representing interest 49,324
--------
Present value of minimum lease payments $279,128
========
8. 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
F-11
<PAGE>
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
$50,000 on July 29, 1996 and $50,000 on September 30, 1996. In addition, the
Company entered into notes with the seller, one for $100,000 due in full on June
30, 1996 with no interest, and a second for $200,000, at 8% annual interest,
with equal principal payments due on May 1, 1997-2000. The $100,000 loan payable
to the seller was paid in full with the proceeds borrowed from the bank.
Full details of the Company's long term debt is as follows:
<TABLE>
<CAPTION>
October 26, October 28,
1996 1995
------------ -----------
<S> <C> <C>
Term loan, principal and interest at 8.00%, payable
monthly through 2003 . . . . . . . . . . . . . . $ --- $ 135,003
Building loan, principal and interest at 9.0%, payable
monthly through 2004 secured by the assets...... 435,049 476,883
Building loans, principal and interest at 5.5% payable
monthly through 1999 secured by the assets...... 388,622 430,856
Mortgage on property acquired in October 1993, interest
at 4.5%, with interest only due through July 1996, then
principal and interest due through 2000 secured by the
property........................................ 393,731 400,000
Mortgage on property acquired in October 1993,
interest at 4.5%, with interest only due through
July 1996, then principal and interest due through
2000 secured by the property. . . . . . . . . . . --- 91,653
Mortgage on property acquired October 18, 1992, interest
at 10%, principal and interest due in monthly payments
of $752 through 2006 secured by the property..... 56,750 59,858
Mortgage on property acquired in July 1993, bearing
interest of 8%, secured by property. Monthly principal
and interest payments totaling $2,277 are payable
through September 1996, with the balance of principal
due November 1996 secured by equipment........... --- 160,770
Mortgage on property acquired October 1993, bearing
interest at prime plus 2%, secured by property. Monthly
principal and interest payments totaling $1,154 are
payable through October 2013. . . . . . . . . . . 131,873 134,782
Term loan, principal and interest at 10.25%, payable
monthly through 2000 secured by equipment . . . . 119,525 ---
Promissory note, without interest, payable through 1997 3,333 ---
Mortgage on property acquired May 1996, interest at 10%,
principal and interest due in monthly payments through
1999 secured by all tangible and intangible assets . . . 1,247,764 ---
Promissory note, principal and interest due in four equal
installments with interest rate at 8% through 2000,
unsecured . . . . . . . . . . . . . . . . . . . . 200,000 ---
----------- ----------
2,976,647 1,889,805
Less current portion............................... 197,239 210,216
----------- ----------
$2,779,408 $1,679,589
=========== ===========
</TABLE>
F-12
<PAGE>
The loans are secured by various property and equipment Annual maturities
of long-term debt are as follows:
Year ending October 26, 1997.......................... $ 197,239
Year ending October 25, 1998.......................... 488,077
Year ending October 31, 1999.......................... 1,377,301
Year ending October 30, 2000.......................... 160,173
Year ending October 27, 2001 and
thereafter . . . . . . . . . . . . . . . . . . . . . 753,857
---------------
$ 2,976,647
===============
9. RECAPITALIZATION
The Company held a special meeting of stockholders on January 12, 1994, at
which the stockholders approved changes to the Company's Certificate of
Incorporation. As a result of these changes, the Class A Common Stock was
redesignated the "Common Stock," each share of Class B Common Stock was
converted into 1.5 shares of Common Stock, the authorized number of shares of
Common Stock was increased to 20,000,000 and a class of 500,000 shares of
Preferred Stock was authorized. This recapitalization is retroactively reflected
for all periods presented.
10. PRIVATE PLACEMENT
In January 1995, the Company issued 1.6 million shares at $2.75 per share
of common stock in a private placement for net proceeds of $4,315,208.
11. STOCK OPTION PLAN
The Company had previously adopted its 1991 Stock Option Plan (the "1991
Plan") covering key employees, directors, consultants and distributors of the
Company and its subsidiary. The plan was for a maximum of 800,000 shares of the
Company's Class A Common Stock exercisable at $2.00 per share expiring September
2001. The options under this plan could only be granted when the Company
achieved certain profit levels.
F-13
<PAGE>
In February 1993, the Company issued non-qualified options under the 1991
Plan to purchase 200,000 shares at a price of $2.00 per share to certain
employees and a consulting firm. The options vest at the rate of 25% per year
commencing November 1, 1993, and were exercisable until November 1, 1997. The
Company recorded deferred compensation expense totaling $750,000 for the
difference between the exercise price and the market price of the stock on the
date of grant. The deferred expense was being amortized over the four year
vesting period. Subsequently, all but 2,000 of the options issued under this
plan were terminated through either voluntary surrender, repurchase or
forfeiture. The 1991 Plan was suspended during 1993.
12. PERFORMANCE EQUITY PLAN
In November 1993, the Company's Board of Directors adopted the 1993
Performance Equity Plan (the "1993 Plan"). The plan authorizes the granting of
awards for up to 1,000,000 shares of common stock to key employees, officers,
directors and consultants. Grants can take the form of stock options (both
qualified and non-qualified), restricted stock awards, deferred stock awards,
stock appreciation rights and other stock based awards.
During the year ended October 29, 1994, the Company granted 398,000
incentive stock options to employees under this plan at exercise prices from
$3.25 to $5.50 per share.
Subsequently, 70,000 and 221,000 options were forfeited in 1994 and 1995,
respectively. During the year ended 1995, the Company granted 235,082 incentive
options to employees under this plan at prices ranging from $2.25 to $3.00.
During the year ended 1996, 205,000 options were granted under the plan at
prices ranging from $1.75 - $2.50.
13. STOCK OPTIONS
The following table illustrates the Company's stock option issuances and
positions during the last three fiscal years:
Exercise
Price Per
Options Share
------------ ------------
Outstanding at October 30, 1993................ 1,065,000 2.00-6.00
Options granted to employees ............. 328,000 3.25-5.50
Options granted to directors (a).......... 70,000 2.25
Options retired........................... (152,000) 2.00
Options exercised......................... (5,000) 2.00
------------ ------------
Outstanding at October 29, 1994................ 1,306,000 2.00-6.00
Options granted (b) 592,375 2.25-3.13
Options retired (c) (548,875) 2.00-5.50
------------ ------------
Outstanding at October 28, 1995 1,349,500 $2.25-6.00
Options granted (e) 435,000 $1.75-2.50
Options retired (49,500) $3.00-3.50
----------- ------------
1,735,000 $1.75-6.00
=========== ============
F-14
<PAGE>
a. During September 1994, the Company issued an aggregate of
70,000 non-plan options to outside members of the Board of Directors.
The options vest on September 1, 1994 and are exercisable until
September 1, 1999 at an exercise price of $3.75 per share.
b. The Company granted a total of 592,375 options during fiscal
1995. Of this amount, 400,000 were granted to the Company's new
president, which vest over the four year term of his employment
agreement.
c. On January 13, 1995, the Board of Directors authorized the
Company to repurchase and amend some of the options issued under the
1991 stock option plan, 1993 performance equity plan and other options
issued outside the plans. All repurchase offers were accepted
resulting in the retirement of 493,500 outstanding options. The
aggregate cost to buy back these options was $104,250. An additional
30,000 options were retired voluntarily and another 25,375 were
forfeited through normal terminations. Since a significant amount of
the options retired were issued at below market, future deferred
compensation costs related to options which had not yet vested were
eliminated as a result of these transactions. Total deferred
compensation costs eliminated that would have been expensed in future
periods were $543,724. Compensation costs that were expended in
previous periods were not recaptured.
d. On May 12, 1995, as a result of the Compensation Committee's
recommendation, the Board of Directors regranted options to purchase
an aggregate of 753,000 shares of common stock on the same terms as
originally granted, with the exception that the exercise price be
reduced to $2.25, the market price on such date.
e. The Company granted 435,000 options in 1996 at prices,
dictated by the market, ranging from $1.75 - $2.50 per share. Of the
total options granted, 205,000 were awarded to employees as incentive
options under the 1993 plan and 230,000 were granted to outside
members of the Board of Directors.
At October 26, 1996, out of a total 1,735,000 options
outstanding, 1,111,237 options were exercisable.
14. COMMITMENTS
a. Employment Contracts - The Company currently has employment
contracts with management totaling approximately $322,000 in annual
salary through 1998.
Contracts for the Company's General Counsel and Vice President of
Sales were terminated by mutual consent in November and December,
respectively. Settlement costs of approximately $60,000 were expensed
in fiscal 1996.
F-15
<PAGE>
b. Operating Leases - The Company currently leases office space
on a month-to-month basis and is obligated under several building,
equipment and vehicle leases expiring variously through October 2000.
Future minimum rental payments over the terms of these leases are
approximately as follows:
1997 $117,671
1998 71,339
1999 41,129
2000 29,744
Rent expense under all operating leases was $51,727, $47,583 and
$56,371, for fiscal years ending October 26, 1996, October 28, 1995
and October 29, 1994.
c. Sponsorship Contracts - In each year from 1991 through 1995,
the Company sponsored the New York City Marathon. It also sponsored
the Boston Marathon in 1994 and 1995. By mutual consent these
relationships were terminated in 1996.
d. Consulting Contracts - In October 1993, the Company entered
into a five year consulting agreement with a related party, which
calls for consulting fees of $100,000 per year.
e. Advertising Agreement - In July 1993, the Company entered into
a two year agreement with a company to provide general transit
advertising (including billboards, train posters, etc.). The aggregate
amount payable over the agreement is $500,000. The fee is payable at
the rate of $12,500 per month over the first year, and $29,167 per
month over the second year. In addition, the advertising company was
granted options to purchase 500,000 shares of the Company's common
stock for $6.00 per share. The rights vest at the rate of 25% for
every six month period covered by the advertising contract. The
options are exercisable through June 30, 1999.
15. RELATED PARTY TRANSACTIONS
During the years ended October 28, 1995 and October 29, 1994, the Company
paid $36,000 each year in consulting fees to an individual who is an outside
member of its Board of Directors.
The Company utilizes the services of a consulting corporation which is
related to the Company through ownership in the Company's common stock. The
Company incurred consulting fees to this firm of $100,000 for each of the years
ended October 26, 1996, October 28, 1995, and October 29, 1994. In October 1993,
the Company entered into a five year agreement with this consulting firm
providing for fees of $100,000 per year, commencing October 1993. As additional
consideration, the consulting firm also received options to purchase 125,000
shares of the Company's common stock for $5.00 per share (subsequently repriced
to $2.25 per share). Such options vest at the rate of 25% on each of October 1,
1993, 1994, 1995 and 1996. The options are exercisable through October 2003.
F-16
<PAGE>
16. CONTINGENCIES
a. Former Distributor - 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 the distributor 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.
17. RESTRUCTURING CHARGES
In August 1994, the Company restructured its distribution system. In
connection with the restructuring, it terminated numerous service agreements
with regional distributors and signed a master agreement with a nationally known
distributor. In this regard, the Company has recognized termination expenses of
approximately $141,000, and associated legal costs totaling $135,000.
In October 1994, in order to continue the Company's change from a
promotional focus to a distribution centered focus, the Company hired a new
Chief Executive Officer. As a result, the Company entered into a termination
agreement with its previous Chief Executive Officer. Expenses relating to this
management restructuring totaled approximately $317,000, and include $270,000 in
severance costs and $47,000 in executive search costs. Also, in connection with
his termination agreement, the former Chief Executive Officer returned 300,000
shares of common stock to the Company for retirement.
18. INCOME TAXES
Effective October 31, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS
109 requires the recognition of deferred tax assets and liabilities for both the
expected impact of differences between the financial statement and tax basis of
assets and liabilities, and for the expected future tax benefit to be derived
from tax loss and tax credit carryforwards. SFAS 109 additionally requires the
establishment of a valuation allowance to reflect the likelihood of deferred tax
assets. As of October 26, 1996, the Company had net deferred tax assets of
$6,056,000. The Company has recorded a valuation allowance for the full amount
of such net deferred tax assets and, as a result, the Company has not recorded
any liability or asset for deferred taxes as of October 26, 1996.
F-17
<PAGE>
The major deferred tax asset (liability) items at October 26, 1996 are as
follows:
Accounts receivable allowance................. $77,000
Amortization.................................. 11,000
Depreciation.................................. (347,000)
Slotting fees................................. 126,000
Other......................................... 12,000
Net operating loss carryforwards.............. 6,177,000
-------------
6,056,000
Valuation allowance........................... (6,056,000)
-------------
$ 0
=============
The Company has approximately $15.4 million of available loss carryforwards
at October 26, 1996 expiring from 2005 through 2011. Due to previous ownership
changes or equity structure shifts as defined in the Internal Revenue Code,
approximately $3.5 million of the net operating losses are limited as to annual
utilization.
The benefit for income taxes differs from the amount computed by applying
the statutory income tax rate to net loss before provision for income taxes is
as follows:
Year Ended
----------------------------------------
October 26, October 28, October 29,
1996 1995 1994
----------- ----------- -----------
Income tax benefit computed at
statutory rate......................... $ 431,000 $ 953,000 $1,403,000
Effect of permanent differences........ (23,000) (27,000) (134,000)
Effect of temporary differences. . . . 115,000 47,000
Tax benefit of net operating loss not
recognized............................. (523,000) (973,000) (1,269,000)
------------ ------------ ------------
Provision for income taxes reported.... $ 0 $ 0 $ 0
============ ============ ============
19. MAJOR CUSTOMER
In July 1994, the Company signed an agreement with a major distributor. The
agreement gives the distributor exclusive rights to sell Vermont Pure water in
parts of New York, New Jersey, Connecticut, Massachusetts and Vermont. The
distributor's purchases under this agreement amounted to 35% and 39% of the
Company's total sales in fiscal 1996 and 1995, respectively. Additionally,
accounts receivable from the distributor accounted for 14% and 26% of total
accounts receivable at October 26, 1996 and October 28, 1995. The agreement also
provides for the Company to pay the distributor for promotional and advertising
support for the Vermont Pure brand in the market areas covered.
F-18
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Since inception, the Company has not changed accountants and has had no
disagreement on any matter of accounting principles or practices or financial
statement disclosure.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The directors and executive officers of the Company as of January 20, 1997,
are listed below, followed by a brief description of their business experience
during the past five years.
Name Age Position
- - - - ---- --- --------
Frank G. McDougall, Jr. 46 Chairman of the Board
Timothy G. Fallon 42 Chief Executive Officer, President and Director
Robert C. Getchell 47 Secretary and Director
David R. Preston 56 Director
Norman E. Rickard 60 Director
Beat Schlagenhauf 44 Director
Richard Worth 46 Director
Bruce MacDonald 38 Senior Vice President and Chief Financial Officer
Frank G. McDougall, Jr. has been the Chairman of the Board since June 1994.
Since January 1995, Mr. McDougall has been a part-time employee of the Company.
From December 1993 until January 1995, Mr. McDougall acted as a consultant to
the Company in the areas of management and government relations and regulation
through Frank McDougall Associates, a management company founded in October
1993, of which Mr. McDougall was the founder and is the principal. Since April
1996, Mr. McDougall has provided services through Frank McDougall Associates as
the Director of Corporate and Government Relations for the Dartmouth Hitchcock
Medical Center and the Lahey Hitchcock Clinic. From July 1990 to October 1993,
Mr. McDougall was the Secretary of the Agency of Development and Community
Affairs of the State of Vermont.
Timothy G. Fallon has been the Chief Executive Officer and President and a
Director of the Company since November 1994. From January 1992 to November 1994,
Mr. Fallon was the Senior Vice President Sales and Marketing for Cadbury
Beverages, Inc. From October 1989 to December 1991, Mr. Fallon was Vice
President of Sales for Canada Dry USA, a division of Cadbury Beverages, Inc.
From July 1984 to September 1989, Mr. Fallon served as Vice President - Sales
and Marketing for Pepsi Cola Bottling Company New York City, Inc.
Robert C. Getchell has been a director of the Company since December 1994.
On December 6, 1995, Mr. Getchell was appointed the Secretary of the Company.
Mr. Getchell has been a principal of Getchell Professional Association, a firm
of certified public accountants in Quechee, Vermont, for more than the past five
years. In June 1996, Mr. Getchell was named the Chairman of the Vermont Economic
Development Authority.
David R. Preston has been a director of the Company since October 1995. Mr.
Preston has been a consultant and adjunct professor of Suffolk University in
Boston, Massachusetts since September 1994. From 1990 to September 1994, Mr.
Preston was a division president at Kayser-Roth Corporation, a sock and hosiery
manufacturer, located in Greensboro, North Carolina. Mr. Preston is a retired
division president and corporate officer of the Gillette Company.
Norman E. Rickard has been a director of the Company since May 1995. Mr.
Rickard has been the President of Xerox Business Services of Xerox Corporation
since 1992. Mr. Rickard has been employed by Xerox Corporation since 1967 in
various capacities, including Director of Business Effectiveness, Director of
the Worldwide Strategic Manufacturing project, Director of Staff Operations and
Vice President of Quality.
15
<PAGE>
Beat Schlagenhauf has been a Director of the Company since July 1993. Mr.
Schlagenhauf has been a principal of Schlagenhauf & Partner, a portfolio
management company in Zurich, Switzerland, for more than the past five years.
Richard Worth has been a Director of the Company since June 1994. Mr. Worth
has been the Chief Executive Officer and President and a director of R.W.
Frookies, Inc., a manufacturer and marketer of cookies and snack products, since
1985. R.W. Frookies, Inc. currently is ranked the eighth largest cookie company
in the United States. From 1978 to 1985, Mr. Worth owned and operated Sorrell
Ridge, Inc., a manufacturer and marketer of jams.
Bruce MacDonald has been Vice President and Chief Financial Officer of the
Company since May 1993. From 1987 to May 1993 Mr. MacDonald was Controller of
Cabot Cooperative Creamery Incorporated.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers, directors and persons who beneficially own more than ten
percent of a registered class of the Company's equity securities ("ten percent
stockholders") to file reports of ownership and changes in ownership with the
Securities and Exchange Commission (SEC") and the National Association of
Securities Dealers, Inc. (NASD"). Officers, directors and ten percent
stockholders are charged by SEC regulation to furnish the Company with copies of
all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, the
Company believes that during the Company's fiscal year ended October 28, 1995,
all required reports on Form 3 and Form 4 were filed timely, except for one late
Form 4 report filed by Mr. Worth which reported the open market acquisition of
2,000 shares of Common Stock in September 1996.
ITEM 10. EXECUTIVE COMPENSATION.
The following tables show the cash compensation paid by the Company, as
well as certain other compensation paid or accrued, to the chief executive
officer of the Company for the fiscal years October 28, 1995 and October 26,
1996, options granted to such executive officer during the fiscal year ended
October 26, 1996, and the value of all options granted to such executive officer
at the end of the fiscal year ended October 26, 1996.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Other -------------------------------
Fiscal Compensation Annual Options/ All Other
Name and Principal Position Year Salary ($) Compensation $ (#Shares) Compensation $
- - - - ------------------------------------- ------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Timothy G. Fallon(1) 1995 $172,000 $75,000 400,000 $14,400
Chief Executive Officer and President 1996 $172,000 $50,000 30,000 $14,400
</TABLE>
(1) Mr. Fallon commenced employment with the Company on November 4, 1994.
The amounts under "Annual Compensation Salary" and "Other Annual
Compensation" represent payments associated with Mr. Fallon's employment
agreement and the amount under "All Other Compensation" represents a car
allowance and disability insurance expense. See "Management - Employment
Agreements."
16
<PAGE>
<TABLE>
<CAPTION>
OPTIONS/SHARES GRANTS IN LAST FISCAL YEAR
Individual Grants
------------------------------- Potential Realizable Value at
% of Total Assumed Annual Rates of Stock
Options/Shares Market Price Appreciation for Option
Granted to Exercise Price on Term(1)
Options/Shares Employees in Price Date of Expiration -----------------------------------
Name Granted (#) Fiscal Year ($/Share) Grant ($) Date 0% ($) 5% ($) 10% ($)
- - - - ------------------- --------------- -------------- ---------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Timothy G. Fallon 30,000 6.9% $2.50 $2.50 7/24/06 -0- $47,167 $119,531
Chief Executive --------------- -------------- ---------- ---------- ---------- ---------- ---------- ---------
Officer and President
</TABLE>
(1) Based on the difference between the aggregate market price on the date of
grant and the aggregate exercise prices of the options granted.
<TABLE>
<CAPTION>
AGGREGATE YEAR-END OPTION VALUES
Number of unexercised options Value of unexercised in-the-money
Name at fiscal year-end (#) options at fiscal year-end ($)(1)
----------------------------- ---------------------------------
Exercisable Unexercisable Exercisable Unexercisable
------------ ------------- -------------- -------------
<S> <C> <C> <C> <C>
Timothy G. Fallon 100,000 300,000 -0- -0-
President and Chief Executive Officer
- - - - -------------------------------------------------- ------------ ------------- -------------- -------------
</TABLE>
(1) As of October 26, 1996, the market value of a share of Common Stock was
$2.1875 which was less than the per share exercise prices of Mr. Fallon's
options of $2.25 and $2.50.
The Company cannot determine, without unreasonable effort or expense, the
specific amount of certain personal benefits afforded to its employees, or the
extent to which benefits are personal rather than business. The Company has
concluded that the aggregate amounts of such personal benefits which cannot be
specifically or precisely ascertained do not in any event exceed, as to each
individual named in the preceding table, the lesser of $50,000 or 10% of the
compensation reported in the preceding table for such individual, or, in the
case of a group, the lesser of $50,000 for each individual in the group, or 10%
of the compensation reported in the preceding table for the group, and that such
information set forth in the preceding table is not rendered materially
misleading by virtue of the omission of the value of such personal benefits.
Executive Participation in Compensation Decisions and Compensation
Committee; Audit Committee
Compensation decisions during the period of inception of the Company
through the fiscal year ended October 28, 1995 were made by the Company's Board
of Directors and, thereafter, by the Board of Directors upon the recommendation
of the Compensation Committee. The Compensation Committee is empowered to make
recommendations to the Board of Directors relating to the overall compensation
arrangements for senior management of the Company and to make recommendations to
the Board of Directors pertaining to any compensation plans in which officers
and directors of the Company are eligible to participate. The Compensation
Committee is comprised of Messrs. McDougall, Preston and Getchell. The named
executive in the Summary Compensation Table served as a director during the
above periods; however, during the periods reflected in the above Summary
Compensation Table the named executive was employed under a written employment
agreement which was entered into before he was a director of the Company.
On May 12, 1995, the Compensation Committee reviewed the exercise prices of
the options previously granted to the executive officers and directors of the
Company in light of the market price of the Common Stock which had been
substantially less than the exercise price of the options for a considerable
part of 1994 and all of 1995 until the date of the meeting. The Compensation
Committee then recommended to the Board that all of the options granted to
executive officers and directors be repriced. After review, the Compensation
17
<PAGE>
Committee believed the options represented incentive compensation for services
of such persons, and it was necessary to relate the exercise price of such
options more directly to the current market price of the Common Stock to provide
the necessary incentive component. In connection with its recommendation, the
Compensation Committee also considered the actual and projected sales, revenues
and expenses of the Company. As a result of the Compensation Committee's
recommendation to the Board, the Board regranted options to purchase an
aggregate of 753,000 shares of Common Stock on the same terms as originally
granted with the exceptions that the exercise prices of all such options be
reduced to the market price of $2.25 on May 12, 1995, and that options
previously granted to Mr. Timothy G. Fallon to purchase 133,332 shares of Common
Stock and options previously granted to Mr. Frank G. McDougall to purchase
70,000 shares of Common Stock of such shares were regranted as incentive options
under the Company's 1993 Performance Equity Plan, rather than as non-incentive
options, so as to take full advantage of the tax aspects of options available to
employees of the Company.
On July 24, 1996, the Board of Directors reviewed the compensation of the
directors of the Company. The review covered the annual and meeting fees paid to
the outside directors, the options held by each director and the need to provide
for adequate compensation in light of the frequency of meetings and the amount
of time the individuals have been devoting and will be devoting to the
activities of the Board of Directors of the Company. As a result of this review,
the Board granted to each current director options to purchase up to 30,000
shares of Common Stock, vesting at the rate of 10,000 options on July 24 in each
of 1997, 1998 and 1999. Of these options, Mr. Fallon received 20,000 options as
incentive options and Mr. McDougall received 30,000 options as incentive
options, each under the 1993 Performance Equity Plan. Each of the options is
exercisable at $2.50 per share and expires on July 24, 2006.
The Board of Directors of the Company has appointed an Audit Committee
which is empowered to recommend to the Board of Directors the engagement of the
independent auditors and to review the scope and procedures of the activities of
the independent auditors and the reports on their audits. The Audit Committee
meets periodically with the independent auditors and management to review their
work and confirm that they are properly discharging their responsibilities. The
Audit Committee is comprised of Messrs. Getchell and Rickard.
Employment Arrangements
On November 4, 1994, the Company entered into an employment agreement with
Mr. Timothy G. Fallon which expires November 1, 1998. Pursuant to the agreement,
Mr. Fallon acts as the Chief Executive Officer and President of the Company. The
annual base salary is $172,000, which will be reviewed annually by the Board. In
addition, Mr. Fallon received single sum payments of $75,000 on January 2, 1995
and $50,000 on January 2, 1996. Mr. Fallon is entitled to an incentive bonus of
$50,000 if in any fiscal year the Company has annual sales in excess of
$12,500,000. The incentive bonus will be increased to $75,000 if the annual
sales of the "Vermont Pure(TM)" brand are in excess of $20,000,000. Mr. Fallon
is also entitled to a supplemental bonus of $100,000 in any year that the
Company and its consolidated subsidiaries as they existed on November 4, 1994,
has positive net income before the supplemental bonus. Although the incentive
bonuses under the employment agreement were not implemented because annual sales
did not reach the target amounts, Mr. Fallon was paid an incentive bonus of
$50,000 on January 16, 1997 upon the recommendation of the Compensation
Committee and approved by the Board of Directors. Pursuant to the agreement, Mr.
Fallon is prohibited from competing with the Company for a period of two years
following the termination of the agreement. In connection with the employment
agreement, the Company granted Mr. Fallon an option to purchase up to 400,000
shares of Common Stock. The exercise price was reduced on May 12, 1995 by the
Board from $3.00 to $2.25, the then market price of the Common Stock, and
options to purchase 133,332 shares of Common Stock were converted from
non-incentive to incentive stock options. Options to purchase 100,000 shares of
Common Stock become exercisable on each of November 4, 1994, 1995, 1996 and 1997
and remain exercisable until the close of business on December 1, 1999. The
Company has granted Mr. Fallon the right to demand that the Company register for
public sale the shares of Common Stock underlying the options.
The Company engaged Mr. Frank G. McDougall, Jr., a Director of the Company,
as a consultant on a nonexclusive basis principally in the areas of management
and government relations and regulation from December 1993 until January 1995.
Mr. McDougall was paid $30,000 per year and was reimbursed for his expenses for
these services. In January 1995, Mr. McDougall became a part-time employee of
the Company and currently is paid a salary of $40,000 per year and provided a
leased car to the value of $8,500 per year .
18
<PAGE>
Stock Options
In 1991, the Company adopted the 1991 Stock Option Plan ("1991 Plan") which
authorized the granting of non-qualified stock options for up to a maximum of
800,000 shares of Common Stock. Currently there are issued non-qualified stock
options to acquire up to 2,000 shares of Common Stock under the 1991 Plan. The
1991 Plan has been suspended and no further options will be granted under the
plan.
On November 3, 1993, the Board adopted the 1993 Performance Equity Plan
("1993 Plan"). The 1993 Plan authorizes the granting of awards for up to
1,000,000 shares of Common Stock to the Company's key employees, officers,
directors and consultants. Awards consist of stock options (both non-qualified
options and options intended to qualify as "incentive" stock options under
Section 422 of the Internal Revenue Code of 1986, as amended ("Code"),
restricted stock awards, deferred stock awards, stock appreciation rights and
other stock based awards, as described in the 1993 Plan. The 1993 Plan was
effective as of November 3, 1993 and approved by the stockholders on August 24,
1994. At January 20, 1997, under the 1993 Plan, there were granted options to
purchase an aggregate of 496,332 shares of Common Stock at prices ranging from
$1.75 to $3.25 per share, exercisable from vesting until various expiration
dates between 1998 and 2001. Under these options, currently an aggregate of
458,332 shares of Common Stock may be purchased by the optionholders as
incentive options and 38,000 shares of Common Stock may be purchased by an
optionholder as non-incentive options. The table below sets forth those options
granted under the 1993 Plan to directors and officers of the Company.
<TABLE>
<CAPTION>
Number of
Name Shares Exercise Price Grant Date Expiration Date
- - - - ------------------------------ ------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Timothy G. Fallon
Chief Executive Officer, 133,332 $2.25 May 12, 1995 December 1, 1999
President and Director 20,000 $2.50 July 24, 1996 July 24, 2006
Various dates in
Frank G. McDougall 70,000 $2.25 May 12, 1995 1999 and 2000
Chairman of the Board 30,000 $2.50 July 24, 1996 July 24, 1996
Bruce MacDonald 25,000 $3.25 June 22, 1994 June 15, 1999
Executive Vice President 20,000 $1.75 December 6,1995 December 6, 2000
and Chief Financial Officer 10,000 $2.12 June 7, 1996 June 7, 2001
</TABLE>
The Company has granted options to acquire an aggregate of 1,258,668 shares
of Common Stock of the Company not under any stock option plan at prices ranging
from $1.75 to $6.00. All of these options are non-incentive options. Of these
options, 576,668 have been granted to directors and officers of the Company and
682,000 have been granted to other persons or entities. The table below sets
forth those options granted to directors and officers of the Company.
<TABLE>
<CAPTION>
Number of Exercise
Name Shares Price Grant Date Expiration Date
<S> <C> <C> <C> <C>
Timothy G. Fallon
Chief Executive Officer, 266,668 $2.25 May 12, 1995 December 1, 1999
President and Director 10,000 $2.50 July 24, 1996 July 24, 2006
20,000 $2.25 May 12, 1995 January 13, 2000
Robert C. Getchell, Director 10,000 $2.12 June 7, 1996 June 7, 2001
30,000 $2.50 July 24, 1996 July 24, 2006
20,000 $1.75 December 6, 1995 December 6, 2000
David R. Preston, Director 10,000 $2.12 June 7, 1996 June 7, 2001
30,000 $2.50 July 24, 1996 July 24, 2006
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Number of Exercise
Name Shares Price Grant Date Expiration Date
<S> <C> <C> <C>
20,000 $2.25 May 12, 1995 May 12, 2000
Norman E. Rickard, Director 10,000 $2.12 June 7, 1996 June 7, 2001
30,000 $2.50 July 24, 1996 July 24, 2006
20,000 $2.25 May 12, 1995 September 1, 1999
Beat Schlagenhauf, Director 10,000 $2.12 June 7, 1996 June 7, 2001
30,000 $2.50 July 24, 1996 July 24, 2006
Richard Worth, Director 20,000 $2.25 May 12, 1995 September 1, 1999
10,000 $2.12 June 7, 1996 June 7, 2001
30,000 $2.50 July 24, 1996 July 24, 2006
</TABLE>
Compensation of Outside Directors
Directors who are employees of the Company do not receive any fees for
attending board meetings. Directors who are not employees of the Company, in
addition to options set forth above, receive $5,000 each year, $2,500 payable on
July 1 and $2,500 payable on January 1, provided the directors participate in
80% or more of the board meetings for the six months prior to the July 1 and
January 1 payment date, and $500 for each board meeting attended.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the Company's
Common Stock owned as of January 20, 1997 by (i) each person who is known by the
Company to own beneficially 5% or more of the Common Stock, (ii) each of the
Company's directors and officers, and (iii) all directors and officers as a
group.
<TABLE>
<CAPTION>
Amount and Nature of Percentage of
Owner's Name and Address Beneficial Ownership Outstanding Shares Owned
- - - - --------------------------- --------------------------- ---------------------------
<S> <C> <C>
Frank G. McDougall, Jr. 70,000(1) 0.7%
Waterman Place
Quechee, Vermont 05059
Timothy G. Fallon 202,000(2) 2.0%
41 Sarles Street
Bretton Ridge Estates
Mt. Kisco, New York 10549
Robert C. Getchell 25,000(3) 0.3%
15 Clarina Nichols Lane
Quechee, Vermont 05050
David R. Preston 22,000(3) 0.2%
115-117 Stage Harbor Road
Chatham, MA 02633
Norman E. Rickard 22,000(3) 0.2%
1 Bretton Ridge Road
Mt. Kisco, NY 10549
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Amount and Nature of Percentage of
Owner's Name and Address Beneficial Ownership Outstanding Shares Owned
- - - - ----------------------------- --------------------- ------------------------
<S> <C> <C>
Beat Schlagenhauf 20,000(3) 0.2%
Schlagenhauf & Partners, A.G.
Parkring 57
Postfach 524
8027 Zurich, Switzerland
Richard Worth 27,500(3) 0.3%
R.W. Frookies, Inc.
The Bay Complex, Bay Street
Sag Harbor, New York 11963
M. Dolores Paoli 687,500(4) 7.1%
1177 Summer Street
Stamford, CT 06905
All Officers and Directors 406,000(5) 4.0%
as a group (8 Individuals)
</TABLE>
* Less than 0.1%.
(1) Includes 70,000 shares of Common Stock issuable upon exercise
of immediately exercisable stock options. Does not include 30,000
shares of Common Stock issuable upon exercise of stock options which
vest in the future.
(2) Includes 200,000 shares of Common Stock issuable upon
exercise of immediately exercisable stock options. Does not include
230,000 shares of Common Stock issuable upon exercise of stock options
which vest in the future.
(3) Includes 20,000 shares of Common Stock issuable upon exercise
of immediately exercisable stock options. Does not include 40,000
shares of Common Stock issuable upon exercise of stock options which
vest in the future.
(4) Does not include any shares of Common Stock beneficially
owned by Mr. Durrani, the husband of Ms. Paoli, as to which Ms. Paoli
disclaims beneficial ownership. Mr. Durrani beneficially owns 135,100
shares of Common Stock and has an immediately exercisable option to
acquire up to 125,000 shares of Common Stock. Does not include 405,000
shares of Common Stock owned by Heights Development Corp. ("HDC"), a
corporation in which Ms. Paoli is a 15% shareholder. Ms. Paoli's
sister, Gloria Paoli, owns 85% of HDC. Ms. Paoli disclaims beneficial
ownership of the shares of Common Stock owned by HDC.
(5) Includes 387,500 shares of Common Stock issuable upon
exercise of immediately exercisable stock options. Does not include
417,500 shares of Common Stock issuable upon exercise of stock options
which vest in the future.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Condor Ventures, Inc. ("Condor") has been a consultant to the Company since
January 1990. In October 1993, the Company entered into a consulting agreement
under which Condor renders consulting services (generally marketing, demographic
and product positioning studies, as well as public relations and management
advice) on a non-exclusive basis for a period of five years. The services are
provided by Mr. Adnan A. Durrani who is the President of Condor, a former
director of the Company and the spouse of M. Dolores Paoli, a holder of more
than five percent
21
<PAGE>
of outstanding Common Stock of the Company. During the term of the agreement,
Condor is paid $100,000 annually. In addition, the Company paid Condor $50,000
on the effective date of the agreement for services rendered during the period
from November 1, 1992 to October 1, 1993. Under the agreement, the Company
granted Condor an option to purchase up to 125,000 shares of Common Stock at an
exercise price of $5.00 per share, which exercise price was reduced to $2.25 on
May 12, 1995, by the Board. This option is fully vested and is exercisable until
October 2003. The Company has granted Condor certain "piggyback" and demand
registration rights for the Common Stock issued upon exercise of the options
until 2005.
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
The following documents are filed as part of this report:
Financial Statements and Financial Statement Schedules.
Reference is made to the Index to Financial Statements included in Item 7
of Part II hereof, where such documents are listed.
Exhibits as required by Item 601 of Regulation S-K:
<TABLE>
<CAPTION>
Exhibit
Number Description
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of Registrant
dated January 12, 1993. (Incorporated by reference from Exhibit 3.3
of Form 10-K for fiscal year ended October 30, 1993 - File No.
1-11254.)
3.2 By-Laws of Registrant. (Incorporated by reference from Exhibit 3.4 of Registration
Statement 33-46382.)
4.1 Form of Representative's Warrant. (Incorporated by reference from Exhibit 4.1 of
Registration Statement 33-46382.)
10.1 Equipment Lease between the Company and AMI Leasing, February 14,
1992. (Incorporated by reference from Exhibit 10.1 of Registration
Statement 33-46382.)
10.2 Commercial Lease between the Company and Bunco, Inc., July 22,
1991. (Incorporated by reference from Exhibit 10.2 of Registration
Statement 33-46382.)
10.3 Employment Agreement between Vermont Pure Springs, Inc. and Timothy G. Fallon.
(Incorporated by reference from Exhibit 10.6 of Form 10-K for fiscal year ended
October 28, 1994, File No. 1-11254.)
10.4 Stock Option Agreement between Company and Timothy G. Fallon. (Incorporated by
reference from Exhibit 10.7 of Form 10-K for fiscal year ended October 28, 1994, File
No. 1-11254.)
10.5 Consulting Agreement between Vermont Pure Springs, Inc. and John X. Maguire.
(Incorporated by reference from Exhibit 10.8 of Form 10-K for fiscal year ended
October 28, 1994, File No. 1-11254.)
10.6 1991 Stock Option Plan. (Incorporated by reference from Exhibit 10.6 of Registration
Statement 33-46382.)
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
<S> <C>
10.7 Consulting Agreement dated October 1, 1993 between the Company and
Condor Ventures Ltd. (Incorporated by reference from Exhibit 10.7
of Registration Statement 33-72940.)
10.8 Agreement dated July 30, 1993 between Transportation Display
Industries and the Company. (Incorporated by reference from Exhibit
10.8 of Registration Statement 33-72940.)
10.9 1993 Performance Equity Plan. (Incorporated by reference from Exhibit 10.9 of
Registration Statement 33-72940.)
10.10 Revolving Credit Facility and Security Agreement between the
Company and The Chittenden Bank. (Incorporated by reference from
Exhibits 6.1 and 6.2, respectively of the Report on Form 10-Q for
the fiscal quarter ended April 30, 1994.)
10.11 Asset Purchase Agreement dated April 30, 1996. (Incorporated by
reference from Exhibit 2.1 of the Report on Form 8-K dated May 1,
1996.)
10.12 Loan Agreement dated April 26, 1996 among Vermont Pure Springs,
Inc., the Company and The Chittenden Bank. (Incorporated by
reference from Exhibit 10.1 of the Report on Form 8-K dated May 1,
1996.)
10.13 Promissory Note of Vermont Pure Springs, Inc. in principal amount of $200,000.
(Incorporated by reference from Exhibit 10.2 of the Report on Form 8-K dated May 1,
1996.)
10.14 Promissory Note of Vermont Pure Springs, Inc. in principal amount of $100,000.
(Incorporated by reference from Exhibit 10.3 of the Report on Form 8-K dated May 1,
1996.)
10.15 Form of Promissory Note of Vermont Pure Springs, Inc. to be entered into May 1,
1998. (Incorporated by reference from Exhibit 10.4 of the Report on Form 8-K dated
May 1, 1996.)
10.16 Lease dated October 1, 1995. (Incorporated by reference from Exhibit 10.5 of the
Report on Form 8-K dated May 1, 1996.)
22 Subsidiaries.
23.1 Consent of Feldman Radin & Co., P.C.
27 Financial Data Schedule
</TABLE>
Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the
Registrant's fiscal year.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Vermont Pure Holdings, Ltd. has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
VERMONT PURE HOLDINGS, LTD.
By: /s/ Timothy G. Fallon
--------------------------
Dated: January 22, 1997 Timothy G. Fallon
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
<S> <C> <C>
/s/ Frank G. McDougall, Jr. Chairman of the Board of Directors January 22, 1997
- - - - --------------------------
Frank G. McDougall, Jr.
/s/ Timothy G. Fallon Chief Executive Officer, President and Director January 22, 1997
- - - - -------------------------- (Principal Executive Officer)
Timothy G. Fallon
/s/ Robert C. Getchell Secretary and Director January 22, 1997
- - - - --------------------------
Robert C. Getchell
/s/ David R. Preston Director January 22, 1997
- - - - --------------------------
David R. Preston
/s/ Norman E. Rickard Director January 22, 1997
- - - - --------------------------
Norman E. Rickard
/s/ Beat Schlagenhauf Director January 22, 1997
- - - - --------------------------
Beat Schlagenhauf
Director
- - - - -------------------------
Richard Worth
/s/ Bruce MacDonald Senior Vice President and Controller (Chief January 22, 1997
- - - - -------------------------- Financial Officer)
Bruce MacDonald
</TABLE>
24
<PAGE>
EXHIBITS TO
ANNUAL REPORT ON FORM 10-KSB
<TABLE>
<CAPTION>
Exhibit
Number Description
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of
Registrant dated January 12, 1993. (Incorporated by
reference from Exhibit 3.3 of Form 10-K for fiscal year
ended October 30, 1993 - File No. 1-11254.)
3.2 By-Laws of Registrant. (Incorporated by reference from Exhibit 3.4 of
Registration Statement 33-46382.)
4.1 Form of Representative's Warrant. (Incorporated by reference from Exhibit
4.1 of Registration Statement 33-46382.)
10.1 Equipment Lease between the Company and AMI Leasing,
February 14, 1992. (Incorporated by reference from
Exhibit 10.1 of Registration Statement 33-46382.)
10.2 Commercial Lease between the Company and Bunco, Inc., July 22, 1991.
(Incorporated by reference from Exhibit 10.2 of Registration Statement
33-46382.)
10.3 Employment Agreement between Vermont Pure Springs, Inc. and
Timothy G. Fallon. (Incorporated by reference from Exhibit 10.6 of Form
10-K for fiscal year ended October 28, 1994, File No. 1-11254.)
10.4 Stock Option Agreement between Company and Timothy G. Fallon.
(Incorporated by reference from Exhibit 10.7 of Form 10-K for fiscal year
ended October 28, 1994, File No. 1-11254.)
10.5 Consulting Agreement between Vermont Pure Springs, Inc. and John X.
Maguire. (Incorporated by reference from Exhibit 10.8 of Form 10-K for
fiscal year ended October 28, 1994, File No. 1-11254.)
10.6 1991 Stock Option Plan. (Incorporated by reference from Exhibit 10.6 of
Registration Statement 33-46382.)
10.7 Consulting Agreement dated October 1, 1993 between the
Company and Condor Ventures Ltd. (Incorporated by
reference from Exhibit 10.7 of Registration Statement
33-72940.)
10.8 Agreement dated July 30, 1993 between Transportation
Display Industries and the Company. (Incorporated by
reference from Exhibit 10.8 of Registration Statement
33-72940.)
10.9 1993 Performance Equity Plan. (Incorporated by reference from Exhibit
10.9 of Registration Statement 33-72940.)
10.10 Revolving Credit Facility and Security Agreement
between the Company and The Chittenden Bank.
(Incorporated by reference from Exhibits 6.1 and 6.2,
respectively of the Report on Form 10-Q for the fiscal
quarter ended April 30, 1994.)
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
<S> <C>
10.11 Asset Purchase Agreement dated April 30, 1996.
(Incorporated by reference from Exhibit 2.1 of the
Report on Form 8-K dated May 1, 1996.)
10.12 Loan Agreement dated April 26, 1996 among Vermont Pure
Springs, Inc., the Company and The Chittenden Bank.
(Incorporated by reference from Exhibit 10.1 of the
Report on Form 8-K dated May 1, 1996.)
10.13 Promissory Note of Vermont Pure Springs, Inc. in principal amount of
$200,000. (Incorporated by reference from Exhibit 10.2 of the Report on
Form 8-K dated May 1, 1996.)
10.14 Promissory Note of Vermont Pure Springs, Inc. in principal amount of
$100,000. (Incorporated by reference from Exhibit 10.3 of the Report on
Form 8-K dated May 1, 1996.)
10.15 Form of Promissory Note of Vermont Pure Springs, Inc. to be entered into
May 1, 1998. (Incorporated by reference from Exhibit 10.4 of the Report
on Form 8-K dated May 1, 1996.)
10.16 Lease dated October 1, 1995. (Incorporated by reference
from Exhibit 10.5 of the Report on Form 8-K dated May
1, 1996.)
22 Subsidiaries.
23.1 Consent of Feldman Radin & Co., P.C.
27 Financial Data Schedule
</TABLE>
26
EXHIBIT 22
VERMONT PURE HOLDINGS, LTD.
SUBSIDIARIES
State of
Name Incorporation
- - - - ------------------------- -------------
Vermont Pure Springs, Inc. Delaware
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and Stockholders
of Vermont Pure Holdings, Ltd.
Randolph, Vermont
We consent to the incorporation by reference in Registration Statement No.
33-95908 on Form S-8 of Vermont Pure Holdings, Ltd. of our report, dated
December 13, 1996, appearing in the Annual Report on Form 10-KSB of Vermont Pure
Holdings, Ltd. for the year ended October 26, 1996.
\S\ FELDMAN RADIN & CO., P.C.
- - - - -----------------------------
Feldman Radin & Co., P.C.
New York, New York
January 23, 1997
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000885040
<NAME> VERMONT PURE HOLDINGS, LTD.
<MULTIPLIER> 1
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-26-1996
<PERIOD-START> OCT-29-1995
<PERIOD-END> OCT-26-1996
<EXCHANGE-RATE> 0
<CASH> 783,081
<SECURITIES> 0
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0
0
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</TABLE>
