SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended July 25, 1998
Commission File No. 1-11254
VERMONT PURE HOLDINGS, LTD.
(Exact name of registrant as specified in its charter)
Delaware 06-1325376
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Route 66; PO Box C; Randolph, VT 05060
(Address of principal executive offices) (Zip Code)
(802)728-3600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class September 4, 1998
Common Stock, $.001 Par Value 10,287,187
<PAGE>
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
INDEX
Page Number
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet as of
July 25, 1998 (unaudited) and
October 25, 1997 3
Consolidated Statement of Operations (unaudited)
for the Nine Months and Three Months ended
July 25, 1998 and July 26, 1997 4
Consolidated Statement of Cash Flows
(unaudited) for the Nine Months ended
July 25, 1998 and July 26, 1997 5
Notes to Consolidated Financial Statements
(unaudited) 6 - 11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operation 12 - 15
Part II - Other Information 16
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signature 17
2
<PAGE>
PART I - Item 1
<TABLE>
<CAPTION>
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
July 25 October 25,
1998 1997
------------- ------------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash $ 382,028 $ 93,808
Accounts receivable 3,812,908 1,974,765
Inventory 1,758,933 978,473
Current portion of deferred tax asset 326,000 326,000
Other current assets 138,436 288,627
------------- -------------
TOTAL CURRENT ASSETS 6,418,305 3,661,673
------------- -------------
PROPERTY AND EQUIPMENT - net of accumulated depreciation 8,675,771 7,332,912
------------- -------------
OTHER ASSETS:
Intangible assets - net of accumulated amortization 9,411,390 5,216,300
Deferred tax asset 218,000 218,000
Other assets 63,708 117,881
------------- -------------
TOTAL OTHER ASSETS 9,693,098 5,552,181
------------- -------------
TOTAL ASSETS $ 24,787,174 $ 16,546,766
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,175,326 $ 1,099,094
Current portion of customer deposits 68,191 49,534
Accrued expenses 1,135,513 986,961
Line of credit 238,021
Current portion of long term debt 508,891 885,748
Current portion of obligations under capital lease 125,332 144,944
------------- -------------
TOTAL CURRENT LIABILITIES 5,013,253 3,404,302
Long term debt 1,543,892 5,435,292
Long term obligations under capital lease 240,380 304,597
Line of credit 8,884,266 -
Long term portion of customer deposits 1,068,324 760,559
------------- -------------
TOTAL LIABILITIES 16,750,115 9,904,750
------------- -------------
STOCKHOLDERS' EQUITY:
Common stock - $.001 par value, 20,000,000 authorized shares,
10,131,980 issued and outstanding shares at October 25, 1997
and 10,287,187 issued and outstanding shares at July 25, 1998 10,288 10,132
Paid in capital 23,070,349 22,447,092
Accumulated deficit (15,043,578) (15,815,208)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 8,037,059 6,642,016
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 24,787,174 $ 16,546,766
============= =============
</TABLE>
See notes to financial statements
3
<PAGE>
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Nine months ended Three months ended
----------------------------------- -----------------------------------
July 25 July 26 July 25 July 26
1998 1997 1998 1997
---------------- ---------------- ---------------- -----------------
---------------- ---------------- ---------------- -----------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
SALES $ 19,717,417 $ 12,255,738 $ 9,155,404 $ 5,724,061
COST OF GOODS SOLD 7,907,932 5,361,124 3,447,622 2,271,827
---------------- ---------------- ---------------- -----------------
GROSS PROFIT 11,809,485 6,894,614 5,707,782 3,452,234
---------------- ---------------- ---------------- -----------------
OPERATING EXPENSES:
Selling, general and administrative expense 7,155,741 4,176,986 2,784,268 1,629,189
Advertising expenses 2,887,685 2,410,552 1,407,505 1,145,522
Amortization 436,948 136,659 174,267 54,256
---------------- ---------------- ---------------- -----------------
TOTAL OPERATING EXPENSES 10,480,374 6,724,197 4,366,040 2,828,967
---------------- ---------------- ---------------- -----------------
PROFIT (LOSS) FROM OPERATIONS 1,329,111 170,417 1,341,742 623,267
---------------- ---------------- ---------------- -----------------
OTHER INCOME (EXPENSE):
Interest - net (574,526) (230,939) (228,746) (79,068)
Miscellaneous 17,045 17,954 15,521 15,818
---------------- ---------------- ---------------- -----------------
TOTAL OTHER INCOME (EXPENSE) (557,481) (212,985) (213,225) (63,250)
---------------- ---------------- ---------------- -----------------
NET INCOME (LOSS) $ 771,630 $ (42,568) $ 1,128,517 $ 560,017
================ ================ ================ =================
NET INCOME (LOSS) PER SHARE - BASIC $ 0.08 $ (0.00) $ 0.11 $ 0.06
================ ================ ================ =================
NET INCOME (LOSS) PER SHARE - DILUTED $ 0.07 $ (0.00) $ 0.10 $ 0.06
================ ================ ================ =================
Weighted Average Shares Used in Computation - Basic 10,240,294 9,697,316 10,284,633 9,716,363
================ ================ ================ =================
Weighted Average Shares Used in Computation -Diluted 11,021,476 9,697,316 11,044,279 9,761,451
================ ================ ================ =================
</TABLE>
See notes to financial statements
4
<PAGE>
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended
----------------------------------------------------
July 25, July 26
1998 1997
------------------------ ------------------------
------------------------ ------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net profit/(loss) $ 771,630 $ (42,568)
Depreciation 747,292 552,046
Amortization 436,948 136,659
(Gain) loss on disposal of property and equipment 7,100 (14,440)
Changes in assets and liabilities (net of effect of acquisitions):
(Increase) Decrease in accounts receivable (1,729,996) (1,237,659)
(Increase) Decrease in inventory (718,518) 270,534
(Increase) Decrease in other current assets 190,191 18,583
(Increase) Decrease in other assets 262,414 191,020
(Decrease) Increase in accounts payable 1,943,987 345,462
(Decrease) Increase in customer deposits 245,329 68,319
(Decrease) Increase in accrued expenses 148,552 765,445
------------------------ ------------------------
CASH PROVIDED BY OPERATING ACTIVITIES 2,304,928 1,053,401
------------------------ ------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (1,853,044) (638,030)
Proceeds from sale of fixed assets 60,500 40,500
Cash used for acquistions (3,927,899) (769,903)
------------------------ ------------------------
CASH USED IN INVESTING ACTIVITIES (5,720,443) (1,367,433)
------------------------ ------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit 879,855 (441,811)
Proceeds from debt 10,419,756 808,468
Principal payments of debt (7,606,826) (587,852)
Sale of common stock 10,950 0
------------------------ ------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 3,703,735 (221,195)
------------------------ ------------------------
NET INCREASE (DECREASE) IN CASH 288,220 (535,227)
CASH - Beginning of period 93,808 783,081
------------------------ ------------------------
CASH - End of period $ 382,028 $ 247,854
======================== ========================
Cash paid for interest $ 574,526 $ 266,201
======================== ========================
</TABLE>
See notes to financial statements
5
<PAGE>
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with Form 10-QSB instructions and in the opinion
of management contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position,
results of operations, and cash flows for the periods presented. The
results have been determined on the basis of generally accepted
accounting principles and practices applied consistently with the Form
10-KSB for the year ended October 25, 1997.
Certain information and footnote disclosures normally included in
financial statements presented in accordance with generally accepted
accounting principles have been condensed or omitted. The accompanying
consolidated financial statements should be read in conjunction with
the financial statements and notes thereto incorporated by reference
from the Company's Form 10-KSB and Annual Report for the year ended
October 25, 1997.
2. SIGNIFICANT ACCOUNTING POLICIES
In February 1997, the Financial Accounting Standards Board issued
Statement on Financial Accounting Standards No. 128, "Earnings Per
Share" (FAS No. 128) which became effective for both interim and annual
financial statements for periods ending after December 15, 1997. FAS
No. 128 requires a presentation of "Basic" and (where applicable)
"Diluted" earnings per share. Generally Basic earnings per share are
computed on only the weighted average number of common shares actually
outstanding during the period and the Diluted computation considers
potential shares issuable upon exercise or conversion of other
outstanding instruments where dilution would result. Furthermore, FAS
No. 128 requires the restatement of prior period reported earnings to
conform to the new standard.
3. ACQUISITIONS
A. Akva - On December 9, 1997 the Company entered into a packing and
distribution rights agreement and a distribution rights agreement with
Akva, Hf. The purpose of the agreements is to allow the Company to
distribute Akva, an Icelandic spring water, on an exclusive basis. The
rights were acquired for 25,000 shares of the Company's common stock
and 50% of the profits resulting from the sale of Akva products from
January 1, 1999 through December 31, 2004 to a maximum of $500,000. The
Company pays a packing fee to Akva for bottling the product and charges
a marketing/administration fee as outlined in the agreements. The
agreements are cancelable by the Company with 90 days written notice.
6
<PAGE>
B. Vermont Coffee Time - On January 5, 1998, the Company completed the
purchase of substantially all of the assets of Vermont Coffee Time,
Inc., a company operating distribution routes for water and coffee to
homes and offices and commercial vending services, primarily in
Northern Vermont. The purchase price of the assets was $1,431,564.
Chittenden Bank financed $1,000,000 of the purchase from an acquisition
credit facility provided by a loan agreement dated June 20, 1997. The
balance of the purchase price was settled by the issuance of a note to
the seller of $250,000 and by the issuance of $181,564 worth of the
Company's common stock. The note was subsequently paid off on April 8,
1998 with borrowings under a line of credit with CoreStates Bank, N.A.
which is described in item 4b below.
C. Sagamon Springs Water of Vermont, Inc. - On January 30, 1998 the
Company purchased certain assets of Sagamon Springs Water Company of
Rutland, Vermont. The assets included a five gallon water bottle filler
and ancillary equipment, exclusive water rights to a spring located in
Tinmouth, Vermont, and exclusive use of the Sagamon trade name. The
spring site and bottling equipment from this acquisition are
geographically located close to the Company's New York operations to
help them meet their increased demands for product. The purchase price
of the assets was $275,000. Of this amount $170,000 was paid with cash
and the remaining balance financed with notes from the sellers.
D. Vermont Naturals - On May 15, 1998 the Company purchased the assets
of Vermont Naturals based in Clifton Park, New York. In addition to
customers, the Company acquired trucks, bottles, coolers and product
inventory. The approximate purchase price was $200,000.
E. Perrier Group of America - On May 29, 1998 the Company acquired the
Poland Spring and Deer Park home and office customers in the Albany,
New York market from the Perrier Group of America. In addition to
customers, the Company acquired trucks, bottles, coolers, product
inventory and office furniture. The approximate purchase price was $2.5
million. The Company borrowed $2.6 million from CoreStates under its
line of credit for the transaction.
4. LONG TERM DEBT
A. Vermont Coffee Time, Inc.- The Company issued a note to Vermont
Coffee Time, Inc. on January 5, 1998 in conjunction with the purchase
of certain assets from that Company. The term of the note is five
years. It is payable in equal monthly installments based on a ten year
amortization at 8.5% interest. There is a lump sum of $154,179 due on
January 5, 2003. The loan is secured by all tangible and intangible
assets purchased pursuant to the Asset Purchase agreement governing
this transaction. As noted in item 3B above this note has been paid
off.
7
<PAGE>
B. CoreStates Banks N.A. - The Company entered into a five (5) year
revolving credit line with CoreStates Banks N.A. on April 18, 1998. The
purpose of the loan is for permitted acquisitions and capital
expenditures, working capital and to refinance existing term debt. The
Company is entitled to borrow up to $15 million under the terms and
conditions of the agreement. Of this amount $2 million is allowed for
working capital with the balance available for acquisitions. As of July
25,1998 $7,766,390 had been borrowed against this facility. The
facility was used to repay working capital and acquisition debt from
Chittenden Bank, the acquisition debt incurred in connection with the
purchase of Happy Ice and Vermont Coffee Time, Inc. as well as the
mortgage note to Randolph National Bank which was secured by the
Company's principal facility. The acquisition line of credit was also
used for the Vermont Naturals and the Perrier acquisitions. Under the
agreement the Company is required to pay interest monthly at a rate of
LIBOR plus 2.5%, currently approximately 7.75%. The interest rate can
decrease during the term based on certain performance parameters
outlined in the agreement. Due to the Company exceeding the financial
covenants established by CoreStates the interest was lowered at the
beginning of the third quarter in 1998. The line of credit is
contingent upon the Company continuing to meet certain loan covenants
which require the Company to comply with certain financial ratios, as
well as other affirmative and negative covenants that are standard for
credit facilities of this type.
5. LINE OF CREDIT
As of July 25,1998 the Company had borrowed $1,117,876 from the
working capital portion of its line of credit with CoreStates Banks.
The Company was eligible to borrow $2,000,000 as of that date.
6. INTANGIBLE ASSETS
The value of the distribution rights obtained from Akva, Hf. in
exchange for the Company's stock will be amortized over six years.
The price of the Company's stock was $4.3125 per share at the time of
the closing. Based on the issuance of 25,000 shares, distribution
rights at the time of the sale were valued at $107,812.
Goodwill that resulted from the acquisition of the assets of Vermont
Coffee Time, Inc., Sagamon Spring Water of Vermont, Inc., Vermont
Naturals and the purchase of the Albany, New York market area from the
Perrier Group of America will be amortized over 30 years and was
calculated, in the aggregate, as follows:
8
<PAGE>
Purchase Price $4,436,489
Acquisition Costs 272,651
Fair Value of Tangible and Identifiable Intangible Assets (1,333,317)
Liabilities Assumed 402,207
----------
Total $ 3,778,030
==========
In conjunction with the acquisition the Company entered into
non-competition, employment and consulting agreements with the owner of Vermont
Coffee Time, Inc.
In conjunction with the acquisition the Company has entered into a
non-competition agreement with the owners of Sagamon Spring Water of Vermont,
Inc.
In conjunction with the acquisition the Company has entered into a
non-competition agreement with the owners of Vermont Naturals.
7. COMMITMENTS
A. Leased Space - The Company entered into a lease for 18,000 square
feet of space in Halfmoon, New York. The space will be used as a
bottling, warehouse, and distribution plant for the Company's upstate
New York Home and Office operations. This space replaces the former
headquarters of Excelsior Spring Water, in Saratoga, NY which the
Company currently leases on a month to month basis. The lease commenced
on April 1, 1998 and the term of the new lease is 10 years. The monthly
lease payments are approximately $7,500 per month. The Company has
subsequently leased an additional 4,500 square feet from this landlord.
B. Production Capacity - In order to increase production capacity, the
Company has leased new production equipment. The equipment includes a
five gallon filling line and associated equipment for installation in
the Albany, New York area. Additionally, the Company is replacing its
filling and packaging machinery in its PET bottling facility in
Randolph, VT. The acquisition of this equipment for an aggregate amount
of $764,132 is being financed by an operating lease with KeyCorp
Leasing. The lease is for seven years with a market value buy out of
the equipment after that term.
8. STOCK ISSUE
In conjunction with acquisitions during the fiscal year the Company
issued 150,207 shares of its common stock valued at $612,464 with
share prices ranging from $4.00 to $4.31.
9
<PAGE>
On April 8, 1998, in connection with the financing arrangement with
CoreStates Bank, the Company issued warrants to the bank to purchase
shares of its common stock. The exercise price was below the stock's
market price on the issuance date. The Company will amortize the value
of the warrants over the five year term of the agreement.
9. STOCK OPTION PLAN
On April 2, 1998, the Company's shareholders approved the 1998
Incentive and Non-Statutory Stock Option Plan. The plan provides for
issuance of up to 500,000 options to purchase the Company's common
stock under the administration of the Board of Directors. The intent of
the plan is to award options to officers, employees, directors, and
other individuals providing services to the Company. Through July 25,
1998, 30,000 options had been issued under the plan.
10. EARNINGS PER SHARE
The Company's dilutive instruments are "in the money" stock options
with various exercise dates and prices. The Company uses the treasury
stock method to calculate the effect that the conversion of these
instruments would have on earnings per share. The following table sets
forth the computation of basic and diluted earnings per share:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
9 Months Ended 3 Months Ended
July 25, July 25,
1998 1997 1998 1997
_________________________________ __________________________________
Numerator
Net Income (Loss) $ 771,630 $ (42,568) $ 1,128,517 $ 560,017
Denominator
Wt. Avg. Shares
Outstanding 10,240,294 9,697,316 10,284,633 9,716,363
Denominator for Basic EPS
Effect of Dilutive Securities/
Options 781,182 - 759,646 45,088
_________________________________ __________________________________
Total- Denominator for 11,021,476 9,697,316 11,044,279 9,761,451
Fully diluted EPS
Basic EPS $.08 $.00 $.11 $.06
Fully Diluted EPS $.07 $.00 $.10 $.06
</TABLE>
10
<PAGE>
11. CONTINGENCIES
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 this litigation. The settlement had
no material financial impact on the Company and both parties agreed to
release their claims against each other.
In August 1998, the court granted an attachment against the Vermont
Pure Holdings, Ltd. common stock owned by the former employee still
involved in the suits. The court has stayed the attachment pending a
further hearing, but issued an injunction prohibiting the sale of any
of these shares until the hearing.
The Company does not anticipate that the outcome of the remaining suit
will have a material financial impact on the Company.
11
<PAGE>
PART I - Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto as filed in the Company's Form 10-KSB for
the year ended October 25, 1997.
Forward-Looking Statements
When used in the Form 10-QSB 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. Among these
risks are water supply and bottling capacity constraints in the face of
significant growth, dependence on outside distributors, and reliance on
commodity price fluctuations as they influence raw material pricing. 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
Sales - Sales for the first nine months of fiscal year 1998 were $19,717,417, an
increase of $7,461,679 or 61% over sales of $12,255,738 for the corresponding
period last year. Sales for the third quarter of fiscal year 1998 were
$9,155,404, an increase of $3,431,343 or 60% over sales of $5,724,061 for the
corresponding period last year. Excluding sales attributable to the acquisitions
in the nine and three months ending July 25, 1998, sales increased approximately
32% and 35%, respectively, over the corresponding periods last year.
Sales for retail-size products increased $2,619,345, or 29%, for the first nine
months of fiscal year 1998 compared to the corresponding period a year ago.
Sales for these products increased $1,386,415, or 32%, for the third quarter of
fiscal year 1998 compared to the corresponding period a year ago. The increase
was a result of volume increases related to the continued growth of both the
Vermont Pure brand and secondary labels. Increased promotional expense was
incurred to enhance brand awareness. Increased market penetration and
development of new markets also contributed to the sales growth. Average selling
prices for the nine and three months ending April 25, 1998 were down 1% for both
of the corresponding periods from the previous year reflecting increased volume
of private and secondary labels and the competitive nature of the marketplace.
The total 29% increase for the year to date was accounted for in the following
distribution channels: 21% attributable to Vermont Pure sizes, 5% attributable
to secondary labels, and 3% attributable to private labels. The Akva brand had
no material impact on sales for either period reported.
12
<PAGE>
Sales for the home and office division increased $4,680,991, or 156%, for the
first nine months of fiscal year 1998 compared to the corresponding period of
the prior year. Sales for this category increased $2,037,891, or 174%, for the
third quarter of fiscal year 1998 compared to the corresponding period of the
prior year. A substantial portion of the increase in sales for this division can
be attributed to acquisitions. Exclusive of acquisitions, sales of home and
office related products increased approximately 18% and 19% for the first half
and third quarter of fiscal 1998, respectively.
Cost of Goods Sold - For the first nine months of fiscal 1998, Cost of Goods
Sold was $7,907,932 compared to $5,361,124 in fiscal year 1997 resulting in
gross profits of $11,809,485, or 60% of sales, and $6,894,614, or 56% of sales,
respectively. For the third quarter, Cost of Goods Sold was $3,447,622 in 1998
compared to $2,271,827 in 1997 resulting in gross profits of $5,707,782, or 62%
of sales, and $3,452,234, or 60% of sales, respectively. The increase in gross
profit for the respective nine and three month periods was due to a considerable
increase in sales volume which resulted in a lower cost per unit. In addition,
the Company's sales continued, through acquisition, to become more heavily
skewed toward higher margin home and office sales. Raw material pricing remained
stable throughout the first three quarters of 1998. However, the Company's PET
bottle prices are dependant on the market costs of resin, and the stability of
these costs cannot be guaranteed. Significant price fluctuations in the future
could result in corresponding positive or negative effects on cost of goods sold
and gross profit.
Operating Expenses - For the first nine months of fiscal year 1998 compared to
the corresponding period in fiscal year 1997, total operating expenses were
$10,480,374 and $6,724,197, respectively, an increase of $3,756,177 or 56%. For
the third quarter, operating expenses were $4,366,040 in 1998 compared to
$2,828,967 in 1997, an increase of $1,537,073, or 54%. Selling, general and
administrative expenses increased by $2,978,755 or 71%, for the first nine
months of fiscal 1998 and $1,155,079 or 71% for the third quarter of fiscal
1998. The increase in these costs was primarily due to the addition of the
operating costs of the acquired companies and the conversion costs to integrate
these companies. The Company anticipates that it will continue to pursue
acquisitions in the future and that a key part of this growth strategy will be
maximizing the operating efficiencies of the acquired companies. However, no
assurance can be given that this effort will yield savings and profit.
Advertising expenses increased by $477,133, or 20%, and $261,983, or 23%, for
the nine and three month periods, respectively, in 1998 compared to the
corresponding periods of fiscal 1997. Advertising expenses are associated with
the retail-size category. The increase in advertising expenses for the
respective periods was due to higher promotional expenses associated with
increased market penetration and brand awareness. The sales growth rate exceeded
the rate of growth in promotional expenses. Given the competitive nature of the
industry, the Company anticipates that it will continue to spend significant
amounts in the future for advertising and promotion as it continues to develop
brand recognition and increase market penetration but can give no assurances
that increases in spending will result in higher sales. For the first nine
months and third quarter of fiscal year 1998, amortization increased $300,289
and $120,011, respectively, from the same periods a year ago as a result of
increased goodwill from new acquisitions.
13
<PAGE>
Profit From Operations - Profit from operations for the first nine months of
fiscal 1998 was $1,329,111 as compared to $170,417 for the corresponding period
last year, an improvement of $1,158,694. Profit from operations for the third
quarter of fiscal 1998 was $1,341,742 as compared to $623,267 for the
corresponding period last year, an increase of $718,475. The improvement is
attributable to the increase in sales combined with a decrease in raw material
costs and production and distribution volume efficiencies. The Company plans
to continue to create greater consumer awareness and to find alternate
distribution channels for its retail product and expand its less seasonal
home and office distribution business. No assurance can be given that this plan
will be successful.
Other Income/Expense - Net interest expense increased $343,587 and $149,678 for
the first nine months and third quarter of fiscal year 1998, respectively,
compared to the corresponding periods in fiscal year 1997. The increase in
interest expense was a result of increased borrowing to finance acquisitions and
fund operations through a bank line of credit.
Net Income/Loss- The Company's net income for the first nine months of fiscal
year 1998 was $771,630 compared to a net loss of $42,568 for the corresponding
period last year, an improvement of $814,198. Net income for the third quarter
of fiscal 1998 was $1,128,517 compared to $560,017 for the same quarter in 1997,
an improvement of $568,500. The increase in net income for the first nine months
and third quarter, respectively are indicative of the improvement in results of
operations more than offsetting increased interest charges to finance growth
through acquisitions.
Liquidity and Capital Resources
As a result of a profitable first nine months of fiscal year 1998, cash flow
from operations showed an improvement as compared to the corresponding period in
fiscal year 1997 when the Company reported a small net loss. The net cash inflow
from operations improved to $2,304,928 from $1,053,402 for those respective
periods, an improvement of $1,251,526. The Company's primary requirements for
cash continues to be for the marketing and promotional activities needed to
effect market penetration and expand sales, acquisition of operating assets
needed to accommodate the growth of the business, and debt repayment. These
requirements may result in future net cash outflows on a seasonal basis.
As of April 25, 1998, the Company had working capital of $1,405,052 compared to
$257,371 on October 25, 1997, the end of the last fiscal year. The increase in
working capital of $1,147,681 reflects, primarily, the refinancing of the
Company's operating line of credit with CoreStates bank and cash generated from
operations. Scheduled debt repayments from the financing of acquisitions and
resulting integration costs and capital expansion continues to be a significant
use of cash for the Company. As of August 25, 1998 the Company had borrowed
$1,227,000 from the working capital portion of its line of credit with
CoreStates Bank compared to a $238,021 balance under the prior line from
Chittenden Bank at the beginning of the fiscal year. The maximum amount
available to borrow under this facility is $2,000,000.
14
<PAGE>
In addition to the working capital line of credit, the Company refinanced its
existing acquisition debt with CoreStates Bank. The total acquisition debt
refinanced with CoreStates was $5.2 million. Subsequently, the Company borrowed
an additional $2.8 million for other acquisitions leaving $5.1 million, subject
to certain acquisition criteria, available under the agreement for future
acquisitions.
All of the CoreStates borrowings are under one facility and divided into
separate working capital and acquisition segments. The Company pays interest on
any outstanding principal at the London Interbank Offered Rate (LIBOR) plus
2.00%, which was approximately 7.7% per annum on August 25, 1998. This rate was
lowered subject to performance covenants in the loan agreement on June 15, 1998
from LIBOR plus 2.50%. The facility is secured by all the inventory, receivables
and intangible assets of the Company and expires April 2003.
At October 25, 1997, the Company had recorded a deferred tax asset of $544,000.
No adjustments were made to this amount through the third quarter of 1998.
Further recognition is dependent on future earnings.
The Company has reduced its cash usage over the last year and anticipates that
its working capital position will improve in future quarters and is adequate to
fund operations when supplemented by its operating line of credit. Future sales
growth and acquisitions may require significant capital additions. The Company
anticipates that it will be able to use its own resources and obtain financing
for this expansion although no assurance can be given that this financing will
be available. The Company is continuing to pursue an active program of
evaluating acquisition options. To complete any acquisitions, the Company
anticipates using its capital resources and the CoreStates facility described
above.
15
<PAGE>
PART II - Other Information
Item 1 - Legal Proceedings
Note 11 to the consolidated financial statements included in this Form
10-QSB is hereby incorporated by reference.
Item 2 - Changes in Securities
(a) None
(b) None
(c) None
Item 3 - Defaults upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
On June 12, 1998, the Company filed a report on form 8-K to report,
under Item 2, the acquisition of certain assets of the Perrier Group of America
in the Albany, New York area.
16
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: September 8, 1998
Randolph, Vermont
VERMONT PURE HOLDINGS, LTD.
By: /s/ Bruce S. MacDonald
Bruce S. MacDonald
Vice President, Chief Financial Officer
(Principal Accounting Officer and Principal Financial Officer)
17
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