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 31, 1998
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
(State or other jurisdiction of
incorporation or organization)
I.R.S. Employer Identification
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 $29,169,185.
Based on the last sale at the close of business on January 15, 1999, the
aggregate market value of the Issuer's common stock held by non-affiliates of
the Issuer was approximately $ 49,320,576.
The number of shares outstanding of the Issuer's Common Stock, $.001 par value,
was 10,253,758 on January 15, 1999.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
ITEM 1. BUSINESS.
The Company bottles, markets and distributes natural spring water under the
"Vermont Pure" and "Hidden Spring" 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 studies 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 12 gallons per capita in 1997, 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 3 billion gallons in 1997; from approximately
$1.3 billion in sales in 1984 to over $3.7 billion in 1997. The studies show
that bottled water is the fastest growing beverage category in the industry.
The bottled water market may be divided into two distinct categories:
non-sparkling (still or non-carbonated water) which accounts for approximately
87% of bottled water sales and sparkling (carbonated) which accounts for
approximately 13% 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."
The Vermont Pure brand 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 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" The Company currently
markets this brand to essentially the same types of markets as the Vermont Pure
brand. It also actively uses trademarks and brands that it has acquired through
acquisitions including Happy Spring Water (TM), Excelsior Spring Water (TM), and
Vermont Natural's(TM) and Coffee Time of Vermont. 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.
<PAGE>
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 has facilitated its expansion into northern Massachusetts. In August
1997, the Company purchased the stock of Excelsior Springs Water Company, Inc.,
a home and commercial bottled water and coffee distributor in the Albany,
Saratoga Springs and Plattsburgh, New York markets.
Continuing this strategy in the 1998 fiscal year, the Company acquired the
worldwide trademark and distribution rights for AKVA Icelandic bottled spring
water, absorbing the United States distribution of AKVA into its existing
operations in December 1997. 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. In May, Vermont Pure acquired the home and office delivery assets
of Perrier Group of America in the Albany, New York market. Perrier's sales in
this market at the time of the acquisition were about $2 million annually.
The Company also completed four small acquisitions of home and office customer
bases with combined sales of about $500,000 annually. In all cases, the
acquisitions of the home and office businesses were absorbed into the Company's
existing operations in the respective market area.
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 and Tinmouth, Vermont.
The rights to the Tinmouth source were acquired in January 1998 to add
additional capacity to the Company's water supply.
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.
<PAGE>
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.
In addition to drawing water from its own springs, the Company purchases
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 1998 and 1997,
purchases of spring water from a non-affiliated source in Vermont amounted to
approximately half of the Company's usage of spring water. The Company is
actively exploring the acquisition of additional spring sources that would
enable it to reduce its reliance on third-party springs.
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 substantially 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 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 and
Hidden Spring 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. In recent
years, sales indicate that the most preferred container sizes are "single serve"
sizes" - 750 ml and .5 liter. 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 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 brand competitive to other domestic
premium brands but lower than imported premium water products. The Hidden Spring
products are similarly packaged and sold to retail grocery and convenience
markets.
<PAGE>
The Company markets its products by highlighting the unique characteristics
of the Company's water, namely a natural spring source, purity, mineral
composition and desirable taste. The Company also uses the image of the State of
Vermont in its marketing and brand identification. The Company believes that
products originating from Vermont have the general reputation for being pure,
wholesome, trustworthy and natural. The State of Vermont also is nationally
recognized as an environmentally clean and health conscious state with strict
regulations protecting its natural resources.
The Company's premium products are bottled in sleek, clear plastic PET
recyclable bottles. The Company believes that this is the "ultimate" consumer
bottle package because it is clean, clear, light and recyclable and generally is
perceived by consumers to be upscale. The Company believes that the high quality
packaging of its products enhances their image as premium domestic bottled water
products.
The Company has focused its 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 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 roots in the Green Mountains. The Company is also utilizing
co-branding opportunities. During 1996 the Company entered into an arrangement
with Ben & Jerry's Homemade Corporation under which the Company supplies its
Vermont Pure water for use in Ben & Jerry's All Natural Sorbets. The Vermont
Pure name is highlighted on all Ben & Jerry's sorbet packaging.
<PAGE>
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 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 brand at established prices. In addition, under its
arrangement with CCE, 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 brand.
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 1998, 1997 and 1996, expressed as a
percentage of total sales, were 30%, 31%, and 35%, respectively. Accounts
receivable from CCE at the end of fiscal years 1998, 1997 and 1996, expressed
as a percentage of total accounts receivable, were 13%, 16%, and 14%,
respectively. In October 1998, the Company announced that CCE had modified its
distribution arrangement with the Company. The arrangement formerly provided for
an annual renewal for an additional one year term unless CCE furnished 90 days
prior notice of termination. The current arrangement with CCE is terminable by
either party upon 30 days notice.
<PAGE>
Coca Cola USA has announced that it will market its own brand of purified
water but has provided few other details to date. Although the Company considers
its relationship with CCE to be good, it 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. If and when Coca-Cola USA begins to market its own brand of
purified water the Company believes that CCE will distribute that brand. In such
an event the Company considers it likely that CCE will decide to limit or cancel
its distribution of Vermont Pure. Accordingly, if the Company's relationship
with CCE were terminated the Company's business would likely be materially
adversely affected while the Company puts into place an 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 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 consumer products on these lines to homes, offices
and retail outlets. 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 act as liaison between
distributors/customers 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, distributors, offices, and homes purchasing the Company's products.
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.
<PAGE>
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 bottle supplier for all of its needs. In
1998, this agreement was extended through 2001. The bottles supplied under the
contract 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 with respect to 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 in the
Company's core Northeastern United States market.
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.
<PAGE>
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 Vermont Pure, 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 (also see
"Contract Packaging"). 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 Suntory Group (Belmont Springs). 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 Natural Spring Water, Hidden Spring, Excelsior Spring Water, and
Vermont Naturals. The Company's labels which include these tradenames are
registered with the United States Patent and Trademark Office.
Government Regulation
The Federal Food and Drug Administration ("FDA") regulates bottled water as
a "food." Accordingly, the Company's bottled water must meet FDA requirements of
safety for human consumption, of processing and distribution under sanitary
conditions and of production in accordance with the FDA "good manufacturing
practices." To assure the safety of bottled water, the FDA has established
quality standards that address the substances that may be present in water which
may be harmful to human health as well as substances that affect the smell,
color and taste of water. These quality standards also require public
notification whenever the microbiological, physical, chemical or radiological
quality of bottled water falls below standard. The labels affixed to bottles and
other packaging of the water are subject to FDA restrictions on health and
nutritional claims for foods under the Fair Packaging and Labeling Act. In
addition all drinking water must meet Environmental Protection Agency standards
established under the Safe Drinking Water Act for mineral and chemical
concentration and drinking water quality and treatment which are enforced by the
FDA.
The Company is subject to the food labeling regulations required by the
Nutritional Labeling and Education Act of 1990. The regulations, which are
administered by the Secretary of Health and Human Services through the FDA,
require all companies which offer food for sale and have annual gross sales of
more than $500,000, including the Company, to place uniform labels disclosing
the amounts of specified nutrients on all food products intended for human
consumption and offered for sale. The act contains exemptions and modifications
of labeling requirements for certain types of food products, such as those
served in restaurants and other institutions, bulk foods, foods in small
packages and foods containing insignificant amounts of nutrients. The act also
establishes the circumstances in which companies may place nutrient content
claims or health claims on labels. The Company believes it is in substantial
compliance with these regulations.
<PAGE>
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.
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 and its Hidden Spring 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 15, 1999, the Company had 163 full-time employees and 5 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.
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY.
The Company owns office, bottling and warehouse properties and natural
springs in Randolph, Vermont. It 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, 1997 and 1998, it has entered
into or assumed various lease agreements for properties used as distribution
points and office space for it's home and office service. The following table
summarizes these arrangements:
Location Lease Expiration Sq. Ft. Annual Rent
______________ _________________ ________ ____________
Williston, VT July, 2003 8,000 $ 58,476
Wilmington, MA October, 2003 10,000 $ 80,485
Rochester, NY July, 2003 8,000 $ 24,000
Buffalo, NY October, 2000 6,760 $ 44,616
Syracuse, NY April, 2000 3,500 $ 25,200
Halfmoon, NY April, 2008 22,500 $ 117,885
Plattsburgh, NY At will 2,000 $ 5,400
Shelton, CT December, 1998 2,000 $ 11,700
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 counter claim 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. In September 1998, the
Company reached a settlement with Mr. Maguire and exchanged mutual releases. The
settlement had no adverse financial affect on the Company.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Common Stock is traded on the Nasdaq SmallCap Market under the symbols
"VPUR". The table below indicates the range of the high and low bid prices of
the Common Stock as reported by Nasdaq. The amounts represent inter-dealer
quotations without adjustment for retail markups, markdowns or commissions and
do not represent the prices of actual transactions.
Fiscal Year Ended October 26, 1996 High Low
___________________________________ _______ _______
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
Fiscal Year Ended October 31, 1998
___________________________________
First Quarter................................... 4 9/16 3 13/16
Second Quarter.................................. 5 7/16 3 5/8
Third Quarter................................... 4 7/8 3 7/8
Fourth Quarter.................................. 4 1/2 2 3/4
The last reported sale price of the Common Stock on the Nasdaq SmallCap
Market on January 15, 1999 was $4.0625.
The Company had 219 record owners of the Common Stock as of January 15,
1999. 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.
<PAGE>
Sales of Unregistered Securities
The Company had no sales of unregistered securities during its fiscal
fourth quarter.
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 31, 1998 Compared to Year Ended October 25, 1997
Sales for 1998 were $29,169,000 compared to $17,685,000 for 1997, an
increase of $11,484,000 or 65%. 1998 sales attributable to acquisitions made
during the year were $5,305,000, which represented 30 percentage points of the
overall 65 point increase. Excluding revenues attributable to acquisitions,
sales for 1998 net of acquisitions were $23,864,000, an increase of $6,179,000,
or 35%, over 1997. Average selling price per case was unchanged. The Company's
35 percentage point (1998 over 1997) and 29 percentage point (1997 over 1996)
increases in sales, net of acquisitions, were accounted for by increases in the
following distribution channels: 1998 - 17 percentage points for retail size
Vermont Pure, 4 points for Hidden Spring, 4 points for Private Label, 8 points
for home/office and 2 points from other sources; 1997 - 18 percentage points for
retail size Vermont Pure, 5 points for Hidden Spring, 3 points for Private
Label, and 3 points for home/office. In addition, the Company operates on a
"52-53 week" reporting year. Sales and other financial results were favorably
affected, though not materially, by the 1998 fiscal year having 53 weeks
compared to 52 weeks for 1997 and 1996.
<PAGE>
Sales of the Company's retail-size products were $17,455,000 in 1998, an
increase of 41% over 1997, when sales of these products were $12,376,000. The
Vermont Pure brand continued to grow in its core markets, particularly the
metropolitan New York City area. Total sales for this brand increased 33% over
1997. Sales for the Hidden Spring brand, up 53% for the year, continued to grow
through market expansion in secondary distribution channels. The Company
increased the number of private label customers that it packs for, resulting in
a 79% increase in sales for these products.
Sales for the home and office delivery category of the business more than
doubled in 1998 to $11,714,000 from $5,310,000 in 1997. The Company continued to
expand its home and office distribution through acquisitions. New sales
attributable to acquisitions in 1998 were $4,950,000. Net of acquisitions,
home/office sales increased 27% in 1998, more than double the 12% rate of
internal growth in 1997. The increase in internal growth in existing market
areas is a result of strong market growth for bottled water, in general, and
greater brand awareness.
Cost of goods sold for 1998 were $11,550,000 or 40% of sales, compared to
$7,644,000, or 43% of sales, for 1997. The decrease in cost of goods sold as a
percentage of sales compared to the prior year is due to lower bottling costs as
a result of higher production volumes and more efficient production, and an
increase in home and office distribution. In addition, new production equipment
was installed to improve the capacity and efficiency of the bottling line. As a
result of acquisitions, the Company's mix of sales skewed more toward product
for home and office delivery- to 40% in 1998 from 30% in 1997. The Home and
Office category is characterized by lower bottling costs because of larger sizes
and re-fillable bottles. Consequently, the gross profit was higher in 1998,
$17,619,000 or 60% of sales, than in 1997 when it was $10,042,000, or 57% of
sales.
Total operating expenses increased to $15,555,000 in 1998 from $9,204,000
in 1997, an increase of $6,351,000, or 69%. Of these amounts, selling, general
and administrative expenses were $10,235,000 and $5,898,000 for 1998 and 1997,
respectively, an increase of $4,337,000, or 74%. The increase in selling,
general and administrative expenses is correlated to the resources needed to
grow and administratively service the business. Advertising expenses increased
to $4,702,000 in 1998 from $3,077,000 in 1997, an increase of $1,625,000, or
53%. 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 and/or reduce selling
prices in order to stay competitive in an increasingly competitive market.
Amortization expense increased to $617,000 from $229,000 in 1998 and 1997,
respectively, an increase of $388,000, as a result of the 1998 acquisitions.
Profit from operations in 1998 was $2,065,000 compared to $838,000 for
1997, an increase of $1,227,000. Interest expense increased to $755,000 in 1998
from $368,000 in 1997, an increase of $387,000. The increase was a result of
greater amounts borrowed during the period primarily related to the
acquisitions. The improvement in profit before income taxes to $1,412,000 in
1998 from $523,000 in 1997 was the result of increased sales and decreased
manufacturing and operating costs, on a per unit basis.
Net income of $2,859,000 in 1998 compared to $1,067,000 in 1997, an
improvement of $1,792,000. The Company recorded a tax benefit of $1,447,000 in
1998 compared to $544,000 in 1997. This benefit reflects a partial recognition
of the Company's total available deferred tax assets of approximately $5.2
million at October 31, 1998, based on an evaluation of likely utilization. If
the Company continues to be profitable, the remaining $3.2 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 10,248,389 during 1998 and 9,771,347
during 1997, the basic net income per share was $.28 and $.11 per share,
respectively. Based on the weighted number of shares of diluted common Stock
outstanding of 10,927,025 and 9,805,500 for the same respective periods, the
diluted net income per share was $.26 per share in 1998 and $.11 per share in
1997.
<PAGE>
Year Ended October 25, 1997 Compared to Year Ended October 26, 1996
Sales for 1997 were $17,685,000 compared to $11,879,000 for 1996, an
increase of $5,806,000 or 49%. 1997 sales attributable to acquisitions made
during the year were $2,324,000, which represented 20 percentage points of the
overall 49 point increase. Excluding those revenues, sales for 1997 net of
acquisitions were $15,361,000, an increase of $3,482,000, 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 (two-thirds of the total increase), 5 points for
Hidden Spring, 3 points for Private Label, and 3 points for home/office; 1996 -
13 points for retail size Vermont Pure (roughly half of the total increase), 8
points for Hidden Spring, 2 points for Private Label and 4 points for
home/office.
Sales of the Company's consumer products were $12,376,000 in 1997, an
increase of 34% over 1996, when sales of these products were $9,219,000. The
increase reflects the continued growth of the Vermont Pure brand in its core
markets and its Hidden Spring 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 $5,310,000 for 1997 compared to $2,656,000 for 1996, an
increase of $2,654,000, or 100%. Net of acquisitions, home/office sales
increased 12% in 1997.
Cost of goods sold for 1997 were $7,644,000 or 43% of sales, compared to
$6,163,000, 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 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
$10,042,000 compared to $5,716,000, respectively.
<PAGE>
Total operating expenses increased to $9,204,000 in 1997 from $6,726,000 in
1996, an increase of $2,478,000, or 37%. Of these amounts, selling, general and
administrative expenses were $5,898,000 and $4,234,000 for 1997 and 1996,
respectively, an increase of $1,664,000, 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 $3,077,000 in 1997 from $2,348,000 in 1996, an
increase of $729,000, 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 $229,000 from $143,000 in 1997 and 1996,
respectively, an increase of $86,000, or 60%, as a result of the 1997
acquisitions.
Income from operations in 1997 was $838,000 compared to a loss from
operations of $1,010,000 for 1996. Interest expenses increased to $368,000 in
1997 from $197,000 in 1996, an increase of $171,000 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 $523,000 from a
loss before income taxes of $1,267,000 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 $1,067,000 in 1997 compared to a net loss of $1,267,000 in
1996, an improvement of $2,334,000. 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.
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 $1,048,000 as part of the financing of
certain acquisitions in 1997. The Company continued to use equity as a source
for funding acquisitions, issuing 155,207 shares at an aggregate market value of
$612,000 in 1998.
At October 31, 1998, the Company had working capital of $735,000. This
represents an increase of $478,000 from the $257,000 of working capital on
October 25, 1997. The increase in working capital is attributable to the
Company's profitable operations during the year although the acquisition of
capital equipment to support the strategic growth of the Company and purchase of
intangible assets associated with the purchase of home and office businesses
continued to be a major use of working capital.
<PAGE>
In April, 1998 the Company entered into a five (5) year revolving credit
line with CoreStates Bank, N.A. (now First Union Corporation) in order to borrow
up to $15 million under certain terms and conditions. The purpose of this loan
is for permitted (under the agreement) acquisitions and capital expenditures,
working capital and consolidation of debt. This agreement replaces a similar one
that the Company had with Chittenden Bank for the same purpose. Under the
agreement and supplemental instruments the Company is required to pay interest
monthly at a current rate of approximately 7.7%. The rate is fixed as to market
conditions but can increase or decrease based on performance parameters outlined
in the agreement. The line of credit is contingent upon the Company continuing
to meet certain loan covenants. The covenants pertain to selected financial
ratios as well as affirmative and negative covenants that are standard for
credit facilities of this type. On October 31, 1998 the Company was entitled to
borrow up to $2 million for operating working capital and the balance for
acquisitions under the agreement, this was subsequently increased on January 22,
1999 to $3 million for operating working capital with the balance to be used for
acquisitions. At October 31, 1998 the Company had borrowed $1.1 million on the
operating portion and $7.7 million on the acquisition portion of the line. The
Company believes that its working capital and access to 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 1999
fiscal year. However, there can be no assurance that this will be the case.
Cash flow from operations improved to a net inflow of $2,806,000 for the
fiscal year ended October 31, 1998 as compared to $1,431,000 in the fiscal year
ended October 25, 1997. This improvement of $1,375,000 is primarily due to the
Company's continued profitability. Cash flows from investing activities had a
net outflow of approximately $7,375,000, with cash expended for acquisitions of
$4,459,000 and $2,916,000 expended for property, plant and equipment being the
primary uses. Financing activities provided a net cash inflow of $4,636,000,
consisting of new borrowings of approximately $12,088,000 offset by repayments
aggregating $7,452,000. Included in the borrowing and repayments was $6,693,000
for refinancing of the working capital and acquisition line of credit.
At October 31, 1998, the Company has recorded a deferred tax asset of
$1,991,000. Based on current levels of profitability, the realization of such
deferred tax asset would take approximately two more years.
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 31, 1998, these notes had an unpaid balance of $857,000. The notes are
at interest rates ranging from 7.75% to 8.5% and are being repaid through
January 2003.
The Company anticipates that it will spend approximately $2 million for
capital improvements in fiscal 1999 to maintain and continue to grow its
business. The Company believes that it will have adequate resources available
from internal cashflow and existing debt instruments to fund its capital plan.
The Company anticipates that it will need production and warehousing capacity in
excess of its current facilities to accommodate growth. As a result, the Company
is contemplating increasing its production capacity in its facility in Randolph,
Vermont, at an estimated cost for the project of approximately $3 million. The
Company currently owns the land and has most of the necessary permits in place
to proceed with this project. Any further expansion of facilities, including
warehouse space, is expected to be financed using a combination of debt and
working capital but other sources may be considered.
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.
<PAGE>
Year 2000 Readiness Disclosure
Computers, software and other equipment utilizing microprocessors that use
only two digits to identify a year in a date field may be unable to accurately
process certain date-based information at or after the Year 2000. This is
commonly referred to as the "Year 2000" or "Y2K" problem.
State of readiness The Company is in the process of assessing its state of
readiness for dealing with the Year 2000 problem. It is investigating its
information technology ("IT") systems and non-information technology ("NIT")
systems for readiness, and expects that some remediation will be necessary. The
Company's evaluation, as well as any related contingency plan, is expected to be
complete by the end of the fiscal second quarter. With respect to IT systems,
the Company expects that it will be necessary to complete certain internal
hardware and software upgrades. With respect to NIT systems, among other things,
the Company is in the process of examining its production equipment for Year
2000 readiness. In addition, the Company is beginning its process of requesting
information on the Year 2000 readiness and contingency plans of its customers,
suppliers, bankers and other third parties to assess the potential risks to the
Company. The Company plans to seek written certifications from such third
parties as to their Year 2000 compliance. However, there can be no assurance
that such certifications will be obtained. Moreover, even if such certifications
are obtained, the Company will not be able to independently verify that such
third parties are, in fact, Year 2000 compliant.
Costs. The Company does not currently have an estimate of its projected
total expenditures related to Year 2000 compliance efforts. It expects to have
an estimate by the end of the fiscal second quarter. To date, the Company has
not incurred any material expenditures in connection with identifying or
evaluating Year 2000 compliance issues. A number of computer hardware and
software upgrades would have been necessary even in the absence the Year 2000
situation, in order to achieve maximum cost savings and other efficiencies from
recent acquisitions.
Risks. As the Company's assessment of its Year 2000 exposure is not yet
complete, the Company cannot fully and accurately quantify the impact of its
reasonably likely worst case Year 2000 scenario at the present time. However,
the Company does not expect the Year 2000 problem to create a material
disruption in the Company's business or have a material financial impact on its
operations. In general, the Company does not rely on electronic technology to
produce or distribute its product. In addition, the Company believes that is has
sufficient time, resources and expertise to accomplish the hardware and software
upgrades that will be necessary.
To the extent that unanticipated Year 2000 problems arise at the Company or
any of its significant customers, suppliers, bankers or other third parties, the
Company's business, financial position and results of operations could be
materially adversely affected. The Company believes that the greatest potential
risk is the failure of third party customers and suppliers to achieve an
appropriate level of Year 2000 readiness. Although the company believes such
third parties have the resources and expertise to avoid significant Year 2000
problems, it would be difficult for the Company to insulate itself from any
disruptions in the operations of key third parties which may result from the
Year 2000 issue. Among other things, the Company's principal distributor could
be unable to deliver products in a timely manner, and the Company may experience
a disruption in its ability to get products to market. In addition, the Company
could suffer from shortages of bottle or water supplies if any of its third
party suppliers experience Year 2000 problems.
Contingency plans. The Company is in the process of developing Year 2000
contingency plans to address any critical risks that may be identified. The
Company also intends to communicate with its external customers, suppliers,
bankers and other third parties to determine their Year 2000 contingency plans
and to coordinate, to the extent possible, with such plans. By the end of the
fiscal second quarter, the Company expects to more completely define these
issues, quantify their potential impact and complete the development of
contingency plans.
The foregoing Year 2000 capital disclosure constitutes a "Year 2000
readiness disclosure" under the Year 2000 Information and Readiness Disclosure
Act.
<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;
SECTION 16A COMPLIANCE
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning each director
and executive officer of the Company:
Name Age Position
Timothy G. Fallon 44 Chief Executive Officer, President and
Chairman of the Board
Phillip Davidowitz 66 Director
Robert C. Getchell 50 Director and Secretary
Frank G. McDougall 48 Director
David R. Preston 58 Director
Norman E. Rickard 62 Director
Beat Schlagenhauf 47 Director
Richard Worth 49 Director
Bruce S. MacDonald 40 Vice President of Finance, Chief
Financial Officer and Treasurer
The business experience during at least the last five years of each of the
directors and the executive officers of the Company is as follows:
Timothy G. Fallon has been the Chief Executive Officer and President and a
director of the Company since November 1994. In April 1998, he was appointed
Chairman of the Board of Directors. From January 1992 to November 1994, Mr.
Fallon was the Senior Vice President, Sales and Marketing for Cadbury Beverages,
Inc. From October 1989 to December 1991, Mr. Fallon was Vice President of Sales
for Canada Dry USA, a division of Cadbury Beverages, Inc. From July 1984 to
September 1989, Mr. Fallon served as Vice President - Sales and Marketing for
Pepsi Cola Bottling Company New York City, Inc.
Phillip Davidowitz has been a Director of the Company since June 1998. Mr.
Davidowitz has been President of TSE Clearing Services, Inc. since 1980 and a
member of The New York Stock Exchange and Vice Chairman of Transatlantic
Securities Co. since 1988.
Robert C. Getchell has been a director of the Company since December 1994. In
December 1995, Mr. Getchell was appointed the Secretary of the Company. Mr.
Getchell has been a principal of Getchell Professional Association, a firm of
certified public accountants in Quechee, Vermont, for more than the past five
years. In July 1992, Mr. Getchell was appointed to the Vermont Economic
Development Authority and served as its chairman from 1996 through 1998.
Frank G. McDougall, Jr. was Chairman of the Board of the Company from June,
1994 to March, 1998. In April 1998 he stepped down from the post but remains a
director. From January 1995 to December 1997, Mr. McDougall was a part-time
employee of the Company. From December 1993 until January 1995 and since January
1998, Mr. McDougall has acted as a consultant to the Company in the areas of
management and government relations and regulation through Frank McDougall &
Associates, a company he founded in October 1993. Since March 1996, Mr.
McDougall has been the Director of Corporate and Government Relations for the
Dartmouth Hitchcock Medical Center and the Lahey Hitchcock Clinic. From July
1990 to October 1993, Mr. McDougall was the Secretary of the Agency of
Development and Community Affairs of the State of Vermont. In March 1997, Mr.
McDougall was appointed to the Vermont Board of Education.
<PAGE>
David R. Preston has been a director of the Company since October 1995. Mr.
Preston has been a consultant and adjunct professor of Suffolk University in
Boston, Massachusetts since September 1995. From 1990 to July 1995, Mr. Preston
was a division president at Kayser-Roth Corporation, a sock and hosiery
manufacturer, located in Greensboro, North Carolina. Since September 1996, he
has been a Senior Associate with Renaissance Management Group LLC, a management
consulting firm. Mr. Preston is a retired division president and corporate
officer of the Gillette Company.
Norman E. Rickard has been a director of the Company since May 1995. Mr.
Rickard has been the President of Xerox Document Services Group of Xerox
Corporation and is currently a Corporate Senior Vice President. Mr. Rickard has
been employed by Xerox Corporation since 1967 in various capacities, including
President of Xerox Business Services, Director of Business Effectiveness,
Director of the Worldwide Strategic Manufacturing Project, Director of Staff
Operations and Vice President of Quality. He is also a director of American
Direct of Windsor, Connecticut and Fastcast of Louisville, Kentucky.
Beat Schlagenhauf has been a director of the Company since July 1993. Mr.
Schlagenhauf has been a principal of Schlagenhauf & Partners, a portfolio
management company in Zurich, Switzerland, for more than the past twelve years.
Richard Worth has been a director of the Company since June 1994. Since 1997,
Mr. Worth has been the Chairman and Chief Executive Officer of Cool Fruits, Inc.
From 1994 to 1997, Mr. Worth was the Chairman and Chief Executive Officer of The
Delicious/Frookie Co., a manufacturer and marketer of cookies and snack
products. From 1986 to 1994, Mr. Worth was the Chairman and Chief Executive
Officer of R.W. Frookies, Inc., a manufacturer and marketer of cookies and snack
products. From 1978 to 1985, Mr. Worth owned and operated Sorrell Ridge, Inc., a
manufacturer and marketer of jams.
Bruce S. MacDonald has been Vice President of Finance, Chief Financial
Officer and Treasurer of the Company since May 1993. From 1987 to May 1993, Mr.
MacDonald was Controller of Cabot Cooperative Creamery Incorporated.
SECTION 16(a) COMPLIANCE
Section 16(a) of the Securities and Exchange Act of 1934, as amended, requires
the Company's officers, directors and persons who beneficially own more than ten
percent of a registered class of the Company's equity securities ("ten percent
stockholders") to file reports of ownership and changes in ownership with the
Securities and Exchange Commission ("SEC"). Officers, directors and ten percent
stockholders are charged by the SEC regulation to furnish the Company with
copies of all Section 16(a) forms they file.
ITEM 10. EXECUTIVE COMPENSATION.
The following tables show (1) the cash compensation paid by the Company, as
well as certain other compensation paid or accrued, to the Chief Executive
Officer and Chief Financial Officer of the Company for the fiscal years ended
October 26, 1996, October 25, 1997,and October 31, 1998 (2) information
reporting options granted to the Chief Executive Officer and the Chief Financial
Officer during the fiscal year ended October 31,1998, and (3) information
regarding the value of all options granted to the Chief Executive Officer and
Chief Financial Officer at the end of the fiscal year ended October 31, 1998.
The Company has no other executive officers.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
___________________ _______________________
Name and Principal Position Fiscal Year Salary($) Bonus($) Options/ All Other
___________________________ ___________ ___________________ (# Shares) Compensation ($)
_______________________
Timothy G. Fallon 1998 $186,400 $202,500 0 $ 4,240
Chief Executive Officer and 1997 $184,000 $150,000 690,000(1) $ 5,278
President 1996 $172,000 $ 50,000 30,000 $14,400
Bruce S. MacDonald 1998 $ 85,000 $ 55,000 30,000 $ 3,937
Vice President of Finance, Chief 1997 $ 75,000 $ 30,000 101,000(2) $ 4,204
Financial Officer and Treasurer 1996 $ 72,000 -0- 10,000 $ 1,976
</TABLE>
(1) The amount under "Options" includes 440,000 options with an exercise price
per share of $2.50 issued in replacement for 400,000 options with an exercise
price of $2.25 per share, a net increase of 40,000 options, and 250,000
options granted with an exercise price per share of $2.50. The amount under
"All Other Compensation" represents a car allowance and life and disability
insurance expenses.
(2) The amount under "Options" includes 51,000 options with an exercise price
per share issued of $2.50 issued in replacement for 45,000 options with a
weighted average exercise price of $2.58 per share, a net increase of 6,000
options, and 50,000 options granted with an exercise price per share of $2.50.
The amount under "All Other Compensation" represents car and disability
insurance allowances.
The Company cannot determine, without unreasonable effort or
expense, the specific amount of certain personal benefits afforded to its
employees, or the extent to which benefits are personal rather than business.
The Company has concluded that the aggregate amounts of such personal benefits
which cannot be specifically or precisely ascertained do not in any event
exceed, as to the individuals named in the preceding table, the lesser of
$50,000 or 10% of the compensation reported in the preceding table for such
individuals, and that such information set forth in the preceding table is not
rendered materially misleading by virtue of the omission of the value of
such personal benefits.
<PAGE>
<TABLE>
<CAPTION>
OPTIONS/SHARES GRANTS IN LAST FISCAL YEAR
_________________________________________
Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation for Option
Individual Grants Term (1)
______________________ _______________________________
% of Total
Options/Shares Market
Granted to Exercise Price on
Options/Shares employees in Price Date of Expiration
Name Granted (#) Fiscal Year (4) ($/Share) Grant ($) Date 0% ($) 5% ($) 10% ($)
=====================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Timothy G. Fallon - - - - - - -
Chief Executive
Officer and President
Bruce S. MacDonald 30,000(2) 21% $3.38 $3.38 9/10/98 0 $ 47,167 $ 119,531
Vice President of
Finance, Chief
Financial Officer and
Treasurer
</TABLE>
(1) Based on the difference between the aggregate market price on the date of
grant and the aggregate exercise prices of the options granted. The amounts
shown as potential realizable value illustrate what might be realized upon
exercise immediately prior to expiration using the 5% and 10% appreciation
rates established in regulations of the SEC, compounded annually. The
potential realizable value is not intended to predict future appreciation of
the price of the Company's Common Stock. The values shown do not consider
non-transferability, applicable vesting periods or earlier termination of the
options upon termination of employment.
(2) Includes 30,000 newly granted options vesting November 1999 through November
2001 and expiring in September, 2008 with an exercise price of $3.38.
<PAGE>
<TABLE>
<CAPTION>
AGGREGATE YEAR-END OPTION VALUES
____________________________________
Number of unexercised options Value of unexercised in-the-money
at fiscal year-end (#) Options at fiscal year-end ($)(1)
_______________________________ _________________________________
Name Exercisable Unexercisable Exercisable Unexercisable
______________________________________________________________________________________________
<S> <C> <C> <C> <C>
Timothy G. Fallon 510,000 210,000 $318,750 $131,250
Chief Executive Officer and
President
Bruce S. MacDonald, Vice 64,500 76,500 $ 44,113 $ 29,063
President of Finance, Chief
Financial Officer and
Treasurer
</TABLE>
(1) As of October 31, 1998, the market value of a share of Common Stock was
$3.125.
<PAGE>
Employment Contracts and Change-in-Control Arrangements
In October 1997, the Company executed an employment agreement with Timothy G.
Fallon which has an effective date of November 1, 1997 and expires November 1,
2001. Pursuant to the agreement, which replaced a prior agreement dated November
4, 1994, Mr. Fallon acts as the Chief Executive Officer and President of the
Company. His annual base salary is $186,400, which is reviewed annually by the
Board. The Company provides Mr. Fallon with an automobile and disability
insurance allowance. In addition, Mr. Fallon is entitled to a relocation
allowance of up to $15,000 for actual moving expenses in the event he relocates
his personal residence before December 31, 1998 to a location reasonably
acceptable to the Company. If his employment is terminated without cause
(including a deemed termination by reason of a "Change of Control", as defined),
Mr. Fallon is entitled to receive life and health insurance benefits together
with severance payments equal to 1.5 times the annual base salary plus $175,000
payable over 18 months if such termination occurs in 1998, and 1.0 times his
annual base salary plus $150,000 payable over 12 months if such termination
occurs in fiscal years 1999 through 2001. In each case, Mr. Fallon will be
subject to a period of non-competition equal to the greater of 12 months or the
period during which severance is paid. No benefits are due if Mr. Fallon's
employment is terminated for "cause", as defined.
In addition to bonus payments disclosed above that were paid to him with
respect to fiscal 1998, Mr. Fallon is entitled to incentive bonuses based upon
the achievement of certain performance goals of the Company for fiscal years
1999 to 2001. For fiscal years 1999, 2000 and 2001, his incentive compensation
will include payments of $75,000 for meeting Board approved target sales and
$75,000 for meeting Board approved target EBITDA, again with greater or lesser
payments (non-cumulative) for achieving targets within specified ranges above or
below budget.
On and as of November 1, 1997, the Company entered into an employment
agreement with Bruce S. MacDonald which expires November 1, 2001. Pursuant to
the agreement, Mr. MacDonald acts as the Vice President of Finance, Chief
Financial Officer and Treasurer of the Company. His annual base salary is
$75,000, to be reviewed annually by the Board. The Company provides Mr.
MacDonald with automobile and disability insurance allowances. If his employment
is terminated without cause (including a deemed termination by reason of a
"Change of Control", as defined), Mr. MacDonald is entitled to receive life and
health insurance benefits together with severance payments equal to 1.5 times
the annual base salary plus $50,000 payable over 18 months if such termination
occurs in 1998, and 1.0 times his annual base salary plus $50,000 payable over
12 months if such termination occurs in fiscal years 1999 through 2001. In each
case, Mr. MacDonald will be subject to a period of non-competition equal to the
greater of 12 months or the period during which severance is paid. No benefits
are due if Mr. MacDonald's employment is terminated for "Cause", as defined.
<PAGE>
In addition to the bonus payments disclosed above that were paid to him with
respect to fiscal 1998, Mr. MacDonald is entitled to incentive bonuses based
upon the achievement of certain performance goals of the Company for fiscal
years 1999 to 2001. Mr. MacDonald's incentive compensation for each of these
years is $50,000 for meeting Board approved target EBITDA, with greater or
lesser payments (non-cumulative) for meeting EBITDA targets within specified
ranges.
Effective December 31, 1997, the Company entered into a consulting agreement
with Frank G. McDougall, Jr., a director of the Company, through Frank McDougall
& Associates for a term of one year. Pursuant to that agreement, Mr. McDougall
provides consulting services to the Company in the area of government relations
and regulations. Mr. McDougall was paid an initial fee of $10,000 on December
31, 1997 and receives $1,000 per month from the Company in exchange for
providing consulting services. From January 1995 to December 1997, Mr. McDougall
was a part-time employee of the Company.
Compensation of Directors
Directors who are employees of the Company do not receive any fees for
attending Board meetings. Directors who are not employees of the Company receive
$5,000 each year, $2,500 payable on July 1 and $2,500 payable on January 1,
provided the directors participate in 80% or more of the meetings of the Board
for the six months prior to the July 1 and January 1 payment dates, and $500 for
each meeting of the Board attended. In addition, the Board voted in September
1998 to automatically issue 5,000 common stock options to each outside director
at the beginning of each fiscal year. Such stock option issuance to directors
are limited to 105,000 options in total.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The table and accompanying footnotes on the following pages set forth certain
information as of January 15, 1999 with respect to the stock ownership of (i)
those persons or groups who beneficially own more than 5% of the Company's
Common Stock, (ii) each director of the Company (iii) the Company's Chief
Executive Officer and Chief Financial Officer, and (iv) all directors and
executive officers of the Company as a group (based upon information furnished
by such persons). The Company has no other executive officers. Shares of Common
Stock issuable upon exercise of options and warrants which are currently
exercisable or exercisable within 60 days of the date of this table have been
included in the following table.
<PAGE>
Amount and Nature Percentage of
of Beneficial Outstanding Shares
Owner's Name and Address Ownership Owned
__________________________ __________________ __________________
Timothy G. Fallon 512,000 (2) 4.6%
Route 66, Catamount
Industrial Park
Randolph, VT 05060
Robert C. Getchell
74 Northeastern Blvd., Suite 11 51,000 (3) .5%
Nashua, NH 03062
Frank G. McDougall, Jr. 97,000 (1) .9%
Dartmouth Hitchcock Medical Center
One Medical Center Drive
Lebanon, NH 03756-0001
David R. Preston 58,000 (4) .5%
67 Marlborough Street
Boston, MA 02116
Norman E. Rickard 54,000 (3) .5%
Xerox Corporation
P.O. Box 1600
Stamford, CT 06904
Beat Schlagenhauf 52,000 (1) .5%
Schlagenhauf & Partners, A.G.
Hofstrasse 62 B
8044 Zurich, Switzerland
Richard Worth 59,500 (3) .5%
Cool Fruits, Inc.
1497 Rail Head Boulevard, Suite 2
Naples, FL 34110-8444
M. Dolores Paoli 947,600 (5) 8.4%
41 Bermuda Road
Westport, CT 06880
Bruce S. MacDonald 71,000 (1) .6%
Route 66, Catamount Industrial Park
Randolph, VT 05060
Phillip Davidowitz 10,000 .08%
12 East 49th St., 22nd. Floor
New York, NY 10017
All Officers and Directors 970,500(6) 8.6%
as a group (9 individuals)
(1) Represents shares of Common Stock issuable pursuant to outstanding stock
options exercisable within 60 days of the date of this table.
(2) Includes 510,000 shares of Common Stock issuable pursuant to outstanding
stock options exercisable within 60 days of the date of this table.
(3) Includes 52,000 shares of Common Stock issuable pursuant to outstanding
stock options exercisable within 60 days of the date of this table.
(4) Includes 56,000 shares of Common Stock issuable pursuant to outstanding
stock options exercisable within 60 days of the date of this table.
(5) Includes 687,000 shares own by Ms. Paoli directly, 135,100 shares owned by
Condor Ventures, Inc., a business of which Ms. Paoli's husband is
President, and 125,000 shares issuable pursuant to an outstanding stock
option held by Condor Ventures. See "Certain Relationships and Related
Transactions".
(6) Includes 950,000 shares of Common Stock issuable pursuant to outstanding
stock options exercisable within 60 days of the date of this table.
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Condor Ventures, Inc. ("Condor"), which is an affiliate of Adnan A. Durrani,
a former director of the Company, and his wife, M. Dolores Paoli, a former
officer and currently a greater than 5% stockholder of the Company, was a
consultant to the Company from January 1990 to December 1997, when the
arrangement terminated. In October 1993, the Company entered into a consulting
agreement under which Condor agreed to render consulting services, including
services in connection with acquisitions by the Company, on a non-exclusive
basis for a period of five years. During the term of the agreement, Condor was
paid $100,000 annually plus an initial fee of $50,000. Condor also received an
option to purchase up to 125,000 shares of Common Stock at an exercise price of
$5.00 per share, which exercise price was reduced to $2.25 per share on May 12,
1995 by action of the Company's Board. This option is fully vested and is
exercisable until October 2003. The Company has also granted Condor certain
"piggyback" and demand registration rights for the Common Stock issuable upon
exercise of the options. On December 12, 1997, the Company and Condor entered
into a Termination Agreement pursuant to which the Company paid Condor $41,667
as a termination payment.
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:
<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.
(Incorporated by reference from Exhibit 3.3 of form 10-KSB for
fiscal year ended October 25,1997 - File No. 1-11254.)
10.1 Employment Agreement between the Registrant and Timothy G. Fallon
dated as of November 1, 1996. (Incorporated by reference from
Exhibit 10.1 of form 10-KSB for fiscal year ended October 25,
1997 - File No. 1-11254.)
10.2 Employment Agreement between the Registrant and Bruce S.
MacDonald dated as of November 1, 1997. (Incorporated by
reference from Exhibit 10.2 of form 10-KSB for fiscal year ended
October 25,1997 - File No. 1-11254.)
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.)
<PAGE>
10.4 Termination Agreement dated as of December 12, 1997 between the
Registrant and Condor Ventures Ltd. (Incorporated by reference
from Exhibit 10.4 of form 10-KSB for fiscal year ended October
25,1997 - File No. 1-11254.)
10.5 1993 Performance Equity Plan. (Incorporated by reference from
Exhibit 10.9 of Registration Statement 33-72940.)
10.6 Agreement dated July 30, 1993 between Transportation Display
Industries and the Registrant. (Incorporated by reference from
Exhibit 10.8 of Registration Statement 33-72940.)
10.7 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.)
10.8 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.)
10.9 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.)
10.10 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.)
10.11 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.)
10.12 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.)
10.13 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.)
10.14 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.)
10.15 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.)
10.16 1998 Incentive and Non-Statutory Stock Option Plan (Incorporated
by reference to Appendix A of the Registrant 1998 Proxy
Statement.)
10.17 Asset Purchase Agreement between Vermont Pure Holding, Ltd. and
Vermont Coffee Time, Inc. relating to the purchase certain assets
and liabilities dated December 19, 1997. (Incorporated by
reference from Exhibit 10.1 of form 10-QSB for Quarter ended
January 24, 1998)
10.18 Promissory Note Between Vermont Pure Springs, Inc. and Vermont
Pure Holdings and Coffee Time, Inc. dated January 5, 1998.
(Incorporated by reference from Exhibit 10.2 of form 10-QSB for
Quarter ended January 24, 1998)
10.19 Security Agreement between Vermont Pure Springs, Inc. and Vermont
Pure Holdings and Coffee Time, Inc. dated January 5, 1998.
(Incorporated by reference from Exhibit 10.3 of form 10-QSB for
Quarter ended January 24, 1998)
10.20 Consulting Agreement between Amy Berger and Vermont Pure
Holdings, Ltd. dated January 5, 1998. (Incorporated by reference
from Exhibit 10.4 of form 10-QSB for Quarter ended January 24,
1998)
10.21 Distribution Rights Agreement between Vermont Pure Springs, Inc.
and Akva Hf. dated December 9, 1997. (Incorporated by reference
from Exhibit 10.5 of form 10-QSB for Quarter ended January 24,
1998)
10.22 Packing and Distribution Agreement between Vermont Pure Springs,
Inc. and Akva Hf. dated December 9, 1997 (Incorporated by
reference from Exhibit 10.6 of form 10-QSB for Quarter ended
January 24, 1998)
10.23 Asset Purchase Agreement between Vermont Pure Holdings, Ltd. and
Sagamon Springs, Inc. relating to the purchase certain assets and
liabilities dated January 31, 1998 (Incorporated by reference
from Exhibit 10.1 of form 10-QSB for Quarter ended April 25,
1998)
10.24 Agreement and Collateral Assignment of Lease between Vermont Pure
Holdings, Ltd. and Sagamon Springs, Inc. dated January 30, 1998.
(Incorporated by reference from Exhibit 10.2 of form 10-QSB for
Quarter ended April 25, 1998)
10.25 Security Agreement between Vermont Pure Holdings, Ltd. and
Sagamon Springs, Inc. dated January 6, 1998. (Incorporated by
reference from Exhibit 10.3 of form 10-QSB for Quarter ended
April 25, 1998)
10.26 Term Note for $65,000 between Vermont Pure Holdings, Ltd. and
Sagamon Springs, Inc. dated January 6, 1998 (Incorporated by
reference from Exhibit 10.4 of form 10-QSB for Quarter ended
April 25, 1998)
10.27 Non Compete Agreement of Fred Beauchamp and Jim Creed between
Vermont Pure Holdings, Ltd. and Sagamon Springs, Inc. dated
January 6, 1998 (Incorporated by reference from Exhibit 10.5 of
form 10-QSB for Quarter ended April 25, 1998)
10.28 Loan and Security Agreement Between Vermont Pure Springs, Inc.
and CoreStates Bank, N.A. dated April 8, 1998. (Incorporated by
reference from Exhibit 10.6 of form 10-QSB for Quarter ended
April 25, 1998)
<PAGE>
Exibit
Number Description
_______ ____________________
22 Subsidiaries are incorporated by referance from exhibit 22 of
form 10-KSB for fiscal year ended October 25, 1997, File
No.1-11254
23.1 Consent of Independant Auditors.
27 Financial data Schedule.
Reports on Form 8-K
The Registrant filed a Report on Form 8-K dated October 7, 1998 with
respect to its distribution arrangement with Coca Cola Enterprises,
Inc.
<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 29, 1999 Timothy G. Fallon, Chief Executive Officer,
President, and Chairman of the Board of Directors
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/ Timothy G. Fallon Chief Executive Officer, January 29, 1999
Timothy G. Fallon President, and Chairman of
the Board of Directors
/s/ Phillip Davidowitz
Phillip Davidowitz Director January 29, 1999
/s/ Robert C. Getchell
Robert C. Getchell Secretary and Director January 29, 1999
/s/ Frank G. McDougall, Jr.
Frank G. McDougall, Jr. Director January 29, 1999
/s/ David R. Preston
David R. Preston Director January 29, 1999
/s/ Norman E. Rickard
Norman E. Rickard Director January 29, 1999
/s/ Beat Schlagenhauf
Beat Schlagenhauf Director January 29, 1999
/s/ Richard Worth
Richard Worth Director January 29, 1999
/s/ Bruce S. MacDonald
Bruce S. MacDonald Vice President, and January 29, 1999
Chief Financial Officer
<PAGE>
EXHIBITS TO VERMONT PURE HOLDINGS, LTD.
ANNUAL REPORT ON FORM 10-KSB
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1998
Exhibit
Number Description
_______ __________________
23.1 Independant Auditors consent
27 Financial data schedule
NONE
<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.
FELDMAN SHERB EHRLICH & CO. P.C
New York, New York
December 17, 1998
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
Index to Financial Statements.
Financial Statements: Page
Independent 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, VT 05060
We have audited the accompanying consolidated balance sheets of Vermont
Pure Holdings, Ltd. and Subsidiaries as of October 31, 1998 and October 25,
1997, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the years ended October 31, 1998,
October 25, 1997 and October 26, 1996. 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 31, 1998 and October 25,
1997, and the results of their operations and their cash flows for the years
ended October 31, 1998, October 25, 1997 and October 26, 1996 in conformity with
generally accepted accounting principles.
/s/ Feldman Sherb Ehrlich & Co., P.C.
Feldman Sherb Ehrlich & Co., P.C
Certified Public Accountants
New York, New York
December 17, 1998
F-2
<PAGE>
PART I - Item 1
<TABLE>
<CAPTION>
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 31, October 25,
1998 1997
------------------------- -------------------------
<S> <C> <C>
ASSETS
____________
CURRENT ASSETS:
Cash $ 161,271 $ 93,808
Accounts receivable 3,069,699 1,974,765
Inventory 1,843,927 978,473
Current portion of deferred tax asset 330,000 326,000
Other current assets 222,970 288,627
------------------------- -------------------------
TOTAL CURRENT ASSETS 5,627,867 3,661,673
------------------------- -------------------------
PROPERTY AND EQUIPMENT - net of accumulated depreciation 9,174,063 7,332,912
------------------------- -------------------------
OTHER ASSETS:
Intangible assets - net of accumulated amortization 9,595,915 5,216,300
Deferred tax asset 1,661,000 218,000
Other assets 114,658 117,881
------------------------- -------------------------
TOTAL OTHER ASSETS 11,371,573 5,552,181
------------------------- -------------------------
TOTAL ASSETS $ 26,173,503 $ 16,546,766
========================= =========================
LIABILITIES AND STOCKHOLDERS' EQUITY
_________________________________________
CURRENT LIABILITIES:
Accounts payable $ 3,007,630 $ 1,099,094
Current portion of customer deposits 58,360 49,534
Accrued expenses 1,104,871 986,961
Line of credit - 238,021
Current portion of long term debt 601,570 885,748
Current portion of obligations under capital lease 119,995 144,944
------------------------ -------------------------
TOTAL CURRENT LIABILITIES 4,892,426 3,404,302
Long term debt 1,428,807 5,435,292
Long term obligations under capital lease 210,203 304,597
Line of credit 8,783,793 -
Long term portion of customer deposits 893,145 760,559
------------------------- ------------------------
TOTAL LIABILITIES 16,208,374 9,904,750
------------------------- ------------------------
STOCKHOLDERS' EQUITY:
Common stock - $.001 par value, 20,000,000 10,288 10,132
authorized shares, 10,287,187 issued shares
at October 31, 1998 and 10,131,980 issued and
outstanding shares at October 25, 1997
Paid in capital 23,080,049 22,447,092
Accumulated deficit (12,956,458) (15,815,208)
Treasury stock, at cost, 50,000 shares (168,750) -
------------------------- ------------------------
TOTAL STOCKHOLDERS' EQUITY 9,965,129 6,642,016
------------------------- ------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 26,173,503 $ 16,546,766
========================= ========================
See note to Financial statements
F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended
----------------------------------------------------------------------------------
October 31, October 25, October 26,
1998 1997 1996
--------------------- --------------------- -------------------------
<S> <C> <C> <C>
SALES $ 29,169,185 $ 17,685,442 $ 11,878,829
COST OF GOODS SOLD 11,549,871 7,643,908 6,162,903
--------------------- --------------------- ------------------------
GROSS PROFIT 17,619,314 10,041,534 5,715,926
--------------------- ------------------- ------------------------
OPERATING EXPENSES:
Selling, general and administrative expense 10,235,168 5,897,735 4,234,104
Advertising expenses 4,702,498 3,077,145 2,348,327
Amortization 616,854 228,808 143,094
--------------------- --------------------- ------------------------
TOTAL OPERATING EXPENSES 15,554,520 9,203,688 6,725,525
--------------------- --------------------- ------------------------
PROFIT (LOSS) FROM OPERATIONS 2,064,794 837,846 (1,009,599)
--------------------- --------------------- ------------------------
OTHER INCOME (EXPENSE):
Interest - net (755,326) (368,224) (196,630)
Miscellaneous 102,282 53,773 (61,102)
--------------------- --------------------- ------------------------
TOTAL OTHER INCOME (EXPENSE) (653,044) (314,451) (257,732)
--------------------- --------------------- ------------------------
PROFIT (LOSS) BEFORE INCOME TAXES 1,411,750 523,395 (1,267,331)
PROVISION FOR INCOME TAX BENEFIT 1,447,000 544,000 -
--------------------- --------------------- ------------------------
NET INCOME (LOSS) $ 2,858,750 $ 1,067,395 $ (1,267,331)
--------------------- --------------------- ------------------------
NET INCOME (LOSS) PER SHARE - BASIC 0.28 $ 0.11 $ (0.13)
NET INCOME (LOSS) PER SHARE - DILUTED 0.26 $ 0.11 $ (a) (0.13)
===================== ===================== =========================
Weighted Average Shares Used in
Computation - Basic 10,248,389 9,771,347 9,678,268
Weighted Average Shares Used in
Computation - Diluted 10,927,025 9,805,800 (a) 9,678,268
===================== ===================== =========================
(a) Potential common shares are anti-dilutive.
See note to Financial statements
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock Paid in Treasury Stock Accumulated
================================ ===============================
Shares Par Value Capital Shares Amount Deficit
=======================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Balance, October 28, 1995 9,678,268 $9,678 $21,399,420 - - ($15,615,272)
Net Loss (1,267,331)
=======================================================================================================
Balance, October 26,1996 9,678,268 9,678 21,399,420 - - (16,882,603)
Issuance of Common Stock 453,712 454 1,047,672
Net Income 1,067,395
=======================================================================================================
Balance, October 25, 1997 10,131,980 10,132 22,447,092 - - (15,815,208)
Issuance of Common Stock 155,207 156 632,957
Acquisition of Treasury Stock (50,000) (168,750)
Net Income 2,858,750
=======================================================================================================
Balance, October 31,1998 10,287,187 $10,288 $23,080,049 (50,000) ($168,750) ($12,956,458)
=======================================================================================================
See note to Financial statements
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended
-------------------------------------------------------------
October 31, October 25, October 26,
1998 1997 1996
-------------------- ---------------- -------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net profit/(loss) $ 2,858,750 $ 1,067,395 $ (1,267,331)
Adjustments to reconcile net income(loss) to net cash provided
by operating activities:
Depreciation 1,150,000 876,553 633,283
Amortization 616,854 228,808 143,094
(Increase) Decrease in deferred tax asset (1,447,000) (544,000) -
(Gain) loss on disposal of property and equipment 93,808 (38,948) 67,421
Changes in assets and liabilities (net of effect of acquisitions):
(Increase) Decrease in accounts receivable (985,349) (433,636) (132,694)
(Increase) Decrease in inventory (783,421) (65,185) 189,916
(Increase) Decrease in other current assets 65,657 (87,311) (14,983)
(Increase) Decrease in other assets (567,567) 95,057 (132,363)
(Decrease) Increase in accounts payable 1,768,238 (165,552) 176,959
(Decrease) Increase in customer deposits (81,525) 58,127 57,253
(Decrease) Increase in accrued expenses 117,910 439,215 54,459
-------------- ----------------- ------------------
CASH PROVIDED BY OPERATING ACTIVITIES 2,806,355 1,430,523 (224,986)
-------------- ----------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (2,983,313) (1,079,569) (453,392)
Proceeds from sale of fixed assets 67,000 103,531 230,264
Cash used for acquistions (4,458,889) (2,774,946) (1,340,677)
-------------- ----------------- ------------------
CASH USED IN INVESTING ACTIVITIES (7,375,202) (3,750,984) (1,563,805)
-------------- ----------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (paydown) of line of credit 843,979 (203,790) 441,811
Proceeds from debt 11,233,158 2,531,978 1,390,000
Principal payment of debt (7,451,777) (697,000) (803,199)
Sale of common stock 10,950 - -
--------------- ---------------- ------------------
CASH PROVIDED BY FINANCING ACTIVITIES 4,636,310 1,631,188 1,028,612
--------------- ---------------- ------------------
NET INCREASE (DECREASE) IN CASH 67,463 (689,273) (760,179)
CASH - Beginning of year 93,808 783,081 1,543,260
--------------- ---------------- ------------------
CASH - End of year $ 161,271 $ 93,808 $ 783,081
=============== ================ ==================
Cash paid for interest $ 755,326 $ 422,026 $ 272,456
=============== ================ ==================
NON-CASH FINANCING AND INVESTING ACTIVITIES:
Equipment acquired under capital leases $ 89,273 $ 81,392 $ 94,627
================ =============== ==================
See note to Financial statements
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. The Company's products
are sold predominately in the New England, Mid-Atlantic and Mid-Western
states through a network of independent beverage distributors.
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. and 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.
The years presented are 52 weeks periods, except for 1998, which
contained 53 weeks.
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 $307,020 and
$204,634 at October 31, 1998 and October 25, 1997. Amounts charged
to expense were $192,527, $57,809 and $123,667 during the years
ended October 31, 1998, October 25, 1997 and October 26, 1996.
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 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.
g. Intangible Assets - The Company records goodwill in connection with its
F-7
<PAGE>
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 the full rights in the
securities received, the compensation expense so recorded is
deferred and amortized as a charge to income over the period that
such rights vest to the recipient.
In 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("SFAS No.123"),
"Accounting for Stock Based Compensation". SFAS No.123 permits
companies to choose to follow the accounting prescribed by SFAS
No. 123 for securities issued to employees, or to continue to
follow the accounting treatment prescribed by Accounting
Principles Board Opinion No.25 ("APB NO.25") along with the
additional disclosure required under SFAS NO.123 if the Company
elects to continue to follow APB No.25. The Company has adopted
the disclosure only option of SFAS 123.
i. Income(Loss) Per Share - Income(Loss) Per Share is based on the
weighted average number of common shares outstanding during each
period. Potential common shares are included in the computation of
diluted per share amounts outstanding during each period.
Potential common shares 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.
F-8
<PAGE>
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.
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 approximate 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 31, 1998, the Company believes
that there has been no impairment of its long-lived assets.
PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
<S> <C> <C>
October 31, October 25,
Life 1998 1997
Land, buildings, and improvements................10 - 40 yrs. $ 3,458,986 $ 3,305,106
Machinery and equipment.... ......................3 - 10 yrs. 7,519,572 5,187,447
Equipment held under capital lease................3 - 10 yrs. 1,812,116 1,404,636
______________ ___________
12,790,674 9,897,189
Less accumulated depreciation............................ 3,616,611 2,564,277
______________ ___________
$9,174,063 $7,332,912
F-9
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
4. INTANGIBLE ASSETS
October 31, October 25,
Life 1998 1997
_______ __________ __________
Goodwill 30 yrs. $ 9,585,384 $ 5,159,705
Covenants not to compete 5 yrs. 498,412 316,599
Customer lists 3 yrs. 772,566 499,378
Other Various 166,780 50,991
__________ __________
$11,023,142 $ 6,026,673
Less accumulated amortization 1,427,227 810,373
__________ __________
$ 9,595,915 $ 5,216,300
========== ==========
</TABLE>
5. ACQUISITIONS
The Company completed the following acquisitions in 1998: Vermont
Coffee Time in January 1998, Sagamon Springs in January 1998, Perrier
Group's Albany, New York home and office customer base in May 1998,
Vermont Naturals in May 1998, Classic Foods in June 1998, Valley
Vending in March 1998 and Mountain Valley in July 1998. The Company
also acquired the United States distribution rights from AKVA in
December 1997 for its AKVA spring water.
The following table gives an aggregate summary of the acquisitions in
financial terms:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
____________ _____________
Purchase Price $ 5,143,935 $ 4,486,606
Acquisition Costs 323,418 388,607
Fair Value of Assets Acquired (1,540,495) (2,736,055)
Fair Value of Liabilities Assumed 498,821 1,414,752
____________ _____________
Goodwill $ 4,425,679 $ 3,553,910
============ =============
F-10
<PAGE>
The detailed components consist of the following:
1998 1997
___________ ____________
Purchase Price
Cash to Sellers $ 4,135,471 $ 2,437,752
Notes to Sellers 396,000 1,000,728
Common Stock to Sellers (155,207 612,464 1,048,126
____________ ____________
shares in 1998 and 453,712 in 1997)
$ 5,143,935 $ 4,486,606
============ ============
1998 1997
____________ ____________
Fair Value of Assets Acquired
_______________________________
Accounts Receivable $ 109,584 $ 381,323
Inventory 82,033 130,132
Property, Plant and Equipment 699,128 1,576,902
Intangible Assets 541,590 554,115
Other 108,160 93,583
____________ ____________
$ 1,540,495 $ 2,736,055
============ ============
Liabilities Assumed
______________________
Accounts Payable $ 140,298 $ 486,215
Customer Deposits 222,937 330,829
Assumed Notes 135,586 597,708
____________ ____________
$ 498,821 $ 1,414,752
============ ============
</TABLE>
The following table summarizes pro forma consolidated results of
operations (unaudited) of the Company and the 1998 and 1997
acquisitions as though the acquisitions had been consummated at October
26, 1996. The pro forma amounts give effect to the appropriate
adjustments for the fair value of assets acquired and amortization of
goodwill, depreciation and the debt incurred and resulting interest
expense.
Years Ended
October 31, October 25,
1998 1997
_____________ ______________
Total Revenue $ 32,813,514 $ 21,481,552
Net Income (Loss) $ 3,478,362 $ 1,422,402
Net (Loss) per Share $ 0.34 $ 0.14
_____________ ______________
Weighted Average Number Of Shares 10,248,389 9,993,455
============= ==============
F-11
<PAGE>
6. ACCRUED EXPENSES
__________________ October 31, October 25,
1998 1997
____________ _________
Advertising and promotion $ 310,558 $ 276,060
Payroll and vacation 380,844 395,671
Taxes - 59,331
Acquisition costs - 113,383
Miscellaneous 413,469 142,516
____________ __________
$ 1,104,871 $ 986,961
============ ==========
7. LINE OF CREDIT - ACQUISITION AND WORKING CAPITAL -
____________________________________________________
The Company entered into a five year revolving line with CoreStates
Banks N.A., now First Union Corporation, 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 October 31, 1998
$8,783,793 had been borrowed against this facility. The proceeds were
used for working capital and acquisition debt. Under the agreement the
Company is required to pay interest monthly at a rate of LIBOR plus
2.5%, currently approximately 7.74%. The interest rate can decrease
during the term based on certain performance parameters as defined in
the agreement. As a result of the Company exceeding certain financial
covenants established in the agreements the interest rate was lowered
at the beginning of the third quarter in 1998. The Company is required
to continue to meet loan covenants as defined in the agreement in order
to have access to the line of credit. The loan is secured by
receivables, inventory, equipment and intangible assets.
8. OBLIGATIONS UNDER CAPITAL LEASES
________________________________
The Company leases equipment under capital lease arrangements. Assets
held under capital leases are included with property and equipment.
The following is a schedule of future minimum lease payments under the
capital leases and the present value of net minimum lease payments as
of October 31,1998:
1999..................................................... $ 151,044
2000...................................................... 136,765
2001...................................................... 74,650
2002...................................................... 23,934
2003 and beyond........................................... 0
-----------
Total minimum lease payments $ 386,393
Less amount representing interest 56,195
-----------
Present value of minimum lease payments $ 330,198
===========
F-12
<PAGE>
9. LONG TERM DEBT - The Company's long term debt is as follows:
______________
<TABLE>
<CAPTION>
<S> <C> <C>
October 31, October 25,
1998 1997
___________ __________
Building loan, principal and interest at 9.0%, payable
monthly through 2004 secured by the assets............... $ 0 403,922
Building loans, principal and interest at 5.5% payable
monthly through 1999 secured by the assets............... 291,807 342,461
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............................. 348,066 374,326
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............... 265,429 279,375
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.......... 464,469 501,051
Acquisition notes secured by certain assets, as defined,
refinanced in 1998. 0 3,589,625
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......... 660,606 830,280
___________ __________
$ 2,030,377 $ 6,321,040
Less current portion ...................................... 601,570 885,748
___________ __________
$ 1,428,807 $ 5,435,292
=========== ==========
</TABLE>
Annual maturities of long term debt are as follows:
Year ending October 31, 1998........................... $ 601,570
Year ending October 30, 1999........................... 247,960
Year ending October 28, 2000........................... 199,163
Year ending October 27, 2001........................... 622,581
Year ending October 26, 2002 and thereafter 359,103
-------
$ 2,030,377
=========
F-13
<PAGE>
10. STOCK ISSUANCE
______________
During 1998, the Company issued 155,207 shares of its common stock as
follows:
45,391 shares were issued in January 1998 at the price of
$4.00 per share in
conjunction with the purchase of assets from Vermont Coffee Time.
7,647 shares were issued at the price of $4.50 per share in
conjunction with the purchase of Vermont Naturals in May 1998.
30,000 shares were issued in exchange for distribution rights obtained
from AKVA at a value of $4.31.
72,169 shares were issued in April 1998 at the price of $4.00 per
per to AM Fridays in conjunction with a sales performance portion
of the original stock purchase agreement.
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.
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. During fiscal 1998, 10,000 options were
issued under this plan.
On April 2, 1998 the Company's shareholders approved the 1998 Incentive
and Non Statutory Stock Option Plan. This 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
reward options to officers, employees, directors, and other individuals
providing services to the company. During fiscal 1998, 192,000 options
were issued under this plan.
F-14
<PAGE>
12. STOCK OPTIONS
_____________
The following table illustrates the Company's stock option issuances
and balances during the last three fiscal years:
Exercise
Price Per
Options Share
Outstanding at October 28, 1995 1,349,500 $2.25-6.00
Options granted 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 392,187 $2.50-2.81
Options regranted 647,000 $2.50
Options retired (32,000) $1.81-2.25
Options surrendered (580,000) $1.75-3.25
_________ __________
Outstanding at October 25, 1997 2,182,187 $1.75-6.00
Options granted 202,000 $3.38-4.81
Options retired (10,000) $2.50
Options exercised (5,000) $2.50
_________ __________
Outstanding options at October 31, 1998 2,369,187 $1.81-6.00
========= ==========
13. 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 May 2008. Future minimum rental payments
over the terms of these leases are approximately as follows:
1999 $423,023
2000 391,902
2001 363,013
Thereafter 118,125
Rent expense under all operating leases was $321,116, $128,247 and
$51,727 for fiscal years ending October 31, 1998, October 25, 1997
and October 26, 1996.
.
14. RELATED PARTY TRANSACTIONS
___________________________
The Company paid consulting fees to related parties aggregating $78,334
in 1998 and $136,000 in each of the years 1997 and 1996.
F-15
<PAGE>
One of the consultants also received options to purchase 125,000 shares
of the Company's common stock for $2.25 per share. The options are
fully vested and are exercisable through October 2003.
15. INCOME TAXES
____________
The Company has approximated $13.1 million of available loss
carryforwards at October 31, 1998 expiring from 2005 through 2011. Due
to previous ownership changes or equity structure shifts as defined in
the Internal Revenue Code, approximately $3.5 million of the net
operating losses are limited as to annual utilization
The major deferred tax asset (liability) items at October 31, 1998 are
as follows:
Accounts receivable allowance ....... $ 122,000
Amortization......................... 70,000
Depreciation......................... (498,000)
Slotting fees........................ 53,000
Other................................ 164,000
Net operating loss carryforwards..... 5,240,000
_______________
5,150,000
Valuation allowance.................. 3,160,000
_______________
Deferred tax asset recorded....... $ 1,991,000
===============
The benefit for income taxes differs from the amount computed by
applying the statutory tax rate to net income (loss) before income tax
benefit as follows:
<TABLE>
<CAPTION>
Year Ended
________________________________________________
October 31, October 25, October 26,
1998 1997 1996
________________________________________________
<S> <C> <C> <C>
Income tax (expense) benefit computed at
statutory rate.................................. $ (480,000) $ (178,000) $431,000
Effect of permanent differences................. (74,000) (18,000) (23,000)
Effect of temporary differences................. (101,000) 40,000 115,000
Tax benefit of net operating loss
not recognized.................................. - - (523,000)
Tax benefit of net operating loss carry
forward......................................... 655,000 156,000 -
Change in valuation allowance................... 1,447,000 544,000 -
___________ __________ _________
Deferred Tax Asset Recorded..................... $ 1,447,000 $ 544,000 -
=========== ========== =========
</TABLE>
F-17
<PAGE>
16. MAJOR CUSTOMER
________________
The Company's sales to a single customer were 30%, 31% and 35% of the
total sales for 1998, 1997 and 1996, respectively. Accounts receivable
from such customer were 13% and 16% of the total receivable at October
31, 1998 and October 25, 1997, respectively.
17. ACCOUNTING FOR STOCK-BASED COMPENSATION
_________________________________________
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees". Accordingly, no
compensation expense related to stock option grants was recorded in
1998, 1997 and 1996 as the exercise price of such options was equal to
or greater than the underlying stock on the date of grant.
Pro-forma information regarding net income and net income per share is
presented below as if the Company had accounted for its employee stock
options under the fair value method; such pro-forma information is not
necessarily representative of the effects on reported net income for
future years due primarily to the options vesting periods and to the
fair value of additional options in future years.
Had compensation cost for the option plans been determined using the
methodology prescribed under the Black-Scholes option pricing model,
the Company's income (loss) would have been $2,509,134 and $.24 per
share in 1998; $324,302 and $.03 per share in 1997 and $(2,049,471) and
$(.21) per share in 1996. The weighted average fair value of the
options granted were $3.42, $1.89 and $1.73 in 1998, 1997 and 1996,
respectively. Assumptions used for 1998 were: expected dividend yield
of 0%; expected volatility of 50%; risk free interest of 5.7% and
expected life of 5 years. Assumptions for both 1997 and 1996 were:
expected dividend yield 0%; expected volatility of 92%; risk-free
interest of 7% and expected life of five years.
F-18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000885040
<NAME> VERMONT PURE HOLDINGS LTD.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> OCT-26-1997
<PERIOD-END> OCT-31-1998
<EXCHANGE-RATE> 1
<CASH> 161,271
<SECURITIES> 0
<RECEIVABLES> 3,376,719
<ALLOWANCES> 307,020
<INVENTORY> 1,843,927
<CURRENT-ASSETS> 5,627,867
<PP&E> 12,790,674
<DEPRECIATION> 3,616,611
<TOTAL-ASSETS> 26,173,503
<CURRENT-LIABILITIES> 4,892,426
<BONDS> 11,315,948
0
0
<COMMON> 10,288
<OTHER-SE> 9,954,841
<TOTAL-LIABILITY-AND-EQUITY> 26,173,503
<SALES> 29,169,185
<TOTAL-REVENUES> 29,169,185
<CGS> 11,549,871
<TOTAL-COSTS> 11,549,871
<OTHER-EXPENSES> 15,554,520
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 755,326
<INCOME-PRETAX> 1,411,750
<INCOME-TAX> (1,447,000)
<INCOME-CONTINUING> 2,858,750
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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