<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended July 31, 2000
Commission File No. 1-11254
VERMONT PURE HOLDINGS, LTD.
(Exact name of registrant as specified in its charter)
Delaware 06-1325376
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Route 66; PO Box C; Randolph, VT 05060
(Address of principal executive offices) (Zip Code)
(802)728-3600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---------------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class September 8, 2000
----- -------------------
Common Stock, $.001 Par Value 10,294,758
<PAGE>
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
INDEX
Part I - Financial Information Page Number
Item 1. Financial Statements
Consolidated Balance Sheets as of
July 31, 2000 (unaudited) and
October 30, 1999 3
Consolidated Statements of Operations (unaudited) for
the Nine Months and Three Months ended July 31, 2000
and July 31, 1999 4
Consolidated Statements of Cash Flows
(unaudited) for the Nine Months ended
July 31, 2000 and July 31, 1999 5
Notes to Consolidated Financial Statements
(unaudited) 6 - 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operation 9 - 12
Item 3. Quantitive and Qualitative Disclosures about
Market Risk 13
Part II - Other Information 14 - 18
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signature 19
2
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VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 31 October 30,
2000 1999
------------ -----------
(unaudited)
ASSETS
--------
CURRENT ASSETS:
Cash ($975,000 of the 2000
balance is restricted) $ 1,281,980 $ 367,018
Investments - Money Market Fund
(restricted building 1,735,029 -
Accounts receivable 4,607,922 3,525,238
Notes Receivable - 975,000
Inventory 2,002,471 2,711,709
Current portion of deferred tax asset 601,922 601,922
Other current assets 1,293,036 781,968
---------- -----------
TOTAL CURRENT ASSETS 11,522,360 8,962,855
---------- -----------
PROPERTY AND EQUIPMENT
- net of accumulated depreciation 14,632,296 11,122,258
---------- -----------
OTHER ASSETS:
Intangible assets
- net of accumulated amortization 10,935,643 10,443,207
Deferred tax asset 3,182,914 3,182,914
Other assets 130,156 122,996
---------- -----------
TOTAL OTHER ASSETS 14,248,712 13,749,117
---------- -----------
TOTAL ASSETS $ 40,403,368 $ 33,834,230
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 3,403,055 $ 3,443,208
Current portion of customer deposits 45,616 45,033
Accrued expenses 1,125,390 851,371
Current portion of long term debt 1,491,537 1,414,930
Current portion of obligations
under capital leases 159,056 180,589
---------- -----------
TOTAL CURRENT LIABILITIES 6,224,653 5,935,131
Long term debt 5,492,221 1,663,893
Long term obligations under capital leases 316,345 379,583
Line of credit 14,249,000 11,689,792
Long term portion of customer deposits 866,720 684,334
---------- -----------
TOTAL LIABILITIES 27,148,939 20,352,733
---------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock - $.001 par value, 500,000
authorized shares, none issued and outstanding
shares at July 31, 2000
Common stock - $.001 par value, 50,000,000
authorized shares, 10,344,758 issued and
outstanding shares at July 31, 2000 and
10,339,758 at October 30, 1999 10,345 10,340
Paid in capital 23,208,969 23,197,724
Accumulated deficit (9,796,136) (9,557,817)
Treasury stock, at cost, 50,000 shares (168,750) (168,750)
---------- -----------
TOTAL STOCKHOLDERS' EQUITY 13,254,429 13,481,497
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 40,403,368 $ 33,834,230
========== ===========
See notes to consolidated financial statements.
3
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<TABLE>
<CAPTION>
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended Nine Months Ended
July 31, July 31, July 31, July 31,
------------- ------------- ------------ -------------
2000 1999 2000 1999
------------- ------------- ------------ -------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
SALES $ 10,158,368 $ 9,432,119 $ 24,806,803 $ 23,112,438
COST OF GOODS SOLD 4,675,045 3,682,347 10,219,169 8,666,220
------------- ------------- ------------ -------------
GROSS PROFIT 5,483,323 5,749,772 14,587,633 14,446,218
------------- ------------- ------------ -------------
OPERATING EXPENSES:
Selling, general
and administrative expenses 4,062,463 3,511,264 11,412,755 9,364,321
Advertising expenses 851,867 818,407 1,982,896 2,366,258
Amortization 185,073 146,773 526,409 450,199
------------- ------------- ------------ -------------
TOTAL OPERATING EXPENSES 5,099,403 4,476,444 13,922,060 12,180,778
------------- ------------- ------------ -------------
INCOME FROM OPERATIONS 383,920 1,273,328 665,574 2,265,440
------------- ------------- ------------ -------------
OTHER INCOME (EXPENSE):
Interest (442,505) (272,436) (1,176,779) (753,752)
Miscellaneous - 12,110 272,887 12,110
------------- ------------- ------------ -------------
TOTAL OTHER EXPENSE (442,505) (260,326) (903,892) (741,642)
------------- ------------- ------------ -------------
NET INCOME (LOSS) $ (58,585) $ 1,013,002 $ (238,319) $ 1,523,798
------------- ------------- ------------ -------------
NET INCOME (LOSS)
PER SHARE - BASIC $ (0.01) $ 0.10 $ (0.02) $ 0.15
============== ============== ============== ==============
NET INCOME (LOSS)
PER SHARE - DILUTED $ (0.01) $ 0.09 $ (0.02) $ 0.14
============== ============== ============== ==============
Weighted Average
Shares Used in
Computation - Basic 10,290,591 10,259,758 10,290,036 10,255,917
============= =============== ============== ==============
Weighted Average Shares
Used in Computation -
Basic/Diluted 10,290,591 10,758,862 10,290,036 10,816,068
============== =============== ============== ==============
</TABLE>
See notes to consolidated financial statements.
4
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<TABLE>
<CAPTION>
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
--------------------------------
July 31, July 31,
2000 1999
------------- -------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income/(loss) $ (238,319) $ 1,523,798
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation 1,381,523 1,021,115
Amortization 526,409 450,199
(Gain) on settlement of note receivable (295,000) -
(Gain) loss on disposal of property and equipment (67,637) -
Changes in assets and liabilities (net of effect of acquisitions):
(Increase) Decrease in accounts receivable (1,082,684) (1,469,336)
(Increase) Decrease in inventory 709,238 319,330
(Increase) in other current assets (511,068) (296,577)
(Increase) Decrease in other assets (1,026,005) 144,255
(Decrease) in accounts payable (40,153) (638,892)
Increase in customer deposits 182,969 298,498
(Decrease) Increase in accrued expenses 274,019 326,027
------------- -------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (186,707) 1,678,416
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (2,261,856) (1,839,615)
Purchase of property, plant and equipment from Bond Financing (2,390,395) -
Purchase of Money Market Investment from Bond Financing (4,125,424) -
Reduction of Money Market Investment Account 2,390,395 -
Proceeds from sale of fixed assets 92,310 -
Collection of note receivable 1,270,000 -
Cash used for acquistions (263,983) (339,665)
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (5,288,952) (2,179,280)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of line of credit 2,559,208 1,966,642
Proceeds from debt 4,295,881 479,895
Principal payment of debt (475,718) (635,939)
Sale of common stock 11,250 37,720
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 6,390,622 1,848,318
------------- -------------
NET INCREASE IN CASH 914,962 1,347,454
------------- -------------
CASH - Beginning of period 367,018 161,271
------------- -------------
CASH - End of period $ 1,281,980 $ 1,508,725
============= =============
Cash paid for interest $ 1,046,747 $ 753,752
============= =============
NON-CASH FINANCING AND INVESTING ACTIVITIES:
Equipment acquired under capital leases $ 145,844 $ 131,913
============== ==============
</TABLE>
See notes to consolidated financial statements.
5
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VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with Form 10-Q instructions and in the opinion
of management contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position,
results of operations, and cash flows for the periods presented. The
results have been determined on the basis of generally accepted
accounting principles and practices applied consistently with the Form
10-K for the year ended October 30, 1999.
Certain information and footnote disclosures normally included in
financial statements presented in accordance with generally accepted
accounting principles have been condensed or omitted. The accompanying
consolidated financial statements should be read in conjunction with
the financial statements and notes thereto incorporated by reference
from the Company's Form 10-K and Annual Report for the year ended
October 30, 1999.
2. FISCAL YEAR/QUARTER END
Since 1994, the Company has used the "4-4-5" method to determine its
fiscal months, quarters and years. Effective April 30, 2000, it began
to use the regular calendar to determine the financial cut-off times
for these periods. The reason for this change is to accommodate a
future significant acquisition and to be more compatible with software
used in the operation of the business.
3. INVESTMENT - MONEY MARKET
A money market account has been set up for undisbursed funds relating
to the Vermont Economic Development Authority Bond issuance (see note
4). The funds have been invested in First Union's Evergreen Money
Market account and administered by First Union, the Bond trustee. These
funds are restricted for the expenditures related to the purchase of
building and equipment.
6
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4. LONG TERM DEBT
The Company amended and restated its five-year revolving credit
agreement with First Union National Bank and KeyBank National
Association on January 28, 2000. The facility was increased to $25
million from $15 million under the terms and conditions of the
agreement. The Company and First Union modified the credit agreement
to waive non-compliance by the Company with a single financial
covenant as of July 31, 2000. The interest rate on funds borrowed
under the agreement is LIBOR plus 2.5%. Pursuant to the proposed
merger agreement as discussed in Note 8 the Company executed a
commitment letter with another institution which, if consumated will
replace the existing agreement with First Union National Bank and
KeyBank National Association. As of the end of the quarter, the
Company had fixed the rate of interest on $7,500,000 of its
outstanding debt at 8.43%. In conjunction with the facility, the
Company entered into a Letter of Credit with First Union for
$4,300,000 to secure bonds issued for the same amount by the Vermont
Economic Development Authority. The Company pays a 2% annual fee of
the Letter of Credit amount. As of July 31, 2000, exclusive of the
Letter of Credit, the Company had borrowed $13,999,000 pursuant to
this agreement and $2,390,000 had been disbursed from the bond
proceeds. The Bonds were issued as two series designated as Variable
Rate Demand/Fixed Rate Revenue Bonds (Vermont Pure Springs, Inc.
Project) 1999 Series A 20 year bonds and Variable Rate Demand/Fixed
Rate Revenue Bonds (Vermont Pure Springs, Inc. Project) 1999 Series
A-T (Taxable) 10 year bonds. The Series A Bonds were issued for
$3,195,000 and mature on January 1, 2020 and the Series A-T Bonds were
issued for $1,105,000 and mature on January 1 2011. The "Floating
Rate" is a variable rate of interest equal to the minimum rate of
interest necessary, in the sole judgment of the Remarketing Agent
(First Union Securities, Inc.), to sell the Bonds on any Business Day
at a price equal to the principal amount thereof, exclusive of accrued
interest, if any, thereon. Interest is determined on a weekly basis
and is payable on the first of every month.
5. LEGAL PROCEEDINGS
a) In connection with litigation with its largest spring water
source, Pristine Mountain Springs, the Company reached a
settlement on December 1, 1999. As part of the settlement, the
owner of the spring and its affiliate paid $1,270,000 to the
Company and acknowledged the Company's rights under the amended
water supply contract and right of first refusal to purchase the
spring site. In order to obtain the rights to the supply contract,
the Company had previously issued a $975,000 non-interest bearing
convertible debenture to the original creditor of the owner of the
spring and its affiliate. Settlement of the transaction resulted
in miscellaneous income being recorded for the period.
Cash Settlement $ 1,270,000
Less: Debt Assumed 975,000
Less: Legal Fees 22,113
--------------
Total Miscellaneous Income $ 272,887
============
b) On July 27, 2000 the Company filed a lawsuit in Vermont Federal
Court against Descartes Systems/Endgame Solutions for
non-performance of the professional services agreement between the
two companies. In the suit Vermont Pure alleges that the vendor
did not adequately perform the services rendered in connection
with approximately $500,000 of unpaid billings. To date, Descartes
Systems/Endgame Solutions has not responded to the complaint.
7
<PAGE>
6. INTEREST RATE HEDGE
On May 2, 2000, the Company signed a three-year "swap" agreement with
the KeyBank National Association to fix the interest rate on $5,000,000
of the Company's debt. The agreement fixes the variable LIBOR rate
portion of the debt at 7.13%. As of July 31, 2000 the Company's total
interest rate spread was 2.5% over LIBOR. Consequently, the agreement
currently fixes the portion of the debt at 9.63%.
7. COMMITMENTS
In March 1999, Vermont Pure Holdings, Ltd. entered into distribution
agreements with several Snapple distributors in order to replace a
major customer. Effective March 1, 2000, the Company modified its
distribution agreements with three of these distributors. Consequently,
Vermont Pure is the exclusive spring water brand carried by Mr.
Natural, Inc., Millrose Distributors and Snapple of Long Island, Inc.
The distribution area served by these businesses is the greater
metropolitan New York City area.
8. PROPOSED MERGER
On May 5, 2000 Vermont Pure Holdings, Ltd. entered into an Agreement
and Plan of Merger and Contribution with Crystal Rock Spring Water
Company. Crystal Rock is a privately held company. The agreement
provides for the formation of a new publicly held holding company, also
to be known as Vermont Pure Holdings, Ltd., that will own the two
businesses. Existing shareholders of Vermont Pure will receive stock of
the new holding company on a 1-for-1 basis.
The consideration to be paid is approximately $64.9 million, consisting
of not less than $9.5 million in cash, stock of Vermont Pure valued at
$31.1 million for purposes of the transaction, 12% subordinated notes
due 2007 of Vermont Pure in the original principal amount of $22.6
million, and the assumption by Vermont Pure of $1.7 million in debt.
The stock price of Vermont Pure for purposes of the merger will be
determined prior to the closing but according to the agreement, can
range from $2.80 per share to $3.15 per share. As a result, the number
of shares that will be issued will be from approximately 11.1 million
to approximately 9.9 million shares, depending on the price.
The transaction requires the approval of the stockholders of Vermont
Pure and is subject to bank financing. In conjunction with the merger
agreement, the Company executed a commitment letter with Webster Bank
of Waterbury, Connecticut that provides for up to $36 million in
financing for the cash portion of the purchase price, consolidation of
the existing debt of both companies (including $1.7 million of Crystal
Rock indebtedness), and post-merger working capital.
In connection with the merger, the Company will hold a shareholders
meeting on October 5, 2000 for shareholders of record on August 30. If
the shareholders approve the merger, it is expected to be closed
concurrently with the bank financing shortly thereafter.
8
<PAGE>
PART I - Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto as filed in the Company's Form 10-K for
the year ended October 30, 1999.
Forward-Looking Statements
When used in the Form 10-Q 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
speaks only as of the date made. Such statements are subject to certain risks
and uncertainties that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. Among these
risks are water supply and bottling capacity constraints in the face of
significant growth, dependence on outside distributors, and reliance on
commodity price fluctuations as they influence raw material pricing. The Company
has no obligation to publicly release the result of any revisions which may be
made to any forward-looking statements to reflect anticipated or unanticipated
events or circumstances occurring after the date of such statements.
Results of Operations
Sales - Sales for the first nine months of fiscal year 2000 were $24,807,000, an
increase of $1,695,000 or 8% over the sales of $23,112,000 for the corresponding
period last year. Sales for the third quarter of fiscal year 2000 were
$10,158,000, an increase of $726,000 or 8% over sales of $9,432,000 for the
corresponding period last year. In total, 14,034,000 gallons of water were sold
at an average price $1.34 per gallon compared to 12,721,000 gallons at an
average price of $1.46 for the corresponding period a year ago. Net of
acquisitions, sales increased 5% for the nine-month period compared to the
corresponding period a year ago.
Sales for retail-size products decreased $1,139,000 or 11%, for the nine months
of fiscal year 2000 compared to the corresponding period a year ago. Sales
increased $23,000 or 1%, for the third quarter of fiscal 2000 compared to the
corresponding period a year ago. In the category, 6,486,000 gallons were sold at
an average price of $1.69 per gallon compared to 6,416,229 gallons at 1.87 per
gallon for the comparable period a year ago. For the first three quarters of the
year, the Vermont Pure brand sales were down 32% while Hidden Spring and Private
Label brands were up 47% and 10% respectively. The decline in the Vermont Pure
brand reflects the major changes in the Company's distribution system for that
brand while the channels for the other categories remained largely unchanged.
The decrease in sales can be attributable to lower selling prices to secure
competitive distribution channels to replace a major distributor relationship in
April of 1999. In addition, an unseasonably cool, rainy summer negatively
impacted overall beverage sales in the Northeastern United States. Decreases in
average selling prices were partially offset by lower promotional spending as
described in further detail below.
9
<PAGE>
Sales for the home and office category increased $2,947,290 or 27%, for the
first nine months of fiscal year 2000 compared to the corresponding period of
the prior year. Net of acquisitions, sales increased 20% for the nine-month
period compared to the corresponding period a year ago. Sales increased $874,397
or 21%, for the third quarter of fiscal year 2000 compared to the corresponding
period of the prior year. In gallonage, sales increased for the comparable
nine-month periods from 6,304,000 gallons to 7,548,000 from 1999 to 2000 while
the average price per gallon remained the same at $1.05. The respective sales
increases in this category for the first nine months and third quarter of 2000
were attributable to market growth and expansion and acquisitions. The Company
has continued its acquisition strategy during the period. Acquisitions made in
the last twelve months have been relatively small in sales volume but
geographically important.
Cost of Goods Sold - For the first nine months of fiscal 2000, Cost of Goods
Sold was $10,219,000 compared to $8,666,000 for the same period in fiscal year
1999. Resulting gross profits were $14,588,000, or 59% of sales, and
$14,446,000, or 63% of sales, for the two respective periods. For the third
quarter of 2000, Cost of Goods Sold was $4,675,000 compared to $3,682,000 for
the same period in fiscal 1999 resulting in gross profits of $5,483,000, or 54%
of sales, and $5,750,000 or 61% of sales. The increase in gross profit for
nine-month period was due to the increase in sales. The increase in sales can be
attributed solely to the delivery of home and office products, which in general,
is the Company's highest margin line. The decrease in gross profit for the third
quarter can be attributed to lower then expected sales from the retail sized
products. The decrease in gross profit as a percentage of sales is a result of
lower average sales prices combined with higher raw material pricing of the
retail-size product. Raw material pricing, particularly for the Company's
retail-size line of products, has fluctuated since mid-1999 as a result of
commodity pricing. Over this period, the Company has been successful at
mitigating these increases by modifying its packaging and increasing production
efficiencies but average cost per case has still increased about 3%. However,
the stability of these costs cannot be guaranteed. Significant price
fluctuations in the future could result in corresponding positive or negative
effects on cost of goods sold and gross profit.
Operating Expenses - For the first nine months of fiscal year 2000 compared to
the corresponding period in fiscal year 1999, total operating expenses were
$13,922,000 and $12,181,000, an increase of $1,741,000 or 15%. For the third
quarter, operating expenses were $5,099,000 in 2000 compared to $4,476,000 in
1999, an increase of $623,000, or 14%. Selling, general and administrative
expenses increased by $2,048,000 or 22%, for the first nine months of fiscal
2000 and $551,000 or 16% for the third quarter of fiscal 2000 compared to the
corresponding periods a year ago. The increase in these costs was primarily due
to the addition of the operating costs to grow the home and office delivery
business and build inventory for the retail-size products to supply customer
demand throughout the peak summer sales season. Specifically, non-recurring
operating costs related to the home and office category growth are:
o Costs associated with integrating PET sales into the home and office
distribution network in the geographic areas that were previously
covered by outside distributors.
10
<PAGE>
o In anticipation of the Crystal Rock transaction, the consolidation of
sales and distribution systems resulting from acquisitions have been
delayed. This includes the cost of warehouses, route operations, and
personnel. As a consequence, the benefits of cost reduction from
consolidation have not yet been achieved.
o Increased administration of implementing a new software system.
Costs to build inventory are outside warehouse rent and handling fees, freight
to the outside location, and the freight cost inefficiencies of double handling
product between the bottling plant and the customer. Advertising and promotional
expense decreased $383,000, or 17%, and increased $33,000, or 4%, during the
nine-month and third quarter periods of 2000, respectively, compared to the
corresponding periods last year. The Company's advertising and promotion is
predominantly associated with the sales of the retail-size packages. As
mentioned above, the pricing environment for these products has changed such
that the Company's distributors seek price discounts instead of advertising and
promotion support. During the nine months and third quarter of 2000 the
Company's aggregate per case expense decreased $.26 and $.03 per case for the
comparable periods in the prior year. Nevertheless, due to the competitive
nature of the industry, the Company anticipates that it will continue to spend
significant amounts in the future for advertising and promotion as it continues
to develop brand recognition and increase market penetration but can give no
assurances that increases in spending will result in higher sales. For the first
nine months and third quarter of fiscal year 2000, amortization increased
$76,000 and $38,000 respectively, from the same periods a year ago as a result
of increased goodwill from new acquisitions.
Income From Operations - Profit from operations for the first nine months of
fiscal 2000 was $666,000 as compared to $2,265,000 for the corresponding period
last year, a decrease of $1,599,000. Income from operations for the third
quarter of fiscal 2000 was $384,000 compared to $1,273,000 for the corresponding
period last year, a decrease of $889,000. The decrease is attributable to lower
sales in the retail-size category combined with an increase in raw material
costs and logistics costs of storing product. The Company plans to continue to
create brand awareness and to find alternate distribution channels for its
retail-size product and expand its less seasonal home and office distribution
business.
Other Income/Expense - Net interest expense increased $423,000 or 57% and
$170,000 or 63% for the first nine months and third quarter of fiscal year 2000,
respectively, compared to the corresponding periods in fiscal year 1999. The
increase in interest expense was a result of increased borrowing to fund
operations as a result of lower operating profits, to build inventory, to add
additional plant and equipment, to finance acquisitions, and higher interest
rates. Miscellaneous income reflects the cash settlement in the Pristine
Mountain Springs litigation, less the related assumed debt and the related legal
costs. For more information, see Note 5 to the enclosed financial statements.
Net Income/Loss- The Company's net loss for the first nine months of fiscal year
2000 was $238,000 compared to a net profit of $1,524,000 for the corresponding
period last year. The net loss for the third quarter of fiscal 2000 was $59,000
compared to a net profit of $1,013,000 for the same quarter in 1999. The net
loss for the quarter and the year to date are attributable to lower operating
results combined with higher interest costs.
11
<PAGE>
Liquidity and Capital Resources
The net decrease in cash for the nine months ended July 31, 2000 was largely to
fund operating losses and payment of debt. A significant amount of cash has been
expended for capital improvements. $4,652,000 has been used primarily for
expansion of the building that houses the Company's main bottling facility, new
production equipment, and hardware and software to support the home and office
delivery system.
As of July 31, 2000, the Company had working capital of $5,298,000 compared to
$3,028,000 on October 30, 1999. The increase in working capital of $2,270,000
reflects, primarily, an increase in cash of $2,710,000 for specified restricted
uses. Of this total, $1,735,000 is being held as proceeds from the bonds issued
for new building and equipment and $975,000 is being held as collateral for a
mandatory convertible debenture scheduled for conversion by September, 2001. As
of July 31, 2000, the Company had disbursed $2,390,000 of the total $4,300,000
in bond proceeds and borrowed $14,249,000 under its credit agreement with First
Union and Key Banks compared to $844,000 of the line at the beginning of the
fiscal year. As of October 30, 1999, $11,690,000 was outstanding under the First
Union agreement. Proceeds from the increased debt were used for new building and
equipment, acquisitions, seasonal inventory build, and working capital. The
maximum amount available to borrow under the First Union facility is $25,000,000
subject to certain conditions and covenants. The facility is secured by all of
the assets of the Company and expires January 2004. The Company and First Union
modified the credit agreement to waive non-compliance by the Company with a
single financial covenant as of July 31, 2000.
The Company has increased its debt significantly in the current year. The
purpose has largely been to put infrastructure in place to accommodate its
future growth - building, equipment, and computer hardware and software systems.
The Company has also been transforming its distribution channels and, in the
process, required more working capital to fund operations. While past trends and
future expectations warrant these investments and efforts no assurance can be
given that future growth will occur. In this case, the Company may be restricted
to its access to working capital by covenants and conditions in the agreement
with its primary lender and no assurance can be given that other financing will
be available.
On May 5, 2000, Vermont Pure Holdings, Ltd. entered into an Agreement and Plan
of Merger and Contribution with Crystal Rock Spring Water Company of Watertown,
Connecticut. More details are provided in footnote 8 to the financial statements
included herewith. In conjunction with the potential merger the Company signed a
letter of intent with Webster Bank of Waterbury, Connecticut. The commitment
provides for up to $36 million of financing for the cash portion of the purchase
price, to consolidate the existing debt of both companies, and post-merger
working capital.
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PART I - Item 3
QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to the Company's operations result primarily from changes
in interest rates and commodity prices related to packaging materials.
Interest Rate Risks - On July 31, 2000, the Company had $14,500,000 outstanding
on its credit facility with First Union and Key Banks at LIBOR plus 2.5%. As of
July 31, 2000, LIBOR was 6.63%. The Company pays a stepped fixed interest rate,
subject to changes in the LIBOR spread pursuant to the agreement, on $7,500,000
of the facility. This interest rate was 8.63% on August 2, 2000. On May 2, 2000
the Company entered into an agreement to fix $5,000,000 of debt at 9.63%,
subject to changes in the LIBOR spread, for three years. In addition, it had
committed to repay $4,300,000 of bonds issued by the Vermont Economic
Development Authority at variable rates for taxable and non-taxable issues. Bond
interest rates are variable based on weekly rates established for the taxable
and non-taxable issues which on August 2, 2000 were 6.7% and 4.3%, respectively.
The Company pays an annual letter of credit fee of 2% to secure the bonds. The
company also has miscellaneous loans totaling at variable interest rates.
Consequently, after considering the Company's fixed rate instruments, a
hypothetical 100 basis point increase in market rates would result in
approximately $70,000 of interest expense on an annualized basis.
Commodity Price Risks - Although the Company has yearly contracts with its
vendors that set the purchase price of its PET bottles used to bottle its
retail-size product, the vendors are entitled to pass on increases in the market
price of the resin used as the raw material for the bottles. These prices are
related to supply and demand market factors for PET and, to a lesser extent the
price of petroleum, from which PET is derived. A hypothetical resin price
increase of $.05 per pound would result in an approximate price increase per
bottle of $.005. During the 2000 fiscal year pricing has increased. To a lesser
extent the Company is similarly dependant on resin for caps and paper for
corrugated boxes and labels. The potential impact is not material compared to
bottles.
The Company is planning to mitigate the effect of these commodity risks by
working with suppliers to reduce the amount of material that it uses to package
its products while maintaining and improving quality
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PART II - Other Information
Item 1 - Legal Proceedings
In March of 1999, the Company contracted with Descartes Systems Group,
Inc. ("Descartes"), an Ontario corporation, to provide professional services
related to the design, installation, maintenance, operation and training for
computer hardware and software. The computer hardware and software was marketed
to the Company as a product that would provide computerized management of the
Company's direct distribution through its delivery network, and associated
billing and accounting.
On July 27, 2000, the Company filed a lawsuit against Descartes and an affiliate
of Descartes entitled Vermont Pure Holdings, Ltd. v. Descartes Systems Group,
Inc. and Endgame Systems, Inc. f/k/a DSD Solutions, Inc., in the United States
District Court for the District of Vermont. The action is docketed as Civil
Action No. 2:00-CV-269. The Company has sought monetary damages against
Descartes and Endgame in an amount exceeding $100,000 for the Company's losses
associated with failures of the systems and services provided by the defendants.
In addition, the Company has sought a Declaratory Judgment invalidating the
defendant's demand for payments in the amount of $411,841.10.
As of the date of this disclosure, the defendants have not yet answered
the Company's lawsuit. The Company intends to vigorously prosecute the lawsuit.
The Company has made alternative arrangements for performing the functions that
were associated with the services of the defendants.
Item 2 - Changes in Securities
(a) None
(b) None
(c) None
Item 3 - Defaults upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
------
On May 2, 2000 the Company held its annual shareholders meeting a 1:30 p.m. at
the Radisson Hotel, in Burlington, Vermont. There was one matter of business
requiring shareholder vote, election of directors.
A total of 8,548,438 votes were cast and the following directors were elected to
one year terms with the corresponding vote tally:
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"For" "Withheld"
Frank G. McDougall 8,501,998 46,440
Timothy G. Fallon 8,501,998 46,440
Robert C. Getchell 8,501,998 46,440
David R. Preston 8,501,998 46,440
Norman E. Rickard 8,501,998 46,440
Beat Schlagenhauf 8,501,998 46,440
Richard S. Worth 8,501,998 46,440
Phillip Davidowitz 8,501,998 46,440
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibit
Number Description
2.1 Agreement and Plan of Merger and Contribution dated as of May 5, 2000
among the Registrant, VP Merger Parent, Inc., VP Acquisition Corp.,
Crystal Rock Spring Water Company and its stockholders.
Exhibits to the merger agreement, appear as Exhibits to the form S-4
Registration Statement, filed by VP Merger Parent, Inc., file number
333-45226, on September 6, 2000.
3.1 Amended and Restated Certificate of Incorporation of Registrant dated
January 12, 1994. (Incorporated by reference from exhibit 3.3 of Form
10-KSB for fiscal year ended October 30, 1993- File No. 1-11254.)
3.2 Amendment of Certificate of Incorporation of Registrant dated June 15,
1999.
3.3 By-Laws of Registrant. (Incorporated by reference from Exhibit 3.4 of
Registration Statement 33-46382)
3.4 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, 996. (Incorporated by reference from exhibit
10.1 of form10-KSB for fiscal year ended October 25, 1997-File No.
1-11254.)
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10.2* Amendment to the November 1, 1996 Employment Agreement between the
Registrant and Timothy G. Fallon dated November 1, 1999.
10.3* Employment Agreement between the Registrant and Bruce S. MacDonald
dated as of November 1, 1997. (Incorporated from Exhibit 10.2 of form
10-KSB for fiscal year ended October 25,1999-File No. 1-11254)
10.4* Stock Option Agreement between Registrant and Mr . Fallon.
(Incorporated by reference from Exhibit 10.7 of form 10-K for fiscal
year ended October 28, 1994, File No. 1-11254.)
10.5 1993 Performance Equity Plan. (Incorporated by reference from Exhibit
10.9 of Registration Statement 33-72940.)
10.6 Stock Purchase Agreement between the Registrant 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 8-K
dated September 11, 1997.)
10.7 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 from 8-K
dated September 1, 1997.)
10.8 Promissory Note from the Registrant to Mr. Eger in the principal
amount of $503,000. (Incorporated by reference form Exhibit 10.2 of
the report on Form 8-K dated September 11, 1997.)
10.9 Form of Note Purchase Agreement between the Registrant and certain
note holders of Excelsior dated August 27,1997. (Incorporated by
reference from Exhibit 10.4 of the Report on form 8-K dated September
11, 1997.)
10.10 Form of Stock Purchase Agreement between 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.)
10.11 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 1, 1997.)
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10.12 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.)
10.13 1998 Incentive and Non-Statutory Stock Option Plan (Incorporated by
reference to Appendix A of the Registrant's 1998 Proxy Statement)
10.14 Asset Purchase Agreement between the Registrant 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 the report on Form 10-QSB for the quarter ended January 24, 1998.)
10.15 Promissory Note from the Registrant to Vermont Coffee Time, Inc. dated
January 5, 1998. (Incorporated by reference from Exhibit 10.3 of the
Report of Form 10-QSB for the quarter ended January 24, 1998.)
10.16 Security Agreement between the Registrant and Vermont Coffee Time,
Inc. dated January 5, 1998. (Incorporated by reference from Exhibit
10.3 of the report of Form 10-QSB for the quarter ended January 24,
1998.)
10.17 Consulting Agreement between Amy Berger and the Registrant dated
January 5, 1998. (Incorporated by the reference form Exhibit 10.4 of
the report on form 10-QSB for the quarter ended January 24, 1998.)
10.18 Non Compete Agreement of Fred Beauchamp and Jim Creed between the
Registrant and Sagamon Springs, Inc. dated January 6 1998.
(Incorporated by the reference form Exhibit 10.5 of the report on form
10-QSB for the quarter ended April 25, 1998.)
10.19 1999 Employee Stock Purchase Plan (Incorporated by reference to the
Exhibit A of the Registrant's 1999 Proxy Statement)
10.20 Stock Purchase Agreement between Registrant, Paul Hayes and Michael
Hayes date July 27, 1999 relating to Adirondack Coffee Service, Inc.
(Incorporated by reference from Exhibit 10.23 of form 10-K for fiscal
year ended October 30, 1999, File No.1-11254).
10.21 Promissory Note dated July 27,1999 from the registrant to the Hayes in
the Principal amount of $303,734. (Incorporated by reference from
Exhibit 10.24 of form 10-K for fiscal year ended October 30, 1999,
File No.1-11254).
10.22 Loan Purchase Agreement to spring source dated September 30,1999
between the Registrant and Marcon Capital Corporation. (Incorporated
by reference from Exhibit 10.26 of form 10-K for fiscal year ended
October 30, 1999, File No.1-11254).
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10.23 Convertible Debenture Agreement dated September 30,1999 between the
Registrant and Marcon Capital Corporation in the amount of $975,000.
(Incorporated by reference from Exhibit 10.27 of form 10-K for fiscal
year ended October 30, 1999, File No.1-11254).
10.24 Amended and Restated Security Agreement between Registrant and First
Union Bank dated January 28, 2000. (Incorporated by reference from
Exhibit 10.27 of the report on form 10Q fourth quarter ended January
29, 2000).
10.25 Loan Agreement between Registrant and Vermont Economic Development
Authority dated December 1, 1999. (Incorporated by reference from
Exhibit 10.28 of the report on form 10Q fourth quarter ended January
29, 2000).
10.26 Trust Indenture Between Registrant and Vermont Economic Development
authority and First Union National Bank, as trustee, dated December1,
1999. (Incorporated by reference from Exhibit 10.29 of the report on
form 10Q fourth quarter ended January 29, 2000).
10.27 Settlement Agreement between Registrant and Pristine Mountain Springs,
Amsource LLC, Barton Lord and Ronald Colton dated December 1, 1999.
(Incorporated by reference from Exhibit 10.31 of the report on form
10Q fourth quarter ended January 29, 2000).
10.28 Amended and Restated Spring Water License and Supply Agreement between
Registrant and Mountain Springs, Amsource LLC, Barton Lord and Ronald
Colton dated December 5, 1999. (Incorporated by reference from Exhibit
10.31 of the report on form 10Q fourth quarter ended January 29,
2000).
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed for the quarter ended July 31, 2000.
* Relates to Compensation
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SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: September 14, 2000
Randolph, Vermont
VERMONT PURE HOLDINGS, LTD.
By:/s/ Bruce S. MacDonald
Bruce S. MacDonald
Vice President, Chief Financial Officer
(Principal Accounting Officer and Principal
Financial Officer)
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