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 for the fiscal year ended October 25, 1997
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ___________ to ___________
Commission File Number 1-11254
VERMONT PURE HOLDINGS, LTD.
(Exact name of small business issuer in its charter)
Delaware 06-1325376
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(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
(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 $17,685,442.
Based on the last sale at the close of business on January 14, 1998, the
aggregate market value of the Issuer's common stock held by non-affiliates of
the Issuer was approximately $41,392,288.
The number of shares outstanding of the Issuer's Common Stock, $.001 par value,
was 10,207,371 on January 14, 1998.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
Documents incorporated by reference: The information required by Items 9 through
12 of Part III of this Form 10-KSB is incorporated by reference from the
Issuer's definitive proxy statement, to be filed with respect to the Issuer's
1998 Annual Meeting of Stockholders.
Exhibit Index is located on page 28
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ITEM 1. BUSINESS.
The Company bottles, markets and distributes natural spring water under
the "Vermont Pure(R)" and "Hidden Spring(R)" brands to the retail consumer and
home/office markets. The Company sells to the retail consumer markets primarily
in the New England, Mid-Atlantic and Mid-Western states while it sells to the
home/office market primarily in Northern New York and Northern New England.
Industry Background
Bottled water has been and continues to be a fast growing segment of
the beverage industry. 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 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 reflects growing public awareness
of, and fears about, environmental pollution, including 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
Incorporated in Delaware in 1990, 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 that acquisition, the Company has 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(R)." The Vermont Pure(R) brand
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is positioned as a premium brand for the general consumer market with a wide
distribution in supermarkets, convenience stores and other consumer outlets, as
well as in home and office markets. The Company has focused on distributing the
Vermont Pure(R) 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 markets this brand to essentially the same types of markets as the
Vermont Pure(R) brand. The Company considers its trademarks, trade names and
brand identities to be very important to its competitive position, and defends
its brands vigorously. See "Competition" below.
Because the home/office bottled water distribution market is a
fragmented yet well established part of the bottled water market and generates
margins and cash flows that compare favorably with consumer bottled water, the
Company has since the mid-1990's sought to expand home/office distribution in
its home market of Vermont and more recently developed and expanded its share of
the Northern New York and Northern New England 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 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
the 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.
The Company has continued a strategy of incremental growth by
acquisition in fiscal 1997 and fiscal 1998. In March 1997, the Company purchased
certain assets and assumed selected liabilities of the home/office business of
Greatwater Refreshment Services, Inc., based in upstate New York. In July 1997,
the Company acquired A.M. Fridays, Inc., a home/office distributor of bottled
water, coffee, and vending services, with warehouse distribution based in
Manchester, New Hampshire and Shelton, Connecticut. The Company believes this
acquisition will provide a good base for expansion into northern Massachusetts.
A.M. Fridays had 1996 revenues of $1.2 million. In August 1997, the Company
purchased the stock of Excelsior Springs Company, a home and commercial bottled
water and coffee distributor in the Albany, Saratoga Springs and Plattsburgh,
New York markets. Excelsior Springs had annual sales in excess of approximately
$2 million in each of 1996 and 1997.
Subsequent to fiscal 1997, the Company in December 1997 acquired the
worldwide trademark and distribution rights for AKVA Icelandic bottled spring
water, and intends to absorb the United States distribution of AKVA into its
existing operations. AKVA's annual sales were approximately $1 million in 1996.
And most recently, in January 1998, the Company acquired the assets of Vermont
Coffee Time, Inc. of Williston, Vermont. Vermont Coffee Time, which had total
sales of $1.5 million in 1997, delivers Green Mountain Coffee and spring water
to offices and homes in Vermont and parts of upstate New York and New Hampshire.
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To date, the Company has not experienced significant problems in
integrating its acquired businesses with its existing operations. However, the
acquisition of new businesses may require management to devote time and energy
to the successful, efficient and timely integration of operations, labor forces,
administrative systems (including accounting practices and procedures and
management information systems), and varying corporate cultures. Although the
Company does not expect to grow by acquisition faster than its ability to
integrate new businesses with existing operations, there can be no assurance
that management will not find it necessary to devote unanticipated time and
effort to integrating new businesses, with possible adverse effects on the
Company's business as a whole.
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 in the area
of its springs assures a high level of purity. Moreover, the long percolation
period permits the water to become mineralized and Ph balanced.
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.
As a result of recent rapid growth in the Company's business, the
Company has found it increasingly necessary to purchase bulk quantities of water
from natural springs owned or operated by non-affiliated entities. All of such
springs are approved sources for natural spring water. See "Government
Regulation." During fiscal 1997, purchases of spring water from a non-affiliated
source in Vermont amounted to approximately half of the Company's usage of
spring water, as compared with approximately 30% in fiscal 1996. The Company is
actively exploring the acquisition of additional spring sources that would
enable it to reduce its reliance on third-party springs. In this connection, the
Company has entered into a purchase and sale agreement pursuant to which it will
acquire a high volume spring source that is expected to reduce significantly the
Company's need to purchase water from non-affiliated sources. The transaction is
expected to close early in calendar 1998. The Company has for several years
purchased spring water from a Vermont supplier with whom it has a good
relationship, and the Company has no reason to believe that it will not be able
to obtain all of the bulk spring water supplies it needs from this supplier.
However, if the supplier ceased to sell spring water to the Company at
commercially reasonable prices or for any reason, or could no longer meet the
Company's needs to a material extent, or if the supplier's spring source were no
longer an approved source for natural spring water by reason of contamination or
otherwise, then, unless the Company could find adequate amounts of bulk spring
water from other suppliers or sources, the Company's business would
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likely be materially adversely affected by an interruption in supply. The
Company believes that it could find adequate supplies of bulk spring water from
other sources, but that it might suffer inventory shortages or inefficiencies,
such as increased purchase or transport costs, in obtaining such supplies.
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 or other
geological changes, 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(R)
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 various product sizes to create interest
and add extra value. Consumer sizes are bottled in clear PET (polyethylene
terephthalate) recyclable bottles which is perceived in the marketplace as a
high quality package. The home/office natural spring water products are sold in
three, five and six gallon bottles. In conjunction 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(R) 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 Food and Drug Administration
("FDA"). The Company prices its Vermont Pure(R) brand competitive to other
domestic premium brands but lower than imported premium water products. The
Hidden Spring(R) products are similarly packaged and sold to retail grocery and
convenience markets.
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.
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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 consumer product 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's home/office sales are generated and serviced using
directly operated facilities, Company employees and Company designated
distributors. The Company generally uses the Vermont Pure(R) brand for this
market and maintains distribution routes in its various market areas.
Slotting Fees
For the Company to achieve placement of its retail consumer products in
certain supermarket chains and individual supermarket stores, it may sometimes
be 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. As the Company has become better established
and its brands have achieved greater recognition, the Company has become less
dependent on slotting fees to gain space. Nevertheless, like many producers of
food products, the Company pays slotting fees in some cases, and expects to
continue to do so.
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 has also actively promoted
its products through sponsorship of various organizations and sporting events.
In recent years, the Company has sponsored professional golf and tennis events,
as well as major ski areas and sports arenas, and various charitable and
cultural organizations, such as Vermont Special Olympics and the Vermont
Symphony Orchestra.
During the winters of 1995-96, and 1996-97, 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. Management believes that 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(R) roots in the Green Mountains. The Company is also utilizing
co-branding
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opportunities. During 1996 the Company entered into an arrangement with Ben &
Jerry's Homemade Corporation under which the Company supplies its Vermont
Pure(R) water for use in Ben & Jerry's(R) All Natural Sorbets. The Vermont
Pure(R) name is highlighted on all Ben & Jerry's sorbet packaging.
Distribution and Sales
The Company uses major beverage distributors for the distribution of
its consumer products, and distributes its home/office products directly. Using
distributors is typical in the beverage industry as an efficient use of capital
for maximum market penetration. Beverage distributors purchase the products of
many companies and then wholesale them to retail chains or make bulk retail
sales. Distributors generally have established relationships with local retail
outlets for beverage products and facilitate obtaining shelf space.
Occasionally, the Company sells its products directly to grocery store chains.
The Company distributes its Vermont Pure(R) brand with a number of
distributors, including the following principal distributors:
Coca-Cola Enterprises, Inc. ("CCE"), which in 1997 purchased the
Company's existing distributor The Coca-Cola Bottling Company of New
York, Inc., 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 Cotton
Club, an Ohio-based beverage distributor for Ohio and western
Pennsylvania.
The Company is obligated to supply the distributors with their
requirements of the Vermont Pure(R) brand at established prices. In addition,
under the CCE 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 to the retail outlets where CCE
determines to sell the Vermont Pure(R) brand. Each of the agreements is for a
stated term, but is terminable if either party does not fulfill certain
obligations.
CCE and its predecessor have been significant customers of the Company
for several years, although the Company's dependence on CCE has been declining
since 1995. Sales to CCE in fiscal years 1997, 1996 and 1995, expressed as a
percentage of total sales, were 31%, 35% and
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39%, respectively. Accounts receivable from CCE at the end of fiscal years 1997,
1996 and 1995, expressed as a percentage of total accounts receivable, were 16%,
14% and 26%, respectively. The Company's contract with CCE is self-renewing but
terminable by CCE upon 90 days' notice prior to the annual renewal date.
Although the Company considers its relationship with CCE to be good and has no
reason to believe that CCE will not continue to distribute its retail products,
the Company has been pursuing strategies designed in part to reduce its reliance
on CCE, most notably the strategy of diversifying into the home and office
markets, where the Company distributes its own products. At present, The
Coca-Cola Company does not sell its own brand of spring or purified water, but
if it were to introduce such a product, or if CCE were independently to acquire
or develop its own brand of water, it is possible that CCE might decide to limit
or cancel its distribution of competing waters. Accordingly, if CCE were to
terminate its relationship with the Company for any reason, the Company's
business would likely be materially adversely affected until the Company could
put into place effective replacement means of distribution. Any such material
interruption in distribution could result in a loss of sales revenue. In the
current market, the Company believes that such replacement means of distribution
would likely involve a number of distributors, with the possibility that the
Company would suffer inefficiencies, such as higher transport costs, that could
also impact earnings.
As discussed elsewhere, the Company is pursuing an acquisition strategy
to purchase independent home and office bottlers and distributors in New England
and New York State. Management's decision to expand in this market has been
driven by, among other things, attractive margins and good cash flows from
equipment rentals, as well as by the advantages of product diversification, such
as diminished reliance on a single segment of the market. Moreover, the Vermont
Pure(R) brand in the multi gallon or home/office setting affords consumers an
opportunity to sample the product, which the Company believes augments retail
sales and contributes to brand awareness.
The Company markets and distributes its water directly to homes and
offices in six, five and three gallon reusable bottles. These products are
distributed from Company operated warehouses and vehicles by employees
throughout Northern New York and Northern New England. Deliveries are made to
customers on a regularly scheduled basis. Water coolers, coffee brewers, coffee
and other products related to these lines are also distributed on the routes.
The Company also sells its Hidden Spring(R) consumer products on these lines to
homes, offices and retail outlets. With respect to home and office markets in
Southern New England and lower New York State, the Company utilizes a network of
outside distributors to distribute the Company's water and ancillary products.
The Company does not own any of the assets or employ any of the personnel
involved with the distribution of the water in these areas.
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.
The Company employs a sales force of 15 persons for retail and
home/office sales. The Company's sales personnel oversee its beverage
distribution network and act as liaison between
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distributors and the Company for ordering product, facilitating distribution,
servicing retail outlets, home/office customers and warehouse distribution.
Sales personnel actively seek to expand the number of retail outlets carrying
the Company's products, seek distributors and generally implement the Company's
marketing efforts.
Contract Packaging
The Company performs private label contract packaging of its natural
spring water for distributors of other brands of bottled water and grocery store
chains for house brands. The Company also packs five and six gallon home and
office containers for third parties. Contract packaging is very price
competitive and typically is performed under short-term agreements. The Company
seeks opportunities for contract packaging for a variety of reasons, including
the fact that it develops favorable relationships with retail chains.
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 and remained stable in 1997. 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 the market price of resin. 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 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.
For information about the Company's spring water sources, see
"Description of Water Sources."
Seasonality
The Company's business is seasonal, with the consumer portion of the
business being somewhat more seasonal than the home and office market. The
period from June to September represents the peak period for sales and revenues
due to increased consumption of beverages during the summer months.
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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, the trend has been toward the development of national
brands of natural spring water. Dominating the national market are The Perrier
Group of America, Inc. (whose brands include Arrowhead Mountain Spring Water,
Poland Spring, Ozarka Spring Water, Great Bear, Deer Park, Ice Mountain and
Zephyrhills Natural Spring Water) and Great Brands of Europe (whose brands
include Evian Natural Spring Water and Dannon Natural Spring Water). Perrier is
owned by 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 now selling a
purified drinking water under the Aquafina trademark. Consumers may also choose
home water purification systems in lieu of drinking spring water, or may choose
to drink beverages other than spring waters, such as soft drinks, coffee,
juices, beer and wine.
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 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 markets include a number of 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.
The Company competes on the basis of pricing, association with the
image of the State of Vermont, attractive packaging, customer service in the
home/office business, and brand recognition. The Company considers its
trademarks, trade names and brand identities to be very important to its
competitive position, and defends its brands vigorously.
Trademarks
The Company sells its natural spring water products under the trade
names Vermont Pure(R) 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.
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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 became effective which redefined 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.
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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
and the basis on which any therapeutic claims for water may be made. The Company
has received approval for its Vermont Pure(R) and its Hidden Spring(R) brands
from 49 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"). By means of unannounced NSF inspections, 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.
Employees
As of January 14, 1998, the Company had 138 full-time employees and 10
part-time employees. None of the employees belongs to a labor union. The Company
believes that its relations with its employees are good.
The Company relies to a great degree on the combined efforts of its
executive officers, Timothy G. Fallon, its President and Chief Executive
Officer, and Bruce S. MacDonald, its Vice President and Chief Financial Officer,
for its day to day management and strategic direction. Both of these officers
have signed employment agreements with the Company that extend to November 1,
2001.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company owns office, bottling and warehouse properties and natural
springs in Randolph, Vermont. 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 on a monthly basis an office in an office
suite in White Plains, New York.
The Company rents warehouse space in different locations from time to
time for the purpose of the trans-shipment of its bottled water products to its
distributors and retailers. This space is rented on a per pallet basis.
As part of the Company's acquisitions in 1996 and 1997, it has entered
into or assumed various lease agreements for properties used as distribution
points and office space. The following table summarizes these arrangements:
12
<PAGE>
<TABLE>
<CAPTION>
Location Lease Expiration Sq. Ft. Annual Rent
<S> <C> <C> <C>
Williston, VT At will 2,000 $17,700
Williston, VT March, 1999 5,000 $31,400
Manchester, NH At will 10,000 $42,200
Rochester, NY July, 1998 2,500 $19,140
Buffalo, NY October, 2000 6,760 $44,616
Syracuse, NY April, 2000 3,000 $19,200
Albany, NY At will 12,000 $48,000
Plattsburgh, NY At will 2,000 $ 5,400
Shelton, CT December, 1998 2,000 $11,700
</TABLE>
The Company believes that its existing bottling plant is adequate for
its current and near-term needs. However, the Company anticipates that as it
grows it will need to add or acquire additional capacity for bottling operations
and warehouse space. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
ITEM 3. LEGAL PROCEEDINGS.
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 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 filed a counterclaim seeking unspecified damages
and attorneys' fees. Subsequently, the Company settled the litigation with Mr.
Beattie for an immaterial amount and the execution of mutual releases. The
Company does not believe that the counterclaims of Mr. Maguire have any merit
and intends to pursue the litigation and defend itself vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
13
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Common Stock is traded on the Nasdaq SmallCap Market under the
symbol "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 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 25, 1997
First Quarter ....................... 3 1/8 1 11/16
Second Quarter ...................... 2 13/16 1 7/8
Third Quarter ....................... 2 1/2 1 3/4
Fourth Quarter ...................... 4 3/4 2 1/8
The last reported sale price of the Common Stock on the Nasdaq SmallCap
Market on January 14, 1998 was $4.0625.
The Company had 209 record owners of the Common Stock as of January 14,
1998. As of that date, the Company believes that 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 paying dividends in the foreseeable
future. The Company has adopted a policy of cash preservation for future use in
the business.
Sales of Unregistered Securities
On August 27, 1997, the Company sold 415,617 shares of its Common Stock
to a total of 6 stockholders and noteholders of Excelsior Spring Water Company
in connection with the acquisition of Excelsior by the Company. The Common Stock
was valued at $2.28 per share, and was issued as partial consideration to the
sellers in the transaction (the purchasers of the Company's stock) for all of
the shares of capital stock of the acquired company. No underwriter was involved
and no commissions were paid in this transaction. The sale of the shares was
effected in reliance on the exemption available under Section 4(2) of the
Securities Act of 1933 for transactions not involving a public offering.
14
<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 25, 1997 Compared to Year Ended October 26, 1996
Sales for 1997 were $17,685,442 compared to $11,878,829 for 1996, an
increase of $5,806,613 or 49%. 1997 sales attributable to acquisitions made
during the year were $2,323,807, which represented 20 percentage points of the
overall 49 point increase. Excluding those revenues, sales for 1997 net of
acquisitions were $15,361,635, an increase of $3,482,806, or 29%, over 1996. The
Company's 29 percentage point (1997 over 1996) and 27 percentage point (1996
over 1995) increases in sales, net of acquisitions, were accounted for by
increases in the following distribution channels: 1997 - 18 percentage points
for retail size Vermont Pure(R) (two-thirds of the total increase), 5 points for
Hidden Spring(R), 3 points for Private Label, and 3 points for home/office; 1996
- - 13 points for retail size Vermont Pure(R) (roughly half of the total
increase), 8 points for Hidden Spring(R), 2 points for Private Label and 4
points for home/office.
Sales of the Company's consumer products were $12,375,567 in 1997, an
increase of 34% over 1996, when sales of these products were $9,219,363. The
increase reflects the continued growth of the Vermont Pure(R) brand in its core
markets and its Hidden Spring(R) brand in secondary distribution channels.
Private label volume also continued to grow during the year. In addition, the
Company substantially expanded its home and office distribution through
acquisitions and grew sales in existing markets. Total sales through the home
and office distribution system were $5,309,873 for 1997 compared to $2,655,662
for 1996, an increase of $2,654,211, or 100%. Net of acquisitions, home/office
sales increased 12% in 1997.
Cost of goods sold for 1997 were $7,643,908 or 43% of sales, compared
to $6,162,903, or 52% of sales, for 1996. The decrease in cost of goods sold as
a percentage of sales compared to the prior year is due to a lower cost of raw
materials, lower bottling costs as a result of higher production volumes and
more efficient production, and an increase in home and office
15
<PAGE>
distribution. Prices for the bottles the Company uses for its retail-size
product declined significantly during the year as a result of a decline in the
market price of the resin used to produce them and the substantial increase in
production volumes. In addition, production equipment was installed to improve
the efficiency of bottle handling. As a result of acquisitions, the Company's
mix of bottling skewed more toward product for home and office distribution
which is characterized by lower bottling costs because of larger sizes and
re-fillable bottles. Consequently, the gross profit was higher in 1997 than in
1996, at $10,041,534 compared to $5,715,926, respectively.
Total operating expenses increased to $9,203,688 in 1997 from
$6,725,525 in 1996, an increase of $2,478,163, or 37%. Of these amounts,
selling, general and administrative expenses were $5,897,735 and $4,234,104 for
1997 and 1996, respectively, an increase of $1,663,631, or 39%. The increase in
selling, general and administrative expenses was due to increased resources
utilized to grow the business and expenses associated with the businesses
acquired in 1997. Advertising expenses increased to $3,077,145 in 1997 from
$2,348,327 in 1996, an increase of $728,818, or 31%. This increase reflects
amounts spent on product promotion, primarily for retail-size product, to stay
competitive in the marketplace and continue the Company's sales growth trend.
The Company anticipates that it will have to continue to make significant
promotional expenditures in order to stay competitive in an increasingly
competitive market. Amortization expense increased to $228,808 from $143,094 in
1997 and 1996, respectively, an increase of $85,714, or 60%, as a result of the
1997 acquisitions.
Income from operations in 1997 was $837,846 compared to a loss from
operations of $1,009,599 for 1996. Interest expenses increased to $368,224 in
1997 from $196,630 in 1996, an increase of $171,594 or 87%. The increase was a
result of greater amounts borrowed during the period primarily related to the
acquisitions. The improvement to income before income taxes to $523,395 from a
loss before income taxes of $1,267,331 in 1996 was the result of increased sales
and decreased manufacturing and operating costs. In 1997, the Company achieved a
level of production that lowered fixed costs per unit and that, when combined
with variable costs, more than offset the incremental costs from sales of the
Company's products.
Net income of $1,067,395 in 1997 compared to a net loss of $1,267,331
in 1996, an improvement of $2,334,726. The Company recorded a tax benefit of
$544,000 in 1997. This benefit reflects a partial recognition of the Company's
total available deferred tax assets of approximately $5.8 million at October 25,
1997, based on an evaluation of likely utilization. If the Company continues to
be profitable, the remaining $5.2 million of unrecorded deferred tax benefits
will be available for recognition in future years. No assurance can be given
that the Company will be profitable in the future and that these tax benefits
will actually be used. Based on the weighted number of shares of Common Stock
outstanding of 9,771,347 during 1997 and 9,678,268 for 1996, the net income per
share was $.11 and the net loss per share was $.13, respectively.
Year Ended October 26, 1996 Compared to Year Ended October 28, 1995
16
<PAGE>
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(R) 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 Happy Ice Corporation which services the
Buffalo/Rochester area of New York, by establishing relationships with several
new distributors to deliver Vermont Pure(R) 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.
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
17
<PAGE>
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.
Liquidity and Capital Resources
From its inception through fiscal 1996, the Company financed its
operations principally through the sale of equity securities in private and
public offerings. By fiscal 1997, the Company had become less dependent on the
need to raise additional capital through sales of its equity securities and was
able to finance its operations and capital expenditures through operating cash
flow and a line of credit. As part of a strategy to grow incrementally by
acquiring existing home and office businesses, the Company issued 453,712 shares
of Common Stock at an aggregate market value of $1,048,126 as part of the
financing of certain acquisitions.
At October 25, 1997, the Company had working capital of $257,371. This
represents a decrease of $451,172 from the amount of working capital on October
26, 1996. The decrease in working capital in 1997 is attributable to the
acquisition of capital equipment to support the growth of the Company and
intangible assets, notably customer lists and goodwill, associated with the
purchase of home and office businesses. At October 25, 1997, the Company had
availability of $831,000 under a working capital line of credit and had borrowed
$238,000 of that amount. The Company believes that its working capital and
available credit are adequate to fund its current day to day operations and that
revenues will continue to cover operating and capital expenses and debt
repayment in the 1998 fiscal year. However, there can be no assurance that this
will be the case.
Cash flow from operations improved to a net inflow of $1,430,523 for
the fiscal year ended October 25, 1997 as compared to a net outflow of $224,986
in the fiscal year ended October 26, 1996. This improvement of approximately
$1,655,000 is primarily due to the Company's improved profitability. Cash flows
from investing activities had a net outflow of approximately $3,751,000, with
cash expended for acquisitions of $2,775,000 and $1,080,000 expended for
property, plant and equipment being the main components. Financing activities
had a net cash inflow of $1,631,000, consisting of new borrowings of
approximately $2,532,000 offset by repayments aggregating $901,000.
At October 25, 1997, the Company has recorded a deferred tax asset of
$544,000. Based on current levels of profitability, the realization of such
deferred tax asset would take approximately two to three years.
On June 25, 1997 the Company revised its line of credit agreement with
The Chittenden Bank to increase the amount it is permitted to borrow up to a
maximum of $1,500,000, based on levels of inventory and receivables, to fund the
working capital needs of its operations. The new agreement is for a term of two
years. At October 25, 1997, the Company had borrowed $238,000 on its line of
credit. The maximum available to borrow as of that date was $831,000, based on
18
<PAGE>
the level of receivables and inventory. Chittenden also agreed to loan the
Company additional funds specifically for acquiring businesses with home and
office distribution, subject to the Bank's approval. As of October 25, 1997 the
Company had borrowed $3,589,625 under this agreement. Both loan facilities are
secured by all the inventory, receivables and intangible assets of the Company
and the Company pays interest on any outstanding principal at the prime rate as
published in The Wall Street Journal, plus .5%, which is currently 9.00% per
annum. The Company considers its relationship with Chittenden to be good.
However, due to Chittenden's relatively small size, the Company is actively
exploring the possibility of obtaining larger financing facilities from a bank
with greater lending capacity. Chittenden has indicated its desire to
participate in such a facility.
In addition to the bank debt associated with its recent acquisitions,
the Company financed certain of these transactions with notes to the sellers. As
of October 25, 1997, these notes had an unpaid balance of $247,180. The notes
are at interest rates ranging from 8.0% to 8.5% and are being repaid through
August 2002.
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. At
present, the Company contemplates doubling its plant capacity over the next two
years, and anticipates substantial capital expenditures to meet its building and
equipment needs. Any further expansion of facilities, including warehouse space,
is expected to be financed using a combination of debt and working capital.
The Company is pursuing an active program of evaluating acquisition
opportunities. 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.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
19
<PAGE>
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
INDEPENDANT AUDITORS' REPORT......................................... 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
F-1
<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 Subsidiaries as of October 25, 1997 and October 26,
1996, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the years ended October 25, 1997,
October 26, 1996 and October 28, 1995. 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 Subsidiaries as of October 25, 1997 and October 26,
1996, and the results of their operations and their cash flows for the years
ended October 25, 1997, October 26, 1996 and October 28, 1995 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 17, 1997
F-2
<PAGE>
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
<S> <C> <C>
October 25, October 26,
1997 1996
--------------------- -------------------
ASSETS
CURRENT ASSETS:
Cash $ 93,808 $ 783,081
Accounts receivable 1,974,765 1,159,806
Inventory 978,473 783,156
Current portion of deferred tax asset 326,000 -
Other current assets 288,627 159,145
-------------------- -------------------
TOTAL CURRENT ASSETS 3,661,673 2,885,188
-------------------- -------------------
PROPERTY AND EQUIPMENT - net of accumulated depreciation 7,332,912 5,536,185
-------------------- -------------------
OTHER ASSETS:
Intangible assets - net of accumulated amortization 5,216,300 1,317,082
Deferred tax asset 218,000 -
Others 117,881 232,939
-------------------- -------------------
5,552,181 1,550,021
-------------------- -------------------
$ 16,546,766 $ 9,971,394
==================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,099,094 $ 879,669
Current portion of customer deposits 49,534 31,236
Accrued expenses 986,961 446,507
Line of credit 238,021 441,811
Current portion of long term debt 885,748 197,239
Current portion of obligations under capital lease 144,944 180,183
-------------------- -------------------
TOTAL CURRENT LIABILITIES 3,404,302 2,176,645
Long term debt 5,435,292 2,779,408
Obligations under capital lease 304,597 98,945
Customer deposits 760,559 389,901
-------------------- -------------------
TOTAL LIABILITIES 9,904,750 5,444,899
-------------------- -------------------
STOCKHOLDERS' EQUITY:
Common stock - $.001 par value, authorized 10,132 9,678
20,000,000 shares, issued and outstanding 10,131,980
shares at October 25, 1997 and 9,678,268 shares at
October 26, 1996
Paid in capital 22,447,092 21,399,420
Accumulated deficit (15,815,208) (16,882,603)
-------------------- -------------------
TOTAL STOCKHOLDERS' EQUITY 6,642,016 4,526,495
-------------------- -------------------
$ 16,546,766 $ 9,971,394
==================== ===================
F-3
</TABLE>
<PAGE>
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
----------------------------------------------------------------
October 25, October 26, October 28,
1997 1996 1995
------------------- --------------------- ------------------
<S> <C> <C> <C>
SALES $ 17,685,442 $ 11,878,829 $ 8,517,470
COST OF GOODS SOLD 7,643,908 6,162,903 5,070,207
------------------- ------------------ ----------------
GROSS PROFIT 10,041,534 5,715,926 3,447,263
------------------- ------------------ ----------------
OPERATING EXPENSES:
Selling, general and administrative expenses 5,897,735 4,234,104 3,426,561
Advertising expenses 3,077,145 2,348,327 2,532,697
Amortization 228,808 143,094 91,404
------------------- ------------------ ---------------
TOTAL OPERATING EXPENSES 9,203,688 6,725,525 6,050,662
------------------- ------------------ ----------------
INCOME(LOSS)FROM OPERATIONS 837,846 (1,009,599) (2,603,399)
------------------- ------------------ ----------------
OTHER INCOME (EXPENSE):
Interest - net (368,224) (196,630) (154,175)
Miscellaneous 53,773 (61,102) (46,527)
------------------- ------------------ ----------------
TOTAL OTHER INCOME (EXPENSE) (314,451) (257,732) (200,702)
------------------- ------------------ ----------------
INCOME(LOSS) BEFORE INCOME TAXES 523,395 (1,267,331) (2,804,101)
PROVISION FOR INCOME TAX EXPENSE (BENEFIT) (544,000) - -
------------------- ------------------ ----------------
NET INCOME (LOSS) $ 1,067,395 $ (1,267,331) $ (2,804,101)
=================== ================== ================
NET INCOME (LOSS) PER SHARE $ 0.11 $ (0.13) $ (0.30)
=================== ================== ================
Weighted Average Shares Used in Computation 9,771,347 9,678,268 9,344,935
=================== ================== ================
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER' EQUITY
Common Stock
--------------------------------- Paid in Unearned Accumulated
Shares Par Value Capital Compensation Deficit Total
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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 - - -
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 Deferred
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 - (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 - (16,882,603) 4,526,495
Issuance of Common Stock 453,712 454 1,047,672 - - 1,048,126
Net Income - - - - 1,067,395 1,067,395
-------------------------------------------------------------------------------------------
Balance, October 25, 1997 10,131,980 $10,132 $22,447,092 $ - ($15,815,208) $6,642,016
===========================================================================================
F-5
</TABLE>
<PAGE>
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
Year ended
-----------------------------------------------------------------
October 25, October 26, October 28,
1997 1996 1995
------------------------------------------ --------------------
<CAPTION>
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income(loss) $ 1,067,395 $ (1,267,331) $ (2,804,101)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation 876,553 633,283 525,525
Amortization 228,808 143,094 91,404
(Gain) loss on disposal of property and equipment (38,948) 67,421 25,800
Non cash imputed stock compensation - - (13,703)
Changes in assets and liabilities (net of effect of acquisitions):
(Increase) Decrease in accounts receivable (433,636) (132,694) (582,663)
(Increase) Decrease in inventory (65,185) 189,916 510,365
(Increase) Decrease in deferred tax asset (544,000) -
(Increase) Decrease in other current assets (87,311) (14,983) 47,606
(Increase) Decrease in other assets 95,057 (132,363) 44,685
(Decrease) Increase in accounts payable (165,552) 176,959 (222,515)
(Decrease) Increase in customer deposits 58,127 57,253 48,700
(Decrease) Increase in accrued expenses 439,215 54,459 (419,263)
------------------ ----------------- -----------------
CASH PROVIDED (USED) IN OPERATING ACTIVITIES 1,430,523 (224,986) (2,748,160)
------------------- ----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (1,079,569) (453,392) (492,887)
Proceeds from sale of property and equipment 103,531 230,264 21,894
Cash expended for acquisitions (2,774,946) (1,340,677) -
------------------- ----------------- -----------------
CASH USED IN INVESTING ACTIVITIES (3,750,984) (1,563,805) (470,993)
------------------- ----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (paydown) of line of credit (203,790) 441,811 (21,400)
Proceeds from debt 2,531,978 1,390,000 -
Payment of long term debt (487,231) (523,991) (105,376)
Payment of capital lease obligations (209,769) (279,208) (341,479)
Sale of common stock - - 4,315,209
Repurchase of stock options - - (104,250)
------------------- -------------------- -----------------
CASH PROVIDED BY FINANCING ACTIVITIES 1,631,188 1,028,612 3,742,704
------------------- -------------------- -----------------
NET INCREASE (DECREASE) IN CASH (689,273) (760,179) 523,551
CASH - Beginning of year 783,081 1,543,260 1,019,709
------------------- -------------------- -----------------
CASH - End of year $ 93,808 $ 783,081 $ 1,543,260
=================== ==================== =================
Cash paid for interest $ 422,026 $ 272,456 $ 239,210
=================== ==================== =================
NON-CASH FINANCING AND INVESTING ACTIVITIES:
Equipment acquired under capital leases $ 81,392 $ 94,627 $ -
=================== ==================== =================
F-6
</TABLE>
<PAGE>
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
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, and other properties in
Vermont. The Company's products are sold predominately in the New
England, Mid-Atlantic and Mid-Western states, 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 subsidiaries, Vermont
Pure Springs, Inc., A.M. Friday's, Inc., Excelsior Springs Water
Co., Inc . The Company's subsidiaries are 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 $204,634 and
$191,079 at October 25, 1997 and October 26, 1996. Amounts charged
to expense were $57,809, $123,667 and $122,000 during the years
ended October 25, 1997, October 26, 1996 and October 28, 1995.
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 on 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 - The Company records goodwill in connection
with its acquisitions. Goodwill is amortized over 30 years. The
value of customer lists acquired is amortized over 3 years and the
value of the covenant agreements not to compete are amortized over
the term of the agreements.
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 a Company
elects to continue to follow APB No. 25. The Company has adopted
the disclosure-only option of SFAS No. 123 for fiscal 1997.
i. Income/(Loss) Per Share - Income/(loss) per share is based on the
weighted average number of common shares and dilutive common share
equivalents outstanding during the periods. Common share
equivalents are not included for loss periods as such inclusion
would be anti-dilutive.
j. Advertising Expenses - The Company expenses advertising costs at
the time that the advertising begins to run.
k. 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.
l. Customer Deposits - Customers receiving home or office delivery of
water pay a deposit for the water bottle on receipt that is
refunded when it is returned. The Company uses an estimate (based
on historical experience) of the deposits it expects to return
over the next 12 months to determine the current portion of the
liability and classifies the balance as long term.
F-8
<PAGE>
Amounts applicable for fiscal year ended October 26, 1996 have
been reclassified to conform to the current year's presentation.
m. Income Taxes - The Company accounts for income taxes under
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.
n. 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.
o. Fair Value of Financial Instruments - 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. The carrying
amount of the Company's borrowings approximates fair value.
p. Accounting for Long-Lived Assets - The Company reviews long-lived
assets, certain identifiable assets and any goodwill related to
those assets for impairment whenever circumstances and situations
change such that there is an indication that the carrying amounts
may not be recovered. At October 25, 1997, the Company believes
that there has been no impairment of its long-lived assets.
3. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
October 25, October 26,
Life 1997 1996
---------------- ------------------ -------------------
<S> <C> <C> <C>
Land, buildings and improvements............... 10 - 40 yrs. $ 3,305,106 $ 3,268,842
Machinery and equipment........................ 3 - 10 yrs. 5,187,447 3,043,750
Equipment held under capital lease............. 3 - 10 yrs. 1,404,636 1,039,905
------------------ -------------------
9,897,189 7,352,497
Less accumulated depreciation.................. 2,564,277 1,816,312
------------------ -------------------
$ 7,332,912 $ 5,536,185
================== ===================
4. INTANGIBLE ASSETS
October 25, October 26,
Life 1997 1996
---------------- ------------------ -------------------
Goodwill....................................... 30 yrs. $ 5,159,705 $ 1,605,795
Covenants not to compete....................... 5 yrs. 316,599 33,598
Customer lists................................. 3 yrs. 499,378 208,913
F-9
<PAGE>
Other.......................................... -- 50,991 50,341
------------------ -------------------
6,026,673 1,898,647
Less accumulated amortization.................. 810,373 581,565
------------------ -------------------
$ 5,216,300 $ 1,317,082
================== ===================
</TABLE>
5. ACQUISITIONS
The Company completed the following acquisitions in 1997, the Greatwater
Refreshment Services, Inc.on March 10, 1997, AM Fridays on July 16, 1997
and Excelsior Springs Water Company on August 27, 1997.
The following table gives an aggregate summary of the acquisitions in
financial terms:
<TABLE>
<CAPTION>
<S> <C> <C>
1997 1996
----------------- ------------------
Purchase Price $ 4,486,606 $ 1,450,000
Acquisition Costs 388,607 90,677
Fair Value of Assets Acquired (2,736,055) (742,657)
Fair Value of Liabilities Assumed 1,414,752 340,324
----------------- ------------------
Goodwill $ 3,553,910 $ 1,138,344
================= ==================
The detailed components consist of the following:
1997 1996
----------------- ------------------
Purchase Price
Cash to Sellers $ 2,437,752 $ 1,150,000
Notes to Sellers 1,000,728 300,000
Common Stock to Sellers (453,712 shares) 1,048,126 --
----------------- -------------------
$ 4,486,606 $ 1,450,000
================= ===================
Fair Market Value of Assets Acquired:
Accounts Receivable $ 381,323 $ 226,231
Inventory 130,132 23,502
Property, Plant and Equipment 1,576,902 239,996
Intangible Assets 554,115 252,928
Other 93,583 --
----------------- -------------------
$ 2,736,055 $ 742,657
================= ===================
Liabilities Assumed:
Accounts Payable $ 486,215 $ 89,820
Customer Deposits 330,829 209,724
Assumed Notes 597,708 40,780
----------------- -------------------
Inventory $ 1,414,752 $ 340,324
================= ===================
</TABLE>
F-10
<PAGE>
Goodwill is amortized over a 30 year term. Identifiable intangible assets
consist of customer lists and covenants not to compete.
The following table summarizes pro forma consolidated results of
operations (unaudited) of the Company and the 1997 and the 1996
acquisitions as though the acquisitions had been consummated at October
29, 1995. 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.
<TABLE>
<CAPTION>
Years Ended
October 25, 1997 October 26, 1996
------------------------- ------------------------
<S> <C> <C>
Total Revenue $ 21,481,552 $ 16,983,473
Net Income (Loss) $ 1,422,402 $ (1,384,550)
Net Income (Loss) per Share $ 0.14 $ (0.14)
Weighted Average Number of Shares 9,993,455 9,993,455
6. ACCRUED EXPENSES
October 25, 1997 October 26, 1996
------------------------- ------------------------
Advertising and promotion................................. $ 276,060 $ 266,565
Payroll and vacation...................................... 395,671 76,054
Taxes..................................................... 59,331 21,799
Acquisition costs. . . . . . . . . . . . . . . . . . . . . . . 113,383 --
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . 142,516 82,089
------------------------- ------------------------
$ 986,961 $ 446,507
========================= ========================
</TABLE>
7. LINE OF CREDIT
During the year ended October 29, 1994, the Company entered into a line
of credit agreement with a Chittenden 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, 1996 and again
in 1997. On June 20, 1997 the Company revised this borrowing
arrangement with the Chittenden Bank. The new loan agreement provides
working capital of up to $1,500,000. Availability of funds under this
line is based on a formula dependent on a certain percentage of
allowable receivables and inventories. At October 25, 1997 the Company
had borrowed and had a maximum availability of approximately $238,000
and $1,069,000, respectively, on the credit line. A year earlier, the
Company had a balance due of $442,000 and a maximum availability of
$774,000 on the same facility. The loan is secured by substantially all
of the Company's assets and are at an interest rate of prime plus 0.5%,
currently 9%.
8. 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.
F-11
<PAGE>
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 25, 1997:
1998. . . . . . . . . . . . . . . . . . . . . . $ 189,800
1999. . . . . . . . . . . . . . . . . . . . . . 140,144
2000. . . . . . . . . . . . . . . . . . . . . . 126,871
2001. . . . . . . . . . . . . . . . . . . . . . 58,832
2002 and beyond . . . . . . . . . . . . . . . 26,036
----------
Total minimum lease payments 541,683
Less amount representing interest 92,142
----------
Present value of minimum lease payments $ 449,541
==========
9. LONG-TERM DEBT
On June 20, 1997 the Company executed a loan agreement with the
Chittenden Bank to provide funds for acquisitions, subject to the
bank's approval, on a case by case basis. Loan agreements that the
Company signed prior to this date with the bank to borrow $1,250,000
and $325,000 for the acquisition of the assets of Happy Spring Water
and Greatwater Refreshment Services, respectively, were rolled into the
new agreement. Subsequently, the Company borrowed a total of $2,100,000
for the acquisitions of A.M. Fridays, Inc. and Excelsior Springs Water
Co., Inc. The Company makes monthly principal and interest payments on
the note. The principal balance was $3,589,625 as of October 25, 1997.
Full details of the Company's long term debt is as follows:
<TABLE>
<CAPTION>
October 25, October 26,
1997 1996
-------------------- ------------------
<S> <C> <C>
Building loan, principal and interest at 9.0%, payable
monthly through 2004 secured by the assets........................... $ 403,922 $ 435,049
Building loans, principal and interest at 5.5% payable
monthly through 1999 secured by the assets........................... 342,461 388,622
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............................................................
374,326 393,731
Acquisition notes, variable interest rate, currently at 9% per annum. Term
is 4 years. The notes are secured by first interest on all accounts
receivable, inventory, equipment, contract rights and general
intangibles
including trademarks and customer lists.............................. 3,589,625 1,247,764
Promissory note, principal and interest at 8.5% payable
monthly through May, 2002 with a final payment of
$140,099 due June, 2002. Note is unsecured. . . . . . . . . . 279,375 --
F-12
<PAGE>
Promissory note, principal and interest at 8.5% payable monthly through
August, 2002 with a final payment of
$308,474 due September, 2002. Note is unsecured. . . . . 501,051 --
Various secured/unsecured notes ranging in amounts of
$14,000 to $150,000 with interest rates of 8.5% to 10%.
These notes are for the most part unsecured. . . . . . . . . . . 830,280 511,481
------------------- ------------------
6,321,040 2,976,647
Less current portion......................................................... 885,748 197,239
------------------- ------------------
$ 5,435,292 $ 2,779,408
=================== ==================
The loans are secured by various property and equipment.
</TABLE>
Annual maturities of long-term debt are as follows:
Year ending October 31, 1998.......................... $ 1,057,770
Year ending October 30, 1999.......................... 1,073,539
Year ending October 28, 2000.......................... 891,979
Year ending October 27, 2001 ......................... 719,402
Year ending October 26, 2002 and thereafter . . . . . 2,578,350
-----------------
$ 6,321,040
=================
10. STOCK ISSUANCES
During fiscal year 1997, the Company issued 453,712 shares of its common
stock. 38,095 shares were issued on March 10, 1997 at the market price of
$2.63 in conjunction with the purchase of assets from Greatwater
Refreshment Services. 415,617 shares were issued at the market price of
$2.28 in conjunction with the purchase of the Excelsior Spring Water
Company on August 27, 1997.
As part of the agreement to purchase the stock of AMF, the Company agreed
to contingent consideration in the event gross sales of AMF exceed
$1,135,000 from the period of January 1, 1997 to January 2, 1998. The
Company has agreed to issue a number of its unregistered common shares,
valued at the closing price of its common shares on December 31, 1997,
equal to the sales dollars exceeding the stated amount.
11. 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.
As of October 25, 1997 882,852 options had been issued under this plan at
prices ranging from $1.50 to $3.00 per share.
F-13
<PAGE>
12. STOCK OPTIONS
The following table illustrates the Company's stock option issuances and
positions during the last three fiscal years:
<TABLE>
<CAPTION>
Exercise
Price Per
Options Share
-------------------- --------------------
<S> <C> <C>
Outstanding at October 29, 1994. . . . . . . . 1,306,000 $2.00 - 6.00
Options granted (a) . . . . . . . . . . . 592,375 $2.25 - 3.13
Options regranted (c) . . . . . . . . . . 753,000 $2.28
Options retired (b) . . . . . . . . . . . (548,875) $2.00 - 5.50
Options surrendered for regrant (c) . . . (753,000) $3.00 - 5.00
-------------------- --------------------
Outstanding at October 28, 1995. . . . . . . . 1,349,500 $2.25 - 6.00
Options granted (d) . . . . . . . . . . . 455,000 $1.75 - 2.50
Options retired . . . . . . . . . . . . (49,500) $3.00 - 3.50
-------------------- --------------------
Outstanding at October 26, 1996. . . . . . . . 1,755,000 $2.25 - 3.13
Options granted (e) . . . . . . . . . . 392,187 $2.50 - 2.81
Options regranted (f) . . . . . . . . . 647,000 $2.50
Options retired . . . . . . . . . . . . (32,000) $1.81 - 2.25
Options surrendered (f) . . . . . . . . (580,000) $1.75 - 3.25
-------------------- --------------------
Outstanding at October 25, 1997. . . . . . . . 2,182,187 $1.75 - 6.00
==================== ====================
</TABLE>
a. 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.
b. 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.
c. 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.
F-14
<PAGE>
d. The Company granted 455,000 options in 1996 at prices, dictated by the
market, ranging from $1.75 - $2.50 per share. Of the total options
granted, 225,000 were awarded to employees and consultants as incentive
options under the 1993 plan and 230,000 were granted to outside members
of the Board of Directors.
e. The Company granted 392,187 options in 1997 at prices dictated by the
market ranging from $2.50-2.81 per share. All options were awarded
under the 1993 plan to employees and a consultant to the Company as
incentive options.
f. On September 12, 1997 the Board of Directors voted to grant new options
to officers, directors and employees of the Company that held options
that expired before January 1, 2001 ("old options"). The new options
were issued in exchange for the surrender of the old options. New
options were issued at $2.50, the market price on that date. In the
cases that the old option price was lower than the new option price,
additional options were issued proportionate to the price difference.
580,000 old options were surrendered under this offer at prices ranging
from $1.75-$3.25. 647,000 new options were issued in connection with
the offer at the market price of $2.50. The new otions expire on
various dates from June, 2004 through December, 2005. Of the old
options surrendered 248,333 were incentive options under the 1993 plan.
274,665 of the new shares were issued under the 1993 plan.
g. At October 25, 1997, out of a total 2,182,187 options outstanding,
1,299,250 options were exercisable.
13. COMMITMENTS
a. Employment Contracts - The Company currently has employment contracts
with upper management totaling approximately $350,000 in annual salary
through 2001. The contracts also contain arrangements for bonuses to
these executives if certain performance criteria are met.
Contracts for the Company's General Counsel and Vice President of Sales
were terminated by mutual consent in November and December 1995,
respectively. Settlement costs of approximately $60,000 were expensed
in fiscal 1996.
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:
1998 $ 148,341
1999 104,538
2000 47,893
Rent expense under all operating leases was $128,247, $51,727 and
$47,583, for fiscal years ending October 25, 1997, October 26, 1996 and
October 28, 1995.
F-15
<PAGE>
14. RELATED PARTY TRANSACTIONS
During the years ended October 26, 1996 and October 28, 1995, 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 25, 1997, October 26, 1996 and October 28, 1995. 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, 1996 and 1997. The
options are exercisable through October 2003. This contract was terminated
effective December 12, 1997, with the option provisions surviving.
15. CONTINGENCIES
a. Former Distributor
In August 1994, an action was brought by a former distributor alleging
that the Company breached an oral distribution arrangement by
terminating its relationship, refusing to continue to supply it with
the Company's products and by allowing another distributor to sell the
Company's products within its alleged territory.
On July 25, 1997 the Company reached a settlement with the distributor.
The settlement had no material financial impact to the Company and both
parties agreed to release their claims against each other.
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 in
Vermont Superior Court that prevented the former employees from
pursuing ventures competitive to the Company. A future hearing will
address the permanency of the injunction. Subsequently, both employees
filed counterclaims against the Company seeking monetary damages. The
Company has certain defenses arising out of its claims against the
employees that it will assert when necessary.
On February 24, 1997 the Company reached a settlement with one of the
two former employees involved in ongoing litigation with the Company.
The settlement had no material financial impact on the Company and both
parties agreed to release their claims against each other.
The Company does not anticipate that the outcome of the remaining suit
will have a material financial impact on the Company.
F-16
<PAGE>
16. INCOME TAXES
The Company accounts for income taxes under 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 realization of deferred tax assets. As of October 25,
1997, the Company had net deferred tax assets of $5,814,000, and has
recorded a valuation allowance of $5,270,000.
The major deferred tax asset (liability) items at October 25, 1997 are as
follows:
Accounts receivable allowance $ 82,000
Amortization 19,000
Depreciation (343,000)
Slotting Fees 92,000
Other 14,000
Net operating loss carryforwards 5,950,000
------------------
5,814,000
Valuation allowance (5,270,000)
------------------
Deferred tax asset recorded $ 544,000
==================
The Company has approximately $14.9 million of available loss carryforwards
at October 25, 1997 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 loss
carryforwards are limited as to annual utilization.
The (provision) benefit for income taxes differs from the amount computed
by applying the statutory Federal income tax rate to net income (loss)
before provision for income taxes as follows:
<TABLE>
<CAPTION>
Year Ended
-------------------------------------------------------------
October 25, October 26, October 28,
1997 1996 1995
--------------------- -------------------- -----------------
<S> <C> <C> <C>
Income tax (provision) benefit
computed at statutory rate..... $ (178,000) $ 431,000 $ 953,000
Effect of permanent differences (18,000) (23,000) (27,000)
Effect of temporary differences 40,000 115,000 47,000
Tax benefit of net operating loss not
recognized - (523,000) (973,000)
Tax benefit of net operating loss
carryforward 156,000 - -
Change in valuation allowance 544,000 - -
--------------------- -------------------- -----------------
Benefit for income taxes reported $ 544,000 $ - $ -
===================== ==================== =================
</TABLE>
17. 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.
In turn, the distributor may not sell any other waters. The distributor's
purchases under this agreement amounted to 31 %, 35% and 39% of the
Company's total sales in fiscal 1997, 1996 and 1995, respectively.
Additionally, accounts receivable from the distributor accounted for 16%
and 14% of total accounts receivable at October 25, 1997 and October 26,
1996. 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-17
<PAGE>
18. ACCOUNTING FOR EMPLOYEE STOCK OPTIONS
In fiscal 1997, the Company adopted the disclosure provisions SFAS No. 123,
"Accounting for Stock-Based Compensation". For disclosure purposes, the
fair value of options is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for stock options granted during the years ended October
25, 1997 and October 26, 1996: annual dividends of $0; expected volatility
of 92%; risk-free interest rate of 7% and expected life of five years. The
weighted average fair value of stock options granted during the years ended
October 25, 1997 and October 26, 1996 was $1.89 and $1.73, respectively. If
the Company had recognized compensation cost for stock options in
accordance with SFAS No. 123, the Company's proforma net income (loss) and
net income (loss) per share would have been $324,302 and $.03 per share for
the fiscal year ended October 25, 1997 and $(2,049,471) and $(.21) per
share for the fiscal year ended October 26, 1996.
19. SUBSEQUENT EVENT
On January 5, 1998, the Company purchased certain assets from Vermont
Coffee Time, Inc. The acquisition increased its home and office
distribution business in Vermont. The approximate purchase price was $1.5
million and was financed by a loan from Chittenden Bank, a note to the
seller and the issuance of Company stock. The assets acquired consisted
primarily of coolers, brewers, vehicles and customer lists.
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 information required by Item 9 of Form 10-KSB is contained in the
Issuer's definitive proxy statement to be filed with respect to the 1998 Annual
Meeting of Stockholders of the Issuer.
ITEM 10. EXECUTIVE COMPENSATION.
The information required by Item 10 of Form 10-KSB is contained in the
Issuer's definitive proxy statement to be filed with respect to the 1998 Annual
Meeting of Stockholders of the Issuer.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required by Item 11 of Form 10-KSB is contained in the
Issuer's definitive proxy statement to be filed with respect to the 1998 Annual
Meeting of Stockholders of the Issuer.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 12 of Form 10-KSB is contained in the
Issuer's definitive proxy statement to be filed with respect to the 1998 Annual
Meeting of Stockholders of the Issuer.
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-B:
21
<PAGE>
Exhibit
Number Description
3.1 Amended and Restated Certificate of Incorporation
of Registrant dated January 12, 1994.
(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.)
3.3 Amendment to By-Laws of Registrant Adopted March 26, 1997.
10.1 Employment Agreement between the Registrant and Timothy G. Fallon
dated as of November 1, 1996.
10.2 Employment Agreement between the Registrant and Bruce S. MacDonald
dated as of November 1, 1997.
10.3 Stock Option Agreement between Registrant and Mr. Fallon.
(Incorporated by reference from Exhibit 10.7 of Form 10-K for fiscal
year ended October 28, 1994, File No. 1-11254.)
10.4 Consulting Agreement dated October 1, 1993
between the Registrant and Condor Ventures Ltd.
(Incorporated by reference from Exhibit 10.7 of
Registration Statement 33-72940.)
10.5 Termination Agreement dated as of December 12, 1997 between the
Registrant and Condor Ventures Ltd.
10.6 1993 Performance Equity Plan. (Incorporated by reference from Exhibit
10.9 of Registration Statement 33-72940.)
10.7 Agreement dated July 30, 1993 between
Transportation Display Industries and the
Registrant. (Incorporated by reference from
Exhibit 10.8 of Registration Statement 33-72940.)
10.8 Asset Purchase Agreement between Vermont Pure Springs, Inc.
("Springs") and Happy Ice Corporation ("HIC") dated April 30, 1996.
(Incorporated by reference from Exhibit 2.1 of the Report on Form 8-K
dated May 1, 1996.)
10.9 Promissory Note of Springs to HIC in the
principal amount of $200,000. (Incorporated by
reference from Exhibit 10.2 of the Report on Form
8-K dated May 1, 1996.)
22
<PAGE>
Exhibit
Number Description
10.10 Form of contingent Promissory Note of Springs to
HIC to be entered into May 1, 1998, if required.
(Incorporated by reference from Exhibit 10.4 of
the Report on Form 8-K dated May 1, 1996.)
10.11 Loan Agreement dated April 26, 1996 among
Springs, the Registrant and The Chittenden Bank
("Chittenden"). (Incorporated by reference from
Exhibit 10.1 of the Report on Form 8-K dated May
1, 1996.)
10.12 Stock Purchase Agreement between Springs and
Carolyn Howard relating to the acquisition of
A.M. Fridays, Inc. dated July 16, 1997.
(Incorporated by reference from Exhibit 10.1 of
the Report on Form 10-QSB for the Quarter Ended
July 26, 1997.)
10.13 Loan Agreement effective June 20, 1997 among
Springs, the Registrant and Chittenden regarding
an operating line of credit and an acquisition
line of credit. (Incorporated by reference from
Exhibit 10.2 of the Report on Form 10-QSB for the
Quarter Ended July 26, 1997.)
10.14 Promissory Note dated June 17, 1997 from Springs
and the Registrant to Chittenden regarding an
acquisition line of credit. (Incorporated by
reference from Exhibit 10.3 of the Report on Form
10-QSB for the Quarter Ended July 26, 1997.)
10.15 Commercial Security Agreement dated June 17, 1997
between Springs, the Registrant and Chittenden
regarding the acquisition line of credit.
(Incorporated by reference from Exhibit 10.4 of
the Report on Form 10- QSB for the Quarter Ended
July 26, 1997.)
10.16 Stock Purchase Agreement between the Registrant
and David Eger dated August 27, 1997 relating to
Excelsior Spring Water Co. ("Excelsior").
(Incorporated by reference from Exhibit 10.1 of
the Report on Form 8-K dated September 11, 1997.)
10.17 Promissory Note from the Registrant to Mr. Eger
in the principal amount of $503,000.
(Incorporated by reference from Exhibit 10.2 of
the Report on Form 8-K dated September 11, 1997.)
10.18 Form of Note Purchase Agreement between the
Registrant and certain note holders of Excelsior
dated August 27, 1997. (Incorporated by reference
from Exhibit 10.3 of the Report on Form 8-K dated
September 11, 1997.)
23
<PAGE>
Exhibit
Number Description
10.19 Form of Stock Purchase Agreement between the
Registrant and certain stockholders of Excelsior
dated August 27, 1997. (Incorporated by reference
from Exhibit 10.4 of the Report on Form 8-K dated
September 11, 1997.)
10.20 Promissory Note dated August 22, 1997 from
Springs and the Registrant to Chittenden
regarding an acquisition line of credit for the
Excelsior purchase. (Incorporated by reference
from Exhibit 10.5 of the Report on Form 8-K dated
September 11, 1997.)
10.21 Commercial Security Agreement among Springs, the
Registrant and Chittenden dated August 22, 1997
regarding the Excelsior purchase. (Incorporated
by reference from Exhibit 10.6 of the Report on
Form 8-K dated September 11, 1997.)
10.22 Schedule of Stock and Note Purchase Agreement
information dated August 27, 1997 regarding the
Excelsior purchase. (Incorporated by reference
from Exhibit 10.7 of the Report on Form 8-K dated
September 11, 1997.)
10.23 Asset Purchase Agreement between Springs and
Greatwater Refreshment Services, Inc. dated
February 19, 1997.(Incorporated by reference from
Exhibit 10.1 of the Report on Form 10-QSB/A for
the Quarter Ended April 26, 1997.)
10.24 Consulting Agreement between the Registrant and
Corporate Investors Network, Inc. dated December
1, 1996. (Incorporated by reference from Exhibit
10.1 of the Report on Form 10-QSB for the Quarter
Ended January 25, 1997.)
10.25 Warrant Agreement between the Registrant and
Eugene F. Malone dated December 1, 1996.
(Incorporated by reference from Exhibit 10.2 of
the Report on Form 10-QSB for the Quarter Ended
January 25, 1997.)
22 Subsidiaries.
23.1 Consent of Feldman Radin & Co., P.C.
27 Financial Data Schedule
24
<PAGE>
Reports on Form 8-K
The Registrant filed a Report on Form 8-K dated September 11,
1997 with respect to the purchase of Excelsior Springs Water
Co.
25
<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 23, 1998 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.
Name Title Date
/s/ Frank G. McDougall, Jr. Chairman of the Board of Directors January 23,
- -------------------------- 1998
Frank G. McDougall, Jr.
/s/ Timothy G. Fallon Chief Executive Officer, President and January 23,
- -------------------------- Director (Principal Executive Officer) 1998
Timothy G. Fallon
/s/ Robert C. Getchell Secretary and Director January 23,
- -------------------------- 1998
Robert C. Getchell
/s/ David R. Preston Director January 23,
- --------------------------- 1998
David R. Preston
/s/ Norman E. Rickard Director January 23,
- --------------------------- 1998
Norman E. Rickard
26
<PAGE>
/s/ Beat Schlagenhauf Director January 23,
- --------------------------- 1998
Beat Schlagenhauf
/s/ Richard Worth Director January 23,
- --------------------------- 1998
Richard Worth
/s/ Bruce MacDonald Vice President and Controller January 23,
- --------------------------- (Chief Financial Officer) 1998
Bruce MacDonald
27
<PAGE>
EXHIBITS TO VERMONT PURE HOLDINGS, LTD.
ANNUAL REPORT ON FORM 10-KSB
FOR THE FISCAL YEAR ENDED OCTOBER 25, 1997
Exhibit
Number Description
3.3 Amendment to By-Laws of Registrant Adopted March 26,
1997.
10.1 Employment Agreement between the Registrant and Timothy
G. Fallon dated as of November 1, 1996.
10.2 Employment Agreement between the Registrant and Bruce S.
MacDonald dated as of November 1, 1997.
10.5 Termination Agreement dated as of December 12, 1997
between the Registrant and Condor Ventures Ltd.
22 Subsidiaries.
23.1 Consent of Feldman Radin & Co., P.C.
27 Financial Data Schedule
28
EXHIBIT 3.3
Resolution of the Board of Directors March 26, 1997 Amending the By-Laws
of Vermont Pure Holdings, Ltd.
VOTED: Section 1 of Article III of the Corporation's by-laws is hereby formally
amended by deleting the existing Section 1 in its entirety and by
inserting in place thereof the following new Section 1:
"Section 1. The number of directors which shall constitute the
whole board shall be determined from time to time by resolution
of the board of directors. The directors shall be elected at
the annual meeting of the stockholders, except as provided in
Section 2 of this Article, and each director elected shall
hold office until his successor is elected and qualified.
Directors need not be stockholders."
Execution Copy
EMPLOYMENT AGREEMENT
AGREEMENT, made as of November 1, 1996, by and between VERMONT PURE
HOLDINGS, LTD., a Delaware corporation (the "Company"), VERMONT PURE SPRINGS,
INC., a Delaware corporation that is a wholly owned subsidiary of the Company
("Springs"), and TIMOTHY FALLON (the "Executive").
WHEREAS, the Executive has been employed pursuant to a written
employment agreement dated November 4, 1994 (the "1994 Agreement"); and the
parties to this Agreement desire that the Company continue to employ the
Executive and wish to enter into this Agreement, replacing in its entirety the
1994 Agreement and setting forth the terms of Executive's employment by the
Company; and the Executive desires to accept such employment and to enter into
this Agreement,
NOW THEREFORE, it is agreed as follows:
1. Employment.
1.1 General. The Company shall employ the Executive (either directly or
by employment with Springs), and the Executive accepts employment, as Chief
Executive Officer and President of the Company, upon the terms and conditions
described herein. During the "Employment Term" (as defined in Section 2.1
hereof), the Executive shall devote all of his business time, attention and
skills to the business and affairs of the Company.
1.2 Duties. The Executive shall at all times render his services at the
direction of the Board of Directors of the Company (the "Board of Directors"),
and his duties generally will include those required for the day-to-day and
long-term planning, development, operation and advancement of the business of
the Company, Springs and their affiliates. The Company may assign to the
Executive such other executive and financial administrative duties for the
Company or any affiliate of the Company as may be determined by the Board of
Directors, consistent with the Executive's status as Chief Executive Officer and
President. The Executive agrees to diligently use his best efforts to promote
and further the reputation and good name of the Company and perform his services
well and faithfully.
2. Term and Termination.
.
2.1 Term. The term of employment by the Company of the Executive
pursuant to this Agreement shall commence on November 1, 1996 and terminate on
November 1, 2001 (the "Employment Term"), subject to the provisions of Section
2.2.
2.2 Early Termination. Not with standing anything to the contrary
contained in this Agreement, Executive's employment may be terminated prior to
the end of the Employment Term only as set forth in this Section.
-1-
<PAGE>
2.2.1 Termination Upon Resignation or Death of Executive. The
Executive's employment shall terminate upon the resignation or death of the
Executive. In case of termination pursuant to this Section, the Company shall
pay to the Executive (or, in case of his death, to his estate or his beneficiary
designated in writing), the base salary earned by the Executive pursuant to
Section 3, prorated through the date of resignation or death.
2.2.2 Termination Upon Disability of Executive. The
Executive's employment shall terminate by reason of the disability of the
Executive. For this purpose, "disability" shall mean the Executive's inability,
by reason of accident, illness or other physical or mental disability
(determined in good faith by the Board of Directors with the advice of a
qualified and independent physician), to perform satisfactorily the duties
required by his employment hereunder for any consecutive period of 120 calendar
days. In case of termination pursuant to this Section, the Executive shall
continue to receive his base salary prorated through the time of such
termination, less any amount the Executive receives during such period from any
Company-sponsored or Company-paid source of insurance, disability compensation
or government program.
2.2.3 Termination Upon Mutual Consent. The Executive's
employment may be terminated by the mutual consent of the Company and the
Executive on such terms as they may agree.
2.2.4 Termination For Cause. The Executive's employment shall
terminate immediately on notice to the Executive upon a good faith finding of
the Board of Directors that the Executive has (i) wilfully or repeatedly failed
to perform his duties in accordance with the provisions of this Agreement
following 30 days' prior written notice to the Executive and failure of the
Executive to cure any deficiency, (ii) committed a breach of any provision of
Section 4 hereof, (iii) misappropriated assets or perpetrated fraud against the
Company, (iv) been convicted of a crime which constitutes a felony, or (v) been
engaged in the illegal use of controlled or habit forming substances. In the
event of termination for cause, the Company shall pay the Executive his base
salary prorated through the date of termination.
2.2.5 Termination by Company Without Cause. The Company
may terminate the Executive's employment at any time and for any reason, without
cause, upon written notice to the Executive.
In the event of termination pursuant to this Section 2.2.5
during the Company's fiscal years ending October 1997 and October 1998, the
Company shall pay or provide to the Executive the following termination
benefits: (i) an amount equal to the sum of 1.5 times the Executive's annual
base salary as of the termination date, plus $150,000 if the termination occurs
in fiscal 1997 or $175,000 if the termination occurs in fiscal 1998, payable in
each case over a period of 18 months after the date of termination, in regular
monthly installments, less income taxes and other applicable withholdings, and
(ii) the Executive's "Fringe Benefits" (as defined below) for a period of 18
months.
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<PAGE>
In the event of termination pursuant to this Section 2.2.5
during the Company's fiscal years ending October 1999, October 2000 and October
2001, the Company shall pay or provide to the Executive the following
termination benefits: (i) an amount equal to the sum of 1.0 times the
Executive's annual base salary as of the termination date, plus $150,000,
payable over a period of 12 months after the date of termination, in regular
monthly installments, less income taxes and other applicable withholdings, and
(ii) the Executive's "Fringe Benefits" (as defined below) for a period of 12
months.
2.2.6 Fringe Benefits. The obligation of the Company to
provide "Fringe Benefits" following any termination pursuant to Section 2.2.5
shall mean that the Executive's participation (including dependent coverage) in
the life and health insurance plans of the Company in effect immediately prior
to the termination shall be continued, or substantially equivalent benefits
provided, by the Company, at a cost to the Executive no greater than his cost at
the date of such termination, for the relevant period of 18 months or 12 months,
as the case may be. Notwithstanding the foregoing, if the Company shall be
unable to provide for the continuation of an insurance benefit (such as life
insurance) because such benefit was provided pursuant to an insurance policy
that does not provide for the extension of such insurance benefit following
termination of the employment of the Executive, then the Executive may purchase
insurance providing such insurance benefit and, whether or not the Executive so
elects to purchase insurance, the Company's only obligation with respect to such
insurance benefit shall be to reimburse the Executive for his premium costs, up
to a maximum aggregate amount for all policies of insurance purchased by the
Executive pursuant to this sentence of $10,000. If the Company is obligated
pursuant to the so-called "COBRA" law to offer the Executive the opportunity for
a temporary extension of health coverage ("continuation coverage"), then the
Executive shall elect continuation coverage, and the premium cost of such
coverage shall be borne by the Company and the Executive as provided in the
first sentence of this Section 2.2.6. Continuation coverage provided pursuant to
COBRA shall terminate in accordance with COBRA. To the extent that any benefit
required to be provided to the Executive by the Company pursuant to Section
2.2.5 shall be provided to the Executive by any successor employer, the
Company's obligation to provide that benefit to the Executive shall be
correspondingly offset or shall cease, as the case may be. In no event shall the
Company have any obligation to provide Fringe Benefits after the expiration of
the relevant period of 18 months or 12 months, as the case may be, following the
date of termination. The Executive shall not be entitled to any expense
allowance, automobile allowance or relocation allowance following the
termination of his employment for any reason.
2.2.7 Change in Control Constitutes Termination Without Cause.
A "Change of Control" (as defined in this Section) will be deemed to be a
termination of the Executive's employment within the meaning of Section 2.2.5. A
"Change of Control" shall mean a change in control of the Company (and not any
person or entity that hereafter becomes a successor to all or substantially all
of the business or assets of the Company by reason of a Change of Control) and
shall be deemed to have taken place if : (i) a third person, including a "group"
as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, becomes
the beneficial owner of shares
-3-
<PAGE>
of the capital stock of the Company having more than 50% of the total number of
votes that may be cast for the election of directors of the Company, (ii) the
sale or other disposition (excluding mortgage or pledge) of all or substantially
all of the assets of the Company, or (iii) the merger or other business
combination of the Company with or into another corporation or entity pursuant
to which the Company will not survive or will survive only as a subsidiary of
another corporation or entity, in either case with the stockholders of the
Company prior to the merger or other business combination holding less than 50%
of the voting shares of the merged or combined companies or entities after such
merger or other business combination. The rights and obligations created by this
Agreement with respect to a Change of Control shall apply only with respect to
the first Change of Control after the date of execution of this Agreement, and
not with respect to any subsequent transaction.
2.2.8 No Other Termination Benefits. The Executive understands
and agrees that the termination payments and benefits described in this Section
2 constitute all of the payments and benefits to which he (or his estate or
beneficiary) will be or become entitled to receive in case of termination of his
employment, and that such payments and benefits are in lieu of any and all other
payments and benefits of every kind or description to which he may be entitled,
including, without limitation, any right to receive a bonus payment or any
portion thereof.
3. Compensation. During the Employment Term, the Company shall pay, in
full payment for all of the Executive's services rendered hereunder, the
following compensation:
3.1 Base Salary. The Company shall pay the Executive an annual base
salary, less income taxes and other applicable withholdings, of $186,400 in
Company's standard payroll installments. Commencing November 1, 1997, the Board
of Directors will review the annual base salary amount as soon as practicable
after the end of each fiscal year of Company to consider whether or not it
should be increased. Such determination shall be in the sole discretion of the
Board of Directors using such criteria as they deem relevant, including, but not
limited to, the performance of the Company and the Executive.
3.2 Bonuses. While the Executive is employed by the Company, the
Executive will be eligible to receive the bonuses described in this Section 3.2.
Unless otherwise specified, all incentive goals set forth in this Section shall
be based upon or derived from the Company's audited consolidated financial
statements prepared in accordance with generally accepted accounting principles
as reported on by the Company's independent accountants.
3.2.1 Fiscal Year 1997 Sales and Net Income Bonuses. With
respect to the Company's fiscal year ending October 1997: (i) if the Company has
annual sales equal to or in excess of $15,000,000, then there shall be a bonus
of $50,000, and (ii) if the Company has adjusted annual net income of at least
$1.00 (calculated prior to the $50,000 bonus, if earned, described in the
preceding clause (i) and prior to the bonus described in this clause (ii)), then
there
-4-
<PAGE>
shall be a bonus of $100,000. The bonuses in clauses (i) and (ii) are
independent of each other and are cumulative.
3.2.2 Fiscal Year 1998 Sales Bonus. With respect to the
Company's fiscal year ending October 1998: if the Company has annual sales equal
to or in excess of $20,000,000, then there shall be a bonus of $75,000.
3.2.3 Fiscal Year 1998 Budgeted Sales and Budgeted EBITDA
Bonuses. With respect to the Company's fiscal year ending October 1998:
(i) if the Company has actual annual sales which, expressed as
a percentage of target annual sales approved in the budget for that fiscal year
by the Board of Directors, are at least 95% of such target annual sales, then
there shall be a bonus as set forth in the following table. Bonuses under this
clause (i) are non-cumulative.
Actual Sales Divided by Target Sales Bonus
------------------------------------ -----
less than 95% of target - $ -0-
at least 95% but less than 96% of target - 25,000
at least 96% but less than 97% of target - 30,000
at least 97% but less than 98% of target - 35,000
at least 98% but less than 99% of target - 40,000
at least 99% but less than 100% of target - 45,000
at least 100% but less than 101% of target - 50,000
at least 101% but less than 102% of target - 52,500
at least 102% but less than 103% of target - 55,000
at least 103% but less than 104% of target - 57,500
at least 104% but less than 105% of target - 60,000
at least 105% but less than 106% of target - 62,500
at least 106% but less than 107% of target - 65,000
at least 107% but less than 108% of target - 67,500
at least 108% but less than 109% of target - 70,000
at least 109% but less than 110% of target - 72,500
at least 110% of target or greater - 75,000
(ii) if the Company has actual annual earnings before
interest, taxes, depreciation and amortization ("EBITDA") which, expressed as a
percentage of target annual EBITDA approved in the budget for that fiscal year
by the Board of Directors, are at least 90% of such target annual EBITDA, then
there shall be a bonus as set forth in the following table. Bonuses under this
clause (ii) are non-cumulative.
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<PAGE>
Actual EBITDA Divided by Target EBITDA Bonus
-------------------------------------- -----
less than 90% of target - $ -0-
at least 90% but less than 91% of target - 25,000
at least 91% but less than 92% of target - 27,500
at least 92% but less than 93% of target - 30,000
at least 93% but less than 94% of target - 32,500
at least 94% but less than 95% of target - 35,000
at least 95% but less than 96% of target - 37,500
at least 96% but less than 97% of target - 40,000
at least 97% but less than 98% of target - 42,500
at least 98% but less than 99% of target - 45,000
at least 99% but less than 100% of target - 47,500
at least 100% but less than 102% of target - 50,000
at least 102% but less than 104% of target - 52,500
at least 104% but less than 106% of target - 55,000
at least 106% but less than 108% of target - 57,500
at least 108% but less than 110% of target - 60,000
at least 110% but less than 112% of target - 62,500
at least 112% but less than 114% of target - 65,000
at least 114% but less than 116% of target - 67,500
at least 116% but less than 118% of target - 70,000
at least 118% but less than 120% of target - 72,500
at least 120% of target or greater - 75,000
3.2.4 Fiscal Years 1999, 2000 and 2001 Budgeted Sales and
Budgeted EBITDA Bonuses. With respect to each of the Company's fiscal years
ending October 1999, October 2000 and October 2001:
(i) if the Company has actual annual sales which, expressed as
a percentage of target annual sales approved in the budget for that fiscal year
by the Board of Directors, are at least 95% of such target annual sales, then
there shall be a bonus as set forth in the following table. Bonuses under this
clause (i) are non-cumulative.
Actual Sales Divided by Target Sales Bonus
------------------------------------ -----
less than 95% of target - $ -0-
at least 95% but less than 96% of target - 50,000
at least 96% but less than 97% of target - 55,000
at least 97% but less than 98% of target - 60,000
at least 98% but less than 99% of target - 65,000
at least 99% but less than 100% of target - 70,000
at least 100% but less than 101% of target - 75,000
at least 101% but less than 102% of target - 77,500
at least 102% but less than 103% of target - 80,000
at least 103% but less than 104% of target - 82,500
at least 104% but less than 105% of target - 85,000
at least 105% but less than 106% of target - 87,500
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<PAGE>
at least 106% but less than 107% of target - 90,000
at least 107% but less than 108% of target - 92,500
at least 108% but less than 109% of target - 95,000
at least 109% but less than 110% of target - 97,500
at least 110% of target or greater - 100,000
(ii) if the Company has actual annual EBITDA which, expressed
as a percentage of target annual EBITDA approved in the budget for that fiscal
year by the Board of Directors, are at least 90% of such target annual EBITDA,
then there shall be a bonus as set forth in the following table. Bonuses under
this clause (ii) are non-cumulative.
Actual EBITDA Divided by Target EBITDA Bonus
-------------------------------------- -----
less than 90% of target - $ -0-
at least 90% but less than 91% of target - 50,000
at least 91% but less than 92% of target - 52,500
at least 92% but less than 93% of target - 55,000
at least 93% but less than 94% of target - 57,500
at least 94% but less than 95% of target - 60,000
at least 95% but less than 96% of target - 62,500
at least 96% but less than 97% of target - 65,000
at least 97% but less than 98% of target - 67,500
at least 98% but less than 99% of target - 70,000
at least 99% but less than 100% of target - 72,500
at least 100% but less than 102% of target - 75,000
at least 102% but less than 104% of target - 77,500
at least 104% but less than 106% of target - 80,000
at least 106% but less than 108% of target - 82,500
at least 108% but less than 110% of target - 85,000
at least 110% but less than 112% of target - 87,500
at least 112% but less than 114% of target - 90,000
at least 114% but less than 116% of target - 92,500
at least 116% but less than 118% of target - 95,000
at least 118% but less than 120% of target - 97,500
at least 120% of target or greater - 100,000
3.2.5 Time of Bonus Payments. Each bonus required to be paid
to the Executive under Section 3.2 shall be paid as soon as practicable after
the filing with the Securities and Exchange Commission of the Company's Annual
Report on Form 10-K or 10-KSB or successor form, as the case may be.
3.3 Vacation. The Executive shall be entitled to three (3) weeks of
vacation in each 12-month period during the Employment Term. No more than two
(2) weeks may be taken consecutively.
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3.4 Executive Benefit Plans. The Executive shall be entitled to
participate in all plans or programs sponsored by the Company for employees in
general, including without limitation, participation in any group health,
medical reimbursement, or life insurance plans.
3.5 Expense Allowance. The Company shall reimburse the Executive for
all reasonable and necessary expenses incurred by him from time to time in the
performance of his duties hereunder, against receipts therefor in accordance
with the then effective policies and requirements of the Company.
3.6 Disability Insurance; Automobile Allowance. The Company shall have
no obligation to provide disability insurance to the Executive. The Company
agrees to provide an allowance of up to $13,000 per year, in the aggregate, to
reimburse the Executive for (i) the actual cost of premiums incurred by the
Executive for disability insurance obtained by the Executive and (ii) the actual
cost of leasing an automobile for use by the Executive during the Executive's
employment with the Company. The Executive may determine in his reasonable
judgment how to allocate the $13,000 between disability insurance premiums and
automobile allowance.
3.7 Election as a Director. The Company will use its best efforts to
cause the Executive to retain his position on the Board during the Employment
Term. If the Executive's employment is terminated for any reason, then the
Executive will be deemed to have resigned from the Board of Directors and from
any and all other positions with the Company, Springs, or any affiliate of
either or both of them.
3.8 Relocation Allowance. If, on or before December 31, 1998, the
Executive relocates his regular and permanent residence to a location reasonably
acceptable to the Company, the Company will provide an allowance of up $15,000
for the actual moving expenses incurred by the Executive in connection with such
relocation.
4. Protection of Confidential Information; Non-Compete
4.1 Acknowledgments. The Executive acknowledges that:
(a) The Executive has obtained and, during his employment by the
Company, will obtain secret and confidential information concerning the business
of the Company and its affiliates, including, without limitation, customer lists
and sources of supply, their needs and requirements, the nature and extent of
contracts with them, and related cost, price and sales information.
(b) The Company and its affiliates will suffer substantial and
irreparable damage which will be difficult to compute if, during the period of
his employment with the Company or thereafter, the Executive should enter a
competitive business or should divulge secret and confidential information
relating to the business of the Company and its affiliates heretofore or
hereafter acquired by him in the course of his employment with the Company.
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(c) The provisions of this Agreement are reasonable and necessary for
the protection of the business of the Company and its affiliates.
4.2 Confidentiality. The Executive agrees that he will not at any time,
either during the Employment Term or thereafter, divulge to any person, firm or
corporation any information obtained or learned by him during the course of his
employment with the Company, with regard to the operational, financial, business
or other affairs of the Company and its affiliates, and their respective offices
and directors, including, without limitation, trade secrets, customer lists,
sources of supply, pricing policies, operational methods or technical processes,
except (i) in the course of performing his authorized duties hereunder, (ii)
with the Company's express written consent; (iii) to the extent that any such
information is lawfully in the public domain other than as a result of the
Executive's breach of any of his obligations hereunder; or (iv) where required
to be disclosed by court order, subpoena or other government process. In the
event that the Executive shall be required to make any disclosure pursuant to
the provisions of clause (iv) of the preceding sentence, the Executive promptly,
but in no event more than 48 hours after learning of such subpoena, court order,
or other government process, shall notify the Company, by personal delivery or
by fax, confirmed by mail, to the Company and, if the Company so elects and at
the Company's expense, the Executive shall: (a) take all reasonably necessary
steps requested by the Company to defend against the enforcement of such
subpoena, court order or other government process, and (b) permit the Company to
intervene and participate with counsel of its choice in any proceeding relating
to the enforcement thereof.
4.3 Return of Property. Upon termination of his employment with the
Company, or at any time the Company may so request, the Executive will promptly
deliver to Company all memoranda, notes, records, reports, manuals, drawings,
blueprints and other documents (and all copies thereof) relating to the business
of the Company and its affiliates and all property associated therewith, which
he may then possess or have under this control.
4.4. Non-Competition. During the Employment Term and for a period equal
to the time during which Executive receives severance payments for benefits
pursuant to Section 2 of this Agreement or for a period of 12 months in the
event the Executive is terminated without entitlement to severance benefits
herein, the Executive shall not, without the prior written permission of the
Company, in the United States, its territories and possessions, directly or
indirectly , (i) enter into the employ of or render any services to any person,
firm or corporation engaged in any Competitive Business (as defined below); (ii)
engage in any Competitive Business for his own account; (iii) become associated
with or interested in any Competitive Business as an individual, partner,
shareholder, creditor, director, officer, principal, agent, employee, trustee,
consultant, advisor or in any other relationship or capacity; (iv) employ or
retain, or have or cause any other person or entity to employ or retain, any
person who was employed or retained by the Company or its affiliates while the
Executive was employed by the Company; or (v) solicit, interfere with, or
endeavor to entice away from the Company or its affiliates any of their
customers or sources of supply. However, nothing in this Agreement shall
preclude the Executive from investing his personal assets in the securities of
any Competitive Business if such securities
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are traded on a national stock exchange or in the over-the-counter market and if
such investment does not result in his beneficially owning, at any time, more
than 4.9% of the publicly-traded equity securities of such competitor.
"Competitive Business" shall mean any business or enterprise which (a) designs,
sells, manufactures, markets and/or distributes spring or purified water
products or still spring or purified water beverages, or (b) engages in any
other business in which Company or its affiliates is involved at any time during
the 12-month period immediately prior to the termination of the Executive's
employment.
4.5 Enforcement. If the Executive commits a breach, or threatens to
commit a breach, of any of the provisions of Section 4, the Company shall have
the right and remedy to have the provisions of this Agreement specifically
enforced by any court having jurisdiction over the matter, it being acknowledged
and agreed by the Executive that the services being rendered hereunder to the
Company are of a special, unique and extraordinary character and that any such
breach or threatened breach will cause irreparable injury to the Company and
that money damages will not provide an adequate remedy to the Company. Such
right and remedy shall be in addition to, and not in lieu of, any other rights
and remedies available to the Company under law or equity-
4.6 "Blue Penciling". If any provision of Section 4 is held to be
unenforceable because of the scope, duration or area of its applicability, the
tribunal making such determination shall have the power to modify such scope,
duration or area, or all of them, and such provision or provisions shall then be
applicable in such modified form.
5. Representations of Executive. The Executive represents and warrants to the
Company that the Executive is not a party to or bound by any agreement,
understanding or restriction that would or may be breached by the Executive's
execution and full performance of this Agreement. The Executive expressly
undertakes and agrees that none of his acts or duties hereunder that will
violate any obligations he may have to any prior employer (or will impose on the
Company any liability to any prior employer) and that he has complied with all
requirements of notice applicable to the termination of any prior employment
before he commenced his employment with the Company. The Executive further
represents and warrants that he has delivered to the Company complete copies of
all employment agreements, understanding and restrictions to which he has been
subject at any time during the last five years.
6. Construction of this Agreement.
6.1 Choice of Law. This Agreement is to be construed pursuant
to the laws of Delaware, without regard to the laws affecting choice of law.
6.2 Invalid Agreement Provisions. Should any provision of this
Agreement become legally unenforceable, no other provision of this Agreement
shall be affected, and this Agreement shall continue as if the Agreement had
been executed absent the unenforceable provision.
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6.3 No Other Agreements. This Agreement represents the full agreement
between the Company and the Executive with respect to the subject matter hereof
and the Company and the Executive have made no agreements, representations or
warranties relating to the subject matter of this Agreement that re not set
forth herein. This Agreement supersedes the 1994 Agreement, which is hereby
terminated, and any and all other agreements, oral or written, that may define
the employment relationship between the Executive and the Company. This
Agreement may be modified only by written agreement by the Executive and the
Company and may not be modified by any oral agreement.
6.4 Notices. All notices provided for in this Agreement shall be in
writing and shall be deemed to be given when delivered personally to the party
to receive the same, when transmitted by electronic means or when mailed first
class, postage prepaid by certified mail, return receipt requested, addressed to
the party to receive the same at the applicable addresses set forth below or
such other address as the party to receive the same shall have specified by
written notice give in the manner provided for in this Section. All notices
shall be deemed to have been given as of the date of personal delivery,
transmittal or mailing thereof.
If to the Executive: Mr. Timothy Fallon, 411 Sarles Street,
Bretton Ridge Estates, Mount Kisco, New York 10549, with a copy to: Kevin F.
Berry, Esq., Ledgewood Law Firm, P.C., 1521 Locust Street, Philadelphia,
Pennsylvania 19102.
If to the Company: Vermont Pure Holdings, Ltd., Route 66,
Catamount Park, Randolph Center, Vermont 05061, Attention: Chairman of the
Board, with a copy to: Dean Hanley, Esquire, Foley, Hoag & Eliot LLP, One Post
Office Square, Boston, Massachusetts 02109.
6.5 Assignment. This Agreement shall be binding upon and inure to
the benefit of the Company's successors and assigns.
6.6 Disputes and Controversies. The parties hereto agree that in case
of any dispute, controversy or claim arising out of or relating to this
Agreement, other than pursuant to Sections 4 and 6 hereof, the dispute,
controversy or claim shall be determined by arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association. The place
of the arbitration shall be Boston, Massachusetts. Any arbitration award shall
be based upon and accompanied by a written opinion containing findings of fact
and conclusions of law. The determination of the arbitrator(s) shall be
conclusive and binding on the parties hereto, and any judgment upon the award
rendered by the arbitrator(s) may be entered in any court having jurisdiction.
307752.5
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IN WITNESS WHEREOF, the parties have executed this Agreement on October__, 1997.
COMPANY: VERMONT PURE HOLDINGS, LTD.
By:_/S/Frank McDougall______________
Name:Frank McDougall
SPRINGS: VERMONT PURE SPRINGS, INC.
By:_/S/Frank McDougall______________
Name:Frank McDougall
EXECUTIVE: By:_/S/_Timothy Fallon______________
TIMOTHY FALLON
307752.5
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Execution Copy
EMPLOYMENT AGREEMENT
AGREEMENT, made as of November 1, 1997, by and between VERMONT PURE
HOLDINGS, LTD., a Delaware corporation (the "Company"), VERMONT PURE SPRINGS,
INC., a Delaware corporation that is a wholly owned subsidiary of the Company
("Springs"), and BRUCE S. MACDONALD (the "Executive").
WHEREAS, the Executive has been employed by the Company and/or Springs;
and the parties to this Agreement desire that the Company continue to employ the
Executive and wish to enter into this Agreement setting forth the terms of
Executive's employment by the Company; and the Executive desires to accept such
employment and to enter into this Agreement,
NOW THEREFORE, it is agreed as follows:
1. Employment.
1.1 General. The Company shall employ the Executive (either directly or
by employment with Springs), and the Executive accepts employment, as Vice
President of Finance, Chief Financial Officer and Treasurer of the Company, upon
the terms and conditions described herein. During the "Employment Term" (as
defined in Section 2.1 hereof), the Executive shall devote all of his business
time, attention and skills to the business and affairs of the Company.
1.2 Duties. The Executive shall at all times render his services at the
direction of the Board of Directors of the Company (the "Board of Directors")
and its Chief Executive Officer and President, and his duties generally will
include those required for the day-to-day and long-term financial reporting and
management, planning, development, operation and advancement of the business of
the Company, Springs and their affiliates. The Company may assign to the
Executive such other executive and financial administrative duties for the
Company or any affiliate of the Company as may be determined by the Board of
Directors or the Chief Executive Officer, consistent with the Executive's status
as Vice President of Finance, Chief Financial Officer and Treasurer. The
Executive agrees to diligently use his best efforts to promote and further the
reputation and good name of the Company and perform his services well and
faithfully.
2. Term and Termination.
.
2.1 Term. The term of employment by the Company of the Executive
pursuant to this Agreement shall commence on November 1, 1997 and terminate on
November 1, 2001 (the "Employment Term"), subject to the provisions of Section
2.2.
2.2 Early Termination. Notwithstanding anything to the contrary
contained in this Agreement, Executive's employment may be terminated prior to
the end of the Employment Term only as set forth in this Section.
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2.2.1 Termination Upon Resignation or Death of Executive. The
Executive's employment shall terminate upon the resignation or death of the
Executive. In case of termination pursuant to this Section 2.2.1, the Company
shall pay to the Executive (or, in case of his death, to his estate or his
beneficiary designated in writing), the base salary earned by the Executive
pursuant to Section 3, prorated through the date of resignation or death.
2.2.2 Termination Upon Disability of Executive. The
Executive's employment shall terminate by reason of the disability of the
Executive. For this purpose, "disability" shall mean the Executive's inability,
by reason of accident, illness or other physical or mental disability
(determined in good faith by the Board of Directors with the advice of a
qualified and independent physician), to perform satisfactorily the duties
required by his employment hereunder for any consecutive period of 120 calendar
days. In case of termination pursuant to this Section, the Executive shall
continue to receive his base salary prorated through the time of such
termination, less any amount the Executive receives during such period from any
Company-sponsored or Company-paid source of insurance, disability compensation
or government program.
2.2.3 Termination Upon Mutual Consent. The Executive's
employment may be terminated by the mutual consent of the Company and the
Executive on such terms as they may agree.
2.2.4 Termination For Cause. The Executive's employment shall
terminate immediately on notice to the Executive upon a good faith finding of
the Board of Directors that the Executive has (i) wilfully or repeatedly failed
to perform his duties in accordance with the provisions of this Agreement
following 30 days' prior written notice to the Executive and failure of the
Executive to cure any deficiency, (ii) committed a breach of any provision of
Section 4 hereof, (iii) misappropriated assets or perpetrated fraud against the
Company, (iv) been convicted of a crime which constitutes a felony, or (v) been
engaged in the illegal use of controlled or habit forming substances. In the
event of termination for cause, the Company shall pay the Executive his base
salary prorated through the date of termination.
2.2.5 Termination by Company Without Cause. The Company
may terminate the Executive's employment at any time and for any reason, without
cause, upon written notice to the Executive.
In the event of termination pursuant to this Section 2.2.5
during the Company's fiscal year ending October 1998, the Company shall pay or
provide to the Executive the following termination benefits: (i) an amount equal
to the sum of 1.5 times the Executive's annual base salary as of the termination
date, plus $50,000, payable over a period of 18 months after the date of
termination, in regular monthly installments, less income taxes and other
applicable withholdings, and (ii) the Executive's "Fringe Benefits" (as defined
below) for a period of 18 months.
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In the event of termination pursuant to this Section 2.2.5
during the Company's fiscal years ending October 1999, October 2000 and October
2001, the Company shall pay or provide to the Executive the following
termination benefits: (i) an amount equal to the sum of 1.0 times the
Executive's annual base salary as of the termination date, plus $50,000, payable
in each case over a period of 12 months after the date of termination, in
regular monthly installments, less income taxes and other applicable
withholdings, and (ii) the Executive's "Fringe Benefits" (as defined below) for
a period of 12 months.
2.2.6 Fringe Benefits. The obligation of the Company to
provide "Fringe Benefits" following any termination pursuant to Section 2.2.5
shall mean that the Executive's participation (including dependent coverage) in
the life and health insurance plans of the Company in effect immediately prior
to the termination shall be continued, or substantially equivalent benefits
provided, by the Company, at a cost to the Executive no greater than his cost at
the date of such termination, for the relevant period of 18 months or 12 months,
as the case may be. Notwithstanding the foregoing, if the Company shall be
unable to provide for the continuation of an insurance benefit (such as life
insurance) because such benefit was provided pursuant to an insurance policy
that does not provide for the extension of such insurance benefit following
termination of the employment of the Executive, then the Executive may purchase
insurance providing such insurance benefit and, whether or not the Executive so
elects to purchase insurance, the Company's only obligation with respect to such
insurance benefit shall be to reimburse the Executive for his premium costs, up
to a maximum aggregate amount for all policies of insurance purchased by the
Executive pursuant to this sentence of $7,000. If the Company is obligated
pursuant to the so-called "COBRA" law to offer the Executive the opportunity for
a temporary extension of health coverage ("continuation coverage"), then the
Executive shall elect continuation coverage, and the premium cost of such
coverage shall be borne by the Company and the Executive as provided in the
first sentence of this Section 2.2.6. Continuation coverage provided pursuant to
COBRA shall terminate in accordance with COBRA. To the extent that any benefit
required to be provided to the Executive by the Company pursuant to Section
2.2.5 shall be provided to the Executive by any successor employer, the
Company's obligation to provide that benefit to the Executive shall be
correspondingly offset or shall cease, as the case may be. In no event shall the
Company have any obligation to provide Fringe Benefits after the expiration of
the relevant period of 18 months or 12 months, as the case may be, following the
date of termination. The Executive shall not be entitled to any expense
allowance, automobile allowance or relocation allowance following the
termination of his employment for any reason.
2.2.7 Change in Control Constitutes Termination Without Cause.
A "Change of Control" (as defined in this Section) will be deemed to be a
termination of the Executive's employment within the meaning of Section 2.2.5. A
"Change of Control" shall mean a change in control of the Company (and not any
person or entity that hereafter becomes a successor to all or substantially all
of the business or assets of the Company by reason of a Change of Control) and
shall be deemed to have taken place if : (i) a third person, including a "group"
as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, becomes
the beneficial owner of shares
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of the capital stock of the Company having more than 50% of the total number of
votes that may be cast for the election of directors of the Company, (ii) the
sale or other disposition (excluding mortgage or pledge) of all or substantially
all of the assets of the Company, or (iii) the merger or other business
combination of the Company with or into another corporation or entity pursuant
to which the Company will not survive or will survive only as a subsidiary of
another corporation or entity, in either case with the stockholders of the
Company prior to the merger or other business combination holding less than 50%
of the voting shares of the merged or combined companies or entities after such
merger or other business combination. The rights and obligations created by this
Agreement with respect to a Change of Control shall apply only with respect to
the first Change of Control after the date of execution of this Agreement, and
not with respect to any subsequent transaction.
2.2.8 No Other Termination Benefits. The Executive understands
and agrees that the termination payments and benefits described in this Section
2 constitute all of the payments and benefits to which he (or his estate or
beneficiary) will be or become entitled to receive in case of termination of his
employment, and that such payments and benefits are in lieu of any and all other
payments and benefits of every kind or description to which he may be entitled,
including, without limitation, any right to receive a bonus payment or any
portion thereof.
3. Compensation. During the Employment Term, the Company shall pay, in
full payment for all of the Executive's services rendered hereunder, the
following compensation:
3.1 Base Salary. The Company shall pay the Executive an annual base
salary, less income taxes and other applicable withholdings, of $75,000 in
Company's standard payroll installments. Commencing November 1, 1997, the Board
of Directors will review the annual base salary amount as soon as practicable
after the end of each fiscal year of Company to consider whether or not it
should be increased. Such determination shall be in the sole discretion of the
Board of Directors using such criteria as they deem relevant, including, but not
limited to, the performance of the Company and the Executive.
3.2 Bonuses. While the Executive is employed by the Company, the
Executive will be eligible to receive the bonuses described in this Section 3.2.
Unless otherwise specified, all incentive goals set forth in this Section shall
be based upon or derived from the Company's audited consolidated financial
statements prepared in accordance with generally accepted accounting principles
as reported on by the Company's independent accountants.
3.2.1 Fiscal Year 1997 Sales Bonus. With respect to the
Company's fiscal year ending October 1997, if the Company has annual sales equal
to or in excess of $15,000,000, then there shall be a bonus of $30,000.
3.2.2 Fiscal Years 1998, 1999, 2000 and 2001 Budgeted EBITDA
Bonus. With respect to the Company's fiscal year ending October 1998, October
1999, October 2000 and
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October 2001: if the Company has actual annual earnings before interest, taxes,
depreciation and amortization ("EBITDA") which, expressed as a percentage of
target annual EBITDA approved in the budget for that fiscal year by the Board of
Directors, are at least 90% of such target annual EBITDA, then there shall be a
bonus as set forth in the following table. Bonuses under this Section 3.2.2 are
non-cumulative.
Actual EBITDA Divided by Target EBITDA Bonus
-------------------------------------- -----
less than 90% of target - $ -0-
at least 90% but less than 91% of target - 25,000
at least 91% but less than 92% of target - 27,500
at least 92% but less than 93% of target - 30,000
at least 93% but less than 94% of target - 32,500
at least 94% but less than 95% of target - 35,000
at least 95% but less than 96% of target - 37,500
at least 96% but less than 97% of target - 40,000
at least 97% but less than 98% of target - 42,500
at least 98% but less than 99% of target - 45,000
at least 99% but less than 100% of target - 47,500
at least 100% but less than 102% of target - 50,000
at least 102% but less than 104% of target - 52,500
at least 104% but less than 106% of target - 55,000
at least 106% but less than 108% of target - 57,500
at least 108% but less than 110% of target - 60,000
at least 110% but less than 112% of target - 62,500
at least 112% but less than 114% of target - 65,000
at least 114% but less than 116% of target - 67,500
at least 116% but less than 118% of target - 70,000
at least 118% but less than 120% of target - 72,500
at least 120% of target or greater - 75,000
3.2.3 Time of Bonus Payments. Each bonus required to be paid
to the Executive under Section 3.2 shall be paid as soon as practicable after
the filing with the Securities and Exchange Commission of the Company's Annual
Report on Form 10-K or 10-KSB or successor form, as the case may be.
3.3 Vacation. The Executive shall be entitled to three (3) weeks of
vacation in each 12-month period during the Employment Term. No more than two
(2) weeks may be taken consecutively.
3.4 Executive Benefit Plans. The Executive shall be entitled to
participate in all plans or programs sponsored by the Company for employees in
general, including without limitation, participation in any group health,
medical reimbursement, or life insurance plans.
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3.6 Expense Allowance. The Company shall reimburse the Executive for
all reasonable and necessary expenses incurred by him from time to time in the
performance of his duties hereunder, against receipts therefor in accordance
with the then effective policies and requirements of the Company.
3.7 Disability Insurance; Automobile Allowance. The Company shall have
no obligation to provide disability insurance to the Executive. The Company
agrees to provide an allowance of up to $4,000.00 per year to reimburse the
Executive for the actual cost of premiums incurred by the Executive for
disability insurance obtained by the Executive. The Company shall provide a
vehicle, equivalent in value to one affordable under an automobile allowance of
$650 per month.
4. Protection of Confidential Information; Non-Compete
4.1 Acknowledgments. The Executive acknowledges that:
(a) The Executive has obtained and, during his employment by the
Company, will obtain secret and confidential information concerning the business
of the Company and its affiliates, including, without limitation, customer lists
and sources of supply, their needs and requirements, the nature and extent of
contracts with them, and related cost, price and sales information.
(b) The Company and its affiliates will suffer substantial and
irreparable damage which will be difficult to compute if, during the period of
his employment with the Company or thereafter, the Executive should enter a
competitive business or should divulge secret and confidential information
relating to the business of the Company and its affiliates heretofore or
hereafter acquired by him in the course of his employment with the Company.
(c) The provisions of this Agreement are reasonable and necessary for
the protection of the business of the Company and its affiliates.
4.2 Confidentiality. The Executive agrees that he will not at any time,
either during the Employment Term or thereafter, divulge to any person, firm or
corporation any information obtained or learned by him during the course of his
employment with the Company, with regard to the operational, financial, business
or other affairs of the Company and its affiliates, and their respective offices
and directors, including, without limitation, trade secrets, customer lists,
sources of supply, pricing policies, operational methods or technical processes,
except (i) in the course of performing his authorized duties hereunder, (ii)
with the Company's express written consent; (iii) to the extent that any such
information is lawfully in the public domain other than as a result of the
Executive's breach of any of his obligations hereunder; or (iv) where required
to be disclosed by court order, subpoena or other government process. In the
event that the Executive shall be required to make any disclosure pursuant to
the provisions of clause (iv) of the preceding sentence, the Executive promptly,
but in no event more than 48 hours after learning of such subpoena, court order,
or other government process, shall notify the Company, by personal
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delivery or by fax, confirmed by mail, to the Company and, if the Company so
elects and at the Company's expense, the Executive shall: (a) take all
reasonably necessary steps requested by the Company to defend against the
enforcement of such subpoena, court order or other government process, and (b)
permit the Company to intervene and participate with counsel of its choice in
any proceeding relating to the enforcement thereof.
4.3 Return of Property. Upon termination of his employment with the
Company, or at any time the Company may so request, the Executive will promptly
deliver to Company all memoranda, notes, records, reports, manuals, drawings,
blueprints and other documents (and all copies thereof) relating to the business
of the Company and its affiliates and all property associated therewith, which
he may then possess or have under this control.
4.4. Non-Competition. During the Employment Term and for a period equal
to the time during which Executive receives severance payments for benefits
pursuant to Section 2 of this Agreement or for a period of 12 months in the
event the Executive is terminated without entitlement to severance benefits
herein, the Executive shall not, without the prior written permission of the
Company, in the United States, its territories and possessions, directly or
indirectly, (i) enter into the employ of or render any services to any person,
firm or corporation engaged in any Competitive Business (as defined below); (ii)
engage in any Competitive Business for his own account; (iii) become associated
with or interested in any Competitive Business as an individual, partner,
shareholder, creditor, director, officer, principal, agent, employee, trustee,
consultant, advisor or in any other relationship or capacity; (iv) employ or
retain, or have or cause any other person or entity to employ or retain, any
person who was employed or retained by the Company or its affiliates while the
Executive was employed by the Company; or (v) solicit, interfere with, or
endeavor to entice away from the Company or its affiliates any of their
customers or sources of supply. However, nothing in this Agreement shall
preclude the Executive from investing his personal assets in the securities of
any Competitive Business if such securities are traded on a national stock
exchange or in the over-the-counter market and if such investment does not
result in his beneficially owning, at any time, more than 4.9% of the
publicly-traded equity securities of such competitor. "Competitive Business"
shall mean any business or enterprise which (a) designs, sells, manufactures,
markets and/or distributes spring or purified water products or still spring or
purified water beverages, or (b) engages in any other business in which Company
or its affiliates is involved at any time during the 12-month period immediately
prior to the termination of the Executive's employment.
4.5 Enforcement. If the Executive commits a breach, or threatens to
commit a breach, of any of the provisions of Section 4, the Company shall have
the right and remedy to have the provisions of this Agreement specifically
enforced by any court having jurisdiction over the matter, it being acknowledged
and agreed by the Executive that the services being rendered hereunder to the
Company are of a special, unique and extraordinary character and that any such
breach or threatened breach will cause irreparable injury to the Company and
that money damages will not provide an adequate remedy to the Company. Such
right and remedy shall be in addition to, and not in lieu of, any other rights
and remedies available to the Company under law or equity-
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<PAGE>
4.6 "Blue Penciling". If any provision of Section 4 is held to be
unenforceable because of the scope, duration or area of its applicability, the
tribunal making such determination shall have the power to modify such scope,
duration or area, or all of them, and such provision or provisions shall then be
applicable in such modified form.
5. Representations of Executive. The Executive represents and warrants to the
Company that the Executive is not a party to or bound by any agreement,
understanding or restriction that would or may be breached by the Executive's
execution and full performance of this Agreement. The Executive expressly
undertakes and agrees that none of his acts or duties hereunder that will
violate any obligations he may have to any prior employer (or will impose on the
Company any liability to any prior employer) and that he has complied with all
requirements of notice applicable to the termination of any prior employment
before he commenced his employment with the Company. The Executive further
represents and warrants that he has delivered to the Company complete copies of
all employment agreements, understanding and restrictions to which he has been
subject at any time during the last five years.
6. Construction of this Agreement.
6.1 Choice of Law. This Agreement is to be construed pursuant
to the laws of Delaware, without regard to the laws affecting choice of law.
6.2 Invalid Agreement Provisions. Should any provision of this
Agreement become legally unenforceable, no other provision of this Agreement
shall be affected, and this Agreement shall continue as if the Agreement had
been executed absent the unenforceable provision.
6.3 No Other Agreements. This Agreement represents the full agreement
between the Company and the Executive with respect to the subject matter hereof
and the Company and the Executive have made no agreements, representations or
warranties relating to the subject matter of this Agreement that re not set
forth herein. This Agreement supersedes the 1994 Agreement, which is hereby
terminated, and any and all other agreements, oral or written, that may define
the employment relationship between the Executive and the Company. This
Agreement may be modified only by written agreement by the Executive and the
Company and may not be modified by any oral agreement.
6.4 Notices. All notices provided for in this Agreement shall be in
writing and shall be deemed to be given when delivered personally to the party
to receive the same, when transmitted by electronic means or when mailed first
class, postage prepaid by certified mail, return receipt requested, addressed to
the party to receive the same at the applicable addresses set forth below or
such other address as the party to receive the same shall have specified by
written notice give in the manner provided for in this Section. All notices
shall be deemed to have been given as of the date of personal delivery,
transmittal or mailing thereof.
-8-
<PAGE>
If to the Executive: Mr. Bruce S. MacDonald, RR #1, Box 141-5,
Warren, Vermont.
If to the Company: Vermont Pure Holdings, Ltd., Route 66,
Catamount Park, Randolph Center, Vermont 05061, Attention: President, with a
copy to: Dean Hanley, Esquire, Foley, Hoag & Eliot LLP, One Post Office Square,
Boston, Massachusetts 02109.
6.5 Assignment. This Agreement shall be binding upon and inure to
the benefit of the Company's successors and assigns.
6.6 Disputes and Controversies. The parties hereto agree that in case
of any dispute, controversy or claim arising out of or relating to this
Agreement, other than pursuant to Sections 4 and 6 hereof, the dispute,
controversy or claim shall be determined by arbitration in accordance with the
Commercial Arbit
IN WITNESS WHEREOF, the parties have executed this Agreement on
November 1, 1997.
COMPANY: VERMONT PURE HOLDINGS, LTD.
By:_/S/Timothy Fallon_________
Name:Timothy G. Fallon
Title:President
SPRINGS: VERMONT PURE SPRINGS, INC.
By:_/S/Timothy Fallon_________
Name:Timothy G. Fallon
Title:President
EXECUTIVE: By:_/S/Bruce MacDonald________
Name:Bruce S. MacDonald
TERMINATION AGREEMENT
This Termination Agreement is made as of December 12, 1997. The parties
refer to that certain Consulting Agreement dated as of October 1, 1993 by and
between Condor Ventures, Inc.("Condor") and a party defined as the "Company" and
variously designated as "Vermont Pure Holdings, Inc." in the recitals to said
Agreement, as "Vermont Pure Holdings, Ltd." in Section 14 thereof, and as
"Vermont Pure Springs, Inc." on the signature line thereof (said Consulting
Agreement, together with the letter from Timothy Fallon to Condor dated June 22,
1995 (the "1995 Letter") and any and all other amendments thereto, being
hereinafter referred to as the "Consulting Agreement").
The parties to the Consulting Agreement desire to terminate the
Consulting Agreement and, accordingly, the parties are entering into this
Termination Agreement as of the date first above written. This Termination
Agreement may be executed and delivered by facsimile counterpart copies sent by
telecopier to each party.
1. Condor acknowledges and agrees that the proper designation of the
"Company" in the Consulting Agreement is and at all times has been Vermont Pure
Holdings, Ltd. ("Holdings"), and that there is no company affiliated with the
Vermont Pure entities known as "Vermont Pure Holdings, Inc." However, in order
to eliminate any uncertainty, Vermont Pure Springs, Inc. ("Springs"), the
wholly-owned subsidiary of Holdings, has also agreed to execute this Agreement.
2. Except as set forth in Section 4 of this Agreement, in consideration
of the payment to Condor on or before December 31, 1997 by either Holdings or
Springs of $41,905.00 (the "Final Payment"), Condor agrees that neither Holdings
nor Springs shall have any further obligations to Condor under the Consulting
Agreement, of any type or nature, and Holdings and Springs each agree that
Condor shall not have any further obligations to either of them under the
Consulting Agreement, of any type or nature.
3. The Final Payment consists of $41,667.00 as a termination
payment and $238.00 in billed but unpaid disbursements. The Final Payment shall
be remitted by wire transfer as follows:
For the account of: Condor Ventures, Inc.
Account Number: 93607-15158
Bank: Fleet Bank
14 High Ridge Road
Stamford, CT 06905
ABA Number: 011900571
Attention of: Paula Pyzik
Telephone: 203-964-4833
307580.3
-1-
<PAGE>
4. The parties agree that upon receipt of the Final Payment the
Consulting Agreement shall thereupon be terminated, except as follows:
(a) Section 3.B., including without limitation paragraphs (i)
through (vi) thereof, with respect to a stock option for the purchase
of 125,000 shares of the capital stock of Holdings at an exercise price
per share of $2.25 (the "Option") and with respect to certain related
matters, shall survive and remain in full force and effect;
(b) Section 3.D., with respect to the reimbursement of
out-of-pocket expenses incurred by Condor, shall survive, but only with
respect to reasonable and necessary out-of-pocket expenses properly
incurred by Condor through December 31, 1997 and actually billed to
Holdings by January 31, 1998;
(c) Sections 6 and 7, with respect to Condor's obligations to
maintain the confidentiality of certain information, to return certain
materials to Holdings, and not to assert certain rights, shall survive;
and
(d) Sections 8 through 15 shall survive in connection
with the Option, except that
(x) Section 14 is amended to provide that notices to
the Company shall be sent to Vermont Pure Holdings, Ltd., P.O.
Box C, Route 66, Catamount Industrial Park, Randolph, Vermont
05060, attention: President; with a copy to Dean F. Hanley,
Esq, Foley, Hoag & Eliot LLP, One Post Office Square, Boston,
Massachusetts 02109, and further amended to provide that
notices sent otherwise than by registered or certified mail,
return receipt requested, shall also be effective if actually
received; and
(y) Section 15 is amended to provide that the Option
shall be construed and enforced in accordance with the
internal laws of the State of Delaware, without giving effect
to conflicts of law.
5. Condor shall return to Holdings all of the materials it is
required to return to Holdings pursuant to Section 6.B. of the Consulting
Agreement on or before January 16, 1998.
[The rest of this page is blank.]
307580.3
-2-
<PAGE>
IN WITNESS WHEREOF, this Termination Agreement is executed as of the
date first above written.
CONDOR VENTURES, INC. VERMONT PURE HOLDINGS, LTD.
By_/S/Adnan Durrani_____________ By_/S/Timothy Fallon________________
Adnan A. Durrani, President Timothy G. Fallon
VERMONT PURE SPRINGS, INC.
By_/S/Timothy Fallon_______________
Timothy G. Fallon
307580.3
-3-
EXHIBIT 22
VERMONT PURE HOLDINGS, LTD.
SUBSIDIARIES
State of
Name Incorporation
Vermont Pure Springs, Inc Delaware
A.M. Fridays, Inc. New Hampshire
Excelsior Springs Water Co., Inc. New York
29
<PAGE>
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 17, 1997, appearing in the Annual Report on Form 10-KSB of Vermont Pure
Holdings, Ltd. for the year ended October 25, 1997.
/S/Feldman Radin & Co., P.C.
FELDMAN RADIN & CO., P.C.
Certified Public Accountants
New York, New York
January 23, 1998
284187.5
30
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