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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
SCHEDULE 14A AMENDMENT
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
FILED BY THE REGISTRANT [X] FILED BY A PARTY OTHER THAN THE REGISTRANT [ ]
--------------------------------------------------------------------------------
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY RULE
14A-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-12
VERMONT PURE HOLDINGS, LTD.
(Name of Registrant as Specified In Its Charter)
NOT APPLICABLE
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
Common Stock, $.001 par value
2) Aggregate number of securities to which transaction applies:
21,396,901(a)
3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined):
$3.50(a)
4) Proposed maximum aggregate value of transaction: 82,249,687.44(a)
5) Total fee paid: $16,449.96(a)
(a) As of June 22, 2000, there were 10,289,758 shares outstanding of
common stock, par value $.001 ("Common Stock"), of Vermont Pure Holdings,
Ltd. The filing fee was paid with preliminary proxy materials filed on
June 23, 2000 on a confidential basis pursuant to Rule 14a-6(e)(2). The
fee was determined by multiplying the aggregate number of securities to
which this transaction applies (comprised of the number of shares
outstanding plus 11,107,143, which together equal the number of shares of
common stock to be issued in connection with the business combination) by
$3.844 (the average high and low price of the Common Stock for the five
business days prior to the filing) to get the proposed maximum aggregate
value of the transaction of $82,249,687.44. The filing fee, calculated in
accordance with Regulation 240.0-11 under the Securities Exchange Act of
1934, as amended, equals one fiftieth of one percent of the maximum
aggregate value of the transaction.
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
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PROXY STATEMENT/PROSPECTUS
BUSINESS COMBINATION PROPOSED: YOUR VOTE IS VERY IMPORTANT
The board of directors of Vermont Pure Holdings, Ltd. and the board of
directors of Crystal Rock Spring Water Company have agreed upon a transaction
that will combine Vermont Pure and Crystal Rock. To facilitate the business
combination, Vermont Pure has formed VP Merger Parent, Inc., which will be a new
publicly-traded parent holding company that will own both the existing Vermont
Pure and Crystal Rock.
Completion of the business combination is subject to approval of the
shareholders of Vermont Pure. A special meeting for the shareholders of Vermont
Pure has been scheduled to vote on the merger agreement. The special meeting
will take place on October 5, 2000. Only shareholders of record of Vermont Pure
common stock as of August 30, 2000, are entitled to attend and vote at the
meeting. This proxy statement/prospectus serves several purposes:
- It gives you detailed information about the proposed merger agreement;
- It is a proxy statement that Vermont Pure is using to solicit proxies for
use at the Vermont Pure special meeting of shareholders; and
- It is a prospectus relating to the issuance of VP Merger Parent common
stock and options in connection with the agreement and plan of merger and
contribution.
A copy of the merger agreement is included as appendix A. You should read
this entire document, including the appendices and exhibits, carefully. Your
vote is very important. Whether or not you plan to attend the special meeting,
please take the time to vote by completing and mailing the enclosed proxy card.
If you sign, date and mail your proxy card without indicating how you want to
vote, your proxy will be counted as a vote in favor of the merger agreement and
the other matters on the agenda for the meeting.
For a more complete description of this transaction, see "Special Meeting
of Shareholders" beginning on page 18.
FOR A DISCUSSION OF THE MATERIAL RISKS INVOLVED IN CONNECTION WITH THE
TRANSACTION, SEE "RISK FACTORS" BEGINNING ON PAGE 13.
On August 30, 2000, Vermont Pure common stock, $.001 par value, which is
traded on the American Stock Exchange under the trading symbol "VPS," closed at
$3.56 per share.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROXY STATEMENT/PROSPECTUS IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
This proxy statement/prospectus is dated September 6, 2000 and is being
mailed to shareholders of Vermont Pure on or about September 8, 2000.
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SUMMARY TERM SHEET
This summary term sheet is designed to provide you with a summary
description of the material aspects of the proposed business combination
described in this proxy statement/prospectus. You should also review the proxy
statement/prospectus, and the appendices to it, so that you may gain a more
complete understanding of the proposed business combination and its anticipated
effect on you and on Vermont Pure Holdings, Ltd.
-- DESCRIPTION OF THE PROPOSED BUSINESS COMBINATION (SEE PAGE 20)
Under the agreement and plan of merger and contribution, sometimes referred
to as the merger agreement, that the parties signed on May 5, 2000, as amended,
a wholly-owned subsidiary of VP Merger Parent will merge with the existing
Vermont Pure. When the business combination occurs, VP Merger Parent will be
renamed Vermont Pure Holdings, Ltd. The existing Vermont Pure will be renamed
Diamond Acquisition Corp. and will be a wholly-owned subsidiary of VP Merger
Parent. At that time, each share of common stock of existing Vermont Pure will
be automatically converted into one share of VP Merger Parent common stock,
which will be publicly traded.
At the same time, the shareholders of Crystal Rock will contribute all of
the outstanding shares of Crystal Rock common stock to VP Merger Parent in
exchange for consideration of at least $63,200,000, consisting of not less than
$9,500,000 in cash, VP Merger Parent's 12% subordinated promissory notes due
2007 in the amount of $22,600,000 and shares of VP Merger Parent's common stock
valued at $31,100,000 for purposes of this transaction.
When the transaction is complete, VP Merger Parent will own 100% of the
outstanding stock of existing Vermont Pure and 100% of the outstanding stock of
Crystal Rock.
-- OWNERSHIP OF VP MERGER PARENT FOLLOWING THE BUSINESS COMBINATION (SEE PAGE
37)
VP Merger Parent will be known as Vermont Pure Holdings, Ltd. immediately
following the transaction. Its shareholders will be the current Vermont Pure
shareholders and the current Crystal Rock shareholders. Depending on the market
value of Vermont Pure common stock at the time of the closing, Crystal Rock
shareholders, consisting of members of the Baker family and related family
trust, will own between 49.0% to approximately 51.9% of the outstanding common
stock of VP Merger Parent. The existing Vermont Pure shareholders will own the
remaining shares of VP Merger Parent.
-- MANAGEMENT OF VP MERGER PARENT FOLLOWING THE BUSINESS COMBINATION (SEE PAGE
38)
After the transaction, the board of directors of VP Merger Parent will
consist of nine directors: Henry E. Baker, Peter K. Baker, Ross S. Rapaport and
all of the current Vermont Pure directors except for Frank McDougall and Richard
Worth.
-- CLOSING AND EFFECTIVE DATE OF THE BUSINESS COMBINATION (SEE PAGE 22)
Completion of the transaction is expected to close and become effective
within one business day following approval of the merger by our shareholders.
-- LISTING OF OUR COMMON STOCK (SEE PAGE 42)
The share of VP Merger Parent common stock issued in connection with the
business combination will be listed on the American Stock Exchange and will
continue to be listed under the symbol "VPS."
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VERMONT PURE HOLDINGS, LTD.
ROUTE 66, P.O. BOX C, CATAMOUNT INDUSTRIAL PARK
RANDOLPH, VERMONT 05060
(802) 728-3600
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NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON OCTOBER 5, 2000
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TO OUR SHAREHOLDERS:
A special meeting of shareholders of Vermont Pure Holdings, Ltd. will be
held on October 5, 2000 at the offices of Foley, Hoag & Eliot LLP, Sixteenth
Floor, One Post Office Square, Boston, Massachusetts, commencing at 10:00 a.m.,
local time, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt the
agreement and plan of merger and contribution dated as of May 5, 2000, as
amended, among Vermont Pure Holdings, Ltd., VP Merger Parent, Inc., VP
Acquisition Corp., Crystal Rock Spring Water Company and the stockholders
of Crystal Rock, as more fully described in the accompanying proxy
statement and in appendix A. If the transaction is approved by our
shareholders, each share of common stock of existing Vermont Pure will be
automatically converted into one share of VP Merger Parent common stock.
2. To consider and vote upon a proposal to amend the 1998 Stock Option
Plan of Vermont Pure as more fully described in the accompanying proxy
statement and in appendix C. If the amendment is approved, the number of
shares covered by the plan will increase from 500,000 to 1,500,000.
3. To consider and vote upon a proposal to adjourn the special meeting
if necessary to permit further solicitation of proxies if there are not
sufficient votes at the time of the special meeting to approve Items 1 and
2 or either of them.
The persons named as proxies shall have discretionary authority to vote on
any matter which the board of directors of Vermont Pure did not know, a
reasonable time before the meeting, would be presented at the meeting, as well
as on matters incident to the conduct of the meeting.
Shareholders of record as of the close of business on August 30, 2000 will
be entitled to notice of, and to vote at, the special meeting and any
adjournments thereof. All shareholders are cordially invited to attend the
meeting.
YOU ARE URGED TO READ THE ATTACHED PROXY STATEMENT/PROSPECTUS, WHICH
CONTAINS INFORMATION RELEVANT TO THE ACTIONS TO BE TAKEN AT THE MEETING. WHETHER
OR NOT YOU EXPECT TO ATTEND THE MEETING IN PERSON, PLEASE SIGN AND DATE THE
ACCOMPANYING PROXY CARD AND MAIL IT PROMPTLY IN THE ENCLOSED ADDRESSED, POSTAGE
PREPAID ENVELOPE. YOU MAY REVOKE YOUR PROXY IF YOU SO DESIRE AT ANY TIME BEFORE
IT IS VOTED.
BY ORDER OF THE BOARD OF DIRECTORS
Bruce S. MacDonald
Secretary
September 8, 2000
Randolph, Vermont
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FINDING IMPORTANT INFORMATION
This proxy statement/prospectus contains important information about
Vermont Pure and Crystal Rock and the proposed business combination that you
should read and consider carefully before you vote your shares. The principal
sections of this document are located at the pages referenced in the table of
contents below. Some of the documents related to this transaction are included
as appendices to this document.
TABLE OF CONTENTS
<TABLE>
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SUMMARY
The Companies Involved in the Business Combination........ 1
Approval Necessary for the Business Combination........... 1
Special Meeting of Vermont Pure Shareholders.............. 1
Additional Considerations................................. 1
Selected Historical Financial Data of Vermont Pure Holdings,
Ltd....................................................... 5
Selected Historical Financial Data of Crystal Rock Spring
Water Company............................................. 7
Selected Pro Forma Combined Financial Data.................. 9
Comparative and Pro Forma Per Share Financial Data.......... 11
Market Prices and Dividend Policies......................... 12
RISK FACTORS................................................ 13
WHERE YOU CAN FIND MORE INFORMATION......................... 17
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
INFORMATION............................................... 17
SPECIAL MEETING OF SHAREHOLDERS............................. 18
ITEM 1. PROPOSAL TO APPROVE THE BUSINESS COMBINATION........ 20
General................................................... 20
Vermont Pure Shares to be Converted....................... 21
Treatment of Vermont Pure Stock, Options and Warrants..... 21
Representations and Warranties............................ 21
Conduct of Business Pending the Business Combination...... 21
Conditions to the Business Combination.................... 22
Closing and Effective Time................................ 22
Exchange of Crystal Rock Certificates..................... 22
Formula Pricing........................................... 23
Background of the Business Combination.................... 23
Opinion of Duff & Phelps LLC.............................. 25
Vermont Pure's Reasons for the Business Combination....... 30
Crystal Rock's Reasons for the Business Combination....... 31
Conflicts of Interest of Mr. Fallon and Others............ 31
Interests of Crystal Rock's Management and Certain
Shareholders in the Business Combination............... 34
Crystal Rock Related Party Transactions................... 36
OWNERSHIP OF VP MERGER PARENT FOLLOWING THE BUSINESS
COMBINATION............................................... 37
MANAGEMENT OF VP MERGER PARENT FOLLOWING THE BUSINESS
COMBINATION............................................... 38
INDEBTEDNESS WE WILL INCUR IN CONNECTION WITH THE BUSINESS
COMBINATION............................................... 39
Senior Debt............................................... 39
12% Subordinated Promissory Notes due 2007................ 41
RESALE OF VP MERGER PARENT COMMON STOCK AND AMERICAN STOCK
EXCHANGE LISTING.......................................... 42
</TABLE>
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<TABLE>
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NO DISSENTER'S RIGHTS FOR VERMONT PURE'S SHAREHOLDERS....... 43
MATERIAL FEDERAL INCOME TAX CONSEQUENCES.................... 43
ACCOUNTING TREATMENT........................................ 44
ITEM 2. PROPOSAL TO AMEND THE 1998 INCENTIVE AND
NON-STATUTORY STOCK OPTION PLAN........................... 45
Action to be Considered................................... 45
Description of the 1998 Plan.............................. 45
New Plan Benefits......................................... 47
ITEM 3. PROPOSAL TO ADJOURN THE VERMONT PURE SPECIAL MEETING
TO PERMIT FURTHER SOLICITATION OF PROXIES IF NECESSARY.... 48
INFORMATION CONCERNING VERMONT PURE HOLDINGS, LTD. ......... 49
Business.................................................. 49
Industry Background....................................... 49
Our Background............................................ 49
Description of Water Sources.............................. 50
Products.................................................. 51
Marketing................................................. 51
Slotting Fees............................................. 52
Advertising and Promotion................................. 52
Sales and Distribution.................................... 52
Competition............................................... 53
Intellectual Property..................................... 54
Packaging................................................. 54
Supplies.................................................. 54
Seasonality............................................... 55
Government Regulation..................................... 55
Employees................................................. 55
Property.................................................. 55
Legal Proceedings......................................... 56
DIRECTORS AND OFFICERS OF VERMONT PURE...................... 57
Biographical.............................................. 57
Executive Compensation.................................... 58
Aggregate Year-End Option Value........................... 59
Employment Agreements..................................... 59
Director Compensation..................................... 60
Compensation Committee, Interlocks and Insider
Participation.......................................... 60
VOTING SECURITIES AND PRINCIPAL SHAREHOLDERS OF VERMONT
PURE...................................................... 61
Amount and Nature of Beneficial Ownership................. 61
Employee Stock Purchase Plan.............................. 61
VERMONT PURE'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............. 62
Results of Operations..................................... 62
Liquidity and Capital Resources........................... 63
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK...................................................... 68
DESCRIPTION OF VP MERGER PARENT COMMON STOCK................ 69
Common Stock.............................................. 69
Preferred Stock........................................... 69
Corporate Provisions...................................... 69
</TABLE>
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<TABLE>
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INFORMATION CONCERNING CRYSTAL ROCK SPRING WATER COMPANY.... 71
The Company............................................... 71
Business.................................................. 71
Company Background........................................ 71
Description of Water Sources.............................. 72
Products.................................................. 72
Marketing................................................. 73
Slotting Fees............................................. 73
Advertising and Promotion................................. 73
Sales and Distribution.................................... 73
Competition............................................... 73
Intellectual Property..................................... 74
Packaging................................................. 74
Supplies.................................................. 74
Seasonality............................................... 74
Government Regulation..................................... 74
Employees................................................. 75
Property.................................................. 75
Legal Proceedings......................................... 75
DIRECTORS AND OFFICERS OF CRYSTAL ROCK...................... 76
Biographical.............................................. 76
Compensation of Crystal Rock's Officers and Directors..... 77
Crystal Rock Employment Agreements and Certain
Transactions........................................... 77
VOTING SECURITIES AND PRINCIPAL SHAREHOLDERS OF CRYSTAL
ROCK...................................................... 78
CRYSTAL ROCK'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............. 79
Overview.................................................. 79
Significant Events........................................ 79
Results of Operations..................................... 79
Liquidity and Capital Resources........................... 80
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK...................................................... 83
COMPARISON OF RIGHTS OF SHAREHOLDERS........................ 83
Notice of Business at a Meeting of the Stockholders....... 83
No Action by Consent...................................... 84
Nomination of Directors................................... 84
Summary Comparisons....................................... 84
LEGAL MATTERS............................................... 85
EXPERTS..................................................... 85
COMMISSION POSITION ON INDEMNIFICATION...................... 85
VERMONT PURE AND CRYSTAL ROCK UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS...................................... 86
INDEX TO FINANCIAL STATEMENTS............................... F-1
</TABLE>
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<TABLE>
<S> <C> <C>
Appendix A Agreement and Plan of Merger and Contribution............... A-1
Exhibit A Form of Certificate of Merger
Exhibit B Certificate of Incorporation of Parent
Exhibit C By-laws of Parent
Exhibit D Table of Cash, Parent Stock and Subordinated Notes Payable
to each of the Stockholders
Exhibit N Form of Lock-Up Agreement
Appendix B Opinion of Duff & Phelps LLC................................ B-1
Appendix C 1998 Incentive and Non-Statutory Stock Option Plan, as C-1
amended.....................................................
</TABLE>
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SUMMARY
This summary highlights selected information from this document and may not
contain all of the information that is important to you. To understand the
transaction fully, and for more complete descriptions of the terms of the
transaction, you should read carefully this entire document and the documents to
which we refer you. Please also refer to the section entitled "Where You Can
Find More Information" on page 17 for sources of additional information.
-- THE COMPANIES INVOLVED IN THE BUSINESS COMBINATION (SEE PAGES 48 AND 70)
VERMONT PURE HOLDINGS, LTD.
Route 66, P.O. Box C, Catamount Industrial Park
Randolph, Vermont 05060
(802) 728-3600
We are a bottler and distributor of natural spring water. Our primary
business is the marketing of Vermont Pure and Hidden Springs branded natural
spring water to retail and home and office delivery markets in New England, New
York and New Jersey as well as in the Mid-Atlantic and Mid-Western states.
CRYSTAL ROCK SPRING WATER COMPANY
1050 Buckingham Street
Watertown, Connecticut 06795
(800) 525-0070
Crystal Rock is a bottled water manufacturer focusing on the still,
non-carbonated segment of the bottled water industry. Crystal Rock's primary
business is the marketing and distribution of Crystal Rock brand of purified and
mineralized drinking water to the home and office delivery markets. Crystal Rock
also sells coffee and other refreshment products and vending services in
Connecticut, New York and Massachusetts.
-- APPROVAL NECESSARY FOR THE BUSINESS COMBINATION (SEE PAGE 19)
The business combination must be approved by the shareholders of Vermont
Pure at the special meeting described below. The board of directors and the
shareholders of Crystal Rock have already approved the transaction.
-- SPECIAL MEETING OF VERMONT PURE SHAREHOLDERS (SEE PAGE 18)
Time, Date, Place and Purpose. We will hold a special meeting of our
shareholders on October 5, 2000 at 10:00 a.m., local time, at the offices of
Foley, Hoag & Eliot LLP, Sixteenth Floor, One Post Office Square, Boston,
Massachusetts. At the meeting, our shareholders will vote on the merger
agreement and the proposals to amend the Vermont Pure option plan and to adjourn
the special meeting if necessary to permit the solicitation of additional
proxies if there do not appear to be sufficient votes to approve the other
matters on the agenda.
ADDITIONAL CONSIDERATIONS
-- CONFLICTS OF INTEREST OF MR. FALLON AND OTHERS (SEE PAGE 31)
In considering our board's recommendations that you vote in favor of the
transaction, you should be aware that certain of our officers and directors may
have interests in the transaction, that are different from, or in addition to,
your interests in the transaction. For example, Timothy G. Fallon, our Chief
Executive Officer, President and Chairman of the Board, has direct conflict of
interest (1) in making his recommendation and (2) in voting to approve the
merger and to approve the transaction. Additionally, Bruce S. MacDonald, our
Chief Financial Officer and Secretary, and members of the board may have the
same conflicts of interest. Upon completion of the transaction, Messrs. Fallon
and MacDonald will have employment agreements with VP Merger Parent which
provide for the grant of options and bonuses.
Under his new employment agreement, Mr. Fallon will: (1) receive a $45,000
increase over his current salary, (2) be eligible to receive incentive bonuses
of up to $200,000, (3) be eligible for three, one-time
1
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special bonuses totaling $125,000, and (4) receive stock options for the
purchase of 500,000 shares of VP Merger Parent common stock exercisable at fair
market value. Pursuant to Mr. MacDonald's new employment agreement, he will: (1)
receive a $5,000 increase over his current salary, (2) be eligible to receive
incentive bonuses of up to $75,000, and (3) receive stock options for the
purchase of 100,000 shares of VP Merger Parent common stock exercisable at fair
market value. In addition, our officers and directors are entitled to
indemnification by Vermont Pure and are covered by liability insurance for their
actions as directors and officers.
-- INTERESTS OF CRYSTAL ROCK'S MANAGEMENT AND SHAREHOLDERS IN THE BUSINESS
COMBINATION (SEE PAGE 34)
Henry E. Baker, Peter K. Baker and John B. Baker have interests in the
business combination that are different from, or in addition to, your interests
in the transaction. For example, each of the Bakers will receive consideration
for their shares of Crystal Rock, and each of them will have employment
agreements with VP Merger Parent. In addition, as described above, Henry E.
Baker, as Trustee, will acquire and leaseback to Crystal Rock that company's
bottling facility in Watertown, Connecticut, and Henry E. Baker will lease real
estate in Stamford, Connecticut to Crystal Rock.
-- CONDITIONS TO THE BUSINESS COMBINATION (SEE PAGE 22)
Completion of the transaction depends upon the satisfaction or waiver of a
number of conditions.
-- ACCOUNTING TREATMENT (SEE PAGE 44)
The merger and contribution will be accounted for as a purchase.
-- FAIRNESS OPINION OF DUFF & PHELPS LLC (SEE PAGE 25)
In deciding to approve the business combination, we considered the opinion
of Duff & Phelps LLC that the aggregate consideration paid for all of the
outstanding stock of Crystal Rock is fair, from a financial point of view, to us
and our stockholders. This opinion is attached as appendix B to this proxy
statement/prospectus.
-- DIVIDENDS AFTER THE BUSINESS COMBINATION (SEE PAGE 12)
We have never paid dividends since our inception in 1990 and do not
anticipate paying cash dividends on our common stock in the foreseeable future.
We currently intend to retain future earnings to finance our operations and fund
the growth of our business, including through acquisitions. In addition, our
loan agreement with Webster Bank prohibits our paying dividends.
-- FEDERAL INCOME TAX CONSEQUENCES (SEE PAGE 43)
Based on an opinion issued to us by Foley, Hoag & Eliot LLP, our special
tax counsel, we expect that the merger will be treated for United States federal
income tax purposes as part of a transaction described in Section 351 of the
Internal Revenue Code or will constitute a reorganization or a part of a
reorganization within the meaning of Section 368(a) of the Code. Counsel has
opined that as a general matter none of our stockholders, VP Merger Parent,
Vermont Pure and VP Acquisition Corp. will recognize any gain or loss for
federal income tax purposes as a result of the business combination.
-- DIFFERENCE IN SHAREHOLDERS' RIGHTS (SEE PAGE 82)
The rights of Vermont Pure shareholders will change in some respects
because of the business combination. Although VP Merger Parent and we are both
Delaware corporations, there are some differences in the certificates of
incorporation and by-laws of the two companies. Those differences might be
considered to make it more difficult for an outside group to gain control of VP
Merger Parent. Upon completion of the merger, your rights as a shareholder of VP
Merger Parent will be governed by Delaware General Corporation Law and by VP
Merger Parent's Certificate of Incorporation and by-laws.
-- REGULATORY APPROVALS (SEE PAGE 22)
There are no federal or state regulatory requirements that must be complied
with, or approvals that must be obtained, to complete the business combination.
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-- FORMULA PRICING (SEE PAGE 23)
The consideration that Crystal Rock will receive in connection with the
business combination consists of cash, promissory notes, and shares of VP Merger
Parent common stock. The number of shares of VP Merger Parent common stock will
be determined, in part, on a formula based on the price of the existing Vermont
Pure common stock during the period prior to the closing of the transaction. The
formula allows for a range of possible prices between $2.80 and $3.15 per share.
Based on available information as of August 30, 2000, the number of shares would
be calculated as follows: $31,100,000/$3.15 per share = 9,873,016 shares. At the
lowest end of the range, $2.80 per share, the Crystal Rock stockholders would
receive 11,107,143 shares. Neither party to the merger agreement has the right
to terminate the merger agreement by reason of the stock price of Vermont Pure.
-- EFFECT OF THE BUSINESS COMBINATION ON VERMONT PURE OPTIONS AND WARRANTS (SEE
PAGE 21)
Vermont Pure stock options and warrants will be converted into options or
warrants to purchase the same number of shares, on the same terms, of VP Merger
Parent common stock. For example, if you have the option to buy 100 shares of
Vermont Pure stock at $2.50 per share, after the transaction you will have the
right to buy 100 shares of VP Merger Parent common stock at $2.50 per share.
-- OTHER MATTERS TO BE VOTED ON AT THE SPECIAL MEETING (SEE PAGE 44)
In connection with the merger and contribution, some of the employees of
Vermont Pure and Crystal Rock will be entitled to receive options to purchase VP
Merger Parent common stock. To make that possible, we are asking the
shareholders of Vermont Pure to amend the Vermont Pure 1998 Stock Option Plan to
increase the number of shares of stock covered by the plan, which is being
assumed by VP Merger Parent. However, if the shareholders do not approve the
amendment to increase the shares covered by the stock option plan, but do
approve the transaction, then the parties will still proceed with the merger and
contribution.
Also, we are asking the shareholders of Vermont Pure to approve an
adjournment to the special meeting to permit us to solicit additional proxies in
favor of the matters to be presented at the meeting if there do not appear to be
sufficient votes to pass them at the time of the meeting.
Under Delaware law, only the specific matters included in a notice of the
meeting and procedural motions regarding the conduct of the meeting may be
presented for shareholder approval at a special meeting. We do not expect to ask
you to vote on any other matters at the special meeting. However, if a motion is
made to take some other action, including a procedural action such as to adjourn
the meeting, you may also be asked to vote on such action at the special
meeting. If you send your proxy card to us for use at the special meeting and do
not revoke that proxy, we will have authority to vote your shares in our
discretion with regard to any such other motion or action that may arise. See
"The Special Meeting."
-- SENDING IN YOUR PROXY OR ABSTAINING FROM VOTING (SEE PAGE 19)
Vermont Pure will count a properly executed proxy marked "ABSTAIN" for
purposes of determining whether there is a quorum, and the shares represented by
that proxy will be voted to abstain at the special meeting. If you fail to give
instructions to a broker who holds your shares in "street name" but does not
have discretion to vote your shares, and the broker submits a so-called
"non-voted" with respect to your shares, those shares will be counted for quorum
purposes but not voted. Because the affirmative vote of a majority of the votes
eligible to be cast by all Vermont Pure shareholders is required for approval of
the merger agreement, if you mark your proxy "ABSTAIN" or your broker submits a
"non-vote" for your shares, that will have the effect of a "NO" vote for
purposes of approving the merger agreement.
For the other items on the agenda, votes to "ABSTAIN" and broker
"non-votes" will be counted for quorum purposes but only abstentions will count
as votes cast. For those items, a majority of the votes present or represented
at the meeting and cast must be voted "FOR" those items to approve them.
-- TREATMENT OF SHARES HELD IN "STREET NAME" (SEE PAGE 19)
Unless your broker has discretionary authority to vote your shares, your
broker will vote your shares only if you provide instructions on how to vote.
You should follow the directions provided by your broker regarding how to
instruct your broker to vote your shares.
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-- ACTION TO TAKE NOW (SEE PAGE 19)
Just sign your proxy card and mail it in the enclosed return envelope as
soon as possible, so that your shares may be represented at the special meeting.
-- CHANGING YOUR VOTE (SEE PAGE 20)
Just send in a later dated, signed proxy card before your special meeting
or attend the special meeting in person and vote.
4
<PAGE> 13
SELECTED HISTORICAL FINANCIAL DATA OF VERMONT PURE HOLDINGS, LTD.
The following table contains selected historical financial data of Vermont
Pure. This data is qualified by the more detailed consolidated financial
statements and the notes to those financial statements included in this proxy
statement/prospectus beginning on page F-1. The consolidated statement of
earnings data for the last five fiscal years ended October 31 and the
consolidated balance sheet data as of the end of each fiscal year are derived
from our financial statements which were audited by Feldman Sherb & Co., P.C. of
New York City. Their report is included in this proxy statement/prospectus
beginning on page F-2.
The consolidated statement of earnings data for the six months ended May 1,
1999 and April 30, 2000 and the consolidated balance sheet data as of May 1,
1999 and April 30, 2000 are derived from unaudited financial statements. The
unaudited financial statements include all adjustments (consisting only of
normal recurring adjustments consistently applied in accordance with generally
accepted accounting principles) that we consider necessary for a fair
presentation of the results of operations for these periods. The following data
should be read together with our "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements, the
notes to those financial statements and other financial information pertaining
to us included elsewhere in this proxy statement/prospectus.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
-------------------------------------------------------- --------------------
OCT. 28, OCT. 26, OCT. 25, OCT. 31, OCT. 30, MAY 1, APRIL 30,
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- ------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales..................... $ 8,517 $11,879 $17,685 $29,169 $31,396 $13,680 $14,648
Gross profit.................. $ 3,447 $ 5,717 $10,041 $17,619 $19,654 $ 8,696 $ 9,104
Income (loss) from
operations.................. $(2,063) $(1,010) $ 838 $ 2,064 $ 2,635 $ 992 $ 281
Net income (loss)............. $(2,804) $(1,267) $ 1,067 $ 2,859 $ 3,399 $ 511 $ (180)
Net income (loss) per share --
basic....................... $ (.30) $ (.13) $ .11 $ .28 $ .33 $ .05 $ (.02)
Weighted average shares used
in computation -- basic..... 9,345 9,678 9,771 10,248 10,279 10,255 10,290
Net income (loss) per share --
diluted..................... $ (.30) $ (.13) $ .11 $ .26 $ .31 $ .05 $ (.02)
Weighted average shares used
in computation -- diluted... 9,345 9,678 9,806 10,927 10,791 10,876 10,290
EBITDA(1)..................... $(1,947) $ (294) $ 1,996 $ 3,934 $ 4,736 $ 1,962 $ 1,805
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
-------------------------------------------------------- --------------------
OCT. 28, OCT. 26, OCT. 25, OCT. 31, OCT. 30, MAY 1, APRIL 30,
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- ------- ---------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA:
Cash and cash
equivalents(2).............. $ 1,543 $ 783 $ 94 $ 161 $ 367 $ 627 $ 1,563
Working capital(3)............ $ 1,847 $ 319 $ 257 $ 735 $ 3,028 $ 2,953 $ 6,300
Total assets.................. $ 9,267 $ 9,971 $16,546 $26,173 $33,834 $28,165 $41,109
Long-term debt................ $ 1,882 $ 2,878 $ 6,500 $11,316 $14,418 $13,546 $20,466
Total shareholders' equity.... $ 5,794 $ 4,526 $ 6,642 $ 9,965 $13,481 $10,519 $13,302
</TABLE>
5
<PAGE> 14
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
------------------------------------------------------------------- -------------------------
OCTOBER 28, OCTOBER 26, OCTOBER 25, OCTOBER 31, OCTOBER 30, MAY 1, APRIL 30,
1995 1996 1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
CASH FLOW DATA:
Net cash flows provided by
(used in) operating
activities................. $1,543 $ 783 $ 1,430 $ 2,806 $ 740 $ 223 $(3,422)
Net cash flows provided by
(used in) investing
activities................. $1,847 $ 319 $(3,750) $(7,375) $(4,026) $(1,412) $(2,413)
Net cash flows provided by
financing activities....... $9,267 $9,971 $ 1,631 $ 4,636 $ 3,492 $ 1,655 $ 7,031
Net increase (decrease) in
cash....................... $1,882 $2,878 $ (689) $ 67 $ 206 $ 466 $ 1,196
</TABLE>
---------------
(1) Represents income before deducting interest on debt, federal and state
income taxes, depreciation of property, plant and equipment, and
amortization of goodwill and costs related to acquisitions. This calculation
is unaudited and may differ from the same or similarly titled measures
presented by other companies or by financial analysts.
EBITDA is frequently considered by readers of financial statements and we
believe that inclusion of EBITDA is useful supplemental information to generally
accepted profitability measures. In this context, it may be understood as one
measure of the ability of a company to continue to generate resources to grow.
In addition, EBITDA is used in determining incentive bonuses for our executive
officers and employees, and the terms of our primary financing use the measure
both to determine the interest rate of outstanding debt and as a financial
covenant. However, EBITDA is not a measure of true cash flow since it does not
incorporate changes of other assets and liabilities that may generate or require
cash. For a full and accurate assessment of cash flows and liquidity, we urge
you to read the financial measures presented in the audited balance sheets and
statements of cash flow, particularly cash flow from operating, investing and
financing activities. EBITDA is not a generally accepted accounting measure. It
only provides one assessment of cash flow and does not consider all of the
factors that ultimately determine a company's value.
(2) As of April 30, 2000, $975 of cash is restricted as collateral and is not
available for discretionary use.
(3) As of April 30, 2000, $2,941 of working capital was restricted in
conjunction with an Industrial Revenue Bond and is restricted to use for the
purchase and installation of building and equipment.
6
<PAGE> 15
SELECTED HISTORICAL FINANCIAL DATA OF CRYSTAL ROCK SPRING WATER COMPANY
The following table contains selected financial data of Crystal Rock and is
qualified by the more detailed financial statements and notes to those financial
statements included elsewhere in this proxy statement/prospectus. The statement
of operations data for the last five fiscal years ended October 31 and the
balance sheet data as of the end of each fiscal year are derived from Crystal
Rock's financial statements which were audited by Berger, Knoth & Company, P.C.
of Stamford, Connecticut. Their report is included in this proxy
statement/prospectus beginning on page F-31.
The statement of operations data for the six months ended April 30, 1999
and 2000 and the balance sheet data as of April 30, 1999 and 2000 are derived
from unaudited financial statements. The unaudited financial statements include
all adjustments (consisting only of normal recurring adjustments) that Crystal
Rock considers necessary for a fair presentation of the results of operations
for these periods. The following data should be read together with Crystal
Rock's "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the financial statements, the notes to those financial
statements and the other financial information pertaining to Crystal Rock
included elsewhere in this proxy statement/prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED OCTOBER 31, APRIL 30,
--------------------------------------------------- ------------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................................. $15,171 $16,796 $19,638 $22,431 $24,018 $11,353 $12,426
Gross profit............................... $ 8,454 $ 9,317 $11,800 $13,586 $14,760 $ 7,042 $ 7,664
Income from operations..................... $ 830 $ 882 $ 1,051 $ 1,547 $ 1,585 $ 2,002 $ 2,081
Other (expense), net....................... $ (317) $ (292) $ (389) $ (402) $ (275) $ (161) $ (148)
Net income................................. $ 284 $ 304 $ 352 $ 649 $ 748 $ 1,077 $ 1,131
Net income per share -- basic.............. $165.84 $177.58 $205.88 $379.44 $437.20 $629.98 $661.41
Weighted average shares used in
computation -- basic..................... 1,710 1,710 1,710 1,710 1,710 1,710 1,710
Net income per share -- diluted............ $165.84 $177.58 $205.88 $379.44 $437.20 $629.98 $661.41
Weighted average shares used in
computation -- diluted................... 1,710 1,710 1,710 1,710 1,710 1,710 1,710
EBITDA(1).................................. $ 1,874 $ 2,080 $ 2,480 $ 3,139 $ 3,341 $ 2,815 $ 3,037
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF OCTOBER 31, APRIL 30,
--------------------------------------------------- ------------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash....................................... $ 43 $ 55 $ 139 $ 80 $ 430 $ 1,283 $ 852
Working capital............................ $ 2,034 $ 1,890 $ 2,619 $ 2,175 $ 2,360 $ 3,385 $ 2,863
Total assets............................... $10,463 $10,560 $13,333 $13,748 $14,283 $14,966 $15,250
Long-term debt............................. $ 5,981 $ 5,574 $ 7,947 $ 7,267 $ 6,934 $ 7,331 $ 6,737
Total shareholders' equity................. $ 3,455 $ 3,764 $ 4,116 $ 4,764 $ 5,512 $ 5,842 $ 6,643
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
------------------------------------------------------------------- ------------------
OCTOBER 28, OCTOBER 28, OCTOBER 26, OCTOBER 31, OCTOBER 30, MAY 1, APRIL 30,
1995 1996 1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- ----------- ------ ---------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF CASH FLOW
DATA:
Net cash flows provided by operating
activities........................... $ 736 $ 1,762 $ 1,175 $ 2,577 $ 2,660 $1,746 $ 2,039
Net cash flows (used in) investing
activities........................... $(1,497) $(1,119) $(2,771) $(1,826) $(1,806) $(603) $(1,312)
Net cash flows provided by (used in)
financing activities................. $ 531 $ (631) $ 1,680 $ (809) $ (504) $ 60 $ (305)
Net increase (decrease) in cash........ $ (230) $ 12 $ 84 $ (58) $ 350 $1,203 $ 421
</TABLE>
---------------
(1) Represents income before deducting interest on debt, federal and state
income taxes, depreciation of property, plant and equipment, and
amortization of goodwill and costs related to acquisitions. This calculation
is unaudited and may differ from the same or similarly titled measures
presented by other companies or by financial analysts.
7
<PAGE> 16
EBITDA is frequently used by readers of financial statements and we believe
that inclusion of EBITDA is useful supplemental information to generally
accepted profitability measures. In this context, it may be understood as
one measure of the ability of a company to continue to generate resources to
grow. However, EBITDA is not a measure of true cash flow since it does not
incorporate changes of other assets and liabilities that may require or
generate cash. For a full and accurate assessment of cash flows and
liquidity, we urge you to read the financial measures presented in the
audited balance sheets and statements of cash flow, particularly cash flow
from operating, investing and financing activities. EBITDA is not a general
accepted accounting measure. It only provides one assessment of cash flow
and does not consider all of the factors that ultimately determine a
company's value.
8
<PAGE> 17
SELECTED PRO FORMA COMBINED FINANCIAL DATA
We derived the selected pro forma combined financial data of Vermont Pure
and Crystal Rock from the pro forma combined financial statements included
elsewhere in this proxy statement/prospectus. The following data is unaudited
and should be read in conjunction with the financial statements and the
accompanying notes of Vermont Pure and Crystal Rock and their respective
"Management's Discussions and Analysis of Financial Condition and Results of
Operations," all of which are included elsewhere in this proxy
statement/prospectus. The unaudited pro forma data is not necessarily indicative
of the combined financial position or results of operations of future periods.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
10/30/99 4/30/00
---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales................................................... $55,414 $27,074
Gross profit................................................ $34,689 $16,859
Income from operations...................................... $ 5,290 $ 1,706
Other (expense), net........................................ $(4,887) $(2,323)
Net income (loss)........................................... $ 1,917 $ (831)
Net income (loss) per share -- basic........................ $ 0.09 $ (.04)
Weighted average used in computation shares
outstanding -- basic...................................... $20,733 $20,774
Net income (loss) per common share -- diluted............... $ 0.09 $ (.04)
Weighted average used in computation shares
outstanding -- diluted.................................... $21,245 $21,060
EBITDA (1).................................................. $11,682 $ 5,362
</TABLE>
<TABLE>
<CAPTION>
AS OF
APRIL 30, 2000
--------------
(UNAUDITED)
<S> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 2,672
Working capital............................................. $ 6,380
Total assets................................................ $107,380
Long-term debt.............................................. $ 54,468
Total shareholders equity................................... $ 44,401
</TABLE>
---------------
(1) Represents income before deducting interest on debt, federal and state
income taxes, depreciation of property, plant and equipment, and
amortization of goodwill and costs related to acquisitions. This calculation
is unaudited and may differ from the same or similarly titled measures
presented by other companies or by financial analysts.
EBITDA is frequently used by readers of financial statements and we believe
that inclusion of EBITDA is useful supplemental information to generally
accepted profitability measures. In this context, it may be understood as
one measure of the ability of a company to continue to generate resources to
grow. In addition, EBITDA is used to determine incentive bonuses of
executives of the combined company and also as a measure to determine the
interest rate on outstanding debt and as a financial covenant. However,
EBITDA is not a measure of true cash flow since it does not incorporate
changes of other assets and liabilities that may require or generate cash.
For a full and accurate assessment of cash flows and liquidity, we urge you
to read the financial measures presented in the audited balance sheets and
statements of cash flow, particularly cash flow from operating, investing
and financing activities. EBITDA is not a general accepted accounting
measure. It only provides one assessment of cash flow and does not consider
all of the factors that ultimately determine a company's value.
For further discussion, see footnotes (2) and (3) to the "Selected
Historical Financial Data of Vermont Pure Holdings, Ltd." on page 6.
In addition to pro forma adjustments that are factually supportable under
applicable accounting rules of the SEC, we and the management of Crystal Rock
anticipate that the merger and contribution will result in significant pre-tax
synergies for the combined companies.
9
<PAGE> 18
We have not shown the following amounts in the pro forma financials as they
are estimates. While we believe these savings are achievable and realistic,
there is no assurance that we can achieve them, or that unanticipated
inefficiencies may outweigh some or even all of the operational synergies we
have described.
- Cost of goods sold: We anticipate a 1% savings ($100,000) in the cost of
PET bottles and caps, coffee and other grocery products for resale by
reason of synergies and combined buying power.
- Cooler reconditioning: We anticipate a $100,000 savings (25%) in our
costs of cooler reconditioning when the activity is consolidated into
Crystal Rock's facilities.
- Closing of Shelton and Hartford distribution facilities: We can close
these facilities because Crystal Rock's distribution in that area of
Connecticut overlaps our own, with an expected savings of $426,000 (75%).
- Elimination of duplicate selling and customer service activities and
advertising expense: We anticipate savings of approximately $325,000 by
eliminating selling and customer service expenses in areas of geographic
overlap of the separate companies. We estimate a 16.7% reduction in
duplicate advertising expense, or $750,000.
- Elimination of duplicate administrative expense: We believe that we can
reduce our combined legal and accounting expense from $585,000 to
$360,000, a savings of $225,000 (38%).
10
<PAGE> 19
COMPARATIVE AND PRO FORMA PER SHARE FINANCIAL DATA
We show below the per share data for the net earnings (loss) and book value
for Vermont Pure and Crystal Rock on an historical basis and on a pro forma
combined basis. We derived the pro forma combined per Vermont Pure share data by
combining historical financial information of Vermont Pure and Crystal Rock
using the purchase method of accounting for business combinations.
The accounting adjustments used for the purpose of calculating the pro
forma combined results using the purchase method of accounting are based upon
estimates of our management and are subject to final determination as of the
closing date of the business combination. Therefore, the pro forma amounts
reflected in the pro forma per share financial information may differ from the
amounts ultimately determined. The unaudited pro forma information is not
necessarily indicative of the combined financial position or results of
operations of future periods.
<TABLE>
<CAPTION>
AS OF AND FOR AS OF AND FOR THE
THE YEAR ENDED SIX MONTHS ENDED
OCTOBER 31, 1999 APRIL 30, 2000
---------------- -----------------
(UNAUDITED)
<S> <C> <C>
HISTORICAL -- VERMONT PURE:
Net income (loss) per common share -- basic............... $ .33 $(.02)
Net income (loss) per common share -- diluted............. $ .31 $(.02)
Book value per common share............................... $1.31 $1.29
</TABLE>
<TABLE>
<S> <C> <C>
HISTORICAL -- CRYSTAL ROCK:
Net income per common share -- basic...................... $ 437.20 $ 661.41
Net income per common share -- diluted.................... $ 437.20 $ 661.41
Book value per common share............................... $3,223.39 $3,884.80
</TABLE>
<TABLE>
<S> <C> <C>
PRO FORMA COMBINED:
Net income (loss) per common share -- basic............... $.09 $(.04)
Net income (loss) per common share -- diluted............. $.09 $(.04)
Book value per common share............................... -- $2.14
</TABLE>
<TABLE>
<S> <C> <C>
Pro Forma Combined per Crystal Rock Equivalent Common
Share Data(1):
Net income (loss) per common share basic.................. $550.20 $ (244.53)
Net income (loss) per share diluted....................... $550.20 $ (244.53)
Book value per share...................................... -- $13,082.51
</TABLE>
---------------
(1) Calculated by multiplying the pro forma combined common share data by the
assumed exchange ratio of 6113.32280.
The accounting adjustments used for the purpose of calculating the pro
forma combined results using the purchase method of accounting are based upon
estimates of Vermont Pure's management and are subject to final determination as
of the closing date of the business combination. Therefore, the pro forma
amounts reflected in the pro forma per share financial information may differ
from the amounts ultimately determined. The unaudited pro forma information is
not necessarily indicative of the combined financial position or results of
operations of future periods.
11
<PAGE> 20
MARKET PRICES AND DIVIDEND POLICIES
Our common stock has traded on the American Stock Exchange since May 18,
1999 and is quoted under the symbol "VPS." There is no trading market for
Crystal Rock stock. The following table shows the high and low sale prices of
our common stock, as reported in published financial sources, for the periods
indicated. Sales prices have been rounded to the nearest full cent.
<TABLE>
<CAPTION>
SALES PRICES
--------------
HIGH LOW
----- -----
<S> <C> <C>
FISCAL YEAR ENDED OCTOBER 31, 1998
First Quarter............................................. $4.56 $3.85
Second Quarter............................................ $5.44 $3.63
Third Quarter............................................. $4.88 $3.88
Fourth Quarter............................................ $4.50 $2.75
FISCAL YEAR ENDED OCTOBER 30, 1999
First Quarter............................................. $4.85 $3.13
Second Quarter............................................ $4.50 $3.19
Third Quarter............................................. $3.88 $3.19
Fourth Quarter............................................ $3.63 $2.63
FISCAL YEAR ENDED OCTOBER 31, 2000
First Quarter............................................. $3.00 $2.50
Second Quarter............................................ $3.75 $2.69
Third Quarter............................................. $3.00 $4.00
Fourth Quarter through August 30.......................... $3.25 $3.81
</TABLE>
We have never paid dividends on our common stock and do not anticipate
paying cash dividends in the foreseeable future. We intend to retain any future
earnings for reinvestment in the operation and expansion of our business,
including possible acquisitions of other businesses. In addition, payment of any
future dividends will be at the discretion of our board of directors after
taking into account various factors, including the financial condition,
operating results, current and anticipated cash needs and plans for expansion of
VP Merger Parent and its subsidiaries. Crystal Rock has never paid dividends on
its common stock. In addition, our loan agreement with Webster Bank prohibits
the payment of dividends.
On May 5, 2000, which was the last full trading day prior to the public
announcement of the signing of the merger agreement, the closing price of a
share of Vermont Pure common stock was $3.63. On August 30, 2000, the closing
price of Vermont Pure common stock was $3.56.
ON THE DATE THE MERGER IS COMPLETED, THE PRICE OF A SHARE OF VP MERGER
PARENT COMMON STOCK MAY DIFFER FROM THE PRICES SET FORTH ABOVE.
12
<PAGE> 21
RISK FACTORS
Before casting your vote on the merger agreement and the other proposals
that we are asking you to support, you should consider carefully the risks
associated with the transaction. If one or more of these risks occurs, our
results of operations, financial condition or prospects are likely to suffer,
and the price of our stock is likely to fall. The value of your investment in us
could decline as result.
These risk factors contain forward-looking statements within the meaning of
the federal securities laws. Such statements are subject to inherent risks and
uncertainties, some of which cannot be predicted or quantified. Our actual
results could differ materially from those reflected in forward-looking
statements. These forward-looking statements are intended to qualify for the
safe harbor provided by the Private Securities Litigation Reform Act of 1995.
Such safe harbor provisions apply to statements made herein by Vermont Pure
Holdings, Ltd. However, the safe harbor provisions do not apply to either VP
Merger Parent or Crystal Rock Spring Water Company because neither company is
subject to the reporting requirements of Section 13(a) or 15(d) of the
Securities Act at the time the statements are made.
IF WE AND CRYSTAL ROCK CANNOT SUCCESSFULLY INTEGRATE OUR BUSINESSES, THE
COMBINED COMPANY MAY NOT REALIZE THE EXPECTED BENEFITS FROM THE MERGER.
Integrating the operations of Crystal Rock with ours after the transaction
could be difficult, time consuming and costly.
The difficulties involved in integrating the companies, which could be
substantial, include:
- Management and key personnel could be distracted from the day-to-day
business of the combined company.
- The business cultures of the two companies could prove to be
incompatible.
- The business combination will result in a material amount of goodwill on
our balance sheet. Not only is goodwill an intangible asset, but the
amortization of our goodwill will adversely affect net income for many
years.
- We will have to incur substantial debt to run our business and pay the
consideration owed to the former Crystal Rock shareholders. Servicing
that debt will utilize a significant part of our cash flow.
- Implementing common systems and procedures, especially information and
accounting systems, could be unexpectedly costly and time consuming.
- We may not be able to retain key management, sales and customer support
personnel.
THE TRANSACTION IS EXPECTED TO REDUCE OUR NET INCOME PER SHARE AND OUR NET
TANGIBLE BOOK VALUE PER SHARE, WHICH COULD ADVERSELY AFFECT OUR STOCK PRICE.
The transaction is likely to have the effect of reducing our net income per
share. Under purchase accounting, we will record goodwill as an intangible asset
on our balance sheet in an amount estimated to be $57,301,000. Amortization of
this goodwill will lower our earnings by approximately $1,910,000 each year for
the 30-year amortization period. We also project that our shareholders will
experience an immediate reduction in net tangible book value per share.
Based on the pro forma financial statements prepared for the transaction,
the combined company would have had a negative tangible book value of
$23,857,000 or $1.15 per share as of April 30, 2000. Comparatively, Vermont Pure
and Crystal Rock had tangible book values of $2,344,000 or $.23 per share, and
$5,973,000 or $3,493 per share, respectively, as of the same date.
13
<PAGE> 22
WE HAVE TO BORROW SUBSTANTIAL SUMS OF MONEY IN CONNECTION WITH THIS TRANSACTION.
IF WE CANNOT MEET OUR DEBT SERVICE OBLIGATIONS, WE WOULD BE IN DEFAULT UNDER
THOSE OBLIGATIONS, AND THAT COULD HURT OUR BUSINESS OR EVEN RESULT IN
FORECLOSURE OR BANKRUPTCY. ALSO, FLUCTUATIONS IN INTEREST RATES COULD
SIGNIFICANTLY INCREASE OUR EXPENSES.
To continue to finance the business of the combined companies, as well as
to pay consideration to the Crystal Rock shareholders in connection with the
merger and contribution, we need to borrow money and issue promissory notes in
the total principal amount of up to $58,600,000. The loans and notes will be
secured by substantially all of our assets. Borrowing additional money increases
the risk that if we do not repay our indebtedness in a timely fashion, our
secured creditors may declare a default and foreclose upon our assets, which
would likely result in harmful disruption to our business, the sale of assets
for less than their fully realizable value and possible bankruptcy. We must
generate enough cash flow to service this indebtedness for a considerable period
of time.
Not including the periodic repayment of our $5,000,000 working capital line
of credit, we have to meet the following minimum annual payment schedule for our
senior debt and our debt to the shareholders of Crystal Rock:
<TABLE>
<CAPTION>
REQUIRED PAYMENTS
-----------------------------------------
YEAR AFTER THE TRANSACTION PRINCIPAL INTEREST(1) TOTAL
-------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Year 1...................................... $ 2,500,000 $ 5,205,000 $ 7,705,000
Year 2...................................... $ 3,500,000 $ 4,958,000 $ 8,458,000
Year 3...................................... $ 4,000,000 $ 4,646,000 $ 8,646,000
Year 4...................................... $ 6,000,000 $ 4,203,000 $10,203,000
Year 5...................................... $ 7,500,000 $ 3,554,000 $11,054,000
Year 6...................................... $ 9,500,000 $ 2,725,000 $12,225,000
Year 7...................................... $14,000,000 $ 1,564,000 $15,564,000
Balloon Payment at the end of Year 7........ $ 6,600,000 $ 6,600,000
----------- ----------- -----------
$53,600,000 $26,855,000 $80,455,000
=========== =========== ===========
</TABLE>
---------------
(1) Interest on Senior Debt is calculated based on an assumed rate of 8.35%, and
interest on the Subordinated Debt is based on 12%.
We will also have a significant interest expense for the foreseeable future
which may increase or decrease due to interest rate fluctuations. For example, a
100 basis-point increase in rates for our borrowings would result in an
additional $322,000 per year in interest cost.
OUR FUTURE ABILITY TO BORROW MAY BE LIMITED, WHICH MAY INHIBIT OUR ABILITY TO
MAKE ACQUISITIONS AND INCREASE OUR BUSINESS.
As a result of our business combination with Crystal Rock, and our
resulting indebtedness, we may be perceived by banks and other lenders to be
highly leveraged and close to our borrowing ceiling. Until we repay some of our
debt, our ability to access additional capital following the transaction may be
limited. In turn, that may limit our ability to finance acquisitions and to grow
our business following the acquisition strategy we have been pursuing for a
number of years. In addition, our loan agreement with Webster Bank limits our
ability to incur incremental debt without Webster's permission.
OUR LOAN AGREEMENT PROHIBITS US FROM PAYING DIVIDENDS.
Our loan agreement with Webster Bank prohibits us from paying a dividend
without the prior consent of the Bank. As a result, it is unlikely that we will
declare a dividend in the near future.
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IF WE ARE UNABLE TO MAKE ACQUISITIONS, OUR FUTURE GROWTH MAY BE LIMITED.
An element of our growth strategy is to acquire businesses or products that
expand and complement the business of the combined company. We believe such
acquisitions may be necessary for us to continue to grow at a desirable rate,
and we are continually evaluating possible acquisition opportunities. Even if we
are able to identify suitable companies or businesses to buy, we may not be able
to purchase any of these companies at favorable prices, or at all, due to any
number of reasons. If we are unable to make acquisitions, we may not be able to
meet or exceed our historical levels of growth and earnings. Acquisitions also
may involve a number of additional risks including:
- Future acquisitions could divert management's attention from our daily
operations or otherwise require additional management, operational and
financial resources;
- We might not be able to successfully integrate future acquisitions into
our business or operate acquired businesses profitably;
- We will be required to amortize goodwill which will reduce our income in
future years; and
- We may be subject to unanticipated problems and liabilities of companies
we acquire.
In addition, our loan agreement with Webster Bank limits our ability to
merge or consolidate with another company or sell all or substantially all of
our assets without Webster's permission or paying off the senior debt.
OUR SUCCESS IS VERY MUCH DEPENDENT ON THE SERVICES OF KEY PERSONS.
Our continued success will depend in large part upon the expertise of our
senior management. Timothy G. Fallon, our Chairman and Chief Executive Officer,
and Bruce MacDonald, our Chief Financial Officer, Treasurer and Secretary, will
enter into five-year employment agreements with VP Merger Parent upon completion
of the transaction. Additionally, Crystal Rock officers and directors Henry E.
Baker, Chairman, John B. Baker, co-President, and Peter K. Baker, co-President,
will have five-year employment agreements with VP Merger Parent. These
agreements do not prevent these employees from resigning. The departure or loss
of Mr. Fallon or Peter K. Baker in particular could have a negative effect on
the business and operations of the combined entity.
MEMBERS OF THE BAKER FAMILY WILL OWN BETWEEN 49.0% AND 51.9% IN VP MERGER PARENT
AND MAY BE ABLE TO CONTROL THE COMPANY.
After the merger and contribution, the former shareholders of Crystal Rock
will control approximately half of the outstanding common stock of VP Merger
Parent. Accordingly, these shareholders, acting together, may be able to exert a
controlling influence over the outcome of matters requiring shareholder
approval, such as the election of directors, amendments to VP Merger Parent's
certificate of incorporation, mergers and various other matters. The
concentration of ownership could also have the effect of delaying or preventing
a change of control of VP Merger Parent.
THE PERSONAL INTERESTS OF OUR DIRECTORS AND OFFICERS AND THOSE OF CRYSTAL ROCK
CREATE A CONFLICT OF INTEREST.
In considering our recommendation to approve the transaction, you should
recognize that some of our directors and officers as well as those of Crystal
Rock have personal interests in the transaction because of employment
arrangements, severance benefits, indemnification and liability insurance and
other reasons. Members of the Baker family will receive substantial
consideration for their shares of Crystal Rock, and will become major creditors
of the business. Their interests create a conflict of interest.
THE MARKET FOR BOTTLED WATER IS SUBJECT TO RAPID MARKET CHANGE, INTRODUCTION OF
COMPETING PRODUCTS, AND CHANGING INDUSTRY STANDARDS.
We operate in highly competitive markets. The principal methods of
competition in the markets in which we compete are distribution capabilities,
brand recognition, quality, reputation, and price. We have a significant number
of competitors, some of which have far greater resources than us. Among our
principal competitors are the Perrier Group of America, Inc., Great Brands of
Europe, NAYA, Crystal Geyser and
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Sparkletts. Among Crystal Rock's principal competitors are Perrier Group, Triple
Spring, Aqua Cool and Iceberg. Like us, Crystal Rock competes with many domestic
and international companies in the marketplace. Crystal Rock focuses exclusively
on the home and office delivery segment of the market with major focus on office
delivery which is approximately 75% of its home and office generated revenue.
Crystal Rock competes on the basis of quality products and service.
THE BOTTLED WATER INDUSTRY IS REGULATED AT BOTH THE STATE AND FEDERAL LEVEL. IF
WE ARE UNABLE TO CONTINUE TO COMPLY WITH APPLICABLE REGULATIONS AND STANDARDS IN
ANY JURISDICTION, WE MIGHT NOT BE ABLE TO SELL OUR PRODUCTS IN THAT
JURISDICTION, AND OUR BUSINESS COULD BE SERIOUSLY HARMED.
The Federal Food and Drug Administration regulates bottled water as a food.
Our bottled water must meet FDA requirements of safety for human consumption,
labeling, processing and distribution under sanitary conditions and production
in accordance with the FDA "good manufacturing practices." 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. We also must
meet state regulations in a variety of areas. These regulations set standards
for approved water sources and the information that must be provided and the
basis on which any therapeutic claims for water may be made. We have received
approval for our Vermont Pure and our Hidden Spring brands from 49 states.
Crystal Rock's bottled water must also meet the same federal regulatory
requirements. Crystal Rock has received approval for its drinking water in
Connecticut, Massachusetts, New York and Rhode Island.
WE DEPEND UPON MAINTAINING THE INTEGRITY OF OUR WATER RESOURCES AND
MANUFACTURING PROCESS. IF OUR WATER SOURCES OR BOTTLING PROCESSES WERE
CONTAMINATED FOR ANY REASON, OUR BUSINESS WOULD BE SERIOUSLY HARMED.
Our ability to retain customers and the goodwill associated with our brands
are dependent upon our ability to maintain the integrity of our water resources
and to guard against defects in, or tampering with, our manufacturing process.
The loss of integrity in our water resources or manufacturing process could lead
to product recalls and/or customer illnesses that could significantly reduce our
goodwill, market share and revenues. Because we rely upon natural spring sites
for sourcing our water supply, Acts of God, such as earthquakes, could alter the
geologic formation of the spring sites, constricting water flow.
Crystal Rock's success is also dependent upon the integrity of its
manufacturing process and it has also taken measures to guard against defects
in, or tampering with, its process.
FLUCTUATIONS IN THE COST OF ESSENTIAL RAW MATERIALS AND COMMODITIES FOR THE
MANUFACTURE AND DELIVERY OF OUR PRODUCTS COULD SIGNIFICANTLY IMPACT OUR
REVENUES.
We rely upon the raw material of polyethylene terephthalate (PET) for
manufacturing our bottles. PET is a commodity subject to fluctuations in price
and supply. We have signed a supply agreement that provides supply and limits
price increases and decreases to pass through formula based on resin cost.
Another concern is inflationary pressures on petroleum-based products including
bottles and diesel fuel. Being a component part of the final product, the cost
of PET bottles can increase with the cost of petroleum. Because trucks are used
in the delivery of a small portion of our (and a significant portion of Crystal
Rock's) products, the cost of diesel fuel can impact the profitability of our
operations. Competitors will also have the same cost pressures which could then
lead to lower profitability or an increase in pricing.
THE SEASONAL NATURE OF OUR BUSINESS MAY CAUSE FLUCTUATIONS IN OUR STOCK PRICE.
Our business is seasonal with the consumer portion of the business being
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 our core Northeastern United States
market. Warmer weather in our geographic markets tends to increase our retail
PET sales, and cooler weather, such as we have experienced this year, tends to
decrease our retail sales of spring water, as well as retail sales
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of all water producers. Fluctuations in operating results and related
fluctuations in market price of our shares are likely to continue, since Crystal
Rock sells its products in substantially the same market and to the same types
of home and office customers as us.
THE SALE OF A LARGE NUMBER OF SHARES OF OUR COMMON STOCK COULD KEEP OUR STOCK
PRICE DOWN.
Of a total of 10,294,758 shares of our common stock outstanding at August
30, 2000, approximately 10,275,758 shares are in the public "float" (i.e., not
held by officers, directors and other insiders), including approximately
6,200,000 shares held by institutions. Up to 11,107,143 of our shares will be
issued in connection with the transaction you are being asked to vote upon.
Actual sales of our stock, or even the perception that large blocks of our stock
might be sold, could depress the prevailing market price for our common stock.
WHERE YOU CAN FIND MORE INFORMATION
VP Merger Parent has filed a registration statement on Form S-4 with the
Securities and Exchange Commission, as required by the Securities Act, which
registers the distribution to our shareholders and to the Crystal Rock
shareholders of the VP Merger Parent stock to be issued in connection with the
merger. The registration statement and the exhibits attached to it contain
additional relevant information about VP Merger Parent and its common stock.
In addition, we file reports, proxy statements and other information with
the Securities and Exchange Commission as required by the Exchange Act. You may
read and copy this information at the following locations of the Securities and
Exchange Commission:
<TABLE>
<S> <C> <C>
Public Reference Office New York Regional Office Chicago Regional Office
Room 1024 7 World Trade Center 500 West Madison Street
450 Fifth Street, N.W. 14th Floor Suite 1400
Washington, DC 20549 New York, NY 10048 Chicago, IL 60661
</TABLE>
You may obtain information about the operation of the SEC's Public
Reference Room by calling the SEC at 1-800-SEC-0330. Our SEC filings are also
available on the SEC's Internet site (http://www.sec.gov).
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING INFORMATION
We make forward-looking statements in this proxy statement/prospectus and
in our public documents to which we may refer, that are subject to risks and
uncertainties. These forward-looking statements include information about
possible or assumed future results of our operations or the performance of the
combined company after the merger. Also, when we use any of the words
"believes," "expects," "anticipates," "estimates," "extends," "will be," "plan"
or similar expressions we are making forward-looking statements.
These forward-looking statements are intended to qualify for the safe
harbor provided by the Private Securities Litigation Reform Act of 1995. Such
safe harbor provisions apply to statements made herein by Vermont Pure Holdings,
Ltd. However, the safe harbor provisions do not apply to either VP Merger Parent
or Crystal Rock Spring Water Company because neither company is subject to the
reporting requirements of Section 13(a) or 15(d) of the Securities Act at the
time the statements are made. While we believe that our forward-looking
statements are reasonable, you should not place undue reliance on any
forward-looking statements, which speak only as of the date made. You should
understand that the following important facts, in addition to those discussed
elsewhere in this proxy statement and in our public documents, could affect the
future results and performance of the combined company. Actual results could
differ materially from those expressed in our forward-looking statements.
Factors that might cause a difference include the following:
- the expected costs of the merger may be more substantial than
anticipated;
- rising interest rates may increase our debt service and reduce our
profits;
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- difficulties in integrating our two businesses may be greater than
expected;
- general economic or business conditions may be less favorable than
expected;
- costs of raw materials used in the manufacture of bottles could rise and
hurt our profitability;
- colder than normal weather could limit consumption of bottled water in
the summer months;
- adverse changes may occur in the securities markets;
- our ability to enter new markets successfully and capitalize on growth
opportunities may be more difficult than expected; and
- technological changes may be more difficult, time consuming or expensive
than we expect.
SPECIAL MEETING OF SHAREHOLDERS
We are sending you this proxy statement in order to provide you with
important information regarding the proposal to approve the agreement and plan
of merger and contribution and the other matters on the agenda. We are
soliciting proxies for use at the special meeting and at any adjournment or
postponement of the special meeting. The special meeting is scheduled to be held
at the time and place described below.
MATTERS FOR CONSIDERATION
The Vermont Pure special meeting of shareholders is scheduled to be held on
October 5, 2000, at 10:00 a.m., local time, at the offices of Foley, Hoag &
Eliot LLP, Sixteenth Floor, One Post Office Square, Boston, Massachusetts 02109,
for the following purposes:
- To consider and vote upon a proposal to approve and adopt the agreement
and plan of merger and contribution dated as of May 5, 2000, as amended,
among Vermont Pure Holdings, Ltd., VP Merger Parent, Inc., VP Acquisition
Corp., Crystal Rock Spring Water Company and the stockholders of Crystal
Rock, as more fully described in this proxy statement and in appendix A.
- To consider and vote upon a proposal to amend our 1998 Stock Option Plan
as more fully described in this proxy statement and in appendix C. If the
amendment is approved, the number of shares covered by the plan will
increase from 500,000 to 1,500,000.
- To consider and vote upon a proposal to adjourn the special meeting if
necessary to permit further solicitation of proxies if there are not
sufficient votes at the time of the special meeting to approve Items 1
and 2 or either of them.
- To act upon any other business which may properly come before the meeting
or any adjournment or postponement thereof of the meeting.
Approval of the amendment to the stock option plan will be ineffective if the
merger agreement is not approved by our shareholders. However, approval of the
merger agreement is not conditioned upon approval of the amendment to the stock
option plan. We will still proceed with the merger and contribution if the
shareholders approve the merger but reject the amendment to the stock option
plan. In other words, consummation of the merger does not depend upon approval
of the amendment to our stock option plan. If our shareholders approve the
transaction, it is expected to become effective within a day following approval
of the transaction.
BOARD OF DIRECTORS' RECOMMENDATION
On May 2, 2000, our board of directors approved, subject to stockholder
approval, the agreement and plan of merger and contribution. The board
unanimously recommends a vote "FOR" approval of the business combination, as
well as the other matters on the agenda.
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RECORD DATE
The record date for determining our shareholders entitled to vote at the
special meeting is August 30, 2000. Only the holders of record of our common
stock as of the close of business on that date are entitled to vote at the
special meeting. Each share of our common stock entitles the holder to one vote
on each proposal and on all other matters properly brought before the special
meeting. As of the record date, there were 10,294,758 shares of our common stock
outstanding and eligible to be voted at the special meeting.
QUORUM AND VOTE REQUIRED
Generally, in order to conduct business at a shareholders meeting, a quorum
must be present. A majority of the votes eligible to be cast by holders of all
of the outstanding shares of our common stock, whether present in person or
represented by proxy, will constitute a quorum for the transaction of business
at the special meeting. By checking the appropriate box on the proxy card
provided by our board of directors, our shareholders may vote "FOR" approval of
the merger agreement, vote "AGAINST" approval of the merger agreement or
"ABSTAIN" from voting.
A quorum must be present, and a majority of the votes eligible to be cast
by holders of all of the outstanding shares of common stock must be voted "FOR"
the proposal to approve the merger agreement in order for the merger agreement
to be approved. If a quorum is present, a majority of the votes present or
represented by proxy at the special meeting must be voted "FOR" the proposals to
increase the number of shares covered by our 1998 stock option plan and to
adjourn the special meeting under the circumstances described above.
VOTING OF PROXIES
GENERAL. Shares represented by a proxy will be voted at the special
meeting as specified in the proxy.
PROXIES WITHOUT VOTING INSTRUCTIONS. Proxies that are properly signed and
dated but which do not contain voting instructions will be voted "FOR" approval
of the agreement and plan of merger and contribution and "FOR" the proposals to
amend our 1998 stock option plan and to adjourn the special meeting under the
circumstances described above.
ABSTENTIONS. We will count a properly executed proxy marked "ABSTAIN" for
purposes of determining whether there is a quorum, and the shares represented by
that proxy will be voted to abstain on the matter at the special meeting.
Because the affirmative vote of a majority of the votes eligible to be cast by
holders of all of the outstanding shares of common stock is required for
approval of the agreement and plan of merger and contribution, if you mark your
proxy "ABSTAIN" it will have the effect of a "NO" vote for the purposes of
approving the merger agreement. For the other items on the agenda, votes to
"ABSTAIN" will be counted for quorum purposes and will count as votes cast. For
those items, a majority of the votes present or represented at the meeting and
cast must be voted "FOR" those items to approve them.
BROKER NON-VOTES. If your shares are held by your broker, your broker will
vote your shares for you only if you provide instructions to your broker on how
to vote your shares. You should follow the directions provided by your broker
regarding how to instruct your broker to vote your shares. Your broker cannot
vote your shares of our common stock without specific instructions from you.
Because the affirmative vote of a majority of the votes eligible to be cast by
holders of all of the outstanding common stock is required to approve the merger
agreement, if you do not instruct your broker how to vote, your vote will not be
counted and will have the effect of a "NO" vote on the approval of the merger
agreement proposal. For the other items on the agenda, broker "non-votes" will
be counted for quorum purposes but disregarded otherwise. For those items, a
majority of the votes present or represented at the meeting and cast must be
voted "FOR" those items to approve them.
VOTING SHARES IN PERSON THAT ARE HELD THROUGH BROKERS. If you hold Vermont
Pure common stock in the name of a broker or other nominee and wish to vote
those shares in person at the special meeting, you must obtain from the nominee
holding the Vermont Pure common stock in the nominee's name a properly executed
"legal proxy," identifying you as a Vermont Pure shareholder, authorizing you to
act on behalf of the
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nominee at the special meeting and identifying the number of shares with respect
to which the authorization is granted.
OTHER MATTERS. If you sign and return the enclosed proxy card, you grant
authority to the persons named in the proxy to vote in their discretion on any
other matters that may properly come before the special meeting or any
adjournment or postponements of the meeting. We do not presently know of any
other matters to be brought before the special meeting. As to other matters that
may be properly brought before the special meeting, unless otherwise provided in
our certificate of incorporation or by-laws or by statute, the matter will be
approved if a majority of the votes cast are in favor of the matter.
HOW TO REVOKE A PROXY
Granting a proxy on the enclosed proxy card will not prevent you from
voting in person at the special meeting or otherwise revoking your proxy. You
may revoke a proxy at any time prior to the special meeting in the following
ways:
- filing with us, before the vote at the special meeting, a written notice
of revocation bearing a later date than the proxy;
- executing a later dated proxy relating to the same shares and delivering
it to us before the vote at the special meeting; or
- voting in person at the special meeting, although attending the special
meeting will not by itself constitute a revocation of proxy.
You may send any written notice of revocation or subsequent proxy to
Vermont Pure Holdings, Ltd., Attn: Secretary, Route 66, P.O. Box C, Catamount
Industrial Park, Randolph, Vermont 05060, or hand deliver the notice of
revocation or subsequent proxy to the Secretary before the vote at the Vermont
Pure special meeting.
SOLICITATION OF PROXIES AND EXPENSES
This solicitation is made on behalf of our board of directors and its costs
(including the cost of preparing and mailing this proxy statement and the form
of proxy card) will be paid by us. In addition to solicitation by mail, our
directors, officers or employees may solicit proxies from shareholders by
telephone, in person or by other means. These persons will not receive
additional compensation, although they will be reimbursed for the reasonable,
out-of-pocket expenses they incur in connection with this solicitation. We will
also make arrangements with brokerage firms, fiduciaries, and other nominees who
hold shares of record to forward solicitation materials to the beneficial owners
of those shares. We will reimburse those brokerage firms, fiduciaries, and other
nominees for their reasonable out-of-pocket expenses in connection with this
solicitation.
STOCK HELD BY OUR DIRECTORS, OFFICERS AND OTHERS
As of August 30, 2000, our directors and executive officers and persons who
may be deemed to be our affiliates beneficially owned 1,186,000 shares of our
common stock, assuming they exercised all options to purchase our common stock
that were then currently exercisable. This figure represents 10.3% of the
outstanding shares of our common stock after exercise of those options.
ITEM 1. PROPOSAL TO APPROVE THE BUSINESS COMBINATION
The discussion of the business combination and the description of the
material terms of the agreement and plan of merger and contribution is subject
to and qualified in its entirety by reference to the merger agreement itself. A
copy of the agreement and plan of merger and contribution is included as
appendix A for your convenience.
GENERAL
Under the merger agreement:
- a wholly owned subsidiary of VP Merger Parent will be merged with and
into existing Vermont Pure with Vermont Pure as the surviving company,
renamed Diamond Acquisition Corp.,
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- each share of Vermont Pure stock will be exchanged for one share of
common stock of VP Merger Parent, and
- Crystal Rock shareholders will contribute all of their Crystal Rock
common stock to VP Merger Parent in exchange for cash, notes and shares
of VP Merger Parent stock. When the business combination is completed, VP
Merger Parent will own 100% of the stock of Vermont Pure and 100% of the
stock of Crystal Rock.
VERMONT PURE SHARES TO BE CONVERTED
When the business combination occurs, by virtue of the transaction and
without any action on your part:
- each one share of our common stock, par value $.001 per share, issued and
outstanding immediately prior to the effectiveness of the business
combination (other than our stock held in treasury) will be canceled and
converted automatically into one validly issued, fully paid and
nonassessable share of the common stock, par value $.001 per share, of VP
Merger Parent; and
- each share of our stock held in treasury will be canceled.
TREATMENT OF VERMONT PURE STOCK, OPTIONS AND WARRANTS
When the business combination occurs, each option to purchase our existing
stock granted by us under any of our stock option plans or otherwise, and each
warrant to purchase our common stock, that is outstanding immediately prior to
the time the business combination occurs, will, in the case of options, become
an option granted pursuant to the corresponding stock option plan of VP Merger
Parent, and, in the case of warrants, become a warrant issued by VP Merger
Parent. VP Merger Parent will assume all of our obligations under each stock
option, stock option plan, employee stock purchase plan or warrant.
Each holder of such an option or warrant will be entitled to purchase from
VP Merger Parent, in accordance with the respective terms of such options and
warrants, and in place of shares of our common stock, the same number of shares
of VP Merger Parent common stock as the number of shares of our stock that such
holder was entitled to purchase from us immediately prior to the time the
business combination occurs. Except for those changes, each option and warrant
will remain subject, after the business combination, to the same terms and
conditions, including those with respect to the dates on which and the
proportionate extent to which those options or warrants may be exercised from
time to time, as were applicable to those options and warrants immediately prior
to the business combination.
The aggregate number of shares of our stock subject to outstanding options
and warrants was 1,892,218 as of May 5, 2000, and we agreed not to grant or
issue any additional options and warrants prior to occurrence of the business
combination except with the consent of Crystal Rock.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains statements made by us about ourselves called
representations and warranties. The merger agreement also contains similar
representations and warranties made by Crystal Rock about itself. You can review
the representations and warranties in the copy of the agreement and plan of
merger and contribution attached to this proxy statement as appendix A.
The merger agreement provides that our representations and warranties and
those of Crystal Rock will not survive, or continue in effect, after the
effective time of the merger and contribution, except those set forth in the tax
matters certificates set forth in the merger agreement.
CONDUCT OF BUSINESS PENDING THE BUSINESS COMBINATION
The merger agreement contains various covenants, or promises, that govern
our actions and those of Crystal Rock prior to the transaction. These covenants
require Vermont Pure and Crystal Rock to take action or to refrain from taking
action with respect to various matters including, among others:
- Vermont Pure and Crystal Rock are to conduct their respective businesses
in the usual and normal course consistent with past practices and to
refrain from any extraordinary transactions.
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- Vermont Pure and Crystal Rock are each to refrain from taking any action
that would result in any of the representations and warranties being
untrue or in any of the conditions to the merger not being satisfied.
In anticipation of the business combination, we entered into a distribution
agreement with Crystal Rock on June 6, 2000, under which Crystal Rock will
service our accounts in the areas that Crystal Rock delivers its own products.
The distribution agreement provides for Crystal Rock to assume operational and
delivery control over all our routes in Crystal Rock's delivery area. Crystal
Rock will also:
- assume responsibility for routing, loading of trucks and delivery
schedules;
- provide tracking, accounting, record-keeping and billing of our customers
who are serviced under the agreement;
- purchase approximately $40,000 in 5-gallon bottles for our customers;
- commence building a rack loader for the Vermont facility; and
- refurbish water coolers for use in connection with its performance of the
agreement.
CONDITIONS TO THE BUSINESS COMBINATION
The completion of the transaction depends upon the satisfaction or waiver
of a number of conditions, including, among other things:
- The merger agreement must be approved by our shareholders.
- Vermont Pure and Crystal Rock must have entered into a credit commitment
with Webster Bank. See "Indebtedness We Will Incur in Connection with the
Business Combination."
- No court order or other legal restraint can be in effect, nor can any
proceeding be pending, that would prevent the completion of the merger.
- The Registration Statement on Form S-4 filed by VP Merger Parent must
have been declared effective by the SEC and at the closing date must
remain effective and not subject to any stop order.
- The Crystal Rock shareholders must have tendered their certificates
evidencing all of the outstanding shares of Crystal Rock stock.
- The lock-up agreements by the Crystal Rock shareholders must have been
delivered.
- The representations and warranties of Vermont Pure and Crystal Rock must
be true as of the date of the merger.
- Each of Vermont Pure and Crystal Rock must have performed all of the
agreements made by that party in the merger agreement.
- Vermont Pure and Crystal Rock must receive opinions from their respective
legal counsel and tax counsel reasonably satisfactory to each of them.
To review all of the conditions contained in the merger agreement, you
should read the merger agreement which is attached to this document as appendix
A.
CLOSING AND EFFECTIVE TIME
If all of the conditions of the merger agreement are satisfied or waived,
then, unless Vermont Pure and Crystal Rock agree to another date, the closing
date for the business combination is expected to be October 6, 2000. Upon the
closing of the transaction, the parties will file a certificate of merger with
the Secretary of State of Delaware and the business combination will be legally
effective at the time of the filing. If our shareholders approve the
transaction, it is expected to become effective within one business day
following approval of the transaction.
EXCHANGE OF CRYSTAL ROCK CERTIFICATES
At the closing, each shareholder of Crystal Rock common stock will
contribute all of his or her shares of Crystal Rock common stock to VP Merger
Parent and VP Merger Parent will transfer to each shareholder of
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Crystal Rock cash and/or cash equivalents, the 12% subordinated promissory notes
due 2007 of VP Merger Parent, and shares of VP Merger Parent common stock. The
aggregate amount of such cash will equal $8,000,000 plus the greater of
$1,500,000 or the average amount of cash and cash-equivalents of Crystal Rock as
of the close of business on the five business days immediately preceding the
effective date. The aggregate principal amount of the promissory notes will be
$22,600,000. The aggregate number of shares of VP Merger Parent stock to be
issued by reason of the contribution will be calculated by multiplying the
aggregate number of shares of Crystal Rock common stock, issued and outstanding
immediately prior to the effective time of the business combination, by the
"exchange ratio." Here is how the exchange ratio is determined in the merger
agreement:
The EXCHANGE RATIO is a number rounded to five decimal places equal to
a fraction, the numerator of which is the VP Merger Parent share amount and
the denominator of which is the aggregate number of shares of Crystal Rock
common stock issued and outstanding immediately prior to the effective
time.
The PARENT SHARE AMOUNT is $31,100,000 divided by the share price.
The SHARE PRICE is the average of the closing price per share of our
stock (as quoted on the American Stock Exchange) for the ten business days
ending on the fifth business day prior to the filing date of the
certificate of merger; but if the share price calculation is less than
$2.80, then the share price will be $2.80, and if the share price
calculation is more than $3.15, then the share price will be $3.15. For
example, if the share price calculation is $3.15, then the number of shares
issued would be 9,873,016.
FORMULA PRICING
Neither party to the merger agreement has the right to terminate the merger
agreement by reason of the price of Vermont Pure common stock.
If between the date of the merger agreement and the legal effectiveness of
the business combination the outstanding shares of our stock are changed into a
different number of shares or a different class by reason of any
reclassification, recapitalization, split-up, stock dividend, stock combination,
exchange of shares or readjustment, the exchange ratio will be appropriately
adjusted.
BACKGROUND OF THE BUSINESS COMBINATION
A key element of our growth strategy has been to attempt to acquire other
companies in the bottled water industry that provide products or services that
are complementary to those provided by us. We have made a number of successful
acquisitions and we have been looking for additional acquisitions. However,
since January 1999, we have not considered acquiring another business on the
same scale as this transaction.
The following is a chronology of events leading up to the signing of the
merger agreement:
September 16, 1999 Timothy G. Fallon and Peter K. Baker met at a
Crystal Rock plant tour as part of a program
for the New England Bottled Water Association.
Mr. Baker approached Mr. Fallon with the idea
to explore merging the companies.
October 28, 1999 Mr. Fallon met with the principal Crystal Rock
shareholders, Henry E. Baker, Peter K. Baker,
John B. Baker and David M. Jurasek, Crystal
Rock's Controller, at Crystal Rock's bottling
facility in Watertown, Connecticut. Mr. Fallon
made a presentation about our history and
proposed some broad assumptions about what a
business combination of the two companies would
look like from a valuation standpoint.
November 8, 1999 Vermont Pure and Crystal Rock signed a
confidentiality agreement and agreed to begin
exchanging financial information. Each side
began its own due diligence investigation.
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<PAGE> 32
November 17, 1999 Mr. Fallon met with Peter K. Baker, John B.
Baker and Mr. Jurasek at the Hilton Hotel in
Danbury, Connecticut. Mr. Fallon proposed a
$57,000,000 valuation for Crystal Rock based on
available financial information for fiscal year
1999. The Baker family rejected this valuation
as inadequate and proposed a $63,400,000
valuation. Mr. Fallon tentatively agreed to
this valuation if the Crystal Rock shareholders
would take approximately 60% of the
consideration in cash and 40% in Vermont Pure
common stock.
December 2, 1999 Mr. Fallon and Bruce S. MacDonald met with the
Bakers and Mr. Jurasek, as well as Mr.
Rapaport, Crystal Rock's legal counsel, and
James F. Berger, a partner of Crystal Rock's
independent auditors, at Crystal Rock's
facility in Watertown, Connecticut. The parties
toured Crystal Rock's plant and continued to
discuss the valuation of Crystal Rock.
December 9, 1999 The Crystal Rock shareholders and their legal
counsel and Mr. Jurasek attended a lunch
meeting at the American Stock Exchange in New
York City to meet our board of directors.
Following the luncheon, our board discussed the
valuation of Crystal Rock, the advantages of
the business combination, and the possible
management structure of the combined companies.
January 7, 2000 Mr. Fallon and Mr. MacDonald met Peter K.
Baker, John B. Baker and Mr. Jurasek at the
Sheraton Hotel in Springfield, Massachusetts to
plan the financing of the business combination
and to refine assumptions about synergies and
their projections of sales and earnings before
interest, taxes, depreciation and amortization,
known as EBITDA.
January 13, 2000 Vermont Pure and Crystal Rock signed a 60 day
"no shop" agreement. Each party continued with
due diligence investigation.
January 31, 2000 Mr. Fallon, Peter K. Baker, John B. Baker and
Mr. Jurasek met with Fleet Bank at Fleet's
Hartford office to discuss financing the
transaction. The parties considered various
structures for the transaction.
February 10, 2000 Mr. Fallon, Mr. MacDonald, Peter K. Baker, John
B. Baker and Mr. Jurasek met with First Union
Bank at a restaurant in Waterbury, Connecticut
to discuss bank financing for the transaction.
The parties hoped to finance the transaction
with senior debt only and to avoid mezzanine
financing. During this time period, our legal
counsel began to draft a merger agreement for
the transaction.
March 7, 2000 Our board of directors met to discuss the
proposed transaction and financing and obtain
authorization to proceed.
March 14, 2000 Mr. Fallon, Mr. MacDonald, Peter K. Baker, John
B. Baker and Mr. Jurasek met in New Haven,
Connecticut with representatives of two banks
to explore senior debt financing for the
transaction.
March 27-28, 2000 Mr. Fallon, Mr. MacDonald, Peter K. Baker, John
B. Baker and Mr. Jurasek traveled to Albany,
New York and locations in Vermont to conduct
due diligence.
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<PAGE> 33
April 3, 2000 Following unsuccessful efforts to finance the
transaction entirely with senior debt, Peter
Baker telephoned Mr. Fallon and proposed that
the Crystal shareholders would be willing to
restructure the consideration from 60% cash and
40% stock to approximately $9,500,000 in cash,
$22,600,000 principal amount of 12%
subordinated promissory notes due 2007 and
common stock valued for purposes of the
transaction at $31,100,000, together with the
assumption of $1,700,000 in existing Crystal
Rock debt. The Crystal Rock shareholders would
contribute their stock to a newly formed
holding company that would own both entities.
April 10, 2000 After considering the new structure, Webster
Bank of Connecticut issued a commitment letter
for $36,000,000 in senior debt for the
transaction. During this time period, legal
counsel prepared, revised and circulated drafts
of the merger agreement, various employment
agreements, and various property leases. Our
compensation committee participated in
negotiation of the employment agreements.
May 1-2, 2000 Our board of directors met in Burlington,
Vermont to discuss the merger with a view
towards approving it. On May 1, 2000, the board
received the oral opinion of Duff & Phelps LLC
as to the fairness of the transaction from a
financial point of view. After a lengthy
discussion, the board voted unanimously to
approve and adopt the proposed agreement and
plan of merger and contribution.
May 5, 2000 Mr. Fallon, members of the Baker family and the
other Crystal Rock shareholders executed the
definitive transaction documents at the home of
Henry Baker in Litchfield, Connecticut. Duff &
Phelps LLC delivered a written copy of its
fairness opinion to us.
May 8, 2000 The parties issued a press release announcing
the transaction at 8:00 a.m.
August 28, 2000 The parties amended the merger agreement to
provide for registration rights for the shares
that we will issue to the Crystal Rock
shareholders and to extend the date after which
the parties can terminate the merger agreement
to October 20, 2000.
On May 1 and 2, 2000, our board of directors held a special meeting to
review the terms of the merger agreement. The board reviewed and discussed the
terms of the merger agreement, and discussed the financial and other effects the
proposed business combination would have on our shareholders, operations and
customers. In addition, Duff & Phelps LLC delivered its oral opinion to the
effect that, as of May 1, 2000 and based upon and subject to matters later
stated in its written opinion, the transaction was fair from a financial point
of view to our shareholders. After Duff & Phelps LLC delivered its opinion, our
board of directors unanimously voted to approve the business combination and
authorized the officers to finalize and execute the merger agreement. Duff &
Phelps confirmed its oral opinion in writing on and as of May 5, 2000. The
opinion of Duff & Phelps appears at the back of this proxy statement as appendix
B.
OPINION OF DUFF & PHELPS LLC
Duff & Phelps, LLC acted as our financial advisor in connection with the
business combination, and assisted our board in its examination of whether the
transactions contemplated by the merger agreement are fair, from a financial
point of view, to our shareholders. Duff & Phelps is one of the nation's largest
independent specialty investment banking and financial advisory firms, and has
been providing valuation and financial advisory services to clients for over 60
years. Duff & Phelps performs nearly 500 engagements each
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<PAGE> 34
year for clients ranging from small, privately held companies to large,
publicly-traded corporations. We selected Duff & Phelps as our financial advisor
based upon Duff & Phelps' experience, ability and reputation for providing
fairness opinions and other advisory services on a wide variety of corporate
transactions.
On May 1, 2000, Duff & Phelps gave its oral opinion to our board to the
effect that, as of the date of such opinion, the transactions contemplated by
the merger agreement are fair, from a financial point of view, to our
shareholders. Duff & Phelps confirmed its opinion in writing on May 5, 2000.
In arriving at its fairness opinion, Duff & Phelps reviewed, among other
items, the signed agreement and plan of merger and contribution; our annual
reports filed on Form 10-K, including our audited financial information for the
last five fiscal years; our interim announcements and unaudited quarterly
reports on Form 10-Q, and other public information of ours; audited financial
information for Crystal Rock for the last five fiscal years and unaudited
quarterly financial information for Crystal Rock; and operating and financial
information that we supplied to Duff & Phelps for purposes of its evaluation,
including pro forma information and internal budgets. Duff & Phelps also
reviewed our historical stock market prices and trading volumes.
Duff & Phelps reviewed industry and financial information, which included,
among other items, financial and stock market data relating to publicly held
companies that Duff & Phelps considered relevant for comparative purposes, and
change of control transactions involving companies in the bottled water
industry. All industry information and data on public companies considered
comparable to Crystal Rock or us and used in Duff & Phelps' analysis were
obtained from regularly published industry and investment sources. In addition,
Duff & Phelps held discussions with our senior management regarding past,
current, and projected operations. Duff & Phelps also held discussions with
senior management of Crystal Rock regarding past, current and projected
operations. Duff & Phelps took into account its assessment of general economic,
market and financial conditions, as well as its experience in securities and
business valuation. Duff & Phelps did not make any independent appraisals of our
assets or liabilities or those of Crystal Rock.
In performing its analysis and rendering its opinion, Duff & Phelps relied
on the accuracy and completeness of all information provided to it, whether
obtained from public or private sources, including Crystal Rock's and our
management, and did not attempt to independently verify any such information.
Duff & Phelps prepared its written opinion effective as of May 5, 2000. The
opinion is necessarily based upon market, economic, financial and other
conditions as they exist and can be evaluated as of such date. We did not place
any limitation upon Duff & Phelps with respect to the procedures followed or
factors considered by Duff & Phelps in rendering its opinion. We negotiated the
consideration to be paid to the shareholders of Crystal Rock before we engaged
Duff & Phelps to provide an opinion on the transaction.
THE FULL TEXT OF THE WRITTEN FAIRNESS OPINION OF DUFF & PHELPS, WHICH SETS
FORTH THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED, LIMITATIONS
ON AND SCOPE OF REVIEW BY DUFF & PHELPS IN RENDERING ITS OPINION, IS ATTACHED AS
APPENDIX B TO THIS PROXY STATEMENT. YOU ARE URGED TO READ THE DUFF & PHELPS
OPINION IN ITS ENTIRETY. THE OPINION WAS RENDERED WITHOUT REGARD TO THE
NECESSITY FOR, OR LEVEL OF, ANY RESTRICTIONS, OBLIGATIONS OR UNDERTAKINGS WHICH
MAY BE IMPOSED OR REQUIRED IN THE COURSE OF OBTAINING REGULATORY APPROVALS FOR
THE TRANSACTION CONTEMPLATED BY THE MERGER AGREEMENT. THE DUFF & PHELPS OPINION
IS NOT A RECOMMENDATION TO YOU ABOUT HOW TO VOTE AT THE SPECIAL MEETING.
In preparing its opinion to our board, Duff & Phelps performed a variety of
financial and comparative analyses regarding the valuation of Crystal Rock
including (i) a discounted cash flow analysis of the projected free cash flow of
Crystal Rock and the combined companies; (ii) a comparison of financial
performance and market valuation ratios of Crystal Rock with those of publicly
traded companies Duff & Phelps considered relevant for purposes of its opinion;
and (iii) a review of recent control transactions involving companies in the
bottled water industry. In addition, Duff & Phelps conducted the analyses it
deemed appropriate for purposes of its opinion.
Discounted Cash Flow Analysis. Duff & Phelps performed a discounted cash
flow analysis of the projected free cash flows of Crystal Rock and the combined
companies. Free cash flow is defined as cash that is available to either
reinvest in new businesses or to distribute to investors in the form of
dividends, stock buybacks, or debt service. The projected free cash flows are
discounted to the present at a rate which reflects
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<PAGE> 35
the relative risk associated with these flows as well as the rates of return
which both equity and debt investors could expect to realize on alternative
investment opportunities. Crystal Rock's and our future free cash flows were
based on projected revenues, net income, depreciation and amortization, working
capital and capital expenditure requirements for the five fiscal years ending in
October 2004. Duff & Phelps' projections included expected operating synergies.
Crystal Rock's future free cash flows for the five fiscal years ending
October 2004 reflected the key assumptions and projections in the first table
below. The projections used were prepared from the standpoint of a hypothetical
buyer of a controlling interest in Crystal Rock and included expected operating
synergies.
Neither these nor any other projections reviewed by Duff & Phelps or
disclosed in this proxy statement were reviewed by independent auditors, nor
were they prepared in accordance with generally accepted accounting principles.
The projections were based on numerous estimates and other assumptions and are
inherently subject to significant uncertainties and contingencies. There is no
assurance that the projections will be achieved. Neither we nor Crystal Rock nor
any other person considers such projections to be an accurate prediction of
future events.
Crystal Rock with Merger Synergies
<TABLE>
<CAPTION>
$ IN MILLIONS 2000 2001 2002 2003 2004
------------- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues............................................ $25.9 $28.0 $30.3 $32.7 $35.3
Baseline EBITDA*.................................... $ 6.9 $ 8.0 $ 9.2 $10.5 $11.9
EBITDA with merger synergies........................ $ 8.5 $ 9.8 $11.1 $12.6 $14.2
Gross margin........................................ 70.6% 70.5% 70.5% 70.5% 70.5%
EBITDA* (with merger synergies) margin.............. 32.9% 34.9% 36.7% 38.5% 40.1%
</TABLE>
---------------
* EBITDA means earnings before interest, taxes, depreciation and amortization.
Please see Note 1 to "Selected Historical Financial Data of Vermont Pure
Holdings, Ltd." for a discussion of the use and interpretation of this term,
which is not an accepted measurement under generally accepted accounting
principles.
The future free cash flows for the combined companies, also including
anticipated operating synergies, for the five fiscal years ending October 2004
reflected the following key assumptions and projections.
Combined Companies with Merger Synergies
<TABLE>
<CAPTION>
$ IN MILLIONS 2000 2001 2002 2003 2004
------------- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues.................................................... $63.4 $70.8 $78.9 $88.3 $99.0
EBITDA*..................................................... $14.8 $16.5 $19.2 $21.9 $25.1
Gross margin................................................ 66.0% 65.0% 64.8% 64.3% 63.7%
EBITDA* margin.............................................. 23.3% 23.4% 24.3% 24.8% 25.3%
</TABLE>
---------------
* EBITDA means earnings before interest, taxes, depreciation and amortization.
Please see Note 1 to "Selected Historical Financial Data of Vermont Pure
Holdings, Ltd." for a discussion of the use and interpretation of this term,
which is not an accepted measurement under generally accepted accounting
principles.
Duff & Phelps discounted the resulting free cash flows at rates of 12.0% to
13.0% for Crystal Rock, which Duff & Phelps considered consistent with bottled
water companies with similar size profiles. Duff & Phelps used a discount rate
range of 11.5% to 12.5% for the combined companies, which it considered
consistent with larger regional beverage and distribution companies. These rates
reflect, among other things, industry risks, the relatively small size of the
two companies in the bottled water industry, and current rates of return
required by investors in equity instruments in general. The discounted cash flow
analysis produced an enterprise value range of $71 million to $80 million for
Crystal Rock on a stand alone basis incorporating operating synergies. For the
combined companies, the discounted cash flow analysis produced an enterprise
value range of
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<PAGE> 36
$135 million to $153 million. Duff & Phelps calculated that the midpoint
enterprise value determined for Crystal Rock on a discounted cash flow (DCF)
basis implied the following multiples:
Crystal Rock -- Stand Alone
<TABLE>
<CAPTION>
DCF MULTIPLE
PERFORMANCE DEAL VALUE AT $75.3 MM
($ IN MILLIONS) MULTIPLE MID-POINT
--------------- ---------- ------------
<S> <C> <C> <C>
Enterprise Value/1999 EBITDA............................ $ 5.787 10.9x NM*
Enterprise Value/Projected 2000 EBITDA.................. $ 8.526 7.4x 8.8x
Enterprise Value/1999 Revenues.......................... $24.018 2.6x 3.1x
Enterprise Value/Projected 2000 Revenues................ $25.928 2.4x 2.9x
</TABLE>
---------------
* NM = not meaningful, because operating synergies are not reflected in 1999
EBITDA.
Based on this analysis for the combined companies, Duff & Phelps concluded
that the per share equity value of the combined companies was estimated to be an
amount greater than the per share price of Vermont Pure Holdings, Ltd. on a
standalone basis compared with a price of $3.25 per share on April 25, 2000.
Comparable Company Analysis. In the comparable company analysis, Duff &
Phelps selected a set of publicly-traded companies based on comparability to
Crystal Rock. Although no single company chosen is exactly similar to Crystal
Rock, these companies share many of the same operating characteristics and are
affected by many of the same economic forces. The value of Crystal Rock is
derived from the rate at which these companies are capitalized in the market,
after adjusting for differences in operations and performance using measurements
that included, but were not limited to, historical and expected revenue and
profit growth, profitability margins, and returns on capital. The valuation
multiples that Duff & Phelps analyzed included, but were not limited to,
enterprise value (total value of common equity plus the book value of debt and
preferred stock less cash) as a multiple of earnings before interest, taxes,
depreciation and amortization, commonly known as EBITDA, and enterprise value as
a multiple of revenues.
Using publicly available information, Duff & Phelps compared Crystal Rock
among the following companies: Saratoga Beverage Group, Green Mountain Coffee,
Hansen Natural Corp., Odwalla Inc., United Natural Foods, National Beverage
Corp. and Performance Food Group. For the comparable group and for Crystal Rock,
the table below compares enterprise value (equity value plus the value of debt
and preferred stock, less cash) to three measures:
- EBITDA for the latest twelve months (LTM)
- Projected EBITDA
- LTM revenues
Enterprise Value as a Multiple of:
<TABLE>
<CAPTION>
LTM PROJECTED LTM
COMPANY OR GROUP EBITDA EBITDA REVENUES
---------------- ------ ---------- --------
<S> <C> <C> <C>
Comparable group median..................................... 8.3x 6.7x 0.6x
Comparable group maximum.................................... 22.1x 25.3x 1.1x
Comparable group minimum.................................... 4.5x 2.0x 0.2x
Crystal Rock adjusted for operating synergies............... 8.9x 8.8x 2.6x
</TABLE>
Duff & Phelps noted that the comparable group's multiples reflect minority
interest valuations in all cases except Saratoga Beverage Group, while Crystal
Rock's multiples reflect a controlling interest valuation. In addition, no
comparable company has operating margins as high as Crystal Rock's. For that
reason, other factors being equal, Duff & Phelps stated that they would expect
Crystal Rock's revenue multiples to be higher as well. Therefore, based on the
analysis of comparable companies, it was Duff & Phelps' opinion that
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<PAGE> 37
Crystal Rock's valuation multiples, as implied by the consideration to be paid
to Crystal Rock's shareholders in the merger and contribution, were reasonable.
Comparable Transactions Analysis. Duff & Phelps reviewed recent control
transactions involving bottled water companies as targets, and analyzed
transactions that had been completed from late 1997 to the present. Similar to
the comparable company analysis described above, the estimated value of the
company to be acquired is derived from the valuation multiples at which these
target companies were acquired, after adjusting for differences in operations
and performance using measurements that included, but were not limited to,
revenue and profit growth and profitability margins. The valuation multiples
that Duff & Phelps analyzed included enterprise value as a multiple of EBITDA
and enterprise value as a multiple of revenues.
Duff & Phelps reviewed the financial terms, to the extent publicly
available or otherwise provided to Duff & Phelps, of eight completed
acquisitions in the bottled water industry. The median ratio of enterprise value
to EBITDA was 9.9x. The median ratio of enterprise value to revenues was 2.0x.
This compares to the enterprise value to EBITDA ratio of 8.9x for Crystal Rock
(10.9x if adjusted for reduced executive compensation only) and an enterprise
value to revenues ratio of 2.6x for Crystal Rock, based on the merger
consideration to be paid to the Crystal Rock shareholders. Duff & Phelps noted
that Crystal Rock's higher margins justify a somewhat higher transaction
multiple for revenues. Based on the comparable transactions analysis, summarized
in the table below, as well as the other analyses described above, Duff & Phelps
concluded that the value of Crystal Rock implied by the merger consideration was
reasonable.
Selected Transactions Involving Bottle Water Companies
<TABLE>
<CAPTION>
ENTERPRISE ENTERPRISE EBITDA
DATE TARGET ACQUIRER VALUE/EBITDA VALUE/REVENUES MARGINS
---- ------------------- -------------- ------------ -------------- -------
<S> <C> <C> <C> <C> <C>
02/29/00 McKesson Water Danone Group NA 2.9x NA
Products
10/10/97 Puro Water Group U.S. Filter 9.9x 2.4x 23.8%
Corp.
Approx. 1/99* Cloister Suntory 9.2x 2.3x 24.8%
04/01/99 Great Pines Water Suntory 15.0x 2.1x 13.8%
Co.
Approx. 12/98* Keystone Products McKesson Water 8.0x 2.0x 25.0%
Products
11/02/98 Aquapenn Spring Danone Group 15.9x 1.9x 12.1%
Water
Approx. 9/98* Ephrata McKesson Water 8.1x 1.4x 16.8%
Products
01/06/00 Saratoga Beverage North Castle 12.1x 1.2x 9.5%
Group Partners
MEDIAN 9.9X 2.0X
Crystal Rock 8.9x 2.6x 29.6%
adjusted for
operating synergies
</TABLE>
---------------
* Private transaction; information provided by Vermont Pure Holdings, Ltd.
This fairness opinion summary provides a description of Duff & Phelps'
presentation to our board on May 1, 2000. It is not a complete description of
that presentation or the analyses performed by Duff & Phelps. The preparation of
a fairness opinion is a complex process and is not necessarily susceptible to
partial analysis or summary description. Selecting portions of the analyses or
of the summary set forth above, without considering the analyses as a whole,
could create an incomplete view of the process underlying Duff & Phelps'
fairness opinion. In arriving at its fairness opinion, Duff & Phelps considered
the results of all such analyses taken as a whole. Furthermore, in arriving at
its fairness opinion, Duff & Phelps did not attribute any
29
<PAGE> 38
particular weight to any analysis or factor considered by it, but rather made
qualitative judgments as to the significance and relevance of each analysis and
factor. No company or transaction used in the above analyses as a comparison is
identical to Vermont Pure, Crystal Rock, or the merger and contribution. The
analyses were prepared solely for purposes of Duff & Phelps providing its
opinion to our board. Those analyses are not appraisals, nor do they necessarily
reflect the prices at which businesses or securities actually may be sold.
Analyses based upon forecasts of future results are not necessarily indicative
of actual future results, which may be significantly more or less favorable than
suggested by such analyses. Such analyses are based upon numerous factors or
events beyond our control and are inherently uncertain.
Fee and other Information
Under our engagement letter with Duff & Phelps, we paid a fee of $75,000,
consisting of a retainer of $37,500 when we signed the engagement letter, and a
further payment of $37,500 when Duff & Phelps delivered its opinion to our
board. We also reimbursed Duff & Phelps for its out of pocket expenses and
agreed to indemnify Duff & Phelps for liabilities it might incur in connection
with the assignment, including liabilities under the federal securities laws. No
portion of the fee paid to Duff & Phelps was contingent upon the conclusion
reached in its opinion. We have not paid Duff & Phelps any other compensation
during the past two years and no further compensation is contemplated.
Furthermore, we have had no other relationship at any time with Duff & Phelps,
and we have not agreed to engage Duff & Phelps to provide any services in the
future.
VERMONT PURE'S REASONS FOR THE BUSINESS COMBINATION
In reaching the decision to proceed with this business combination, our
board of directors considered a number of factors and concluded that combining
with Crystal Rock would both enhance and create shareholder value. The
transaction closely fits our strategy for growth. In the past, we acquired a
number of smaller bottling and delivery operations because we believe that both
the dynamics and the economics of the bottled water industry favor
consolidation. Crystal Rock presents a much more significant opportunity for us.
We will benefit from a greater market presence in the Northeastern United
States, and combining with Crystal Rock fits our strategy.
The combined companies will continue to market the Crystal Rock and Vermont
Pure brands separately. There are no anticipated marketing synergies.
Currently, we may tanker bulk Vermont spring water to Crystal Rock's
Watertown, Connecticut production facility to produce Vermont Pure products.
Conversely, we may install distillation equipment in Vermont Pure's Randolph,
Vermont production facility to produce Crystal Rock products. The logistics cost
and marketplace demand will determine the implementation or non-implementation
of the above strategy.
Accordingly, we had the following reasons for deciding to proceed with this
business combination:
- Combining with Crystal Rock gives us a greater market presence in the
Northeastern United States and helps us compete with national companies
on the local level.
- Crystal Rock is well established in geographic areas in southern New
England and New York that are complementary to our own areas, and has a
strong market presence in those areas.
- Crystal Rock's home and office business has strong gross margins and
complements our own home and office business.
- The fairness opinion rendered by Duff & Phelps in connection with the
business combination;
- The accounting and tax treatment of the transaction;
- Crystal Rock has a deep and excellent management team the members of
which are known throughout the water industry trade association, the
International Bottled Water Association (IBWA), and are recognized as
leaders and innovators within the industry. Henry. E. Baker was a Board
member for 20 years and is in the IBWA Hall of Fame. Peter K. Baker has
served as a Board member and Chairman
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<PAGE> 39
of the association. John B. Baker has designed and patented a number of
devices used within the bottled water industry. The most notable of these
devices is the Water Safe System, which acts as a seal between the water
bottle and the cooler to prevent spillage and reduce the introduction of
dust or other particles into the cooler and water. John has also assisted
other water companies to design and build plant equipment.
- Crystal Rock has excellent infrastructure in terms of systems, plant and
equipment.
- With a larger company, we can achieve savings on purchases of raw
materials, such as bottles and the resin used to make bottles, and
increase our gross margins.
- With a larger company, we can save money on distribution costs by
consolidating warehouse operations and truck routes.
- With a larger company, we can achieve greater route density and provide
more profitable and timely service to our home and office customers.
- The combination of the two companies is expected to increase our revenues
and EBITDA even after servicing the indebtedness we will incur to carry
out the transaction.
CRYSTAL ROCK'S REASONS FOR THE BUSINESS COMBINATION
In reaching the decision to proceed with this transaction, the Crystal Rock
board of directors considered a number of factors and concluded that combining
with Vermont Pure would enhance Crystal Rock shareholder value. Crystal Rock
shareholders are more limited in the ways they can effectively recognize the
true value of their holdings as compared to shareholders of a publicly traded
company.
Accordingly, the following reasons were foremost in the decision to proceed
with the combining of the two businesses:
- The merger with Vermont Pure, a publicly traded company, enabled Crystal
Rock shareholders individually a level of liquidity not available in the
private sector market.
- The consideration received by the Crystal Rock shareholders, including
its form in relation to the merger, is fair and equitable.
- As part of a publicly traded company, Crystal Rock has access to capital
markets and alternatives to debt financing as it relates to future
acquisitions.
- The merger of Crystal Rock and Vermont Pure provides current Crystal Rock
management an active role in a growing business.
- The merger will more fully utilize existing Crystal Rock facilities
thereby increasing production efficiencies.
- With a larger company, savings can be achieved on purchases of raw
materials, such as bottles and the resin used to make bottles leading to
an increase in gross margins.
- Crystal Rock believes that the combination of the two companies will
increase our revenues and EBITDA and further enhance the ownership value
currently realized by the Crystal Rock shareholders.
CONFLICTS OF INTEREST OF MR. FALLON AND OTHERS
In considering the recommendation of our board of directors with respect to
the proposed transaction, you should note that some of our officers and
directors may have interests in the transaction, that are different from, or in
addition to, your interests in the transaction. For example, Timothy G. Fallon,
our Chief Executive Officer, President and Chairman of the Board, has a direct
conflict of interest (1) in making his recommendation and (2) in voting to
approve the merger and to approve the transaction. Additionally, Bruce S.
MacDonald, our Chief Financial Officer and Secretary, and other members of the
board may have the same
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conflicts of interests. Upon completion of the transaction, Messrs. Fallon and
MacDonald will have employment agreements with VP Merger Parent. They will also
be entitled to indemnification by Vermont Pure and are covered by liability
insurance for their actions as directors and officers. The boards of directors
of Vermont Pure and Crystal Rock were aware of these interests and took these
interests into account in approving the proposed business combination.
STOCK HELD BY OUR DIRECTORS AND OFFICERS. As of August 30, 2000, our
directors and executive officers and persons who may be considered to be our
affiliates beneficially owned or held voting control of 1,186,000 shares or
10.3% of our common stock assuming exercise of all existing options to purchase
common stock that were exercisable within the sixty-day period following that
date.
VERMONT PURE EMPLOYMENT AGREEMENTS. In connection with the business
combination, VP Merger Parent will enter into a new employment agreement with
each of Timothy G. Fallon and Bruce S. MacDonald. In addition, Mr. Fallon will
serve as Chairman of the Board of VP Merger Parent.
TIMOTHY G. FALLON.
NEW EMPLOYMENT AGREEMENT
VP Merger Parent's agreement with Mr. Fallon has a term of five years and
provides that he will become Chief Executive Officer of VP Merger Parent when
the business combination occurs. His base salary will be $250,000, subject to
annual review by the board of directors, and he will be eligible to receive
various bonuses. For fiscal years 2000 and 2001, VP Merger Parent will pay him a
bonus of from $50,000 to $100,000 depending on its ability to achieve stated
levels of target sales, and a further bonus of from $50,000 to $100,000
depending upon its ability to achieve stated levels of target EBITDA. For fiscal
years 2002 through 2004, the range for the sales and EBITDA bonuses will be from
$70,000 to $120,000.
As is true in his existing employment contract, VP Merger Parent may also
pay Mr. Fallon three special bonuses. The first, payable only once, equals
$25,000 if VP Merger Parent achieve annual sales of over $40,000,000 during
either of its fiscal years 2000 or 2001. The second, also payable only once, is
a bonus of $50,000, cumulative with the $25,000 bonus, if VP Merger Parent
achieves annual sales of over $50,000,000 during either of those fiscal years.
The third, again payable only once, is a bonus of $50,000 if the closing price
of VP Merger Parent common stock is equal to or in excess of $5.00 per share for
54 trading days in any period of 60 consecutive trading days. VP Merger Parent
will reimburse Mr. Fallon for up to $25,000 for buying disability and other
insurance that it does not offer as an employee benefit, if he elects to obtain
it, and leasing and operating an automobile. Subject to the fiduciary duties of
its directors, VP Merger Parent will use its best efforts to have Mr. Fallon
elected as a member of its board of directors and any executive committee of the
board of directors. VP Merger Parent's agreement with Mr. Fallon also contains
confidentiality provisions and a non-competition clause that prohibits Mr.
Fallon from competing with it during the term of the agreement and any period in
which he is no longer employed and receives severance payments or for 12 months
if he is not receiving severance payments. Provided that VP Merger Parent
shareholders approve an increase in the number of stock options it can grant,
when the business combination occurs VP Merger Parent will grant Mr. Fallon a
stock option with an exercise price at fair market value for the purchase of
500,000 shares of its common stock, vesting at the rate of 100,000 shares per
year.
If VP Merger Parent terminates Mr. Fallon's employment before it expires
and without "cause," as defined in the agreement, in our fiscal years 2000 and
2001 VP Merger Parent will be required to pay him monthly severance benefits for
the remaining term of his agreement or 24 months, whichever is less, at an
annual rate equal to his base annual salary plus $150,000, together with fringe
benefits as defined in the agreement, subject to various limits. In VP Merger
Parent's fiscal years 2002 through 2004, it would be required to pay him monthly
severance benefits for the remaining term of his agreement or 24 months,
whichever is less, at an annual rate equal to his base annual salary plus
$200,000, together with fringe benefits as described in the agreement. Mr.
Fallon's contract contains no provisions entitling him to resign and be
compensated for "good reason." If there is a "change of control," as defined in
the agreement, of VP Merger Parent, followed within 30 days by the termination
of Mr. Fallon's employment for any reason, then we would
32
<PAGE> 41
be required to pay him monthly severance benefits as if there had been a
termination without cause, together with fringe benefits as described in the
agreement.
CURRENT EMPLOYMENT AGREEMENT
In October 1997, we executed an employment agreement with Timothy G. Fallon
that has an effective date of November 1, 1997 and expires November 1, 2001.
This agreement was amended during October 1999 but still expires on November 1,
2001. Pursuant to the agreement, which replaced a prior agreement dated November
4, 1994, Mr. Fallon acts as our Chief Executive Officer and President. His
annual base salary is $205,000, which is reviewed annually by the board. We
provide Mr. Fallon with an automobile and disability insurance allowance. 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 1.0
times his annual base salary plus $150,000 payable over 12 months if such
termination occurs in fiscal years 2000 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 1999, Mr. Fallon is entitled to incentive bonuses based upon
the achievement of performance goals for fiscal years 2000 and 2001. For fiscal
years 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. Mr. Fallon is
also entitled to receive special bonuses if we achieve sales of $40,000,000 or
$50,000,000 during fiscal year October 2000 or October 2001. These bonuses are,
respectively, $25,000 and $50,000. These bonuses are cumulative and may be
earned in the same fiscal year. If we maintain or exceed a $5.00 per share stock
price of 54 out of 60 consecutive trading days during the period November 1,
1999 through October 31, 2001, Mr. Fallon will receive a special bonus of
$50,000.
BRUCE S. MACDONALD.
NEW EMPLOYMENT AGREEMENT
VP Merger Parent's agreement with Mr. MacDonald has a term of five years
and provides that he will become Vice President of Finance, Chief Financial
Officer and Treasurer of VP Merger Parent when the business combination occurs.
His base salary will be $105,000, subject to annual review by the board of
directors, and he will be eligible to receive a bonus of from $25,000 to $75,000
depending on our ability to achieve stated levels of target EBITDA. VP Merger
Parent will reimburse Mr. MacDonald for up to $15,000 for buying disability
insurance that it does do not offer as an employee benefit, if he elects to
obtain it, and leasing and operating an automobile. VP Merger Parent's agreement
with Mr. MacDonald also contains confidentiality provisions and a
non-competition clause substantially the same as for Mr. Fallon. Provided that
its shareholders approve an increase in the number of stock options it can
grant, when the business combination occurs it will grant Mr. MacDonald a stock
option with an exercise price at fair market value for the purchase of 100,000
shares of our common stock, vesting at the rate of 20,000 shares per year.
If VP Merger Parent terminates Mr. MacDonald's employment before it expires
and without "cause," as defined in the agreement, it will be required to pay him
monthly severance benefits for the remaining term of his agreement or 24 months,
whichever is less, at an annual rate equal to his base annual salary plus
$50,000, together with fringe benefits as defined in the agreement, subject to
various limits. Mr. MacDonald's contract contains no provisions entitling him to
resign and be compensated for "good reason." If there is a "change of control,"
as defined in the agreement, of VP Merger Parent, followed within 30 days by the
termination of Mr. MacDonald's employment for any reason, then it would be
required to pay him monthly severance benefits as if there had been a
termination without cause, together with fringe benefits as described in the
agreement.
33
<PAGE> 42
CURRENT EMPLOYMENT AGREEMENT
On and as of November 1, 1997, we entered into an employment agreement with
Bruce S. MacDonald that expires November 1, 2001. Pursuant to the agreement, Mr.
MacDonald acts as our Chief Financial Officer and Treasurer. His annual base
salary is $100,000, to be reviewed annually by the board. We provide 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 1.0 times
his annual base salary plus $50,000 payable over 12 months if such termination
occurs in fiscal years 2000 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.
In addition to the bonus payments disclosed above that were paid to him
with respect to fiscal 1999, Mr. MacDonald is entitled to incentive bonuses
based upon the achievement of performance goals for fiscal year 2000 to 2001.
Mr. MacDonald's incentive compensation for each of these year is $50,000 for
meeting Board approved target EBITDA, with greater or lesser payments
(non-cumulative) for meeting EBITDA targets within specified ranges.
VERMONT PURE STOCK OPTIONS. Upon consummation of the business combination,
holders of Vermont Pure options will be entitled to receive Vermont Pure stock
options and, upon the exercise of their Vermont Pure stock options, will receive
a number of shares of VP Merger Parent common stock determined as described
under "Item 1. Proposal to Approve the Business Combination -- Treatment of
Vermont Pure Stock Options and Warrants." Elsewhere in this proxy statement we
are asking you to amend our stock option plan to increase the number of shares
covered by the plan to allow us to grant the options to Mr. Fallon and Mr.
MacDonald as noted above and to employees of Crystal Rock. However, even if the
shareholders of Vermont Pure do not approve the amendment that would increase
the number of shares covered by our stock option plan, we will still proceed
with the merger and contribution if the shareholders approve the merger
agreement. In other words, consummation of the merger does not depend upon
approval of the amendment to our stock option plan.
INDEMNIFICATION AND INSURANCE FOR VERMONT PURE DIRECTORS AND OFFICERS. Our
directors and officers are entitled to indemnification by us prior to the
business combination as provided in our certificate of incorporation and
by-laws. We have maintained a directors' and officers' liability insurance
policy for the benefit of our directors and officers. We expect that the
directors and officers of VP Merger Parent will be covered by a substantially
similar directors' and officers' liability insurance policy.
INTEREST OF CRYSTAL ROCK'S MANAGEMENT AND CERTAIN SHAREHOLDERS IN THE BUSINESS
COMBINATION
In considering the vote by Crystal Rock's board of directors in favor of
the agreement and plan of merger and contribution, you should note that some of
Crystal Rock's shareholders, directors and officers have interests in the
transaction that are different from, or in addition to, your interests
generally. The boards of directors of Vermont Pure and Crystal Rock were aware
of these interests and took these interests into account in approving the
proposed business combination.
STOCK HELD BY CRYSTAL ROCK DIRECTORS AND OTHERS. As of August 30, 2000,
the directors and executive officers of Crystal Rock and persons who may be
considered to be affiliates of Crystal Rock, beneficially owned or held voting
control of 100% of Crystal Rock common stock.
ELECTION OF DIRECTORS. In the merger agreement, we have agreed to use our
efforts to appoint Henry E. Baker and Peter K. Baker, directors of Crystal Rock,
to the board of directors of VP Merger Parent as of the date the business
combination is completed. We also agreed to appoint Ross S. Rapaport, an
attorney who has provided legal counsel to Crystal Rock and to members of the
Baker family, to the board.
CRYSTAL ROCK EMPLOYMENT AGREEMENTS. In connection with the business
combination, VP Merger Parent will enter into employment agreements with Peter
K. Baker, John B. Baker and Henry E. Baker.
34
<PAGE> 43
PETER K. BAKER. The agreement with Peter K. Baker has a term of five years
and provides that he will become President of VP Merger Parent when the
transaction occurs. His base salary will be $250,000, subject to annual review
by the board of directors, and he will be eligible to receive a bonus of from
$25,000 to $75,000 depending on our ability to achieve stated levels of EBITDA.
Mr. Baker will also be entitled to a guaranteed bonus equal to the excess of
$50,000 over the actual cost to him, which VP Merger Parent will reimburse, of
buying disability insurance, if he elects to obtain it, and leasing and
operating an automobile. Subject to the fiduciary duties of its directors, VP
Merger Parent will use its best efforts to have Mr. Baker elected as a member of
its board of directors and any executive committee of the board of directors, so
long as the former shareholders of Crystal Rock hold in the aggregate at least
40% of the outstanding shares of VP Merger Parent. The agreement also contains
confidentiality provisions and a non-competition clause that prohibits Mr. Baker
from competing with us during the term of the agreement and any period in which
he is no longer employed and receives severance payments or for 12 months if he
is not receiving severance payments.
If we terminate Mr. Baker's employment before it expires and without
"cause," as defined in the agreement, VP Merger Parent will be required to pay
him monthly severance benefits for the remaining term of his agreement at an
annual rate equal to his base annual salary plus $50,000, together with fringe
benefits as defined in the agreement, subject to various limits. If Mr. Baker
leaves VP Merger Parent for "good reason," which means if VP Merger Parent
requires him to relocate his home a distance of more than 50 miles, if VP Merger
Parent assigns to him duties materially inconsistent with his position, or if VP
Merger Parent materially breaches its agreement with him, he will be entitled to
the same payments as if VP Merger Parent had terminated his employment without
cause. Finally, if there is a "change of control," as defined in the agreement,
of VP Merger Parent, followed within 30 days by the termination of Mr. Baker's
employment for any reason, then VP Merger Parent would be required to pay him
monthly severance benefits for 24 months or the remaining term of his agreement,
whichever is less, at the same annual rate that applies in case of termination
without cause, together with fringe benefits as described in the agreement.
JOHN B. BAKER. John B. Baker has a five year agreement with VP Merger
Parent that provides that he will become Executive Vice President of VP Merger
Parent when the merger occurs. His base salary will be $250,000, subject to
annual review by the board of directors, and he will be eligible to receive a
bonus of from $25,000 to $75,000 depending on our ability to achieve stated
levels of EBITDA. Mr. Baker will also be entitled to a guaranteed bonus equal to
the excess of $50,000 over the actual cost to him, which VP Merger Parent will
reimburse, of buying disability insurance, if he elects to obtain it, and
leasing and operating an automobile. After 18 months Mr. Baker may elect to
reduce his duties and compensation by giving us written notice. In that case, he
must make himself reasonably available to VP Merger Parent for consultation for
at least 20 hours per calendar month. While he is employed full time, his base
salary and bonus arrangements are the same as for Peter K. Baker. If he chooses
reduced employment, his base salary will be reduced to $160,000, subject to
annual review by the board of directors. He would no longer be eligible for a
bonus based on our EBITDA targets. His guaranteed bonus would be equal to the
excess of $15,000 over the reimbursed insurance and automobile allowance
described above. With respect to confidentiality and non-competition, John B.
Baker's employment agreement is substantially the same as Peter K. Baker's.
John B. Baker's agreement for severance payments following termination is
substantially the same as for Peter K. Baker in case of termination of
employment without cause, termination for good reason, and termination following
a change of control. However, if John B. Baker has elected reduced employment,
VP Merger Parent is required to pay him monthly severance benefits at an annual
rate equal to his base annual salary for reduced employment, without any added
amount, plus fringe benefits as defined in the agreement, for the remaining term
of his agreement, but not more than 24 months in case of a change of control.
HENRY E. BAKER. VP Merger Parent's agreement with Henry E. Baker has a
term of five years and provides that he will be Chairman Emeritus of VP Merger
Parent when the merger occurs. Mr. Baker is required to make himself reasonably
available to us for consultation for at least 20 hours per calendar month. His
base annual salary is $25,000, subject to annual review by the board of
directors. VP Merger Parent will provide him with an automobile allowance of up
to $12,000 per year for his actual cost of leasing and operating an automobile.
Subject to the fiduciary duties of its directors, VP Merger Parent will use its
best efforts to have Mr. Baker elected as a member of its board of directors so
long as the former shareholders of Crystal
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<PAGE> 44
Rock hold in the aggregate at least 40% of the outstanding shares of VP Merger
Parent. Henry E. Baker's employment agreement is substantially the same as Peter
K. Baker's with respect to confidentiality and non-competition. His agreement
regarding severance following termination is substantially the same as for Peter
Baker in case of termination of employment without cause, termination for good
reason, and termination following a change of control. In cases requiring
severance payments, VP Merger Parent will pay Mr. Baker monthly severance
benefits for the remaining term of his agreement, but not more than 24 months in
case of a change of control, at an annual rate equal to his base annual salary,
without any added amount, plus fringe benefits as defined in the agreement.
CRYSTAL ROCK RELATED PARTY TRANSACTIONS
CONSIDERATION AND EMPLOYMENT AGREEMENTS. If the business combination
occurs, the shareholders of Crystal Rock will contribute all of the outstanding
shares of Crystal Rock to VP Merger Parent in exchange for consideration of at
least $63,200,000, consisting of at least $9,500,000 in cash, VP Merger Parent's
12% subordinated promissory notes due 2007 in the original principal amount of
$22,600,000, and shares of VP Merger Parent's common stock valued for purposes
of the merger agreement at $31,100,000. The consideration to be paid to the
Crystal Rock shareholders will be paid as follows:
<TABLE>
<CAPTION>
SUBORDINATED PARENT TOTAL
PROMISSORY SHARE TRANSFER
STOCKHOLDER CASH(1) NOTE AMOUNT VALUE
----------- ------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Henry E. Baker............... $5,500,000.00 $ 3,488,888.89 $ 3,355,438.61 $12,344,327.50
John B. Baker................ $1,500,000.00 $ 5,200,000.00 $ 9,044,561.40 $15,744,561.40
Peter K. Baker............... $1,500,000.00 $ 5,200,000.00 $ 9,044,561.40 $15,744,561.40
Joan A. Baker................ $ -0- $ 3,511,111.11 $ -0- $ 3,511,111.11
Ross S. Rapaport, Trustee
U/T/A dated 12/16/91 F/B/O
Joan Baker et al........... $1,000,000.00 $ 5,200,000.00 $ 9,581,520.47 $15,781,520.47
Peter K. Baker Life Insurance
Trust, Ross S. Rapaport,
Trustee.................... $ -0- $ -0- $ 36,959.06 $ 36,959.06
John B. Baker Life Insurance
Trust, Ross S. Rapaport,
Trustee.................... $ -0- $ -0- $ 36,959.06 $ 36,959.06
------------- -------------- -------------- --------------
Totals............. $9,500,000.00 $22,600,000.00 $31,100,000.00 $63,200,000.00
============= ============== ============== ==============
</TABLE>
---------------
(1) Should the average amount of cash and cash-equivalents of Crystal Rock as of
the close of business on the five business days immediately preceding the
effective date exceed $1,500,000, the excess shall be allocated
proportionately to each Crystal Rock stockholder based on the total transfer
value.
In addition, VP Merger Parent will enter into employment agreements with
Henry E. Baker, John B. Baker, and Peter K. Baker, respectively, under which
each of these persons will receive substantial compensation for acting as an
executive officer of VP Merger Parent.
TRANSFER OF WATERTOWN FACILITY. Prior to the closing of the business
combination, Crystal Rock will sell to Henry E. Baker, as Trustee of the Baker
Grandchildren's Trust, real estate located at 1050 Buckingham Street in
Watertown, Connecticut, consisting of about ten acres of land including an
approximately 72,000-square foot building containing a water-purification and
bottling plant, warehouse space, a truck garage, and office space. The
consideration for the sale of this real estate will consist of the assumption by
the Baker Grandchildren's Trust of the mortgage indebtedness associated with
this real estate. As of June 15, 2000, the amount of that debt was approximately
$3,637,000 in principal plus about $11,000 in accrued interest. The mortgage
indebtedness includes a recent increase of $425,000 in principal amount, plus
accrued interest, that was incurred on May 16, 2000 in contemplation of the
business combination.
LEASEBACK OF WATERTOWN FACILITY. When the business combination is
completed, Crystal Rock, as a subsidiary of VP Merger Parent, will lease back
the transferred Watertown real estate from the Baker
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<PAGE> 45
Grandchildren's Trust. The lease term is ten years, and Crystal Rock has an
option to extend the lease for an additional five years. The annual rent under
the lease is $360,000 during the first five years and $414,000 during the second
five years, payable monthly. If Crystal Rock elects to extend the term of the
lease, the rent during the extended term will be negotiated between the parties
or determined by arbitration if they cannot agree. The lease is "triple net,"
meaning that Crystal Rock is responsible for paying not only the rent but also
the costs of all associated real estate taxes, insurance, and maintenance. The
lease payments are substantially the same in amount as the payments of principal
and interest that Crystal Rock has been making on the mortgage debt on the
property. Vermont Pure believes that the rent Crystal Rock will pay on this
lease is at least as favorable as Crystal Rock could obtain in an arm's-length
transaction.
LEASE OF STAMFORD FACILITY. Crystal Rock will also lease other real estate
from Henry E. Baker. This real estate consists of about two acres of land in
Stamford, Connecticut, including an approximately 22,000-square foot building
containing warehouse space, a truck garage, and office space. The lease term is
ten years, and Crystal Rock has an option to extend the lease for an additional
five years. Either the landlord or Crystal Rock may terminate the lease prior to
its expiration or nine months' prior notice to the other; if Crystal Rock
terminates the lease before it expires, it must pay a termination fee equal to
six months' rent. The annual rent under the lease is $216,000 during the first
five years and $248,400 during the second five years, in each case, payable
monthly. If Crystal Rock elects to extend the term of the lease, the rent during
the extended term will be negotiated between the parties or determined by
arbitration if they cannot agree. The lease is also "triple net." The current
annual rent on the property is $216,000. Vermont Pure believes that the rent
Crystal Rock will pay on this lease is at least as favorable as Crystal Rock
could obtain in an arm's-length transaction.
OWNERSHIP OF VP MERGER PARENT FOLLOWING THE BUSINESS COMBINATION
As a result of the business combination, the holders of Crystal Rock common
stock will become VP Merger Parent shareholders. Depending on the calculation of
the exchange ratio as described above VP Merger Parent will issue a maximum of
11,107,143 shares (51.9% of the outstanding common stock) and a minimum of
9,873,015 shares (49.0% of the outstanding common stock) of its common stock to
Crystal Rock shareholders in the merger. If the share price is less than $2.80,
the calculation will be based on a price of $2.80. If it is more than $3.15, the
calculation will be based on a price of $3.15. On August 30, 2000, the closing
price for our common stock, $.001 par value, on the American Stock Exchange was
$3.56 per share.
If the share price is at the midpoint, or $2.975, then the beneficial
ownership (including shares obtainable upon the exercise of stock options within
60 days of the date of the table) of VP Merger Parent following the business
combination would be as follows:
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENTAGE OF
BENEFICIAL OUTSTANDING SHARES
OWNER'S NAME AND ADDRESS OWNERSHIP OWNED
------------------------ ---------- ------------------
<S> <C> <C>
Timothy G. Fallon........................................... 622,500(2) 2.8%
Route 66, Catamount Industrial Park
Randolph, VT 05060
Robert C. Getchell.......................................... 72,000(3) .3%
David R. Preston............................................ 73,000(4) .4%
Norman E. Rickard........................................... 69,000(3) .3%
Beat Schlagenhauf........................................... 67,000(1) .3%
Bruce S. MacDonald.......................................... 101,000(1) .5%
Phillip Davidowitz.......................................... 25,000(1) .1%
Henry E. Baker.............................................. 1,127,879 5.4%
Jack B. Baker............................................... 3,040,189 14.7%
Peter K. Baker.............................................. 3,040,189 14.7%
Ross S. Rapaport, Trustee................................... 3,245,525 15.6%
</TABLE>
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<PAGE> 46
---------------
(1) Represents shares of common stock issuable pursuant to outstanding stock
options exercisable within 60 days of the date of this table.
(2) Includes 620,000 shares of common stock issuable pursuant to outstanding
stock options exercisable within 60 days of the date of this table.
(3) Includes 67,000 shares of common stock issuable pursuant to outstanding
stock options exercisable within 60 days of the date of this table.
(4) Includes 71,000 shares of common stock issuable pursuant to outstanding
stock options exercisable within 60 days of the date of this table.
In evaluating the business combination, we considered the issue of change
in control. Although it is possible that the current Crystal Rock stockholders
could receive more than 50% of the outstanding shares of the combined company,
the following points summarize why we believe that effective control does not
change solely by reason of the transaction.
- Based on the historic price of our stock since the merger agreement was
signed, under the formula for computing the number of shares of VP Merger
Parent stock to be issued, it is probable, though not certain, that
Crystal Rock's stockholders will receive less than 50% of the outstanding
shares of VP Merger Parent.
- The ownership position of the former Crystal Rock stockholders will be
subject to dilution based upon our outstanding options, warrants and
convertible securities.
- No single Crystal Rock stockholder will own more than 15.6% of the
outstanding stock of VP Merger Parent, and there is no voting agreement
or other similar arrangement that obliges them to act together.
- Six of nine board members of the combined company will be former Vermont
Pure board members.
- The Chairman of the Board and of the Executive Committee and the Chief
Executive Officer of VP Merger Parent will be Mr. Fallon, who holds those
positions with Vermont Pure, and the Chief Financial Officer of VP Merger
Parent will be Mr. MacDonald, who holds that position with Vermont Pure.
MANAGEMENT OF VP MERGER PARENT FOLLOWING THE BUSINESS COMBINATION
When the merger is complete, the name of VP Merger Parent will become
Vermont Pure Holdings, Ltd. The directors and officers of VP Merger Parent will
be as follows:
ELECTION OF OFFICERS AND DIRECTORS. In the merger agreement, VP Merger
Parent agreed that the following persons would constitute its directors and
executive officers as of the date the business combination is completed:
Timothy G. Fallon, Chairman, Chief Executive Officer and Director
Henry E. Baker, Chairman Emeritus and Director
Peter K. Baker, President and Director
John B. Baker, Executive Vice President
Bruce S. MacDonald, Vice President of Finance, Chief Financial Officer and
Treasurer
Philip Davidowitz, Director
Robert C. Getchell, Director
David R. Preston, Director
Ross S. Rapaport, Director
Norman Rickard, Director
Beat Schlagenhauf, Director
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<PAGE> 47
In general, Mr. Fallon will be responsible for the day-to-day and long term
planning, development, operation and advancement of the business of VP Merger
Parent and its subsidiaries. Mr. MacDonald will have related responsibilities
for the business in the areas of financial reporting and management. Peter K.
Baker will be principally in charge of the day-to-day and long-term planning,
development and operation of the home and office business. John B. Baker will
have similar responsibilities with emphasis on manufacturing, quality and
operations in the home and office division. As Chairman Emeritus, Henry E. Baker
will act primarily in a consulting type of role, including, but not limited to,
serving as VP Merger Parent's IBWA representative, investigating potential
acquisitions and consulting on technical matters.
Mr. Rapaport is a trustee of various trusts that own significant amounts of
Crystal Rock stock and will own material amounts of VP Merger Parent common
stock as well. He is counsel to Crystal Rock. More information about Mr.
Rapaport appears below.
INDEBTEDNESS WE WILL INCUR IN CONNECTION WITH
THE BUSINESS COMBINATION
SENIOR DEBT
We need to borrow money and issue promissory notes to the former
shareholders of Crystal Rock in connection with the business combination. The
loans and notes will be secured by substantially all of our assets. Working with
the management of Crystal Rock, we believe we have structured this borrowing so
that we can meet our obligations as they arise. However, borrowing additional
money increases the risk that if we do not repay our indebtedness in a timely
fashion, our secured creditors may declare a default and foreclose upon our
assets, which would likely result in harmful disruption to our business, the
sale of assets for less than their fully realizable value, and possible
bankruptcy. You should read the third Risk Factor under "Risk Factors," which
begins "We have to borrow substantial sums of money in connection with this
transaction," for more information about this type of risk.
In order to have enough cash to pay the Crystal Rock shareholders the cash
portion of the consideration owed to them for their shares, and also to finance
the operations of the combined companies, VP Merger Parent has obtained a
commitment for $36,000,000 of senior debt financing from Webster Bank of
Waterbury, Connecticut. The loan commitment provides for a term loan of
$31,000,000 to consolidate our existing debt and to fund the payments to the
Crystal Rock shareholders. The commitment also provides for a line of credit of
$5,000,000 to support the working capital needs of the combined companies.
Within the working capital line of credit there is a separate limit of $750,000
for the issuance of letters of credit. All of the subsidiaries of VP Merger
Parent would be guarantors of the senior debt. The cost of refinancing our
existing debt will be $364,000, consisting of forgone costs of $171,000 in bank
fees, $48,000 in annual letter of credit fees, and $145,000 in bond closing
costs.
As provided in the commitment letter, the term loan and working capital
line of credit have the following features:
Maturity TERM LOAN -- 7 years
LINE OF CREDIT -- 2 years
Repayment TERM LOAN -- monthly payments of principal and
interest, with graduated principal as follows:
<TABLE>
<S> <C> <C>
Year 1 $208,333 per month
Year 2 $291,666 per month
Year 3 $333,333 per month
Year 4 $333,333 per month
Year 5 $375,000 per month
Year 6 $458,333 per month
Year 7 $583,333 per month
</TABLE>
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<PAGE> 48
LINE OF CREDIT -- interest only in arrears
Collateral A first blanket lien on all our assets now
owned or hereafter acquired, including the
stock of Vermont Pure and Crystal Rock that we
own.
Permitted Hedging TERM LOAN -- We are permitted to hedge the
interest rate on the term loan for a period up
to the maturity of the term loan by entering
into an interest rate hedge agreement with
either Webster Bank or another acceptable
borrower.
Rates TERM LOAN -- Rates are linked to our ratio of
senior funded debt to EBITDA as follows:
<TABLE>
<CAPTION>
RATIO PRICING
----- ----------------------------------
<S> <C> <C>
>3.0 to 1 and above LIBOR plus 225 basis points
>2.5 to 1 and # 3.0 to 1 LIBOR plus 175 basis points
>2.0 to 1 and # 2.5 to 1 LIBOR plus 150 basis points
>1.5 to 1 and # 2.0 to 1 LIBOR plus 125 basis points
#1.5 to 1 LIBOR plus 100 basis points
</TABLE>
The term loan will initially be priced at LIBOR
plus 175 basis points, to be adjusted annually
based on audited fiscal year end financial
statements. Senior funded debt includes all of
our term loans (but not subordinated debt) and
all amounts drawn under the line of credit and
capital leases.
LINE OF CREDIT -- Interest on the line of
credit accrues at the same rate as on the term
loan unless we select the Webster Bank prime
rate in effect from time to time.
Fees We will pay an underwriting fee of 0.5%
($180,000) of the commitment for the term loan
and the line of credit, payable at the closing.
We will also pay a commitment fee of $87,000
and an agency fee of $5,000 per year.
Prepayment Penalties If we refinance our senior debt with another
financial institution, we will owe a prepayment
penalty equal to 3% of the amount we prepay in
Year 1, 2% in Year 2, 1% in Year 3 and none
after that. However, if we want to make an
acquisition in excess of a cash outlay of
$10,000,000 that requires financing that
Webster Bank cannot or declines to accommodate,
those penalties are reduced by half.
Subordination The debt evidenced by the 12% subordinated
promissory notes due 2007 that we issue to the
Crystal Rock shareholders will be subordinated
to the senior debt. The subordination agreement
is discussed below.
Financial Covenants Webster Bank will impose customary financial
covenants, including these:
Maximum Senior Funded Debt/EBITDA
<TABLE>
<S> <C> <C>
From closing to 7/31/01 3.50 to 1
10/31/01 and thereafter 3.00 to 1
</TABLE>
This is tested on a rolling four quarter basis.
Debt Service Coverage
Our net income, plus depreciation and
amortization, plus or minus
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<PAGE> 49
the net change in customer deposits, all
divided by the sum of current portion of long
term debt and capital leases, unfinanced
capital expenditures, and scheduled
subordinated debt repayments plus the current
portion of specified obligations, may not fall
below 1.2 to 1.
Liquidity
Our current ratio may not be less than 1.0 to
1.
Net Worth
In general, we may not incur net losses. This
is tested on a rolling four quarter basis.
Capital Expenditures
We may not have capital expenditures in any
year of more than $3,000,000 plus net income,
not to exceed a total of $5,000,000.
Other
We may not pay dividends, incur incremental
debt or make acquisitions without Webster's
permission, nor can we have a material change
in management.
Restrictions on M&A We will not be permitted to merge or
consolidate with another company or sell all or
substantially all of our assets without either
obtaining Webster's permission or paying off
the senior debt. However, if there would be no
default, we can make small acquisitions using
internally generated cash, "seller paper" or
our stock up to $500,000 per transaction or
$1,000,000 per fiscal year.
There are numerous other customary provisions in the Webster Bank loan
documents, such as provisions for increased interest rates in case we are in
default, insurance obligations, financial reporting obligations, and the like.
We would not necessarily satisfy all of these covenants based on pro forma
financial statements meeting SEC accounting rules, which do not allow the use of
projections in such statements. However, after giving effect to operating
synergies arising from the merger, both we and Crystal Rock believe that we will
satisfy the covenants.
The Webster Bank commitment letter expires October 31, 2000.
12% SUBORDINATED PROMISSORY NOTES DUE 2007
As part of the consideration to be paid to the Crystal Rock shareholders,
VP Merger Parent will issue secured subordinated notes with a total principal
amount of $22,600,000 to the following persons: Henry E. Baker -- $3,488,889,
Joan A. Baker -- $3,511,111, John B. Baker -- $5,200,000, Peter K. Baker --
$5,200,000 and Ross S. Rapaport, as trustee of a Baker family trust
--$5,200,000. The notes bear interest at 12%, compounded quarterly, with
payments due the 20th of each February, May, August, and November. In
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<PAGE> 50
years 1 through 3 we will pay interest only, amounting to $678,000 per quarter.
The amortization of the notes is as follows:
<TABLE>
<CAPTION>
YEAR INTEREST PRINCIPAL TOTAL
-------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REPAYMENT 1 $ 2,712,000 $ -- $ 2,712,000
2 $ 2,712,000 $ -- $ 2,712,000
3 $ 2,712,000 $ -- $ 2,712,000
4 $ 2,602,000 $ 2,000,000 $ 4,602,000
5 $ 2,307,000 $ 3,000,000 $ 5,307,000
6 $ 1,892,000 $ 4,000,000 $ 5,892,000
7 $ 1,247,000 $ 7,000,000 $ 8,247,000
Maturity $ 6,600,000
-------- ----------- ----------- -----------
Total $16,184,000 $22,600,000 $32,184,000
======== =========== =========== ===========
</TABLE>
The notes will become due and payable following notice to us in case of our
liquidation, dissolution or insolvency or the sale of our business, or in case
of the acceleration of any senior debt.
If we prepay principal in Year 1, then we owe a prepayment penalty equal to
3% of the amount we prepay, declining to 2% in Year 2, 1% in Year 3, and none
thereafter.
The notes are secured by all of our assets, but the notes and the security
interest are junior and subordinated to the senior debt owed to and the security
interest in favor of Webster Bank and its successors. At the closing of the
transactions contemplated by the merger agreement, we and the former Crystal
Rock shareholders who hold the notes will enter into a subordination agreement
with Webster Bank.
Under the subordination agreement, we may pay, and the holders of the notes
may accept, quarterly payments of interest on the notes so long as there is no
default on the senior debt and the payment of interest on the notes would not
cause such a default. We may make partial payments of interest on the
subordinated notes if partial payments would not cause a default on the senior
debt. The holders of the notes can accrue any unpaid interest that we owe, and
we can pay it to them under the subordination agreement in subsequent periods,
provided that any such later payment will not cause a default on the senior
debt. We may not pay and the holders of the notes may not accept interest at a
rate higher than 12%. As additional security for Webster, the holders of the
subordinated notes will pledge to the Bank a continuing security interest in the
subordinated loan documents.
If we are in compliance with all of our financial covenants with Webster
Bank, then we will pay principal on the subordinated notes commencing with the
third anniversary of the issuance of the notes, as described above.
RESALE OF VP MERGER PARENT COMMON STOCK AND
AMERICAN STOCK EXCHANGE LISTING
VP Merger Parent common stock issued to Vermont Pure stockholders in
connection with the business combination will be freely transferable, except
that the directors and executive officers of Vermont Pure will be subject to
volume and manner of sale limitations imposed by Rule 145 and Rule 144 under the
Securities Act. The former shareholders of Crystal Rock have contractually
agreed to limit their sales for a period of one year following the merger. In
that "lock-up" contract, a form of which appears as Exhibit N to the merger
agreement, each shareholder agrees not to sell any VP Merger Parent common stock
for a year following the merger. However, the contract permits transfers to
family members or family trusts or partnerships, as well as the transfer of up
to an aggregate of 200,000 shares of common stock per shareholder in one or more
private transactions to persons or companies that do not compete with VP Merger
Parent, so long as any such transferee agrees to be bound by the lock-up
agreement.
The former shareholders of Crystal Rock will receive "restricted" stock of
VP Merger Parent in the transaction, which, in addition to the lock-up
limitations noted above, will not be freely tradeable under federal
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<PAGE> 51
and state securities laws. These shareholders have entered into a registration
rights agreement with VP Merger Parent. Under that agreement, VP Merger Parent
will, not later than one year after the merger, file a registration statement
under the Securities Act covering all of the shares held by the former Crystal
Rock shareholders. Registration will be at the expense of VP Merger Parent. The
registration rights agreement contains customary provisions regarding expenses
and indemnification, including indemnification under the federal securities
laws.
VP Merger Parent common stock will be freely tradable on the American Stock
Exchange upon the completion of the business combination.
NO DISSENTER'S RIGHTS FOR VERMONT PURE SHAREHOLDERS
Delaware law does not provide dissenter's rights in connection with the
business combination. The contribution of the Crystal Rock shares is not a
statutory merger and does not give rise to dissenter's rights. Moreover, all of
the Crystal Rock shareholders have signed the agreement and plan of merger and
contribution and do not have appraisal rights.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
Here is a summary of the material United States federal income tax
consequences generally applicable to you, as a shareholder of Vermont Pure, if
you are a "United States person" as defined for United States federal income tax
purposes and you hold your shares of Vermont Pure common stock as a capital
asset.
For United States federal income tax purposes, a "United States person" is:
- a United States citizen or resident alien as determined under the
Internal Revenue Code of 1986, as amended (the "Code"),
- a corporation or partnership (as defined by the Code) that is organized
under the laws of the United States or any state,
- an estate, the income of which is subject to United States federal income
taxation regardless of its source, and
- a trust if a court within the United States is able to exercise primary
supervision over its administration and at least one United States person
is authorized to control all of its major decisions.
This summary is based on the Code, existing and proposed Treasury
Regulations and judicial and administrative determinations, as each is in effect
as of the date of this proxy statement/ prospectus. All of the foregoing are
subject to change at any time, possibly with retroactive effect, and all are
subject to differing interpretation. No advance ruling has been sought or
obtained from the Internal Revenue Service regarding the United States federal
income tax consequences of the merger and contribution. The statements in this
proxy statement/ prospectus and the opinions of counsel that are described
herein are not binding on the Internal Revenue Service or a court. As a result,
neither Vermont Pure, Crystal Rock, nor VP Merger Parent can assure you that the
tax considerations or opinions described here will not be challenged by the
Internal Revenue Service or sustained by a court if so challenged.
This summary does not address aspects of United States taxation other than
United States federal income taxation. It does not address all aspects of United
States federal income taxation that may apply to you if you are subject to
special rules under the Code, including, without limitation, rules that apply to
persons who acquired shares of Vermont Pure common stock as a result of the
exercise of employee stock options, tax-exempt organizations, financial
institutions, broker-dealers, insurance companies, persons having a "functional
currency" other than the United States dollar, persons who hold their Vermont
Pure shares as part of a straddle, wash sale, hedging or conversion transaction,
and certain United States expatriates. In addition, this summary and the
opinions described here do not address the state, local or foreign tax
consequences of the merger and contribution.
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<PAGE> 52
EACH VERMONT PURE STOCKHOLDER IS URGED TO CONSULT AND RELY ON HIS OR HER
TAX ADVISORS WITH RESPECT TO THE UNITED STATES FEDERAL, STATE AND LOCAL, AND
FOREIGN TAX CONSEQUENCES OF THE MERGER AND CONTRIBUTION BASED UPON THE
STOCKHOLDER'S PARTICULAR CIRCUMSTANCES.
It is a condition of the obligations of each of VP Merger Parent, Vermont
Pure, and VP Acquisition Corp. -- the Vermont parties -- to effect the merger
that the Vermont Parties shall have received a favorable opinion of their
special tax counsel, Foley, Hoag & Eliot LLP. Our tax counsel has issued a
currently dated opinion setting forth the conclusions listed in the next
paragraph. That opinion has been filed with the registration statement of which
this prospectus/proxy statement forms a part. It is a condition to closing that
our tax counsel issue a closing opinion confirming its conclusions on the
closing date. That opinion will be filed with a post-effective amendment to the
registration statement. In rendering its opinions, special tax counsel are
entitled to request, receive and rely upon certificates regarding tax matters
containing representations, warranties and covenants that are customary for
transactions of this nature.
The opinion of Foley, Hoag & Eliot LLP, as special tax counsel to the
Vermont parties, states that for United States federal income tax purposes
- the merger will constitute part of a transaction described in Section 351
of the Code or will constitute a reorganization or a part of a
reorganization within the meaning of Section 368(a) of the Code;
- if you are a Vermont Pure stockholder you will recognize no gain or loss
upon the conversion of your shares of Vermont Pure common stock into
shares of VP Merger Parent common stock;
- your aggregate tax basis of the shares of VP Merger Parent common stock
that you receive in the merger in exchange for your shares of Vermont
Pure common stock will be the same as the aggregate tax basis of those
shares of Vermont Pure common stock;
- and your holding period for the shares of VP Merger Parent common stock
that you receive in the merger in exchange for your shares of Vermont
Pure common stock will include your holding period for those shares of
Vermont Pure common stock.
IF EITHER:
- THE CONFIRMING OPINION OF OUR SPECIAL TAX COUNSEL THAT IS TO BE DELIVERED
AT THE CLOSING OF THE TRANSACTION, OR
- THE EXPECTED TAX CONSEQUENCES TO THE VERMONT PURE STOCKHOLDERS, DIFFER
MATERIALLY FROM THOSE CURRENTLY FILED OR DESCRIBED, THEN THE TRANSACTION
WILL NOT CLOSE UNLESS VERMONT PURE RECIRCULATES A REVISED
PROSPECTUS/PROXY STATEMENT AND RE-SOLICITS SHAREHOLDER APPROVAL OF THE
TRANSACTION IN LIGHT OF THE CHANGED TAX CONSEQUENCES.
If the Internal Revenue Service were to challenge successfully the
treatment of the merger as set forth in the opinion described above, then if you
are a Vermont Pure stockholder you would recognize taxable gain or loss with
respect to your shares of Vermont Pure common stock surrendered in the merger,
in an amount equal to the difference between
- the fair market value of the shares of VP Merger Parent common stock that
you receive in the merger, and
- your adjusted tax basis in your shares of Vermont Pure common stock.
ACCOUNTING TREATMENT
We expect to account for the merger and contribution as a purchase in
accordance with generally accepted accounting principles. Under this accounting
method, VP Merger Parent will record the total consideration given to the
Crystal Rock shareholders plus direct transaction costs. The consideration plus
the direct transaction costs will be allocated to the assets and liabilities of
Crystal Rock. The Crystal Rock assets will be recorded on the combined entity's
books at fair market value as of the date of the business combination. Crystal
Rock liabilities will also be recorded at their fair values at the date of the
merger. Any intangible assets on Crystal Rock's books will be eliminated;
consequently, none of the consideration will be
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<PAGE> 53
allocated to these intangibles. Based on information contained in the Crystal
Rock balance sheet as of April 30, 2000, the consideration paid by VP Merger
Parent plus the direct transaction costs will be in excess of the sum of the
fair values of the identifiable assets of Crystal Rock. Because of this,
goodwill in the amount of approximately $57,301,000 will be recorded in
connection with the transaction. This goodwill will be amortized over a 30-year
period at the rate of $1,910,000, which will reduce the earnings of the combined
entity by a corresponding amount.
ITEM 2. PROPOSAL TO AMEND THE 1998 INCENTIVE AND NON-STATUTORY STOCK OPTION
PLAN
ACTION TO BE CONSIDERED
In order to permit stock option grants as provided in several of the
employment agreements that we will enter into in connection with the agreement
and plan of merger and contribution, you are asked to consider and vote upon a
proposal to amend the 1998 incentive and non-statutory stock option plan of
Vermont Pure to increase the number of shares covered by the plan from 500,000
shares to 1,500,000 shares. Under the terms of the merger agreement, the 1998
Plan will be assumed by VP Merger Parent. Approval of the proposal to adopt the
merger agreement does not depend on approval of the proposal to increase the
shares covered by the 1998 Plan.
Additionally, we are subject to Section 162(m) of the Internal Revenue
Code, which prohibits us from claiming a deduction on our federal income tax
return for compensation in excess of $1 million paid in a given fiscal year to
the chief executive officer and the four most highly compensated executive
officers, other than the chief executive officer, at the end of that fiscal
year. The $1 million limitation does not apply to "performance-based
compensation." Under rules promulgated by the Internal Revenue Service, options
granted under a stock option plan that has been approved by the stockholders of
a publicly held corporation and that meets other criteria will qualify as
"performance-based compensation" under Section 162(m). We are also proposing
that our plan be amended to comply with Section 162(m) by changing its
administration from the whole board to a compensation committee that meets the
criteria outlined below.
A vote FOR the proposal to increase the shares covered by the 1998 Plan
will permit us to grant in full the stock options described in Mr. Fallon's and
Mr. MacDonald's employment agreements, as discussed elsewhere in this proxy
statement, as well as options to two Crystal Rock employees who will not become
executive officers of VP Merger Parent. A vote AGAINST the proposal to increase
the shares covered by the 1998 Plan will not have any effect on the business
combination and all options previously granted under the plan will remain in
effect, however we will be unable to grant options under the plan to our chief
executive officer and our four most highly compensated executive officers other
than the chief executive officer.
Our board of directors recommends that you vote FOR the proposal. In
considering its recommendation, the board was aware of and considered all
material facts surrounding the conflicts of interest of Mr. Fallon and those of
other officers and directors.
DESCRIPTION OF THE 1998 PLAN
The 1998 plan currently provides for the issuance of up to 500,000 shares
of common stock pursuant to the exercise of options granted or to be granted
under the plan. You are being asked to vote for an increase in the number of
shares covered from 500,000 to 1,500,000. As amended, the plan will limit to
500,000 the number of shares covered by options that may be granted to an
individual participant in any calendar year.
Under the Internal Revenue Code, shareholder approval is necessary in order
for stock options covering the shares issuable under the 1998 plan to be
eligible to qualify as incentive stock options under Section 422 of the Code.
The board believes that approval to amend the 1998 Plan is desirable because
options have been and will continue to be an important part of our compensation
system, and the number of options that remain available for grant under our
existing option plans after the merger is insufficient.
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<PAGE> 54
The full text of the 1998 plan as adopted and proposed to be amended is
attached as appendix C. This summary of some of its provisions is qualified by
reference to the text of the 1998 Plan. The 1998 plan authorizes the grant of
- options to purchase common stock intended to qualify as incentive stock
options, as defined in Section 422 of the Code, and
- options that do not so qualify. Subject to shareholder approval, up to
1,500,000 shares of common stock (subject to adjustment upon changes in
the capitalization of VP Merger Parent) may be issued pursuant to options
granted under the 1998 plan.
The 1998 plan will be administered by a committee consisting of all members
of our compensation committee who qualify as outside directors, provided that
the committee shall have at least two members at all times. To qualify to serve
as an outside director on the committee, a director cannot
- be employed by us or our affiliates,
- be a former employee of us or our affiliates who is receiving
compensation for prior services during our or our affiliate's fiscal
year,
- have served as an officer of ours or our affiliates, or
- receive remuneration from us or our affiliates in any capacity other than
as a director.
The committee will select the individuals to whom options are granted and
will determine the option exercise price, expiration date, vesting and other
terms of each award, subject to the provisions of the 1998 plan. Incentive
options may be granted under the 1998 plan to employees, including officers and
directors who are also employees. As of August 30, 2000, all of our employees
and directors were eligible to participate in the 1998 Plan. Non-statutory
options may be granted under the 1998 Plan to employees, officers, consultants
and other individuals providing services to us and to our directors, whether or
not they are employees.
No option granted under the 1998 Plan may extend for more than 10 years
from the date of grant. This limit is five years in the case of an incentive
option granted to an optionee who owns stock possessing more than 10% of the
total combined voting power of all classes of stock of VP Merger Parent or any
parent or subsidiary. The exercise price of incentive options granted under the
1998 Plan must be at least equal to the fair market value of the common stock on
the date of grant, or 110% of fair market value in the case of a greater than
10% stockholder. Although we have no present plans to grant options at less than
fair market value, non-statutory options may have an exercise price that is less
than, equal to, or greater than the fair market value of the common stock on the
date of grant.
The aggregate fair market value (determined at the time of grant) of shares
issuable pursuant to incentive options under any plan of ours or our parent or
subsidiary providing for the grant of incentive stock options which first become
exercisable by an employee or officer in any calendar year may not exceed
$100,000.
Payment of the exercise price of the shares subject to the option may be
made with (1) cash or check for an amount equal to the option price for such
shares, or (2) with our approval, in shares of common stock having a fair market
value equal to the option price of such shares, plus cash in an amount equal to
the excess, if any, of the option price over the fair market value of such
shares of common stock.
The grantee of a non-statutory option recognizes no income for federal
income tax purposes on the grant thereof. On the exercise of such an option, the
difference between the exercise price and the fair market value of the shares
purchased under the option at the time of such purchase will be recognized by
the option holder in the year of exercise as ordinary income, and the fair
market value of the shares on the date of exercise will be the tax basis thereof
for computing gain or loss on any subsequent sale. We may reduce our taxable
income by an amount equal to the amount recognized by the option holder as
ordinary income upon exercise of a non-statutory option.
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<PAGE> 55
Generally, the grantee of an incentive option recognizes no income for
federal income tax purposes at the time of grant or exercise of the option.
Rather, the holder ordinarily will recognize taxable income upon subsequent
disposition of the shares purchased under the option. If no disposition of
shares acquired upon exercise of an incentive option is made by the optionee
within two years of the date of grant or within one year after exercise of the
option, any gain realized by the optionee on the subsequent sale of such shares
is treated, for federal income tax purposes, as long-term capital gain. The
price paid for the shares purchased upon the exercise of the option will be the
tax basis for computing any gain. If the shares are sold prior to the expiration
of such periods, known as a disqualifying disposition, the difference between
the lesser of the value of the stock at the date of exercise or the date of sale
and the exercise price of the stock is treated as compensation taxable to the
grantee as ordinary income and the excess gain, if any, is treated as capital
gain (which will be long-term capital gain if the shares were held for more than
12 months). The amount by which the fair market value of shares at the time of
exercise of the incentive option covering such shares exceeds the option price
for such shares is a tax preference item and is included in "alternative minimum
taxable income" for the purpose of computing the "alternative minimum tax." We
do not withhold any tax in connection with the grant or exercise of an incentive
option and, in the usual circumstances, we are not entitled to any tax deduction
in connection with the grant or exercise of an incentive option.
We believe that, under current federal tax law, options granted under the
1998 plan will not, at the time of grant, have a readily ascertainable fair
market value. Accordingly, under the applicable provisions of the Code, even if
options do not qualify as incentive options, the grantee of such non-statutory
option would recognize no income for federal income tax purposes on the grant
thereof. The 1998 plan is not subject to the provisions of the Employee
Retirement Income Security Act of 1974.
Options are non-transferable except by will or by the laws of descent or
distribution and are exercisable, during the optionee's lifetime, only by the
optionee. Options generally may not be exercised after:
- termination of the optionee's employment by optionee for any reason or by
us for cause,
- 30 days after termination of the optionee's employment by us without
cause and
- 180 days following the optionee's termination of employment with us by
reason of death or the optionee's retirement by reason of age or
disability.
The board may terminate the 1998 plan at any time, and may, in general,
amend the 1998 plan at any time and from time-to-time. However, no amendment
that would:
- increase the number of shares of common stock as to which options may be
granted under the 1998 Plan (not including increases in the event of
certain changes in our capital structure) or
- materially change the provisions relating to eligibility to participate
in the 1998 plan is effective without the approval of our shareholders at
an annual or special meeting held within 12 months of adoption of the
amendment.
We intend to file, as soon as practicable after stockholder approval of the
proposal, a registration statement under the Securities Act of 1933 covering the
shares of common stock issuable under the 1998 plan.
NEW PLAN BENEFITS
As of the date of this proxy statement, 305,200 options have been granted
under the 1998 plan. Based on the closing price per share of our common stock as
reported on the American Stock Exchange on August 30, 2000, the aggregate market
value of the 1,500,000 shares issuable under the plan was $3.56. If the proposal
to increase shares in our 1998 option plan is approved by the stockholders at
the special meeting, the following options will be granted pursuant to the terms
of the merger agreement: 500,000 options to Timothy G. Fallon, 100,000 to Bruce
MacDonald, and 100,000 to employees of Crystal Rock other than current directors
and executive officers of Crystal Rock.
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ITEM 3. PROPOSAL TO ADJOURN THE VERMONT PURE SPECIAL MEETING TO PERMIT FURTHER
SOLICITATION OF PROXIES IF NECESSARY
If there are not enough affirmative votes to approve the adoption of the
merger agreement at the time we convene the special meeting of shareholders, the
proposal could not be approved unless we adjourn the special meeting to permit
us to solicit additional proxies. In order to allow proxies that we have
received at the time of the special meeting to be voted for such an adjournment,
if necessary, we are submitting the question of adjournment under those
circumstances to you, our shareholders, as a separate matter for your
consideration. A majority of the shares present or represented and voting at the
special meeting is required in order to approve any such adjournment.
If it is necessary to adjourn the special meeting of shareholders and the
adjournment is for a period of less than 30 days, then we will not give any
additional notice of the time and place of the adjourned meeting to shareholders
other than an announcement at the special meeting.
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INFORMATION CONCERNING VERMONT PURE HOLDINGS, LTD.
The following presentation pertains to the business of Vermont Pure as a
separate company and does not contemplate specifically the effect of the
business combination.
BUSINESS
We bottle, market and distribute natural spring water under the Vermont
Pure and Hidden Spring brands to the retail consumer and home/office markets. We
sell our products primarily in New England, New York and New Jersey as well as
in Mid-Atlantic and Mid-Western states.
INDUSTRY BACKGROUND
Bottled water has been and continues to be a fast growing segment of the
beverage industry. According to research compiled by Beverage Marketing
Corporation of New York, total bottled water consumption on a gallon per capita
basis in the United States increased 77% or 6.7 gallons from 1990 to 1999.
Annual consumption increased from 8.8 gallons per capita in 1990 to 15.5 gallons
per capita in 1999. Bottled water volume in the United States has grown
significantly, increasing from the approximately 2.2 billion gallons in 1990 to
approximately 4.3 billion gallons in 1999. The retail sales value in 1990 was
approximately $2.6 billion and has grown to approximately $5.0 billion in 1999.
In the period 1993 to 1999, bottled water has been the fastest growing beverage
category.
The bottled water market may be divided into two distinct categories:
non-sparkling (still or non-carbonated water) which accounts for approximately
91% of bottled water sales, and sparkling (carbonated) which accounts for
approximately 9% of bottled water sales. Non-sparkling water picked up over 99%
of incremental volume gain from 1990 to 1999. All of our natural spring water
products are in the non-sparkling category.
We believe that the development and continued growth of bottled water
markets since the early 1980s reflect growing public awareness of, and fears
about, environmental pollution, including the effect on many municipal water
sources of lead, carcinogenic chemical by-products from excess chlorination,
toxic waste dumps, landfills and bacterial contamination. In addition, we
believe that consumers perceive bottled water as a healthy and refreshing
beverage alternative to beer, liquor, wine, soft drinks, coffee and tea. We
anticipate 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.
OUR BACKGROUND
Incorporated in Delaware in 1990, we 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, we have acquired additional springs on
approximately 65 acres of land and built a second 32,000 square foot office,
bottling and warehouse facility in Randolph, Vermont. We are currently expanding
this second facility to approximately 71,000 square feet.
Immediately after we acquired the business of Vermont's Hidden Spring,
Inc., we 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. We have focused on distributing
the Vermont Pure brand in the New England, New York, New Jersey and Mid-Atlantic
regions since 1991, and more recently we have expanded our distribution into the
Northern Virginia -- Washington, D.C. -- Baltimore metropolitan and the Northern
Mid-Western markets.
We retained the original product trade name Vermont's Hidden Spring and
subsequently modified it to Hidden Spring. We currently market this brand to
essentially the same types of markets as the Vermont Pure brand. We also
actively use trademarks and brands that we have acquired through acquisitions
including Happy Spring Water(TM), Excelsior Spring Water(TM), Vermont
Natural's(TM) and Coffee Time of Vermont. We
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consider our trademarks, trade names and brand identities to be very important
to our competitive position, and defend our brands vigorously.
Because the home and 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, we
have since the mid-1990's sought to expand home and office distribution in our
home market of Vermont. More recently, we have developed and expanded our share
of the Northern New York and Northern New England home and office markets. In
May 1996, we purchased assets of the spring water division of Happy Ice
Corporation used in the bottling, sales and distribution of spring water in
three and five-gallon bottles, and the sale of a variety of coffee, tea and hot
beverage supplies for home and office customers. In addition, we 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.
We continued a strategy of incremental growth by acquisition in fiscal
years 1997, 1998, and 1999. In March 1997, we purchased assets and assumed
selected liabilities of the home/office business of Greatwater Refreshment
Services, Inc., based in upstate New York. In July 1997, we acquired A.M.
Fridays, Inc., a home and office distributor of bottled water, coffee, and
vending services, with warehouse distribution based in Manchester, New Hampshire
and Shelton, Connecticut. We believe this acquisition has facilitated our
expansion into northern Massachusetts. In August 1997, we 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.
In January 1998, we 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 1999, we
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. We also completed four small
acquisitions of home and office customer bases with combined sales of about
$500,000 annually.
Continuing with this strategy during fiscal 1999, we acquired the stock of
Adirondack Coffee Services, Inc., which had 1998 annual sales of approximately
$1.5 million. Adirondack Coffee serviced home and office customers primarily in
the Albany, New York and Rutland, Vermont areas. During fiscal year 1999, we
also completed eight small acquisitions of home and office customer bases with
aggregate sales of approximately $800,000. In all cases, the acquisitions of the
home and office businesses were absorbed into our existing operations in the
respective market area.
To date, we have not experienced significant problems in integrating our
acquired businesses with our 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 we do
not expect to grow by acquisition faster than our 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 our business as a
whole.
DESCRIPTION OF WATER SOURCES
The primary sources of the natural spring water we use are springs located
at our properties in Randolph and Tinmouth, Vermont, and a spring owned by
Pristine Mountain Springs in Stockbridge, Vermont, that is subject to a water
supply contract with Amsource LLC in our favor.
Percolation through the earth's surface is nature's best filter of water.
We believe that the exceptionally long percolation period of natural spring
water in the central Vermont area and in particular in the area of our springs
assures a high level of purity. Moreover, the long percolation period permits
the water to become mineralized and Ph balanced.
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We believe that the age and extended percolation period of Vermont Pure's
natural spring water provides the natural spring water with distinct attributes:
noteworthy mineral characteristics including the fact that the water is sodium
free and has a naturally balanced Ph; and a light, refreshing taste. We utilize
several disinfection processes to treat the spring water before processing. Our
spring water is treated by ultraviolet light, .35 absolute micron filtration to
remove particulate matter, and ozonation to prevent the formation of bacteria.
In addition to drawing water from our own springs, we purchase bulk
quantities of water from natural springs owned or operated by non-affiliated
entities. All of such springs are approved sources for natural spring water. The
State of Vermont certifies and approves spring water sites. The spring site
owner submits quarterly testing for bacterial analysis to maintain the state
certification. Each bulk tanker load is tested prior to off loading for
bacteriological contaminants. During fiscal years 1999 and 1998, purchases of
spring water from a non-affiliated source in Vermont amounted to approximately
half of our usage of spring water.
We have for several years purchased spring water from an unaffiliated
source, Pristine Mountain Springs, in Stockbridge, Vermont. Until late 1999, we
had no written contract with respect to this source. Commencing in November
1999, we have obtained a 50-year water supply contract giving us an unqualified
first priority right to purchase water from the spring owner, subject to a
co-equal right of Amsource LLC to draw up to 5,000,000 gallons per month.
Because this amount is well in excess of our current needs and within the
apparent capacity of the spring, we believe we can readily meet our bulk water
supply needs for the foreseeable future. However, if this spring source was no
longer an approved source for natural spring water by reason of contamination or
otherwise, then unless we could find adequate amounts of bulk spring water from
other suppliers or sources, our business would likely be materially adversely
affected by an interruption in supply. We believe that we could find adequate
supplies of bulk spring water from other sources, but that we might suffer
inventory shortages or inefficiencies, such as increased purchase or transport
costs, in obtaining such supplies.
We are highly dependent on the integrity and existence of the natural
springs from which we obtain our spring water. Natural occurrences beyond our
control 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 we
use. Any such occurrence may have an adverse impact on our business.
PRODUCTS
Our natural spring water is sold under the Vermont Pure and Hidden Spring
brands and is packaged in various bottle sizes ranging from 8 ounces to 1.5
liters and is sold in single units and plastic rings of six and eight bottles.
These are sold in twelve pack and twenty four pack cases, 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. We use 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 and office natural spring water products are sold
in three and five-gallon bottles. We rent water coolers to dispense the bottled
water. These coolers are available in cold, warm and/or hot temperature
configurations. In conjunction with the home and office accounts, we also
distribute a variety of coffee, tea and other hot beverage products and related
supplies. We rent or supply multi-burner coffee machines to customers. In
addition, we supply whole beans and coffee grinders for fresh ground coffee as
well as cappuccino machines to restaurants.
MARKETING
We generally market our 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. We price our Vermont Pure brand
competitively with other domestic
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premium brands but lower than imported premium water products. The Hidden Spring
products are similarly packaged and sold to retail grocery and convenience
markets.
We market our products by highlighting the unique characteristics of
Vermont Pure's water, namely a natural spring source, purity, mineral
composition and desirable taste. We also use the image of the State of Vermont
in our marketing and brand identification. We believe that products originating
from Vermont have the general reputation for being pure, wholesome, trustworthy
and natural. Our premium products are bottled in sleek, clear plastic PET
recyclable bottles. We believe that this is the ultimate consumer bottle package
because it is clean, clear, light, recyclable and generally is perceived by
consumers to be upscale. We believe that the high quality packaging of our
products enhances their image as premium domestic bottled water products.
We have focused our consumer product marketing and sales activities in the
eastern and mid-western United States. We currently distribute our products in
the New England, New York, New Jersey, Mid-Atlantic and Northern Mid-Western
states and the Northern Virginia -- Washington, D.C. -- Baltimore metropolitan
area.
Our home and office sales are generated and serviced using directly
operated facilities, Vermont Pure employees and vehicles, as well as Vermont
Pure designated distributors. We generally use the Vermont Pure brand for this
market and maintain distribution routes in our various market areas.
SLOTTING FEES
For us to achieve placement of our retail consumer products in supermarket
chains and individual supermarket stores, it may sometimes be necessary for us
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 we have become better established and our brands have achieved greater
recognition, we have become less dependent on slotting fees to gain space.
Nevertheless, like many producers of food products, we pay slotting fees in some
cases, and expect to continue to do so.
ADVERTISING AND PROMOTION
We advertise our products primarily through television and radio media. In
connection with this advertising, we use point of sale, in-store displays, price
promotions, store coupons, free-standing inserts and cooperative and trade
advertising. We have also actively promoted our products through sponsorship of
various organizations and sporting events. In recent years, we have sponsored
professional golf and tennis events, major ski areas and sports arenas, and
various charitable and cultural organizations, such as Vermont Special Olympics
and the Vermont Symphony Orchestra.
SALES AND DISTRIBUTION
We use major beverage distributors for the distribution of our consumer
products and distribute our home and 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, we sell our products directly to grocery store chains.
We distribute our Vermont Pure brand with a number of distributors. We are
obligated to supply the distributors with their requirements of the Vermont Pure
brand at established prices.
We made a significant change to our distribution network, effective in
April 1999, when we terminated our relationship with Coca-Cola Enterprises,
Inc., or CCE, a long-time distributor. CCE had been a significant customer of
Vermont Pure for several years, with sales to CCE, expressed as a percentage of
total sales, equal to 16%, 30% and 31% in fiscal years 1999, 1998 and 1997,
respectively. Early in calendar 1999, we
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concluded that it was highly likely that Coca Cola USA would market its own
brand of purified water in the relatively near future and that CCE would
probably distribute that brand. To alleviate the uncertainty and disruption to
our distribution network that would accompany any ill-timed decision by CCE not
to distribute Vermont Pure water, we decided to terminate our relationship with
CCE in early spring of 1999. This provided us with an opportunity to establish
alternative distribution systems in areas served by CCE, and to do so before the
warm summer months when sales volumes rise sharply. Coca Cola USA subsequently
introduced Dasani, Coca Cola's brand of purified water, which is distributed by
CCE.
Although sales of Vermont Pure's retail PET products declined in fiscal
year 1999, in part due to distribution factors, management believes that the
timing of its decision to terminate Vermont Pure's relationship with CCE helped
to minimize the disruption and inefficiencies that inevitably follow a
significant change in distribution. Although it was necessary for us to use
several smaller distributors to replace CCE, we believe that we have taken steps
to solidify and improve our distribution system and that we are in a better
position than if we had left the timing of the matter to CCE. The continuing
growth of our home and office business also lessened the adverse effects of
changing this part of our retail PET distribution system.
As discussed elsewhere, we are 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 we believe augments retail sales and
contributes to brand awareness.
We market and distribute our water directly to homes and offices in five
and three-gallon reusable bottles. These products are distributed from Vermont
Pure operated warehouses and vehicles by employees throughout Northern New York
and 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. We also sell our Hidden Spring
consumer products on these lines to homes, offices and retail outlets. We
utilize a network of outside distributors to distribute our water and ancillary
products. We do not own any of the assets or employ any of the personnel
involved with the distribution of the water in these areas.
We ship our consumer products from our 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.
We employ a sales force of 27 persons for retail and home and office sales.
Our sales personnel act as liaison between distributors/customers and Vermont
Pure for ordering products, 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 our products.
COMPETITION
We believe 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. Coca-Cola Bottling Company is distributing its
own brand of purified water under the Dasani trademark. The Pepsi-Cola Company
distributes a brand of bottled spring water under the Avalon
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label and is now selling a purified drinking water under the Aquafina trademark.
Consumers may also choose home water purification systems in lieu of drinking
spring water, or may choose to drink beverages other than spring waters, such as
soft drinks, coffee, juices, beer and wine.
Many of our regional and national competitors are well established
companies with recognized brand names and consumer loyalty. Moreover, these
companies, as compared to us, have substantially greater financial resources and
have established market positions, proprietary trademarks, distribution networks
and bottling facilities. We also face competition from the fast growing "private
label" and contract packaged brands of natural spring water. These brands
compete on a low-price basis and often occupy premium shelf space because they
are retailer brands. Additionally, we face 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 us.
We compete 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. We consider our trademarks, trade names and brand
identities to be very important to our competitive position, and defend our
brands vigorously.
INTELLECTUAL PROPERTY
We sell our natural spring water products under the trade names Vermont
Pure Natural Spring Water, Hidden Spring, Excelsior Spring Water, Happy Spring
Water and Vermont Naturals. Our labels, which include these trade names, are
registered with the United States Patent and Trademark Office.
PACKAGING
We perform private label contract packaging of our natural spring water for
distributors of other brands of bottled water and grocery store chains for house
brands. We also pack five gallon home and office containers for third parties.
Contract packaging is very price competitive and typically is performed under
short-term arrangements. We seek opportunities for contract packaging for a
variety of reasons, including the fact that it develops favorable relationships
with retail chains.
SUPPLIES
We do not manufacture any of the bottles or packaging in which our products
are sold. We purchase all of our PET bottles and the plastic caps we use on them
from major plastic bottle vendors. Because of the intense demand for this form
of bottle, from time to time we have 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, our cost for
plastic bottles dropped significantly and remained stable in 1997. On October
15, 1998, we executed a bottle supply agreement with Zuckerman-Honickman Inc.
The contract term is from January 1, 1999 to December 30, 2001. During 1999, we
experienced two price increases due to the cost of resin rising. The bottles
supplied under the contract for many of its raw materials are priced by
reference to the market price of resin. Notwithstanding our contracts, we may
experience market instability with respect to raw material supplies. No
assurance can be given that we will be able to obtain the supplies we require on
a timely basis or that we will be able to obtain them at prices that allow us to
maintain the profit margins we have had in the past. Any raw material disruption
or price increase may result in an adverse impact on our financial condition and
prospects. For information about our spring water sources, see "Description of
Water Sources."
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SEASONALITY
Our 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 our core Northeastern
United States market.
GOVERNMENT REGULATION
The Federal Food and Drug Administration regulates bottled water as a food.
Accordingly, our bottled water must meet FDA requirements of safety for human
consumption, labeling, processing and distribution under sanitary conditions,
and 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.
We are also subject to the food labeling regulations required by the
Nutritional Labeling and Education Act of 1990. We believe we are in substantial
compliance with these regulations. We are subject to periodic, unannounced
inspections by the FDA. Upon inspection, we 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.
We also must meet state regulations in a variety of areas. These
regulations set standards for approved water sources and the information that
must be provided and the basis on which any therapeutic claims for water may be
made. We have received approval for our Vermont Pure and Hidden Spring brands
from 49 states.
The bottled water industry has a comprehensive program of self-regulation.
We are a member of the International Bottled Water Association. As a member of
the IBWA, our facilities are inspected annually by an independent laboratory,
the National Sanitation Foundation. 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 some respects are more stringent
than those of the federal and various state regulations.
EMPLOYEES
As of September 1, 2000, we had 179 full-time employees and 12 part-time
employees. None of the employees belong to a labor union. We believe that our
relations with our employees are good. We rely to a great degree on the combined
efforts of our executive officers, Timothy G. Fallon, our Chairman, President
and Chief Executive Officer, and Bruce S. MacDonald, our Chief Financial Officer
and Treasurer, for our day-to-day management and strategic direction.
PROPERTY
We own office, bottling and warehouse properties and natural springs in
Randolph, Vermont. We also own a spring and recharge acreage in Sharon Springs,
New York. We currently do not intend to use this spring.
We rent on a monthly basis an office suite in White Plains, New York. We
rent warehouse space in different locations from time to time for the purpose of
the trans-shipment of our bottled water products to our distributors and
retailers.
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This space is rented on a per pallet basis. As part of our acquisitions in
fiscal years 1997, 1998 and 1999, we have entered into or assumed various lease
agreements for properties used as distribution points and office space for our
home and office service. The following table summarizes these arrangements:
<TABLE>
<CAPTION>
LOCATION LEASE EXPIRATION SQ. FT. ANNUAL
-------- ---------------- ------- --------
<S> <C> <C> <C>
Williston, VT.......................................... July, 2003 8,500 $ 53,380
Wilmington, MA......................................... October, 2003 10,670 $ 82,159
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 $118,125
Plattsburgh, NY........................................ August, 2004 3,640 $ 20,568
White River Junction, VT............................... March, 2004 3,275 $ 16,211
</TABLE>
We are currently expanding our PET bottling plant to accommodate increased
bottling operations and to gain the efficiencies of internal warehouse space.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
LEGAL PROCEEDINGS
On October 1, 1999, we issued a $975,000 non-interest bearing convertible
debenture due September 30, 2001 to Marcon Capital Corporation. In consideration
for the issuance of the debenture, Marcon transferred to us all of its rights
under various loan documents, including related collateral. The loan documents
related to a loan by Marcon to an affiliate, known as Amsource, of the owner,
known as Pristine Mountain Springs, of our largest spring water source. The
collateral included:
- a mortgage and security interests on the spring site and associated
equipment;
- a guaranty by Pristine in favor of Marcon;
- a water supply contract in favor of Marcon;
- the right to buy an equity ownership position in Amsource.
As a result of this transaction, we became a creditor of Pristine and
Amsource in the amount of approximately $905,000. The purpose of the transaction
was to minimize the possible adverse effect on our water supply due to defaults
by Pristine and Amsource in their obligations to Marcon.
Following our purchase of Marcon's position, as a creditor we attempted to
negotiate with Pristine and Amsource to resolve the matter. When that failed, we
notified Pristine and Amsource that we were exercising our rights to take
possession of the water supply contract and acquire an equity interest in
Amsource. Pristine and Amsource then attempted to repudiate our rights under the
water supply contract. We filed three different lawsuits to enforce our rights:
a foreclosure action (Vermont Pure Holdings, Ltd. v. Pristine Mountain Springs,
Inc., et al., Windsor County Superior Court, Vermont, filed October 22, 1999)
and actions for equitable and injunctive relief (Vermont Pure Holdings, Ltd. v.
Pristine Mountain Springs, Inc., Amsource LLC and Ronald Colton, Windsor County
Superior Court, Vermont, filed November 17, 1999, and Vermont Pure Holdings,
Ltd. v. Pristine Mountain Springs, Inc., Amsource LLC, Ronald Colton, et al.,
Sullivan County Superior Court, New Hampshire, filed November 16, 1999).
We settled these matters by arbitration on December 1, 1999. As part of the
settlement, Pristine, Amsource and others paid us $1,270,000 and acknowledged
our rights under the amended water supply contract and right of first refusal to
purchase the spring site. As amended, the 50-year water supply contract provides
that we have an unqualified first priority right to draw water from the spring
site, subject to a co-equal right of Amsource to draw up to 5,000,000 gallons
per month.
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DIRECTORS AND OFFICERS OF VERMONT PURE
We currently have eight directors. All of them except Mr. McDougall and Mr.
Worth will continue as directors of VP Merger Parent.
BIOGRAPHICAL
The names of the persons presently serving as our directors and officers
who will be directors or officers of VP Merger Parent are listed below, together
with their ages and other biographical information as of August 30, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Timothy G. Fallon......................... 46 Chief Executive Officer, President and Chairman
of the Board
Phillip Davidowitz........................ 68 Director
Robert C. Getchell........................ 51 Director
David R. Preston.......................... 59 Director
Norman E. Rickard......................... 63 Director
Beat Schlagenhauf......................... 48 Director
Bruce S. MacDonald........................ 41 Chief Financial Officer, Treasurer and Secretary
</TABLE>
The business experience during at least the last five years of each of the
directors and the executive officers of Vermont Pure who will serve on the VP
Merger Parent board is as follows:
Timothy G. Fallon has been the Chief Executive Officer, President and a
director of Vermont Pure 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 Vermont Pure 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. TSC clearing services is a wholly-owned subsidiary of
Transatlantic Securities Company, and is a sales and marketing company for
client retention. Transatlantic Securities Company is a member of the NYSE and
executes orders for clients on an agency basis only and clears its own
transactions.
Robert C. Getchell has been a director of Vermont Pure since December 1994.
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.
David R. Preston has been a director of Vermont Pure 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 Vermont Pure since October 1995.
Mr. Rickard, who retired in March 1999, was the President of Xerox Document
Services Group of Xerox Corporation and a Corporate Senior Vice President. From
January 1992 until January 1997, Mr. Rickard was President of Xerox Business
Services Division of the Xerox Corporation and a Corporate Vice President. He is
also currently a director of National Alliance of Business, Optical Dynamic
Corporation and Health Now.
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Beat Schlagenhauf has been a director of Vermont Pure since July 1993. Mr.
Schlagenhauf has been a principal of Schlagenhauf & Partners, a portfolio
management company in Zurich, Switzerland, for more than the past thirteen
years.
Bruce S. MacDonald has been Chief Financial Officer and Treasurer of
Vermont Pure since May 1993. During 1999 he was assigned the additional
responsibility of Chief Operating Officer. From 1987 to May 1993, Mr. MacDonald
was Controller of Cabot Cooperative Creamery Incorporated.
The following two members of the existing Vermont Pure board of directors
will not serve as members of the board of VP Merger Parent upon completion of
the transaction:
Frank G. McDougall, Jr. Mr. McDougall has been a director since June 1994
and was Chairman of the Board from November 1994 through March 1998. From
January 1995 to December 1997, Mr. McDougall was one of our part-time employees.
From December 1993 until January 1995 and since January 1998, Mr. McDougall has
acted as a consultant to us 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
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.
Richard Worth. Mr. Worth has served as one of our directors 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.
EXECUTIVE COMPENSATION
The following tables show:
- the cash compensation we paid, as well as other compensation paid or
accrued, to the Chief Executive Officer and Chief Financial Officer of
Vermont Pure for the fiscal years ended October 25, 1997, October 31,
1998, and October 30, 1999
- information reporting options granted to the Chief Executive Officer and
the Chief Financial Officer during the fiscal year ended October 30, 1999
and
- 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 30, 1999. Vermont Pure has no other executive
officers.
<TABLE>
<CAPTION>
OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (# SHARES)
--------------------------- ---- -------- -------- ----------
<S> <C> <C> <C> <C>
Timothy G. Fallon.................................. 1999 $186,400 $195,000 -0-
Chief Executive Officer and President 1998 $186,400 $202,500 -0-
1997 $184,000 $150,000 690,000(1)
Bruce S. MacDonald................................. 1999 $ 85,000 $ 75,000 -0-
Chief Financial Officer, Treasurer and Secretary 1998 $ 85,000 $ 55,000 30,000
1997 $ 75,000 $ 30,000 101,000(2)
</TABLE>
---------------
(1) This amount 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.
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<PAGE> 67
(2) This amount 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.
We cannot determine, without unreasonable effort or expense, the specific
amount of some personal benefits afforded to our employees, or the extent to
which benefits are personal rather than business. We have 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 $50,000 or 10% of the compensation reported
in the preceding table for such individuals, and that such information set forth
in the preceding table for such individuals is not rendered materially
misleading by virtue of the omission of the precise value of such personal
benefits.
The executive officers named in the preceding summary compensation table
were not granted options or shares during the fiscal year ended October 30,
1999.
AGGREGATE YEAR-END OPTION VALUE
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
AT FISCAL YEAR-END(#) FISCAL YEAR-END($)(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Timothy G. Fallon.......................... 570,000 150,000 $177,784 $46,950
Chief Executive Officer and President
Bruce S. MacDonald,........................ 91,000 50,000 $ 29,153 $ 9,390
Chief Financial Officer, Treasurer and
Secretary
</TABLE>
---------------
(1) As of October 30, 1999, the closing price per share of common stock was
$2.813 on the American Stock Exchange.
EMPLOYMENT AGREEMENTS
In October 1997, we executed an employment agreement with Timothy G. Fallon
which has an effective date of November 1, 1997 and expires November 1, 2001.
This agreement was amended during October 1999 but still expires on November 1,
2001. Under the agreement, which replaced a prior agreement dated November 4,
1994, Mr. Fallon acts as our Chief Executive Officer and President. His annual
base salary is $205,000, which is reviewed annually by the board. We provide Mr.
Fallon with an automobile and disability insurance allowance. If his employment
is terminated without cause (including a deemed termination by reason of a
change of control), Mr. Fallon is entitled to receive life and health insurance
benefits together with severance payments equal to 1.0 time his annual base
salary plus $150,000 payable over 12 months if such termination occurs in fiscal
years 2000 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 year 1999, Mr. Fallon is entitled to incentive bonuses based
upon the achievement of performance goals for fiscal years 2000 and 2001. For
fiscal years 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 earnings before interest, taxes, depreciation and amortization,
again with greater or lesser payments (non-cumulative) for achieving targets
within specified ranges above or below budget. Mr. Fallon is also entitled to
receive special bonuses if we achieve sales of $40,000,000 or $50,000,000 during
fiscal year October 2000 or October 2001. These bonuses are, respectively,
$25,000 and $50,000. These bonuses are cumulative and may be earned in the same
fiscal year. If we can maintain or exceed a $5.00 per share stock price for 54
out of 60 consecutive trading days during the period November 1, 1999 through
October 31, 2001, Mr. Fallon will receive a special bonus of $50,000.
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<PAGE> 68
On and as of November 1, 1997, we entered into an employment agreement with
Bruce S. MacDonald which expires November 1, 2001. Pursuant to this agreement,
Mr. MacDonald acts as our Chief Financial Officer and Treasurer. His annual base
salary is $100,000, to be reviewed annually by the board. We provide 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), Mr. MacDonald is entitled to receive life and health
insurance benefits together with severance payments equal to 1.0 times his
annual base salary plus $50,000 payable over 12 months if such termination
occurs in fiscal years 2000 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.
In addition to the bonus payments disclosed above that were paid to Mr.
MacDonald with respect to fiscal year 1999, he is entitled to incentive bonuses
based upon the achievement of our performance goals for fiscal years 2000 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 November 1, 1999, we entered into a consulting agreement with
Frank G. McDougall, Jr., a director of ours, through Frank McDougall &
Associates for a term of one year. Pursuant to that agreement, Mr. McDougall
provides consulting services to us in the area of government relations and
regulations. Mr. McDougall was paid an initial fee of $10,000 on November 1,
1999 and receives $1,000 per month from us in exchange for providing consulting
services. As part of this agreement, Mr. McDougall has waived all compensation
as a director.
If the merger is approved by our shareholders, Messrs. Fallon's and
MacDonald's employment agreements will be superseded by employment agreements
with VP Merger Parent.
DIRECTOR COMPENSATION
Directors who are employees or consultants of ours do not receive any fees
for attending board meetings. Directors who are not employees or consultants of
ours receive $750 for each meeting of the board attended and $7,500 each year,
subject to reduction by
- 50% if the director misses two meetings, and
- 100% if the director misses more than two meetings. Directors serving on
a committee receive $400 for each Committee meeting attended. In
addition, the board voted in September 1998 to automatically issue an
option to purchase 5,000 shares of common stock options to each outside
director at the beginning of each fiscal year. Such option issuances to
directors are limited to 105,000 options in aggregate.
We extended the expiration date for 87,000 options held by Frank G.
McDougall, Jr. with a weighted average exercise price of $2.56 and 72,000
options held by Richard Worth with a weighted average exercise price of $2.51
until two years from the closing of the merger and contribution.
COMPENSATION COMMITTEE, INTERLOCKS AND INSIDER PARTICIPATION
Our Compensation Committee of the board is composed of three directors,
Messrs. Norman Rickard, Robert Getchell and David Preston. The Compensation
Committee also administers our stock option plans and employee stock purchase
plan. This Committee is also charged with the responsibilities of reviewing and
approving executive officers' compensation and approving all discretionary
grants of stock options under our stock option plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. Frank
McDougall, Jr., Robert Getchell and David R. Preston served on the Compensation
Committee during fiscal year 1999. Mr. McDougall has now been replaced by Norman
Rickard. Except for Mr. McDougall, who acts as a consultant to us in the areas
of management and government relations and regulation, persons serving on the
Compensation Committee
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<PAGE> 69
had no relationships with us other than their relationship to us as directors
entitled to the receipt of standard compensation as directors and members of
some committees of the board and their relationship to us as stockholders. No
person serving on the Compensation Committee or on the board of directors is an
executive officer of another entity for which an executive officer of ours
serves on the board of directors or on that entity's compensation committee.
VOTING SECURITIES AND PRINCIPAL SHAREHOLDERS OF VERMONT PURE
The table and accompanying footnotes on the following pages set forth
information as of August 30, 2000 with respect to the stock ownership of:
- those persons or groups who beneficially own more than 5% of our Common
Stock,
- each of our directors,
- our Chief Executive Officer and Chief Financial Officer, and
- all of our directors and executive officers as a group (based upon
information furnished by such persons). We have 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.
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF BENEFICIAL PERCENTAGE OF
NAME AND ADDRESS OWNERSHIP OUTSTANDING SHARES OWNED
---------------- -------------------- ------------------------
<S> <C> <C>
Timothy G. Fallon.................................... 622,500(2) 5.4%
Robert C. Getchell................................... 72,000(3) .6%
Frank G. McDougall, Jr. ............................. 82,000(1) .7%
David R. Preston..................................... 73,000(4) .7%
Norman E. Rickard.................................... 69,000(3) .6%
Beat Schlagenhauf.................................... 67,000(1) .6%
Richard Worth........................................ 74,500(3) .7%
Bruce S. MacDonald................................... 101,000(1) .8%
Phillip Davidowitz................................... 25,000(1) .2%
All Officers and Directors as a group (9
individuals)....................................... 1,186,000(5) 10.3%
</TABLE>
---------------
(1) Represents shares of common stock issuable pursuant to outstanding stock
options exercisable within sixty days of the date of this table.
(2) Includes 620,000 shares of common stock issuable pursuant to outstanding
stock exercisable within sixty days of the date of this table.
(3) Includes 67,000 shares of common stock issuable pursuant to outstanding
stock exercisable within sixty days of the date of this table.
(4) Includes 71,000 shares of common stock issuable pursuant to outstanding
stock exercisable within sixty days of the date of this table.
(5) Includes 1,167,000 shares of common stock issuable pursuant to outstanding
stock exercisable within sixty days of the date of this table
EMPLOYEE STOCK PURCHASE PLAN
We have an employee stock purchase plan under Section 423 of the Internal
Revenue Code in which participating employees may utilize payroll deductions to
purchase shares of our common stock at a discount from fair market value. The
first offering period has not yet commenced.
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<PAGE> 70
VERMONT PURE'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Six Months Ended April 30, 2000 Compared to Six Months Ended May 1, 1999
Sales -- Sales for the first six months of fiscal year 2000 were
$14,648,000, an increase of $968,000 or 7% over the sales of $13,680,000 for the
corresponding period last year. Sales for the second quarter of fiscal year 2000
were $8,225,000, an increase of $426,000 or 5% over sales of $7,799,000 for the
corresponding period last year. In total, we sold 8,074,000 gallons of water at
an average price of $1.31 per gallon compared to 7,164,000 gallons at an average
price of $1.49 for the corresponding period a year ago. Sales related to
acquisition activity were $1,009,000, or 7% of sales. Net of acquisitions, sales
for the first six months of 2000 were essentially the same as in the
corresponding period last year.
Sales for retail-size products decreased $1,076,000, or 16%, for the first
six months of fiscal year 2000 compared to the corresponding period a year ago.
Sales decreased $592,000 or 14%, for the second quarter of fiscal year 2000
compared to the corresponding period a year ago. In the category, 3,466,000
gallons were sold at an average price of $1.67 per gallon compared to 3,352,000
gallons at $1.97 per gallon for the comparable period a year ago. For the first
half of this year, the Vermont Pure brand sales were down 47% while Hidden
Spring and Private Label brands were up 60% and 16% respectively. The decrease
for both the quarter and year to date are attributable to a reduction in case
volume due to a change in a major distributor relationship in April 1999 and
lower average selling prices related to competitiveness of the marketplace.
Average selling prices for the six and three months ending April 30, 2000 were
down 15% and 20%, respectively, for the corresponding periods from the previous
year. This is indicative of the competitive marketplace as well as the increase
in private and secondary labels. Decreases in average selling prices were
partially offset by lower promotional spending as described in further detail
below.
Sales for the home and office category increased $2,044,000 or 30%, for the
first six months of fiscal year 2000 compared to the corresponding period of the
prior year. Net of acquisitions, sales increased 15% for the six month period.
Sales increased 1,018,000 or 29%, for the second quarter of fiscal year 2000
compared to the corresponding period of the prior year. In gallonage, sales
increased for the comparable six month periods from 3,631,000 gallons to
4,607,000 from 1999 to 2000 while the average price per gallon increased from
$1.03 to $1.04, from period to period. Other services and non water products
increased $925,000, or 33%. The respective sales increases in this category for
the first half and second quarter of 2000 were attributable to market growth and
expansion and acquisitions. We have continued our 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 six months of fiscal year 2000, Cost of
Goods Sold was $5,544,000 compared to $4,984,000 for the same period in fiscal
year 1999. Resulting gross profits were $9,104,000, or 62% of sales, and
$8,696,000, or 64% of sales, for the respective periods. For the second quarter
of 2000, Cost of Goods Sold was $3,256,000 compared to $2,953,000 for the same
period in fiscal year 1999 resulting in gross profits of $4,968,000, or 61% of
sales, and $4,846,000 or 62% of sales. The increase in gross profit for the
respective six and three month periods 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 our highest margin line. The decrease in gross
margin 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 our retail-size line of products, has
fluctuated since mid-1999 as a result of commodity pricing. Over this period, we
have 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 six months of fiscal year 2000 compared
to the corresponding period in fiscal year 1999, total operating expenses were
$8,823,000 and $7,704,000, an increase of $1,119,000 or 15%.
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<PAGE> 71
For the second quarter, operating expenses were $4,601,000 in 2000 compared to
$4,147,000 in 1999, an increase of $454,000, or 11%. Selling, general and
administrative expenses increased by $1,497,000, or 27%, for the first six
months of fiscal year 2000 and $670,000 or 22% for the second quarter of fiscal
year 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:
- Costs associated with integrating PET sales into the home and office
distribution network in the geographic areas that were previously covered
by outside distributors.
- In anticipation of the Crystal Rock transaction, we have delayed the
consolidation of sales and distribution systems, including warehouses,
routes, and personnel, resulting from acquisitions. As a consequence, the
benefits of cost reduction from consolidation have not been achieved.
- 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 expenses decreased $417,000, or 27%, and $237,000, or 28%, during
the six month and second quarter periods of 2000, respectively, compared to the
corresponding periods last year. Our 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 our distributors
seek price discounts instead of advertising and promotion support. During the
first half and second quarter of 2000 our aggregate per case expense decreased
$.50 and $.32 per case for the comparable periods in the prior year.
Nevertheless, due to the competitive nature of the industry, we anticipate that
we will continue to spend significant amounts in the future for advertising and
promotion as we continue 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 half and second quarter of fiscal year 2000,
amortization increased $38,000 and $23,000 respectively, from the same periods a
year ago as a result of increased goodwill from new acquisitions.
Profit From Operations -- Profit from operations for the first six months
of fiscal year 2000 was $282,000 as compared to $992,000 for the corresponding
period last year, a decrease of $710,000. Profit from operations for the second
quarter of fiscal year 2000 was $367,000 compared to $699,000 for the
corresponding period last year, a decrease of $332,000. 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 products. We plan
to continue to create brand awareness and to find alternate distribution
channels for our retail-size products and expand our less seasonal home and
office distribution business.
Other Income/Expense -- Net interest expense increased $253,000 or 53% and
$195,000 or 75% for the first six months and second 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 "Information Concerning Vermont Pure Holdings,
Ltd. -- Legal Proceedings."
Net Income/Loss -- Our net loss for the first six months of fiscal year
2000 was $180,000 compared to a net profit of $511,000 for the corresponding
period last year. The net loss for the second quarter of fiscal year 2000 was
$89,000 compared to a net profit of $440,000 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.
LIQUIDITY AND CAPITAL RESOURCES
The net increase in cash for the six months ended April 30, 2000 was
largely generated by receipt of payment of a note owed to the company the
proceeds of which are being held on a restricted basis as described below. For
more information, see "Information Concerning Vermont Pure Holdings,
Ltd. -- Legal Proceed-
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<PAGE> 72
ings." On an operating basis, we used cash for seasonal needs -- to fund
operating losses and build inventory for an anticipated increase in summer
sales. A significant amount of cash has been expended for capital improvements.
$3,556,000 has been used primarily for expansion of the building that houses our
main bottling facility, new production equipment, and hardware and software to
support the home and office delivery system.
As of April 30, 2000, we had working capital of $6,300,000 compared to
$3,028,000 on October 30, 1999. The increase in working capital of $3,272,000
reflects, primarily, an increase in cash of $3,916,000 for specified restricted
uses. Of this total, $2,941,000 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 April 30, 2000, we had disbursed $1,359,000 of the total $4,300,000 in bond
proceeds and borrowed $14,500,000 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 April 30, 2000, $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-up 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
our assets and expires January 2004.
We have increased our debt significantly in the current year. The purpose
has largely been to put infrastructure in place to accommodate our future
growth -- building, equipment, and computer hardware and software systems. We
have also been transforming our 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, we may be restricted to our access
to working capital by covenants and conditions in the agreement with our primary
lender and no assurance can be given that other financing will be available.
In conjunction with the merger and contribution, we 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. We also will issue $22,600,000 face amount of 12% subordinated
promissory notes due 2007 to the Crystal Rock shareholders. For further
discussion on the Webster loan and the promissory notes, see "Indebtedness We
Will Incur in Connection with the Business Combination." We expect that the cash
flow from the combined entity will provide sufficient resources to repay the
debt on schedule.
Year Ended October 30, 1999 Compared To Year Ended October 31, 1998
Sales for 1999 were $31,396,000 compared to $29,169,000 for 1998, an
increase of $2,227,000 or 8%. 1999 sales attributable to acquisitions made
during the year were $2,137,000, which represented 7 percentage points of the
overall 8 point increase. Excluding revenues attributable to acquisitions, sales
for 1999 net of acquisitions were $29,259,000. Our revenue growth trend was
slowed primarily due to terminating our distribution agreement with our largest
distributor which resulted in some loss of sales revenue as new distributors
were brought on line. For discussion of this action, See
"Business -- Distribution and Sales." Our 1 percentage point (1999 over 1998)
increase in sales, net of acquisitions, was accounted for by increases in the
following distribution channels: 6 points for Hidden Spring, 5 points for
private label and 6 points for home and office. These were mostly offset by the
16 point decrease in retail size Vermont Pure, a direct result of the change in
distribution networks. Due to the fact that we operate on a "52-53 week"
reporting year, 1999 had 52 weeks of sales while 1998 had 53 weeks of sales. In
total, we sold 18,756,000 gallons of water at an average price of $1.34 per
gallon compared to 15,014,000 at an average price of $1.61 for the corresponding
period a year ago.
Sales of our retail-size products were $15,996,000 in 1999, a decrease of
8% compared to 1998, when sales of these products were $17,455,000. For fiscal
years 1999 and 1998, respectively, 9,810,000 gallons were sold at an average
price of $1.63 per gallon compared to 8,392,000 gallons at an average price of
$2.08 per gallon. The sales decline is partially attributable to the termination
of our agreement with our largest distributor and decreased average selling
prices. Year-to-year average selling price per case was down 28%. Vermont Pure
brand sales decreased 34% compared to 1998. Hidden Spring brand sales were up
89% for the
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<PAGE> 73
year, due to continued growth through market expansion in secondary distribution
channels. During the year, we increased the number of private label customers
that we pack for, resulting in an 83% increase in sales for these products.
Sales for the home and office delivery category of the business increased
in 1999 to $15,400,000 from $11,714,000 in 1998, an increase of $3,686,000 or
31%. In addition to internal growth, we continued to expand our home and office
distribution through acquisitions. New sales attributable to acquisitions in
1999 were $2,137,000. Net of acquisitions, home and office sales increased 13%
in 1999. 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.
In gallonage, the total sales increase of water in the category improved to
8,946,000 gallons at $1.03 per gallon in 1999 from 6,622,000 at $1.02 per gallon
in 1998. Other services and non-water products increased $1,234,000 or 25%.
Cost of goods sold for 1999 were $11,742,000 or 37% of sales, compared to
$11,550,000, or 40% of sales, for 1998. The decrease in cost of goods sold as a
percentage of sales compared to the prior year is partially attributable to
lower bottling costs as a result of higher production volumes and more efficient
production, and an increase in home and office distribution, which has better
margins. Our mix of sales continued to skew more toward product for home and
office delivery to 49% in 1999 from 40% in 1998, in large part the result of
acquisitions. The home and office category is characterized by lower bottling
costs because of larger sizes and refillable bottles. As a result, the gross
profit was higher in 1999, $19,654,000 or 63% of sales, than in 1998 when it was
$17,619,000, or 60% of sales.
Total operating expenses increased to $17,019,000 in 1999 from $15,555,000
in 1998, an increase of $1,464,000, or 9%. Of these amounts, selling, general
and administrative expenses were $13,149,000 and $10,235,000 for 1999 and 1998,
respectively, an increase of $2,914,000, or 28%. The increase in selling,
general and administrative expenses was due to increased personnel, rent and
lease expenses needed to grow the business as well as expenses associated with
the businesses acquired in 1999. Advertising expenses decreased to $3,258,000 in
1999 from $4,702,000 in 1998, a decrease of $1,444,000, or 31%. The decrease is
related primarily to our use of different distribution channels that require
less promotional support. However, given the competitive nature of the industry,
we anticipate that we are likely to continue to spend significant amounts in the
future for advertising and promotion as we continue to develop brand recognition
and increase market penetration but can give no assurances that increases in
spending will result in higher sales. Amortization expense decreased slightly to
$612,000 in 1999 from $617,000 in 1998, a decrease of $5,000.
Profit from operations in 1999 was $2,635,000 compared to $2,065,000 for
1998, an increase of $570,000. Net interest expense increased to $1,030,000 in
1999 from $755,000 in 1998, an increase of $275,000. The increase was a result
of greater amounts borrowed during the period primarily related to acquisitions.
The improvement in profit before income taxes to $1,605,000 in 1999 from
$1,412,000 in 1998 was the result of increased sales and decreased manufacturing
and operating costs, on a per unit basis.
Net income of $3,399,000 in 1999 compared to $2,859,000 in 1998, an
improvement of $540,000. We recorded a tax benefit of $1,793,000 in 1999
compared to $1,447,000 in 1998. This benefit reflects a partial recognition of
our total available deferred tax assets of approximately $4.6 million at October
30, 1999, based on an evaluation of likely utilization. If we continue to be
profitable, the remaining $832,000 of unrecorded deferred tax benefits will be
available for recognition in future years. No assurance can be given that we
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
10,279,377 during 1999 and 10,248,389 during 1998, the basic net income per
share was $.33 and $.28 per share, respectively. Based on the weighted number of
shares of diluted common stock outstanding of 10,790,722 and 10,927,025 for the
same respective periods, the diluted net income per share was $.31 per share in
1999 and $.26 per share in 1998.
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. Average selling price per
case was unchanged. Our 35 percentage point (1998
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over 1997) increase in sales, net of acquisitions, was accounted for by
increases in the following distribution channels: 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. In addition, we
operated on a "52-53 week" reporting year. Sales and other financial results
were favorably affected by the 1998 fiscal year having 53 weeks compared to 52
weeks for 1997 and 1996. In total, we sold 15,014,000 gallons of water at an
average price of $1.61 per gallon compared to 8,651,000 at an average price of
$1.75 for the corresponding period a year ago.
Sales of our retail-size products were $17,455,000 in 1998, an increase of
41% over 1997, when sales of these products were $12,375,000. For fiscal years
1998 and 1997, respectively, 8,392,000 gallons were sold at an average price of
$2.08 per gallon compared to 5,949,000 gallons at the same average price. 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. We increased the
number of private label customers that we pack for, resulting in a 79% increase
in sales for these products. In gallonage, the total sales increase of water in
the category improved to 6,622,000 gallons at $1.02 per gallon in 1998 from
2,702,000 gallons at $1.01 per gallon in 1997. Other services and non-water
products increased $2,358,000 or 87%.
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. We continued to expand
our home and office distribution through acquisitions. New sales attributable to
acquisitions in 1998 were $4,950,000. Net of acquisitions, home and 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, our 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 refillable
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 our
sales growth trend. We anticipate that we 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. Net 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. We recorded a tax benefit of $1,447,000 in 1998
compared to $544,000 in 1997. This benefit reflects a partial recognition of our
total available deferred tax assets of approximately $5.2 million at October 31,
1998, based on an evaluation of likely utilization. If we continue 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 we
will be profitable in the future and that these tax benefits will actually be
used.
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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.
At October 30, 1999, we had working capital of $3,028,000. This represents
an increase of $2,293,000 from the $735,000 of working capital on October 31,
1998. The increase in working capital primarily reflects a PET inventory buildup
to accommodate summer demand as well as the prepayment of the new home and
office computer system and a building expansion in Randolph, Vermont. When these
two projects are finished they will be capitalized.
In April 1998, we entered into a five year revolving credit line with
CoreStates Bank, N.A. (now First Union National Bank) 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. Under the agreement and supplemental
instruments, we are required to pay interest monthly at a rate of LIBOR plus
2.5%, currently approximately 8.4%. The line of credit is contingent upon our
continuing to meet specific loan covenants that are customary for credit
facilities of this type. On October 30, 1999 we were entitled to borrow up to $3
million for operating working capital and the balance for acquisitions under the
agreement. At October 30, 1999 we had borrowed $2.0 million on the operating
portion and $9.7 million on the acquisition portion of the line.
We later signed a letter of intent with First Union National Bank to
increase the line of credit to $25 million. Of the $25 million, $4.3 million
will be allocated to a letter of credit to underwrite a new bond issue for the
Randolph, Vermont building expansion as well as new production equipment
purchases. We believe that our working capital and access to available credit
are adequate to fund our current day to day operations and that revenues will
continue to cover operating and capital expenses and debt repayment in the 2000
fiscal year. However, there can be no assurance that this will be the case.
Cash flow from operations was $876,000 for the fiscal year ended October
30, 1999 as compared to $2,806,000 in the fiscal year ended October 31, 1998, a
decrease of $1,930,000. Operating cash usage was up due primarily to a planned
inventory build up. Cash flows from investing activities had a net outflow of
approximately $4,746,000, with $2,024,000 expended for acquisitions and
$2,775,000 expended for property, plant and equipment being the primary uses.
Financing activities provided a net cash inflow of $4,076,000. Proceeds from
debt, proceeds from line of credit and the exercise of stock options were
$3,743,000 and 1,025,000 and $88,000 respectively. These borrowings were
slightly offset by principal payment of debt of $780,000.
At October 30, 1999, we recorded a deferred tax asset of $3,793,000. Based
on current levels of profitability, the realization of such deferred tax assets
would take approximately four more years.
In addition to the bank debt associated with its recent acquisitions, we
financed some of these transactions with notes to the sellers. As of October 30,
1999, these notes had an unpaid balance of $1,335,000. The notes are at interest
rates ranging from 8% to 10% and are being repaid through August 2004.
We anticipate that we will spend approximately $6.3 million for capital
items in fiscal 2000 to maintain and continue to grow our business. We believe
that we will have adequate resources available from internal cash flow and
existing debt instruments to fund our capital plan. We have begun the expansion
of our facility in Randolph, Vermont. The cost of this expansion, including a
new high speed bottling line, is approximately $4.3 million. The expansion is
being funded through a combination of debt and working capital. The remaining $2
million consists of fixed assets, which include water coolers, coffee machines
and 5 gallon water bottles for the home and office segment of the business.
We are pursuing an active program of evaluating acquisition opportunities.
To complete any acquisitions, we anticipate using our capital resources and
obtaining financing from outside sources. Except for the current loan facilities
discussed above, we have no other current arrangements with respect to, or
sources of, additional financing for our business or future plans. Although we
believe we will be able to obtain any required financing, there can be no
assurance given that financing will be available to us on acceptable terms or at
all.
Inflation has not had a material impact on our operations to date.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to our operations result primarily from changes in
interest rates and commodity prices (the resin prices for PET bottles).
INTEREST RATE RISKS
On April 30, 2000, we had $14,500,000 outstanding on our credit facility
with First Union and Key Banks at LIBOR plus 2.5%. As of June 7, 2000, LIBOR was
6.63%. We pay 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 8.43% on April 30, 2000 and increased to 8.53% on June 1, 2000. On May
2, 2000, we 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, we 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 June 7, 2000 were 6.7% and 4.2%, respectively.
We pay an annual letter of credit fee of 2% to secure the bonds. We also have
miscellaneous loans at variable interest rates. Consequently, after considering
our 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 we have yearly contracts with our vendors that set the purchase
price of our PET bottles used to bottle our 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 8%. It is anticipated that the resin market will be
stable for the balance of the year. Resin increased 7% in fiscal 1999. To a
lesser extent we are similarly dependent on resin for caps and paper for
corrugated boxes and labels. The potential impact is not material compared to
bottles.
We are planning to mitigate the effect of these commodity risks by working
with suppliers to reduce the amount of material that they use to package their
products while maintaining and improving quality.
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DESCRIPTION OF VP MERGER PARENT COMMON STOCK
The authorized capital stock of VP Merger Parent consists of shares of
common stock and shares of preferred stock.
The following is a summary of the provisions of the common stock and
preferred stock and is subject to, and qualified in its entirety by, the
provisions of VP Merger Parent's certificate of incorporation, which is included
as an exhibit to this proxy statement/prospectus, and by the provisions of
Delaware law.
COMMON STOCK
The total number of shares of capital stock which VP Merger Parent shall
have authority to issue is 50,500,000 shares, of which 50,000,000 shares will be
common stock. As of August 30, 2000, there were 10,294,758 shares of common
stock outstanding that were held beneficially by approximately 1,500
shareholders. Holders of common stock are entitled to one vote per share, to
receive dividends when and if declared by the board of directors and to share
ratably in the assets of VP Merger Parent legally available for distribution to
its shareholders in the event of liquidation. Holders of common stock have no
preemptive, subscription, redemption or conversion rights. All outstanding
shares of common stock are, and the shares to be issued hereby will be upon
issuance duly authorized, fully paid and nonassessable. The holders of common
stock do not have cumulative voting rights. The holders of a majority of the
shares of common stock can elect all the directors and can control the
management and affairs of VP Merger Parent. The rights, preferences and
privileges of holders of VP Merger Parent common stock will be subject to the
rights of the holders of any series of preferred stock that Vermont Pure may
issue in the future.
PREFERRED STOCK
VP Merger Parent has an authorized class of undesignated preferred stock
consisting of 500,000 shares. Preferred stock may be issued in series from time
to time when designations, relative rights, priorities, preferences,
qualifications, as the board of directors determines. The rights, priorities,
preferences, qualifications, limitations and restrictions of different series of
preferred stock may differ with respect to dividend rates, amounts payable on
liquidation, voting rights, conversion rights, redemption provisions, sinking
fund provisions and other matters. VP Merger Parent board of directors may
authorize the issuance of preferred stock which ranks senior to the common stock
with respect to the payment of dividends and the distribution of assets on
liquidation. In addition, the board of directors is authorized to fix the
limitations and restrictions, if any, upon the payment of dividends on common
stock to be effective while any shares of preferred stock are outstanding. The
board of directors, without shareholder approval, can issue preferred stock with
voting and conversion rights which could adversely affect the voting power of
the holders of common stock. The issuance of preferred stock may have the effect
of delaying, deferring or preventing a change of control of VP Merger Parent.
Upon consummation of the transaction, no share of preferred stock will be
outstanding. VP Merger Parent has no present intention to issue shares of
preferred stock.
CORPORATE PROVISIONS
VP Merger Parent's certificate of incorporation and by-laws contain a
number of provisions relating to corporate governance and to the rights of
shareholders. Some of these provisions may be deemed to have a potential
"anti-takeover" effect, in that these provisions may delay, defer or prevent a
change of control of VP Merger Parent. These provisions include the authority of
the board of directors to issue series of preferred stock with voting rights and
other powers as the board of directors may determine. See "Comparison of Rights
of Shareholders."
VP Merger Parent is subject to the provisions of the Delaware General
Corporation Law (also referred to as the DGCL). Section 203 of the DGCL
prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested shareholder," for a period of three years after
the date of the
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transaction in which the person became an interested shareholder, unless the
business combination is approved in a prescribed manner. A "business
combination" includes mergers, asset sales and other transactions resulting in a
financial benefit to the interested shareholder. Subject to certain exceptions,
an "interested shareholder" is a person who, together with affiliates, owns, or
within three years did own, 15 percent or more of the corporation's voting
stock.
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INFORMATION CONCERNING CRYSTAL ROCK SPRING WATER COMPANY
The following discussion pertains to the business of Crystal Rock as a
separate company and does not contemplate specifically the effect of the merger
and contribution.
THE COMPANY
Crystal Rock's principal executive offices are located at 1050 Buckingham
Street, Watertown, Connecticut 06795. Its telephone number is (800) 525-0070.
BUSINESS
Crystal Rock is a bottled water manufacturer focusing on the still,
non-carbonated, segment of the bottled water industry. Crystal Rock's primary
business is the marketing and distribution of Crystal Rock brand of purified and
mineralized drinking water to the home and office delivery markets. Crystal Rock
also distributes coffee and other refreshment type products, and vending
services in Connecticut, New York and Massachusetts.
Over the course of Crystal Rock's existence since 1914, bottled water has
frequently been viewed as a "fad." However, Crystal Rock has realized continued
growth and believes that the industry will continue its growth and development
of better and improved products and methods of product delivery. Crystal Rock's
method of water manufacturing has provided a consistently pure product
eliminating fears over 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.
Crystal Rock anticipates that sales of bottled water will continue to grow.
COMPANY BACKGROUND
Crystal Rock was founded in 1914 by Henry Baker, Sr. who delivered water in
1/2-gallon glass bottles by horse-drawn wagon in Stamford, Connecticut. Upon
the death of Henry Baker, Sr. in 1947 his wife, Gladys, and his son, Henry, Jr.,
took over the business. In 1965 Henry E. Baker, Jr. became President,
representing the second generation of Bakers to manage Crystal Rock. Under Henry
Baker's tenure as President in the 60's and 70's Crystal Rock constructed a
bottling plant in Stamford, Connecticut and successfully implemented a strategy
to expand sales to the office coffee and refreshment service market. In 1975
John Baker joined Crystal Rock, with brother Peter joining in 1977.
With expansion continuing into the 80's, Crystal Rock constructed a new
facility in 1988 in Watertown, Connecticut. The 72,000 square foot bottling
facility replaced the Stamford facility as a plant and became Crystal Rock's
headquarters. With the construction of the new facility came a new strategy to
market "purified and mineralized drinking water" with the slogan, "Crystal Rock
Premium Bottled Water, Purer than Nature." By purifying and remineralizing
municipal water, drinking water of uniform desired composition and taste is
created. This process can easily be replicated in any market that Crystal Rock
targets for expansion. Maintaining the strategy to penetrate the office coffee
and refreshment service market, Crystal Rock realized a customer mix of 75%
commercial accounts to 25% residential by 1989.
Because of successful integration of coffee and refreshment products in
Crystal Rock's sales mix, Crystal Rock is recognized as a water industry leader
in the ability to successfully and continually maintain such integration. This
is evident through the recognition that the Bakers have received from the IBWA.
Henry E. Baker was a Board member for 20 years and is in the IBWA Hall of Fame.
Peter K. Baker has served as a Board member and Chairman of the association. In
addition to this, other bottled water companies from other geographical areas in
both the United States and from as far as Australia have requested and sent
their employees and management to Crystal Rock to learn how such integration is
implemented and maintained.
In 1993, John B. Baker and Peter K. Baker were appointed Co-Presidents of
the growing enterprise. Contributing to growth in the 90's were a number of
acquisitions of various office coffee and water companies. In April of 1992
Crystal Rock purchased the assets of Gramatin Springs Co., Inc., a large
independent bottler servicing Westchester County, New York. In May of 1994,
Crystal Rock purchased the assets and routes of
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the office coffee division of Arctic Falls Spring Water. During the course of
1995, Crystal Rock purchased Shouvlin Coffee Service, Coffee Delite and some of
the assets of Colony Coffee, adding aggregate base sales in excess of $1.3
million. With a track record of success in integrating acquisitions into
existing operations, Crystal Rock acquired the assets and customers of Pequot
Spring Water Company with an annual sales base of $1.9 million in 1996. During
the 1997-1999 time period Crystal Rock made three smaller acquisitions adding to
the sales base a total of $1.7 million.
To date, Crystal Rock has been successful in integrating its acquired
businesses with existing operations. Management is aware of difficulties
associated with the process of acquiring and integrating new businesses and has
been able to manage the process in the past; however, 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 Crystal
Rock's business as a whole.
Crystal Rock is now focused almost exclusively on the still segment of the
bottled water industry, the largest segment and primary growth driver of the
bottled water industry. By focusing on the home and office delivery sector,
Crystal Rock has intentionally concentrated efforts on the largest and most
profitable segment of the industry. By offering over 500 products for sale to
Crystal Rock's customers the value of the home and office account base is
maximized. Utilization of 100% of truck space and equitable sales commission
plans to Crystal Rock's Route Sales Personnel creates efficiencies and maintains
profitability. A major factor in Crystal Rock's ability to duplicate its success
in other territories is the water manufacturing process.
DESCRIPTION OF WATER SOURCES
Crystal Rock utilizes municipal water as its primary raw water source.
Although the water source is currently made available from the local
municipality, should for an unforeseen reason the source be eliminated, Crystal
Rock could purchase water from other sources and have it shipped to the
Watertown manufacturing facility. The raw water is purified through a number of
processes beginning with filtration. Utilizing carbon and ion exchange
filtration systems, chlorine and other volatile compounds and dissolved solids
are removed. After the filtration process, 98% of all impurities are removed by
reverse osmosis and any remaining impurities are removed through distillation.
This process produces highly purified water in conformance with U.S.
Pharmacopoeia (23rd Revision). Purified water is ozonated (the process of
injecting ozone (O(3)) into the water as an agent to prohibit the formation of
bacteria) prior to storage in four 30,000-gallon storage tanks. Prior to
bottling, drinking water has pharmaceutical grade minerals including calcium and
potassium added for taste. The water is again ozonated and bottled in a fully
enclosed clean room with a high efficiency particulate air, or HEPA, filtering
system designed to prevent any airborne contaminants from entering the bottling
area, assuring a sanitary filling environment.
PRODUCTS
Crystal Rock's drinking water is sold under the Crystal Rock and Stoneridge
brands and is packaged in various bottle sizes ranging from 0.5 liter to 5
gallons. Crystal Rock sells the bottles in single units and corrugated cardboard
cases of two (2.5 gallon bottles), six (1 gallon bottles) twelve (1 and 1.5
liter bottles) and twenty-four (.5 and .75 liter bottles). Crystal Rock uses a
sports cap on the .75-liter size 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 and office purified drinking water products are sold in three and five
gallon bottles. Crystal Rock rents water coolers to dispense the bottled water.
These coolers are available in cold, warm and/or hot temperature configurations.
In conjunction with the home and office accounts, Crystal Rock also distributes
a variety of coffee, tea and other refreshment products and related supplies.
Crystal Rock rents or supplies multi burner coffee machines to customers. In
addition, Crystal Rock supplies whole beans and coffee grinders for fresh ground
coffee as well as cappuccino machines to restaurants. Crystal Rock also offers
vending equipment and servicing for snacks, soft drinks and water.
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MARKETING
Crystal Rock markets its Crystal Rock products as "premium" bottled water
products. Crystal Rock seeks brand differentiation by offering quality service.
Crystal Rock's home and office sales are generated and serviced using directly
operated facilities, Crystal Rock employees and vehicles. Less than 4% of
Crystal Rock's annual revenue is generated through sales to third party
distributors or water products sold under different brand names through
different distribution channels.
Crystal Rock uses telemarketers and outside/cold-call Sales Personnel. The
sales effort is supported through promotional giveaways, Yellow Page
advertising, as well as radio, television and billboard ad campaigns. Crystal
Rock sponsors local area professional sports and professional sporting events,
and participates in area Chamber of Commerce and trade show events.
Additionally, Crystal Rock is very visible in community and charitable events.
SLOTTING FEES
Because Crystal Rock has intentionally concentrated sales efforts in the
home and office segment of the bottled water industry, minimal sales are made to
supermarkets or convenience stores. Any of these sales will generally be made
through distributors and are minimal. Crystal Rock does not pay slotting fees.
ADVERTISING AND PROMOTION
Crystal Rock advertises its products primarily through print and radio
media. Crystal Rock has also actively promoted its products through sponsorship
of various organizations and sporting events. Management of Crystal Rock also
has a strong commitment to community involvement. Crystal Rock personnel have
volunteered time and Crystal Rock has committed monetary and product donations
to such organizations as the Special Olympics and The Multiple Sclerosis
Society.
SALES AND DISTRIBUTION
Crystal Rock sells and delivers products directly to its customers using
Crystal Rock employees and Crystal Rock owned route delivery trucks. Crystal
Rock brand drinking water is produced at a single production facility in
Watertown, Connecticut. Crystal Rock also maintains two warehouses, one at the
Watertown production facility and the second in Stamford, Connecticut. Crystal
Rock maintains an inventory of a variety of coffee, tea and other refreshment
products and related supplies at the two warehouse locations. Equipment that is
also purchased to be rented or sold to customers is also stored at these
locations. Crystal Rock will ship product between the two warehouse locations by
contracted carrier.
Crystal Rock employs an inside/telemarketing sales force of 4 persons to
contact existing customers for new product sales and potential new customers. In
addition to this an outside/cold call sales force of 10 is employed to contact
key accounts and potential new customers. Crystal Rock employs a 44-route
distribution sales force for the sale and delivery of products directly to
customers. All sales personnel actively seek to expand the number of customers
and the number of different products sold to each existing customer. Less than
4% of Crystal Rock sales are to beverage distributors.
COMPETITION
The home and office distribution market remains somewhat fragmented with a
few large national and international companies operating under a number of
various brand names as well as a number of smaller regional and often family
owned companies. In the geographical area in which Crystal Rock operates Nestle
owned Perrier Group of America sells under the brand name Poland Spring; Suntory
Group sells under the Belmont Springs brand name; and Ionics, Inc. sells under
the name Aqua Cool. Smaller regional companies in the area include Iceberg
Springs Water Inc., Triple Springs, and Big Indian among others.
Crystal Rock competes based on quality products and service. While pricing
is a consideration, Crystal Rock encourages the highest level of quality
achievable in production, sales, service and distribution of Crystal
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Rock's products. Crystal Rock believes that its employees have been and will
continue to be a major reason for Crystal Rock's success.
INTELLECTUAL PROPERTY
Crystal Rock sells purified water products and premium coffee products
under the trade names Crystal Rock Bottled Water, Stoneridge Bottled Water and
Crystal Rock Coffee Service, respectively. Crystal Rock's logo and brand name
are registered with the United States Patent and Trademark office. Crystal Rock
also has rights to an acquired trademark, "Pequot Natural Spring Water."
PACKAGING
Crystal Rock performs private label contract packaging of its purified
drinking water for distributors of other brands of bottled water. Crystal Rock
also packs five gallon home and office containers for third parties. Contract
packaging is very price competitive and typically is performed under short-term
arrangements. Crystal Rock will seek opportunities for contract packaging
primarily to increase production efficiency and increase plant utilization to a
point closer to plant capacity. Less than 4% of Crystal Rock sales are to
beverage distributors or for contract packaging.
SUPPLIES
Crystal Rock does not manufacture any of the bottles or packaging in which
its products are sold. Crystal Rock is a member in a bottling cooperative which
negotiates annually with individual bidders for pricing and supply of 3 and 5
gallon bottles. This allows Crystal Rock to remain competitive with larger
bottlers. Crystal Rock will also commit to purchase a minimal quantity of
bottles during the contract period. The same cooperative association will
negotiate pricing for water coolers that will be sold or rented to Crystal Rock
customers. Both Vermont Pure and Crystal Rock belong to this cooperative. The
combined company will continue to be a member. Crystal Rock purchases all of its
PET bottles and the plastic caps used thereon from major plastic bottle vendors.
Although Crystal Rock has not experienced any shortages of the form bottle used,
price fluctuations have occurred. However, PET product sales account for less
than 5% of total sales limiting the impact of such price fluctuations. In recent
years coffee prices have fluctuated in a wide range. Coffee sales have accounted
for more than 10% of Crystal Rock's total sales in fiscal 1998 and 1999. Many
customers are under annual contracts locking prices on Crystal Rock products.
However, when possible Crystal Rock will adjust prices to maintain suitable
margins on products sold. Crystal Rock may experience market instability with
respect to raw material supplies. No assurance can be given that Crystal Rock
will be able to obtain the supplies it requires on a timely basis or that
Crystal Rock 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 Crystal Rock. Crystal Rock feels that competitors will also have
the same cost pressures which could then lead to lower profitability or an
increase in pricing.
SEASONALITY
Crystal Rock's business is somewhat seasonal. However, because of the
integration of products other than bottled water into the home and office sales
mix, individual product categories may fluctuate with weather, such as higher
water sales in summer months or higher coffee sales in winter months. Overall,
sales are relatively stable over the course of the year. During the fiscal year
ended October 31, 1999, no one month accounted for less than 7.0% of annual
sales, and no one month accounted for more than 9.7% of annual sales.
GOVERNMENT REGULATION
Crystal Rock must meet the same federal government regulations as required
of Vermont Pure described previously, including the regulations of the FDA, Fair
Packaging and Labelling Act, and the Nutritional Labeling and Education Act of
1990. The FDA has jurisdiction over the labeling of the products sold under the
Crystal Rock name. Crystal Rock Spring Water Company is the legal name of the
company, however,
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water sold is labeled as "Crystal Rock (Bottled) Water" with no representation
of it being from a spring source.
Crystal Rock also must meet requirements in a number of states. Crystal
Rock has received approval for its drinking water in Connecticut, Massachusetts,
New York and Rhode Island.
The bottled water industry has a comprehensive program of self-regulation.
Crystal Rock is a member of the International Bottled Water Association. As a
member of the IBWA, Crystal Rock's facilities are inspected annually by an
independent laboratory, the National Sanitation Foundation. 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 some
respects are more stringent than those of the federal and various state
regulations.
EMPLOYEES
As of September 1, 2000, Crystal Rock had 139 full-time employees and 14
part-time employees. None of the employees belongs to a labor union. Crystal
Rock believes that its relations with its employees are good. Crystal Rock
relies to a great degree on the combined efforts of its executive officers,
Henry E. Baker, its Chairman, John B. Baker, Co-President and Peter K. Baker,
Co-President for its day-to-day management and strategic direction.
PROPERTY
Crystal Rock owns a combined 72,000 square feet of office, bottling and
warehouse space in Watertown, Connecticut. Negotiations are under way for the
sale of the building to a related party trust. Under the proposed terms of the
sale, Crystal Rock would enter into a 10 year lease with the new owner at an
annual lease cost of $360,000 plus real estate taxes, utilities, insurance and
normal operating and maintenance costs for the first five years. See "Proposal
to Approve the Business Combination -- Crystal Rock Related Party Transactions."
Crystal Rock leases office and warehouse space in Stamford, Connecticut
from a related party. Under terms of the current lease, Crystal Rock's annual
lease cost is $216,000 plus real estate taxes, utilities, insurance and normal
operating and maintenance costs. Terms of the lease are in the process of being
renegotiated. Under the proposed lease, Crystal Rock would lease the property
for 10 years with the annual lease cost to remain the same as the current lease
for the first five years. See "Proposal to Approve the Business
Combination -- Crystal Rock Related Party Transactions."
Crystal Rock also rents 15,000 square feet of warehouse space in Watertown,
Connecticut at a cost of $3,750 per month. The rental agreement expires November
30, 2000.
LEGAL PROCEEDINGS
Crystal Rock is defendant in a number of small claims concerning primarily
property damage and workers' compensation. Crystal Rock has insurance coverage
regarding the claims and indemnification agreements with involved parties
related to some claims. Management believes that any cost to Crystal Rock
associated with these actions will be immaterial individually and in the
aggregate.
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DIRECTORS AND OFFICERS OF CRYSTAL ROCK
BIOGRAPHICAL
The names of the persons presently serving as directors and officers of
Crystal Rock are listed below, together with their ages and other biographical
information as of August 30, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Henry E. Baker............................ 68 Chairman of the Board
John B. Baker............................. 45 Co-President and Director
Peter K. Baker............................ 41 Co-President, Secretary and Director
</TABLE>
The business experience during at least the last five years of each of the
directors and the executive officers of Crystal Rock is as follows:
Henry E. Baker has been employed at Crystal Rock Water Company since 1947.
He and his mother Gladys ran the business until 1965 when Henry was appointed
President. He became Chairman of the Board in 1965. Henry served on the IBWA
Board of Directors for two decades, and has been recognized as an industry
leader in the areas of quality control and ability to market coffee break
supplies and bottled water into the workplace. He was inducted into the Beverage
World Bottled Water Hall of Fame in 1990.
John B. Baker has been employed at Crystal Rock Water Company since 1975.
John was appointed Co-President in 1993. During his time at the Company, John
has designed and patented a number of devices used within the bottled water
industry. The most notable of these devices is the Water Safe System, which acts
as a seal between the water bottle and the cooler to prevent spillage and reduce
the introduction of dust or other particles into the cooler and water.
Peter K. Baker has been employed at Crystal Rock Water Company since 1977.
Peter was appointed Co-President in 1993. Peter has concentrated efforts in the
Sales and Marketing area of Crystal Rock while maintaining a high level of
visibility to the bottled water industry in general. After serving on the board
of directors of the International Bottled Water Association, Peter served as
Chairman of the IBWA Board during the 1998-1999 term.
Although he is not a director or officer of Crystal Rock, Ross S. Rapaport
is, in his capacity as trustee, a major shareholder of Crystal Rock and will be
a director of VP Merger Parent. Biographical information about Mr. Rapaport is
as follows:
Ross S. Rapaport is Senior Partner in Rapaport & Ellenthal, P.C., a general
practice law firm located in Stamford, Connecticut. He has practiced in the area
of corporate and general business law for more than thirty years. He has
represented Crystal Rock since 1974. Mr. Rapaport is a 1967 graduate of Cornell
Law School.
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COMPENSATION OF CRYSTAL ROCK'S OFFICERS AND DIRECTORS
The following table shows the cash compensation paid by Crystal Rock, as
well as other compensation paid or accrued, to the Chairman of the Board and the
two Co-Presidents for the fiscal years ended October 31, 1997, 1998 and 1999.
Crystal Rock has no other executive officers.
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS
--------------------------- ---- -------- --------
<S> <C> <C> <C>
Henry E. Baker.............................................. 1999 $600,000 $300,000
Chairman of the Board of Directors 1998 $500,000 $249,000
1997 $500,000 $237,000
John B. Baker............................................... 1999 $650,000 $332,000
Co-President, Director 1998 $500,000 $346,000
1997 $400,000 $235,000
Peter K. Baker.............................................. 1999 $650,000 $347,000
Co-President, Director 1998 $500,000 $350,000
1997 $400,000 $246,000
</TABLE>
Crystal Rock cannot determine, without unreasonable effort or expense, the
specific amount of personal benefits afforded to its employees, or the extent to
which benefits are personal rather than business. Crystal Rock 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.
Crystal Rock does not grant options or shares.
CRYSTAL ROCK EMPLOYMENT AGREEMENTS AND CERTAIN TRANSACTIONS
In 1998, Crystal Rock and each of Henry E. Baker, John B. Baker, and Peter
K. Baker entered into employment agreements under which Crystal Rock employs
Henry B. Baker as its Chairman of the Board and John B. Baker and Peter K. Baker
as its Co-Presidents. Each of these employment agreements expires on October 31,
2001, subject to earlier termination by either Crystal Rock or the employee on
30 days' notice. Under these employment agreements, Henry E. Baker receives an
annual salary of $600,000 and is eligible to receive an annual bonus of up to
$300,000, and each of John B. Baker and Peter K. Baker receives an annual salary
of $650,000 and is eligible to receive an annual bonus of up to $350,000. Each
of Henry E. Baker, John B. Baker, and Peter K. Baker also receives fringe
benefits including life and medical insurance, the use of an automobile, and 30
days of paid vacation per year. The Bakers' employment agreements also entitle
their respective estates to a payment of three months' salary upon death.
During the fiscal year ended October 31, 1999, Crystal Rock paid the law
firm of Rapaport & Ellenthal, P.C., of which Ross S. Rapaport is Senior Partner,
an aggregate of $221,179 for legal services.
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VOTING SECURITIES AND PRINCIPAL SHAREHOLDERS OF CRYSTAL ROCK
The following tables set forth information regarding the beneficial
ownership of Crystal Rock's voting securities as of August 30, 2000, by:
- any person or entity known to Crystal Rock to own beneficially more than
5% of Crystal Rock's common stock,
- each of Crystal Rock's directors and officers, and
- all directors and executive officers of Crystal Rock as a group; unless
otherwise indicated, each person or entity named in the table has sole
voting power and investment power (or shares such power with his or her
spouse) with respect to all shares of capital stock listed as owned by
such person or entity.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY OWNED
-------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT
------------------------ ------ -------
<S> <C> <C>
Henry E. Baker.............................................. 334 19.5%
Joan A. Baker............................................... 95 5.6%
Peter K. Baker.............................................. 426 24.9%
John B. Baker............................................... 426 24.9%
Ross S. Rapaport, Trustee................................... 429 25.1%
As a Group (5 Individuals).................................. 1,710 100%
</TABLE>
Henry E. Baker is the father of Peter K. and John B. Baker and the husband
of Joan A. Baker.
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CRYSTAL ROCK'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Crystal Rock's financial performance for the first six months of fiscal
2000 were relatively strong though as a percentage to sales operating income was
lower. Total sales revenue through April 30, 2000 was 9.5% higher than the same
fiscal 1999 period. The increased revenue was fueled primarily by an increase in
5-gallon water sales and equipment rental revenues which combined accounted for
54.9% of the increase.
Year to date net income of $1,131,000 is an increase over fiscal 1999 of
5.0%. Earnings before interest, taxes, depreciation and amortization (EBITDA) of
$3,037,000 for the six month period is an increase of 7.9% over fiscal 1999.
As of April 30, 2000 Crystal Rock reported $852,000 in cash and cash
equivalents after funding $1.3 million of fixed asset purchases through the
six-month reporting period. The current ratio at April 30, 2000 was 2.5 to 1 and
debt to total net worth was 1.3 to 1.
SIGNIFICANT EVENTS
In December 1999, Crystal Rock lost a major distributor as a customer in
the Long Island, New York area. In fiscal 1999 this customer accounted for
approximately $430,000 in sales, or 1.8% of Crystal Rock's total fiscal 1999
annual sales. To date, the loss of this customer has reduced Crystal Rock's
distributor sales, but Crystal Rock has not suffered a proportionate loss to
profitability.
On April 28, 2000, Crystal Rock entered into a second mortgage on property
at 1050 Buckingham Street, Watertown, Connecticut with Fleet Bank for $425,000.
Funding under this agreement was received in May 2000. Under the terms of the
agreement, Crystal Rock may borrow up to $425,000 at a floating monthly rate of
prime or LIBOR plus 110 basis points. The note is due and payable in its
entirety on October 28, 2000.
Crystal Rock entered into an agreement with Vermont Pure Holdings, Ltd. to
merge the two companies. The agreement and plan of merger and contribution was
signed on May 5, 2000, and amended on August 28, 2000.
RESULTS OF OPERATIONS
Six Months Ended April 30, 2000 Compared to Six Months Ended April 30, 1999
Crystal Rock sales the first six months of fiscal 2000 were $12,426,000
compared to $11,353,000 for the same period fiscal 1999, an increase of
$1,073,000 or 9.5%. Year to date sales attributable to acquisitions made during
the year were $25,000 or 0.2 percentage points of the overall 9.5% point
increase. Crystal Rock's growth in sales is mainly attributable to an increase
in 5-gallon water sales delivered to home and office customers and rental income
on field rental units. The total gallons delivered to home and office customers
for the first six months of fiscal 2000 was 4,421,000 at an average sales price
of $1.13 per gallon, as compared to 4,023,000 gallons at an average price of
$1.12 per gallon for the comparable period in 1999. The remaining increase was
primarily due to sales of other products to home and office customers such as
coffee and other grocery items.
Cost of goods sold for the first six months of fiscal 2000 was $4,762,000
or 38.3% of sales, compared to $4,311,000 or 37.9% of sales, for 1999. The
increase in cost of goods sold as a percentage of sales compared to the prior
year is mainly attributable to higher costs associated with coffee and other
grocery products. Gross margins on these products have fallen approximately
1.0%. The lower margins recognized for coffee and grocery sales have been
partially offset by a slight increase in margins on 5-gallon water sales to home
and office customers and distributors.
Total operating expenses increased to $5,583,000 for the first six months
of fiscal 2000 from $5,040,000 in 1999, an increase of $543,000 or 10.8%. Of the
total increase, selling expenses increased $284,000 or 10.5% from 1999 levels.
The increase in selling expenses was primarily due to the increase in home and
office sales and additions of new home and office accounts. In addition to costs
directly associated with the increased
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sales, there has been an increase in costs of operating the Crystal Rock route
truck fleet. Partially due to increased fuel costs, total fleet costs increased
$106,000 or 46.6% from fiscal 1999 levels. General and administrative costs
increased $260,000 or 11.1% over fiscal 1999 year to date levels. Much of the
increase is due to nonrecurring expenditures for professional services and data
processing expenses.
Profit from operations for the first six months of fiscal 2000 was
$2,081,000 compared to $2,002,000 for 1999. Net interest expense decreased to
$167,000 in 2000 from $180,000 in 1999, a decrease of $13,000. The decrease was
due primarily to lower debt during 2000 versus 1999. Net income increased to
$1,131,000, an increase of $54,000 or 5.0% over fiscal 1999.
Based on the weighted number of shares of common stock outstanding of 1,710
during the first six months of fiscal 2000 and 1,710 for the same fiscal 1999
period, the basic and diluted net income per share was $661.41 and $629.98 per
share, respectively.
LIQUIDITY AND CAPITAL RESOURCES
As of April 30, 2000, Crystal Rock had working capital of $2,863,000. This
represents an increase of $503,000 from the $2,360,000 of working capital on
October 31, 1999. The increase is primarily due to an increase in cash and
equivalents of $422,000.
In June of 1998 Crystal Rock entered into financing arrangements with Fleet
National Bank. Portions of the agreement were the results of renegotiating
already existing agreements. Crystal Rock could borrow up to $3,000,000 for
acquisitions and fixed assets on a revolving credit line with repayment
commencing June 1, 2000 at a floating interest rate of prime or LIBOR plus 110
basis points. The note matures June 1, 2005. To date Crystal Rock has not drawn
on the line. Crystal Rock has an additional $1,000,000 working capital credit
line at a floating rate of prime or LIBOR plus 110 basis points. Crystal Rock
has not drawn against either available line during the first six months of
fiscal 2000. On April 28, 2000 Crystal Rock entered into a second mortgage on
property at 1050 Buckingham Street, Watertown, Connecticut with Fleet Bank for
$425,000. Funding under this agreement was received in May 2000. Under the terms
of the agreement, Crystal Rock may borrow up to $425,000 at a floating monthly
rate of prime or LIBOR plus 110 basis points. The note is due and payable in its
entirety on October 28, 2000.
Cash flow from operations for the first six months of fiscal 2000 was
$2,039,000 as compared to $1,747,000 for the first six months of fiscal 1999, an
increase of $292,000. Year to date cash flows from investing activities had a
net outflow of approximately $1,312,000 which was expended for property, plant
and equipment. Financing activities produced a cash decrease of $305,000,
$251,000 of which was for the repayment of debt.
Crystal Rock anticipates that it will spend approximately $800,000 for
capital items during the remainder of fiscal 2000 to maintain and continue to
grow its business. Of this amount $225,000 is earmarked for new route trucks.
The majority of the remaining capital expenditures is expected to be for the
purchase of water coolers, and other equipment rented to home and office
customers as well as improvements to computer and production systems. Crystal
Rock believes that it will have adequate resources available from internal cash
flow and existing debt instruments to fund its capital plan.
Although Crystal Rock has felt an impact due to inflation, the increased
operating costs have not been material in management's opinion.
Year Ended October 31, 1999 Compared to Year Ended October 31, 1998
Crystal Rock sales for 1999 were $24,018,000 compared to $22,431,000 for
1998, an increase of $1,587,000 or 7.1%. 1999 sales attributable to acquisitions
made during the year were $57,000 or 0.3 percentage points of the overall 7.1%
point increase. Excluding revenues attributable to acquisitions, sales for 1999
net of acquisitions were $23,961,000. Crystal Rock's growth in sales is mainly
attributable to an increase in the number of 5-gallon units delivered to home
and office customers. The total gallons delivered to home and office customers
for fiscal 1999 was 8,760,000 at an average sales price of $1.13 per gallon, as
compared to 8,117,000 gallons at an average sales price of $1.10 per gallon for
the fiscal 1998. Additionally, Crystal Rock
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grew the number of field rental equipment units at year-end to a base of 38,600,
an increase of 7.2% over the previous year-end.
Cost of goods sold for 1999 was $9,258,000 or 38.5% of sales, compared to
$8,845,000 or 39.4% of sales, for 1998. The decrease in cost of goods sold as a
percentage of sales compared to the prior year is partially attributable to
lower bottling costs as a result of longer bottle life for refillable 5-gallon
bottles. In addition to this, 5-gallon water sales were a slightly larger
portion of Crystal Rock's total sales in fiscal 1999 versus 1998. These water
sales to the home and office customers have a higher gross margin than coffee
and other products sold.
Total operating expenses increased to $13,175,000 in 1999 from $12,040,000
in 1998, an increase of $1,135,000 or 9.4%. Of the total increase, selling
expenses increased $590,000 or 10.5% from 1998 levels, while general and
administrative expenses increased $545,000 or 8.5% from 1998 levels. The
increase in selling expenses was primarily due to the increase in home and
office sales and additions of new home and office accounts combined with an
increase in advertising and promotional activities in fiscal 1999. The increase
in general and administrative expenses was primarily due to increased executive
compensation. The increase in general and administrative expenses before
executive compensation was 3%.
Profit from operations in 1999 was $1,585,000 compared to $1,547,000 for
1998. Net interest expense decreased to $318,000 in 1999 from $419,000 in 1998,
a decrease of $101,000. The decrease was due to a combination of lower debt
during 1999 and lower interest rates. Net income increased to $748,000, an
increase of $99,000 or 15.2% over fiscal 1998.
Based on the weighted number of shares of common stock outstanding of 1,710
during 1999 and 1,710 during 1998, the basic and diluted net income per share
was $437.20 and $379.44 per share, respectively.
Year Ended October 31, 1998 Compared to Year Ended October 31, 1997
Crystal Rock sales for 1998 were $22,431,000 compared to $19,638,000 for
1997, an increase of $2,793,000 or 14.2%. 1998 sales attributable to
acquisitions made during the year were $900,000 or 4.6 percentage points of the
overall 14.2% point increase. Excluding revenues attributable to acquisitions,
sales for 1998 net of acquisitions were $21,531,000. Crystal Rock's growth in
sales is mainly attributable to an increase in the number of 5-gallon units
delivered to home and office customers. The total gallons delivered to home and
office customers for fiscal 1998 was 8,117,000 at an average sales price of
$1.10 per gallon, as compared to 7,319,000 gallons at an average sales price of
$1.09 per gallon for fiscal 1997 period. Sales of coffee, grocery and vending
products also increased by $1,269,000. Additionally, Crystal Rock grew the
number of field rental equipment units at year-end to a base of 36,000, only 300
of which were through acquisition. This was an increase of 7.5% over the
previous year-end.
Cost of goods sold for 1998 was $8,845,000 or 39.4% of sales, compared to
$7,838,000 or 39.9% of sales, for 1997. The decrease in cost of goods sold as a
percentage of sales compared to the prior year is partially attributable to a
decrease in PET sales as a percentage of total sales.
Total operating expenses increased to $12,040,000 in 1998 from $10,749,000
in 1997, an increase of $1,291,000 or 12.0%. Of the total increase, selling
expenses increased $620,000 or 12.4% from 1997 levels, while general and
administrative expenses increased $671,000 or 11.7% from 1997 levels. The
increase in selling expenses was primarily due to the increase in home and
office sales and additions of new home and office accounts combined with an
increase in advertising and promotional activities in fiscal 1998. The increase
in general and administrative expenses was primarily due to increased executive
compensation. The increase in general and administrative expenses before
executive compensation was 6.2%. During 1998 Crystal Rock was bound by a lease
arrangement associated with an acquisition made in fiscal 1997 which increased
rental expense substantially. This one time arrangement accounts for 3.7
percentage points of the 6.2% increase in general and administrative expenses
before executive compensation.
Profit from operations in 1998 was $1,547,000 compared to $1,051,000 for
1997. Net interest expense decreased to $419,000 in 1998 from $429,000 in 1997.
Net income increased to $649,000, an increase of $297,000 or 84.4% over fiscal
1997.
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Based on the weighted number of shares of common stock outstanding of 1,710
during 1998 and 1,710 during 1997, the basic and diluted net income per share
was $379.44 and $205.88 per share, respectively.
As of October 31, 1999, Crystal Rock had working capital of $2,360,000.
This represents an increase of $185,000 from the $2,175,000 of working capital
on October 31, 1998. The increase is primarily due to an increase in cash and
equivalents of $347,000 partially offset by an increase in accounts payable.
In June of 1998, Crystal Rock entered into financing arrangements with
Fleet National Bank. Portions of the agreement were the results of renegotiating
already existing agreements. Crystal Rock could borrow up to $3,000,000 for
acquisitions and fixed assets on a revolving credit line with repayment
commencing June 1, 2000 at a floating interest rate of prime or LIBOR plus 110
basis points. The note matures June 1, 2005. To date Crystal Rock has not drawn
on the line. Crystal Rock has an additional $1,000,000 working capital credit
line at a floating rate of prime or LIBOR plus 110 basis points. Crystal Rock's
12-month average balance on the working capital credit line in fiscal 1999 and
fiscal 1998 was $65,000 and $33,000, respectively.
Cash flow from operations was $2,660,000 for the fiscal year ended October
31, 1999 as compared to $2,577,000 in the fiscal year ended October 31, 1998, an
increase of $83,000. Cash flows from investing activities had a net outflow of
approximately $1,806,000 which was expended primarily for property, plant and
equipment. Financing activities produced a cash decrease of $504,000, $501,000
of which was for the repayment of debt.
Crystal Rock anticipates that it will spend approximately $2.1 million for
capital items in fiscal 2000 to maintain and continue to grow its business.
Crystal rock believes that it will have adequate resources available from
internal cash flow and existing debt instruments to fund its capital plan.
$850,000 of the forecasted capital items is expected to be for vehicle purchases
due to replacement and expansion. $900,000 of the remaining amount is expected
to be for the purchase of water coolers, and other equipment rented to home and
office customers. The remaining amount has been projected for the expansion and
improvement of computer systems and production equipment to be purchased to
improve operating efficiency.
Inflation did not have a material impact on Crystal Rock's operations
through October 31, 1999.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Crystal Rock is somewhat vulnerable to inflationary pressures on petroleum
based products including bottles and diesel fuel. Since petroleum is a component
part of the final product, the cost of bottles can increase with the cost of
petroleum. Crystal Rock hedges against this by being a member in a bottling
cooperative which negotiates annually with individual bidders for pricing and
supply of bottles. This allows Crystal Rock to remain competitive with larger
bottlers.
Because trucks are used in the delivery of Crystal Rock products, the cost
of diesel fuel can impact the profitability of operations. Competitors will also
have the same cost pressures which could then lead to lower profitability or an
increase in pricing.
COMPARISON OF RIGHTS OF STOCKHOLDERS
When the business combination is completed, the stockholders of existing
Vermont Pure will become stockholders of VP Merger Parent. Delaware General
Corporation Law, referred to as the DGCL, and our certificate of incorporation
and by-laws govern your rights as a stockholder of the existing Vermont Pure.
After the transaction, your rights will be governed by DGCL, and the certificate
of incorporation and by-laws of VP Merger Parent. The certificate of
incorporation and by-laws of VP Merger Parent and those of existing Vermont Pure
are substantially the same. The following discussion is a summary of the
differences between your rights as a stockholder of existing Vermont Pure and
your rights as a stockholder of VP Merger Parent. This summary is qualified by
reference to the provisions of (1) our certificate of incorporation and by-laws,
and (2) the certificate of incorporation and by-laws of VP Merger Parent. VP
Merger Parent's certificate of incorporation and by-laws are attached to this
document as exhibits B and C in appendix A.
NOTICE OF BUSINESS AT A MEETING OF THE STOCKHOLDERS
VP Merger Parent's by-laws provide that at any meeting of the stockholders,
only such business shall be conducted as shall have been properly brought before
the meeting: (1) pursuant to the corporation's notice of meeting, (2) by or at
the direction of the board of directors or (3) by any stockholder of record at
the time of giving of the notice who is entitled to vote at such meeting and who
gives timely and proper notice for business to be discussed at such meeting.
The stockholder's notice shall:
- describe each matter to be discussed at the meeting and the reasons for
conducting such business at the meeting,
- set forth the name, address, and class and number of shares owned
beneficially and of record by the stockholder and/or that of the
beneficial owner on whose behalf the proposal is being made, and
- any material interest of such stockholder of record and/or of the
beneficial owner, if any, on whose behalf the proposal is made, in such
proposed business and any material interest of any other stockholders or
beneficial owners known by such stockholder to be supporting such
proposal in such proposed business, to the extent known by such
stockholder.
For the purpose of determining business that shall be conducted at the
meeting, timely notice shall constitute written notice delivered to or mailed
and received by the Secretary at the principal executive offices of VP Merger
Parent (1) in the case of an annual meeting, not less than ninety days prior to
the specified date of the meeting, regardless of any postponements, deferrals or
adjournments of that meeting to a later date; provided, however, that if the
annual meeting of stockholders or a special meeting in lieu thereof is to be
held on a date prior to the specified date of the meeting, and if less than
seventy days' notice or prior public disclosure of the date of such annual or
special meeting is given or made, notice by the stockholder to be timely must be
so delivered or received not later than the close of business on the tenth day
following the earlier of the date on which notice of the date of such annual or
special meeting was mailed or the day on which public disclosure was made of the
date of such annual or special meeting; and (2) in the case of a
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special meeting (other than a special meeting in lieu of an annual meeting), not
later than the tenth day following the earlier of the day on which notice of the
date of the scheduled meeting was mailed or the day on which public disclosure
was made of the date of the scheduled meeting.
The person presiding over the meeting shall, if necessary, determine
whether or not business was properly brought before the meeting in accordance
with the by-laws.
NO ACTION BY CONSENT
VP Merger Parent's by-laws do not permit action by stockholders by less
than unanimous written consent in lieu of a meeting. Instead, any action
required or permitted to be taken by the stockholders of the corporation must be
effected at a duly constituted annual or special meeting of such holders and may
not be effected by any consent in writing by such stockholders.
NOMINATION OF DIRECTORS
VP Merger Parent's by-laws provide that no person shall be eligible to
serve as a director of VP Merger Parent unless nominated (1) by or at the
direction of the board of directors or (2) by any stockholder of record at the
time of giving of the notice required for such nomination who is entitled to
vote for election of directors at the meeting and who gives timely and proper
notice for such nomination. To be considered timely, written notice shall be
delivered to or mailed and received by the Secretary at the principal executive
offices of VP Merger Parent in the same manner as that for a notice by a
stockholder of a proposal for business to be considered at an annual meeting, as
discussed above.
The stockholder's notice shall set forth (x) as to each person whom the
stockholder proposes to nominate for election or reelection as a director all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required,
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended, or pursuant to any other then existing statute, rule or regulation
applicable thereto (including such person's written consent to being named in
the proxy statement as a nominee and to serving as a director if elected); (y)
as to the stockholder giving the notice (1) the name and address, as they appear
on the corporation's books, of such stockholder and (2) the class and number of
shares of the corporation which are beneficially owned by such stockholder and
also which are owned of record by such stockholder; and (z) as to the beneficial
owner, if any, on whose behalf the nomination is made, (1) the name and address
of such person and (2) the class and number of shares of the corporation which
are beneficially owned by such person. The corporation may require any proposed
nominee to furnish such other information as may reasonably be required by the
corporation to determine the eligibility of such proposed nominee as a director.
At the request of the board of directors, any person nominated by the board of
directors for election as a director shall furnish to the Secretary of the
corporation that information required to be set forth in a stockholder's notice
of nomination which pertains to the nominee.
The person presiding over the meeting shall, if necessary, determine
whether or not the nomination was properly brought before the meeting in
accordance with the by-laws.
SUMMARY COMPARISONS
The above mentioned provisions may be summarized as follows:
- there is no requirement in Vermont Pure's by-laws calling for advance
notice of business to be proposed by a stockholder at a meeting of
stockholders;
- there is no limitation in Vermont Pure's charter barring stockholder
action by less than unanimous written consent of stockholders;
- there is no requirement in Vermont Pure's by-laws calling for advance
notice of the nomination of a director by a stockholder at a meeting of
stockholders.
84
<PAGE> 93
LEGAL MATTERS
The legality of the shares of VP Merger Parent common stock issued in the
merger will be passed upon by Foley, Hoag & Eliot LLP.
EXPERTS
Our consolidated financial statements as of October 30, 1999 and October
31, 1998, and for each of the years ended October 30, 1999, October 31, 1998 and
October 25, 1997, included in this proxy statement have been audited by Feldman
Sherb & Co., P.C., independent auditors, as set forth in their report appearing
elsewhere herein. These financial statements are included in this proxy
statement in reliance upon such report of Feldman Sherb & Co., P.C. and upon the
authority of said firm as experts in auditing and accounting.
The financial statements of Crystal Rock at October 31, 1999, 1998 and 1997
and for each of the three fiscal years in the period ended October 31, 1999,
included in this proxy statement, which is referred to and made a part of this
prospectus and registration statement, have been audited by Berger, Knoth and
Company, P.C., independent auditors, as set forth in their report appearing
elsewhere herein and are included in reliance upon such report given on the
authority of such firm as experts in auditing and accounting.
COMMISSION POSITION ON INDEMNIFICATION
Pursuant to the provisions of the Delaware General Corporation Law (DGCL),
we have adopted provisions in our certificate of incorporation which limit the
personal liability of our directors to our shareholders for monetary damages for
breach of their fiduciary duty as a director to the fullest extent permitted by
the DGCL, and in our by-laws which require us to indemnify its directors and
officers to the fullest extent permitted by Delaware law. The by-laws require us
to indemnify an officer or director in connection with a proceeding, or any part
of a proceeding, initiated by that officer or director only if the initiation of
the proceeding by him was authorized by the board of directors. We have a
directors' and officers' liability insurance policy.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, we have been informed that in
the opinion of the Securities and Exchange Commission, indemnification for this
purpose is against public policy as expressed in the Securities Act and is
therefore unenforceable.
85
<PAGE> 94
VERMONT PURE AND CRYSTAL ROCK
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements of VP
Merger Parent for the year ended October 30, 1999 and as of and for the six
months ended April 30, 2000 were prepared by Vermont Pure to illustrate the
estimated effects of the merger proposal, principally:
- The effect of the issuance of shares and increase in common stock
outstanding resulting from the exchange of VP Merger Parent common stock
for Crystal Rock common stock held by the Crystal Rock shareholders.
- The effect of debt issuances, reflecting our expectation that VP Merger
Parent will have senior financing of $36,000,000 as well as $22,600,000
in subordinated debt issued to the current Crystal Rock shareholders.
- The effect on operating income and earnings before interest, taxes,
depreciation and amortization (EBITDA) resulting from combined operating
activities.
Further information and description is provided in the notes to these
unaudited pro forma financial statements. To the extent these events are not
reflected in the historical consolidated statement of operations of Vermont
Pure, the unaudited pro forma statement of operations assumes that these
transactions occurred as of the beginning of the periods presented. To the
extent these events are not reflected in the historical consolidated balance
sheet, the unaudited pro forma balance sheet assumes that these transactions
occurred as of April 30, 2000.
Vermont Pure believes that the assumptions used provide reasonable basis
for presenting the significant effects directly attributable to the contemplated
merger and contribution. The pro forma combined financial statements do not
purport to represent what the results of operations or financial position of VP
Merger Parent would actually have been if the merger and contribution had in
fact occurred on such dates or to project the results of operations or financial
position of VP Merger Parent for any future period or date. These statements
should be read in connection with, and are qualified by reference to, the
consolidated financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
86
<PAGE> 95
VP MERGER PARENT
PRO FORMA BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
APRIL 30, 2000
----------------------------------------------------------------
HISTORIC
----------------------------
VERMONT CRYSTAL PRO FORMA
PURE ROCK COMBINED ADJUSTMENTS REF. PRO FORMA
------- ------- -------- ----------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash.............................................. $ 1,563 $ 852 $ 2,415 $ 257 3,4,5,6 $ 2,672
Investments -- Money Market Fund (restricted
building funds)................................. 2,941 2,941 (2,941) 6 --
Accounts receivable............................... 4,075 2,898 6,973 6,973
Notes receivable.................................. -- 6 6 6
Inventory......................................... 2,803 672 3,475 3,475
Current portion of deferred tax asset............. 602 -- 602 602
Other current assets.............................. 867 305 1,172 (9) 2 1,163
------- ------- ------- -------- --------
Total Current Assets........................ 12,851 4,733 17,584 (2,693) 14,891
------- ------- ------- -------- --------
Property and Equipment -- net of accumulated
depreciation...................................... 13,980 9,643 23,623 (2,918) 1 20,705
------- ------- ------- -------- --------
Other Assets:
Intangible assets -- net of accumulated
amortization.................................... 10,957 670 11,627 56,631 2,4,5 68,258
Deferred tax asset................................ 3,183 -- 3,183 3,183
Other assets...................................... 139 204 343 343
------- ------- ------- -------- --------
Total Other Assets.......................... 14,279 874 15,153 56,631 4 71,784
------- ------- ------- -------- --------
Total Assets........................................ $41,110 $15,250 $56,360 $ 51,020 $107,380
======= ======= ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................................. $ 2,830 $ 630 $ 3,460 $ 3,460
Current portion of customer deposits.............. 42 -- 42 42
Accrued expenses.................................. 1,785 724 2,509 2,509
Current portion of long term debt................. 1,712 501 2,213 $ 287 1,3,6 2,500
Current portion of obligations under capital
leases.......................................... 182 -- 182 (182) 6 --
Current portion of deferred tax liability......... 15 15 (15) 4 --
------- ------- ------- -------- --------
Total Current Liabilities................... 6,551 1,870 8,421 90 8,511
Long term debt.................................... 5,422 4,521 9,943 19,532 1,3,6 29,475
Subordinated Debt................................. 22,600 4 22,600
Long term obligations under capital leases........ 295 -- 295 (295) 6 --
Line of credit.................................... 14,750 -- 14,750 (14,750) 6 --
Long term portion of customer deposits............ 791 1,602 2,393 2,393
Deferred tax liability............................ 614 614 (614) 4 --
------- ------- ------- -------- --------
Total Liabilities........................... 27,809 8,607 36,416 26,563 62,979
------- ------- ------- -------- --------
Stockholders' Equity
Preferred stock................................... -- -- --
Common stock...................................... 10 85 95 (75) 4 20
Paid in capital................................... 23,198 29 23,227 30,892 4, 7 54,119
Accumulated deficit............................... (9,738) -- (9,738) (9,738)
Retained earnings................................. 6,529 6,529 (6,529) 1,2,4 --
Treasury stock, at cost........................... (169) -- (169) 169 7 --
------- ------- ------- -------- --------
Total Stockholders' Equity.................. 13,301 6,643 19,944 24,457 44,401
------- ------- ------- -------- --------
Total Liabilities and Stockholders' Equity........ $41,110 $15,250 $56,360 $ 51,020 $107,380
======= ======= ======= ======== ========
</TABLE>
See Notes to Pro Forma Financial Statements.
87
<PAGE> 96
VP MERGER PARENT
PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED 1999
----------------------------------------------------------------------
HISTORIC
------------------------------------
OCTOBER 30, OCTOBER 31,
VERMONT CRYSTAL PRO FORMA
PURE ROCK COMBINED ADJUSTMENTS REF. PRO FORMA
----------- ----------- -------- ----------- ---- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Sales........................... $ 31,396 $24,018 $55,414 $ 55,414
Cost of Goods Sold.............. 11,742 9,258 21,000 $ (275) (a) 20,725
---------- ------- ------- ---------- ----------
Gross Profit.................... 19,654 14,760 34,414 (275) 34,689
---------- ------- ------- ---------- ----------
Operating Expenses:
Selling, general and
administrative expense..... 13,149 11,819 24,968 (2,602) (b) 22,366
Advertising expense........... 3,258 1,253 4,511 -- 4,511
Amortization.................. 612 103 715 1,807 (c) 2,522
---------- ------- ------- ---------- ----------
Total Operating Expenses........ 17,019 13,175 30,194 (795) 29,399
---------- ------- ------- ---------- ----------
Income from Operations.......... 2,635 1,585 4,220 1,070 5,290
---------- ------- ------- ---------- ----------
Other Income (Expense)
Interest -- net............... (1,030) (318) (1,348) (3,582) (d) (4,930)
Miscellaneous................. -- 43 43 -- 43
---------- ------- ------- ---------- ----------
Total Other Expenses............ (1,030) (275) (1,305) (3,582) (4,887)
---------- ------- ------- ---------- ----------
Income before Income Taxes...... 1,605 1,310 2,915 (2,512) 403
Income Tax Benefit (Expense).... 1,794 (562) 1,232 282 (e) 1,514
---------- ------- ------- ---------- ----------
Net Income...................... $ 3,399 $ 748 $ 4,147 $ (2,230) $ 1,917
---------- ------- ------- ---------- ----------
Net Income per Share -- Basic... $ 0.33 $437.20 N/A N/A $ .09
Net Income per Share --
Diluted....................... $ 0.31 $437.20 N/A N/A $ .09
========== ======= ======= ========== ==========
Weighted Average Shares Used in
Computation -- Basic.......... 10,279,377 1,710 N/A 10,453,782 (f) 20,733,159
Weighted Average Shares Used in
Computation -- Diluted........ 10,790,722 1,710 N/A 10,453,782 (g) 21,244,504
========== ======= ======= ========== ==========
</TABLE>
See Notes to Pro Forma Financial Statements.
88
<PAGE> 97
VP MERGER PARENT
PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED APRIL 30, 2000
------------------------------------------------------------------
HISTORIC
--------------------------------
VERMONT CRYSTAL PRO FORMA COMBINED
PURE ROCK COMBINED ADJUSTMENTS REF. PRO FORMA
---------- -------- -------- ----------- ---- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Sales............................. $ 14,648 $12,426 $27,074 $ 27,074
Cost of Goods Sold................ 5,544 4,762 10,306 $ (91) (a) 10,215
---------- ------- ------- ---------- ----------
Gross Profit...................... 9,104 7,664 16,768 (91) 16,859
---------- ------- ------- ---------- ----------
Operating Expenses:
Selling, general and
administrative expense....... 7,350 5,246 12,596 (154) (b) 12,442
Advertising expense............. 1,131 284 1,415 -- 1,415
Amortization.................... 341 53 394 902 (c) 1,296
---------- ------- ------- ---------- ----------
Total Operating Expenses.......... 8,822 5,583 14,405 748 15,153
---------- ------- ------- ---------- ----------
Income from Operations............ 282 2,081 2,363 (657) 1,706
---------- ------- ------- ---------- ----------
Other Income (Expense)
Interest -- net................. (734) (168) (902) (1,714) (d) (2,616)
Miscellaneous................... 273 20 293 -- 293
---------- ------- ------- ---------- ----------
Total Other Expenses.............. (461) (148) (609) (1,714) (2,323)
---------- ------- ------- ---------- ----------
Income (loss) before Income
Taxes........................... (179) 1,933 1,754 (2,371) (617)
Income Tax Benefit (Expense)...... (802) (802) 588 (e) (214)
---------- ------- ------- ---------- ----------
Net Income (loss)................. $ (179) $ 1,131 $ 952 $ (1,783) $ (831)
---------- ------- ------- ---------- ----------
Net Income (loss) per
Share -- Basic.................. $ (0.02) $ 0.66 N/A N/A (.04)
Net Income (loss) per Share --
Diluted......................... $ (0.02) $ 0.66 N/A N/A (.04)
========== ======= ======= ========== ==========
Weighted Average Shares Used in
Computation -- Basic............ 10,289,758 1,710 N/A 10,453,782 (f) 20,743,540
Weighted Average Shares Used in
Computation -- Diluted.......... 10,606,218 1,710 N/A 10,453,782 (g) 21,060,000
========== ======= ======= ========== ==========
</TABLE>
See Notes to Pro Forma Financial Statements.
89
<PAGE> 98
VP MERGER PARENT
NOTES TO PRO FORMA BALANCE SHEET
APRIL 30, 2000
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DEBIT/
REF DESCRIPTION (CREDIT)
--- ----------- --------
<C> <S> <C>
(1) Property, Plant, and Equipment -- Prior to the transaction,
Crystal Rock owned its plant and headquarters in Watertown,
Connecticut. After the transaction, the facility will be
leased by VP Merger Parent. Prior to the transaction,
Crystal Rock will sell the building. The cost of the
building is $4,835 and the accumulated depreciation is
$1,917. $ (2,918)
(1) Debt -- Crystal Rock has a mortgage on the building that
will be retired as part of the sale:
Current Portion of Long Term Debt $ 153
Long Term Debt $ 3,071
(1) Retained Earnings -- It is assumed that the building will be
sold for the amount of the outstanding debt. The difference
between the book value and the mortgage will be a gain and
is added to retained earnings. $ (306)
(2) Intangible Assets -- Certain Crystal Rock intangible assets
will not be transferred to the combined company. $ (670)
(2) Other Assets -- Other assets written off are related to a
former Crystal Rock employee and will be transferred to the
former employee. $ (9)
(2) Retained Earnings -- The write-off of intangible assets
results in a loss and a reduction of retained earnings. $ 679
(3) Cash -- The Company will finance the transaction and
re-finance existing debt by giving a $31,000 senior term
note to Webster Bank. $ 31,000
(3) Debt -- Based on the amortization schedule of the note,
$2,500 is a current liability and the balance of $28,500 is
a long term liability. $(31,000)
(4) Consideration -- In accordance with the merger agreement,
the consideration to Crystal Rock stockholders at the time
of the merger will be as follows:
Common Stock -- The contract value would be divided by the
"Share Price" as defined in the agreement. For purposes
of the pro forma presentation the assumed Share Price
is $2.975. This would result in an increase of
10,453,782 shares at a par value of $.001 per share. In
accordance with the merger agreement, the highest
possible Share Price would result in an increase of
9,873,016 shares and the lowest possible Share Price
would result in an increase of 11,107,143 shares. $ (10)
Paid in Capital -- The balance of the value of the shares
for the above stock issue will be recorded as paid in
capital. $(31,090)
Debt -- Subordinated (to senior bank debt) notes bearing
annual interest of 12%. $(22,600)
Cash -- Amount paid to Crystal Rock shareholders. $ (9,500)
</TABLE>
90
<PAGE> 99
VP MERGER PARENT
NOTES TO PRO FORMA BALANCE SHEET -- (CONTINUED)
APRIL 30, 2000
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DEBIT/
REF DESCRIPTION (CREDIT)
--- ----------- --------
<C> <S> <C>
(4) The value of the assets acquired is booked by recording the
net book value of the Crystal Rock assets as follows:
Crystal Rock Common Stock $ 85
Crystal Rock Paid in Capital $ 29
Retained Earnings $ 6,156
Deferred Tax Liability -- Current $ 15
Deferred Tax Liability $ 614
The actual value of material tangible and intangible
assets will be determined by independent appraisal at
or about the time the transaction is completed. We do
not believe that the fair market value will differ
significantly from the net book valuation used in this
presentation.
(4) Goodwill -- The difference between the consideration given
for the Crystal Rock contribution and the value of the
assets and liabilities (net) transferred to the Company. $ 56,301
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C>
(5) Cash -- The Company will incur closing costs related to the transaction for legal,
accounting, and other outside services, estimated to be $1,000. (1,000)
(5) Goodwill -- Closing costs will increase the goodwill booked for the transaction. $ 1,000
(6) Debt -- Vermont Pure and Crystal Rock will pay off existing debt to consolidate
debt under the senior loan facility. This includes retiring the bond issue closed
by Vermont Pure in January 2000.
Vermont Pure Long Term Debt $ 4,447
Vermont Pure Line of Credit $ 14,750
Vermont Pure Capital Leases $ 295
Vermont Pure -- Current Portion of Long Term Debt $ 1,712
Vermont Pure -- Current Portion Capital Leases $ 182
Crystal Rock -- Long Term Debt $ 1,450
Crystal Rock -- Current Portion Long Term Debt $ 348
(6) Investments -- All of the proceeds from the issue will not have been disbursed
when the transaction takes place. As a result, undisbursed bond funds (listed as
investments on the balance sheet) will be used to retire the bonds. $ (2,941)
(6) Cash -- Existing debt will be retired with the cash proceeds from the Webster
loan. $(20,243)
</TABLE>
91
<PAGE> 100
VP MERGER PARENT
NOTES TO PRO FORMA BALANCE SHEET -- (CONTINUED)
APRIL 30, 2000
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<C> <S> <C>
(7) Treasury stock -- In conjunction with the transaction, Vermont Pure Treasury Stock
will be retired.
Paid in capital $ (169)
Treasury stock, at cost $ 169
(8) Cash -- The adjusted balance of $2,672 represents funds available after closing
the facility with Webster Bank and disbursing cash for transaction related
activity. This balance results from assumptions made for debt balances and closing
costs as of the closing date. No assurance can be given that these assumptions
will be accurate. The Company has an operating line of credit of $5,000 included
in the facility which is assumed to be undrawn upon as of the balance sheet date.
$975 of the balance represents restricted cash that serves as collateral for a
note that has a mandatory conversion to the Company's stock. Under the note, the
conversion must occur by October 2001. N/A
</TABLE>
92
<PAGE> 101
VP MERGER PARENT
NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 30, 1999
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
COST OF GOODS SOLD:
<TABLE>
<CAPTION>
EXPENSE
INCREASE/
REF DESCRIPTION (DECREASE)
--- ----------- ----------
<C> <S> <C>
(a) Crystal Rock accounts for the purchase of 3 and 5-gallon
bottles as current period expenses. Vermont Pure accounts
for such purchases as capital expenditures. Crystal Rock
current period expenditures for these purchases in fiscal
1999 were $260. Accounting for these as capital expenditures
reduces current period expense by $260, partially offset by
an increase in depreciation expense of $41. $(219)
(a) Crystal Rock accounts for the purchase of cooler parts as
current period expenses. Vermont Pure accounts for such
purchases as capital expenditures. Crystal Rock current
period expenditures for these purchases in fiscal 1999 were
$67. Accounting for these as capital expenditures reduces
current period expense by $67, partially offset by an
increase in depreciation expense of $11. $ (56)
-----
TOTAL COST OF GOODS SOLD ADJUSTMENT $(275)
=====
</TABLE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE:
<TABLE>
<CAPTION>
EXPENSE
INCREASE/
REF DESCRIPTION (DECREASE)
--- ----------- ----------
<C> <S> <C>
(b) Crystal Rock paid its executives cash compensation of $2,879
in fiscal 1999. Employment contracts with these individuals
will provide for salaries totaling $525. Total expense
reductions for executive compensation therefore would be the
difference between the $2,879 and the $525 plus associated
payroll taxes of $36. $(2,390)
(b) Vermont Pure and Crystal Rock have maintained incentive
bonus and profit sharing arrangements. Within a combined
operation, the performance levels necessary to generate
these distributions were not achieved and therefore they
would not have been made. $ (368)
(b) During fiscal 1999 Crystal Rock owned its plant and
headquarters in Watertown, Connecticut. Depreciation for
fiscal 1999 was $162. This facility will not be owned by
Vermont Pure or Crystal Rock, but will be leased at an
annual lease cost of $360. This results in an increase in
fiscal 1999 expenditures equal to the lease cost less the
previously charged depreciation. $ 198
(b) Based on quotes received for general liability, workers'
compensation and vehicle/auto liability, 1999 costs for
coverage would have been less for the combined operations
than as reported separately. $ (42)
-------
TOTAL SELLING, GENERAL AND ADMINISTRATIVE EXPENSE ADJUSTMENT $(2,602)
=======
</TABLE>
93
<PAGE> 102
VP MERGER PARENT
NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS -- (CONTINUED)
YEAR ENDED OCTOBER 30, 1999
(UNAUDITED)
AMORTIZATION EXPENSE:
<TABLE>
<CAPTION>
EXPENSE
INCREASE/
REF DESCRIPTION (DECREASE)
--- ----------- ----------
<C> <S> <C>
(c) Management projects that based on current information, the
merger will result in $56,301 of Goodwill. Transaction costs
are estimated to be $1,000. The combined total of $57,301 is
amortized over 30 years in the pro forma model resulting in
an annual expense of $1,910, partially offset by the
elimination of the $103 amortization expense recognized by
Crystal Rock. $1,807
------
TOTAL AMORTIZATION EXPENSE ADJUSTMENT $1,807
======
</TABLE>
INTEREST -- NET:
<TABLE>
<CAPTION>
EXPENSE
INCREASE/
REF DESCRIPTION (DECREASE)
--- ----------- ----------
<C> <S> <C>
(d) Interest expense in the historical financial statements
reflects debt actually carried by both Vermont Pure and
Crystal Rock during fiscal 1999. This interest is eliminated
from the pro forma financial statements and replaced with
interest expense calculated using the terms proposed by the
senior and subordinate lenders. The commitment from the
senior lender provides for Vermont Pure the ability to
borrow at Prime Rate or LIBOR plus 175 basis points. For
purposes of the pro forma financial statements a 12-month
average LIBOR rate of 5.104% for fiscal 1999 was used. By
comparison, the first 6-month average of fiscal 2000 has
averaged 5.86%. The 5.104% LIBOR rate plus 175 basis points
was applied to the senior term note of $31,000 (which would
amortize $2,500 during the year). The same rate was used for
half of the $5,000 available revolver under the assumption
that Vermont Pure would use an average of 50% of credit
facility over the course of the year. The interest on these
senior facilities during fiscal 1999 would be $2,218. 12%
subordinated notes would also be outstanding for $22,600.
The annual interest on the subordinated debt for fiscal 1999
was assumed to be $2,712. The combined interest expense of
$2,218 and $2,712 has been used in the pro forma, replacing
the historical combined amount of $1,348, resulting in a net
interest expense increase. $3,582
------
TOTAL INTEREST EXPENSE ADJUSTMENT $3,582
======
</TABLE>
INCOME TAX BENEFIT (EXPENSE):
<TABLE>
<CAPTION>
EXPENSE
INCREASE/
REF DESCRIPTION (DECREASE)
--- ----------- ----------
<C> <S> <C>
(e) Based on the pro forma total adjustment to Income before
Income Taxes of a reduction of income of $2,512 netted
against the increase in net nondeductible amortization
expense of $1,807, additional income tax is calculated
against the net reduction of $705. Assuming a 40% tax rate,
income tax expense would decrease. $(282)
-----
INCOME TAX BENEFIT ADJUSTMENT $(282)
=====
</TABLE>
94
<PAGE> 103
VP MERGER PARENT
NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS -- (CONTINUED)
YEAR ENDED OCTOBER 30, 1999
(UNAUDITED)
WEIGHTED AVERAGE SHARES USED IN COMPUTATION -- BASIC:
<TABLE>
<CAPTION>
SHARE
REF DESCRIPTION INCREASE
--- ----------- --------
<C> <S> <C>
(f) Shares issued in exchange for Crystal Rock shares would have
a contract value of $31,100. The contract value would be
divided by the "Share Price" as defined in the merger
agreement. At an assumed Share Price of $2.975, this would
result in an increase of $31,100/$2.975 shares. 10,453,782
----------
TOTAL SHARES ADJUSTMENT 10,453,782
==========
</TABLE>
WEIGHTED AVERAGE SHARES USED IN COMPUTATION -- DILUTED:
<TABLE>
<CAPTION>
EXPENSE
INCREASE/
REF DESCRIPTION (DECREASE)
--- ----------- ----------
<C> <S> <C>
(g) As in (f) above, the total diluted shares would increase an
equal amount. Options issued in conjunction with the
transaction are not dilutive. 10,453,782
----------
TOTAL SHARES ADJUSTMENT 10,453,782
==========
</TABLE>
95
<PAGE> 104
VP MERGER PARENT
NOTES TO PRO FORMA STATEMENT OF OPERATIONS
SIX MONTHS ENDED APRIL 30, 2000
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
COST OF GOODS SOLD:
<TABLE>
<CAPTION>
EXPENSE
INCREASE/
REF DESCRIPTION (DECREASE)
--- ----------- ----------
<C> <S> <C>
(a) Crystal Rock accounts for the purchase of 3 and 5-gallon
bottles as current period expenses. Vermont Pure accounts
for such purchases as capital expenditures. Crystal Rock
current period expenditures for these purchases during the
first six months fiscal 2000 were $87. Accounting for these
as capital expenditures reduces current period expense by
$87, partially offset by an increase in depreciation expense
of $14. $ (73)
(a) Crystal Rock accounts for the purchase of certain cooler
parts as current period expenses. Vermont Pure accounts for
such purchases as capital expenditures. Crystal Rock current
period expenditures for these purchases in fiscal 2000 were
$22. Accounting for these as capital expenditures reduces
current period expense after offsetting an increase in
depreciation expense of $4. $ (18)
-----
TOTAL COST OF GOODS SOLD ADJUSTMENT $ (91)
=====
</TABLE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE:
<TABLE>
<CAPTION>
EXPENSE
INCREASE/
REF DESCRIPTION (DECREASE)
--- ----------- ----------
<C> <S> <C>
(b) Crystal Rock paid executives cash compensation of $388
during the first six months of fiscal 2000. Employment
contracts with these individuals will provide for salaries
totaling $263. Total expense reductions for executive
compensation therefore would be the difference between the
$388 and the $263 plus associated payroll taxes of $11. $(136)
(b) Vermont Pure and Crystal Rock have maintained incentive
bonus and profit sharing arrangements. Within a combined
operation, the performance levels necessary to generate
these distributions were not achieved and therefore would
not have been made. $ (96)
(b) Prior to the transaction, Crystal Rock owned its plant and
headquarters in Watertown, Connecticut. Depreciation for the
first six months of fiscal 2000 was $81. After the
transaction, the facility will be leased; the annual lease
cost for the facility is assumed to be $360. This results in
an increase in expenditures equal to half of the lease cost
less the previously charged depreciation. $ 99
(b) Based on quotes received for general liability, workers'
compensation and vehicle/auto liability, insurance costs
would have been less for the combined operations than as
reported separately. $ (21)
-----
TOTAL SELLING, GENERAL AND ADMINISTRATIVE EXPENSE ADJUSTMENT $(154)
=====
</TABLE>
96
<PAGE> 105
VP MERGER PARENT
NOTES TO PRO FORMA STATEMENT OF OPERATIONS -- (CONTINUED)
SIX MONTHS ENDED APRIL 30, 2000
(UNAUDITED)
AMORTIZATION EXPENSE:
<TABLE>
<CAPTION>
EXPENSE
INCREASE/
REF DESCRIPTION (DECREASE)
--- ----------- ----------
<C> <S> <C>
(c) Management projects that based on current information, the
merger will result in $56,301 of Goodwill. Transaction costs
are estimated to be $1,000. The combined total of $57,301 is
amortized over 30 years in the pro forma model resulting in
an annual expense of $1,910. This amount would be partially
offset by the elimination of the $53 amortization expense
recognized by Crystal Rock. $902
----
TOTAL AMORTIZATION EXPENSE ADJUSTMENT $902
====
</TABLE>
INTEREST -- NET:
<TABLE>
<CAPTION>
EXPENSE
INCREASE/
REF DESCRIPTION (DECREASE)
--- ----------- ----------
<C> <S> <C>
(d) Interest expense in the historical financial statements
reflects debt actually carried by both Vermont Pure and
Crystal Rock during fiscal 2000. This interest is eliminated
from the pro forma financial statements and replaced with
interest expense calculated using the terms proposed by the
senior and subordinate lenders. The commitment from the
senior lender provides for Vermont Pure the ability to
borrow at Prime Rate or LIBOR plus 175 basis points. For
purposes of the pro forma financial statements an average
LIBOR rate of 5.86% from November 1999 through April 2000
was used. The 5.86% LIBOR rate plus 175 basis points was
applied to the senior term note of $31,000 (which would
amortize $2,500 during the year). The same rate was used for
half of the $5,000 available revolver under the assumption
that Vermont Pure would use an average of 50% of credit
facility over the course of the year. The interest on these
senior facilities during the first half of fiscal 2000 would
be $1,260. 12% subordinated notes would also be outstanding
for $22,600. The annual interest on the subordinated debt
for six months would be $1,356. The combined interest
expense of $2,616 has been used in the pro forma, replacing
the historical combined amount of $902, resulting in a net
interest expense increase. $1,714
------
TOTAL INTEREST EXPENSE ADJUSTMENT $1,714
======
</TABLE>
INCOME TAX BENEFIT (EXPENSE):
<TABLE>
<CAPTION>
EXPENSE
INCREASE/
REF DESCRIPTION (DECREASE)
--- ----------- ----------
<C> <S> <C>
(e) Based on the pro forma total adjustment to Income before
Income Taxes of a reduction of income of $2,371 netted
against the increase in net nondeductible amortization
expense of $902, a reduction of income tax is calculated
against the net adjustment of $(1,469). Assuming a 40% tax
rate, Income Tax Expense decreases. $(588)
-----
INCOME TAX BENEFIT ADJUSTMENT $(588)
=====
</TABLE>
97
<PAGE> 106
VP MERGER PARENT
NOTES TO PRO FORMA STATEMENT OF OPERATIONS -- (CONTINUED)
SIX MONTHS ENDED APRIL 30, 2000
(UNAUDITED)
WEIGHTED AVERAGE SHARES USED IN COMPUTATION -- BASIC:
<TABLE>
<CAPTION>
SHARE
REF DESCRIPTION INCREASE
--- ----------- --------
<C> <S> <C>
(f) Shares issued in exchange for Crystal Rock shares would have
a contract value of $31,100. 10,453,782
----------
TOTAL SHARES ADJUSTMENT 10,453,782
==========
</TABLE>
WEIGHTED AVERAGE SHARES USED IN COMPUTATION -- DILUTED:
<TABLE>
<CAPTION>
SHARE
REF DESCRIPTION INCREASE
--- ----------- --------
<C> <S> <C>
(g) As in (f) above, the total diluted shares would increase an
equal amount. Options issued in conjunction with the
transaction are not dilutive. 10,453,782
----------
TOTAL SHARES ADJUSTMENT 10,453,782
==========
</TABLE>
98
<PAGE> 107
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
VERMONT PURE HOLDINGS, LTD.
Consolidated Financial Statements:
Independent Auditors' Report.............................. F-2
Consolidated Balance Sheets as of October 30, 1999 and
October 31, 1998....................................... F-3
Consolidated Statements of Operations for the years ended
October 30, 1999, October 31, 1998 and October 25,
1997................................................... F-4
Consolidated Statements of Statement of Changes in
Stockholders' Equity for the years ended October 30,
1999, October 31, 1998, October 25, 1997 and October
26, 1996............................................... F-5
Consolidated Statements of Cash Flows for the years ended
October 30, 1999, October 31, 1998 and October 25,
1997................................................... F-6
Notes to Consolidated Financial Statements................ F-7
Consolidated Interim Financial Statements (unaudited):
Consolidated Balance Sheets as of April 30, 2000 and
October 30, 1999....................................... F-16
Consolidated Statements of Operations for the six months
ended April 30, 2000 and May 1, 1999................... F-17
Condensed Consolidated Statements of Cash Flows for the
six months ended April 30, 2000 and May 1, 1999........ F-18
Notes to Unaudited Consolidated Financial Statements...... F-19
CRYSTAL ROCK SPRING WATER COMPANY
Financial Statements:
Independent Auditors' Report.............................. F-21
Balance Sheets as of October 31, 1999 and 1998............ F-22
Statements of Income for the years ended October 31, 1999
and 1998............................................... F-23
Statements of Retained Earnings for years ended October
31, 1999 and 1998...................................... F-24
Statements of Cash Flows for the years ended October 31,
1999 and 1998.......................................... F-25
Notes to Financial Statements............................. F-26
Independent Auditors' Report.............................. F-31
Balance Sheets as of October 31, 1998 and 1997............ F-32
Statements of Income for the years ended October 31, 1998
and 1997............................................... F-33
Statements of Retained Earnings for years ended October
31, 1998 and 1997...................................... F-34
Statements of Cash Flows for the years ended October 31,
1998 and 1997.......................................... F-35
Notes to Financial Statements............................. F-36
Interim Financial Statements (unaudited):
Balance Sheets as of April 30, 2000 and October 31,
1999................................................... F-41
Statements of Income for the six months ended April 30,
2000 and 1999.......................................... F-42
Statements of Cash Flows for the six months ended April
30, 2000 and 1999...................................... F-43
Notes to Unaudited Financial Statements................... F-44
</TABLE>
F-1
<PAGE> 108
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 30, 1999 and October 31,
1998, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the years ended October 30, 1999,
October 31, 1998 and October 25, 1997. 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 30, 1999 and October 31, 1998, and
the results of their operations and their cash flows for the years ended October
30, 1999, October 31, 1998 and October 25, 1997 in conformity with generally
accepted accounting principles.
/s/ FELDMAN SHERB HOROWITZ & CO., P.C.
--------------------------------------
Feldman Sherb Horowitz & Co., P.C.
Certified Public Accountants
New York, New York
December 22, 1999
F-2
<PAGE> 109
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 30, OCTOBER 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 367,018 $ 161,271
Accounts receivable....................................... 3,525,238 3,069,699
Notes receivable.......................................... 975,000 --
Inventory................................................. 2,711,709 1,843,927
Current portion of deferred tax asset..................... 601,922 330,000
Other current assets...................................... 781,968 222,970
----------- ------------
TOTAL CURRENT ASSETS.............................. 8,962,855 5,627,867
----------- ------------
PROPERTY AND EQUIPMENT -- net of accumulated depreciation... 11,122,258 9,174,063
----------- ------------
OTHER ASSETS:
Intangible assets -- net of accumulated amortization...... 10,443,207 9,595,915
Deferred tax asset........................................ 3,182,914 1,661,000
Other assets.............................................. 122,996 114,658
----------- ------------
TOTAL OTHER ASSETS................................ 13,749,117 11,371,573
----------- ------------
TOTAL ASSETS................................................ $33,834,230 $ 26,173,503
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 3,443,208 $ 3,007,630
Current portion of customer deposits...................... 45,033 58,360
Accrued expenses.......................................... 851,371 1,104,871
Current portion of long term debt......................... 1,414,930 601,570
Current portion of obligations under capital leases....... 180,589 119,995
----------- ------------
TOTAL CURRENT LIABILITIES......................... 5,935,131 4,892,426
Long term debt............................................ 1,663,893 1,428,807
Long term obligations under capital leases................ 379,583 210,203
Line of credit............................................ 11,689,792 8,783,793
Long term portion of customer deposits.................... 684,334 893,145
----------- ------------
TOTAL LIABILITIES................................. 20,352,733 16,208,374
----------- ------------
STOCKHOLDERS' EQUITY:
Preferred stock -- $.001 par value, 500,000 authorized
shares, none issued and outstanding shares at October
30, 1999............................................... -- --
Common stock -- $.001 par value, 50,000,000 authorized
shares, 10,339,758 issued and outstanding shares at
October 30, 1999 and 10,287,187 at October 31, 1998.... 10,340 10,288
Paid in capital........................................... 23,197,724 23,080,049
Accumulated deficit....................................... (9,557,817) (12,956,458)
Treasury stock, at cost, 50,000 shares.................... (168,750) (168,750)
----------- ------------
TOTAL STOCKHOLDERS' EQUITY........................ 13,481,497 9,965,129
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $33,834,230 $ 26,173,503
=========== ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 110
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED
---------------------------------------
OCTOBER 30, OCTOBER 31, OCTOBER 25,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
SALES................................................. $31,396,375 $29,169,185 $17,685,442
COST OF GOODS SOLD.................................... 11,742,003 11,549,871 7,643,908
----------- ----------- -----------
GROSS PROFIT.......................................... 19,654,372 17,619,314 10,041,534
----------- ----------- -----------
OPERATING EXPENSES:
Selling, general and administrative expenses........ 13,149,023 10,235,168 5,897,735
Advertising expenses................................ 3,257,918 4,702,498 3,077,145
Amortization........................................ 612,057 616,854 228,808
----------- ----------- -----------
TOTAL OPERATING EXPENSES.............................. 17,018,998 15,554,520 9,203,688
----------- ----------- -----------
INCOME FROM OPERATIONS................................ 2,635,374 2,064,794 837,846
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest -- net..................................... (1,030,151) (755,326) (368,224)
Miscellaneous....................................... -- 102,282 53,773
----------- ----------- -----------
TOTAL OTHER EXPENSE................................... (1,030,151) (653,044) (314,451)
----------- ----------- -----------
INCOME BEFORE INCOME TAXES............................ 1,605,223 1,411,750 523,395
INCOME TAX BENEFIT.................................... 1,793,418 1,447,000 544,000
----------- ----------- -----------
NET INCOME............................................ $ 3,398,641 $ 2,858,750 $ 1,067,395
----------- ----------- -----------
NET INCOME PER SHARE -- BASIC......................... $ 0.33 $ 0.28 $ 0.11
NET INCOME PER SHARE -- DILUTED....................... $ 0.31 $ 0.26 $ 0.11
=========== =========== ===========
Weighted Average Shares Used in Computation --Basic... 10,279,377 10,248,389 9,771,347
Weighted Average Shares Used in
Computation -- Diluted.............................. 10,790,722 10,927,025 9,805,800
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 111
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
---------------------- PAID IN ------------------ ACCUMULATED
SHARES PAR VALUE CAPITAL SHARES AMOUNT DEFICIT TOTAL
---------- --------- ----------- ------ --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, October 26,
1996.................... 9,678,268 $ 9,678 $21,399,420 -- $ -- $(16,882,603) $ 4,526,495
Issuance of Common
Stock................... 453,712 454 1,047,672 1,048,126
Net Income................ 1,067,395 1,067,395
---------- ------- ----------- ------ --------- ------------ -----------
Balance, October 25,
1997.................... 10,131,980 10,132 22,447,092 -- -- (15,815,208) 6,642,016
Issuance of Common
Stock................... 155,207 156 632,957 633,113
Acquisition of Treasury
Stock................... 50,000 (168,750) (168,750)
Net Income................ 2,858,750 2,858,750
---------- ------- ----------- ------ --------- ------------ -----------
Balance, October 31,
1998.................... 10,287,187 10,288 23,080,049 50,000 (168,750) (12,956,458) 9,965,129
Issuance of Common
Stock................... 52,571 52 117,675 117,727
Net Income................ 3,398,641 3,398,641
---------- ------- ----------- ------ --------- ------------ -----------
Balance, October 30,
1999.................... 10,339,758 $10,340 $23,197,724 50,000 $(168,750) $ (9,557,817) $13,481,497
========== ======= =========== ====== ========= ============ ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 112
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------
OCTOBER 30, OCTOBER 31, OCTOBER 25,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................ $ 3,398,641 $ 2,858,750 $ 1,067,395
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation................................... 1,489,384 1,150,000 876,553
Amortization................................... 612,057 616,854 228,808
(Increase) in deferred tax asset............... (1,793,418) (1,447,000) (544,000)
(Gain) loss on disposal of property and
equipment.................................... 72,315 93,808 (38,948)
Changes in assets and liabilities (net of effect
of acquisitions):
(Increase) in accounts receivable.............. (250,476) (985,349) (433,636)
(Increase) in inventory........................ (720,525) (783,421) (65,185)
(Increase) Decrease in other current assets.... (558,998) 65,657 (87,311)
(Increase) Decrease in other assets............ (1,466,273) (567,567) 95,057
(Decrease) Increase in accounts payable........ 435,578 1,768,238 (165,552)
(Decrease) Increase in customer deposits....... (225,038) (81,525) 58,127
(Decrease) Increase in accrued expenses........ (253,500) 117,910 439,215
----------- ----------- -----------
CASH PROVIDED BY OPERATING ACTIVITIES............... 739,746 2,806,355 1,430,523
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment......... (2,115,945) (2,983,313) (1,079,569)
Proceeds from sale of fixed assets................ 113,752 67,000 103,531
Cash used for acquisitions........................ (2,023,610) (4,458,889) (2,774,946)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES............... (4,025,803) (7,375,202) (3,750,984)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (paydown) of line of credit.............. 2,905,999 843,979 (203,790)
Proceeds from debt................................ 1,278,420 11,233,158 2,531,978
Principal payment of debt......................... (780,355) (7,451,777) (697,000)
Exercise of stock options......................... 87,740 -- --
Sale of common stock.............................. -- 10,950 --
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES........... 3,491,804 4,636,310 1,631,188
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH..................... 205,747 67,463 (689,273)
CASH -- Beginning of year........................... 161,271 93,808 783,081
----------- ----------- -----------
CASH -- End of year................................. $ 367,018 $ 161,271 $ 93,808
=========== =========== ===========
Cash paid for interest.............................. $ 852,638 $ 755,326 $ 422,026
=========== =========== ===========
NON-CASH FINANCING AND INVESTING ACTIVITIES:
Equipment acquired under capital leases........... $ 212,315 $ 89,273 $ 81,392
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 113
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. The Company's products are
sold predominantly in the New England, New York and New Jersey as well as
Mid-Atlantic and Mid-Western states. Distribution is accomplished through a
network of independent beverage distributors and with the Company's own trucks
and employees.
2. SIGNIFICANT ACCOUNTING POLICIES
a. Basis of Presentation -- The consolidated financial statements include
the accounts of the Company and its subsidiaries, Vermont Pure Springs, Inc.,
A.M Friday's, Inc., Excelsior Springs Water Co., Inc. and Adirondack Coffee
Services, Inc. The Company's subsidiaries are wholly-owned. All material
intercompany profits, transactions, and balances have been eliminated. There are
no material intercompany transactions.
b. Fiscal Year -- The Company operates on a "52-53 week" reporting year.
Fiscal year ended October 30, 1999 had 52 weeks in it while fiscal year ended
October 31, 1998 had 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 $348,167 and $307,020 at
October 30, 1999 and October 31, 1998, respectively. Amounts charged to expense
were $187,113, $192,527 and $57,809 respectively, during the years ended October
30, 1999, October 31, 1998 and October 25, 1997.
e. Inventories -- Inventories consist primarily of the packaging material,
labor and overhead content of the Company's products. Such inventories are
stated at the lower of cost or market using average costing.
f. Property and Equipment -- Property and equipment are stated at cost.
Depreciation is calculated on the straight-line method over the estimated useful
lives of the assets, which range from three to ten years for equipment, and from
ten to forty years for buildings and improvements. Three gallon bottles are
depreciated over five years and five gallons bottles over six years.
g. Intangible Assets -- The Company records goodwill in connection with its
acquisitions. Goodwill is amortized over 30 years. The value of customer lists
acquired is amortized over 3 years and the value of 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. Net Income Per Share -- Net Income 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.
F-7
<PAGE> 114
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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. The payment of slotting fees does not guarantee that a
company's product will be carried for any definite period of time. The Company
pays for such fees in cash, providing free goods or issuing credits for
previously sold goods. The cost of the slotting fees is valued at the amount of
cash paid, or the cost to the Company of the goods provided in exchange. The
Company expenses slotting fees when the obligation is incurred.
l. Customer Deposits -- Customers receiving home or office delivery of
water pay a deposit for the water bottle on receipt that is refunded when it is
returned. The Company uses an estimate (based on historical experience) of the
deposits it expects to return over the next 12 months to determine the current
portion of the liability and classifies the balance as long term.
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 principles 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 30, 1999,
the Company believes that there has been no impairment of its long-lived assets.
3. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
OCTOBER 30, OCTOBER 31,
LIFE 1999 1998
------------ ----------- -----------
<S> <C> <C> <C>
Land, buildings, and improvements........... 10 - 40 yrs. $ 3,624,258 $ 3,458,986
Machinery and equipment..................... 3 - 10 yrs. 11,741,545 7,519,572
Equipment held under capital leases......... 3 - 10 yrs. 786,776 1,812,116
----------- -----------
16,152,579 12,790,674
Less accumulated depreciation............... 5,030,321 3,616,611
----------- -----------
$11,122,258 $ 9,174,063
=========== ===========
</TABLE>
F-8
<PAGE> 115
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. INTANGIBLE ASSETS
<TABLE>
<CAPTION>
OCTOBER 30, OCTOBER 31,
LIFE 1999 1998
------- ----------- -----------
<S> <C> <C> <C>
Goodwill....................................... 30 yrs. $10,933,826 $ 9,585,384
Covenants not to compete....................... 5 yrs. 498,412 498,412
Customer lists................................. 3 yrs. 946,535 772,566
Other.......................................... Various 103,717 166,780
----------- -----------
$12,482,490 $11,023,142
Less accumulated amortization.................. 2,039,283 1,427,227
----------- -----------
$10,443,207 $ 9,595,915
=========== ===========
</TABLE>
5. ACQUISITIONS
The Company completed the following acquisitions in fiscal year 1999:
Russell Distributing in November 1998, Roblee Water Works in January 1999, L&C
Spring Water in March 1999, Waters of Sand Springs in April 1999, Ravenwood
Spring Water Co. in June 1999, Adirondack Coffee Service, Inc. in July 1999,
Dunbar Coffee Service in July 1999, Coratti Water Group, Ltd.'s Connecticut home
and office customer base in August 1999 and Absolute Coffee Break in August
1999.
The following table gives an aggregate summary of the acquisitions:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Purchase Price.................................... $ 2,446,282 $ 5,143,935
Acquisition Costs................................. 26,062 323,418
Fair Value of Assets Acquired..................... (1,195,022) (1,540,495)
Fair Value of Liabilities Assumed................. 49,623 498,821
----------- -----------
Goodwill.......................................... $ 1,326,945 $ 4,425,679
=========== ===========
</TABLE>
The detailed components consist of the following:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Cash to Sellers..................................... $1,997,548 $4,114,822
Notes to Sellers.................................... 418,734 396,000
Common Stock to Sellers (8,571 shares in 1999 and
155,207 in 1998).................................. 30,000 633,113
---------- ----------
Purchase Price...................................... $2,446,282 $5,143,935
========== ==========
</TABLE>
F-9
<PAGE> 116
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Fair Value of Assets Acquired
Accounts Receivable................................. $ 205,063 $ 109,584
Inventory........................................... 147,257 82,033
Property, Plant and Equipment....................... 662,448 699,128
Intangible Assets................................... 178,840 541,590
Other............................................... 1,414 108,160
---------- ----------
$1,195,022 $1,540,495
========== ==========
Liabilities Assumed
Accounts Payable.................................... $ 0 $ 140,298
Customer Deposits................................... 2,900 222,937
Assumed Notes....................................... 37,910 135,586
Other............................................... 8,813 0
---------- ----------
$ 49,623 $ 498,821
========== ==========
</TABLE>
During fiscal year 1999, the Company issued 8,571 shares of its common
stock as follows:
- 8,571 shares were issued in November 1998 at the price of $3.50 per share
in conjunction with the purchase of assets from Russell Distributing.
During fiscal year 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 in conjunction with the purchase of assets from Vermont Coffee Time; 7,647
shares were issued at the price of $4.50 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 $4.28; 72,169 shares were
issued in April 1998 at the price of $4.00 per share to AM Fridays in
conjunction with the sales performance portion of the original stock purchase
agreement.
The following table summarizes pro forma consolidated results of operations
(unaudited) of the Company and the 1999 and 1998 acquisitions as though the
acquisitions had been consummated at October 25, 1997. The pro forma amounts
give effect to the appropriate adjustments for the fair value of assets acquired
and amortization of goodwill, depreciation and the debt incurred and resulting
interest expense.
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------
OCTOBER 30, OCTOBER 31,
1999 1998
----------- -----------
<S> <C> <C>
Total Revenue..................................... $32,594,417 $32,813,514
Net Income........................................ $ 3,843,705 $ 3,478,362
Net Income Per Share.............................. $ 0.37 $ 0.34
Weighted Average Number Of Shares................. 10,279,377 10,248,389
=========== ===========
</TABLE>
6. ACCRUED EXPENSES
<TABLE>
<CAPTION>
OCTOBER 30, OCTOBER 31,
1999 1998
----------- -----------
<S> <C> <C>
Advertising and promotion............................ $130,000 $ 310,558
Payroll and vacation................................. 206,018 380,844
Miscellaneous........................................ 515,353 413,469
-------- ----------
$851,371 $1,104,871
======== ==========
</TABLE>
F-10
<PAGE> 117
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. LINE OF CREDIT -- ACQUISITIONS AND WORKING CAPITAL -- The Company entered
into a five year revolving line with CoreStates Banks N.A., now First Union
National Bank, 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, $3 million is allowed for
working capital with the balance available for acquisitions. The Company has
signed a letter of intent with First Union National Bank to increase this credit
line up to $25 million. Of the $25 million, $4.3 million will be allocated for a
letter of credit to underwrite a new bond issue for the Randolph, Vermont
building expansion as well as new production equipment purchases. As of October
30, 1999 $11,689,792 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 8.4%. The interest rate can decrease during the term based on
certain performance parameters as defined in the agreement. 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
30, 1999:
<TABLE>
<S> <C>
2000...................................................... $215,925
2001...................................................... 172,923
2002...................................................... 135,253
2003...................................................... 57,949
2004 and beyond........................................... 77,174
--------
Total minimum lease payments.............................. 659,224
Less amount representing interest......................... 99,052
--------
Present value of minimum lease payments................... $560,172
========
</TABLE>
9. LONG TERM DEBT -- The Company's long term debt is as follows:
<TABLE>
<CAPTION>
OCTOBER 30, OCTOBER 31,
1999 1998
----------- -----------
<S> <C> <C>
Mortgage on property purchased in June 1999,
interest at .5% over prime, currently 8.25% to be
revised annually, principal and interest payable
monthly through 2014, secured by property......... $ 198,182 --
Building loans, principal and interest at 5.5%
payable monthly through 1999 secured by the
assets............................................ -- 291,807
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...................... 318,341 348,066
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......................................... 235,011 265,429
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......................................... 430,782 464,469
</TABLE>
F-11
<PAGE> 118
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
OCTOBER 30, OCTOBER 31,
1999 1998
----------- -----------
<S> <C> <C>
Promissory note, principal and interest at 8%
payable monthly through August 2004. Note is
unsecured......................................... 295,439 --
Various secured/unsecured notes ranging in amounts
of $14,000 to $975,000 with interest rates of 8.5%
to 10%. These notes are for the most part
unsecured......................................... 1,601,068 660,606
---------- ----------
3,078,823 2,030,377
Less current portion................................ 1,414,930 601,570
---------- ----------
$1,663,893 $1,428,807
========== ==========
</TABLE>
Annual maturities of long term debt are as follows:
<TABLE>
<S> <C>
Year ending October 28, 2000............................. $1,414,930
Year ending October 27, 2001............................. 259,039
Year ending October 26, 2002............................. 687,786
Year ending October 25, 2003............................. 136,692
Year ending October 24, 2004 and thereafter.............. 580,376
----------
$3,078,823
==========
</TABLE>
10. PERFORMANCE EQUITY PLANS
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 1999,
there were no options 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 1999, 48,200 options were issued under this plan.
11. STOCK OPTIONS
The following table illustrates the Company's stock option issuances and
balances during the last three fiscal years:
<TABLE>
<CAPTION>
EXERCISE PRICE
OPTIONS PER SHARE
--------- --------------
<S> <C> <C>
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
--------- -----------
</TABLE>
F-12
<PAGE> 119
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
EXERCISE PRICE
OPTIONS PER SHARE
--------- --------------
<S> <C> <C>
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
Options granted................................... 48,200 $ 3.13
Options retired................................... (540,000) $2.50 - 6.00
Options exercised................................. (36,000) $2.25 - 2.50
--------- -----------
Outstanding options at October 30, 1999............. 1,841,387 $1.81 - 4.81
========= ===========
</TABLE>
There were 1,485,000, 1,742,000 and 1,612,000 options exercisable for
fiscal years ending October 30, 1999, October 31, 1998 and October 25, 1997,
respectively.
12. 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:
<TABLE>
<S> <C>
2000...................................................... $801,745
2001...................................................... 705,357
2002...................................................... 631,882
2003...................................................... 550,388
Thereafter................................................ 755,705
</TABLE>
Rent expense under all operating leases was $413,217, $321,116 and $128,247
for fiscal years ending October 30, 1999, October 31, 1998 and October 25, 1997.
13. RELATED PARTY TRANSACTIONS
The Company paid consulting fees to related parties aggregating $22,000 in
1999, $78,334 in 1998 and $136,000 in 1997.
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.
14. INCOME TAXES
The Company has approximated $13.1 million of available loss carryforwards
at October 30, 1999 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.
F-13
<PAGE> 120
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The major deferred tax asset (liability) items at October 30, 1999 are as
follows:
<TABLE>
<S> <C>
Accounts receivable allowance.......................... $ 139,000
Amortization........................................... 225,000
Depreciation........................................... (919,000)
Slotting fees.......................................... 10,000
Other.................................................. 95,000
Net operating loss carryforwards....................... 5,067,000
----------
4,617,000
Valuation allowance.................................... 832,000
----------
Deferred tax asset recorded............................ $3,785,000
==========
</TABLE>
The benefit for income taxes differs from the amount computed by applying
the statutory tax rate to net income before income tax benefit as follows:
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------
OCTOBER 30, OCTOBER 31, OCTOBER 25,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Income tax expense computed at statutory
rate......................................... $ (546,000) $ (480,000) $(178,000)
Effect of permanent differences................ (7,000) (74,000) (18,000)
Effect of temporary differences................ 115,000 (101,000) 40,000
Tax benefit of net operating loss carry
forward...................................... 438,000 655,000 156,000
Change in valuation allowance.................. 1,793,000 1,447,000 544,000
---------- ---------- ---------
Income tax benefit............................. $1,793,000 $1,447,000 $ 544,000
========== ========== =========
</TABLE>
15. MAJOR CUSTOMER
The Company's sales to a single customer were 16%, 30% and 31% of the total
sales for 1999, 1998 and 1997, respectively. However, the Company terminated its
distribution agreement with this customer effective April 1999. The Company has
entered into contracts with distributors to market Vermont Pure spring water in
the territory previously serviced by the former customer.
16. 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 1999, 1998 and 1997 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 $3,307,489 and $.32 per share in 1999;
$2,509,134 and $.24 per share in 1998 and $324,302 and $.03 per share in 1997.
The weighted average fair value of the options granted were $2.11, $3.42 and
$1.89 in 1999, 1998 and 1997, respectively. Assumptions used for 1999 were:
expected dividend yield of 0%; expected volatility of 79%; risk free interest of
5.7% and expected life of 5 years. Assumptions used for 1998 were: expected
dividend yield of 0%; expected
F-14
<PAGE> 121
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
volatility of 50%; risk free interest of 5.7% and expected life of 5 years.
Assumptions for 1997 were: expected dividend yield of 0%; expected volatility of
92%; risk-free interest of 7% and expected life of five years.
17. SUBSEQUENT EVENT
On October 1, 1999, the Company acquired various security interests held by
Marcon Capital Corporation associated with Pristine Mountain Springs, Inc.,
("Pristine") and Amsource Limited Liability Company ("Amsource"). The Company
has historically purchased spring water from Pristine.
Following notice of the assignment, Amsource and Pristine contended that
the Company did not have to right to purchase water from Pristine. The Company
filed litigation through three separate actions to foreclose its security
interests against Pristine and Amsource, exercise control over Amsource, and
specifically enforce its rights to purchase water from Pristine.
The parties have reached a settlement that resulted in the dismissal of all
pending litigation. Under the settlement, the Company received a cash settlement
of $1,270,000 and retained the right to purchase water from Pristine's spring in
Stockbridge, and the right of first refusal to purchase the spring itself. The
settlement satisfied the outstanding note receivable as of October 30, 1999 of
$975,000. The balance of the settlement, net of legal costs, was recognized as
miscellaneous income in the Company's first quarter of fiscal 2000. By virtue of
the settlement, the Company has secured a legal right to a water supply from the
Pristine spring. The security interest in the water supply agreement is recorded
in the municipality where the spring is located. The only interest ahead of it
is a lien by Randolph National Bank in the amount of $500,000. The settlement
has concluded all litigation among the parties.
F-15
<PAGE> 122
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 30, OCTOBER 30,
2000 1999
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash ($975 of the 2000 balance is restricted).......... $ 1,562,762 $ 367,018
Investments -- Money Market Fund (restricted building
funds)................................................ 2,941,397 --
Accounts receivable.................................... 4,074,523 3,525,238
Notes Receivable....................................... -- 975,000
Inventory.............................................. 2,802,611 2,711,709
Current portion of deferred tax asset.................. 601,922 601,922
Other current assets................................... 866,948 781,968
----------- -----------
TOTAL CURRENT ASSETS.............................. 12,850,163 8,962,855
----------- -----------
PROPERTY AND EQUIPMENT -- net of accumulated depreciation... 13,980,077 11,122,258
----------- -----------
OTHER ASSETS:
Intangible assets -- net of accumulated amortization... 10,957,215 10,443,207
Deferred tax asset..................................... 3,182,914 3,182,914
Other assets........................................... 138,662 122,996
----------- -----------
TOTAL OTHER ASSETS................................ 14,278,791 13,749,117
----------- -----------
TOTAL ASSETS...................................... $41,109,031 $33,834,230
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable....................................... $ 2,829,843 $ 3,443,208
Current portion of customer deposits................... 41,624 45,033
Accrued expenses....................................... 1,784,782 851,371
Current portion of long term debt...................... 1,711,999 1,414,930
Current portion of obligations under capital leases.... 181,904 180,589
----------- -----------
TOTAL CURRENT LIABILITIES......................... 6,550,152 5,935,131
Long term debt......................................... 5,421,757 1,663,893
Long term obligations under capital leases............. 294,498 379,583
Line of credit......................................... 14,750,000 11,689,792
Long term portion of customer deposits................. 790,861 684,334
----------- -----------
TOTAL LIABILITIES................................. 27,807,268 20,352,733
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock -- $.001 par value, 500,000 authorized
shares, none issued and outstanding shares at April
29, 2000.............................................. 10,340 10,340
Common stock -- $.001 par value, 50,000,000 authorized
shares, 10,339,758 issued and outstanding shares at
April 29, 2000 and 10,339,758 at October 30, 1999.....
Paid in capital........................................ 23,197,724 23,197,724
Accumulated deficit.................................... (9,737,551) (9,557,817)
Treasury stock, at cost, 50,000 shares................. (168,750) (168,750)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY........................ 13,301,763 13,481,497
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $41,109,031 $33,834,230
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-16
<PAGE> 123
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------------
APRIL 30, MAY 1,
2000 1999
----------- -----------
<S> <C> <C>
SALES....................................................... $14,648,435 $13,680,319
COST OF GOODS SOLD.......................................... 5,544,124 4,983,873
----------- -----------
GROSS PROFIT................................................ 9,104,311 8,696,446
----------- -----------
OPERATING EXPENSES:
Selling, general and administrative expenses........... 7,350,293 5,853,057
Advertising expenses................................... 1,131,028 1,547,851
Amortization........................................... 341,336 303,426
----------- -----------
TOTAL OPERATION EXPENSES.................................... 8,822,657 7,704,334
----------- -----------
INCOME FROM OPERATIONS...................................... 281,654 992,112
----------- -----------
OTHER INCOME (EXPENSE):
Interest............................................... (734,274) (481,316)
Miscellaneous.......................................... 272,886 --
----------- -----------
TOTAL OTHER INCOME (EXPENSE)................................ (461,388) (481,316)
----------- -----------
NET INCOME (LOSS)........................................... $ (179,734) $ 510,796
----------- -----------
NET INCOME (LOSS) PER SHARE -- BASIC........................ $ (0.02) $ 0.05
=========== ===========
NET INCOME (LOSS) PER SHARE -- DILUTED...................... $ (0.02) $ 0.05
=========== ===========
Weighted Average Shares Used in Computation -- Basic........ 10,289,758 10,254,996
=========== ===========
Weighted Average Shares Used in Computation -- Diluted...... 10,289,758 10,875,518
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-17
<PAGE> 124
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------
APRIL 30, MAY 1,
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income...................................... $ (179,734) $ 510,796
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation...................................... 909,700 666,778
Amortization...................................... 341,336 303,426
Gain on settlement of note receivable............. (295,000) --
(Gain) loss on disposal of property and
equipment...................................... (84,512) 6,883
Changes in assets and liabilities (net of effect of
acquisitions):
(Increase) Decrease in accounts receivable........ (549,285) (723,441)
(Increase) Decrease in inventory.................. (90,902) 60,794
Increase in other current assets.................. (84,980) (296,949)
(Increase) Decrease in other assets............... (871,011) 146,270
Decrease in accounts payable...................... (613,365) (309,215)
Increase in customer deposits..................... 103,119 46,966
(Decrease) Increase in accrued expenses........... 933,409 (189,590)
----------- -----------
NET CASH PROVIDED (USED) IN OPERATING ACTIVITIES............ (481,225) 222,717
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment.............. (2,406,463) (1,117,160)
Purchase of property, plant and equipment from Bond
Financing............................................. (1,149,569) --
Purchase of Money Market Investment from Bond
Financing............................................. (4,090,966) --
Reduction of Money Market Investment Account........... 1,149,569 --
Proceeds from sale of fixed assets..................... 92,310 --
Collection of note receivable.......................... 1,270,000 --
Cash used for acquisition.............................. (219,283) (294,665)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES....................... (5,354,402) (1,411,825)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit........................... 3,060,208 2,201,000
Proceeds from debt..................................... 4,254,422 --
Principal payment of debt.............................. (283,259) (558,939)
Sale of common stock................................... -- 12,720
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES................... 7,031,371 1,654,781
----------- -----------
NET INCREASE IN CASH........................................ 1,195,744 465,673
CASH -- Beginning of period................................. 367,018 161,271
----------- -----------
CASH -- End of period....................................... $ 1,562,762 $ 626,944
=========== ===========
Cash paid for interest...................................... $ 509,274 $ 481,316
=========== ===========
NON-CASH FINANCING AND INVESTING ACTIVITIES:
Equipment acquired under capital leases................ $ 102,202 $ 102,913
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-18
<PAGE> 125
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of management, the Company's unaudited financial statements
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 "4-4-5" method to determine its fiscal
months, quarters and years. Effective April 30, 2000, it will 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
This money market account has been set up for undisbursed funds relating to
the Vermont Economic Development Authority Bond issuance (discussed in note
four). 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.
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 interest rate on funds borrowed under the
agreement is LIBOR plus 2.5%. 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. It pays a 2% annual fee of the Letter of
Credit amount. As of April 30, 2000, exclusive of the Letter of Credit, the
Company had borrowed $14,500,000 pursuant to this agreement and $1,359,000 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.
F-19
<PAGE> 126
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
5. LEGAL PROCEEDINGS
The Company reached a settlement with its largest spring water source 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.
<TABLE>
<S> <C>
Cash Settlement............................................. $1,270,000
Less: Debt Assumed.......................................... 975,000
Less: Legal Fees............................................ 22,113
----------
Total Miscellaneous Income.................................. $ 272,887
==========
</TABLE>
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 April 30, 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. SUBSEQUENT EVENT
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 $63.2 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. The stock price
of Vermont Pure for purposes of the merger will be determined prior to the
closing and has a collar of 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, consolidate the existing debt of both companies (including $1.7
million of Crystal Rock indebtedness), and post-merger working capital.
F-20
<PAGE> 127
INDEPENDENT AUDITORS' REPORT
Board of Directors
Crystal Rock Spring Water Company
1050 Buckingham Street
Watertown, Connecticut 06795
We have audited the balance sheets of Crystal Rock Spring Water Company as of
October 31, 1999 and 1998, and the related statements of income, retained
earnings, and cash flows for the years then ended. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Crystal Rock Spring Water
Company as of October 31, 1999 and 1998, and the results of its operations and
cash flows for the years then ended, in conformity with generally accepted
accounting principles.
/s/ BERGER, KNOTH & COMPANY, P.C.
--------------------------------------
Certified Public Accountants
Stamford, Connecticut
January 26, 2000
F-21
<PAGE> 128
CRYSTAL ROCK SPRING WATER COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Equivalents...................................... $ 430,189 $ 80,466
Accounts Receivable -- Net of Allowance for Doubtful
Accounts............................................... 2,856,739 2,829,343
Other Receivables......................................... 11,134 187,533
Prepaid Expenses.......................................... 292,312 243,752
Inventory................................................. 606,790 550,373
----------- -----------
Total Current Assets.............................. 4,197,164 3,891,467
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Land...................................................... 293,653 293,653
Buildings and Improvements................................ 5,057,749 5,026,795
Computers and Software.................................... 521,324 474,299
Machinery and Equipment................................... 9,258,312 8,699,019
Transportation Equipment.................................. 2,867,557 2,873,931
Furniture and Fixtures.................................... 442,007 585,953
----------- -----------
Total Property, Plant and Equipment............... 18,440,602 17,953,650
Less Accumulated Depreciation............................. 9,226,439 8,935,316
----------- -----------
Property, Plant and Equipment -- Net.............. 9,214,163 9,018,334
----------- -----------
OTHER ASSETS:
Loan Receivable -- Long Term.............................. 132,750 --
Other Assets -- Net of Amortization....................... 739,190 838,149
----------- -----------
Total Other Assets................................ 871,940 838,149
----------- -----------
TOTAL ASSETS...................................... $14,283,267 $13,747,950
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable.......................................... $ 803,269 $ 662,364
Accrued Expenses.......................................... 382,190 442,701
Loans Payable (Current Portion)........................... 500,616 491,478
Profit Sharing Payable.................................... 63,000 120,000
Income Taxes Payable...................................... 73,406 --
Deferred Income Tax (Current Portion)..................... 14,866 --
----------- -----------
Total Current Liabilities......................... 1,837,347 1,716,543
----------- -----------
LONG TERM LIABILITIES:
Deferred Income Tax (Long-Term Portion)................... 614,406 565,097
Loans Payable (Long-Term Portion)......................... 4,771,285 5,281,013
----------- -----------
Total Long Term Liabilities....................... 5,385,691 5,846,110
----------- -----------
OTHER LIABILITIES:
Security Deposits......................................... 1,548,141 1,420,820
----------- -----------
Total Liabilities................................. 8,771,179 8,983,473
----------- -----------
STOCKHOLDERS' EQUITY:
Common Stock ($0 Par, 5,000 Shs. Authorized, 1,710 Shs.
Issued and Outstanding)................................ 85,200 85,200
Paid-In Surplus........................................... 28,512 28,512
Retained Earnings......................................... 5,398,376 4,650,765
----------- -----------
Total Stockholders' Equity........................ 5,512,088 4,764,477
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $14,283,267 $13,747,950
=========== ===========
</TABLE>
See accountants' audit report and accompanying notes to financial statements.
F-22
<PAGE> 129
CRYSTAL ROCK SPRING WATER COMPANY
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
OCTOBER 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
OPERATING REVENUE........................................... $24,017,850 $22,431,198
COST OF SALES............................................... 9,258,222 8,845,138
----------- -----------
Gross Profit.............................................. 14,759,628 13,586,060
----------- -----------
SELLING EXPENSE............................................. 6,215,647 5,625,914
GENERAL AND ADMINISTRATIVE EXPENSE.......................... 6,958,882 6,413,599
----------- -----------
Total Operating Expenses.......................... 13,174,529 12,039,513
----------- -----------
Operating Income.................................. 1,585,099 1,546,547
----------- -----------
OTHER INCOME AND (EXPENSE):
Gain (Loss) on Sale of Assets............................. 5,000 (20,129)
Rental Income -- Office Space............................. 38,165 36,875
Interest Income........................................... 55,396 15,686
Interest Expense.......................................... (373,189) (434,575)
----------- -----------
Total Other (Expense)............................. (274,628) (402,143)
----------- -----------
Income Before Provision for State and Federal
Income Tax..................................... 1,310,471 1,144,404
Provision for State and Federal Income Tax.................. 562,860 495,557
----------- -----------
NET INCOME........................................ $ 747,611 $ 648,847
=========== ===========
</TABLE>
See accountants' audit report and accompanying notes to financial statements.
F-23
<PAGE> 130
CRYSTAL ROCK SPRING WATER COMPANY
STATEMENTS OF RETAINED EARNINGS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
OCTOBER 31,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
RETAINED EARNINGS
Beginning of Period....................................... $4,650,765 $4,001,918
Additions:
Net Income................................................ 747,611 648,847
---------- ----------
RETAINED EARNINGS
End of Period............................................. $5,398,376 $4,650,765
========== ==========
</TABLE>
See accountants' audit report and accompanying notes to financial statements.
F-24
<PAGE> 131
CRYSTAL ROCK SPRING WATER COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
OCTOBER 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income................................................ $ 747,611 $ 648,847
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Depreciation and Amortization.......................... 1,713,064 1,575,738
Deferred Income Taxes.................................. 64,175 54,600
Decrease (Increase) in:
Accounts Receivable.................................. (27,396) (44,070)
Other Receivables.................................... 43,649 (182,533)
Inventories and Prepaid Expenses..................... (104,977) 166,433
Increase (Decrease) in:
Accounts Payable..................................... 140,905 113,293
Accrued Expenses..................................... (60,511) 161,587
Profit Sharing Plan Payable.......................... (57,000) (40,000)
Security Deposits.................................... 127,321 123,452
Taxes Payable........................................ 73,406 --
----------- -----------
Net Cash Provided By Operating Activities.............. 2,660,247 2,577,347
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Property, Plant and Equipment................. (1,806,115) (1,945,907)
Disposition of Property, Plant and Equipment.............. -- 119,943
----------- -----------
Net Cash Used in Investing Activities.................. (1,806,115) (1,825,964)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Mortgages and Bank Notes.................... -- --
Repayment of Mortgages and Bank Notes..................... (500,590) (646,534)
Acquisition of Other Assets............................... (5,359) (163,492)
Disposition of Other Assets............................... 1,540 223
----------- -----------
Net Cash Used By Financing Activities.................. (504,409) (809,803)
----------- -----------
Net Increase (Decrease) in Cash............................. 349,723 (58,420)
Cash and Equivalents -- Beginning of Year................... 80,466 138,886
----------- -----------
Cash and Equivalents -- End of Year......................... $ 430,189 $ 80,466
=========== ===========
Supplemental Information:
Cash Paid for Income Taxes................................ 498,685 434,938
Cash Paid for Interest.................................... 373,189 434,575
</TABLE>
See accountants' audit report and accompanying notes to financial statements.
F-25
<PAGE> 132
CRYSTAL ROCK SPRING WATER COMPANY
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1999
NOTE 1 -- OPERATIONS
Crystal Rock Spring Water Company is a privately held corporation primarily
engaged in the purification and distribution of bottled water.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by Crystal Rock Spring Water
Company are summarized below:
Inventories
Inventories are stated at the lower of cost or market and accounted for by
the first-in, first-out method.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Significant
improvements, additions, renewals and betterments that materially add to
productive capacity or extend the life of an asset are capitalized. Maintenance
and repairs are charged to expense as incurred.
Depreciation
The cost of property, plant and equipment is depreciated over the estimated
useful lives of the related assets. Depreciation is computed on a straight-line
method for financial reporting purposes and on accelerated methods for income
tax purposes.
Mortgage Acquisition Costs
Loan origination and commitment fees have been capitalized and are being
amortized on a straight-line method over the term of the debt instruments.
Income Taxes
The provision for income tax includes federal and state taxes currently
payable, and deferred taxes. The Company has adopted the provisions of SFAS No.
109. Deferred income taxes arise from timing differences between income for
financial reporting and income tax purposes. These timing differences result
principally from depreciation and allowable deductions for contributions.
Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
Common Stock
The Company is authorized to issue 5,000 shares of common stock. As of
October 31, 1999 there were 1,710 shares outstanding.
NOTE 3 -- ALLOWANCE FOR DOUBTFUL ACCOUNTS
An allowance for doubtful accounts is provided based upon management's
evaluation of the collectibility of the accounts receivable for financial
reporting purposes.
F-26
<PAGE> 133
CRYSTAL ROCK SPRING WATER COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The allowance for doubtful accounts is $208,864 for the year ending October
31, 1999 and $105,502 for the year ending October 31, 1998.
NOTE 4 -- LOANS PAYABLE
The following is a summary of loans payable at October 31, 1999 and October
31, 1998:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
A $3,405,612 mortgage with Fleet Bank, modified for
interest rate change March 1, 1999, is subject to
interest at 6.11% per annum and will remain unchanged
through February 2004 at which point a new fixed rate
will be established based on the weekly yield
percentage for United States Treasury fixed interest
obligations plus 1%. The note consists of 180 monthly
payments of $29,106.11 which includes principal and
interest. Next rate change is scheduled for March 1,
2004.
Principal maturities of the note, as of October 31,
1999, during the next five years are as follows:
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------
<S> <C> <C> <C>
2000......................... 148,441
2001......................... 158,480
2002......................... 168,581
2003......................... 179,326
2004......................... 190,296
3,300,709 3,453,453
</TABLE>
<TABLE>
<S> <C> <C>
A $1,000,000 commercial promissory note (Line of Credit)
with Fleet Bank has been executed as of August 30, 1995.
Nothing has been drawn on the line as of October 31, 1999.
Interest on the note will be computed on a 360 day period at
a rate of 8.5%.
-- --
A $3,000,000 line of credit note with Fleet Bank has been
executed as of June 5, 1998. Nothing has been drawn on the
line as of October 31, 1999. Interest on the note will be
computed on a 360 day period at a rate of prime rate or at
the LIBOR rate plus 110 basis points. The right to request
advances on this note terminates on June 1, 2000. Any
principal due at the termination date is eligible for
conversion to a term note.
-- --
A commercial promissory note with Fleet Bank has been
executed as of June 5, 1998. The terms of the modification
call for interest to be computed on a 360 day period at a
rate of the prime rate or the LIBOR rate plus 110 basis
points. Principal payments are due in the amount of $28,988
per month with any outstanding principal due at the maturity
date of June 1, 2005.
</TABLE>
F-27
<PAGE> 134
CRYSTAL ROCK SPRING WATER COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Principal maturities of the note, as of October 31, 1999,
during the next five years are as follows:
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------
<S> <C> <C> <C>
2000......................... 347,856
2001......................... 347,856
2002......................... 347,856
2003......................... 347,856
2004......................... 347,856
1,971,192 2,319,038
---------- ----------
</TABLE>
<TABLE>
<S> <C> <C>
Total Notes Payable................................. 5,271,901 5,772,491
Less Current Portion.............................. 500,616 491,478
---------- ----------
Total Long Term Portion........................... $4,771,285 $5,281,013
========== ==========
</TABLE>
NOTE 5 -- PROFIT SHARING PLAN AND 401(K) PLAN
The Profit Sharing Plan covers all employees who have completed the
required minimum length of service. Contributions are determined by management
and are allocated to the participants based on salary. For years ending October
31, 1999 and 1998, the Company contributed $185,000 and $170,000 respectively.
The Company also operates a 401(K) Plan for its' employees. The Company
does match 10% of the first 6% that employees contribute to this plan. Employees
can contribute a maximum of 10% of their salaries.
NOTE 6 -- PROVISION FOR INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
OCTOBER 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Current:
Federal.............................................. $382,765 $316,315
State................................................ 115,920 118,623
-------- --------
498,685 434,938
Change in Net Deferred Tax........................... 64,175 54,600
-------- --------
Total........................................ $562,860 $489,538
======== ========
</TABLE>
NOTE 7 -- RELATED PARTY TRANSACTIONS
The Company leases office, production, storage and parking facilities from
major shareholders on a month to month basis. Rent expense paid to related
parties, deducted in the accompanying statements of income for the years ended
October 31, 1999 and 1998, was $216,000 and $216,000 respectively.
The Company has a service agreement with CDS/Voyager Software, an entity in
which the Company is a shareholder. The Company pays approximately $2,263 per
month for the service agreement. Additionally, the Company holds a loan
receivable from CDS/Voyager of $120,000, which was entered into on August 1,
1998. Interest on this receivable has accrued to $12,750 as of October 31, 1999.
F-28
<PAGE> 135
CRYSTAL ROCK SPRING WATER COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- LEASES AND COMMITMENTS
A small package bottling line is leased from Liquabox, Inc., on which a
$681 yearly rental is charged and on the provision that the Company buys certain
supplies only from Liquabox, Inc. The company has determined that this agreement
is a cost-effective alternative to buying the equipment.
NOTE 9 -- PURCHASE AGREEMENTS
The Company has one payment remaining on its purchase of Colony Coffee.
This payment is estimated to be $54,044 and is scheduled to be paid in February
2000. Additionally, the Company has an option to purchase the vending routes
associated with Colony Coffee. This option has not yet been decided upon by
management.
The Company has plans to enter into an agreement to buy vending routes and
equipment from FBN Enterprises/Deleo Vending. The anticipated amount of this
purchase is approximately $75,000. A six month term agreement is expected.
NOTE 10 -- LETTER OF CREDIT
The Company has a letter of credit for $230,312 at October 31, 1999, which
secures its equity interest in MAC Causality. This letter of credit is scheduled
to increase by $20,330 to $250,642 in February 2000.
NOTE 11 -- ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
NOTE 12 -- CONCENTRATIONS OF CREDIT RISK
The Company grants credit to its customers, primarily located in the
northeastern United States, during the normal course of business. The Company
performs ongoing credit evaluations of its customers' and generally requires no
collateral from its customers. The Company routinely collects a security deposit
on its bottles. At times throughout the year the Company may maintain certain
bank accounts in excess of the FDIC insured limits.
NOTE 13 -- POLICY FOR PAID DAYS OFF
The Company grants paid vacation time off to full time employees in the
following manner:
<TABLE>
<S> <C>
At the completion of 1 year 1 week
For years two through nine 2 weeks per year
For years ten or more 3 weeks per year
</TABLE>
The Company allows up to 5 paid sick days per year, to employees with more
than one year of service. Sick pay accumulates at the rate of one-half day every
five weeks. Unused vacation and/or sick days are paid at the end of the year.
F-29
<PAGE> 136
CRYSTAL ROCK SPRING WATER COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 -- LITIGATION
The Company is currently named as a co-defendant in a lawsuit regarding the
packaging of flavored water. The Company has been indemnified by the primary
defendant for any losses which occur. It is the opinion of the Company's legal
counsel that the Company will have no liability regarding this matter.
NOTE 15 -- RECLASSIFICATIONS
Certain amounts in the October 31, 1998 financial statements have been
reclassified to conform to the October 31, 1999 presentation.
F-30
<PAGE> 137
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Crystal Rock Spring Water Company
1050 Buckingham Street
Watertown, Connecticut 06795
We have audited the balance sheets of Crystal Rock Spring Water Company as
of October 31, 1998 and 1997, and the related statements of income, retained
earnings, and cash flows for the years then ended. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Crystal Rock Spring Water
Company as of October 31, 1998 and 1997, and the results of its operations and
cash flows for the years then ended, in conformity with generally accepted
accounting principles.
/s/ BERGER & COMPANY, P.C.
--------------------------------------
Certified Public Accountants
Stamford, Connecticut
February 5, 1999
F-31
<PAGE> 138
CRYSTAL ROCK SPRING WATER COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Equivalents...................................... $ 80,466 $ 138,886
Accounts Receivable -- Net of Allowance for Doubtful
Accounts............................................... 2,829,343 2,785,273
Other Receivables......................................... 187,533 5,000
Prepaid Expenses.......................................... 243,752 299,831
Inventory................................................. 550,373 660,727
----------- -----------
Total Current Assets.............................. 3,891,467 3,889,717
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Land...................................................... 293,653 293,653
Buildings and Improvements................................ 5,026,795 5,026,795
Computers................................................. 474,299 383,534
Machinery and Equipment................................... 8,699,019 7,654,475
Transportation Equipment.................................. 2,873,931 2,519,455
Furniture and Fixtures.................................... 585,953 568,296
----------- -----------
Total Property, Plant and Equipment............... 17,953,650 16,446,208
Less Accumulated Depreciation............................. 8,935,316 7,774,474
----------- -----------
Property, Plant and Equipment -- Net.............. 9,018,334 8,671,734
----------- -----------
Other Assets -- Net of Amortization....................... 838,149 771,254
----------- -----------
TOTAL ASSETS...................................... $13,747,950 $13,332,705
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable.......................................... $ 662,364 $ 549,071
Accrued Expenses.......................................... 442,701 281,114
Loans Payable (Current Portion)........................... 491,478 266,761
Profit Sharing Payable.................................... 120,000 160,000
Deferred Income Tax (Current Portion)..................... -- 13,403
----------- -----------
Total Current Liabilities......................... 1,716,543 1,270,349
----------- -----------
LONG TERM LIABILITIES:
Deferred Income Tax (Long-Term Portion)................... 565,097 497,094
Loans Payable (Long-Term Portion)......................... 5,281,013 6,152,264
----------- -----------
Total Long Term Liabilities....................... 5,846,110 6,649,358
----------- -----------
OTHER LIABILITIES:
Security Deposits......................................... 1,420,820 1,297,368
----------- -----------
Total Liabilities................................. 8,983,473 9,217,075
----------- -----------
STOCKHOLDERS' EQUITY:
Common Stock ($0 Par, 5,000 Shs. Authorized, 1,710 Shs.
Issued and Outstanding)................................ 85,200 85,200
Paid-In Surplus........................................... 28,512 28,512
Retained Earnings......................................... 4,650,765 4,001,918
----------- -----------
Total Stockholders' Equity........................ 4,764,477 4,115,630
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $13,747,950 $13,332,705
=========== ===========
</TABLE>
See accountants' audit report and accompanying notes to financial statements.
F-32
<PAGE> 139
CRYSTAL ROCK SPRING WATER COMPANY
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
OCTOBER 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
OPERATING REVENUE........................................... $22,431,198 $19,637,591
COST OF SALES............................................... 8,845,138 7,837,773
----------- -----------
Gross Profit.............................................. 13,586,060 11,799,818
----------- -----------
SELLING EXPENSE............................................. 5,625,914 5,006,281
GENERAL AND ADMINISTRATIVE EXPENSE.......................... 6,413,599 5,742,220
----------- -----------
Total Operating Expenses.......................... 12,039,513 10,748,501
----------- -----------
Operating Income.................................. 1,546,547 1,051,317
----------- -----------
OTHER INCOME AND (EXPENSE):
Loss on Sale of Assets.................................... (20,129) --
Rental Income -- Office Space............................. 36,875 35,136
Interest Income........................................... 15,686 592
Interest Expense.......................................... (434,575) (429,597)
Write-up of Investments Previously Written down........... -- 5,277
----------- -----------
Total Other Income and (Expense).................. (402,143) (388,592)
----------- -----------
Income Before Provision for State and Federal
Income Tax..................................... 1,144,404 662,725
Provision for State and Federal Income Tax.................. 495,557 310,667
----------- -----------
NET INCOME........................................ $ 648,847 $ 352,058
=========== ===========
</TABLE>
See accountants' audit report and accompanying notes to financial statements.
F-33
<PAGE> 140
CRYSTAL ROCK SPRING WATER COMPANY
STATEMENTS OF RETAINED EARNINGS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
OCTOBER 31,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
RETAINED EARNINGS
BEGINNING OF PERIOD....................................... $4,001,918 $3,649,860
Additions:
Net Income................................................ 648,847 352,058
---------- ----------
RETAINED EARNINGS
END OF PERIOD............................................. $4,650,765 $4,001,918
========== ==========
</TABLE>
See accountants' audit report and accompanying notes to financial statements.
F-34
<PAGE> 141
CRYSTAL ROCK SPRING WATER COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
OCTOBER 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income................................................ $ 648,847 $ 352,058
Adjustments to Reconcile Net Income to Net Cash Provided
by
Operating Activities:
Depreciation and Amortization.......................... 1,575,738 1,388,073
Deferred Income Taxes.................................. 54,600 45,926
Decrease (Increase) in:
Accounts Receivable.................................. (44,070) (522,103)
Other Receivables.................................... (182,533) 699
Inventories and Prepaid Expenses..................... 166,433 (171,243)
Increase (Decrease) in:
Accounts Payable..................................... 113,293 (114,616)
Accrued Expenses..................................... 161,587 62,708
Profit Sharing Plan Payable.......................... (40,000) --
Security Deposits.................................... 123,452 133,233
----------- -----------
Net Cash Provided By Operating Activities.............. 2,577,347 1,174,735
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Property, Plant and Equipment................. (1,945,907) (3,068,137)
Disposition of Property, Plant and Equipment.............. 119,943 297,583
----------- -----------
Net Cash Used in Investing Activities.................. (1,825,964) (2,770,554)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Mortgages and Bank Notes.................... -- 5,003,768
Repayment of Mortgages and Bank Notes..................... (646,534) (2,710,844)
Acquisition of Other Assets............................... (163,492) (616,137)
Disposition of Other Assets............................... 223 2,838
----------- -----------
Net Cash Used By Financing Activities.................. (809,803) 1,679,625
----------- -----------
Net Increase (Decrease) in Cash............................. (58,420) 83,806
Cash and Equivalents -- Beginning of Year................... 138,886 55,080
----------- -----------
Cash and Equivalents -- End of Year......................... $ 80,466 $ 138,886
=========== ===========
Supplemental Information:
Cash Paid for Income Taxes................................ 434,938 264,761
Cash Paid for Interest.................................... 434,575 429,597
</TABLE>
See accountants' audit report and accompanying notes to financial statements.
F-35
<PAGE> 142
CRYSTAL ROCK SPRING WATER COMPANY
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1998
NOTE 1 -- OPERATIONS
Crystal Rock Spring Water Company is a privately held corporation primarily
engaged in the purification and distribution of bottled water.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by Crystal Rock Spring Water
Company are summarized below:
Inventories
Inventories are stated at the lower of cost or market and accounted for by
the first-in, first-out method.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Significant
improvements, additions, renewals and betterments that materially add to
productive capacity or extend the life of an asset are capitalized. Maintenance
and repairs are charged to expense as incurred.
Depreciation
The cost of property, plant and equipment is depreciated over the estimated
useful lives of the related assets. Depreciation is computed on a straight-line
method for financial reporting purposes and on accelerated methods for income
tax purposes.
Mortgage Acquisition Costs
Loan origination and commitment fees have been capitalized and are being
amortized on a straight-line method over the term of the debt instruments.
Income Taxes
The provision for income tax includes federal and state taxes currently
payable, and deferred taxes. The Company has adopted the provisions of SFAS No.
109. Deferred income taxes arise from timing differences between income for
financial reporting and income tax purposes. These timing differences result
principally from depreciation and allowable deductions for contributions.
Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
Common Stock
The Company is authorized to issue 5000 shares of common stock. As of
October 31, 1998 there were 1710 shares outstanding.
NOTE 3 -- ALLOWANCE FOR DOUBTFUL ACCOUNTS
An allowance for doubtful accounts is provided based upon management's
evaluation of the collectibility of the accounts receivable for financial
reporting purposes.
F-36
<PAGE> 143
CRYSTAL ROCK SPRING WATER COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The allowance for doubtful accounts is $105,502 for the year ending October
31, 1998 and $70,721 for the year ending October 31, 1997.
NOTE 4 -- LOANS PAYABLE
The following is a summary of loans payable at October 31, 1998 and October
31, 1997:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
A $75,000 note payable with Webster Bank, has been assumed
as of November 1996. The loan requires interest only
payments until the loan turns into a term note in September
1998. Interest is currently calculated at 200 basis points
above LIBOR. This loan was combined with other loans and
modified into a new agreement on June 5, 1998.
$ -- $ 75,000
A $325,000 note payable with Webster Bank, has been assumed
as of November 1996. The loan requires interest only
payments until the loan turns into a term note in September
1998. Interest is currently calculated at 200 basis points
above LIBOR. This loan was combined with other loans and
modified into a new agreement on June 5, 1998.
-- 191,518
A $3,945,000 mortgage with Fleet Bank, modified June 5,
1998, is subject to interest at 6.50% per annum and will
remain unchanged through February 1999 at which point a new
fixed rate will be established based on the weekly yield
percentage for United States Treasury fixed interest
obligations plus 1%. The note consists of 180 monthly
payments of $30,573.75 which includes principal and
interest.
Principal maturities of the note, as of October 31, 1998,
during the next five years are as follows:
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------
<S> <C> <C> <C>
1999......................... 143,622
2000......................... 152,761
2001......................... 163,756
2002......................... 174,879
2003......................... 187,060
</TABLE>
<TABLE>
<S> <C> <C>
3,453,453 3,577,507
A $1,000,000 commercial promissory note (Line of Credit)
with Fleet Bank has been executed as of August 30, 1995.
Nothing has been drawn on the line as of October 31, 1998.
Interest on the note will be computed on a 360 day period at
a rate of 8.5%.
-- --
</TABLE>
F-37
<PAGE> 144
CRYSTAL ROCK SPRING WATER COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
A $3,000,000 line of credit note with Fleet Bank has been
executed as of June 5, 1998. Nothing has been drawn on the
line as of October 31, 1998. Interest on the note will be
computed on a 360 day period at a rate of prime rate or at
the LIBOR rate plus 110 basis points. The right to request
advances on this note terminates on June 1, 2000. Any
principal due at the termination date is eligible for
conversion to a term note.
A $750,000 equipment promissory note (Line of Credit) with
Fleet Bank has been executed as of August 30, 1995. The note
has been partially utilized at October 31, 1996. Interest on
the note is computed on a 360 day period at a rate of 6%. On
the termination date of December 1, 1996 the principal
amount of all outstanding advances here under shall be
repayable in sixty (60) substantially equal monthly
installments commencing January 1, 1997. Interest on the
fixed note is computed at the bank's base rate. At October
31, 1997 the base rate was 7.40625%. This note was combined
with other loans and modified into a new agreement on June
5, 1998.
-- 625,000
A $1,950,000 commercial promissory note with Fleet Bank has
been executed as of November 21, 1996 and modified October
15, 1997. Interest on the note is computed on a 360 day
period at a rate of the prime rate, LIBOR rate, or cost of
funds plus 150 basis points. On the termination date of
February 28, 1998 the principal amount outstanding shall be
repayable. No principal payments are due until the
termination date. This note was combined with other loans
and modified into a new agreement on June 5, 1998.
-- 1,950,000
A commercial promissory note with Fleet Bank combining the
previously referred to notes, has been executed as of June
5, 1998. The terms of the modification call for interest to
be computed on a 360 day period at a rate of the prime rate
or the LIBOR rate plus 110 basis points. Principal payments
are due in the amount of $28,988 per month with any
outstanding principal due at the maturity date of June 1,
2005.
</TABLE>
F-38
<PAGE> 145
CRYSTAL ROCK SPRING WATER COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Principal maturities of the note, as of October 31, 1998,
during the next five years are as follows:
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------
<S> <C> <C> <C>
1999......................... 347,856
2000......................... 347,856
2001......................... 347,856
2002......................... 347,856
2003......................... 347,856
</TABLE>
<TABLE>
<S> <C> <C>
2,319,038 --
---------- ----------
Total Notes Payable............................. 5,772,491 6,419,025
Less Current Portion............................ 491,478 266,761
---------- ----------
Total Long Term Portion......................... $5,281,013 $6,152,264
========== ==========
</TABLE>
NOTE 5 -- PROFIT SHARING PLAN
The Profit Sharing Plan covers all employees who have completed the
required minimum length of service. Contributions are determined by management
and are allocated to the participants based on salary. For years ending October
31, 1998 and 1997, the Company contributed $170,000 and $160,000 respectively.
NOTE 6 -- PROVISION FOR INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
OCTOBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Current:
Federal.............................................. $316,315 $197,251
State................................................ 118,623 67,490
-------- --------
434,938 264,741
Change in Net Deferred Tax........................... 54,600 45,926
-------- --------
Total........................................ $489,538 $310,667
======== ========
</TABLE>
NOTE 7 -- RELATED PARTY TRANSACTIONS
The Company leases office, production, storage and parking facilities from
major shareholders on a month to month basis. Rent expense paid to related
parties, deducted in the accompanying statements of income for the years ended
October 31, 1998 and 1997, was $216,000 and $196,000 respectively.
The Company has a service agreement with CDS/Voyager Software, an entity in
which the Company is a shareholder. The Company pays approximately $2,263 per
month for the service agreement. For the year ended October 31, 1998, the
Company paid software upgrade expenses of $53,373. Additionally, the Company
holds a loan receivable from CDS/Voyager of $120,000, which was entered into on
August 1, 1998.
F-39
<PAGE> 146
CRYSTAL ROCK SPRING WATER COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- LEASES AND COMMITMENTS
Excluding the related party transactions shown in Note 7, the Company acted
as a guarantor on a lease agreement between Pequot Spring Water Company, as
tenant and Doris Brunelle, as landlord. The agreement was terminated in the year
ended October 31, 1998. For the year ended October 31, 1998, the Company paid
$167,454 on this agreement.
A small package bottling line is leased from Liquabox, Inc., on which a
$681 yearly rental is charged and on the provision that the Company buys certain
supplies only from Liquabox, Inc. The company has determined that this agreement
is a cost-effective alternative to buying the equipment.
NOTE 9 -- ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
NOTE 10 -- CONCENTRATIONS OF CREDIT RISK
The Company grants credit to its customers, primarily located in the
northeastern United States, during the normal course of business. The Company
performs ongoing credit evaluations of its customers' and generally requires no
collateral from its customers. The Company routinely collects a security deposit
on its bottles. At times throughout the year the Company may maintain certain
bank accounts in excess of the FDIC insured limits.
NOTE 11 -- POLICY FOR PAID DAYS OFF
The Company grants paid vacation time off to full time employees in the
following manner:
<TABLE>
<S> <C>
At the completion of 1 year 1 week
For years two through nine 2 weeks per year
For years ten or more 3 weeks per year
</TABLE>
The Company allows up to 5 paid sick days per year, to employees with more
than one year of service. Sick pay accumulates at the rate of one-half day every
five weeks. Unused vacation and/or sick days are paid at the end of the year.
NOTE 12 -- LITIGATION
The Company is currently named as a co-defendant in a lawsuit regarding the
packaging of flavored water. The Company has been indemnified by the primary
defendant for any losses which occur. It is the opinion of the Company's legal
counsel that the Company will have no liability regarding this matter.
NOTE 13 -- RECLASSIFICATIONS
Certain amounts in the October 31, 1997 financial statements have been
reclassified to conform to the October 31, 1998 presentation.
F-40
<PAGE> 147
CRYSTAL ROCK SPRING WATER COMPANY
UNAUDITED BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 30, OCTOBER 31,
----------- -----------
2000 1999
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Equivalents...................................... $ 851,517 $ 430,189
Accounts Receivable -- Net of Allowance for Doubtful
Accounts............................................... 2,897,989 2,856,739
Other Receivables......................................... 5,700 11,134
Prepaid Expenses.......................................... 305,138 292,312
Inventory................................................. 672,135 606,790
----------- -----------
Total Current Assets.............................. 4,732,479 4,197,164
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Land...................................................... 293,653 293,653
Buildings and Improvements................................ 5,103,534 5,057,749
Computers and Software.................................... 542,201 521,324
Machinery and Equipment................................... 9,907,188 9,258,312
Transportation Equipment.................................. 3,450,811 2,867,557
Furniture and Fixtures.................................... 455,463 442,007
----------- -----------
Total Property, Plant and Equipment............... 19,752,850 18,440,602
----------- -----------
Less Accumulated Depreciation............................. 10,109,781 9,226,439
----------- -----------
Property, Plant and Equipment -- Net.............. 9,643,069 9,214,163
----------- -----------
OTHER ASSETS:
Loan Receivable -- Long Term.............................. 132,750 132,750
Other Assets -- Net of Amortization....................... 741,224 739,190
----------- -----------
Total Other Assets................................ 873,974 871,940
----------- -----------
TOTAL ASSETS...................................... $15,249,522 $14,283,267
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable.......................................... $ 629,351 $ 803,269
Accrued Expenses.......................................... 190,060 382,190
Loans Payable (Current Portion)........................... 500,699 500,616
Profit Sharing Payable.................................... 6,000 63,000
Income Taxes Payable...................................... 528,044 73,406
Deferred Income Tax (Current Portion)..................... 14,866 14,866
----------- -----------
Total Current Liabilities......................... 1,869,020 1,837,347
----------- -----------
LONG TERM LIABILITIES:
Deferred Income Tax (Long-Term Portion)................... 614,406 614,406
Loans Payable (Long-Term Portion)......................... 4,520,661 4,771,285
----------- -----------
Total Long Term Liabilities....................... 5,135,067 5,385,691
----------- -----------
OTHER LIABILITIES:
Security Deposits......................................... 1,602,332 1,548,141
----------- -----------
Total Liabilities................................. 8,606,419 8,771,179
----------- -----------
STOCKHOLDERS' EQUITY:
Common Stock (No Par, 5,000 Shs. Authorized, 1,710 Shs.
Issued and Outstanding)................................ 85,200 85,200
Paid-In Surplus........................................... 28,512 28,512
Retained Earnings......................................... 6,529,391 5,398,376
----------- -----------
Total Stockholders' Equity........................ 6,643,103 5,512,088
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $15,249,522 $14,283,267
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-41
<PAGE> 148
CRYSTAL ROCK SPRING WATER COMPANY
UNAUDITED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
APRIL 30,
----------------------------
2000 1999
----------- -----------
<S> <C> <C>
OPERATING REVENUE........................................... $12,425,907 $11,352,756
COST OF SALES............................................... 4,761,668 4,310,803
----------- -----------
Gross Profit.............................................. 7,664,239 7,041,953
----------- -----------
SELLING EXPENSE............................................. 3,000,516 2,716,493
GENERAL AND ADMINISTRATIVE EXPENSE.......................... 2,582,465 2,323,159
----------- -----------
Total Operating Expenses.......................... 5,582,981 5,039,652
----------- -----------
Operating Income.................................. 2,081,258 2,002,301
----------- -----------
OTHER INCOME AND (EXPENSE):
Rental Income -- Office Space............................. 19,578 19,038
Interest Income........................................... 4,466 15,282
Interest Expense.......................................... (171,943) (195,154)
----------- -----------
Total Other Income and (Expense).................. (147,899) (160,834)
----------- -----------
Income Before Provision for State and Federal
Income Tax...................................... 1,933,359 1,841,467
Provision for State and Federal Income Tax.................. 802,344 764,209
----------- -----------
NET INCOME........................................ $ 1,131,015 $ 1,077,258
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-42
<PAGE> 149
CRYSTAL ROCK SPRING WATER COMPANY
UNAUDITED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
APRIL 30,
-------------------------
2000 1999
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income................................................ $ 1,131,015 $1,077,258
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Depreciation and Amortization.......................... 936,087 794,130
Decrease (Increase) in:
Accounts Receivable.................................. (41,250) 35,705
Other Receivables.................................... 5,434 (148,464)
Inventories and Prepaid Expenses..................... (78,171) (93,348)
Increase (Decrease) in:
Accounts Payable..................................... (173,918) (156,131)
Accrued Expenses..................................... (192,130) (259,264)
Profit Sharing Plan Payable.......................... (57,000) (40,000)
Security Deposits.................................... 54,191 3,937
Taxes Payable........................................ 454,638 532,737
----------- ----------
Net Cash Provided By Operating Activities.............. 2,038,896 1,746,560
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Property, Plant and Equipment................. (1,312,246) (603,313)
Disposition of Property, Plant and Equipment.............. -- --
----------- ----------
Net Cash Used in Investing Activities.................. (1,312,246) (603,313)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Borrowings.................................. -- 307,400
Repayment of Borrowings................................... (250,541) (247,717)
Acquisition of Other Assets............................... (54,781) --
Disposition of Other Assets............................... -- --
----------- ----------
Net Cash Used By Financing Activities.................. (305,322) 59,683
----------- ----------
Net Increase (Decrease) in Cash............................. 421,328 1,202,930
Cash and Equivalents -- Beginning of Year................... 430,189 80,466
----------- ----------
Cash and Equivalents -- End of Period....................... $ 851,517 $1,283,396
=========== ==========
Supplemental Information:
Cash Paid for Income Taxes................................ 347,706 231,472
Cash Paid for Interest.................................... 172,506 191,314
</TABLE>
See accompanying notes to financial statements.
F-43
<PAGE> 150
CRYSTAL ROCK SPRING WATER COMPANY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
In the opinion of management, the Company's unaudited financial statements
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 audited financial statements for the year ended October 31, 1999.
NOTE 2 -- OPERATIONS
Crystal Rock Spring Water Company is a privately held corporation primarily
engaged in the manufacture and distribution of bottled water.
NOTE 3 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by Crystal Rock Spring Water
Company are summarized below:
Inventories
Inventories are stated at the lower of cost or market and accounted for by
the first-in, first-out method.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Significant
improvements, additions, renewals and betterments that materially add to
productive capacity or extend the life of an asset are capitalized. Maintenance
and repairs are charged to expense as incurred.
Depreciation
The cost of property, plant and equipment is depreciated over the estimated
useful lives of the related assets. Depreciation is computed on a straight-line
method for financial reporting purposes and on accelerated methods for income
tax purposes.
Mortgage Acquisition Costs
Loan origination and commitment fees have been capitalized and are being
amortized on a straight-line method over the term of the debt instruments.
Income Taxes
The provision for income tax includes federal and state taxes currently
payable, and deferred taxes. The Company has adopted the provisions of SFAS No.
109. Deferred income taxes arise from timing differences between income for
financial reporting and income tax purposes. These timing differences result
principally from depreciation and allowable deductions for contributions.
Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
F-44
<PAGE> 151
CRYSTAL ROCK SPRING WATER COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Common Stock
The Company is authorized to issue 5,000 shares of common stock. As of
April 30, 2000 there were 1,710 shares outstanding.
NOTE 4 -- ALLOWANCE FOR DOUBTFUL ACCOUNTS
An allowance for doubtful accounts is provided based upon management's
evaluation of the collectibility of the accounts receivable for financial
reporting purposes.
The allowance for doubtful accounts is $242,322 as of April 30, 2000.
NOTE 5 -- LOANS PAYABLE
The following is a summary of loans payable at April 30, 2000:
<TABLE>
<S> <C>
A $3,405,612 mortgage with Fleet Bank, modified for interest
rate change March 1, 1999, is subject to interest at 6.11%
per annum and will remain unchanged through February 2004 at
which point a new fixed rate will be established based on
the weekly yield percentage for United States Treasury fixed
interest obligations plus 1%. The note consists of 180
monthly payments of $29,106.11 which includes principal and
interest. Next rate change is scheduled for March 1, 2004.
</TABLE>
<TABLE>
<S> <C>
Principal maturities of the note, as of October 31, 1999,
during the next five years are as follows:
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------
<S> <C> <C>
2000...................................... $148,441
2001...................................... 158,480
2002...................................... 168,581
2003...................................... 179,326
2004...................................... 190,296
</TABLE>
<TABLE>
<S> <C>
$3,224,096
A $1,000,000 commercial promissory note (Line of Credit)
with Fleet Bank has been executed as of August 30, 1995.
Nothing has been drawn on the line as of April 30, 2000.
Interest on the note will be computed on a 360 day period at
a rate of prime rate or at the LIBOR rate plus 110 basis
points.
--
A $3,000,000 line of credit note with Fleet Bank has been
executed as of June 5, 1998. Nothing has been drawn on the
line as of April 30, 2000. Interest on the note will be
computed on a 360 day period at a rate of prime rate or at
the LIBOR rate plus 110 basis points. The right to request
advances on this note terminates on June 1, 2000. Any
principal due at the termination date is eligible for
conversion to a term note.
--
</TABLE>
F-45
<PAGE> 152
CRYSTAL ROCK SPRING WATER COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
2000
----------
<S> <C>
A commercial promissory note with Fleet Bank has been
executed as of June 5, 1998. The terms of the modification
call for interest to be computed on a 360 day period at a
rate of the prime rate or the LIBOR rate plus 110 basis
points. Principal payments are due in the amount of $28,988
per month with any outstanding principal due at the maturity
date of June 1, 2005.
Principal maturities of the note, as of April 30, 2000,
during the next five years are as follows:
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------
<S> <C> <C>
2000..................................... $347,856
2001..................................... 347,856
2002..................................... 347,856
2003..................................... 347,856
2004..................................... 347,856
$1,797,264
</TABLE>
<TABLE>
<S> <C>
A $425,000 second mortgage note with Fleet Bank has been
executed as of April 28, 2000. Funds were not made available
as of April 30, 2000. Interest on the note will be computed
on a 360 day period at a rate of prime rate or at the LIBOR
rate plus 110 basis points. The note is due on October 28,
2000.
--
Total Notes Payable.............................................. $5,021,360
Less Current Portion............................................. 500,699
----------
Total Long Term Portion.......................................... $4,520,661
==========
</TABLE>
NOTE 6 -- PROFIT SHARING PLAN AND 401(K) PLAN
The Profit Sharing Plan covers all employees who have completed the
required minimum length of service. Contributions are determined by management
and are allocated to the participants based on salary. For the six months ended
April 30, 2000 and 1999, the Company accrued $96,000 and $90,000, respectively.
The Company accrues monthly an anticipated contribution, however, the
contribution is not finalized until September 30 of each year.
The Company also operates a 401(K) Plan for its employees. The Company does
match 10% of the first 6% that employees contribute to this plan. Employees can
contribute a maximum of 10% of their salaries.
F-46
<PAGE> 153
CRYSTAL ROCK SPRING WATER COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 7 -- PROVISION FOR INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
APRIL 30, APRIL 30,
2000 1999
--------- ---------
<S> <C> <C>
Current:
Federal.............................................. $612,187 $583,090
State................................................ 190,157 181,119
-------- --------
802,344 764,209
Change in Net Deferred Tax........................... -- --
-------- --------
Total........................................ $802,344 764,209
======== ========
</TABLE>
NOTE 8 -- RELATED PARTY TRANSACTIONS
The Company leases office, production, storage and parking facilities from
major shareholders on a month to month basis. Rent expense paid to related
parties for the six months ended April 30, 2000 and 1999, was $108,000 and
$108,000 respectively.
The Company has a service agreement with CDS/Voyager Software, an entity in
which the Company is a shareholder. The Company pays approximately $2,263 per
month for the service agreement. Additionally, the Company holds a loan
receivable from CDS/Voyager of $120,000, which was entered into on August 1,
1998. Interest on this receivable has accrued to $12,750 as of April 30, 2000.
NOTE 9 -- LEASES AND COMMITMENTS
A small package bottling line is leased from Liquabox, Inc., on which a
$681 yearly rental is charged and on the provision that the Company buys certain
supplies only from Liquabox, Inc. The Company has determined that this agreement
is a cost-effective alternative to buying the equipment.
NOTE 10 -- LETTER OF CREDIT
The Company has a letter of credit for $250,642 at April 30, 2000, which
secures its equity interest in MAC Casualty.
NOTE 11 -- ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
NOTE 12 -- CONCENTRATIONS OF CREDIT RISK
The Company grants credit to its customers, primarily located in the
northeastern United States, during the normal course of business. The Company
performs ongoing credit evaluations of its customers' and generally requires no
collateral from its customers. The Company routinely collects a security deposit
on its bottles. At times throughout the year the Company may maintain certain
bank accounts in excess of the FDIC insured limits.
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CRYSTAL ROCK SPRING WATER COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 13 -- POLICY FOR PAID DAYS OFF
The Company grants paid vacation time off to full time employees in the
following manner:
<TABLE>
<S> <C>
At the completion of 1 year 1 week
For years two through nine 2 weeks per year
For years ten or more 3 weeks per year
</TABLE>
The Company allows up to 5 paid sick days per year, to employees with more
than one year of service. Sick pay accumulates at the rate of one-half day every
five weeks. Unused vacation and/or sick days are paid at the end of the year.
NOTE 14 -- LITIGATION
The Company is currently named as a co-defendant in a lawsuit regarding the
packaging of flavored water. The Company has been indemnified by the primary
defendant for any losses which occur. It is the opinion of the Company's legal
counsel that the Company will have no liability regarding this matter.
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<PAGE> 155
APPENDIX A
EXECUTION COPY
AGREEMENT AND PLAN
OF
MERGER AND CONTRIBUTION
(as amended as of August 28, 2000)
Agreement and Plan of Merger and Contribution, dated as of May 5, 2000 (the
"Agreement"), by and among
- VERMONT PURE HOLDINGS, LTD., a publicly traded Delaware corporation
("Holdings"),
- VP MERGER PARENT, INC., a Delaware corporation with no outstanding
capital stock ("Parent"),
- VP ACQUISITION CORP., a Delaware corporation and wholly-owned subsidiary
of "Parent" ("Merger Sub"),
- CRYSTAL ROCK SPRING WATER COMPANY, a Connecticut corporation (the
"Company"), and
- HENRY E. BAKER, JOHN B. BAKER, PETER K. BAKER and the other stockholders
of the Company listed on Exhibit D hereto, being all of the stockholders
of the Company (the "Stockholders").
RECITALS
The respective boards of directors of Holdings, Parent and Merger Sub have
approved this Agreement and have determined that it is advisable that Merger Sub
be merged with and into Holdings (the "Merger") on the terms and conditions set
forth herein and in accordance with the provisions of the Delaware General
Corporation Law (the "DGCL"), and Parent, as the sole stockholder of Merger Sub,
has approved this Agreement.
The board of directors of the Company and the Stockholders have approved
this Agreement and have determined that contemporaneously with the Merger the
Stockholders will contribute all of the issued and outstanding stock of the
Company to Parent (the "Contribution").
Holdings, Parent, Merger Sub, the Company and the Stockholders desire to
make certain representations and warranties and other agreements in connection
with the Merger and Contribution.
The parties intend that the Merger and Contribution, taken together, be
treated as a transaction described in Section 351 of the Internal Revenue Code
of 1986, as amended (the "Code").
To effect these transactions, Holdings, Parent, Merger Sub, the Company and
the Stockholders hereby agree as follows:
ARTICLE 1
DEFINITIONS
1.1. CERTAIN MATTERS OF CONSTRUCTION. A reference to an Article, Section,
Exhibit or Schedule shall mean an Article of, a Section in, or Exhibit or
Schedule to, this Agreement unless otherwise expressly stated. The titles and
headings herein are for reference purposes only and shall not in any manner
limit the construction of this Agreement which shall be considered as a whole.
The words "include," "includes" and "including" when used herein shall be deemed
in each case to be followed by the words "without limitation."
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1.2. CROSS REFERENCES. The following terms defined elsewhere in this
Agreement in the Sections set forth below shall have the respective meanings
therein defined:
<TABLE>
<CAPTION>
TERM DEFINITION
---- ----------
<S> <C>
Affiliate............................................ Section 1.3.1.
Affiliated Group..................................... Section 3.10.1.
Agreement............................................ Preamble
Benefit Plans........................................ Section 3.11.1.
Certificate of Merger................................ Section 2.1.
Closing.............................................. Section 2.6.
Closing Date......................................... Section 2.6.
Code................................................. Recitals
Company.............................................. Preamble
Company Common Stock................................. Section 2.5.1.
Contribution......................................... Recitals
Certificate of Merger................................ Section 2.1.
DGCL................................................. Recitals
Effective Date....................................... Section 2.1.
Effective Time....................................... Section 2.1.
Employee List........................................ Section 3.12.2.
Encumbrances......................................... Section 3.15.1.
Environmental Claim.................................. Section 1.3.2.
Environmental Laws................................... Section 1.3.3.
ERISA................................................ Section 1.3.4.
ERISA Affiliate...................................... Section 1.3.5.
Exchange Act......................................... Section 1.3.6.
Exchange Ratio....................................... Section 2.5.2.
Exclusivity Period................................... Section 7.6.
Financial Advisor.................................... Section 3.27.
Financial Statements................................. Section 3.6.
GAAP................................................. Section 3.6.
Governmental Entity.................................. Section 3.5.2.
Holdings............................................. Preamble
Holdings Public Filings.............................. Section 3.26.
Holdings Stock....................................... Section 2.4.1.
Insurance Contracts.................................. Section 3.19.
Interim Balance Sheet................................ Section 3.6.
Interim Balance Sheet Date........................... Section 3.6.
Interim Financial Statements......................... Section 3.6.
Liabilities.......................................... Section 3.7.2.
Material Adverse Effect.............................. Section 1.3.7.
</TABLE>
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<TABLE>
<CAPTION>
TERM DEFINITION
---- ----------
<S> <C>
Materials of Environmental Concern................... Section 1.3.8.
Merger............................................... Recitals
Merger Sub........................................... Preamble
Parent............................................... Preamble
Parent Share Amount.................................. Section 2.5.2.
Parent Stock......................................... Section 2.4.1.
Permits.............................................. Section 3.8.
Permitted Encumbrances............................... Section 1.3.9.
Person............................................... Section 1.3.10.
Proprietary Rights................................... Section 3.17.1.
Real Property........................................ Section 3.16.1.
Real Property Leases................................. Section 1.3.11.
Registration Statement............................... Section 7.1.
SEC.................................................. Section 1.3.12.
Securities Act....................................... Section 1.3.13.
Share Price.......................................... Section 2.5.2.
Share Price Calculation.............................. Section 2.5.2.
Stockholder Approval................................. Section 7.1.
Stockholders......................................... Preamble
Subordinated Notes................................... Section 2.5.2.
Subsidiary........................................... Section 1.3.14.
Surviving Corporation................................ Section 2.1.
Tax.................................................. Section 3.10.1.
Tax Returns.......................................... Section 3.10.1.
Treasury Regulation.................................. Section 3.10.1.
Year 2000 Compliant.................................. Section 3.17.3.
</TABLE>
1.3. CERTAIN DEFINITIONS. As used herein, the following terms shall have
the following meanings:
1.3.1. AFFILIATE: with respect to any Person, any Person which,
directly or indirectly, controls, is controlled by, or is under common
control with, such Person where control (including with correlative
meaning, controlled by and under common control with) as used with respect
to any Person, means the possession, directly or indirectly, of the power
to direct or cause the direction of the management and policies of such
Person, whether through the ownership of voting securities, by contract or
otherwise.
1.3.2. ENVIRONMENTAL CLAIM: any notice alleging potential liability
(including potential liability for investigatory costs, cleanup costs,
response or remediation costs, natural resources damages, property damages,
personal injuries, fines or penalties) arising out of, based on or
resulting from (a) the presence, or release of any Material of
Environmental Concern at any location, whether or not owned by that party
or any of its Affiliates or (b) circumstances forming the basis of any
violation, or alleged violation, by that party of any Environmental Law.
1.3.3. ENVIRONMENTAL LAWS: any and all statutes, regulations,
ordinances and laws, including common law, relating to the protection of
public health, safety or the environment.
1.3.4. ERISA: the Employee Retirement Income Security Act of 1974,
as amended.
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1.3.5. ERISA AFFILIATE: with respect to a party, any member (other
than that party) of a controlled group of corporations, group of trades or
businesses under common control or affiliated service group that includes
that party (as defined for purposes of Code Sections 414(b), (c) and (m)).
1.3.6. EXCHANGE ACT: the Securities Exchange Act of 1934, as
amended.
1.3.7. MATERIAL ADVERSE EFFECT: any materially adverse change in or
effect on the financial condition, business, operations, assets,
properties, results of operations or prospects of an entity.
1.3.8. MATERIALS OF ENVIRONMENTAL CONCERN: petroleum and its
by-products and all substances or constituents that are regulated by, or
form the basis of liability under, any Environmental Law.
1.3.9. PERMITTED ENCUMBRANCES: (a) liens for current taxes and other
statutory liens and trusts not yet due and payable or that are being
contested in good faith, (b) liens that were incurred in the ordinary
course of business, such as carriers', warehousemen's, landlords' and
mechanics' liens and other similar liens arising in the ordinary course of
business, (c) liens on personal property leased under operating leases, (d)
liens, pledges or deposits incurred or made in connection with workmen's
compensation, unemployment insurance and other social security benefits, or
securing the performance of bids, tenders, leases, contracts (other than
for the repayment of borrowed money), statutory obligations, progress
payments, surety and appeal bonds and other obligations of like nature, in
each case incurred in the ordinary course of business, (e) pledges of or
liens on manufactured products as security for any drafts or bills of
exchange drawn in connection with the importation of such manufactured
products in the ordinary course of business, (f) liens under Article 2 of
the Uniform Commercial Code that are special property interests in goods
identified as goods to which a contract refers, and (g) liens under Article
9 of the Uniform Commercial Code that are purchase money security
interests, none of which, individually or in the aggregate, exceed $50,000.
1.3.10. PERSON: an individual, a corporation, an association, a
partnership, an estate, a limited liability company, a trust and any other
entity or organization.
1.3.11 REAL PROPERTY LEASES: each lease, sublease, license or other
agreement under which a Person uses, occupies or has the right to occupy
any real property or interest therein that (a) provides for future minimum
payments of $25,000 or more (ignoring any right of cancellation or
termination) or (b) the cancellation or termination of which would result
in costs to the Person of $25,000 or more.
1.3.12. SEC: the Securities and Exchange Commission, or any
Governmental Entity succeeding to its functions.
1.3.13. SECURITIES ACT: the Securities Act of 1933, as amended.
1.3.14. SUBSIDIARY: any corporation, association, or other business
entity a majority (by number of votes on the election of directors or
persons holding positions with similar responsibilities) of the shares of
capital stock (or other voting interests) of which is owned by Parent, the
Company or their respective Subsidiaries, as the case may be.
ARTICLE 2
THE MERGER AND CONTRIBUTION
2.1. THE MERGER OF MERGER SUB INTO HOLDINGS. Merger Sub shall be merged,
in accordance with the applicable provisions of the DGCL, with and into
Holdings, which shall be and is sometimes referred to herein to as the
"Surviving Corporation." The Merger shall be effected by filing a certificate of
merger, substantially in the form of Exhibit A (the "Certificate of Merger")
hereto, with the Secretary of State of Delaware in accordance with the
applicable provisions of the DGCL. The effective date of the Merger (the
"Effective Date") shall be the date upon which the Certificate of Merger is
filed with the Secretary of State of Delaware and the effective time of the
Merger (the "Effective Time") shall be the time of the filing of the Certificate
of Merger with the Secretary of State of Delaware.
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<PAGE> 159
2.2. SURVIVING CORPORATION AND MERGER SUB.
2.2.1. CORPORATE EXISTENCE. The Surviving Corporation shall continue its
corporate existence under the laws of the State of Delaware. At the Effective
Time, the name of the Surviving Corporation shall be and become "Diamond
Acquisition Corp." The separate corporate existence of Merger Sub shall cease at
the Effective Time.
2.2.2. CERTIFICATE OF INCORPORATION AND BY-LAWS. The Certificate of
Incorporation of the Surviving Corporation shall be amended and shall be and
become the Amended and Restated Certificate of Incorporation of Diamond
Acquisition Corp., a copy of which appears as Attachment 1 to the Certificate of
Merger that is Exhibit A to this Agreement, until such Certificate of
Incorporation shall be amended thereafter in accordance with the DGCL and such
Certificate of Incorporation. Without limiting the generality of the foregoing,
at the Effective Time, the purposes of the Surviving Corporation and the total
number of shares and the par value of each class of stock which the Surviving
Corporation shall be authorized to issue shall be as set forth in such Amended
and Restated Certificate of Incorporation of Diamond Acquisition Corp. The
by-laws of Merger Sub, as in effect immediately prior to the Effective Time,
shall be and become the by-laws of the Surviving Corporation (except that the
name of the Surviving Corporation shall be Diamond Acquisition Corp.), until the
same shall be amended thereafter in accordance with the DGCL, the Certificate of
Incorporation of the Surviving Corporation and such by-laws.
2.2.3. DIRECTORS AND OFFICERS. From and after the Effective Time, the
respective officers and members of the board of directors of the Surviving
Corporation will consist of Timothy Fallon, Chairman, Chief Executive Officer
and Director; Peter Baker, President and Director; and Bruce MacDonald, Vice
President of Finance, Treasurer, Secretary and Director, each such officer to
serve at the pleasure of the board of directors and each such director to hold
office, subject to the applicable provisions of the Certificate of Incorporation
and by-laws of the Surviving Corporation, until the next annual meeting of
stockholders of the Surviving Corporation and until his or her successor shall
be duly elected or appointed and shall duly qualify.
2.2.4. EFFECT OF THE MERGER. At the Effective Time, the effect of the
Merger shall be as provided in this Agreement and the applicable provisions of
the DGCL. Without limiting the generality of the foregoing, at the Effective
Time, all of the estate, property, rights, privileges, powers and franchises of
Holdings and Merger Sub and all of their property, real, personal or mixed, and
all the debts due on whatever account to any of them, as well as all stock
subscriptions and other choses in action belonging to any of them, shall be
transferred to and vested in the Surviving Corporation.
2.3. PARENT.
2.3.1. CORPORATE EXISTENCE. At and after the Effective Time, Parent shall
continue its corporate existence under the laws of the State of Delaware. At the
Effective Time, the name of Parent shall be and become "Vermont Pure Holdings,
Ltd."
2.3.2. CERTIFICATE OF INCORPORATION AND BY-LAWS. The Certificate of
Incorporation of Parent as in effect immediately prior to the Effective Time,
which shall be substantially in the form of Exhibit B hereto, shall be the
Certificate of Incorporation of Parent thereafter, until such Certificate of
Incorporation shall be amended thereafter in accordance with the DGCL and such
Certificate of Incorporation. Without limiting the generality of the foregoing,
at and after the Effective Time the purposes of Parent and the total number of
shares and the par value of each class of stock which Parent shall be authorized
to issue shall be as set forth in the Certificate of Incorporation of Parent as
in effect immediately prior to the Effective Time. The by-laws of Parent as in
effect immediately prior to the Effective Time, which shall be substantially in
the form of Exhibit C hereto, shall be the by-laws of Parent until the same
shall be amended thereafter in accordance with the DGCL, the Certificate of
Incorporation of Parent and such by-laws.
2.3.3. DIRECTORS AND OFFICERS. From and after the Effective Time, the
respective officers and members of the board of directors of Parent will consist
of the following: Timothy Fallon, Chairman, Chief Executive Officer and
Director; Henry E. Baker, Chairman Emeritus and Director; Peter K. Baker,
President and Director; John B. Baker, Executive Vice President; Bruce
MacDonald, Vice President of Finance, Chief Financial Officer and Treasurer;
Philip Davidowitz, Director; Robert C. Getchell, Director; David R. Preston,
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<PAGE> 160
Director; Ross Rapaport, Director; Norman Rickard, Director; and Beat
Schlagenhauf, Director; each such officer to serve at the pleasure of the board
of directors and each such director to hold office, subject to the applicable
provisions of the Certificate of Incorporation and by-laws of Parent, until the
next annual meeting of stockholders of Parent and until his or her successor
shall be duly elected or appointed and shall duly qualify.
2.4. CONVERSION OF STOCK AND OTHER EQUITY SECURITIES IN THE MERGER.
2.4.1. HOLDINGS STOCK. At the Effective Time, by virtue of the Merger and
without any action on the part of the respective holders thereof, (a) each one
(1) share of the Common Stock, par value $.001 per share, of Holdings ("Holdings
Stock"), issued and outstanding immediately prior to the Effective Time (other
than Holdings Stock held in treasury) will be canceled and extinguished and will
be converted automatically into one (1) validly issued, fully paid and
nonassessable share of the Common Stock, par value $.001 per share, of Parent
("Parent Stock"); and (b) each share of Holdings Stock held in treasury will be
canceled and extinguished.
2.4.2. OTHER EQUITY SECURITIES OF HOLDINGS. After the Effective Time,
each option to purchase Holdings Stock granted by Holdings pursuant to any stock
option plan of Holdings, and each warrant to purchase Holdings Stock, that is
outstanding immediately prior to the Effective Time, shall, in the case of
options, be deemed to be an option granted pursuant to the corresponding stock
option plan of Parent, and, in the case of warrants, be deemed to be a warrant
issued by Parent, and Parent shall assume all of the obligations of Holdings
under each and every stock option, stock option plan, employee stock purchase
plan and warrant of Holdings. Each holder of such an option or warrant shall be
entitled to purchase from Parent, in accordance with the respective terms of
such options and warrants, and in lieu of shares of Holdings Stock, the same
number of shares of Parent Stock as the number of shares of Holdings Stock which
such holder was entitled to purchase from Holdings immediately prior to the
Effective Time. Except for the foregoing, each such option and warrant shall
remain subject after the Effective Time to the same terms and conditions,
including without limitation those with respect to the dates on which and the
proportionate extent to which such options or warrants may be exercised from
time to time, as were applicable to such options and warrants immediately prior
to the Effective Time. Holdings hereby represents and warrants that the
aggregate number of shares of Holdings Stock subject to outstanding options and
warrants is 1,872,218 as of the date hereof, and agrees not to grant or issue
any additional options and warrants prior to the Effective Time except with the
consent of the Company.
2.4.3. MERGER SUB STOCK. At the Effective Time, by virtue of the Merger
and without any action on the part of the respective holders thereof, each one
(1) share of the Common Stock, par value $.01, of Merger Sub, issued and
outstanding immediately prior to the Effective Time will be canceled and
extinguished and be converted automatically into one (1) validly issued, fully
paid and nonassessable share of the Common Stock, par value $.01 per share, of
the Surviving Corporation.
2.4.4. CERTIFICATES FOR PARENT STOCK. Each issued and outstanding stock
certificate evidencing shares of Holdings Stock outstanding immediately prior to
the Effective Time, shall, at and after the Effective Time, by virtue of the
Merger and without any action on the part of the respective holders thereof, be
deemed to evidence the same number of shares of Parent Stock as the number of
shares of Holdings Stock evidenced by such certificate immediately prior to the
Effective Time.
2.5. CONTRIBUTION OF COMPANY COMMON STOCK TO PARENT
2.5.1. CONTRIBUTION BY STOCKHOLDERS. At the Closing, effective at the
Effective Time, each Stockholder shall contribute all of his or its shares of
Common Stock, no par value per share, of the Company ("Company Common Stock"),
issued and outstanding immediately prior to the Closing (other than Company
Common Stock, if any, held in treasury), to Parent, in each case by delivering
to Parent stock certificates, duly endorsed for transfer to Parent, with
signature guaranteed, evidencing all of the Company Common Stock held of record
by such Stockholder.
2.5.2. TRANSFER OF CASH, STOCK AND SUBORDINATED NOTES BY PARENT. At the
Closing, effective at the Effective Time, Parent shall transfer and remit to
each Stockholder the amount of cash, the principal amount
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<PAGE> 161
of 12% Subordinated Promissory Note due 2007 of Parent (the "Subordinated
Notes"), and the number of shares of Parent Stock set forth opposite such
Stockholder's name on Exhibit D hereto. The aggregate amount of such cash will
be equal to the sum of (A) $8,000,000.00, plus (B) the greater of $1,500,000 or
the average amount of cash and cash-equivalents of the Company as of the close
of business on the five business days immediately preceding the Effective Date.
The aggregate principal amount of Subordinated Notes will be $22,600,000.00. The
aggregate number of shares of Parent Stock to be issued by reason of the
Contribution will be calculated by multiplying the aggregate number of shares of
Company Common Stock, issued and outstanding immediately prior to the Effective
Time, by the "Exchange Ratio." For purposes of this Agreement, the following
definitions apply:
2.5.2.1. EXCHANGE RATIO: a number rounded to five decimal places
equal to a fraction, the numerator of which is the "Parent Share Amount"
and the denominator of which is the aggregate number of shares of Company
Common Stock issued and outstanding immediately prior to the Effective
Time.
2.5.2.2. PARENT SHARE AMOUNT: $31,100,000.00 divided by the "Share
Price."
2.5.2.3. SHARE PRICE: the average of the closing price per share of
Holdings Stock (as quoted on the American Stock Exchange) for the ten (10)
business days ending on the fifth business day prior to the Effective Date
of the Merger (the "Share Price Calculation"); provided, however, that if
the Share Price Calculation is less than $2.80, then the Share Price shall
be $2.80, and if the Share Price Calculation is more than $3.15, then the
Share Price shall be $3.15.
2.5.3. ADJUSTMENT OF EXCHANGE RATIO. If, between the date of this
Agreement and the Closing, the outstanding shares of Holdings Stock shall have
been changed into a different number of shares or a different class by reason of
any reclassification, recapitalization, split-up, stock dividend, stock
combination, exchange of shares or readjustment, the Exchange Ratio shall be
appropriately adjusted.
2.6. FRACTIONAL SHARES. Only whole shares of Parent Stock will be issued
by reason of the Contribution. Any Stockholder who would otherwise be entitled
to a fraction of a share of Parent Stock (after aggregating all fractional
shares of Parent Stock to be received by such Stockholder) shall have such
fractional share interest rounded up or down to the nearest whole share of
Parent Stock.
2.7. DELIVERY OF CERTIFICATES; TRANSFERS OF OWNERSHIP. At or promptly
after the Effective Time, Parent shall cause its transfer agent to prepare a
stock certificate for each Stockholder, each such certificate to be registered
in the name of such Stockholder and evidencing the total number of shares of
Parent Stock issuable to such Stockholder by reason of the Contribution. If any
certificate for shares of Parent Stock is to be issued in a name other than that
in which the certificate surrendered in exchange therefor is registered, it will
be a condition of the issuance thereof that the certificate so surrendered will
be properly endorsed, with signature guaranteed, and otherwise in proper form
for transfer, and that the Stockholder requesting such exchange will have paid
to Parent or any agent designated by it any transfer or other taxes required by
reason of issuance of a certificate for shares of Parent Stock in any name other
than that of the registered holder of the certificate surrendered, or will have
established to the reasonable satisfaction of Parent or any agent designated by
it that such tax has been paid or is not payable.
2.8. CLOSING. The closing of the Merger and Contribution (the "Closing")
shall take place at the offices of Foley, Hoag & Eliot LLP in Boston,
Massachusetts on July 28, 2000, or at such other time and place or on such other
date as the parties hereto agree (the "Closing Date").
2.9. TAX CONSEQUENCES. It is intended by the parties hereto that the
Merger and the Contribution shall constitute a transaction described in Code
Section 351.
2.10. ADDITIONAL ACTIONS. If, at any time after the Effective Time, any
further action is necessary or desirable to carry out the purposes of this
Agreement or to vest, perfect or confirm in the Surviving Corporation or Parent
title to or ownership or possession of any property, right, privilege, power,
franchise or other asset of any constituent corporation acquired or to be
acquired by reason of, or as a result of, the Merger or the Contribution, the
officers and directors of the constituent corporations to this Agreement are
fully
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authorized in the name of their respective corporations or otherwise to take,
and will take, all such lawful and necessary action, so long as such action is
consistent with this Agreement.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
Holdings represents to the Company and each of the Stockholders, and the
Company represents to Parent, Holdings and Merger Sub as follows (subject in
each case to such exceptions as are set forth in the representing party's
attached Disclosure Schedule in the labeled Section corresponding to the caption
of the representation or warranty to which such exceptions relate):
3.1. CORPORATE STATUS. It is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation, with the requisite corporate power to own, operate and lease its
properties and to carry on its business as now being conducted. It is duly
qualified or licensed to do business and is in good standing in all
jurisdictions in which the character of the properties owned or held under lease
by it or the nature of the business transacted by it makes such qualification
necessary, except where the failure to be so qualified would not have a Material
Adverse Effect. All jurisdictions in which it is qualified to do business are
set forth in its Disclosure Schedule sec. 3.1.
3.2. CAPITAL STOCK.
3.2.1. AUTHORIZED AND OUTSTANDING STOCK. Its authorized and outstanding
capital stock are as set forth in its Disclosure Schedule sec. 3.2. The Company
represents that all such outstanding shares of its capital stock are, as of the
date of this Agreement, and will be, immediately prior the Effective Time, owned
of record and beneficially by the Stockholders in the amounts set forth opposite
their respective names as set forth in its Disclosure Schedule sec. 3.2. All
such outstanding shares of capital stock, and all outstanding shares of capital
stock of each of its Subsidiaries, have been duly authorized and validly issued,
were not issued in violation of any Person's preemptive or similar rights, and
are fully paid and nonassessable. No Person has any valid right to rescind any
purchase from or issuance by it or any of its Subsidiaries of any shares of
capital stock of it or any of its Subsidiaries. It owns, directly or indirectly
through a Subsidiary, all of the issued and outstanding shares of the capital
stock of each of its Subsidiaries, free and clear of all liens, pledges,
charges, security interests, encumbrances, or adverse claims of any kind
whatsoever.
3.2.2. OPTIONS, CONVERTIBLE SECURITIES AND SIMILAR RIGHTS. Except as set
forth in its Disclosure Schedule sec. 3.2, neither it nor any of its
Subsidiaries has or is bound by any outstanding subscriptions, options,
warrants, conversion rights or other rights, securities, agreements or
commitments obligating it or any such Subsidiary to issue, sell or otherwise
dispose of shares of its capital stock, or any securities or obligations
convertible into, or exercisable or exchangeable for, any shares of its or such
Subsidiary's capital stock. Except as set forth in its Disclosure Schedule sec.
3.2, neither it nor any of its Subsidiaries (a) has any outstanding obligation,
contractual or otherwise, to repurchase, redeem, or otherwise acquire any shares
of its or such Subsidiary's capital stock, (b) is a party to or bound by, or has
knowledge of, any agreement or instrument relating to the voting of its or such
Subsidiary's voting securities, or (c) is a party to or bound by any agreement
or instrument under which any Person has the right to require it or any of its
Subsidiaries to effect, or to include any securities held by such Person in, any
registration under the Securities Act.
3.3. SUBSIDIARIES. Its Subsidiaries are as set forth in Disclosure
Schedule sec. 3.3, and, except as set forth therein, it does not own, directly
or indirectly, any shares or other equity interest or securities in any business
organization, entity or enterprise. It has delivered to Holdings, in the case of
the Company, or to the Company, in the case of Holdings, true and correct copies
of the charter documents and by-laws, and all amendments thereto, of each of its
Subsidiaries, as in effect on the date hereof. Disclosure Schedule sec. 3.3 sets
forth a list of each of its Subsidiary's directors and officers.
3.4. CERTIFICATE OF INCORPORATION, BY-LAWS, DIRECTORS AND OFFICERS. It
has delivered to Holdings, in the case of the Company, or to the Company, in the
case of Holdings, true and correct copies of its Certificate of Incorporation
and by-laws, including all amendments thereto, as in effect on the date hereof.
Its minute books,
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which have been made available to Holdings, in the case of the Company, or to
the Company, in the case of Holdings, contain accurate records of all meetings
and consents in lieu of meetings of its board of directors (and any committees
thereof that recorded written minutes, whether permanent or temporary) and of
its stockholders since the date of its incorporation, and such records
accurately reflect all transactions referred to in such minutes and consents.
The Company represents that its stock books accurately reflect record ownership
of the Company's capital stock. Disclosure Schedule sec. 3.4 sets forth a list
of its directors and officers.
3.5. AUTHORITY FOR AGREEMENT; NONCONTRAVENTION
3.5.1. AUTHORITY. It has the corporate power and authority to enter into
this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by its
board of directors and stockholders, and no other corporate proceedings on its
part are necessary to authorize the execution and delivery of this Agreement and
except, in the case of Holdings, for the requisite approval of its stockholders,
which has not been obtained as of the date of this Agreement, the consummation
of the transactions contemplated hereby. This Agreement has been duly executed
and delivered by it and constitutes its valid and binding obligation,
enforceable against it in accordance with its terms, with the qualification that
enforcement of the rights and remedies created hereby are subject to (a)
bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium and
other laws of general application affecting the rights and remedies of
creditors, (b) general principles of equity (regardless of whether enforcement
is considered in a proceeding in equity or at law), and (c) in the case of
Holdings, the requisite approval of its stockholders. On or before the Effective
Date, the other agreements contemplated hereby to be executed and delivered by
it on or before the Effective Date will have been executed and delivered by it,
and, upon such execution and delivery, will constitute its valid and binding
obligations, enforceable against it in accordance with their respective terms,
with the qualification that enforcement of the rights and remedies created
thereby are subject to (a) bankruptcy, insolvency, reorganization, fraudulent
conveyance, moratorium and other laws of general application affecting the
rights and remedies of creditors, (b) general principles of equity (regardless
of whether enforcement is considered in a proceeding in equity or at law).
3.5.2. NO CONFLICT. Subject to obtaining the terminations, consents and
waivers set forth in its Disclosure Schedule sec. 3.5, neither the execution and
delivery of this Agreement by it, nor the performance by it of its obligations
hereunder, nor the consummation by it of the transactions contemplated hereby
will (a) conflict with or result in a violation of any provision of its
Certificate of Incorporation or by-laws, (b) with or without the giving of
notice or the lapse of time, or both, conflict with, or result in any violation
or breach of, or constitute a default under, or result in any right to
accelerate or result in the creation of any encumbrance pursuant to, or right of
termination under, any provision of any note, mortgage, indenture, lease,
instrument or other agreement, Permit, concession, grant, franchise, license,
judgment, order, decree, statute, ordinance, rule or regulation to which it is a
party or by which it or any of its assets or properties is bound or which is
applicable to it or any of its assets or properties. No authorization, consent
or approval of, or filing with or notice to, any United States or foreign
governmental or public body or authority (each a "Governmental Entity") is
necessary for the execution and delivery of this Agreement by it or the
consummation by it of the transactions contemplated hereby, except for the
filing of the Certificate of Merger with the Secretary of State of Delaware, and
the filing with the SEC by Holdings or Parent of a registration statement on
Form S-4 together with any required filings under Regulation C of the Securities
Act in connection therewith, and related filings, if any, under state securities
laws.
3.6. FINANCIAL STATEMENTS. Disclosure Schedule sec. 3.6 contains accurate
and complete copies of the following financial statements (collectively, the
"Financial Statements"): (a) its audited consolidated balance sheets, statements
of income and statements of cash flow for each of the fiscal years ended in
October 1997, October 1998 and October 1999, and (b) its unaudited consolidated
balance sheet, statement of income and statement of cash flows as of, at and for
the period commencing on the first day of its fiscal year 2000 through the last
day of its first fiscal quarter ending in January 2000 (the "Interim Financial
Statements"). The Financial Statements are based upon the information contained
in its books and records and fairly present its financial condition as at the
dates thereof and results of operations for the periods referred to therein. The
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Financial Statements have been prepared in accordance with generally accepted
accounting principles ("GAAP") applied on a consistent basis throughout the
periods indicated; provided, however, that the Interim Financial Statements are
subject to normal year end adjustments (which will not be material, individually
or in the aggregate, when made on a basis consistent with the audited Financial
Statements) and lack footnotes and other presentation items. For purposes
hereof, the "Interim Balance Sheet Date" shall be January 31, 2000, in the case
of the Company, and January 29, 2000, in the case of Holdings, and the balance
sheet as of that date shall be the "Interim Balance Sheet."
3.7. ABSENCE OF MATERIAL ADVERSE CHANGES AND UNDISCLOSED LIABILITIES.
3.7.1. CHANGES. Except as set forth in its Disclosure Schedule sec. 3.7,
since the Interim Balance Sheet Date, it has not suffered any Material Adverse
Effect, nor has there occurred or arisen any event, condition or state of facts
of any character that could reasonably be expected to result in a Material
Adverse Effect. Except as described or expressly contemplated in its Disclosure
Schedule sec. 3.7 or by this Agreement, and without limiting the generality of
the foregoing, since the Interim Balance Sheet Date, it has not:
(a) experienced any change in its or any of its Subsidiaries' assets,
liabilities, sales, income or business or in their relationships with
suppliers, customers, or lessors, other than changes in the ordinary course
of business that have not resulted, either individually or in the
aggregate, in a Material Adverse Effect;
(b) either directly or through any Subsidiary entered into any
material transaction, other than in the ordinary course of business;
(c) sold, leased, transferred or assigned any of its assets, tangible
or intangible, other than in the ordinary course of business;
(d) experienced the loss of any director, executive officer or key
employee of it or any of its Subsidiaries;
(e) accelerated, terminated, modified in a manner adverse to it, or
canceled any contract, lease, sublease, license, or sublicense (or series
of related contracts, leases, subleases, licenses, and sublicenses)
involving more than $25,000 to which it is a party;
(f) canceled, compromised, waived, or released any right or claim (or
series of related rights and claims) either involving more than $25,000 or
outside the ordinary course of business;
(g) granted any license or sublicense of any rights under or with
respect to any of its Proprietary Rights other than to its distributors,
resellers and other licensees under agreements as set forth on its
Disclosure Schedule sec. 3.17;
(h) experienced material damage, destruction, or loss (whether or not
covered by insurance) to its property, other than ordinary wear and tear
not caused by neglect;
(i) created or suffered to exist any encumbrance not in effect on the
Interim Balance Sheet Date, other than Permitted Encumbrances, upon any of
its assets, tangible or intangible;
(j) issued, sold or otherwise disposed of, or redeemed, purchased, or
otherwise acquired, any of its capital stock; granted or redeemed,
purchased, canceled or otherwise acquired, any options, warrants, or other
rights to purchase or obtain (including upon conversion or exercise) any of
its capital stock, or any securities convertible or exchangeable into any
of its capital stock; or otherwise changed its capital structure or stock
ownership in any way;
(k) declared, set aside, or paid any dividend or distribution with
respect to its capital stock (whether in cash or in kind);
(l) entered into financial arrangements for the benefit of any of any
of its directors, executive officers or beneficial owners of more than 5%
of its outstanding capital stock, except in the ordinary course of business
consistent with past practice;
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(m) made or committed to make any capital expenditures or entered into
any other material transaction, in either case outside the ordinary course
of business or involving an expenditure in excess of $25,000;
(n) amended or modified in any respect any employment contract or
arrangement or any profit sharing, bonus, incentive compensation,
severance, employee benefit or multiemployer plans;
(o) entered into any employment agreement or collective bargaining
agreement or increased the compensation paid to, in any capacity, (A) any
of its directors and executive officers, or (B) any of its other employees;
(p) incurred any indebtedness for borrowed money;
(q) written off as uncollectible any of its notes or accounts
receivable or written down the value of any of its assets or inventory,
other than in immaterial amounts;
(r) changed any method of accounting or keeping its books of account
or accounting practices; or
(s) committed orally or in writing to any of the foregoing.
3.7.2. LIABILITIES. Except as set forth on its Disclosure Schedule sec.
3.7, it has no liabilities or obligations, fixed, accrued, contingent or
otherwise (collectively, "Liabilities"), that are not fully reflected or
provided for on, or disclosed in the notes to, the Interim Balance Sheet, except
Liabilities incurred in the ordinary course of business since the Interim
Balance Sheet Date, none of which individually or in the aggregate has resulted
or could reasonably be expected to result in costs to it, individually or in the
aggregate, in excess of $25,000. Since the Interim Balance Sheet Date, there has
not been any discharge or satisfaction by it or any of its Subsidiaries of any
lien or encumbrance, or payment by any of them of any Liability other than (a)
current Liabilities included in its Interim Balance Sheet, (b) current
Liabilities incurred since the Interim Balance Sheet Date in the ordinary course
of business, and (c) current Liabilities incurred in connection with this
transaction and set forth on its Disclosure Schedule sec. 3.7.
3.8. COMPLIANCE WITH APPLICABLE LAW, CERTIFICATES OF INCORPORATION AND
BY-LAWS. It has all requisite licenses, permits and certificates from all
Governmental Entities (collectively, "Permits") necessary to conduct its
business as currently conducted, and to own, lease and operate its properties in
the manner currently held and operated, except for any the absence of which,
individually or in the aggregate, would not have a Material Adverse Effect. It
is in compliance in all material respects with all the terms and conditions
related to such Permits. There are no proceedings pending or, to its knowledge,
threatened, which may result in revocation, cancellation, suspension, or any
material adverse modification of any of such Permits. Its business is not being
conducted in violation of any applicable law, statute, ordinance, regulation,
rule, judgment, decree, order, Permit, concession, grant or other authorization
of any Governmental Entity, except for violations that, individually or in the
aggregate, have not resulted in, and could not reasonably be expected to result
in, a Material Adverse Effect. It is not in default or violation of any
provision of its Certificate of Incorporation or its by-laws.
3.9. LITIGATION AND AUDITS. Except as set forth on its Disclosure
Schedule sec. 3.9, (a) there is no claim, action, suit, arbitration or
proceeding pending or, to its knowledge, threatened against or involving it, or
any of its assets or properties, at law or in equity, or before any arbitrator
or Governmental Entity, and there are no judgments, decrees, injunctions or
orders of any Governmental Entity or arbitrator outstanding against it, and (b)
there is no investigation by any Governmental Entity or any other Person with
respect to it that is pending or, to its knowledge, threatened, nor has any
Governmental Entity or other Person indicated to it an intention to conduct the
same.
3.10. TAX MATTERS. Except as set forth on its Disclosure Schedule sec.
3.10:
3.10.1. DEFINITIONS. As used in this Agreement, "Affiliated Group" means
any affiliated group within the meaning of Code Section 1504(a) or any similar
group defined under a similar provision of state, local or foreign law; "Tax"
means any federal, state, local, or foreign income, gross receipts, license,
payroll, employment, excise, severance, stamp, occupation, premium, windfall
profits, environmental (including taxes
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under Code Section 59A), customs duties, capital stock, franchise, profits,
withholding, social security (or similar), unemployment, disability, real
property, personal property, sales, use, transfer, registration, value added,
alternative or add-on minimum, estimated, or other tax of any kind whatsoever,
including any interest, penalty, or addition thereto, whether disputed or not;
"Tax Returns" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof; and "Treasury
Regulation" means those regulations promulgated under the Code.
3.10.2. TAX RETURNS AND PAYMENTS. It and each of its Subsidiaries has
filed all material Tax Returns required to be filed. All such Tax Returns were
correct and complete in all material respects. All Taxes due and payable by it
(whether or not shown on any Tax Return) have been paid (other than amounts
being contested in good faith by appropriate proceedings for which adequate
reserves have been established on its books). Neither it nor any of its
Subsidiaries is currently the beneficiary of any extension of time within which
to file any Tax Return. No claim that has not been finally resolved has ever
been made by an authority in a jurisdiction where it or any of its Subsidiaries
does not file Tax Returns that such entity is or may be subject to taxation by
that jurisdiction. There are no encumbrances on any of its or its Subsidiaries'
assets that arose in connection with any failure (or alleged failure) to pay any
Tax (other than liens for Taxes that are not yet due or that are being contested
in good faith by appropriate proceedings), except for encumbrances that are not
reasonably likely, individually or in the aggregate, to have a Material Adverse
Effect on it.
3.10.3. WITHHOLDING. It and each of its Subsidiaries has withheld and
paid all Taxes required to have been withheld and paid in connection with
amounts paid or owing to any employee, independent contractor, creditor,
stockholder, or other third party, except for amounts that are not reasonably
likely, individually or in the aggregate, to have a Material Adverse Effect on
it.
3.10.4. AUDITS. There is no pending dispute or claim concerning any Tax
liability of it or any of its Subsidiaries either (a) claimed or raised by any
authority in writing or (b) as to which any of its or its Subsidiaries'
directors and officers (and employees responsible for Tax matters) has knowledge
based upon personal contact with any agent of such authority. Disclosure
Schedule sec. 3.10 lists all federal, state, local, and foreign income Tax
Returns filed with respect to its taxable periods ended on or after October 31,
1994, indicates those Tax Returns that have been audited, and indicates those
Tax Returns that currently are the subject of audit. It has delivered or made
available to Holdings, in the case of the Company, or to the Company, in the
case of Holdings, correct and complete copies of all federal income Tax Returns,
examination reports, and statements of deficiencies assessed against or agreed
to by it since October 31, 1994.
3.10.5. WAIVERS AND EXTENSIONS. Neither it nor any of its Subsidiaries
has granted any currently outstanding waiver of any statute of limitations in
respect of Taxes or agreed to any currently outstanding extension of time with
respect to a Tax assessment or deficiency.
3.10.6. ELECTIONS AND CONSENTS. Neither it nor any of its Subsidiaries
has filed a consent under Code Section 341(f) concerning collapsible
corporations. Neither it nor any of its Subsidiaries has made any payments, is
not obligated to make any payments, and is not a party to any agreement that
under certain circumstances could obligate it to make any payments that will not
be deductible under either of Code Section 162(m) or 280G. Neither it nor any of
its Subsidiaries is a party to any Tax allocation or sharing agreement. Neither
it nor any of its Subsidiaries (a) has ever been a member of an Affiliated Group
filing a consolidated federal income Tax Return (other than a group the Common
Parent of which is Parent) or (b) has any liability for the Taxes of any person
(other than it and its Subsidiaries) under Treasury Regulation Section 1.1502-6
(or any similar provision of state, local, or foreign law), as a transferee or
successor, by contract, or otherwise.
3.10.7. UNPAID TAXES. Its unpaid Taxes (a) did not, as of the Interim
Balance Sheet Date, exceed the reserve for Tax liability (rather than any
reserve for deferred Taxes established to reflect timing differences between
book and Tax income) set forth on the Interim Balance Sheet (rather than in any
notes thereto) and (b) do not exceed that reserve as adjusted for the passage of
time through the date of the Closing in accordance with the its past practice in
filing its Tax Returns.
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3.11. EMPLOYEE BENEFIT PLANS.
3.11.1. LIST OF PLANS. Disclosure Schedule sec. 3.11 hereto contains a
correct and complete list of all pension, profit sharing, retirement, deferred
compensation, welfare, legal services, medical, dental or other employee benefit
or health insurance plans, life insurance or other death benefit plans,
disability, stock option, stock purchase, restricted stock, stock compensation,
bonus, vacation pay, severance pay and other similar plans, programs or
agreements, relating to any persons employed by it or in which any person
employed by it is eligible to participate and which it currently maintains or
has maintained at any time in the last five calendar years (collectively, the
"Benefit Plans"). It has provided or made available to Holdings, in the case of
the Company, or to the Company, in the case of Holdings, complete copies, as of
the date hereof, of all of the Benefit Plans that have been reduced to writing,
together with all documents establishing or constituting any related trust,
annuity contract, insurance contract or other funding instrument, and summaries
of those that have not been reduced to writing. It has provided or made
available to Holdings, in the case of the Company, or to the Company, in the
case of Holdings, complete copies of current plan summaries, employee booklets,
personnel manuals and other material documents or written materials concerning
the Benefit Plans that are in its possession as of the date hereof. It does not
have any "defined benefit plans" as defined in Section 3(35) of ERISA.
3.11.2. ERISA. Neither it nor any of its ERISA Affiliates has incurred
any "withdrawal liability" calculated under Section 4211 of ERISA, and there has
been no event or circumstance which would cause them to incur any such
liability. Neither it nor any of its ERISA Affiliates has ever maintained a
Benefit Plan providing health or life insurance benefits to former employees,
other than as required pursuant to Code Section 4980B or to any state law
conversion rights. No pension plan (as defined by ERISA) previously maintained
by it or its ERISA Affiliates which was subject to ERISA has been terminated; no
proceedings to terminate any such plan have been instituted within the meaning
of Subtitle C of Title IV of ERISA; and no reportable event within the meaning
of Section 4043 of said Subtitle C of Title IV of ERISA with respect to which
the requirement to file a notice with the Pension Benefit Guaranty Corporation
has not been waived has occurred with respect to any such Benefit Plan, and no
liability to the Pension Benefit Guaranty Corporation has been incurred by it or
its ERISA Affiliates. With respect to all the Benefit Plans, it and each of its
ERISA Affiliates are in material compliance with all requirements prescribed by
all statutes, regulations, orders or rules currently in effect, and have in all
material respects performed all obligations required to be performed by them.
Neither it nor any of its ERISA Affiliates, nor any of their directors,
officers, employees or agents, nor any trustee or administrator of any trust
created under the Benefit Plans, has engaged in or been a party to any
"prohibited transaction" as defined in Code Section 4975 and Section 406 of
ERISA which could subject it or its ERISA Affiliates, directors or employees or
the Benefit Plans or the trusts relating thereto or any party dealing with any
of the Benefit Plans or trusts to any tax or penalty on "prohibited
transactions" imposed by Code Section 4975. Neither the Benefit Plans nor the
trusts created thereunder have incurred any "accumulated funding deficiency," as
such term is defined in Code Section 412 and regulations issued thereunder,
whether or not waived.
3.11.3. PLAN DETERMINATIONS. Each Benefit Plan intended to qualify under
Code Section 401(a) has been determined by the Internal Revenue Service to so
qualify, and the trusts created thereunder have been determined to be exempt
from tax under Code Section 501(a); copies of all determination letters have
been delivered to it; and nothing has occurred since the date of such
determination letters which is likely to cause the loss of such qualification or
exemption. With respect to each Benefit Plan which is a qualified profit sharing
plan, all employer contributions accrued for plan years ending prior to the date
hereof under the Benefit Plan terms and applicable law have been made.
3.11.4. FUNDING. Except as set forth on Disclosure Schedule sec. 3.11:
(a) all contributions, premiums or other payments due or required to
be made to the Benefit Plans prior to the date hereof have been made as of
the date hereof or are properly reflected on the Interim Balance Sheet;
(b) there are no actions, liens, suits or claims pending or, to its
knowledge, threatened (other than routine claims for benefits) with respect
to any Benefit Plan;
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(c) each Benefit Plan that is a "group health plan" (as defined in
Section 607(1) of ERISA) has been operated at all times in material
compliance with the provisions of COBRA and any applicable, similar state
law; and
(d) with respect to any Benefit Plan that is qualified under Code
Section 401(k), individually and in the aggregate, no event has occurred,
and, to its knowledge, there exists no condition or set of circumstances,
in connection with which it could be subject to any liability that is
reasonably likely to result in costs to it, individually or in the
aggregate, in excess of $25,000 (except liability for benefits claims and
funding obligations payable in the ordinary course) under ERISA, the Code
or any other applicable law.
3.12. EMPLOYMENT-RELATED MATTERS.
3.12.1. LABOR RELATIONS. It is not a party to any collective bargaining
agreement or other contract or agreement with any labor organization or other
representative of any of its employees. There is no labor strike, dispute,
slowdown, work stoppage or lockout that is pending or threatened against or
otherwise affecting it, and it has not experienced the same at any time during
the period of five years preceding the date of this Agreement. It has not closed
any plant or facility, effected any layoffs of employees or implemented any
early retirement or separation program at any time during such period, nor has
it planned or announced any such action or program for the future with respect
to which it has any liability. All salaries, wages, vacation pay, bonuses,
commissions and other compensation payable by it to its employees before the
date hereof have been paid or accrued in all material respects as of the date
hereof.
3.12.2. EMPLOYEE LIST. It has delivered or made available to Holdings, in
the case of the Company, or to the Company, in the case of Holdings, a list (the
"Employee List") containing the name of each of its employees, and each such
employee's position, starting employment date and annual salary or hourly wage.
The Employee List is correct and complete as of the date of the Employee List,
and is correct and complete as of the date hereof, except for changes since that
date that are not material individually or in the aggregate. No third party has
asserted any claim, or, to its knowledge, has any reasonable basis to assert any
valid claim, against it that either the continued employment by or association
with it of any of its present officers, employees or consultants contravenes any
agreement or law applicable to unfair competition, trade secrets or proprietary
information. To its knowledge, each of the employees listed on its Employee List
intends to continue his or her employment with it after the Closing.
3.13. ENVIRONMENTAL.
3.13.1. ENVIRONMENTAL LAWS. It is in compliance in all material respects
with all applicable Environmental Laws. It has not received any communication
that alleges that it is not in compliance in all respects with all applicable
Environmental Laws in effect on the date hereof. There are no circumstances that
may prevent, and there are no circumstances specific to it that may interfere
with, compliance by it in the future with all applicable Environmental Laws. All
Permits and other governmental authorizations currently held by it pursuant to
the Environmental Laws are in full force and effect, it is in compliance in all
material respects with all of the terms of such Permits and authorizations, and
no other Permits or authorizations are required by it for the conduct of its
business as of the date hereof. The management, handling, storage,
transportation, treatment, and disposal by it of all Materials of Environmental
Concern has been in compliance in all material respects with all applicable
Environmental Laws.
3.13.2. ENVIRONMENTAL CLAIMS. There is no Environmental Claim pending or,
to its knowledge, threatened against or involving the it or any of its
Subsidiaries or, to its knowledge, against any Person or entity whose liability
for any Environmental Claim it has knowingly retained or assumed.
3.13.3. NO BASIS FOR CLAIMS. To its knowledge, there are no past or
present actions or activities by it or any of its Subsidiaries, or any
circumstances, conditions, events or incidents, including the storage,
treatment, release, emission, discharge, disposal or arrangement for disposal of
any Material of Environmental Concern, that could reasonably form the basis of
any Environmental Claim against it or against any Person or entity whose
liability for any Environmental Claim it has knowingly retained or assumed.
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3.14. NO BROKER'S OR FINDER'S FEES. Except as set forth in its Disclosure
Schedule sec. 3.14, it has not paid or become obligated to pay any fee or
commission to any broker, finder, financial advisor or intermediary in
connection with the transactions contemplated by this Agreement.
3.15. ASSETS OTHER THAN REAL PROPERTY
3.15.1. TITLE. It or its Subsidiaries have good and marketable title to
all of the tangible assets shown on the Interim Balance Sheet, in each case,
free and clear of any mortgage, pledge, lien, claim, charge, security interest,
lease or other encumbrance (collectively, "Encumbrances"), except for (a) assets
disposed of since the Interim Balance Sheet Date in the ordinary course of
business, in a manner consistent with past practices and with a value,
individually or in the aggregate, of $25,000 or less, (b) liabilities,
obligations and Encumbrances reflected in the Interim Balance Sheet or otherwise
in the Financial Statements, (c) Permitted Encumbrances, and (d) liabilities,
obligations and Encumbrances set forth on Disclosure Schedule sec. 3.15.
3.15.2. CONDITION. Except as set forth on Disclosure Schedule sec. 3.15,
all receivables shown on the Interim Balance Sheet and all receivables accrued
by it since the Interim Balance Sheet Date, have been collected or, to its
knowledge, are collectible in the aggregate amount shown, less any allowances
for doubtful accounts reflected therein, and, in the case of receivables arising
since the Interim Balance Sheet Date, any additional allowance in respect
thereof calculated in a manner consistent with the allowance reflected in the
Interim Balance Sheet, it being understood that the foregoing representation and
warranty is not a guaranty of collection. All material plant, equipment and
personal property owned by it and its Subsidiaries and regularly used in its
business is in good operating condition and repair, ordinary wear and tear
excepted.
3.16. REAL PROPERTY.
3.16.1. REAL PROPERTY. Disclosure Schedule sec. 3.16 lists (a) each
parcel of real property in which it or its Subsidiaries have an ownership
interest and describes the plants, buildings, structures, installations,
fixtures, betterments, additions and other improvements located thereon,
together with all easements used or useful in connection therewith (the "Real
Property"), and (b) all Encumbrances upon the Real Property.
3.16.2. REAL PROPERTY LEASES. Disclosure Schedule sec. 3.16 lists all of
its and its Subsidiaries' Real Property Leases. Complete copies of such Real
Property Leases, including all material amendments thereto, have previously been
delivered or made available by Holdings to the Company or by the Company to
Holdings, as the case may be. Such Real Property Leases grant leasehold estates
free and clear of all Encumbrances, except Permitted Encumbrances. Such Real
Property Leases are in full force and effect and, to its knowledge with respect
to any party other than it or any Subsidiary, are binding and enforceable
against each of the parties thereto in accordance with their respective terms.
Neither it nor, to its knowledge with respect to any party other than it or any
Subsidiary, any other party to any of such Real Property Leases, has committed a
material breach or default under any Real Property Lease, nor, to its knowledge
with respect to any party other than it or any Subsidiary, has there occurred
any event that with the passage of time or the giving of notice or both would
constitute such a breach or default, nor are there any facts or circumstances
known to it that would reasonably indicate that it or any of its Subsidiaries is
likely to be in material breach or default thereunder. Disclosure Schedule sec.
3.16 correctly identifies each such Real Property Lease that requires the
consent of any third party in connection with the transactions contemplated
hereby. No material construction, alteration or other leasehold improvement work
with respect to the real property covered by any such Real Property Leases
remains to be paid for or to be performed by it or any Subsidiary.
3.16.3. CONDITION. All buildings, structures and fixtures, or parts
thereof, used by it or any of its Subsidiaries in the conduct of its or their
business are in good operating condition and repair, ordinary wear and tear
excepted, and are insured with coverages that are usual and customary for
similar properties and similar businesses or are required, pursuant to the terms
of its Real Property Leases or the terms of the Encumbrances on its Real
Property, to be insured by third parties. The zoning of its Real Property and
the property subject to its Real Property Leases permits the presently existing
improvements and the continuation of the business presently being conducted on
such Real Property and property subject to Real Property Leases.
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3.17. INTELLECTUAL PROPERTY.
3.17.1. LIST OF INTELLECTUAL PROPERTY. Disclosure Schedule sec. 3.17
lists all patents, trademarks, trade names, service marks, logos, copyrights,
and licenses, and any applications therefor, that are used in or necessary to
its or any of its Subsidiaries' businesses as now being conducted or as
currently proposed to be conducted (other than software programs that have not
been customized for its or such subsidiary's use) (collectively, and together
with any technology, know-how, trade secrets, processes, formulas and techniques
used in or necessary to its or any of its Subsidiaries' business, "Proprietary
Rights"). It and its Subsidiaries own, or are licensed or otherwise have the
full and unrestricted right to use, all Proprietary Rights used in or necessary
to its or its Subsidiaries' business, and no other intellectual property rights,
privileges, licenses, contracts or other instruments, or evidences of interests,
are necessary to the conduct of its or its Subsidiaries' business.
3.17.2. RIGHTS IN INTELLECTUAL PROPERTY; NO INFRINGEMENT. In any instance
where its or any of its Subsidiaries' rights to Proprietary Information arise
under a license or similar agreement (other than for software programs that have
not been customized for its or such Subsidiary's use), such licenses and
agreements are set forth in Disclosure Schedule sec. 3.17, and such rights are
licensed exclusively to it or such Subsidiary except as indicated in Disclosure
Schedule sec. 3.17. Except as set forth in Disclosure Schedule sec. 3.17,
neither it nor any of its Subsidiaries has any obligation to compensate any
other Person or the use of any Proprietary Information. Disclosure Schedule sec.
3.17 lists every instance in which it or any of its Subsidiaries has granted to
any other Person any license or other right to use in any manner any of the
Proprietary Information, whether or not requiring the payment of royalties
(other than licenses of commercially available software entered into in the
ordinary course of business). No other Person has an interest in or right or
license to use any of its or its Subsidiaries' Proprietary Information. To its
knowledge, none of its or any of its Subsidiaries' Proprietary Information is
being infringed by others, or is subject to any outstanding order, decree,
judgment or stipulation. No litigation or other proceeding in or before any
court or other Governmental Entity or adjudicatory, arbitral or administrative
body either (a) relating to it or any of its Subsidiaries' Proprietary
Information or (b) charging it or any of its Subsidiaries with infringement of
any patent, trademark, copyright, license or other proprietary right, is pending
or, or to its knowledge, threatened, nor is there, to its knowledge, any basis
for any such litigation or proceeding. It and its Subsidiaries maintain
reasonable security measures for the preservation of the secrecy and proprietary
nature of such of their Proprietary Information as constitutes trade secrets.
3.17.3. YEAR 2000 READINESS. Except as set forth in Disclosure Schedule
sec. 3.17, neither it nor any of its Subsidiaries has incurred any business
disruption as a result of any instance in which computer hardware or software
was not Year 2000 Compliant. It has received assurances of Year 2000 Compliance
from its material vendors and, to the extent material to its business and
operations, its customers, financial institutions, payroll service providers and
retirement plan administrators. "Year 2000 Compliant" means, with respect to
computer hardware and software, that such hardware and software (a) did and will
accurately receive, record, store, provide, recognize and process all date and
time data from, during, into and between the twentieth and twenty-first
centuries; (b) did and will accurately perform all date-dependent calculations
and operations (including mathematical operations, sorting, comparing and
reporting) from, during, into and between the twentieth and twenty-first
centuries; and (c) did and will not malfunction, cease to function or provide
invalid or incorrect results as a result of (i) the change of century, (ii) date
data, including date data which represents or references different centuries or
more than one century or (iii) the occurrence of any particular date; in each
case without human intervention, other than original data entry.
3.18. AGREEMENTS, CONTRACTS AND COMMITMENTS.
3.18.1. CONTRACTS. Except as set forth on its Disclosure Schedule 3.18,
neither it nor any of its Subsidiaries is a party to:
(a) any employment agreement with any present employee, officer,
director or consultant (or former employees, officers, directors and
consultants to the extent there remain at the date hereof obligations to be
performed by it or any such Subsidiary);
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(b) any agreement for personal services or employment with a term of
service or employment specified in the agreement in which it or any such
Subsidiary has agreed on the termination of such agreement to make any
payments greater than those that would otherwise be imposed by law;
(c) any agreement to guarantee the obligations of others;
(d) any agreement or commitment containing a covenant limiting or
purporting to limit the freedom of it or any such Subsidiary to compete
with any Person in any geographic area or to engage in any line of
business;
(e) any joint venture or profit-sharing agreement;
(f) except for trade indebtedness incurred in the ordinary course of
business and, prior to the Interim Balance Sheet Date, reflected on the
Interim Balance Sheet, any loan or credit agreements providing for the
extension of credit to it or any such Subsidiary or any instrument
evidencing or related in any way to indebtedness incurred in the
acquisition of companies or other entities or indebtedness for borrowed
money by way of direct loan, sale of debt securities, purchase money
obligation, conditional sale, lease, guarantee, or otherwise that
individually is in the amount of $50,000 or more;
(g) any license or royalty agreement other than those disclosed on its
Disclosure Schedule sec. 3.17;
(h) any distribution, VAR or OEM agreement (identifying any that
contain exclusivity provisions);
(i) any agreement or arrangement with any third party to develop any
intellectual property or other asset expected to be used or currently used
or useful in the its or any such Subsidiary's business;
(j) any agreement or arrangement for it or any such Subsidiary to
develop any intellectual property or other asset for any third party;
(k) any agreement or arrangement providing for the payment of any
commission based on sales;
(l) any agreement for the sale or license by or to it or any such
Subsidiary of materials, products, services or supplies that involves
future payments by or to it or such Subsidiary of more than $50,000;
(m) any agreement for the purchase or capital lease by it or any such
Subsidiary of any materials, equipment (including rolling stock), services,
or supplies, that either (i) involves a binding commitment by it or such
Subsidiary to make future payments in excess of $50,000 and cannot be
terminated by it or such Subsidiary without penalty upon less than three
months" notice or (ii) was not entered into in the ordinary course of
business;
(n) any agreement or commitment for the acquisition, construction or
sale of fixed assets owned or to be owned by it or any such Subsidiary that
involves future payments by it or such Subsidiary of more than $50,000;
(o) any agreement or commitment to which any of its present or former
directors or officers (or their Affiliates or members of their immediate
families) or Affiliates (or directors or officers of an Affiliate) are also
parties;
(p) any agreement not described above (ignoring, solely for this
purpose, any dollar amount thresholds in those descriptions) involving the
payment or receipt by it or any such Subsidiary of more than $50,000, other
than the Real Property Leases; or
(q) any agreement not described above that was not made in the
ordinary course of business and that is material to the financial
condition, business, operations, assets, results of operations or prospects
of it or any such Subsidiary.
3.18.2. VALIDITY. Except as set forth on its Disclosure Schedule sec.
3.18, all contracts, leases, instruments, licenses and other agreements or
documents described or referred to thereon are enforceable against it, and to
its knowledge, against the other parties thereto, and neither it nor any of its
Subsidiaries has, nor, to its knowledge, has any other party thereto, committed
any material breach of or default under the terms of any such contract, lease,
instrument, license or other agreement or document. Its Disclosure Schedule sec.
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identifies each agreement and other document set forth thereon or disclosed by
it on another Section of its Disclosure Schedule that requires the consent of a
third party in connection with the transactions contemplated hereby.
3.19. INSURANCE. Its Disclosure Schedule sec. 3.19 lists all contracts of
insurance and indemnity (not shown on another Section of its Disclosure
Schedule) in force at the date hereof with respect to it or any of its
Subsidiaries (collectively, the "Insurance Contracts"). All of the Insurance
Contracts are in full force and effect, with no default thereunder by it or any
such Subsidiary that could permit the insurer to deny payment of claims
thereunder. The execution and delivery of this Agreement by it or any of its
Affiliates, and the consummation of the transactions contemplated hereby, will
not cause it or any of its Subsidiaries to be in violation or default under any
Insurance Contracts, nor, to its knowledge, entitle any other party thereto to
terminate or modify an Insurance Contract. Neither it nor any of its
Subsidiaries has received notice from any insurance carriers that any insurance
premiums will be materially increased in the future or that any insurance
coverage provided under the Insurance Contracts will not be available in the
future on substantially the same terms as now in effect. Neither it nor any of
its Subsidiaries has received or given a notice of cancellation with respect to
any of the Insurance Contracts.
3.20. BANKING RELATIONSHIPS. Its Disclosure Schedule sec. 3.20 hereto
shows the names and locations of all banks and trust companies in which it or
any of its Subsidiaries has accounts, lines of credit or safety deposit boxes
and, with respect to each account, line of credit or safety deposit box, the
names of all persons authorized to draw thereon or to have access thereto.
3.21. NO APPRAISAL RIGHTS. Its stockholders will not be entitled to
dissenters' rights of appraisal or similar rights in connection with the Merger
or the transactions contemplated in connection therewith.
3.22. SUPPLIERS, DISTRIBUTORS AND CUSTOMERS. To its knowledge, the
relationships of it and its Subsidiaries its and their suppliers, distributors
and customers are satisfactory commercial working relationships. Since the
Interim Balance Sheet Date, no material supplier, distributor or customer of it
or any such Subsidiary has canceled or otherwise modified its relationship with
it or any such Subsidiary in a manner materially adverse to it or any such
Subsidiary and, to its knowledge, no supplier, distributor or customer of it or
any of its Subsidiaries has any intention to do so.
3.23. PRODUCT WARRANTIES. Each product sold, leased, licensed or
delivered by it or any of its Subsidiaries has been in material conformity with
all applicable contractual commitments and all express and implied warranties,
and neither it nor any such Subsidiary has any Liability, individually or in the
aggregate (and none of them has any knowledge of any basis for any present or
future action, suit, proceeding, hearing, investigation, charge, complaint,
claim, or demand giving rise to any such Liability, individually or in the
aggregate) that could reasonably be expected to result in costs to it or any
such Subsidiary, individually or in the aggregate, in excess of $25,000 for
replacement or repair thereof or other damages in connection therewith. Its
Disclosure Schedule sec. 3.23 includes copies of the standard terms and
conditions of license and sale for it and its Subsidiaries (containing
applicable warranty and indemnity provisions). Except as set forth on its
Disclosure Schedule sec. 3.23, no product sold, leased, licensed or delivered by
the Company is subject to any guarantee, warranty, or other indemnity beyond the
applicable standard terms and conditions of license and sale and such other
indemnities and warranties disclosed on its Disclosure Schedule sec. 3.23.
3.24. ACQUIRED BUSINESS. The Company represents that upon consummation of
the Contribution to Parent by the Stockholders of all of their capital stock of
the Company, Parent will own, of record and beneficially, free and clear of all
liens, pledges, charges, security interests, encumbrances, or adverse claims of
any kind whatsoever, all of the capital stock of the Company outstanding
immediately prior to the Effective Time.
3.25. ACCOUNTING SYSTEM. It maintains a system of internal accounting
controls sufficient to provide reasonable assurance that (a) transactions are
executed in accordance with management's general or specific authorizations; (b)
transactions are recorded as necessary to permit preparation of financial
statements in a manner consistent with its past accounting practices and to
maintain asset accountability; (c) access to assets is permitted only in
accordance with management's general or specific authorization; and (d) the
recorded
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accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
3.26. SEC STATEMENTS, REPORTS AND DOCUMENTS. Holdings represents that it
has delivered or made available to the Company true and complete copies of (a)
all reports on Forms 10-K or 10-KSB, 10-Q or 10-QSB and 8-K filed by it with the
SEC since January 1, 1999, and (b) all amendments to such reports filed by
Holdings with the SEC (the documents referred to in clauses (a) and (b) being
hereinafter referred to as the "Holdings Public Filings"). As of their
respective dates, the Holdings Public Filings complied in all material respects
with all applicable requirements of the Securities Act and the Exchange Act and
the rules and regulations promulgated thereunder, and did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. None of the Holdings
Public Filings is required to be amended or supplemented.
3.27. FAIRNESS OPINION. Holdings represents that it has received the oral
opinion of Duff & Phelps, LLC, its financial advisor (the "Financial Advisor"),
that the Merger and the Contribution and the other transactions contemplated
thereby are fair, from a financial point of view, to its stockholders.
3.28. CREDIT COMMITMENT. Each of Holdings and the Company represents that
it has entered into a credit commitment with Webster Bank as set forth in
commitment letter of Webster Bank dated as of April 14, 2000.
3.29. FULL DISCLOSURE. Neither this Agreement nor any written statement,
report or other document furnished or to be furnished by it or any of its
Subsidiaries pursuant to this Agreement or in connection with the transactions
contemplated hereby contains, or will contain, any untrue statement of a
material fact or omits to state a material fact necessary to make the statements
contained herein or therein not false or misleading. There is no fact known to
it or any of its Subsidiaries which has not been disclosed to Holdings, in the
case of the Company, or to the Company, in the case of Holdings, that could
reasonably be expected to have a Material Adverse Effect on (a) the ability of
it or any of its Subsidiaries to perform this Agreement and carry out the
transactions contemplated hereby, or (b) its consolidated financial condition,
business, operations, assets, properties, results of operations or prospects.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS
Each of the Stockholders, severally and not jointly, represents and
warrants to Parent, Holdings and Merger Sub as follows:
4.1. AUTHORITY. Such Stockholder has the power to enter into this
Agreement and the other agreements contemplated hereby to be signed by such
Stockholder and to consummate the transactions contemplated hereby and thereby.
Such Stockholder has good title to the shares of Company Common Stock
purportedly owned by such Stockholder as shown on Disclosure Schedule sec. 3.2,
free and clear of all Encumbrances other than restrictions on transfer imposed
by reason of the issuance of such shares without registration or qualification
under applicable securities laws. This Agreement and the other agreements
contemplated hereby to be signed by such Stockholder have been duly executed and
delivered by such Stockholder, and constitute the valid and binding obligations
of such Stockholder, enforceable against such Stockholder in accordance with
their respective terms, subject to the qualifications that enforcement of the
rights and remedies created hereby and thereby is subject to (a) bankruptcy,
insolvency, reorganization, fraudulent conveyance, moratorium and other laws of
general application affecting the rights and remedies of creditors and (b)
general principles of equity (regardless of whether the enforcement is
considered in a proceeding in equity or at law). On or before the Effective
Date, the other agreements contemplated hereby to be executed and delivered by
any Stockholder on or before the Effective Date will have been executed and
delivered by such Stockholder, and, upon such execution and delivery, will
constitute valid and binding obligations of such Stockholder, enforceable
against such Stockholder in accordance with their respective terms, subject to
the qualifications that enforcement of the rights and remedies created thereby
are subject to
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(a) bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium
and other laws of general application affecting the rights and remedies of
creditors and (b) general principles of equity (regardless of whether
enforcement is considered in a proceeding in equity or at law).
4.2. NO CONFLICT. Neither the execution and delivery of this Agreement by
such Stockholder and the other agreements contemplated hereby to be signed by
such Stockholder, nor the performance by such Stockholder of such Stockholder's
obligations hereunder or thereunder, nor the consummation by such Stockholder of
the transactions contemplated hereby or thereby will with or without the giving
of notice or the lapse of time, or both, conflict with, or result in any
violation or breach of, or constitute a default under, or result in any right to
accelerate or result in the creation of any Encumbrance pursuant to, or right of
termination under, any provision of any note, mortgage, indenture, lease,
instrument or other agreement, Permit, concession, grant, franchise, license,
judgment, order, decree, statute, ordinance, rule or regulation to which such
Stockholder is a party or by which such Stockholder or any of such Stockholder's
assets or properties is bound or which is applicable to such Stockholder or any
of such Stockholder's assets or properties.
4.3 NO BROKER'S OR FINDER'S FEES. Such Stockholder has not paid or become
obligated to pay any fee or commission to any broker, finder, financial advisor
or intermediary in connection with the transactions contemplated by this
Agreement.
4.4 SOPHISTICATION. Such Stockholder by reason of such Stockholder's
business and financial experience, and the business and financial experience of
those persons retained by such Stockholder to advise such Stockholder with
respect to the cash and shares of Parent Stock to be received by such
Stockholder by reason of the Contribution, has such knowledge, sophistication
and experience in business and financial matters as to be capable of evaluating
the merits and risks of the transactions contemplated by this Agreement. Such
Stockholder acknowledges that he or it has been granted the opportunity to ask
questions of, and receive answers from, representatives of Holdings concerning
Holdings and Parent and the Parent Stock that such Stockholder is receiving by
reason of the Contribution, and to obtain any additional information that such
Stockholder deems necessary to verify the accuracy of the answers such
Stockholder received from such representatives. Such Stockholder represents and
warrants that such Stockholder is an "accredited investor" within the meaning of
Rule 501 promulgated under the Securities Act.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub, jointly and severally, represent and warrant to the
Company and the Stockholders as follows:
5.1. CORPORATE STATUS OF PARENT AND MERGER SUB. Each of Parent and Merger
Sub is a corporation duly incorporated, validly existing and in good standing
under the laws of the jurisdiction of its incorporation, with the requisite
corporate power to own, operate and lease its properties and to carry on its
business as now being conducted.
5.2. AUTHORITY FOR AGREEMENT; NONCONTRAVENTION
5.2.1. AUTHORITY. Each of Parent and Merger Sub has the corporate power
and authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by the boards of directors of Parent and Merger Sub and the
stockholder of Merger Sub and no other corporate proceedings on the part of
Parent or Merger Sub are necessary to authorize the execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby.
This Agreement has been duly executed and delivered by Parent and Merger Sub and
constitutes the valid and binding obligation of Parent and Merger Sub,
enforceable against each of them in accordance with its terms, subject to the
qualifications that enforcement of the rights and remedies created hereby are
subject to (a) bankruptcy, insolvency, reorganization, fraudulent conveyance,
moratorium and other laws of general application affecting
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the rights and remedies of creditors and (b) general principles of equity
(regardless of whether enforcement is considered in a proceeding in equity or at
law). On or before the Effective Date, the other agreements contemplated hereby
to be executed and delivered by Parent and Merger Sub on or before the Effective
Date will have been executed and delivered by Parent and Merger Sub, and, upon
such execution and delivery, will constitute valid and binding obligations of
Parent and Merger Sub, enforceable against Parent and Merger Sub in accordance
with their respective terms, subject to the qualifications that enforcement of
the rights and remedies created thereby are subject to (a) bankruptcy,
insolvency, reorganization, fraudulent conveyance, moratorium and other laws of
general application affecting the rights and remedies of creditors and (b)
general principles of equity (regardless of whether enforcement is considered in
a proceeding in equity or at law).
5.2.2. NO CONFLICT. Neither the execution and delivery of this Agreement
by Parent or Merger Sub, nor the performance by Parent or Merger Sub of its
obligations hereunder, nor the consummation by Parent or Merger Sub of the
transactions contemplated hereby will (a) conflict with or result in a violation
of any provision of the Certificates of Incorporation or by-laws of Parent or
Merger Sub, or (b) with or without the giving of notice or the lapse of time, or
both, conflict with, or result in any violation or breach of, or constitute a
default under, or result in any right to accelerate or result in the creation of
any Encumbrance pursuant to, or right of termination under, any provision of any
note, mortgage, indenture, lease, instrument or other agreement, Permit,
concession, grant, franchise, license, judgment, order, decree, statute,
ordinance, rule or regulation to which Parent or Merger Sub is a party or by
which either of them or any of their respective assets or properties is bound or
which is applicable to either of them or any of their assets or properties. No
authorization, consent or approval of, or filing with or notice to, any
Governmental Entity is necessary for the execution and delivery of this
Agreement by Parent or Merger Sub or the consummation by Parent or Merger Sub of
the transactions contemplated hereby, except for (i) the filing of the
Certificate of Merger with the Secretary of State of Delaware, and (ii) any
filings as may be required under applicable federal or state securities laws.
5.3 LITIGATION. There is no claim, action, suit arbitration or proceeding
pending or, to the knowledge of Parent, threatened against or involving Parent
which, if determined adversely to Parent, could have a material adverse effect
on the financial condition, business, operations, assets, properties, results of
operations or prospects of Parent.
5.4 INTERIM OPERATIONS OF MERGER SUB. Parent and Merger Sub were formed
solely for the purpose of engaging in the transactions contemplated by this
Agreement and have engaged in no business activities other than as contemplated
by this Agreement.
ARTICLE 6
CONDUCT PRIOR TO THE EFFECTIVE TIME
Each of Holdings and the Company, in each case for itself and each of its
Subsidiaries, covenants and agrees as follows, from and after the date of this
Agreement and until the Effective Time, except as otherwise expressly
contemplated by or set forth in this Agreement or expressly consented to in
writing by the Company, in the case of Holdings, or by Holdings, in the case of
the Company:
6.1. GENERAL CONDUCT OF BUSINESS. Between the date of this Agreement and
the Effective Time or the date, if any, on which this Agreement is earlier
terminated pursuant to its terms, it shall (a) carry on its business in the
usual, regular and ordinary course in substantially the same manner as
heretofore conducted, pay its debts and taxes when due subject to good faith
disputes over such debts or taxes, pay or perform other material obligations
when due subject to good faith disputes over such obligations, and use all
reasonable efforts consistent with past practices and policies to preserve
intact its present business organization, keep available the services of its
present officers and employees and preserve its relationships with customers,
suppliers and others having business relationships with it, to the end that its
goodwill and ongoing business be unimpaired at the Effective Time, and (b)
promptly notify Holdings, in the case of the Company, or the Company, in the
case of Holdings, of any event or occurrence not in the ordinary course of its
business which
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will result or could reasonably be expected to result in costs to it,
individually or in the aggregate, in excess of $100,000, or that could prevent
or materially delay the consummation of the transactions contemplated hereby.
Without limiting the generality of the foregoing except as indicated in the
specific exceptions set forth below, it shall not:
(a) amend its Certificate of Incorporation or by-laws;
(b) declare or pay any dividends or distributions on its outstanding
shares of capital stock nor purchase, redeem or otherwise acquire for
consideration any shares of its capital stock or other securities except in
accordance with agreements existing as of the date hereof;
(c) issue or sell any shares of its capital stock (except pursuant to
any options, stock appreciation or purchase rights, warrants, conversion
rights or other rights, securities or commitments obligating it to issue or
sell any shares of its capital stock and outstanding as of the date
hereof), effect any stock split or otherwise change its capitalization as
it exists on the date hereof, or issue, grant, or sell any options, stock
appreciation or purchase rights, warrants, conversion rights or other
rights, securities or commitments obligating it to issue or sell any shares
of its capital stock, or any securities or obligations convertible into, or
exercisable or exchangeable for, any shares of its capital stock;
(d) borrow or agree to borrow any funds or voluntarily incur, or
assume or become subject to, whether directly or by way of guaranty or
otherwise, any obligation or Liability, except obligations incurred in the
ordinary course of business consistent with past practices and except for
debt incurred pursuant to the commitment letter referred to in Section 3.28
and the Subordinated Notes;
(e) pay, discharge or satisfy any claim, obligation or Liability in
excess of $50,000 (in any one case) or $100,000 (in the aggregate), other
than the payment, discharge or satisfaction in the ordinary course of
business of obligations reflected on or reserved against in the Interim
Balance Sheet, or incurred since the Interim Balance Sheet Date in the
ordinary course of business consistent with past;
(f) except as required by applicable law, adopt or amend in any
material respect, any agreement or plan (including severance arrangements)
for the benefit of its employees;
(g) sell, mortgage, pledge or otherwise encumber or dispose of any of
its assets which are material, individually or in the aggregate, to its
business, except in the ordinary course of business consistent with past;
(h) acquire by merging or consolidating with, or by purchasing any
equity interest in or a material portion of the assets of, any business or
any corporation, partnership interest, association or other business
organization or division thereof, or otherwise acquire any assets which are
material, individually or in the aggregate, to the its business, except in
the ordinary course of business consistent with past practices;
(i) grant any bonus; grant any increase in the rate of pay or
otherwise increase the compensation payable or to become payable to any
officer, director, key salaried employee, or agent; grant any increase in
the rates of pay or other compensation payable to its employees, other than
increases in the salaries of non-officer employees made in the ordinary
course of business consistent with past practices; or institute or increase
the benefits under any bonus, insurance, pension or other benefit plan,
payment, contract, commitment or arrangement;
(j) enter into any transaction with any Affiliate other than (A)
transactions involving only the elimination of rights, claims or other
benefits of such Affiliate, with no adverse consequences to it (including
without limitation the obtaining of the terminations, consents and waivers
set forth in its Disclosure Schedule sec. 3.5); (B) the payment of
compensation and reimbursement of expenses in accordance with existing
employment agreements and usual past practices); (C) subject to this
Section, sales of goods and services to its Subsidiaries in the ordinary
course of business consistent with past practices; and (D) the transfer of
funds to its Subsidiaries solely for the purpose of investment in bank time
deposits or money market investments;
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(k) dispose of, permit to lapse, or otherwise fail to preserve the its
right to use its Proprietary Rights or enter into any settlement regarding
the breach or infringement of, any of its Proprietary Rights, or modify any
existing rights with respect thereto, other than in the ordinary course of
business consistent with past practices, and other than any such disposal,
lapse, failure, settlement or modification that does not have, and could
not reasonably be expected to have, a Material Adverse Effect;
(l) enter into any contract or commitment or take any other action
that is not in the ordinary course of its business or could reasonably be
expected to have an adverse impact on the transactions contemplated
hereunder or that would result or could reasonably be expected to result in
costs to it, individually or in the aggregate, in excess of $100,000;
(m) amend in any material respect any agreement to which it is a party
or to which any of its property or assets is bound, the amendment of which
will result or could reasonably be expected to result in costs to it,
individually or in the aggregate, in excess of $100,000, except as provided
herein with respect to the execution of new employment agreements as set
forth in Section 7.9 or otherwise executed in connection with the execution
of this Agreement;
(n) waive, release, transfer or permit to lapse any claims or rights
(i) that has a value, or involves payment or receipt by it, of more than
$25,000 or (ii) the waiver, release, transfer or lapse of which would
result or could reasonably be expected to result in costs to it in excess
of $25,000;
(o) make any change in any method of accounting or accounting
practice; or
(p) agree, whether in writing or otherwise, to take any action
described in this Section.
6.2. INSURANCE. It shall maintain with financially sound and reputable
insurance companies, funds or underwriters adequate insurance (including without
limitation insurance described in its Disclosure Schedule sec. 3.19) of the
kinds, covering such risks, and in such amounts, and with such deductible and
exclusions, as are consistent with past practices.
6.3. CONSENTS OF THIRD PARTIES. It shall employ its best efforts to
secure, before the Closing Date, the consent, in form and substance satisfactory
to the other party and its counsel, to the consummation of the transactions
contemplated by this Agreement by each party to any of its contracts,
commitments, or obligations under which such transactions would constitute a
default, or would accelerate, modify or vest any rights or obligations of it or
any other party thereto, or would permit cancellation or termination by any
other party of any such contract, commitment or obligation.
6.4. COMPLIANCE WITH LAWS. It shall duly comply in all material respects
with all applicable laws, rules, regulations and orders.
6.5. ACCESS AND INFORMATION. It shall afford to the other and to its
officers, employees, accountants, counsel and other authorized representatives
full and complete access, upon 24 hours advance telephone notice, during regular
business hours, throughout the period prior to the earlier of the Effective Time
or the termination of this Agreement pursuant to its terms, to its offices,
properties, books and records, and shall use reasonable efforts to cause its
representatives and independent public accountants to furnish to the other party
such additional financial and operating data and other information as to its
business, customers, vendors and properties as the other may from time to time
reasonably request. It shall exercise such rights in a manner so as not to
interfere unreasonably with the normal business operations of the other.
6.6. PUBLIC DISCLOSURE. It agrees that its non-disclosure obligations
contained in a Mutual Agreement of Confidentiality dated November 8, 1999 by and
between Holdings and the Company, and any other non-disclosure obligations
agreed to in writing by Holdings and the Company, shall remain in full force and
effect in accordance with the terms of such letter agreement and such other
writings. Unless otherwise required by law, any press release or other public
disclosure of information regarding this Agreement or the transactions
contemplated hereby will be prepared by Holdings, subject to the approval of the
Stockholders, which approval shall not be unreasonably withheld or delayed.
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ARTICLE 7
ADDITIONAL AGREEMENTS
7.1. FILING OF PROXY STATEMENT/PROSPECTUS. Parent and Holdings shall
prepare and file with the SEC a registration statement on Form S-4 or other
appropriate form (including all duly filed amendments and supplements thereto,
the "Registration Statement"), relating to the registration under the Securities
Act of the Parent Stock to be issued in the Merger and the Contribution, and
shall file with appropriate state securities administrators such registration
statements or other documents, if any, as may be required under applicable blue
sky laws to register or qualify such shares in such states as are necessary to
consummate the Merger and the Contribution. Parent and Holdings shall use
commercially reasonable efforts to have the Registration Statement declared
effective by the SEC as promptly as practicable. The parties to this Agreement
agree to correct promptly any information provided by each of them for use in
the Registration Statement that contains any untrue statement of a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading. The
prospectus contained in the Registration Statement will also constitute a proxy
statement of Holdings for the meeting of its stockholders to be held to approve
the Merger (the "Stockholder Approval"). Holdings shall, as promptly as
practicable, take all steps necessary to call, give notice of, convene and a
hold a meeting of its stockholders for the purpose of approving this Agreement,
the Merger, and the other transactions contemplated hereby, and shall recommend
to its stockholders, and solicit proxies for, and in general use its best
commercially reasonable efforts to obtain, the Stockholder Approval and
stockholder approval of all other matters that Holdings shall submit to its
stockholders.
7.2. PROCEDURES IN CONNECTION WITH THE REGISTRATION STATEMENT;
COOPERATION. Parent and Holdings shall promptly notify the Company of the
receipt by Parent or Holdings of any comments of or requests by the SEC with
respect to the Registration Statement and will promptly supply the Company with
copies of correspondence between the Parent, Holdings and its representatives,
on the one hand, and the SEC or members of its staff or any other appropriate
government officials, on the other, with respect to the Registration Statement.
The parties to this Agreement will use all reasonable efforts to obtain and
furnish the information required to be included in the Registration Statement
and shall each use commercially reasonable efforts to respond promptly to any
comments made by the SEC or any other governmental official with respect to the
Registration Statement and any preliminary versions thereof and to cause the
proxy statement contained therein to be mailed to the stockholders of Holdings
as soon as practicable; provided, however, that Parent and Holdings shall direct
and control all communications with the SEC with respect to the Registration
Statement, and the Company and the Stockholders shall cooperate therewith.
Parent or Holdings shall advise the Company, promptly after it receives notice
thereof, of the time when the Registration Statement has become effective or any
amendment or supplement thereto has been filed, or the issuance of any stop
order in any jurisdiction, of the initiation or threat of any proceeding for
such purpose, or of any request by the SEC for the amendment or supplement of
the Registration Statement or for any additional information.
7.3. BLUE SKY LAWS. Parent and Holdings shall take such steps, if any, as
may be necessary to comply with the securities and blue sky laws of all
jurisdictions which are applicable to the issuance of shares of Parent Stock
pursuant to the Merger and the Contribution except that it will not be required
to execute a general consent to service of process in jurisdictions where it has
not already done so. The Company and the Stockholders shall use commercially
reasonable efforts to assist Parent and Holdings as may be necessary to comply
with the securities and blue sky laws of all jurisdictions which are applicable
in connection with the issuance of Parent Stock pursuant hereto. Each
Stockholder represents that such Stockholder has resided, and continues to
reside, in the State of Connecticut at all times since November 8, 1999.
7.4. AMERICAN STOCK EXCHANGE LISTING. Parent agrees to authorize for
listing on the American Stock Exchange, prior to the Effective Time, the shares
of Parent Stock issuable in connection with the Merger and the Contribution,
upon official notice of issuance.
7.5. EXPENSES. Parent and Holdings shall be responsible for their own
costs and expenses in connection with the Merger, including fees and
disbursements of consultants, investment bankers and other financial advisors,
brokers and finders, counsel and accountants. The Company shall be responsible
for its and
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the Stockholders' costs and expenses in connection with the Merger and the
Contribution, including fees and disbursements of consultants, investment
bankers and other financial advisors, brokers and finders, counsel and
accountants.
7.6. EXCLUSIVITY. From and after the date of this Agreement until the
earlier of the Effective Time and termination of this Agreement in accordance
with Article 10 hereof (the "Exclusivity Period"), the Company and the
Stockholders shall not, directly or indirectly, through any officer, director,
employee, Affiliate or agent of the Company or any Stockholder, or otherwise,
take any action to solicit, initiate, seek, entertain, encourage or support any
inquiry, proposal or offer from, furnish any information to, or participate in
any negotiations with, any third party regarding any acquisition of the Company,
any merger or consolidation with or involving the Company, or any acquisition of
any material portion of the stock or assets or the Company. The Company and the
Stockholders agree that in no event shall the Company or any Stockholder accept
or enter into an agreement concerning any such third party acquisition
transaction during the Exclusivity Period. The Company and the Stockholders
shall notify Parent and Holdings immediately after receipt by the Company or any
Stockholder (or any officer, director, employee, Affiliate or agent of the
Company or any Stockholder) at any time during the Exclusivity Period of any
unsolicited proposal for, or inquiry respecting, any third party acquisition
transaction involving the Company or any request for nonpublic information in
connection with such a proposal or inquiry, or for access to the properties,
books or records of the Company by any person, or entity that informs the
Company or any Stockholder that it is considering making, or has made, such a
proposal or inquiry. Such notice to Parent will indicate in reasonable detail
the identity of the person making the proposal or inquiry and the terms and
conditions of such proposal or inquiry.
7.7. TAX-FREE TREATMENT; TAX MATTERS CERTIFICATES. Parent, Holdings and
the Company shall each use all reasonable efforts to cause the Merger and the
Contribution, taken together, to be treated as a transaction described in
Section 351 of the Code. Parent and Holdings, on the one hand, and the Company,
on the other, shall use all reasonable efforts to obtain, as promptly as
practicable following the date hereof and in any event prior to the Effective
Time, such oral or written assurances as it reasonably deems sufficient to
enable it to execute and deliver to the Company, in the case of Parent and
Holdings, or to Parent and Holdings, in the case of the Company, certificates
substantially in the forms set forth in Exhibit E hereto (the "Tax Matters
Certificates") as an exhibit to the tax matters opinions to be delivered at the
Closing in accordance with Section 8.2.6 of this Agreement.
7.8. TRANSFER OF THE WATERTOWN, CONNECTICUT FACILITY AND THE RELATED
MORTGAGE DEBT; LEASES. At or before the Closing, the Company shall transfer and
sell its Watertown, Connecticut facility to one or more Stockholders, or an
entity controlled by one or more of them, in consideration of the assumption by
such buyer or buyers of the mortgage debt currently secured thereby, and shall
cause the transfer or assumption to or by such buyer or buyers of the mortgage
debt currently secured thereby, with no further liability therefor attaching to
the Company or any other corporate party to this Agreement. The sale and
transfer of the Watertown facility shall be permissible under this Agreement
notwithstanding any other provision to the contrary herein. Contemporaneously
with the execution and delivery of this Agreement, the Company and each other
party thereto has executed and delivered leases in the forms of Exhibit F,
Exhibit G and Exhibit H with respect to the facilities currently owned or leased
by the Company in Watertown and Stamford, Connecticut, such leases to be
effective at the Closing.
7.9. EMPLOYMENT AGREEMENTS. Contemporaneously with the execution and
delivery of this Agreement, Parent and Holdings' wholly owned subsidiary Vermont
Pure Springs, Inc. and each other party thereto has executed and delivered
employment agreements (which shall have the effect of terminating any existing
employment agreements) in the forms attached hereto as Exhibit I, Exhibit J,
Exhibit K, Exhibit L and Exhibit M with, respectively, Timothy Fallon, Bruce
MacDonald, Peter K. Baker, John B. Baker and Henry E. Baker, such employment
agreements to be effective at the Closing.
7.10. LOCK-UP AGREEMENTS. At the Closing, each of the Stockholders shall
have furnished to Parent and Holdings a Lock-Up Agreement, substantially in the
form of Exhibit N, prohibiting until the first anniversary of the Closing Date
the sale, transfer, pledge or other disposition by him or it of the shares of
Parent Stock received in connection with the Contribution.
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7.11. BOARD OF DIRECTORS OF PARENT. Prior to the Closing, effective at
the Effective Time, the board of directors of Parent will establish the size of
the full board at nine directors, six of whom shall be current directors of
Holdings, and will elect to the board Peter Baker, Ross Rapaport and Henry
Baker. Subject only to the fiduciary duties of its directors, with respect to
the first annual meeting of stockholders following the Closing, Parent will use
its best efforts to nominate and cause Peter Baker, Ross Rapaport and Henry
Baker to be elected as a member of the Board of Directors.
7.12. DISCLOSURE SUPPLEMENTS. From time to time prior to the Effective
Time, and in any event immediately prior to the Effective Time, each of Holdings
and the Company shall promptly supplement or amend its Disclosure Schedule with
respect to any matter hereafter arising that, if existing, occurring, or known
at the date of this Agreement, would have been required to be set forth or
described in such Disclosure Schedule or that is necessary to correct any
information in such Disclosure Schedule that is or has become inaccurate.
Notwithstanding the foregoing, if any such supplement or amendment discloses a
Material Adverse Effect, the conditions to the other party's obligations to
consummate the Merger and the Contribution set forth in Article 8 hereof shall
be deemed not to have been satisfied.
7.13. REASONABLE EFFORTS. Subject to terms and conditions herein
provided, each of the parties agrees to use all reasonable efforts to take, or
cause to be taken, all action and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the Merger and the Contribution and the other
transactions contemplated by this Agreement. Without limiting the generality of
the foregoing, the Parent, Holdings and the Company each will use all reasonable
efforts to obtain all approvals, authorizations, consents and waivers from, and
give all notices to, any public or private third parties that are necessary on
its part in order to effect the transactions contemplated hereby.
ARTICLE 8
CONDITIONS PRECEDENT
8.1. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF EACH PARTY. The
obligations of the parties hereto to effect the Merger and the Contribution
shall be subject to the fulfillment at or prior to the Closing of the following
conditions:
8.1.1. NO INJUNCTION. No injunction or restraining or other order
issued by a court of competent jurisdiction that prohibits or materially
restricts the consummation of the Merger, the Contribution or the other
transactions contemplated hereby shall be in effect (each party agreeing to
use all reasonable efforts to have any injunction or other order
immediately lifted), and no action or proceeding shall have been commenced
seeking any injunction or restraining or other order that seeks to
prohibit, restrain, invalidate or set aside consummation of the Merger, the
Contribution or any of the other transactions contemplated hereby.
8.1.2. ILLEGALITY. There shall not have been any action taken, and
no statute, rule or regulation shall have been enacted, by any state or
federal government agency that would prohibit or materially restrict the
consummation of the Merger, the Contribution or the other transactions
contemplated hereby.
8.1.3. PREMERGER NOTIFICATION COMPLIANCE. To the extent applicable,
if any, all requirements under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976 and the rules promulgated thereunder applicable to the
transactions contemplated hereby shall have been met, including, without
limitation, all necessary filing and waiting requirements, and neither the
United States Department of Justice nor the Federal Trade Commission shall
have raised objection to the transactions contemplated hereby.
8.1.4. STOCKHOLDER APPROVAL. Holdings shall have obtained the
Stockholder Approval specified in Section 7.1.
8.1.5. CREDIT COMMITMENT. The credit commitment of Webster Bank
described in Section 3.28 shall be in full force and effect as of the
Closing Date, and all conditions to the disbursement of funds thereunder in
accordance with the terms and provisions thereof shall have been satisfied.
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8.1.6. REGISTRATION STATEMENT. The Registration Statement shall have
been declared effective by the SEC and at the Closing Date shall remain
effective and shall not be subject to any stop order.
8.2. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF PARENT, HOLDINGS, MERGER
SUB, THE COMPANY AND THE STOCKHOLDERS TO EFFECT THE MERGER AND THE
CONTRIBUTION. The obligation of Parent, Holdings and Merger Sub (collectively,
the "VPS Parties") to effect the Merger, and the obligation of the Stockholders
to effect the Contribution, shall be subject to the fulfillment by the Company
and the Stockholders (collectively, the "CRI Parties"), at or prior to the
Closing Date, of each of the indicated conditions below, or the written waiver
of fulfillment of any such indicated condition by the VPS Parties. The
obligation of the CRI Parties to effect the Contribution shall be subject to the
fulfillment by the VPS Parties, at or prior to the Closing Date, of each of the
indicated conditions below, or the written waiver of fulfillment of any such
indicated condition by the CRI Parties.
8.2.1. REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the VPS Parties or the CRI Parties, as the case may be, set
forth in this Agreement shall be true and correct in all material respects
on and as of the Effective Time, except for changes expressly contemplated
by this Agreement and except for those representations and warranties which
address matters only as of a particular date (which shall remain true and
correct as of such date), with the same force and effect as if made on and
as of the Effective Time; and, without limiting the generality of the
foregoing, the VPS Parties and the CRI Parties, as the case may be, shall
have obtained all of the terminations, consents and waivers set forth in
Disclosure Schedule sec. 3.5 to be obtained by the appropriate party.
8.2.2. AGREEMENTS AND COVENANTS. Each of the VPS Parties, and each
of the CRI Parties, as the case may be, shall have performed in all
material respects all of their agreements and covenants set forth herein
that are required to be performed by it at or prior to the Effective Time.
8.2.3. NO MATERIAL CHANGE. Since the date of this Agreement, there
shall not have been any material damage to or loss or destruction (whether
or not covered by insurance) of any of the properties or assets owned or
leased by the VPS Parties or the Company, as the case may be, nor has there
been any Material Adverse Effect or the imposition of any law, rule,
regulation or order that could reasonably be expected to have a Material
Adverse Effect upon the VPS Parties or the Company, as the case may be.
8.2.4. OFFICERS' CLOSING CERTIFICATE. The VPS Parties shall have
executed and delivered to the CRI Parties, and the CRI Parties shall have
executed and delivered to the VPS Parties, a certificate, duly executed by
the President and the Chief Financial Officer of Parent and Holdings, or
duly executed by the Stockholders and by the President and Chief Financial
Officer of the Company, as the case may be, in form and substance
reasonably satisfactory to the receiving parties and their counsel, that
the conditions specified in Sections 8.2.1, 8.2.2 and 8.2.3 have been
satisfied.
8.2.5. LEGAL OPINION. The VPS Parties shall have received opinions
from Ross Rapaport, Esq., and Bingham Dana LLP, respectively, counsel to
the CRI Parties, reasonably satisfactory in form and substance to the VPS
Parties and their counsel; and the CRI Parties shall have received an
opinion from Foley, Hoag & Eliot LLP, counsel to the VPS Parties,
reasonably satisfactory in form and substance to the CRI Parties and their
counsel.
8.2.6. TAX MATTERS OPINION. The VPS Parties shall have received a
favorable opinion from Foley, Hoag & Eliot LLP, special tax counsel to the
VPS Parties, and the CRI Parties shall have received a favorable opinion of
Bingham Dana LLP, special tax counsel to the CRI Parties, in each case with
respect to matters under Section 351 of the Code. In rendering such
opinions, counsel shall be entitled to request, receive and rely upon
certificates regarding tax matters containing representations, warranties
and covenants that are customary for transactions of this nature.
8.2.7. DELIVERY OF CERTIFICATE OF MERGER. The obligations of the CRI
Parties shall be subject to the condition that the constituent corporations
to the Merger shall have duly executed and delivered the Certificate of
Merger for filing with the Secretary of State of Delaware.
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8.2.8. TENDER OF COMPANY COMMON STOCK. The obligations of the VPS
Parties shall be subject to the condition that each of the Stockholders
shall have tendered his or its certificates evidencing Company Common Stock
as described in Section 2.5.1.
8.2.9. DELIVERY OF EMPLOYMENT AGREEMENTS BY HOLDINGS OFFICERS. The
obligations of the CRI Parties shall be subject to the condition that each
of Timothy Fallon and Bruce MacDonald shall have executed and delivered the
employment agreements described in Section 7.9. The transactions
contemplated hereby shall not have triggered, and shall have no remaining
potential to trigger, any contractual obligation on the part of Parent, the
Surviving Corporation or any Subsidiary of the Surviving Corporation to
make any compensation or other similar payments to the directors, officers
or employees of any of them; and neither Parent nor the Surviving
Corporation or any Subsidiary of the Surviving Corporation shall have any
obligation to provide any severance benefits to any of their employees in
connection with any termination of their employment.
8.2.10. DELIVERY OF EMPLOYMENT AGREEMENTS BY COMPANY OFFICERS AND
LOCK-UP AGREEMENTS BY THE STOCKHOLDERS. The obligations of the VPS Parties
shall be subject to the condition that each of Peter Baker, Jack Baker and
Henry Baker shall have executed and delivered the employment agreements
described in Section 7.9, and to the further condition that each
Stockholder shall have executed and delivered the Lock-Up Agreement
described in Section 7.10. Each officer and each member of the board of
directors of the Company shall have resigned as an officer or director of
the Company, as the case may be, effective as of the Effective Time. The
transactions contemplated hereby shall not have triggered, and shall have
no remaining potential to trigger, any contractual obligation on the part
of Parent, the Surviving Corporation or any Subsidiary of the Surviving
Corporation, or the Company to make any compensation or other similar
payments to the directors, officers or employees of any of them; and
neither Parent nor the Surviving Corporation or any Subsidiary of the
Surviving Corporation nor the Company shall have any obligation to provide
any severance benefits to any of their employees in connection with any
termination of their employment.
8.2.11. REAL PROPERTY TRANSFER AND LEASES. The obligations of the
VPS Parties shall be subject to the condition that the Company shall have
transferred its Watertown, Connecticut facility and the related
indebtedness as contemplated by Section 7.8, and the Company shall have
entered into the leases described in Section 7.8 effective as of the
Closing.
8.2.12. REGISTRATION RIGHTS AGREEMENT. At the Closing, each of the
Stockholders shall have executed and furnished to the Parent and Holdings a
Registration Rights Agreement, substantially in the form of Exhibit O, that
sets forth the registration rights agreed upon between the parties with
respect to the Holdings stock transferred to the Stockholders at the
Closing.
8.2.13. PROCEEDINGS AND CLOSING DOCUMENTS SATISFACTORY. All
proceedings in connection with the Merger, the Contribution and the other
transactions contemplated by this Agreement, and all certificates and
documents delivered by the VPS Parties or the CRI Parties pursuant to this
Agreement shall be reasonably satisfactory to the CRI Parties or the VPS
Parties, as the case may be, and their counsel.
ARTICLE 9
SURVIVAL OF REPRESENTATIONS AND WARRANTIES
9.1. NO SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The respective
representations, warranties, covenants, agreements and promises of the parties
in this Agreement and any schedule, certificate or other writing delivered
pursuant hereto or in connection herewith, other than those that by their terms
are to be performed by Parent, the Surviving Corporation, the Company or the
Stockholders after the Effective Time or after the Contribution, as the case may
be, and other than as set forth in Section 10.2, shall terminate as of, and
shall not survive, the consummation of the Merger and the Contribution or the
termination of this Agreement. Notwithstanding the foregoing, representations,
warranties and covenants in the Tax Matters Certificates shall survive the
consummation of the Merger and the Contribution.
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ARTICLE 10
TERMINATION
10.1. TERMINATION EVENTS. This Agreement may be terminated and the Merger
abandoned at any time prior to the Effective Time, notwithstanding approval of
the stockholders of Holdings:
(a) by mutual written consent of Holdings and the Company;
(b) by Holdings if there has been a material breach of any
representation, warranty, covenant or agreement contained in this Agreement
on the part of the Company or the Stockholders and such breach has not been
cured within ten (10) business days after written notice to the Company or
the Stockholders, as the case may be (provided that neither Parent nor
Merger Sub is in material breach of the terms of this Agreement, and
provided further, that no cure period shall be allowed for a breach which
by its nature cannot be cured) such that the conditions set forth in
Article 8 required to be satisfied on the part of the Company or the
Stockholders, as the case may be, will not be satisfied;
(c) by the Company if there has been a material breach of any
representation, warranty, covenant or agreement contained in this Agreement
on the part of Parent, Holdings or Merger Sub and such breach has not been
cured within ten (10) business days after written notice to Parent
(provided that neither the Company nor the Stockholders is in material
breach of the terms of this Agreement, and provided further, that no cure
period shall be allowed for a breach which by its nature cannot be cured)
such that the conditions set forth in Article 8 required to be satisfied on
the part of Parent, Holdings or Merger Sub, as the case may be, will not be
satisfied;
(d) by any party hereto if: (i) there shall be a final, non-appealable
order of a federal or state court in effect preventing consummation of the
Merger or the Contribution, or (ii) there shall be any final action taken,
or any statute, rule, regulation or order enacted, promulgated or issued or
deemed applicable to the Merger or the Contribution by any Governmental
Entity which would make consummation of the Merger or the Contribution
illegal or which would prohibit Parent's ownership or operation of all or a
material portion of the business or assets of the Company, or compel Parent
to dispose of or hold separate all or a material portion of the business or
assets of the Company or Parent as a result of the Merger or the
Contribution; or
(e) by any party hereto if the Merger shall not have been consummated
by October 20, 2000, provided that the right to terminate this Agreement
under this Section 10.1(e) shall not be available to any party whose
failure to fulfill any material obligation under this Agreement has been
the cause of, or resulted in, the failure of the Effective Time to occur on
or before such date.
Where action is taken to terminate this Agreement pursuant to this Section
10.1, such action shall be authorized by the board of directors of the party
taking such action.
10.2. EFFECT OF TERMINATION. In the event of termination of this
Agreement as provided in Section 10.1 hereof, this Agreement shall forthwith
become void and there shall be no liability or obligation on the part of the
Parent, Holdings, Merger Sub, the Company, the Stockholders or their respective
officers, directors, stockholders or Affiliates, except to the extent that a
party hereto is in breach of any of its representations, warranties, covenants
or agreements set forth in this Agreement, and provided that the provisions of
Sections 6.6 and 7.5 hereof and Articles 9 and 11 hereof shall remain in full
force and effect and survive any termination of this Agreement.
ARTICLE 11
MISCELLANEOUS
11.1. AMENDMENTS AND SUPPLEMENTS. This Agreement may not be amended,
modified or supplemented by the parties hereto in any manner, except (i) prior
to the Effective Time, to the fullest extent permissible under Section 251(d) of
the DGCL, by an agreement in writing signed by Parent, Holdings,
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Merger Sub, the Company and the Stockholders, and (ii) after the Effective Time,
by an agreement in writing signed by Parent and the Stockholders.
11.2. WAIVER. The terms and conditions of this Agreement may be waived
only by a written instrument signed by the party waiving compliance. The failure
of any party hereto to enforce at any time any of the provisions of this
Agreement shall in no way be construed to be a waiver of any such provision, nor
in any way to affect the validity of this Agreement or any part hereof or the
right of such party thereafter to enforce each and every such provision. No
waiver of any breach of or non-compliance with this Agreement shall be held to
be a waiver of any other or subsequent breach or non-compliance. The rights and
remedies herein provided are cumulative and are not exclusive of any rights or
remedies that any party may otherwise have at law or in equity.
11.3. GOVERNING LAW. This Agreement shall be governed by, and construed
and enforced in accordance with, the substantive laws of the State of Delaware,
without regard to its principles of conflicts of laws.
11.4. NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered by hand, sent by facsimile
transmission with confirmation of receipt, sent via a reputable overnight
courier service with confirmation of receipt requested, or mailed by registered
or certified mail (postage prepaid and return receipt requested) to the parties
at the following addresses (or at such other address for a party as shall be
specified by like notice), and shall be deemed given on the date on which
delivered by hand or otherwise on the date of receipt as confirmed:
To Holdings, Parent or Merger Sub:
Vermont Pure Holdings, Ltd.
P.O. Box C
Route 66, Catamount Industrial Park
Randolph, Vermont 05060
Facsimile: (802) 728-4614
Attn: Chairman and Chief Executive Officer
With a copy to:
Dean F. Hanley, Esq.
Foley, Hoag & Eliot LLP
One Post Office Square
Boston, Massachusetts 02109
Facsimile: (617) 832-7000
To the Company:
Crystal Rock Spring Water Company
1050 Buckingham Street
Watertown, Connecticut 06795
Facsimile: (860) 945-6246
Attn: President
With a copy to:
Brian Keeler, Esq.
Bingham Dana LLP
150 Federal Street
Boston, Massachusetts 02110
Facsimile: (617) 951-8736
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To the Stockholders:
Henry E. Baker
c/o Crystal Rock Spring Water Company
1050 Buckingham Street
Watertown, Connecticut 06795
Peter K. Baker
c/o Crystal Rock Spring Water Company
1050 Buckingham Street
Watertown, Connecticut 06795
John B. Baker
c/o Crystal Rock Spring Water Company
1050 Buckingham Street
Watertown, Connecticut 06795
Joan A. Baker
c/o Crystal Rock Spring Water Company
1050 Buckingham Street
Watertown, Connecticut 06795
Peter K. Baker Life Insurance Trust, Ross S. Rapaport, Trustee
750 Summer Street
Stamford, Connecticut 06901
John B. Baker Life Insurance Trust, Ross S. Rapaport, Trustee
750 Summer Street
Stamford, Connecticut 06901
Ross S. Rapaport, Trustee U/T/A dated 12/16/91 F/B/O Joan Baker et al.
750 Summer Street
Stamford, Connecticut 06901
With a copy to:
Brian Keeler, Esq.
Bingham Dana LLP
150 Federal Street
Boston, Massachusetts 02110
Facsimile: (617) 951-8736
11.5. ENTIRE AGREEMENT. This Agreement and the documents and instruments
and other agreements among the parties hereto as contemplated by or referred to
herein constitute the entire agreement among the parties with respect to the
subject matter hereof and supersede all other prior agreements and
understandings, both written and oral, between the parties with respect to the
subject matter hereof, excluding the Mutual Agreement of Confidentiality dated
November 8, 1999 by and between Holdings and the Company. Each party hereto
acknowledges that, in entering into this Agreement and completing the
transactions contemplated hereby, such party is not relying on any
representation, warranty, covenant or agreement not expressly stated in this
Agreement or in the agreements, certificates and other documents among or
between the parties contemplated by or referred to herein.
11.6. BINDING EFFECT; ASSIGNABILITY. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and assigns. This Agreement is not intended to confer upon any person other than
the parties hereto (and such parties' respective successors and assigns) any
rights or remedies hereunder, except as otherwise expressly provided herein.
Neither this Agreement nor any of the
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rights and obligations of the parties hereunder shall be assigned or delegated,
whether by operation of law or otherwise, without the written consent of all
parties hereto, except that certain rights and obligations of Merger Sub and the
Holdings will by operation of law be assigned and delegated to the Surviving
Corporation as a result of the Merger without any further consent hereunder.
11.7. VALIDITY. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, each of which shall remain in full force and
effect.
11.8. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which together shall constitute one and the same agreement.
* * * * *
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IN WITNESS WHEREOF, the parties have caused this Agreement and Plan of
Merger and Contribution to be executed as an agreement under seal as of the date
first above written.
VERMONT PURE HOLDINGS, LTD.
By: /s/ TIMOTHY M. FALLON
------------------------------------
Title: Chief Executive Officer and
President
VP MERGER PARENT, INC.
By: /s/ TIMOTHY M. FALLON
------------------------------------
Title: Chief Executive Officer and
President
VP ACQUISITION CORP.
By: /s/ TIMOTHY M. FALLON
------------------------------------
Title: Chief Executive Officer and
President
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CRYSTAL ROCK SPRING WATER COMPANY
By: /s/ HENRY E. BAKER
------------------------------------
Title: Chairman
/s/ HENRY E. BAKER
--------------------------------------
Henry E. Baker
/s/ JOAN A. BAKER
--------------------------------------
Joan A. Baker
/s/ PETER K. BAKER
--------------------------------------
Peter K. Baker
/s/ JOHN B. BAKER
--------------------------------------
John B. Baker
/s/ ROSS RAPAPORT
--------------------------------------
Peter K. Baker Life Insurance Trust,
Ross Rapaport, Trustee (and not
individually)
/s/ ROSS RAPAPORT
--------------------------------------
John B. Baker Life Insurance Trust,
Ross Rapaport, Trustee (and not
individually)
/s/ ROSS RAPAPORT
--------------------------------------
Ross Rapaport, Trustee U/T/A dated
12/16/91 F/B/O Joan Baker et al. (and
not individually)
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<PAGE> 189
LIST OF EXHIBITS
<TABLE>
<S> <C>
Exhibit A Form of Certificate of Merger
Exhibit B Certificate of Incorporation of Parent
Exhibit C By-laws of Parent
Exhibit D Table of Cash, Parent Stock and Subordinated Notes Payable
to each of the Stockholders
Exhibit E Forms of Tax Matters Certificate
Exhibit F Watertown Lease
Exhibit G Stamford Ground Lease
Exhibit H Stamford Building Lease
Exhibit I Employment Agreement with Timothy G. Fallon
Exhibit J Employment Agreement with Bruce M. MacDonald
Exhibit K Employment Agreement with Peter K. Baker
Exhibit L Employment Agreement with John B. Baker
Exhibit M Employment Agreement with Henry E. Baker
Exhibit N Form of Lock-Up Agreement
Exhibit O Form of Registration Rights Agreement
</TABLE>
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<PAGE> 190
EXHIBIT A
FORM OF
CERTIFICATE OF MERGER
OF
VP ACQUISITION CORP.
WITH AND INTO
VERMONT PURE HOLDINGS, LTD.
The undersigned corporation organized and existing under and by virtue of
the General Corporation Law of the State of Delaware DOES HEREBY CERTIFY:
FIRST: The name and state of incorporation of each of the constituent
corporations of the merger is as follows:
<TABLE>
<CAPTION>
NAME STATE OF INCORPORATION
---- ----------------------
<S> <C>
Vermont Pure Holdings, Ltd. Delaware
VP Acquisition Corp. Delaware
</TABLE>
SECOND: An agreement of merger between the parties to the merger has been
approved, adopted, certified, executed and acknowledged by each of the
constituent corporations in accordance with the requirements of Section 251 of
the General Corporation Law of the State of Delaware.
THIRD: The corporation currently known as Vermont Pure Holdings, Ltd. shall
be the surviving corporation and shall upon the filing of this certificate of
merger be renamed DIAMOND ACQUISITION CORP.
FOURTH: The certificate of incorporation of the surviving corporation,
DIAMOND ACQUISITION CORP., as in effect immediately prior to the merger, shall
be amended and restated in its entirety so that, as so amended, it reads as set
forth on Attachment 1 hereto.
FIFTH: The executed agreement of merger is on file at the principal place
of business of the surviving corporation. The address of the principal place of
business of the surviving corporation is Route 66, Catamount Industrial Park,
Randolph, Vermont 05060.
SIXTH: A copy of the agreement of merger will be furnished by the surviving
corporation, on request and without cost to any stockholder of either
constituent corporation.
IN WITNESS WHEREOF, Vermont Pure Holdings, Ltd. has caused this Certificate
of Merger to be executed by its President and attested by its Secretary this
day of , 2000.
<TABLE>
<S> <C>
VERMONT PURE HOLDINGS, LTD.
[SEAL] By:
ATTEST:
--------------------------------------------------------
By: President
--------------------------------------------------------
Secretary
</TABLE>
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<PAGE> 191
ATTACHMENT 1 TO EXHIBIT A
FORM OF
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
DIAMOND ACQUISITION CORP.
F/K/A VERMONT PURE HOLDINGS, LTD.
FIRST: The name of the corporation (the "Corporation") is Diamond
Acquisition Corp.
SECOND: The address of the registered office of the Corporation in the
State of Delaware is 1209 Orange Street, Wilmington, Delaware, County of New
Castle, and the name of its registered agent at such address is The Corporation
Trust Company.
THIRD: The nature of the business or purposes to be conducted or promoted
is to engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of Delaware.
FOURTH: The total number of shares of capital stock that the Corporation
shall have the authority to issue shall be 100 shares of common stock, each of
which shall have a par value of $0.01, amounting to an aggregate par value of
$1.00.
FIFTH: The Board of Directors is authorized to make, alter or repeal the
by-laws of the Corporation. Election of directors need not be by written ballot.
SIXTH: The Corporation shall indemnify each person who at any time is, or
shall have been, a director or officer of the Corporation and was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he or she is or was a director or
officer of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee, or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
incurred in connection with any such action, suit or proceeding, to the maximum
extent permitted by the General Corporation Law of the State of Delaware, as the
same exists or may hereafter be amended. The foregoing right of indemnification
shall in no way be exclusive of any other rights of indemnification to which any
such director or officer may be entitled, under any by-law, agreement, vote of
directors or stockholders or otherwise. No amendment to or repeal of the
provisions of this Article SEVENTH shall deprive a director or officer of the
benefit hereof with respect to any act or failure to act occurring prior to such
amendment or repeal.
SEVENTH: No director of the Corporation shall be personally liable to the
Corporation or to any of its stockholders for monetary damages arising out of
such director's breach of fiduciary duty as a director of the Corporation,
except to the extent that the elimination or limitation of such liability is not
permitted by the General Corporation Law of the State of Delaware, as the same
exists or may hereafter be amended. No amendment to or repeal of the provisions
of this Article SEVENTH shall deprive any director of the Corporation of the
benefit hereof with respect to any act or failure to act of such director
occurring prior to such amendment or repeal.
EIGHTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation in the
manner now or hereafter prescribed by statute and this Certificate of
Incorporation, and all rights conferred upon stockholders herein are granted
subject to this reservation.
IN WITNESS WHEREOF, I have hereunto set my hand this day of ,
2000.
--------------------------------------
Timothy Fallon
Chief Executive Officer
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<PAGE> 192
EXHIBIT B
CERTIFICATE OF INCORPORATION
OF
VP MERGER PARENT, INC.
Article 1. The name of the Corporation is: VP Merger Parent, Inc.
Article 2. The address of its registered office in the State of Delaware is
Corporation Trust Center, 1209 Orange Street in the City of Wilmington, County
of New Castle. The name of its registered agent at such address is The
Corporation Trust Company.
Article 3. The nature of the business or purposes to be conducted or
promoted is to engage in any lawful act or activity for which corporations may
be organized under the General Corporation Law of Delaware.
Article 4. The total number of shares of capital stock which the
Corporation shall have authority to issue is Fifty Million Five Hundred Thousand
(50,500,000) shares, of which Fifty Million (50,000,000) shares shall be Common
Stock, par value $.001 per share, and Five Hundred Thousand (500,000) shares
shall be Preferred Stock, par value $.001 per share.
The Preferred Stock may be issued from time to time in one or more series.
The Board of Directors of the Corporation is hereby expressly authorized to
provide, by resolution or resolutions duly adopted by it prior to issuance, for
the creation of each such series and to fix the designations and the powers,
preferences, rights, qualifications, limitations and restrictions relating to
the shares of each such series. The authority of the Board of Directors with
respect to each series of Preferred Stock shall include, but not be limited to,
determining the following:
(a) the designation of such series, the number of shares to constitute
such series and the stated value thereof if different from the par value
thereof;
(b) whether the shares of such series shall have voting rights, in
addition to any voting rights provided by law, and, if so, the terms of
such voting rights, which may be general or limited;
(c) the dividends, if any, payable on such series, whether any such
dividends shall be cumulative, and, if so, from what dates, the conditions
and dates upon which such dividends shall be payable, and the preference or
relation which such dividends shall bear to the dividends payable on any
shares of stock of any other class or any other series of Preferred Stock;
(d) whether the shares of such series shall be subject to redemption
by the Corporation, and, if so, the times, prices and other conditions of
such redemption;
(e) the amount or amounts payable upon shares of such series upon, and
the rights of the holders of such series in, the voluntary or involuntary
liquidation, dissolution or winding up, or upon any distribution of the
assets of the Corporation;
(f) whether the shares of such series shall be subject to the
operation of a retirement or sinking fund and, if so, the extent to and
manner in which any such retirement or sinking fund shall be applied to the
purchase or redemption of the shares of such series for retirement or other
corporate purposes and the terms and provisions relating to the operation
thereof;
(g) whether the shares of such series shall be convertible into, or
exchangeable for, shares of stock of any other class or any other series of
Preferred Stock or any other securities and, if so, the price or prices or
the rate or rates of conversion or exchange and the method, if any, of
adjusting the same, and any other terms and conditions of conversion or
exchange;
(h) the limitations and restrictions, if any, to be effective while
any shares of such series are outstanding upon the payment of dividends or
the making of other distributions on, and upon the purchase, redemption or
other acquisition by the Corporation of, the Common Stock or shares of
stock of any other class or any other series of Preferred Stock;
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<PAGE> 193
(i) the conditions or restrictions, if any, upon the creation of
indebtedness of the Corporation or upon the issue of any additional stock,
including additional shares of such series or of any other series of
Preferred Stock or of any other class; and
(j) any other powers, preferences and relative, participating,
optional and other special rights, and any qualifications, limitations and
restrictions, thereof.
The powers, preferences and relative, participating, optional and other
special rights of each series of Preferred Stock, and the qualifications,
limitations or restrictions thereof, if any, may differ from those of any and
all other series at any time outstanding. All shares of any one series of
Preferred Stock shall be identical in all respects with all other shares of such
series, except that shares of any one series issued at different times may
differ as to the dates from which dividends thereof shall be cumulative.
Article 5. The Board of Directors is authorized to make, alter or repeal
the by-laws of the Corporation. Election of directors need not be by written
ballot.
Article 6. Any action required or permitted to be taken by the stockholders
of the corporation must be effected at a duly constituted annual or special
meeting of such holders and may not be effected by any consent in writing by
such stockholders, except for unanimous written consent.
Article 7. The name and mailing address of each person who shall serve as a
Director of the Corporation until the first annual meeting of Stockholders, or
until a successor or successors are elected and qualified is:
<TABLE>
<CAPTION>
NAME ADDRESS
---- -------
<S> <C>
Timothy Fallon c/o Vermont Pure Holdings, Ltd.
70 West Red Oak Lane
White Plains, New York 10604
</TABLE>
Article 8. No director of the Corporation shall be personally liable to the
Corporation or its stockholders for any monetary damages for breaches of
fiduciary duty as a director, provided that this provision shall not eliminate
or limit the liability of a director (i) for any breach of the director's duty
of loyalty to the Corporation or its stockholders; (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the General Corporation Law of the State of
Delaware, or (iv) for any transaction from which the director derived an
improper personal benefit.
Article 9. All persons who the Corporation is empowered to indemnify
pursuant to the provisions of Section 145 or the General Corporation law of the
State of Delaware (or any similar provision or provisions of applicable law at
the time in effect), shall be indemnified by the Corporation to the full extent
permitted thereby. The following right of indemnification shall not be deemed to
be exclusive of any other rights to which those seeking indemnification may be
entitled under any by-laws, agreements, vote of stockholders or disinterested
directors or otherwise.
Article 10. The name and the mailing address of the sole incorporator of
the Corporation is Kenneth A. Itrato, Esq. c/o Foley, Hoag & Eliot LLP, One Post
Office Square, Boston, Massachusetts 02109.
IN WITNESS WHEREOF, I have hereunto set my hand this day of May, 2000.
/s/ KENNETH A. ITRATO
--------------------------------------
Kenneth A. Itrato, Esq.
Sole Incorporator
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<PAGE> 194
EXHIBIT C
BY-LAWS
OF
VP MERGER PARENT, INC.
Section 1. CERTIFICATE OF INCORPORATION AND BY-LAWS
1.1 These by-laws are subject to the certificate of incorporation of the
corporation. In these by-laws, references to the certificate of incorporation
and by-laws mean the provisions of the certificate of incorporation and the
by-laws as are from time to time in effect.
Section 2. OFFICES
2.1 Registered Office. The registered office shall be in the City of
Wilmington, County of New Castle, State of Delaware.
2.2 Other Offices. The corporation may also have offices at such other
places both within and without the State of Delaware as the board of directors
may from time to time determine or the business of the corporation may require.
Section 3. STOCKHOLDERS
3.1 Location of Meetings. All meetings of the stockholders shall be held
at such place either within or without the State of Delaware as shall be
designated from time to time by the board of directors. Any adjourned session of
any meeting shall be held at the place designated in the vote of adjournment.
3.2 Annual Meeting. The annual meeting of stockholders shall be held at
10:00 a.m. on the second Thursday in May in each year (unless that day be a
legal holiday at the place where the meeting is to be held, in which case the
meeting shall be held at the same hour on the next succeeding day not a legal
holiday)(the "Specified Date") or at such other date and time as shall be
designated from time to time by the board of directors, at which they shall
elect a board of directors and transact such other business as may be required
by law or these by-laws or as may properly come before the meeting.
3.3 Special Meeting in Place of Annual Meeting. If the election for
directors shall not be held on the day designated by these by-laws, the
directors shall cause the election to be held as soon thereafter as convenient,
and to that end, if the annual meeting is omitted on the day herein provided
therefor or if the election of directors shall not be held thereat, a special
meeting of the stockholders may be held in place of such omitted meeting or
election, and any business transacted or election held at such special meeting
shall have the same effect as if transacted or held at the annual meeting, and
in such case all references in these by-laws to the annual meeting of the
stockholders, or to the annual election of directors, shall be deemed to refer
to or include such special meeting. Any such special meeting shall be called and
the purposes thereof shall be specified in the call, as provided in Section 3.4.
3.4 Notice of Annual Meeting. Written notice of the annual meeting stating
the place, date and hour of the meeting shall be given to each stockholder
entitled to vote at such meeting not less than ten nor more than sixty days
before the date of the meeting. Such notice may specify the business to be
transacted and actions to be taken at such meeting. No action shall be taken at
such meeting unless such notice is given, or unless waiver of such notice is
given by the holders of outstanding stock having not less than the minimum
number of votes necessary to take such action at a meeting at which all shares
entitled to vote thereon were voted. Prompt notice of all action taken in
connection with such waiver of notice shall be given to all stockholders not
present or represented at such meeting.
3.5 Other Special Meetings. Special meetings of the stockholders, for any
purpose or purposes, unless otherwise prescribed by law or by the certificate of
incorporation, may be called by chairman of the board or the president and shall
be called by the president or the secretary at the request in writing of a
majority of the board of directors. Such request shall state the purpose or
purposes of the proposed meeting and business to be transacted at any special
meeting of the stockholders.
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3.6 Notice of Special Meeting. Written notice of a special meeting stating
the place, date and hour of the meeting and the purpose or purposes for which
the meeting is called, shall be given not less than ten nor more than sixty days
before the date of the meeting, to each stockholder entitled to vote at such
meeting. No action shall be taken at such meeting unless such notice is given,
or unless waiver of such notice is given by the holders of outstanding stock
having not less than the minimum number of votes necessary to take such action
at a meeting at which all shares entitled to vote thereon were voted. Prompt
notice of all action taken in connection with such waiver of notice shall be
given to all stockholders not present or represented at such meeting.
3.7 Notice of Stockholder Business at a Meeting of the Stockholders.
Unless otherwise prescribed by law or by the certificate of incorporation,
the following provisions of this Section 3.7 shall apply to the conduct of
business at any meeting of the stockholders. (As used in this Section 3.7, the
term annual meeting shall include a special meeting in lieu of an annual
meeting.)
(a) At any meeting of the stockholders, only such business shall be
conducted as shall have been brought before the meeting (i) pursuant to the
Corporation's notice of meeting, (ii) by or at the direction of the Board
of Directors or (iii) by any stockholder of the Corporation who is a
stockholder of record at the time of giving of the notice provided for in
paragraph (b) of this Section 3.7, who shall be entitled to vote at such
meeting and who complies with the notice procedures set forth in paragraph
(b) of this Section 3.7.
(b) For business to be properly brought before any meeting of the
stockholders by a stockholder pursuant to clause (iii) of paragraph (a) of
this Section 3.7, the stockholder must have given timely notice thereof in
writing to the Secretary of the Corporation. To be timely, a stockholder's
notice must be delivered to or mailed and received at the principal
executive offices of the Corporation (i) in the case of an annual meeting,
not less than ninety (90) days prior to the Specified Date, regardless of
any postponements, deferrals or adjournments of that meeting to a later
date; provided, however, that if the annual meeting of stockholders or a
special meeting in lieu thereof is to be held on a date prior to the
Specified Date, and if less than seventy days' notice or prior public
disclosure of the date of such annual or special meeting is given or made,
notice by the stockholder to be timely must be so delivered or received not
later than the close of business on the tenth day following the earlier of
the date on which notice of the date of such annual or special meeting was
mailed or the day on which public disclosure was made of the date of such
annual or special meeting; and (ii) in the case of a special meeting (other
than a special meeting in lieu of an annual meeting), not later than the
tenth (10th) day following the earlier of the day on which notice of the
date of the scheduled meeting was mailed or the day on which public
disclosure was made of the date of the scheduled meeting. A stockholder's
notice to the Secretary shall set forth as to each matter the stockholder
proposes to bring before the meeting (i) a brief description of the
business desired to be brought before the meeting and the reasons for
conducting such business at the meeting, (ii) the name and address, as they
appear on the Corporation's books, of the stockholder proposing such
business, the name and address of the beneficial owner, if any, on whose
behalf the proposal is made, and the name and address of any other
stockholders or beneficial owners known by such stockholder to be
supporting such proposal, (iii) the class and number of shares of the
Corporation which are owned beneficially and of record by such stockholder
of record, by the beneficial owner, if any, on whose behalf the proposal is
made and by any other stockholders or beneficial owners known by such
stockholder to be supporting such proposal, and (iv) any material interest
of such stockholder of record and/or of the beneficial owner, if any, on
whose behalf the proposal is made, in such proposed business and any
material interest of any other stockholders or beneficial owners known by
such stockholder to be supporting such proposal in such proposed business,
to the extent known by such stockholder.
(c) Notwithstanding anything in these by-laws to the contrary, no
business shall be conducted at a meeting except in accordance with the
procedures set forth in this Section 3.7. The person presiding at the
meeting shall, if the facts warrant, determine that business was not
properly brought before the meeting and in accordance with the procedures
prescribed by these by-laws, and if he should so determine, he shall so
declare at the meeting and any such business not properly brought before
the
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meeting shall not be transacted. Notwithstanding the foregoing provisions
of this Section 3.7, a stockholder shall also comply with all applicable
requirements of the Securities Exchange Act of 1934, as amended (or any
successor provision), and the rules and regulations thereunder with respect
to the matters set forth in this Section 3.7.
(d) This provision shall not prevent the consideration and approval or
disapproval at the meeting of reports of officers, Directors and committees
of the Board of Directors, but, in connection with such reports, no new
business shall be acted upon at such meeting unless properly brought before
the meeting as herein provided.
3.8 Stockholder List. The officer who has charge of the stock ledger of
the corporation shall prepare and make, at least ten days before every meeting
of stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
3.9 Quorum of Stockholders. The holders of a majority of the stock issued
and outstanding and entitled to vote thereat, present in person or represented
by proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise required by law, or by the
certificate of incorporation or by these by-laws. Except as otherwise provided
by law, no stockholder present at a meeting may withhold his shares from the
quorum count by declaring his shares absent from the meeting.
3.10 Adjournment. Any meeting of stockholders may be adjourned from time
to time to any other time and to any other place at which a meeting of
stockholders may be held under these by-laws, which time and place shall be
announced at the meeting, by a majority of votes cast upon the question, whether
or not a quorum is present. At such adjourned meeting at which a quorum shall be
present or represented any business may be transacted which might have been
transacted at the original meeting. If the adjournment is for more than thirty
days, or if after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote at the meeting.
3.11 Proxy Representation. Every stockholder may authorize another person
or persons to act for him by proxy in all matters in which a stockholder is
entitled to participate, whether by waiving notice of any meeting, objecting to
or voting or participating at a meeting, or expressing consent or dissent
without a meeting. Every proxy must be signed by the stockholder or by his
attorney-in-fact. No proxy shall be voted or acted upon after three years from
its date unless such proxy provides for a longer period. A duly executed proxy
shall be irrevocable if it states that it is irrevocable and, if, and only as
long as, it is coupled with an interest sufficient in law to support an
irrevocable power. A proxy may be made irrevocable regardless of whether the
interest with which it is coupled is an interest in the stock itself or an
interest in the corporation generally. The authorization of a proxy may but need
not be limited to specified action, provided, however, that if a proxy limits
its authorization to a meeting or meetings of stockholders, unless otherwise
specifically provided such proxy shall entitle the holder thereof to vote at any
adjourned session but shall not be valid after the final adjournment thereof.
3.12 Inspectors. If required to do so by Section 231 of the Delaware
General Corporation Law or other applicable law or regulation, the directors or
the person presiding at the meeting shall appoint one or more inspectors of
election and any substitute inspectors to act at the meeting or any adjournment
thereof. If not so required, the directors or the person presiding at the
meeting may, but need not, appoint such inspectors and substitute inspectors. In
either event, the inspectors and substitute inspectors shall have such duties
and responsibilities as are required by applicable law or regulation and such
other duties and responsibilities not inconsistent therewith as the directors or
the person presiding at the meeting shall deem appropriate.
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<PAGE> 197
3.13 Action by Vote. When a quorum is present at any meeting, whether the
same be an original or an adjourned session, a plurality of the votes properly
cast for election to any office shall elect to such office and a majority of the
votes properly cast upon any question other than an election to an office shall
decide the question, except when a larger vote is required by law, by the
certificate of incorporation or by these by-laws. No ballot shall be required
for any election unless requested by a stockholder present or represented at the
meeting and entitled to vote in the election.
3.14 No Action by Consent. Any action required or permitted to be taken by
the stockholders of the corporation must be effected at a duly constituted
annual or special meeting of such holders and may not be effected by any consent
in writing by such stockholders.
Section 4. DIRECTORS
4.1 Number. The number of directors which shall constitute the whole board
shall be determined by resolution of the board. If the corporation has issued
shares of its capital stock, such number of directors shall not be less than
three. The number of directors may be decreased at any time or from time to time
by the directors by vote of a majority of directors then in office, except that
any such decrease by vote of the directors shall only be made to eliminate
vacancies existing by reason of the death, resignation, removal or
disqualification of one or more directors. The directors shall be elected at the
annual meeting of the stockholders, except as provided in Section 4.4 of these
by-laws. Directors need not be stockholders.
4.2 Tenure. Except as otherwise provided by law, by the certificate of
incorporation or by these by-laws, each director shall hold office until the
next annual meeting and until his or her successor is elected and qualified, or
until he or she sooner dies, resigns, is removed or becomes disqualified.
4.3 Powers. The business of the corporation shall be managed by or under
the direction of the board of directors which shall have and may exercise all
the powers of the corporation and do all such lawful acts and things as are not
by law, the certificate of incorporation or these by-laws directed or required
to be exercised or done by the stockholders.
4.4 Vacancies. Except as otherwise provided by law or by the certificate
of incorporation, vacancies and any newly created directorships resulting from
any increase in the number of directors shall be filled only by a majority of
the directors then in office, although less than a quorum, or by a sole
remaining director. When one or more directors shall resign from the board,
effective at a future date, a majority of the directors then in office,
including those who have resigned, shall have power to fill such vacancy or
vacancies, the vote or action by writing thereon to take effect when such
resignation or resignations shall become effective. The directors shall have and
may exercise all their powers notwithstanding the existence of one or more
vacancies in their number, subject to any requirements of law or of the
certificate of incorporation or of these by-laws as to the number of directors
required for a quorum or for any vote or other actions.
4.5 Nomination of Directors.
The following provisions of this Section 4.5 shall apply to the nomination
of persons for election to the Board of Directors.
(a) Nominations of persons for election to the Board of Directors of
the Corporation may be made (i) by or at the direction of the Board of
Directors or (ii) by any stockholder of the Corporation who is a
stockholder of record at the time of giving of notice provided for in
paragraph (b) of this Section 4.5, who shall be entitled to vote for the
election of Directors at the meeting and who complies with the notice
procedures set forth in paragraph (b) of this Section 4.5.
(b) Nominations by stockholders shall be made pursuant to timely
notice in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice shall be delivered to or mailed and received at the
principal executive offices of the Corporation, not less than ninety (90)
days prior to the Specified Date, regardless of any postponements,
deferrals or adjournments of that meeting to a later date; provided,
however, that if the annual meeting of stockholders or a special meeting in
lieu thereof is to be held on a date prior to the Specified Date, and if
less than seventy days' notice or prior public disclosure of the date of
such annual or special meeting is given or made, notice by the stockholder
to be timely must be so
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delivered or received not later than the close of business on the tenth day
following the earlier of the day on which notice of the date of such annual
or special meeting was mailed or the day on which public disclosure was
made of the date of such annual or special meeting. Such stockholder's
notice shall set forth (x) as to each person whom the stockholder proposes
to nominate for election or reelection as a Director all information
relating to such person that is required to be disclosed in solicitations
of proxies for election of directors, or is otherwise required, pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended, or
pursuant to any other then existing statute, rule or regulation applicable
thereto (including such person's written consent to being named in the
proxy statement as a nominee and to serving as a Director if elected); (y)
as to the stockholder giving the notice (1) the name and address, as they
appear on the Corporation's books, of such stockholder and (2) the class
and number of shares of the Corporation which are beneficially owned by
such stockholder and also which are owned of record by such stockholder;
and (z) as to the beneficial owner, if any, on whose behalf the nomination
is made, (1) the name and address of such person and (2) the class and
number of shares of the Corporation which are beneficially owned by such
person. The Corporation may require any proposed nominee to furnish such
other information as may reasonably be required by the Corporation to
determine the eligibility of such proposed nominee as a Director. At the
request of the Board of Directors, any person nominated by the Board of
Directors for election as a Director shall furnish to the Secretary of the
Corporation that information required to be set forth in a stockholder's
notice of nomination which pertains to the nominee.
(c) No person shall be eligible to serve as a Director of the
Corporation unless nominated in accordance with the procedures set forth in
this Section 4.5. The person presiding at the meeting shall, if the facts
warrant, determine that a nomination was not made in accordance with the
procedures prescribed by these by-laws, and if he should so determine, he
shall so declare to the meeting and the defective nomination shall be
disregarded. Notwithstanding the foregoing provisions of this Section 4.5,
a stockholder shall also comply with all applicable requirements of the
Securities Exchange Act of 1934, as amended (or any successor provision),
and the rules and regulations thereunder with respect to the matters set
forth in this by-law.
4.6 Committees. The board of directors may, by vote of a majority of the
whole board, (a) designate, change the membership of or terminate the existence
of any committee or committees, each committee to consist of one or more of the
directors; (b) designate one or more directors as alternate members of any such
committee who may replace any absent or disqualified member at any meeting of
the committee; and (c) determine the extent to which each such committee shall
have and may exercise the powers and authority of the board of directors in the
management of the business and affairs of the corporation, including the power
to authorize the seal of the corporation to be affixed to all papers which
require it and the power and authority to declare dividends or to authorize the
issuance of stock; excepting, however, such powers which by law, by the
certificate of incorporation or by these by-laws they are prohibited from so
delegating. In the absence or disqualification of any member of such committee
and his alternate, if any, the member or members thereof present at any meeting
and not disqualified from voting, whether or not constituting a quorum, may
unanimously appoint another member of the board of directors to act at the
meeting in the place of any such absent or disqualified member. Except as the
board of directors may otherwise determine, any committee may make rules for the
conduct of its business, but unless otherwise provided by the board or such
rules, its business shall be conducted as nearly as may be in same manner as is
provided by these by-laws for the conduct of business by the board of directors.
Each committee shall keep regular minutes of its meetings and report the same to
the board of directors upon request.
4.7 Regular Meeting. Regular meetings of the board of directors may be
held without call or notice at such place within or without the State of
Delaware and at such times as the board may from time to time determine,
provided that notice of the first regular meeting following any such
determination shall be given to absent directors. A regular meeting of the
directors may be held without call or notice immediately after and at the same
place as the annual meeting of the stockholders.
4.8 Special Meetings. Special meetings of the board of directors may be
held at any time and at any place within or without the State of Delaware
designated in the notice of the meeting, when called by the
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chairman of the board or president, or by one-third or more in number of the
directors, reasonable notice thereof being given to each director by the
secretary or by the chairman of the board or president or by any one of the
directors calling the meeting.
4.9 Notice. It shall be reasonable and sufficient notice to a director to
send notice by mail at least forty-eight hours or by telegram or telecopy at
least twenty-four hours before the meeting, addressed to him at his usual or
last known business or residence address or to give notice to him in person or
by telephone at least twenty-four hours before the meeting. Notice of a meeting
need not be given to any director if a written waiver of notice, executed by him
before or after the meeting, is filed with the records of the meeting, or to any
director who attends the meeting without protesting prior thereto or at its
commencement the lack of notice to him. Neither notice of a meeting nor a waiver
of a notice need specify the purposes of the meeting.
4.10 Quorum. Except as may be otherwise provided by law, by the
certificate of incorporation or by these by-laws, at any meeting of the
directors a majority of the directors then in office shall constitute a quorum;
a quorum shall not in any case be less than one-third of the total number of
directors constituting the whole board. Any meeting may be adjourned from time
to time by a majority of the votes cast upon the question, whether or not a
quorum is present, and the meeting may be held as adjourned without further
notice.
4.11 Action by Vote. Except as may be otherwise provided by law, by the
certificate of incorporation or by these by-laws, when a quorum is present at
any meeting the vote of a majority of the directors present shall be the act of
the board of directors.
4.12 Action Without a Meeting. Unless otherwise restricted by the
certificate of incorporation or these by-laws, any action required or permitted
to be taken at any meeting of the board of directors or of any committee thereof
may be taken without a meeting if all the members of the board or of such
committee, as the case may be, consent thereto in writing, and such writing or
writings are filed with the records of the meetings of the board or of such
committee. Such consent shall be treated for all purposes as the act of the
board or of such committee, as the case may be.
4.13 Participation in Meetings by Conference Telephone. Unless otherwise
restricted by the certificate of incorporation or these by-laws, members of the
board of directors or of any committee thereof may participate in a meeting of
such board or committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other. Such participation shall constitute presence in
person at such meeting.
4.14 Compensation. Unless otherwise restricted by the certificate of
incorporation or these by-laws, the board of directors shall have the authority
to fix from time to time the compensation of directors. The directors may be
paid their expenses, if any, of attendance at each meeting of the board of
directors and the performance of their responsibilities as directors and may be
paid a fixed sum for attendance at each meeting of the board of directors and/or
a stated salary as director. No such payment shall preclude any director from
serving the corporation or its parent or subsidiary corporations in any other
capacity and receiving compensation therefor. The board of directors may also
allow compensation for members of special or standing committees for service on
such committees.
4.15 Interested Directors and Officers.
(a) No contract or transaction between the corporation and one or more of
its directors or officers, or between the corporation and any other corporation,
partnership, association, or other organization in which one or more of the
corporation's directors or officers are directors or officers, or have a
financial interest, shall be void or voidable solely for this reason, or solely
because the director or officer is present at or participates in the meeting of
the board or committee thereof which authorizes the contract or transaction, or
solely because his or their votes are counted for such purpose, if:
(1) The material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to the board of
directors or the committee, and the board or committee in good
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faith authorizes the contract or transaction by the affirmative votes of a
majority of the disinterested directors, even though the disinterested
directors be less than a quorum; or
(2) The material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to the stockholders
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by vote of the stockholders; or
(3) The contract or transaction is fair as to the corporation as of
the time it is authorized, approved or ratified, by the board of directors,
a committee thereof, or the stockholders.
(b) Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the board of directors or of a committee
which authorizes the contract or transaction.
4.16 Resignation or Removal of Directors. Unless otherwise restricted by
the certificate of incorporation or by law, any director or the entire board of
directors may be removed for cause by the holders of a majority of the stock
issued and outstanding and entitled to vote at an election of directors. Any
director may resign at any time by delivering his resignation in writing to the
president or the secretary or to a meeting of the board of directors. Such
resignation shall be effective upon receipt unless specified to be effective at
some other time; and without in either case the necessity of its being accepted
unless the resignation shall so state. No director resigning and (except where a
right to receive compensation shall be expressly provided in a duly authorized
written agreement with the corporation) no director removed shall have any right
to receive compensation as such director for any period following his
resignation or removal, or any right to damages on account of such removal,
whether his compensation be by the month or by the year or otherwise; unless in
the case of a resignation, the directors, or in the case of removal, the body
acting on the removal, shall in their or its discretion provide for
compensation.
Section 5. NOTICES
5.1 Form of Notice. Whenever, under the provisions of law, or of the
certificate of incorporation or of these by-laws, notice is required to be given
to any director or stockholder, such notice may be given by mail, addressed to
such director or stockholder, at his address as it appears on the records of the
corporation, with postage thereon prepaid, and such notice shall be deemed to be
given at the time when the same shall be deposited in the United States mail.
Unless written notice by mail is required by law, written notice may also be
given by telegram, cable, telecopy, commercial delivery service, telex or
similar means, addressed to such director or stockholder at his address as it
appears on the records of the corporation, in which case such notice shall be
deemed to be given when delivered into the control of the persons charged with
effecting such transmission, the transmission charge to be paid by the
corporation or the person sending such notice and not by the addressee. Oral
notice or other in-hand delivery (in person or by telephone) shall be deemed
given at the time it is actually given.
5.2 Waiver of Notice. Whenever notice is required to be given under the
provisions of law, the certificate of incorporation or these by-laws, a written
waiver thereof, signed by the person entitled to notice, whether before or after
the time stated therein, shall be deemed equivalent to notice. Attendance of a
person at a meeting shall constitute a waiver of notice of such meeting, except
when the person attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. Neither the business to be transacted at,
nor the purpose of, any meeting of the stockholders, directors or members of a
committee of the directors need be specified in any written waiver of notice.
Section 6. OFFICERS AND AGENTS
6.1 Enumeration; Qualification. The officers of the corporation shall be a
chief executive officer, a president, a treasurer, a secretary and such other
officers, if any, as the board of directors from time to time may in its
discretion elect or appoint including without limitation a chairman of the board
and one or more vice presidents. Any officer may be, but none need be, a
director or stockholder. Any two or more offices may be held by the same person.
Any officer may be required by the board of directors to secure the faithful
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performance of his duties to the corporation by giving bond in such amount and
with sureties or otherwise as the board of directors may determine.
6.2 Powers. Subject to law, to the certificate of incorporation and to the
other provisions of these by-laws, each officer shall have, in addition to the
duties and powers herein set forth, such duties and powers as are commonly
incident to his office and such additional duties and powers as the board of
directors may from time to time designate.
6.3 Election. The board of directors at its first meeting after each
annual meeting of stockholders shall choose a chief executive officer, a
president, a secretary and a treasurer. Other officers may be appointed by the
board of directors at such meeting, at any other meeting or by written consent.
At any time or from time to time, the directors may delegate to any officer
their power to elect or appoint any other officer or any agents.
6.4 Tenure. Each officer shall hold office until the first meeting of the
board of directors following the next annual meeting of the stockholders and
until his successor is elected and qualified unless a shorter period shall have
been specified in terms of his election or appointment, or in each case until he
sooner dies, resigns, is removed or becomes disqualified. Each agent of the
corporation shall retain his authority at the pleasure of the directors, or the
officer by whom he was appointed or by the officer who then holds agent
appointive power.
6.5 Chief Executive Officer, President and Vice President. The chief
executive officer and shall have direct and active charge of all business
operations of the corporation and shall have general supervision of the entire
business of the corporation, subject to the control of the board of directors.
He shall preside at all meetings of the stockholders and of the board of
directors at which he is present, except as otherwise voted by the board of
directors. If there is no chief executive officer, the president shall have the
duties and powers of the chief executive officer.
The president or treasurer shall execute bonds, mortgages and other
contracts requiring a seal, under the seal of the corporation, except where
required or permitted by law to be otherwise signed and executed and except
where the signing and execution thereof shall be expressly delegated by the
board of directors to some other officer or agent of the corporation.
Any vice presidents shall have such duties and powers as shall be
designated from time to time by the board of directors or by the president.
6.6 Treasurer and Assistant Treasurers. The treasurer shall be in charge
of the corporation's funds and valuable papers, and shall have such other duties
and powers as may be assigned to him from time to time by the board of directors
or by the president.
Any assistant treasurers shall have such duties and powers as shall be
designated from time to time by the board of directors, the president or the
treasurer.
6.7 Secretary and Assistant Secretaries. The secretary shall record all
proceedings of the stockholders, of the board of directors and of committees of
the board of directors in a book or series of books to be kept therefor and
shall file therein all writings of, or related to, action by stockholder or
director consent. In the absence of the secretary from any meeting, an assistant
secretary, or if there is none or he is absent, a temporary secretary chosen at
the meeting, shall record the proceedings thereof. Unless a transfer agent has
been appointed, the secretary shall keep or cause to be kept the stock and
transfer records of the corporation, which shall contain the names and record
addresses of all stockholders and the number of shares registered in the name of
each stockholder. The secretary shall have such other duties and powers as may
from time to time be designated by the board of directors or the president.
Any assistant secretaries shall have such duties and powers as shall be
designated from time to time by the board of directors, the president or the
secretary.
6.8 Resignation and Removal. Any officer may resign at any time by
delivering his resignation in writing to the president or the secretary or to a
meeting of the board of directors. Such resignation shall be effective upon
receipt unless specified to be effective at some other time, and without in any
case the necessity of its being accepted unless the resignation shall so state.
The board of directors may at any time remove any
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officer either with or without cause. The board of directors may at any time
terminate or modify the authority of any agent. No officer resigning and (except
where a right to receive compensation shall be expressly provided in a duly
authorized written agreement with the corporation) no officer removed shall have
any right to any compensation as such officer for any period following his
resignation or removal, or any right to damages on account of such removal,
whether his compensation be by the month or by the year or otherwise; unless in
the case of a resignation, the directors, or in the case of removal, the body
acting on the removal, shall in their or its discretion provide for
compensation.
6.9 Vacancies. If the office of the president or the treasurer or the
secretary becomes vacant, the directors may elect a successor by vote of a
majority of the directors then in office. If the office of any other officer
becomes vacant, any person or body empowered to elect or appoint that office may
choose a successor. Each such successor shall hold office for the unexpired term
of his predecessor, and in the case of the president, the treasurer and the
secretary until his successor is chosen and qualified, or in each case until he
sooner dies, resigns, is removed or becomes disqualified.
Section 7. CAPITAL STOCK
7.1 Stock Certificates. Each stockholder shall be entitled to a
certificate stating the number and the class and the designation of the series,
if any, of the shares held by him, in such form as shall, in conformity to law,
the certificate of incorporation and the by-laws, be prescribed from time to
time by the board of directors. Such certificate shall be signed by the
president or a vice-president and (i) the treasurer or an assistant treasurer or
(ii) the secretary or an assistant secretary. Any of or all the signatures on
the certificate may be a facsimile. In case an officer, transfer agent, or
registrar who has signed or whose facsimile signature has been placed on such
certificate shall have ceased to be such officer, transfer agent, or registrar
before such certificate is issued, it may be issued by the corporation with the
same effect as if he were such officer, transfer agent, or registrar at the time
of its issue.
7.2 Lost Certificates. The board of directors may direct a new certificate
or certificates to be issued in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a new certificate or certificates, the board of directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or his
legal representative, to advertise the same in such manner as it shall require
and/or to give the corporation a bond in such sum as it may direct as indemnity
against any claim that may be made against the corporation with respect to the
certificate alleged to have been lost, stolen or destroyed.
Section 8. TRANSFER OF SHARES OF STOCK
8.1 Transfer on Books. Subject to any restrictions with respect to the
transfer of shares of stock, shares of stock may be transferred on the books of
the corporation by the surrender to the corporation or its transfer agent of the
certificate therefor properly endorsed or accompanied by a written assignment
and power of attorney properly executed, with necessary transfer stamps affixed,
and with such proof of the authenticity of signature as the board of directors
or the transfer agent of the corporation may reasonably require. Except as may
be otherwise required by law, by the certificate of incorporation or by these
by-laws, the corporation shall be entitled to treat the record holder of stock
as shown on its books as the owner of such stock for all purposes, including the
payment of dividends and the right to receive notice and to vote or to give any
consent with respect thereto and to be held liable for such calls and
assessments, if any, as may lawfully be made thereon, regardless of any
transfer, pledge or other disposition of such stock until the shares have been
properly transferred on the books of the corporation.
It shall be the duty of each stockholder to notify the corporation of his
post office address.
Section 9. GENERAL PROVISIONS
9.1 Record Date. In order that the corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of
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any rights, or entitled to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action,
the board of directors may fix, in advance, a record date, which shall not be
more than sixty days nor less than ten days before the date of such meeting, nor
more than sixty days prior to any other action to which such record date
relates. A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the
adjourned meeting. If no record date is fixed,
(a) The record date for determining stockholders entitled to notice of
or to vote at a meeting of stockholders shall be at the close of business
on the day next preceding the day on which notice is given, or, if notice
is waived, at the close of business on the day next preceding the day on
which the meeting is held;
(b) The record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting, when no prior
action by the board of directors is necessary, shall be the day on which
the first written consent is expressed; and
(c) The record date for determining stockholders for any other purpose
shall be at the close of business on the day on which the board of
directors adopts the resolution relating to such purpose.
9.2 Dividends. Dividends upon the capital stock of the corporation may be
declared by the board of directors at any regular or special meeting or by
written consent, pursuant to law. Dividends may be paid in cash, in property, or
in shares of the capital stock, subject to the provisions of the certificate of
incorporation.
9.3 Payment of Dividends. Before payment of any dividend, there may be set
aside out of any funds of the corporation available for dividends such sum or
sums as the directors from time to time, in their absolute discretion, think
proper as a reserve or reserves to meet contingencies, or for equalizing
dividends, or for repairing or maintaining any property of the corporation, or
for such other purpose as the directors shall think conducive to the interest of
the corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
9.4 Checks. All checks or demands for money and notes of the corporation
shall be signed by such officer or officers or such other person or persons as
the board of directors may from time to time designate.
9.5 Fiscal Year. The fiscal year of the corporation shall end on the last
Saturday of October, unless otherwise determined by the board of directors.
9.6 Seal. The board of directors may, by resolution, adopt a corporate
seal. The corporate seal shall have inscribed thereon the name of the
corporation, the year of its organization and the word "Delaware." The seal may
be used by causing it or a facsimile thereof to be impressed or affixed or
reproduced or otherwise. The seal may be altered from time to time by the board
of directors.
Section 10. AMENDMENTS
10.1 By the Board of Directors. These by-laws may be altered, amended or
repealed or new by-laws may be adopted by the affirmative vote of a majority of
the directors present at any regular or special meeting of the board of
directors at which a quorum is present.
10.2 By the Stockholders. Except as otherwise provided in Section 10.3,
these by-laws may be altered, amended or repealed or new by-laws may be adopted
by the affirmative vote of the holders of a majority of the shares of the
capital stock of the corporation issued and outstanding and entitled to vote at
any regular or special meeting of stockholders, provided notice of such
alteration, amendment, repeal or adoption of new by-laws shall have been stated
in the notice of such regular or special meeting.
10.3 Certain Provisions. Notwithstanding any other provision of law, the
certificate of incorporation or these by-laws, and notwithstanding the fact that
a lesser percentage may be specified by law, for purposes of Section 10.2 (but
not Section 10.1) the affirmative vote of the holders of at least two-thirds of
the shares of capital stock of the corporation issued and outstanding and
entitled to vote shall be required to amend or repeal, or to adopt any provision
inconsistent with, Section 3.5, Section 3.7, Section 3.14, Section 4 and Section
10 of these by-laws.
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EXHIBIT D
AGREEMENT AND PLAN
OF
MERGER AND CONTRIBUTION
EXHIBIT D
<TABLE>
<CAPTION>
SUBORDINATED PARENT TOTAL
PROMISSORY SHARE TRANSFER
STOCKHOLDER CASH(1) NOTE AMOUNT VALUE
----------- ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Henry E. Baker................ $5,500,000.00 $3,488,888.89 $ 3,355,438.61 $12,344,327.50
John B. Baker................. $1,500,000.00 $5,200,000.00 $ 9,044,561.40 $15,744,561.40
Peter K. Baker................ $1,500,000.00 $5,200,000.00 $ 9,044,561.40 $15,744,561.40
Joan A. Baker................. $ -0- $3,511,111.11 $ -0- $ 3,511,111.11
Ross Rapaport, Trustee U/T/A
dated 12/16/91 F/B/O Joan
Baker et al................. $1,000,000.00 $5,200,000.00 $ 9,581,520.47 $15,781,520.47
Peter K. Baker Life Insurance
Trust, Ross Rapaport,
Trustee..................... $ -0- $ -0- $ 36,959.06 $ 36,959.06
John B. Baker Life Insurance
Trust, Ross Rapaport,
Trustee..................... $ -0- $ -0- $ 36,959.06 $ 36,959.06
Totals........................ $ 9,500,000 $ 22,600,000 31,100,000.00 63,200,000.00
</TABLE>
---------------
(1) Should the average amount of cash and cash-equivalents of the Company as of
the close of business on the five business days immediately preceding the
Effective Date exceed $1,500,000, the excess shall be allocated
proportionately to each Stockholder based on the Total Transfer Value.
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<PAGE> 205
EXHIBIT N
LOCK-UP AGREEMENT
[Closing Date], 2000
Vermont Pure Holdings, Ltd. (f/k/a VP Merger Parent, Inc.)
P.O. Box C
Route 66, Catamount Industrial Park
Randolph, Vermont 05060
Attn: Chairman and Chief Executive Officer
Ladies & Gentlemen:
In connection with that certain Agreement and Plan of Merger and
Contribution dated as of May , 2000 (the "Merger Agreement") by and among VP
Merger Parent, Inc. (subsequently renamed Vermont Pure Holdings, Ltd., to whom
this letter is addressed), VP Acquisition Corp., Vermont Pure Holdings, Ltd.
(subsequently renamed Diamond Acquisition Corp.), Crystal Rock Spring Water
Company ("Crystal Rock") and the stockholders of Crystal Rock, the undersigned
has acquired shares of the common stock of Vermont Pure Holdings, Ltd. (f/k/a VP
Merger Parent, Inc.) (the "Parent"). Accordingly, the undersigned is an owner of
record or beneficially of certain shares of the common stock of the Parent (such
shares acquired pursuant to the Merger Agreement, the "Common Stock").
In consideration of the foregoing, the undersigned hereby agrees that the
undersigned will not, without the prior written consent of the Parent pursuant
to authorization by its Board of Directors (which consent may be withheld in the
Parent's sole discretion), directly or indirectly, sell, offer, contract or
grant any option to sell (including without limitation any short sale) pledge,
transfer, establish an open "put equivalent position" within the meaning of Rule
16a-1(h) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act") or otherwise dispose of any shares of Common Stock owned either of record
or beneficially (as defined in Rule 13d-3 under the Exchange Act) by the
undersigned, or publicly announce the undersigned's intention to do any of the
foregoing, for a period commencing on the date hereof and continuing to a date
one (1) year after the date hereof; provided, however, that the foregoing
restrictions shall not prohibit
(i) any gift, assignment, transfer or other disposition to any immediate
family member of the undersigned, to a trust or family partnership for
the benefit of any immediate family member of the undersigned, or
(ii) the assignment, transfer or other disposition of an aggregate of not
more than 200,000 shares of Common Stock in one or more private
transactions to persons or entities that are not competitors of the
Parent or any subsidiary of the Parent,
provided that, in each case described in the foregoing clauses (i) and (ii), the
transaction does not result in any breach by the undersigned of any
representation or warranty in the Tax Matters Certificates referred to in the
Merger Agreement, the transaction is otherwise in compliance with law, and the
Parent shall have received a copy of this letter agreement executed by each such
transferee and, in each case described in the foregoing clause (ii), the Board
of Directors shall have determined in good faith, and in its sole discretion,
that a proposed transferee is not a competitor of the Parent or any subsidiary
of the Parent. The undersigned further agrees and consents to the entry of stop
transfer instructions with the Parent's transfer agent and registrar against the
transfer of shares of Common Stock or securities convertible into or
exchangeable or exercisable for Common Stock held by the undersigned except in
compliance with the foregoing restrictions.
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This agreement is irrevocable and will be binding on the undersigned and
the respective successors, heirs, personal representatives, and assigns of the
undersigned.
--------------------------------------
Printed Name of Holder
By:
----------------------------------
Signature
--------------------------------------
Printed Name of Person Signing
(and indicate capacity of person
signing if signing as custodian,
trustee, or on behalf of an entity)
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APPENDIX B
DUFF & PHELPS, LETTERHEAD
May 5, 2000
Board of Directors
Vermont Pure Holdings, Ltd.
Rt. 66, Catamount Commercial Park
Randolph, VT 06050
Dear Board of Directors:
You have retained Duff & Phelps, LLC ("Duff & Phelps") to serve as
independent financial advisor to Vermont Pure Holdings, Ltd. ("VPUR" or the
"Company") to provide an opinion (the "Opinion") as to whether the transactions
(the "Proposed Transaction") contemplated by the Agreement and Plan of Merger
and Contribution dated this date, pursuant to which VP Merger Parent, Inc., a
successor to the Company, will acquire Crystal Rock Spring Water Company
("Crystal Rock"), is fair from a financial point of view to the shareholders of
the Company. Previously, Duff & Phelps has not provided financial advisory
services to the Company or to Crystal Rock.
DESCRIPTION OF THE PROPOSED TRANSACTION
The Proposed Transaction involves the acquisition of Crystal Rock for an
aggregate consideration of $64.9 million, comprised of $9.5 million in cash,
$31.1 million in common stock of the Company, $22.6 million in the form of
subordinated notes to the sellers, and the assumption of $1.7 million in
existing debt.
SCOPE OF ANALYSIS
In conducting our analysis and arriving at our Opinion, we reviewed and
analyzed, among other things:
1. The Agreement and Plan of Merger and Contribution by and among the
Company, VP Merger Parent, Inc., VP Acquisition Corp., Crystal Rock and the
stockholders of Crystal Rock, dated this date.
2. Forms 10-K or 10-KSB for the Company filed with Securities and
Exchange Commission ("SEC") for the fiscal years ended on or about October
31, 1994 through 1999.
3. Form 10-Q for the Company filed with the SEC for the three months
ended January 31, 2000.
4. Audited financial statements for Crystal Rock for the years ended
October 31, 1994 through 1999.
5. Unaudited interim financial statements for Crystal Rock for the
three months ended January 31, 2000.
6. Certain operating and financial information provided to us by the
management of Company for both the Company and Crystal Rock including pro
forma historical financial statements and internal budgets of future
financial results on a standalone and combined basis.
7. The historical stock prices and trading volume of the common stock
of the Company.
8. Transactions involving companies deemed similar to Crystal Rock.
9. Financial information and market valuations of other publicly
traded companies that we deemed to be reasonably comparable to Crystal Rock
and the Company.
10. Other financial studies, analyses, and investigations as we deemed
appropriate.
Duff & Phelps held discussions with members of the senior management of the
Company regarding the history, current business operations, financial condition
and future prospects of VPUR at the Company's
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Board of Directors
Vermont Pure Holdings, Ltd.
May 5, 2000
Page 2
headquarters in Randolph, Vermont and toured its bottling facilities and natural
spring source in Randolph and its distribution and warehouse facility in
southern Vermont. We also held discussions with the senior management of Crystal
Rock at their headquarters in Watertown, Connecticut and toured their bottling
facility there. Duff & Phelps also took into account its assessment of general
economic, market and financial conditions, as well as its experience in
securities and business valuation, in general, and with respect to similar
transactions, in particular. Duff & Phelps did not make any independent
appraisals of the physical assets or liabilities of the Company or of Crystal
Rock.
In performing its analysis and rendering its Opinion with respect to the
Proposed Transaction, Duff & Phelps relied upon the accuracy and completeness of
all information provided to it, whether obtained from public or private sources,
including Company management, and did not attempt to independently verify such
information. With respect to financial forecasts, we have assumed that these
have been reasonably prepared on bases reflecting the best currently available
estimates of the Company and Crystal Rock management. Duff & Phelps' Opinion
further assumes that information supplied and representations made by the
management of both the Company and Crystal Rock are substantially accurate
regarding their respective companies and the background and terms of the
Proposed Transaction. Neither Company management nor its board of directors
placed any limitation upon Duff & Phelps with respect to the procedures followed
or factors considered by Duff & Phelps in rendering its Opinion.
We delivered our findings to the Board of Directors of the Company on May
1, 2000. Our conclusion was that the Proposed Transaction, as then contemplated,
was fair, from a financial point of view, to the shareholders of the Company.
Duff & Phelps has prepared this Opinion effective as of the date set forth above
and the Opinion is necessarily based upon market, economic, financial and other
conditions as they exist and can be evaluated as of such date.
It is understood that this letter is only for the information of the
Company and its shareholders. Except for its inclusion in the Form S-4
Registration Statement of the Company or its successor, to which we consent, or
as required under the disclosure requirements of the securities laws and
applicable law or legal process, this letter may not be quoted or referred to,
in whole or in part, in any written document or used for any other purpose
without our prior consent.
CONCLUSION
Based upon and subject to the foregoing, Duff & Phelps is of the opinion
that the Proposed Transaction is fair to the shareholders of Vermont Pure
Holdings, Ltd. from a financial point of view.
Respectfully submitted,
/s/ DUFF & PHELPS, LLC
------------------------------
Duff & Phelps, LLC
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APPENDIX C
VERMONT PURE HOLDINGS, LTD.
1998 INCENTIVE AND NON-STATUTORY STOCK OPTION PLAN
SECTION 1. PURPOSE
This 1998 Incentive and Non-Statutory Stock Option Plan (the "Plan") is
intended as a performance incentive for officers and employees of Vermont Pure
Holdings, Ltd., a Delaware corporation (the "Company"), or its Subsidiaries (as
hereinafter defined) and for certain other individuals providing services to or
acting as directors of the Company or its Subsidiaries, to enable the persons to
whom options are granted (an "Optionee" or "Optionees") to acquire or increase a
proprietary interest in the Company and its success. The Company intends that
this purpose will be effected by the granting of incentive stock options
("Incentive Options") as defined in Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), and other stock options ("Non-Statutory Options")
under the Plan. The term "Subsidiaries" means any corporations in which stock
possessing 50% or more of the total combined voting power of all classes of
stock of such corporation or corporations is owned directly or indirectly by the
Company.
SECTION 2. OPTIONS TO BE GRANTED AND ADMINISTRATION
2.1 Options to be Granted. Options granted under the Plan may be either
Incentive Options or Non-Statutory Options.
2.2 Administration by the Committee. This Plan shall be administered by a
committee (the "Committee") consisting of all members of the Compensation
Committee of the Board of Directors of the Company (the "Board") who qualify as
Outside Directors. The Committee shall have at least two (2) members at all
times. "Outside Director" means any director who (i) is not an employee of the
Company or of any "affiliated group," as such term is defined in Section 1504(a)
of the Code, which includes the Company (an "Affiliate"), (ii) is not a former
employee of the Company or any Affiliate who is receiving compensation for prior
services (other than benefits under a tax-qualified retirement plan) during the
Company's or any Affiliate's taxable year, (iii) has not been an officer of the
Company or any Affiliate and (iv) does not receive remuneration from the Company
or any Affiliate, either directly or indirectly, in any capacity other than as a
director. "Outside Director" shall be determined in accordance with Section
162(m) of the Code and the Treasury regulations issued thereunder.
It is the intention of the Company that the Plan shall be administered to
comply with the provisions of Rule 16b-3 under the Securities Exchange Act of
1934 (the "Exchange Act"), but the authority and validity of any act taken or
not taken by the Committee shall not be affected if any person administering the
Plan is not a Non-Employee Director (as defined in such Rule). Except as
specifically reserved to the Board under the terms of the Plan, the Committee
shall have full and final authority to operate, manage and administer the Plan
on behalf of the Company. This authority includes, but is not limited to: (i)
the power to grant, modify and amend options conditionally or unconditionally;
(ii) the power to prescribe the form or forms of the instruments evidencing
options granted under this Plan; (iii) the power to interpret the Plan; (iv) the
power to provide regulations for the operation of the incentive features of the
Plan, and otherwise to prescribe regulations for interpretation, management and
administration of the Plan; (v) the power to delegate responsibility for Plan
operation, management and administration on such terms, consistent with the
Plan, as the Committee may establish; (vi) the power to delegate to other
persons the responsibility for performing ministerial acts in furtherance of the
Plan's purpose; (vii) the power to make, in its sole discretion, changes to any
outstanding option granted under the Plan, including the power to reduce the
exercise price, to accelerate the vesting schedule, or to extend the expiration
date; and (viii) the power to engage the services of persons or organizations in
furtherance of the Plan's purpose, including but not limited to banks, insurance
companies, brokerage firms and consultants.
In addition, as to each option, the Committee shall have full and final
authority in its sole discretion: (i) to determine the number of shares subject
to each option; (ii) to determine the time or times at which
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options will be granted; (iii) to determine the option price for the shares
subject to each option, which price shall be subject to the applicable
requirements, if any, of Section 5.1(c) hereof; (iv) to determine the time or
times when each option shall become exercisable and the duration of the exercise
period, which shall not exceed the limitations specified in Section 5.1(a).
No member of the Board or the Committee shall be liable for any action or
determination made in good faith with respect to the Plan or any option granted
hereunder.
2.3 Appointment and Proceedings of Committee. The Board may from time to
time appoint members of the Committee in substitution for or in addition to
members previously appointed, and may fill vacancies, however caused, in the
Committee, provided that such appointees satisfy the requirements set forth in
Section 2.2 hereof. The Committee shall select one of its members as its
chairman and shall hold its meetings at such times and places as it shall deem
advisable. A majority of its members shall constitute a quorum, and all actions
of the Committee shall require the affirmative vote of a majority of its
members. Any action may be taken by a written instrument signed by all of the
members, and any action so taken shall be as fully effective as if it had been
taken by a vote of a majority of the members at a meeting duly called and held.
SECTION 3. STOCK
3.1 Shares Subject to Plan. The stock subject to the options granted under
the Plan shall be shares of the Company's common stock, $.001 par value ("Common
Stock"). The total number of shares that may be issued pursuant to options
granted under the Plan shall not exceed an aggregate of 1,500,000 shares of
Common Stock. Such number of shares shall be subject to adjustment as provided
in Section 7 hereof. Such shares may be treasury shares or authorized but
unissued shares.
3.2 Lapsed or Unexercised Options. Whenever any outstanding option under
the Plan expires, is cancelled or is otherwise terminated (other than by
exercise), the shares of Common Stock allocable to the unexercised portion of
such option shall be restored to the Plan and shall again become available for
the grant of other options under the Plan.
SECTION 4. ELIGIBILITY
4.1 Eligible Optionees. Incentive Options may be granted only to officers
and other employees of the Company or its Subsidiaries, including members of the
Board who are also employees of the Company or a Subsidiary. Non-Statutory
Options may be granted to officers or other employees of the Company or its
Subsidiaries, to members of the Board or the board of directors of any
Subsidiary whether or not employees of the Company or such Subsidiary, and to
consultants and other individuals providing services to the Company or its
Subsidiaries.
4.2 Limitations on 10% Stockholders. No Incentive Option shall be granted
to an individual who, at the time the Incentive Option is granted, owns
(including ownership attributed pursuant to Section 424 of the Code) more than
10% of the total combined voting power of all classes of stock of the Company or
any parent or Subsidiary of the Company (a "greater-than-10% stockholder"),
unless such Incentive Option provides that (i) the purchase price per share
shall not be less than 110% of the fair market value of the Common Stock at the
time such Incentive Option is granted, and (ii) that such Incentive Option shall
not be exercisable to any extent after the expiration of five years from the
date on which it is granted.
4.3 Limitation on Exercisable Options. The aggregate fair market value
(determined at the time the Incentive Option is granted) of the Common Stock
with respect to which Incentive Options are exercisable for the first time by
any person during any calendar year under the Plan and under any other option
plan of the Company (or a parent or subsidiary as defined in Section 424 of the
Code) shall not exceed $100,000. Any option granted in excess of the foregoing
limitation shall be specifically designated as being a Non-Statutory Option.
4.4 Limitation on Number of Options Granted to an Individual. In no event
shall Options with respect to more than 500,000 shares of Common Stock be
granted to an individual in any calendar year.
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SECTION 5. TERMS OF THE OPTION AGREEMENTS
5.1 Mandatory Terms. Each option agreement shall contain such provisions
as the Committee shall from time to time deem appropriate. Option agreements
need not be identical, but each option agreement by appropriate language shall
include the substance of all of the following provisions:
(a) Expiration. Notwithstanding any other provision of the Plan or of
any option agreement, each option shall expire on the date specified in the
option agreement, which date shall not be later than the tenth anniversary
of the date on which the option was granted (fifth anniversary in the case
of an Incentive Option granted to a greater-than-10% stockholder).
(b) Exercise. Each option shall be exercisable in full or in
installments (which need not be equal) and at such times as designated by
the Committee. To the extent not exercised, installments shall accumulate
and be exercisable, in whole or in part, at any time after becoming
exercisable, but not later than the date the option expires.
(c) Purchase Price. The purchase price per share of the Common Stock
under each Incentive Option shall be not less than the fair market value of
the Common Stock on the date the option is granted (110% of the fair market
value in the case of a greater-than-10% stockholder). For the purpose of
the Plan the fair market value of the Common Stock shall be the closing
price per share of the Common Stock as reported on a nationally recognized
stock exchange or on the Nasdaq National or SmallCap Market, or, if the
Common Stock price is not so reported, the fair market value as determined
by the Committee. The price at which shares may be purchased pursuant to
Non-Statutory Options shall be specified by the Committee at the time the
option is granted, and may be less than, equal to or greater than the fair
market value of the shares of Common Stock on the date such Non-Statutory
Option is granted, but shall not be less than the par value of shares of
Common Stock.
(d) Transferability of Options. Options granted under the Plan and
the rights and privileges conferred thereby may not be transferred,
assigned, pledged or hypothecated in any manner (whether by operation of
law or otherwise) other than by will or by applicable laws of descent and
distribution, and shall not be subject to execution, attachment or similar
process. Upon any attempt so to transfer, assign, pledge, hypothecate or
otherwise dispose of any option under the Plan or any right or privilege
conferred hereby, contrary to the provisions of the Plan, or upon the sale
or levy or any attachment or similar process upon the rights and privileges
conferred hereby, such option shall thereupon terminate and become null and
void.
(e) Termination of Employment or Death of Optionee. Except as may be
otherwise expressly provided in the terms and conditions of the option
granted to an Optionee, options granted hereunder shall terminate on the
earliest to occur of:
(i) the date of expiration thereof;
(ii) other than in the case of death of the Optionee or retirement
in good standing of the Optionee for reasons of age or disability under
the then established rules of the Company, immediately upon termination
of the Optionee's employment with or services to the Company by the
Optionee for any reason or by the Company for cause (as hereinafter
defined); or
(iii) 30 days after the date of termination of the Optionee's
employment with or services to the Company by the Company without cause;
provided, however, that Non-Statutory Options granted to persons who are
not employees of the Company need not, unless the Committee determines
otherwise, be subject to the provisions set forth in clauses (ii) and
(iii) hereof. Until the date on which the option so expires, the
Optionee may exercise that portion of his option which is exercisable at
the time of termination of such relationship.
An employment relationship between the Company and the Optionee shall be
deemed to exist during any period during which the Optionee is employed by the
Company or by any Subsidiary. Whether authorized leave of absence or absence on
military government service shall constitute termination of the employment
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relationship between the Company and the Optionee shall be determined by the
Committee at the time thereof.
For purposes of this Section 5.1(e), the term "cause" shall mean (a) any
material breach by the Optionee of any agreement to which the Optionee and the
Company are both parties, (b) any act (other than retirement) or omission to act
by the Optionee which may have a material and adverse effect on the Company's
business or on the Optionee's ability to perform services for the Company,
including, without limitation, the commission of any crime (other than minor
traffic violations), or (c) any material misconduct or material neglect of
duties by the Optionee in connection with the business or affairs of the Company
or any Subsidiary or affiliate of the Company.
In the event of the death of an Optionee while in an employment or other
relationship with the Company and before the date of expiration of such option,
such option shall terminate on the earlier of such date of expiration or 180
days following the date of such death. After the death of the Optionee, his
executor, administrator or any person or persons to whom his option may be
transferred by will or by laws of descent and distribution, shall have the
right, at any time prior to such termination, to exercise the option to the
extent the Optionee was entitled to exercise such option as of the date of his
death.
If, before the date of expiration of the option, the Optionee shall be
retired in good standing from the employ of the Company by reason of age or
disability under the then established rules of the Company, the option shall
terminate on the earlier of such date of expiration or 90 days after the date of
such retirement. Permanent and total disability shall be determined with
reference to Section 22(e)(3) of the Code and the regulations issued thereunder.
In the event of such retirement, the Optionee shall have the right prior to the
termination of such option to exercise the option to the extent the Optionee was
entitled to exercise such option immediately prior to such retirement.
(f) Rights of Optionees. No Optionee shall be deemed for any purpose
to be the owner of any shares of Common Stock subject to any option unless
and until (i) the option shall have been exercised with respect to such
shares pursuant to the terms thereof, and (ii) the Company shall have
issued and delivered a certificate representing such shares. Thereupon, the
Optionee shall have full voting, dividend and other ownership rights with
respect to such shares of Common Stock.
5.2 Certain Optional Terms. The Committee may in its discretion provide,
upon the grant of any option hereunder, that the Company shall have an option to
repurchase all or any number of shares purchased upon exercise of such option.
The repurchase price per share payable by the Company shall be such amount or be
determined by such formula as is fixed by the Committee at the time the option
for the shares subject to repurchase was granted. The Committee may also provide
that the Company shall have a right of first refusal with respect to the
transfer or proposed transfer of any shares purchased upon exercise of an option
granted hereunder. In the event the Committee shall grant options subject to the
Company's repurchase rights or rights of first refusal, the certificate or
certificates representing the shares purchased pursuant to the exercise of such
option shall carry a legend satisfactory to counsel for the Company referring to
such rights.
SECTION 6. METHOD OF EXERCISE; PAYMENT OF PURCHASE PRICE
6.1 Notice of Exercise. Any option granted under the Plan may be exercised
by the Optionee by delivering to the Company on any business day a written
notice specifying the number of shares of Common Stock the Optionee then desires
to purchase and specifying the address to which the certificates for such shares
are to be mailed (the "Notice"), accompanied by payment for such shares.
6.2 Means of Payment and Delivery. Payment for the shares of Common Stock
purchased pursuant to the exercise of an option shall be made either (i) in cash
equal to the option price for the number of shares specified in the Notice (the
"Total Option Price"), or (ii) if authorized by the applicable option agreement,
in shares of Common Stock of the Company having a fair market value equal to or
less than the Total Option Price, plus cash in an amount equal to the excess, if
any, of the Total Option Price over the fair market value of such shares of
Common Stock. For the purpose of the preceding sentence, the fair market value
of the shares of Common Stock so delivered to the Company shall be determined in
the manner specified in
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Section 5.1(c) hereof. As promptly as practicable after receipt of such written
notification and payment, the Company shall deliver to the Optionee certificates
for the number of shares with respect to which such Option has been so
exercised, issued in the Optionee's name; provided, however, that such delivery
shall be deemed effected for all purposes when the Company or a stock transfer
agent of the Company shall have deposited such certificates in the United States
mail, addressed to the Optionee, at the address specified pursuant to Section
6.1.
SECTION 7. ADJUSTMENT UPON CHANGES IN CAPITALIZATION
7.1 No Effect of Options upon Certain Corporate Transactions. The
existence of outstanding options shall not affect in any way the right or power
of the Company or its stockholders to make or authorize any or all adjustments,
recapitalizations, reorganizations or other changes in the Company's capital
structure or its business, or any merger or consolidation of the Company, or any
issue of Common Stock, or any issue of bonds, debentures, preferred or prior
preference stock ahead of or affecting the Common Stock or the rights thereof,
or the dissolution or liquidation of the Company, or any sale or transfer of all
or any part of its assets or business, or any other corporate act or proceeding,
whether of a similar character or otherwise.
7.2 Stock Dividends, Recapitalizations, Etc. If the Company shall effect a
subdivision or consolidation of shares or other capital readjustment, the
payment of a stock dividend, or other increase or reduction of the number of
shares of the Common Stock outstanding, without receiving compensation therefor
in money, services or property, then: (i) the number, class and per share price
of shares of stock subject to outstanding options hereunder shall be
appropriately adjusted in such a manner as to entitle an Optionee to receive
upon exercise of an option, for the same aggregate cash consideration, the same
total number and class of shares that the owner of an equal number of
outstanding shares of Common Stock would own as a result of the event requiring
the adjustment; and (ii) the number and class of shares with respect to which
options may be granted under the Plan shall be adjusted by substituting for the
total number of shares of Common Stock then reserved for issuance under the Plan
that number and class of shares of stock that the owner of an equal number of
outstanding shares of Common Stock would own as the result of the event
requiring the adjustment.
7.3 Determination of Adjustments. Adjustments under this Section 7 shall
be determined by the Committee and such determinations shall be conclusive. The
Committee shall have the discretion and power in any such event to determine and
to make effective provision for acceleration of the time or times at which any
option or portion thereof shall become exercisable. No fractional shares of
Common Stock shall be issued under the Plan on account of any adjustment
specified above.
7.4 No Adjustment in Certain Cases. Except as hereinbefore expressly
provided, the issue by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, for cash or property
or for labor or services, either upon direct sale or upon the exercise of rights
or warrants to subscribe therefor, or upon conversion of shares or obligations
of the Company convertible into such shares or other securities, shall not
affect, and no adjustment by reason thereof shall be made with respect to, the
number or price of shares of Common Stock then subject to outstanding options.
SECTION 8. EFFECT OF CERTAIN TRANSACTIONS
8.1 Merger without Change of Control. After a merger of one or more
corporations into the Company, or after a consolidation of the Company and one
or more corporations, in each case as a result of which (i) the Company shall be
the surviving corporation, and (ii) the stockholders of the Company immediately
prior to such merger or consolidation receive or are entitled to receive
consideration in the merger or consolidation and own after such merger or
consolidation shares representing at least 50% of the voting power of the
Company, each holder of an outstanding option shall, at no additional cost, be
entitled upon exercise of such option to receive (subject to any required action
by stockholders), instead of (or, as the case may be, in addition to) the number
of shares as to which such option shall then be so exercisable, the number and
class of shares of stock or other securities or property to which such holder
would have been entitled pursuant to the terms of the agreement of merger or
consolidation if, immediately prior to such merger or consolidation, such holder
had
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been the record holder of a number of shares of Common Stock equal to the number
of shares as to which such option was exercisable.
8.2 Sale or Merger with Change of Control. If the Company is merged into
or consolidated with another corporation under circumstances in which the
Company is not the surviving corporation, or if there is a merger or
consolidation where the Company is the surviving corporation but the
stockholders of the Company immediately prior to such merger or consolidation do
not own after such merger or consolidation shares representing at least 50% of
the voting power of the Company, or if the Company is liquidated or sells or
otherwise disposes of all or substantially all of its assets, while unexercised
options remain outstanding under the Plan: (i) subject to the provisions of
clause (iii) below, after the effective date of such merger, consolidation,
liquidation, sale or disposition, as the case may be (each, a "Transaction"),
each holder of an outstanding option shall be entitled, upon exercise of such
option, to receive, in lieu of shares of Common Stock, shares of such stock or
other securities, cash or property as the holders of shares of Common Stock
received pursuant to the terms of the Transaction; (ii) the Committee may
accelerate the time for exercise of all unexercised and unexpired options to a
date prior to the effective date of such Transaction, specified by the
Committee; or (iii) all outstanding options may be canceled by the Committee as
of the effective date of such Transaction, provided that notice of such
cancellation shall be given to each holder of an option and (y) each holder of
an option shall have the right to exercise such option to the extent that the
same is then exercisable or, if the Committee shall have accelerated the time
for exercise of all of the unexercised and unexpired options, in full during the
30-day period preceding the effective date of such Transaction.
SECTION 9. AMENDMENT OR TERMINATION OF THE PLAN
The Board may terminate the Plan at any time, and may amend the Plan at any
time and from time to time, subject to the limitation that, except as provided
in Sections 7 and 8 hereof, no amendment shall be effective unless approved by
the stockholders of the Company in accordance with applicable law and
regulations, at an annual or special meeting held within twelve months before or
after the date of adoption of such amendment, in any instance in which such
amendment would: (i) increase the number of shares of Common Stock as to which
options may be granted under the Plan; or (ii) change in substance the
provisions of Section 4 hereof relating to eligibility to participate in the
Plan.
Except as provided in Sections 7 and 8 hereof, rights and obligations under
any option granted before termination or amendment of the Plan shall not be
altered or impaired by such termination or amendment except with the consent of
the Optionee.
SECTION 10. NON-EXCLUSIVITY OF THE PLAN; NON-UNIFORM DETERMINATIONS
Neither the adoption of the Plan by the Board nor the approval of the Plan
by the stockholders of the Company shall be construed as creating any
limitations on the power of the Board to adopt such other incentive arrangements
as it may deem desirable, including without limitation the granting of stock
options otherwise than under the Plan, and such arrangements may be either
applicable generally or only in specific cases.
The Committee's determinations under the Plan need not be uniform and may
be made by it selectively among persons who receive or are eligible to receive
options under the Plan (whether or not such persons are similarly situated).
Without limiting the generality of the foregoing, the Committee shall be
entitled, among other things, to make non-uniform and selective determinations,
and to enter into non-uniform and selective option agreements, as to (i) the
persons to receive options under the Plan, (ii) the terms and provisions of
options, (iii) the exercise by the Committee of its discretion in respect of the
exercise of options pursuant to the terms of the Plan, and (iv) the treatment of
leaves of absence pursuant to Section 5.1(e) hereof.
SECTION 11. GOVERNMENT AND OTHER REGULATIONS; GOVERNING LAW; WITHHOLDING TAXES
The obligation of the Company to sell and deliver shares of Common Stock
with respect to options granted under the Plan shall be subject to all
applicable laws, rules and regulations, including all applicable federal and
state securities laws, and the obtaining of all such approvals by government
agencies as may be
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deemed necessary or appropriate by the Board or the Committee. All shares sold
under the Plan shall bear appropriate legends. The Company may, but shall in no
event be obligated to, register or qualify any shares covered by options under
applicable federal and state securities laws; and in the event that any shares
are so registered or qualified the Company may remove any legend on certificates
representing such shares. The Company shall not be obligated to take any other
affirmative action in order to cause the exercise of an option or the issuance
of shares pursuant thereto to comply with any law or regulation of any
governmental authority. The Plan shall be governed by and construed in
accordance with the laws of the State of Delaware.
Whenever under the Plan shares are to be delivered upon exercise of an
option, the Company shall be entitled to require as a condition of delivery that
the Optionee remit an amount sufficient to satisfy all federal, state and other
governmental withholding tax requirements related thereto.
SECTION 12. "LOCKUP" AGREEMENT
The Committee may in its discretion specify upon granting an option that
the Optionee shall agree, for a period of time (not to exceed 180 days) from the
effective date of any registration of securities of the Company, upon request of
the Company or the underwriter or underwriters managing any underwritten
offering of the Company's securities, not to sell, make any short sale of, loan,
grant any option for the purchase of, or otherwise dispose of any shares issued
pursuant to the exercise of such option, without the prior written consent of
the Company or such underwriter or underwriters, as the case may be.
SECTION 13. EFFECTIVE DATE AND DURATION OF PLAN
The Plan shall become effective upon its adoption by the Board of Directors
provided that the stockholders of the Company shall have approved the Plan
within twelve months prior to or following the adoption of the Plan by the
Board. No option may be granted under the Plan after the tenth anniversary of
the effective date. The Plan shall terminate (i) when the total amount of the
Stock with respect to which options may be granted shall have been issued upon
the exercise of options or (ii) by action of the Board of Directors pursuant to
Section 9 hereof, whichever shall first occur.
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FORM OF PROXY FOR SPECIAL MEETING
VERMONT PURE HOLDINGS, LTD.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS FOR THE SPECIAL
MEETING OF SHAREHOLDERS TO BE HELD ON OCTOBER 5, 2000.
The undersigned stockholder of Vermont Pure Holdings, Ltd. ("Vermont Pure")
does hereby nominate, constitute and appoint Timothy G. Fallon and Bruce S.
MacDonald or either one of them (with full power to act alone) my true and
lawful attorney(s) and proxy(ies), with full power of substitution, for me and
in my name, place and stead to vote all the shares of common stock of said
Vermont Pure standing in my name on its books, as of August 30, 2000, at the
Special Meeting of Stockholders to be held at the law office of Foley, Hoag &
Eliot LLP, Sixteenth Floor, One Post Office Square, Boston, Massachusetts on
October 5, 2000 at 10:00 a.m., or at any adjournments thereof, with all the
powers the undersigned would possess if personally present on the following
proposals more fully described in the accompanying Proxy Statement/Prospectus in
the manner specified and in their discretion on any other business that may
properly come before the meeting. The undersigned hereby acknowledges receipt of
the Notice of Special Meeting and proxy statement relating to the Special
Meeting and hereby instructs said proxies to vote or refrain from voting such
shares of Vermont Pure common stock as marked on the reverse side of this proxy
card upon the matters listed thereon.
This proxy, when properly executed, will be voted in the manner directed
herein by the undersigned stockholder. If no direction is given, this proxy will
be voted for the approval of the Agreement and Plan of Merger and Contribution,
and the other matters on the agenda, in accordance with the recommendation of
the Board of Directors of Vermont Pure. The proxies cannot vote your shares
unless you sign and return this card.
(CONTINUED, AND TO BE SIGNED AND DATED, ON REVERSE SIDE)
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[X] Please mark your vote as in this example.
THE BOARD OF DIRECTORS OF VERMONT PURE RECOMMENDS A
VOTE FOR PROPOSALS 1, 2 AND 3.
1. To consider and vote upon a proposal to approve and adopt the Agreement and
Plan of Merger and Contribution dated as of May 5, 2000, as amended, among
Vermont Pure Holdings, Ltd., VP Merger Parent, Inc., VP Acquisition Corp.,
Crystal Rock Spring Water Company and the stockholders of Crystal Rock, as
more fully described in the accompanying proxy statement and in Appendix A.
If the transaction is approved by our shareholders, each share of common
stock of existing Vermont Pure will be automatically converted into one share
of VP Merger Parent common stock.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. To consider and vote upon a proposal to amend the 1998 Stock Option Plan of
Vermont Pure as more fully described in the accompanying proxy statement and
in Appendix C. If the amendment is approved, the number of shares covered by
the plan will increase from 500,000 to 1,500,000.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. To consider and vote upon a proposal to adjourn the special meeting if
necessary to permit further solicitation of proxies in the event that there
are not sufficient votes at the time of the special meeting to approve Items
1 and 2 or either of them.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
The persons named as proxies shall have discretionary authority to vote on
any matter which the board of directors of Vermont Pure did not know, a
reasonable time before the meeting, would be presented at the meeting, as well
as on matters incident to the conduct of the meeting.
Please sign and date this proxy and return it in the enclosed return
envelope, whether or not you expect to attend the Special Meeting. You may also
vote in person if you do attend.
Date:
Signature (s):
Note: Please sign this proxy exactly as name appears hereon. If shares are
held as joint tenants, both joint tenants should sign. Attorneys-in-fact,
executors, administrators, trustees, guardians, corporate officers or others
signing in a representative capacity should indicate the capacity in which they
are signing.
