<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission File No 1-12130
GREAT PINES WATER COMPANY, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
TEXAS 76-0203752
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
600 NORTH SHEPHERD, SUITE 303
HOUSTON, TEXAS 77007
(713) 864-6688
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $.01 per share
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days:
Yes X No
___ ___
Check if there is no disclosure of delinquent filers in response to item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. ___
Issuer's revenues for its most recent fiscal year were $7,495,000.
As of March 24, 1997, there were outstanding 2,453,012 shares of the
registrant's Common Stock, par value $.01, which is the only class of common or
voting stock of the registrant. As of that date, the aggregate market value of
the shares of Common Stock or voting stock held by nonaffiliates of the
registrant (based on the last sales price for the Common Stock on Nasdaq
SmallCap market March 24, 1997) was approximately $5,052,000.
Transitional Small Business Disclosure Format ( Check one): Yes ; No X
___ ___
<PAGE>
GREAT PINES WATER COMPANY, INC.
ANNUAL REPORT ON FORM 10-KSB
TABLE OF CONTENTS
PART I............................................................. 1
ITEM 1. DESCRIPTION OF BUSINESS................................... 1
ITEM 2. DESCRIPTION OF PROPERTY................................... 7
ITEM 3. LEGAL PROCEEDINGS......................................... 7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....... 7
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS....................................... 8
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 9
ITEM 7. FINANCIAL STATEMENTS...................................... 13
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE....................... 13
PART III........................................................... 14
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT 14
ITEM 10. EXECUTIVE COMPENSATION.................................... 15
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 17
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............ 18
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.......................... 18
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Great Pines Water Company, Inc., a Texas corporation ("Great Pines" or the
"Company"), processes, delivers and sells bottled water to homes and businesses
in the greater Houston and Dallas-Fort Worth ("DFW") metropolitan areas, under
the assumed name of "Texas Premium Waters." The Company completed its initial
public offering of Common Stock, par value $.01 per share (the "Common Stock"),
in August 1993. Its shares are traded on Nasdaq SmallCap market under the
symbol "GPWC."
INDUSTRY BACKGROUND
Sales of bottled water in the U.S. market have grown significantly, increasing
from approximately 317 million gallons in 1976 to approximately 2.9 billion
gallons in 1995 ($3.4 billion), according to a September 1996 article in
Beverage World. According to Business Trend Analysts, Inc., production of non-
sparkling water in the United States increased at a rate of approximately 10%
per year for the last ten years, which is among the fastest growing segments of
the beverage industry. Business Trend Analysts, Inc. predicts that water sales
will continue to grow at a rate of approximately 10% per year, resulting in
sales of approximately 4 billion gallons in 2000. Annual bottled water
consumption increased from 2.8 gallons per capita in 1980 to 11.0 gallons per
capita in 1995 and it is projected to reach 14.2 gallons per capita in 2000.
Bottled water has grown in popularity as consumers have become increasingly
concerned about impurities in municipal water supplies. According to a cover
story in U. S. News and World Report, dated July 29, 1992, drinking water in
various regions of the U. S. may have impurities that pose health hazards to
consumers. Based upon a study of the water crisis, this article highlights
three main problems with today's municipal tap water: lead content, certain
dangerous carcinogenic chemical by-products resulting from over-chlorination of
some municipal water, and pollution of existing underground water sources by
toxic waste dumping. The U.S. Environmental Protection Agency is quoted as
stating that more than 40 million Americans drink tap water at their homes that
has hazardous or excessive levels of lead, resulting from lead in municipal
water lines or home plumbing. Furthermore, in 1987, a study of 1,000
"superfund" waste sites found that 80% were leaking toxic waste into the ground
water. The Company believes that this heightened awareness will cause consumers
in the United States to turn to bottled water as an alternative, and that will
result in increased demand for healthy and clean bottled water and in increased
growth in the bottled water market. The Company believes that it is well
positioned to take advantage of such increased demand.
The bottled water market comprises three major segments: non-sparkling,
sparkling and imported water.
. Non-sparkling, or still, water contains no carbonation and is consumed as an
"alternative to tap water." Non-sparkling water is generally distributed
directly to homes and offices, through retail outlets and through vending
machines. Distinctions are often made among brands of non-sparkling water based
on their source, level of mineral content and the method of purification
(distillation, deionization or reverse osmosis).
. Sparkling water contains either natural or artificial carbonation and is
positioned to compete in the broad "refreshment beverage" field. Sparkling
water includes domestic sparkling water, club soda and seltzer, and typically is
sold through normal food and beverage retail channels.
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. Imported water, which includes both sparkling and non-sparkling water
produced and bottled outside the U.S., is targeted to "image-conscious
consumers." Imported water is sold through normal food and beverage water
alternatives.
Non-sparkling bottled water is currently distributed through three channels:
office and home delivery, retail stores and vending machines. Within the non-
sparkling segment, retail pricing generally reflects the costs associated with
the maintenance of each distribution channel. As a result, bottled water
delivered to the home or office has the highest per gallon price, with off-the-
shelf bottled water sold through retail channels having the next highest per
gallon price and, finally, vended water, which has the lowest price per gallon.
See "--Retail Pricing and Payment."
BUSINESS AND OPERATIONS
The Company provides office and home delivery of five-gallon bottles of water,
as well as water dispensers and cups. The Company offers three types of water--
spring water, drinking water and purified water, and four types of dispensers--
one that offers both room temperature and chilled water, one that offers both
room temperature and heated water, one that offers both heated and chilled water
and has a small built-in refrigerator, and one that offers room temperature
water only. A large majority of the Company's customers rent the dispenser
offering both room temperature and chilled water. Each type of dispenser can
utilize either the Company's closed water delivery system or the more
conventional open water system. In the closed system, the cap remains on the
bottle, the bottle is inverted into the top of the dispenser, and a device in
the dispenser punctures the seal of the cap. The closed system reduces both
spillage of the water during bottle replacement and the risk of contamination of
the water from the exterior neck of the bottle. In the open water system, the
entire plastic cap on top of the water bottle is removed first and the bottle is
then inverted into the top of the dispenser. As of December 31, 1996, the
Company owned approximately 35,500 water dispensers, of which approximately
32,000 utilized the closed system and approximately 3,500 utilized the open
system.
As of December 31, 1996, the Company served approximately 16,544 customers in
the Houston area and approximately 12,314 customers in the DFW area. No single
customer represents more than 1% of the Company's gross revenues. The following
chart shows the approximate number of total accounts of the Company at the
indicated dates, the new accounts of the Company added since the previous date,
net of losses, and the percentage increase in total accounts:
<TABLE>
<CAPTION>
December 31,
------------
1996 1995 1994 (1)
---- ---- --------
<S> <C> <C> <C>
Net New Accounts 1,305 2,003 7,500
Total Accounts 28,558 27,2532 5,250
Percentage Increase 5% 8% 42%
</TABLE>
(1) Increase was due to the expansion into the DFW marketplace during 1994.
DELIVERY, BOTTLING, AND WATER SUPPLY
As of December 31, 1996, the Company owned or leased 25 "ten-bay" trucks that it
uses to deliver full water bottles to customers and to pick up empty bottles.
Each ten-bay truck is capable of carrying 288 five-gallon water bottles. The
Company believes that a majority of its current competitors primarily use
smaller "eight-bay" beverage trucks, which are generally capable of carrying
only 200 five-gallon water bottles. The Company's larger delivery trucks permit
the Company to service its customers either once every 19 days or 38 days,
depending on the average amount of water delivered, as opposed to the 10 or 20
day cycle of its competitors. The Company believes that its
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ability to deliver on a 19-day or 38-day average cycle enables it to have a
competitive advantage over many of its competitors, increasing delivery
efficiency and decreasing delivery cost. The Company also owns or leases 25 cube
vans for special deliveries and new account setups. The Company's customers are
segregated geographically and placed on one of the routes that are maintained by
the Company. At the present time, the Company maintains approximately 350
separate routes. The Company's drivers are paid on a per-delivered-bottle basis,
further promoting efficiency and higher utilization of the delivery trucks. The
Company's drivers are eligible for commissions for qualifying new customer
accounts they generate.
As of December 31, 1996, the Company owned approximately 143,000 five-gallon
bottles. Empty bottles picked up from customers are stored at the Company's
facilities until required to be used. Each day a sufficient number of empty
bottles are washed, filled and loaded onto delivery trucks to satisfy delivery
requirements for the next day. On an average day, the Company delivers
approximately 3,000 bottles of water.
At the present time, the Company' obtains spring water from natural springs in
Jasper, Texas. The Company purchases the spring water from owners of the springs
who deliver the spring water to the Company's facilities in Houston and Grand
Prairie, near Dallas. In accordance with applicable regulations, chlorine is
added to the spring water in the tanker truck. The water is tested and the
tanker truck unloads the spring water into two 5,000-gallon fiberglass tanks.
The spring water is maintained in these tanks until it is bottled. Prior to
bottling, spring water from the tanks is carbon-filtered and ozonated to remove
the chlorine that was previously added. At the present time, the Company uses
water from the individual cities' municipal water system for its drinking and
purified water. Drinking and purified water are processed through carbon
filtration and reverse osmosis equipment at the Company's facilities. Certain
food grade minerals (calcium and magnesium) are added to drinking water to add
taste. Purified water is deionized.
RETAIL PRICING AND PAYMENT
The Company's drinking water competes with non-sparkling water delivered by its
direct competitors, sold in containers inside retail outlets and with water
produced by water vending machines located at supermarkets and other retail
locations. As with many consumer products, the costs of packing and distributing
drinking water sold by these competing methods comprise a significant portion of
the total product cost, and these costs are reflected in the retail price to the
consumer. In the Company's sales areas, non-sparkling water sold in five-gallon
containers delivered directly to consumers' offices or homes generally sells for
$1.50 to $1.75 per gallon. As of December 31, 1996, the Company charged $8.35 to
$8.85 for a five gallon bottle of spring water (or $1.67 to $1.77 per gallon)
and $7.35 to $7.85 for a five gallon bottle of drinking or purified water (or
$1.47 to $1.57 per gallon). Customers who purchase more than ten bottles of
water per month are offered discounts of ten to twenty percent. As of December
31, 1996, the Company rented water dispensers for $10.40 to $18.10 per month,
depending on the type of dispenser. Customers are billed every four weeks for
the cost of the dispenser rented and all the water products and cups delivered
to them. Customer billing services are performed by Company employees at the
Company's Houston and Grand Prairie facilities. During the twelve-month period
ended December 31, 1996, the Company maintained its pricing levels for bottled
water. The Company intends to remain competitive with its competition and raise
the prices of its bottled water products as market conditions permit.
EXPANSION
Great Pines' growth has been achieved through a three-tiered strategy aimed
initially at increasing density along existing sales routes, secondly at
establishing new sales routes in existing cities, and finally at penetrating new
cities. This strategy focuses on adding new customers through the Company's
marketing plan. See "Marketing". The Company records the marketing expenses
associated with the implementation of its growth strategy in the period in which
such expenses are incurred, the Company's net income will initially decrease for
a period in which the Company experiences rapid growth. The Company experienced
such a decrease in connection with its expansion into the DFW market in 1994.
Despite the short-term, negative effect of this expansion on net income, the
Company believes that its strategy of increasing the size of its customer base
will enhance shareholder value and improve the long-term financial performance
of the Company.
3
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MARKETING
Great Pines utilizes a telemarketing sales program in establishing commercial
and residential customers. The Company also contracts a direct sales force to
market its products on a commission basis. The marketing team solicits potential
customers in specific geographic areas in which the Company desires to increase
the density of existing routes or in which it desires to establish new routes.
By targeting growth in specific areas, the Company is able to increase
efficiency of delivery and decrease delivery time and costs. The telemarketing
sales program utilizes a computer software system which can automatically dial a
specified range of phone numbers, and has the ability to recognize a "live"
voice once a connection is made and to transfer such calls to a salesperson.
Telephone numbers are input from a purchased, demographically-focused list which
is screened for certain income and credit levels. The computer software system
bypasses busy signals and answering machines and enables the Company's
telemarketers to reach more potential customers in substantially less time.
Potential customers are offered free trial usage, usually for one month, which
includes a cooler and two bottles of water. Once a potential customer agrees to
accept the trial offer, the Company's goal is to have the water dispenser and
water delivered within an hour of acceptance.
The Company has also implemented a customer retention program. Should a customer
telephone to discontinue delivery service, a special customer service
representative is immediately assigned to the call to address potential problems
and resolve any issues. In the event that the customer still wants to
discontinue service, a representative is sent to personally visit the customer
within forty eight hours. In the Company's experience, its customer retention
program is successful in reversing subscriber cancellations and in retaining the
customer approximately 70% of the time.
COMPETITION
The bottled water market is highly competitive. The Company competes in the non-
sparkling segment of the bottled water market directly with other home delivery
water companies, indirectly with companies that provide water vending machines
and with off-the-shelf marketers. The Company's water products compete not only
with other bottled water products but also with other types of beverages,
including soft drinks, coffee, beer, wine, fruit juices and tap water. The
Company competes with vending water and off-the-shelf marketers on the basis of
(1) taste (many customers claim that water bottled in five-gallon plastic
bottles has better taste compared to water in one-gallon plastic bottles, which
sometimes has a "plastic" taste), (2) the convenience of home delivery, and (3)
the dispenser (i.e. the ability to have heated, chilled or room temperature
water, depending on the type of dispenser rented). Such competition includes
bottlers and distributors of water products, several of which are more
experienced and have greater financial and management resources and have
established proprietary trademarks and distribution facilities. Certain of the
Company's potential customers may use water filtration systems installed in
their homes and businesses. These systems are expensive to purchase, and must be
installed and maintained. The Company believes that these have not had and will
not have a material effect on the Company's operations in the foreseeable
future.
Many bottled water companies in the United States are owned by European or
Japanese companies. Nestle (Swiss) owns the Perrier, Great Bear, Poland Springs,
Ozarka, Oasis, Zephyrhills, Arrowhead, Calistoga, Ice Mountain and Volvic
brands. BSN Group (French) owns the Evian brand. Suntory (Japanese) owns the
Belmont Springs, Crystal, Kentwood, Polar, Willow and Talwonda Springs brands.
Most of these companies are larger and have substantially greater management and
financial resources than the Company. The Company markets the Company's products
as independent "American" products.
EQUIPMENT SUPPLY
As of December 31, 1996 the Company is negotiating for a long-term agreement for
the purchase and financing of water coolers. The Company purchases its bottles,
caps and water delivery system components from various vendors. There are
numerous manufacturers of all such items, and different cap design and water
delivery systems whose components may be used with the Company's existing
dispensers. There are no written agreements obligating any such suppliers to
supply the Company with any such supplies, as is typical in this industry.
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SEASONALITY
Bottled water sales revenues are seasonal, with sales in the winter months being
lower than sales in the summer months when consumption is greater. Equipment
rental revenues are not seasonal.
IMPACT OF INFLATION
The Company believes that the present relatively low rate of inflation will not
have a significant impact on the Company. Historically, the Company has
increased prices to its customers in excess of inflation, and anticipates that
it will be able to do so for the foreseeable future. In addition, the Company
believes it will enjoy certain economies of scale as it continues to expand,
such as increasing purchasing power for the purchase of water bottles,
dispensers, and ancillary supplies and reduced distribution costs as route
density increases. As a result, the Company does not believe inflation will have
a material adverse impact on the Company's operations for the foreseeable
future.
PATENT AND TRADEMARKS
The Company does not hold any patents. In October 1993, the Texas Secretary of
State granted the Company's application to register its Texas Premium Waters
trademark and design. The Company plans to market its bottled water in expansion
markets outside of Texas under a comparable "Premium Waters" trade name, and
intends to apply for trademarks in the appropriate states. There can be no
assurance that the applications will be granted or that other entities might not
assert superior or exclusive rights on the Company's trademark and seek or
obtain damages from or injunctive relief against the Company based on its use of
that trademark. Although there can be no assurance that the loss of the
Company's trademark and design would not effect sales, the Company believes that
if it were unable to continue to use the trademark and design, its operations
would not be materially affected.
GOVERNMENT REGULATIONS
The bottled water industry is subject to various federal, state and local laws
and regulations, which require the Company, among other things, to obtain
licenses for its business, to pay annual license and inspection fees, to comply
with certain standards regarding its water products and to continuously control
the quality and quantity of those products. Regulations of the U.S.
Environmental Protection Agency established under The Safe Drinking Water Act
principally govern matters of purity and safety. Regulations of the U.S. Food
and Drug Administration govern purification and bottling practices. Regulations
of the Texas Department of Health (the "TDH") require, among other things,
registration of the Company, weekly submission of water samples, and that an
operator certified by the TDH be present at the Company's facilities at all
times. The Company believes that it is operating in substantial compliance with
these laws and regulations. Representatives of the City of Houston, the City of
Grand Prairie and the TDH conduct periodic inspections of the Company's
facilities, as well. Should the Company expand its operations outside the
Houston and DFW metropolitan areas, it may become subject to additional laws and
regulations and may have to incur additional costs related to compliance with
such laws and regulations.
INSURANCE
The Company currently maintains $2 million in general liability and $1 million
in product liability insurance. The Company also maintains automobile insurance
for its delivery fleet with coverage up to $1 million per occurrence. The
Company is a subscriber to Texas Workers' Compensation. The Company carries a $4
million umbrella liability insurance policy. The Company believes these
insurance policies are adequate given the nature and size of its business, and
will reevaluate its coverage limits as its management considers prudent. There
can be no assurance that such insurance will be sufficient or effective under
all circumstances.
EMPLOYEES
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As of December 31, 1996, the Company had 182 full-time employees, including 56
in administration, 53 in marketing and 73 in production and delivery. All
marketing employees are compensated on a commission basis. Drivers are
compensated on a per-delivered bottle basis. All other employees are paid wages,
on a weekly or semi-monthly basis. The Company's employees are not represented
by a labor union and it has experienced no work stoppages. The Company believes
that its employee relations are good.
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ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 22,000 square feet for its Houston facilities,
including office space, storage, and bottling and distribution. The Company also
leases approximately 25,000 square feet in Grand Prairie, Texas for similar
facilities in the DFW area.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. Management believes, based on discussions with
its legal counsel that the outcome of these legal actions will not have a
material adverse effect upon the financial position and results of operations of
the Company.
The Company filed suit against Liqui-Box Corporation ("Liqui-Box") on July 18,
1994 in the United States District Court for the Southern District of Texas. In
the lawsuit , the Company alleges that Liqui-Box sold a defective water system,
which , in turn, the Company leased to its bottled water customers. The Company
seeks monetary damages, including lost customers, the cost of replacing
defective equipment, treble damages under the Texas Deceptive Trade Practices
Act, and attorney's fees. During February 1997, the case went to trial and a
jury verdict was reached. Damages of approximately $2.1 million were awarded to
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during the
fourth quarter of 1996.
7
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Company's Common Stock has traded on the Nasdaq SmallCap market under the
symbol "GPWC" since August 10, 1993. Prior to August 10, 1993 there was no
public market for the Company's Common Stock.
As of March 24, 1997, there were 2,451,712 outstanding shares of the Common
Stock of the Company (net of treasury shares) held by approximately 500
shareholders of record. The following table sets forth the high and low bid
price per share of the Common Stock on the Nasdaq SmallCap market for the
periods presented. The prices represent inter-dealer quotations, without
adjustments for retail mark-ups, mark-downs or commissions and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
1995 High Low
---- ---- ---
<S> <C> <C>
First Quarter 4 1 7/8
Second Quarter 4 2 1/4
Third Quarter 3 1/8 2 1/8
Fourth Quarter 3 3/8 2 1/4
1996
----
First Quarter 4 1/2 2 1/4
Second Quarter 4 5/8 3 3/8
Third Quarter 4 9/16 2 1/8
Fourth Quarter 6 5/8 3 5/8
</TABLE>
The Company has not paid any cash dividends on its Common Stock since inception
and the Board of Directors does not contemplate the payment of cash dividends in
the foreseeable future. The Company's agreements with its current lenders
prohibit the payment of dividends. It is the present policy of the Board of the
Directors to retain earnings, if any, for use in developing and expanding the
Company's business.
During the fourth quarter of 1996, the Company completed a private placement of
7,500 shares of Series A Preferred Stock, $1.00 par, at $100 per share (the
"Preferred Stock Offering").
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company. This data
should be read in conjunction with the Company's financial statements and the
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues $7,495 $7,121 $ 6,076
Operating costs 1,391 1,284 950
Transportation costs 1,745 1,802 1,534
Depreciation and amortization 1,064 1,149 822
Commissions and other selling costs 1,231 1,141 1,487
General and administrative costs 2,084 2,091 2,239
--------------------------
Loss from operations (21) (345) (955)
Other expense (income) 623 433 343
--------------------------
Loss before income taxes (644) (778) (1,297)
Income tax expense (benefit) 0 (44) (317)
--------------------------
Loss after income taxes (644) (734) (980)
Dividends on Preferred Stock 25 0 0
--------------------------
Loss attributable to Common Stock (699) (734) (980)
==========================
Loss per common share $(.28) $(.31) $(.41)
==========================
BALANCE SHEET DATA:
Total Assets $6,263 $6,606 $ 7,760
Current and long term debt and capital lease obligations $3,480 $4,295 $ 4,979
OTHER DATA:
EBITDA (1) $ 830 $ 811 $ (112)
Cash flow from Operations $ 704 $ 707 $ (213)
</TABLE>
(1) EBITDA is defined as the sum of (i) loss before income taxes; (ii) interest;
and (iii) depreciation and amortization, as reported on the Company's income
statement. EBITDA is presented not as an alternative measure of operating
results or cash flow from operations (as determined in accordance with generally
accepted accounting principles), but rather to provide additional information
related to the debt servicing ability of the Company.
GENERAL
The Company was incorporated in 1986 and began operations in 1987. The Company's
revenues consist of sales of the Company's bottled water products, rental of
water dispensers and sales of cups and other miscellaneous items. As of December
31, 1996, the Company serviced approximately 28,558 customers as compared to
27,253 at December 31, 1995. This growth in customer accounts has been
accompanied by increased revenues during 1996 and 1995. The Company attributes
the growth in customer accounts to aggressive marketing, increased bottled water
consumption, a change in the type of closed water system and an effective
customer retention program. The Company anticipates that its customer base and
revenues will continue to expand as sales of bottled water increase and the
Company continues to penetrate the Houston and DFW bottled water markets. Some
of the factors that the
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Company believes may affect the rate of increase in bottled water sales include
the public perception of the quality of municipal water supplies and general
health concerns.
Commissions and other selling costs comprise the largest controllable component
of expenses. Selling expenses consist primarily of commissions paid to the
sales force and telemarketing expenses. Commissions paid are expensed as they
are incurred. Commissions represent a higher percentage of total expenses during
periods when the Company is adding accounts at an accelerated rate when compared
to other expenses, which are not as variable.
Transportation expenses include lease expense, fuel, insurance, repair and
maintenance expenses associated with the Company's delivery trucks and vans.
Depreciation and amortization and operating expenses consist primarily of
depreciation of the Company's delivery trucks and vans, water dispensers and
bottles and the bottling plants. Depreciation and amortization are expected to
increase as the Company continues to commit resources to its growing customer
base.
General and administrative expenses include centralized administration and
support costs.
The Company currently provides for coolers which are lost or stolen as a
reduction of fixed assets.
RESULTS OF OPERATIONS
Year Ended December 31, 1996 and 1995
Revenues in 1996 increased 5% to $7,495,000 from $7,121,000 in 1995. The
increase was primarily the result of the addition of new customers and price
increases during 1996.
Operating costs increased slightly, as a percentage of sales, to 19% or
$1,391,000 in 1996 from 18% or $1,284,000 in 1995. During 1995, the Company
benefited from a credit granted by a cap supplier of approximately $40,000 in
settlement of a dispute.
Transportation Costs decreased 2% , as a percentage of sales, to 23% or
$1,745,000 in 1996 from 25% or $1,802,000 in 1995. The decrease is due to a
decrease in the number of trucks partially offset by increased fuel costs which
was caused by an increase in water sales.
Depreciation and amortization costs decreased, as a percentage of sales, to 14%
or $1,064,000 in 1996 from 16% or $1,149,000 in 1995. The decrease is due to
certain fixed assets of the Company becoming fully depreciated during 1995 and
1996.
Commissions and other selling costs, as a percentage of sales, remained stable
at 16% or $1,231,000 and $1,141,000 during 1996 and 1995, respectively.
Management's policy is to use all available cash from operations and financing
activities after debt service for its marketing activities. During the fourth
quarter of 1996, the Company completed the Preferred Stock Offering with net
proceeds of $652,500. The Company was able to significantly expand its marketing
efforts due to the availability of cash. During the three month period ended
December 31, 1996, commissions and other selling costs were $498,000 as compared
to $246,000 during the three month period ended December 31, 1995. This is
partially offset by decreased marketing activities during the first two quarters
of 1996.
General and administrative expenses, as a percentage of sales, decreased to 28%
or $2,084,000 during 1996 from 29% or $2,091,000 during 1995. During 1996, the
Company recognized as a reduction of bad debt expense, the write down of certain
unclaimed customer deposits of approximately $70,000.
Interest expense, as a percentage of sales, decreased to 5% or $410,000 in 1996
compared to 6% or $441,000 in 1995. This is primarily due to reductions in long
term debt.
10
<PAGE>
Other expenses, as a percentage of sales, was 3% or $218,000 during 1996. The
Company charged approximately $117,000 to other expenses due to an unfavorable
judgment being rendered against the Company. The plaintiff in a suit provided
certain printing services to the Company. The Company's position was that
services were not performed and withheld payment from the plaintiff . The
Company intends to appeal the court's decision. Also, the Company charged
approximately $87,000 to settle a dispute with a former member of the Board of
Directors of the Company. Another $14,000 was expensed for the settlement of a
dispute with a consultant.
The Company reported a loss after income taxes of $644,000 in 1996, compared to
a loss after income taxes of $734,000 in 1995. The decrease in the loss during
1996 was caused by increased revenues and improved operating efficiencies. This
was significantly offset by the Other expenses of $218,000.
Year Ended December 31, 1995 and 1994
Revenue in 1995 increased 17% to $7,121,000 from $6,076,000 in 1994. The
increase was the result of the addition of new customers and price increases
during 1995.
Operating expenses increased, as a percentage of sales, to 18% or $1,284,000 in
1995 from 16% or $950,000 in 1994. The increase was the result of the inclusion
of one full year of operating expenses for the Grand Prairie plant in 1995.
Transportation costs remained the same, as a percentage of sales, at 25% or
$1,802,000 in 1995 compared to $1,534,000 in 1994.
Depreciation and amortization costs increased, as a percentage of sales, to 16%
or $1,149,000 from 14% or $822,000 in 1994. The increase was the result of the
additional costs associated with assets purchased to facilitate the Company's
growth and expansion into DFW during 1994 and 1995.
Commission and selling expenses, as a percentage of sales, decreased to 16% or
$1,141,000 in 1995 from 24% or $1,487,000 in 1994. Management's policy is to use
all available cash from operations and financing activities after debt service
for its marketing effort. The decrease in commission and selling expenses in
1995 is due to a reduction in available cash.
General and administrative expenses, as a percentage of sales, decreased to 27%
or $1,897,000 in 1995 from 35% or $2,117,000. The percentage decrease relates
primarily to a reduction in overhead costs due to improved efficiency.
Additionally, the Company did not have expenses associated with expansion into
new markets during 1995.
Interest expense remained the same, as a percentage of sales, at 6% or $433,000
in 1995 compared to $364,000 in 1994.
The Company reported a loss after income taxes of $734,000 in 1995, compared to
a loss after income taxes of $980,000 in 1994. The decrease in the loss during
1995 was caused by the increased revenues associated with acquiring additional
customer accounts obtained in connection with the Company's expansion into the
DFW area and decreased commissions and selling expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company has typically financed operations from a combination of vendor
financing, bank loans and leases, placement of securities and cash generated
from operations. The Company acquires water coolers and cooler equipment through
vendor financing. The Company leases water processing and bottling plants and
various trucks from financial institutions under capital lease arrangements.
Additional trucks and equipment are obtained under operating leases.
11
<PAGE>
Net cash provided by operating activities in 1996 was $714,000 compared to
$707,000 in 1995. The increase in the Company's net cash provided by operating
activities was primarily the result of an increase in customer deposits. This
was partially offset by an increase in accounts receivable coupled with a
decrease in accounts payable.
During 1996, the Company made capital expenditures of $381,000 for plant
equipment, water bottles and trucks and truck improvements. No significant
capital expenditures are anticipated in the near future. The Company used cash
of $185,000 for capital expenditures in 1995. Cash was used for the purchase
of water bottles, office equipment, trucks, and truck improvements during 1996.
Plant equipment of $22,000 was financed through a note to a bank.
As of December 31, 1996, the Company's long term debt amounted to $439,000 in
bank debt, $2,449,000 in vendor financing, and $408,000 in convertible
subordinated debt. The Company had capital lease commitments of $184,000 as of
December 31, 1996.
During the first quarter of 1996, the Company was in default of the net worth
covenant of a bank loan agreement. The loan balance was refinanced with a new
bank to cure the default position. The note is due in monthly installments with
interest at prime plus 2%, adjusted quarterly, through October 1998. The note
is collateralized by accounts receivable, inventory, equipment, vehicles, the
assignment of a life insurance policy on a shareholder and 200,000 shares held
by a principal shareholder. The note is guaranteed by a corporation related
through common ownership up to 37.5% of the outstanding balance and is
guaranteed by the Small Business Administration up to 75% of the outstanding
balance. The new agreement contains no financial covenant restrictions.
During 1996, the Company was in default with a financial covenant of the capital
lease arrangement. Subsequent to year end, the Company obtained a waiver for
all non-compliance during 1996.
On May 1, 1996, the Company rolled $45,000 of accrued interest into the
principal balance of the convertible subordinated debt as per the loan agreement
with a water cooler manufacturer in Europe.
During the fourth quarter of 1996, the Company completed a private placement of
7,500 shares of Series A Preferred Stock, $1.00 par, at $100 per share. The
Preferred Stock has a 12% cumulative dividend rate payable in monthly
installments. The Preferred Stock is convertible into 24 shares of the
Company's Common Stock at a conversion price of $4.17 per share. Rule 144
promulgated under the Securities Act requires, among other conditions, that two
years elapse from the date the purchaser purchases the shares before the
purchaser can resell ( in limited amounts) the shares (or the shares of Common
Stock of the Company issuable upon conversion of the shares) without having to
satisfy the registration requirements under the Securities Act. The Preferred
Stock is redeemable for cash at any time after March 1, 1998 in whole or in
part, at the option of the Company, at redemption prices that will decline from
$106 per share on March 1, 1998 to $100 per share on September 1, 1999, at a
rate of $1 per three month period, plus any accrued and unpaid dividends through
the redemption date. As of December 31, 1996, 7,500 shares of the Preferred
Stock of the Company were issued. Proceeds of $652,500 will be used for
commissions and other selling costs and working capital.
Management's strategy is based on increasing the Company's value by increasing
the customer base. Because the Company records the Commissions and other selling
costs associated with the implementation of its growth strategy in the period in
which such expenses are incurred, the Company's net income will initially
decrease for a period in which the Company experiences rapid growth. Despite the
short-term effect of growth on net income, the Company believes that its
strategy of increasing the size of its customer base will enhance shareholder
value and improve the financial performance of the Company. The Company will not
be able to expand significantly or enter into new markets until additional
funding is acquired. There can be not assurance that such arrangements will
become available on terms acceptable to the Company.
FORWARD LOOKING STATEMENTS
This Form 10-KSB contains forward looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Act"), and Section
21E of the Securities Act of 1934, as amended (the "Exchange Act"),
12
<PAGE>
which are intended to be covered by the safe harbors created thereby. Investors
are cautioned that all forward looking statements involve risks and uncertainty.
Although the Company believes that the assumptions underlying the forward
looking statements contained herein are reasonable, any of the assumptions could
be inaccurate, and therefore, there can be no assurance that the forward looking
statements included in this Form 10-KSB will prove to be accurate. In light of
the significant uncertainties inherent in the forward looking statements
included herein, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives and plans
of the Company will be achieved.
ITEM 7. FINANCIAL STATEMENTS
The financial statements are filed elsewhere herein as a part of this annual
report on Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
13
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
The names, ages and position of the directors and executive officers of the
Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Robert A. Hammond, Jr. 42 Chairman of the Board, President and
Chief Executive Officer; Director
Robert A Hammond, Sr. 62 Vice President of Operations and
Secretary; Director
Nick A. Baki 32 Vice President - New Markets
Kevin F. Vigneaux 38 Chief Financial Officer and Treasurer
Stephen A. Lee (1) (2) 44 Director
Edward McCartin (1) (2) 42 Director
</TABLE>
(1) Member, Audit Committee
(2) Member, Compensation Committee
Robert A. Hammond, Jr. founded the Company in 1986 and has served as President
and Chief Executive Officer a Director since that time. Mr. Hammond is a co-
founder of Aviation Laboratories, Inc., a company that specializes in the
analysis of oil from jet engines, and has served as Vice President and Chairman
since its incorporation in 1985. From 1981 to 1985, Mr. Hammond was a commercial
real estate broker with Henry S. Miller Company. Mr. Hammond received a B.A. in
Marketing, Transportation and Distribution from Syracuse University in 1976.
Robert A. Hammond, Sr. has served as Vice President Operations of the Company
since 1987 and as a Director of the Company since March 1993. Mr. Hammond has
been responsible for production and product quality control for the Company, as
well as all phases of construction, installation and maintenance of the
Company's facility in Houston, Texas, since 1987. From 1974 to 1980, Mr. Hammond
served as Executive Vice President of Coyne Industrial Laundries, an industrial
uniform rental company with headquarters in Syracuse, New York. Mr. Hammond was
responsible for eleven plants owned by Coyne.
Nick A. Baki has served as Vice President-New Markets of the Company since
January 1994, and prior to that as Chief Financial Officer and Treasurer since
November 1992. Previously, Mr. Baki was employed by Holland Mortgage Corporation
as an assistant controller, by the Stouffer Hotel in Austin, Texas as an account
supervisor, and the Hyatt Regency Hotel in Austin, Texas as an assistant
controller. Mr. Baki received a B.A., in economics from the University of Texas
at Austin in 1989, and earned a B.B.A. in Accounting from the University of
Houston in 1992.
Kevin F. Vigneaux joined the Company as Chief Financial Officer and Treasurer in
October 1996 from Texberry Container Corporation, a manufacturer and distributor
of containers, where he was employed as Controller since 1994. Previous to that,
Mr. Vigneaux was with Drypers, a baby diaper manufacturer, as Division
Controller and served as Salinas Plant Controller with McCormick and Company, a
spice and seasoning manufacturer. He was
14
<PAGE>
also employed by Arthur Andersen & Company. Mr. Vigneaux is a registered
Certified Public Accountant in the state of Texas, he received a M.B.A. in
Finance from Loyola College of Maryland, and also a B.S.B.A. in Accounting from
Northeastern University.
Stephen A. Lee has served as a Director at the Company since December 1994 and
is a member of the compensation and audit committees. Mr. Lee is a corporate law
attorney with the Houston law firm of Crady, Jewett, and McCulley, LLP. Prior to
1991, Mr. Lee served as a Senior Tax Manager with Deloitte & Touche. Mr. Lee is
a registered Certified Public Accountant in the state of Texas. Mr. Lee received
a B.A. from Houston Baptist University in 1974, a J.D. from the University of
Houston in 1977 and a L.L.M. (tax) from Georgetown University in 1978.
Edward McCartin has served as a Director of the Company since December 1994 and
is a member of the compensation and audit committees. Mr. McCartin has been the
Vice President of Operations of Aviation Laboratories, Inc. since its inception
in 1985.
The Bylaws of the Company authorize the Board of Directors to fix the number of
directors of the Company. The Board of Directors is currently comprised of four
members. Each director of the Company serves until the earliest to occur of (i)
his death, resignation or removal or (ii) the election of his successor. The
executive officers of the Company serve at the pleasure of the Board of
Directors and are subject to annual appointment by the Board at the first
meeting following the annual meeting of the shareholders. No family
relationships exist among the officers and directors of the Company other than
between Messrs. Hammond.
BOARD COMMITTEES
The Board of Directors has established a Compensation Committee and an Audit
Committee. The Compensation Committee reviews and recommends to the Board of
Directors all forms of remuneration for directors and management and administers
the Company's 1993 Stock Option Plan and the 1995 Incentive Stock Plan. Messrs.
Lee and McCartin were appointed to the Company's Compensation and Audit
Committees during 1994. The Audit Committee is charged with reviewing the
financial statements of the Company, and reviews the scope and performance of
the audit and non-audit services provided by the Company's independent auditors
and the Company's internal accounting controls.
BOARD COMPENSATION
The Company reimburses its directors who are not employees of the Company $250
for each meeting of the Board of Directors attended. In addition, each non-
employee director will automatically be granted non-qualified options under the
Company's 1993 Non-Employee Director Stock Option Plan to purchase 5,000 shares
of Common Stock upon his election and 1,000 shares of Common Stock upon his
reelection each year thereafter. Each director who is an employee of the Company
will be eligible to receive a grant of incentive stock options or non-qualified
stock options under the Company's 1993 Stock Option Plan (the "Option Plan").
EMPLOYMENT AGREEMENTS
The Company does not have employment agreements with any of its executive
officers.
ITEM 10. EXECUTIVE COMPENSATION
The following table reflects all forms of compensation for services to the
Company for the years ended December 31, 1996, 1995, 1994, of Robert A. Hammond,
Jr., Chief Executive Officer of the Company. No executive officer of the Company
received compensation that exceeded $100,000 during 1996.
15
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
------------
Annual Compensation Restricted Stock All
------------------- Stock Options Other
Year Salary Bonus Other Awards (Shares) Compensation
---- ------ ----- ----- ------ -------- ------------
<S> <C> <C> <C> <C> <C> <C>
1996 $84,000 $0 $0 0 0 $10,000 (1)
1995 $84,000 $0 $0 0 0 $25,000 (1)
1994 $58,500 $0 $0 0 75,000 $25,000 (1)
</TABLE>
(1) Consists of the value of certain insurance on personal vehicles, maintenance
of personal vehicles, certain personal travel and entertainment expenses and
related items of Mr. Hammond, Jr. that were paid by the Company.
The following table provides information concerning the options held by Mr.
Hammond as of December 31, 1996 all of which are exercisable. No options of the
Company were exercised by Mr. Hammond during the year ended December 31, 1996.
No additional options were granted during the year ended December 31, 1996.
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options at
Name Options at Year End Year End (1)
- --------------------------------------------------------------------------------
Robert A. Hammond, Jr. 75,000 $341,250
(1) Calculated by multiplying the number of shares underlying outstanding
options by the difference between the last sales price of the Company's Common
Stock on the last trading day of the fiscal year as report by the Nasdaq
SmallCap market ($6 7/64 per share) and the exercise price ($2.20 per share).
Options are in-the-money if the fair market value of the underlying Common Stock
exceeds the exercise price of the option.
STOCK OPTION PLANS
The Company's Option Plan was adopted in 1993. An aggregate of 225,000 shares of
common stock were reserved for issuance pursuant to the Option Plan. The Option
Plan is administered by the Board of Directors or a stock option committee
established by the Board of Directors (the "Plan Administrator"). The Plan
Administrator determines, subject to the provisions of the Option Plan, the
employees to whom options are granted and the number of options to be granted.
The Plan Administrator may grant (i) "incentive stock options" within the
meaning of Section 422 of the Internal Revenue Code of 1986, and (ii) "non-
qualified stock options" (options which do not meet the requirements of Section
422). Incentive stock options granted under the Option Plan must have an
exercise price equal to at least the fair market value of the Common Stock at
the date the option is granted. Each option granted under the Option Plan may
have a term of up to ten years, except that incentive stock option granted to a
shareholder who, at the time of grant, owns more than 10% of the voting stock of
the Company, may have a term of up to ten years, except that an incentive stock
option granted to a shareholder who, at the time of grant, owns more than 10% of
the voting stock of the Company may have a term of up to five years. The
exercise price of incentive stock options granted shareholders possessing more
than 10% of the total combined voting stock of the Company must be not less than
110% of the fair market value of the Company's Common Stock on the date of
grant. As of December 31, 1996, stock options to acquire 199,150 shares of the
Company's Common stock have been granted under the Option Plan at an execise
price ranging from $2.00 to $2.20 per share. The options are exercisable
beginning March 28, 1995 through December 28, 1998. During 1996, the Company
issued 25,200 shares for employee options exercised under the Opton Plan. As of
December 31, 1996 options to purchase 156,200 shares were exercisable.
The Company's Non-Employee Director Stock Option Plan (the "Non-Employee
Director Plan") was also adopted in 1993. An aggregate of 25,000 shares of
Common Stock were reserved for issuance pursuant to the Plan. Options to
purchase 5,000 shares of Common Stock will be automatically granted to each
person, elected for the first time as
16
<PAGE>
director of the Company, who is not an employee of the Company. An option to
acquire an additional 1,000 shares will be automatically granted each year
thereafter that such director is re-elected. Options granted under the Non-
Employee Director Plan will not qualify as "incentive stock options" within the
meaning of Section 422 of the Internal Revenue Code of 1986. Options granted
under the Non-Employee Director Plan expire ten years after date of grant. As of
December 31, 1996, 12,000 options have been granted under the Non-Employee
Director Plan at an exercise price of $2.00 to $3.375 per share. As of December
31, 1996 options to purchase 10,000 shares were exercisable.
The Company's Incentive Stock Plan (the "Incentive Plan") was adopted
in 1995. An aggregate of 500,000 shares of Common Stock were reserved for
issuance pursuant to the Incentive Plan. The Incentive Plan is administered by
the compensation committee. The compensation committee determines, subject to
the provisions of the Incentive Plan, to whom incentives are to be awarded.
The compensation committee may award (i) "incentive stock options" within the
meaning of Section 422 of the Internal Revenue Code of 1986, (ii) "non-qualified
stock options" (options which do not meet the requirements of Section 422),
(iii) shares of "restricted stock", and (iv) "stock bonuses." Subject to the
terms of the Incentive Plan, the compensation committee will also determine the
prices, expiration dates and other material features of the incentive awards.
During 1996 and 1995, the Company issued 45,612 shares and 5,000 shares,
respectively, of Common Stock under the Incentive Plan. As of December 31,1996,
stock options to acquire 38,000 shares of the Company's Common stock have been
granted under the Incentive Plna at an exercise price ranging from $2.50 to
$5.00 per share. The options are exercisable beginning October 26, 1995 through
December 9, 1999. During 1996, the Company issued 45,612 shares of common stock
to consultants and in settlement of lawsuits under the Incentive Plan. As of
December 31, 1996 options to purchase 4,000 shares were exercisable.
WARRANTS
During August 1993, the Company issued 575,000 shares of common stock at $5.00
per share in conjunction with its Initial Public Offering. Proceeds from the
Initial Public Offering were approximately $2,322,500, net of offering expenses.
In connection with the offering, the Company sold, for nominal consideration,
warrants to underwriters to purchase 50,000 shares of Common Stock at $6.00 per
share. The warrants expire on August 10, 1998. The warrants are not redeemable
by the Company, and contain certain anti-dilution provisions and registration
rights with respect to the Common Stock issuable upon exercise of such warrants.
The costs of registering with the Securities and Exchange Commission of any
Common Stock issuable upon exercise of the warrants are to paid by the Company.
As of December 31, 1996, the price per share of the Company's Common Stock was
$6 7/64.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company has adopted provisions in its Amended and Restated Articles of
Incorporation (the "Articles") that require the Company to indemnify its
directors and officers and former directors and officers to the fullest extent
permitted by Texas law. Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers or persons
controlling the Company pursuant to the foregoing provisions, the Company has
been informed that, in the opinion of the SEC, such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. These provisions may require the Company, among other things, to
indemnify directors and officers against certain liabilities that may arise by
reason of their status or service as directors and officers and to advance their
expenses incurred as a result if any proceeding against them as to which they
could be indemnified. At the present time, there is no pending litigation or
proceeding involving a director, officer or agent of the Company where
indemnification will be required or permitted. The Company is not aware of any
threatened litigation or proceeding that may result in a claim for such
indemnification.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows the amount of Common Stock owned as of March 24, 1997
by each Director, each named executive officer , and all Directors and officers
as a group, consisting of 6 persons. Each individual has
17
<PAGE>
beneficial ownership of the shares and each individual has sole voting power and
sole investment power with respect to the number of shares beneficially owned:
<TABLE>
<CAPTION>
Number of Percentage of
Name and Address (1) Shares Class
-------------------- --------- -------------
<S> <C> <C>
Robert A. Hammond, Jr. 1,248,417 (2) 51%
Robert A. Hammond, Sr. (3) 530,000 22%
Joshua Slocum Hammond Trust (4) 353,333 14%
Nick A. Baki 0 0%
Kevin F. Vigneaux 0 0%
Stephen A. Lee 1,000 *
Edward McCartin 0 0%
All Executive Officers and Directors
as a Group (6 persons) 1,779,417 73%
</TABLE>
* Less than 1%
(1) The business address of each beneficial owner is the same as the address of
the Company's principal executive office.
(2) Includes 353,333 shares of Common Stock owned by the Joshua Slocum Hammond
Trust, as to which shares Mr. Hammond has sole voting and investment power
and may deemed to be the beneficial owner. Mr. Hammond is the son of
Robert A. Hammond, Sr.
(3) Mr. Hammond is the father of Robert A. Hammond, Jr.
(4) The trust was established by Mr. Hammond, Sr. for the sole benefit of his
minor son, Joshua Slocum Hammond. Mr. Hammond, Jr. is the sole trustee and
a contingent beneficiary of the trust.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1994 the Company entered a consulting agreement with one of its
directors. The agreement provided for the compensation to the director of
$3,000 per month and an option to purchase 50,000 shares of Common Stock at
$2.23 per share with a guarantee as to the amount to be realized on exercise.
The contract is no longer in effect and the director did not stand for re-
election at the Company's 1994 annual meeting. The Company paid the director an
aggregate of $17,500 under the agreement. During 1996, the Company granted
15,000 shares of Common Stock under the Incentive Plan and paid $5,000 to the
former director to resolve certain issues relating to the stock option and
guaranteed payment.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description of Exhibit
- ----------- ----------------------
18
<PAGE>
3.1 Amended and Restated Articles of Incorporation. Exhibit 3.1 to the
Company's Registration Statement on Form SB-2 (No. 33-63022-FW)
that was initially filed on May 19, 1993 (the "Registration
Statement") is incorporated herein by reference.
3.2 Restated Bylaws. Exhibit 3.2 to the Registration Statement is
incorporated herein by reference.
3.3 Certificate of Designation, Preferences, Rights and Limitations of
Series A Preferred Stock, $1.00 Par Value of Great Pines Water
Company, Inc. Exhibit 3.3 is incorporated by reference.
4.1 Specimen stock certificate evidencing shares of Common Stock.
Exhibit 4.1 to the Registration Statement is incorporated herein
by reference.
9.1 Joshua Slocum Hammond Trust Agreement, dated May 11, 1993. Exhibit
9.1 to the Registration Statement is incorporated herein by
reference.
10.1 Loan Agreement, dated November 1, 1988, by and between Great Pines
Water Company, Inc. and Bank One Texas, National Association, as
amended. Exhibit 10.1 to the Registration Statement is
incorporated herein by reference.
10.2 Authorization and Loan Agreement with the United States Small
Business Administration. Exhibit 10.2 to the Registration
Statement is incorporated herein by reference.
10.3 Lease Agreement, dated April 1, 1990, with DBH Investment Partners
No. 3, as amended. Exhibit 10.3 to the Registration Statement is
incorporated herein by reference.
10.4 1993 Stock Option Plan of Great Pines Water Company, Inc. Exhibit
10.4 to the Registration Statement is incorporated herein by
reference.
10.5 1993 Non-Employee Director Stock Option Plan of Great Pines Water
Company, Inc. Exhibit 10.5 to the Registration Statement is
incorporated herein by reference.
10.6 Form of Loan Agreement by and between Great Pines Water Company,
Inc. and Dependable Acceptance Company for the purchase of
equipment. Exhibit 10.6 to the Company's annual report on Form
10-KSB for the fiscal year ended December 31, 1994 is incorporated
herein by reference.
10.7 Amendment dated December 31, 1994 to Loan Agreement, dated
November 1, 1988 by and between Great Pines Water Company, Inc.
and Bank One Texas, N.A. Exhibit 10.7 to the Company's annual
report on Form 10-KSB for the fiscal year ended December 31, 1994
is incorporated herein by reference.
10.8 1995 Incentive Stock Plan of Great Pines Water Company, Inc.
Exhibit 10.8 to the Company's quarterly report on Form 10-QSB for
the quarter ended September 30,1995 is incorporated by reference.
10.9 Convertible Debenture, dated April 21, 1995, together with Form of
Convertible Note, by and between Great Pines Water Company, Inc.
and EBAC Systems Inc. Exhibit 10.9 to the Company's quarterly
report on Form 10-QSB for the quarter ended September 30, 1995 is
incorporated by reference.
10.10 Promissory Note dated October 13, 1995 between Great Pines Water
Company, Inc. and Metrobank, N.A. for the assumption of equipment
loans previously with Bank One Texas, N.A. Exhibit 10.10 is
incorporated herein by reference.
10.11 Assignment dated March 21, 1996 of the SBA loan dated October 19,
1991 to Sunbelt National Bank, N.A. from Bank One Texas, N.A.
Exhibit 10.11 is incorporated herein by reference.
19
<PAGE>
10.12 Amendment dated March 22, 1996 to the loan agreement, dated
November 1, 1988 by and between Great Pines Water Company, Inc.
and Bank One Texas, N.A. Exhibit 10.12 is incorporated herein by
reference.
10.13 Amendment to the Lease Agreement dated April, 1 1990, with DBH
Investment Partners No. 3. Exhibit 10.10 to the Company's annual
report on Form 10-KSB for the fiscal year ended December 31, 1995
is incorporated herein by reference.
10.14 Promissory Note dated June 12, 1996 between the Great Pines Water
Company, Inc. and Sunbelt National Bank for the purchase of plant
equipment. Exhibit 10.14 is incorporated by reference.
23.1 Consent of independent auditors dated March 28, 1997. Exhibit 23.1
is filed herein.
27.1 Financial Data Schedule. Exhibit 27.1 is filed herein.
(b) Reports on Form 8-K:
The Company filed no current reports on Form 8-K during the quarter ended
December 31, 1996.
20
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, Great Pines Water
Company, Inc. has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized this 31st day of March, 1997:
GREAT PINES WATER COMPANY, INC.
By: /s/ Robert A. Hammond, Jr.
----------------------------------
Robert A. Hammond, Jr.
President, Chief Executive Officer
In accordance with the requirements of the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Robert A. Hammond, Jr. President, Chief Executive March 31, 1997
- ------------------------------ Officer, Director (Principal
Robert A. Hammond, Jr. Executive Officer)
/s/ Robert A. Hammond, Sr. Secretary, Vice President, March 31, 1997
- ------------------------------ Director
Robert A. Hammond, Sr.
/s/ Kevin F. Vigneaux Chief Financial Officer March 31, 1997
- ------------------------------ and Treasurer (Principal
Kevin F. Vigneaux Financial and Accounting
Officer)
/s/ Stephen A. Lee Director March 31, 1997
- ------------------------------
Stephen A. Lee
/s/ Edward McCartin Director March 31, 1997
- ------------------------------
Edward McCartin
21
<PAGE>
GREAT PINES WATER COMPANY, INC.
INDEX TO FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT................................... 23
BALANCE SHEETS AS OF DECEMBER 31, 1996 AND 1995................ 24
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996,
1995 AND 1994.................................................. 25
STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER
31, 1996, 1995 AND 1994......................................... 26
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996,
1995 AND 1994................................................... 27
NOTES TO FINANCIAL STATEMENTS................................... 28
22
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Great Pines Water Company, Inc.
Houston, Texas
We have audited the accompanying balance sheets of Great Pines Water Company,
Inc. (the "Company") as of December 31, 1996 and December 31, 1995 and the
related statements of operations, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Great Pines Water Company, Inc.
as of December 31, 1996 and December 31, 1995, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
February 14, 1997
23
<PAGE>
GREAT PINES WATER COMPANY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
---- ----
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents including interest-bearing balances
of $232,541 in 1996 and $61,111 in 1995 $ 315,936 $ 61,611
Accounts receivable - trade, net of allowance for doubtful
accounts of $143,014 in 1996 and $131,339 in 1995 684,824 628,380
Inventory 99,808 85,541
Prepaid expenses 16,318 9,698
Prepaid insurance 216,341 167,581
Other current assets 8,032 4,903
----------- -----------
Total current assets 1,341,259 957,714
----------- -----------
Property and equipment, net 4,861,543 5,593,079
Other assets 60,576 55,041
----------- -----------
$ 6,263,378 $ 6,605,834
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable, trade $ 220,870 $ 271,429
Customer deposits 912,496 766,641
Accrued liabilities and other current liabilities 279,600 154,070
Note payable 189,722 142,470
Current portion of capital lease obligations 102,267 125,994
Current maturities of long term debt 760,406 779,289
----------- -----------
Total current liabilities 2,465,361 2,239,893
----------- -----------
Long term debt, net of current portion 2,536,298 3,206,807
Capital lease obligations, net of current portion 80,782 183,063
Commitments and Contingencies (Note 6)
Shareholders' equity:
Preferred stock, $1.00 par value; 1,000,000 shares
authorized; 7,500 shares outstanding at December 31,
1996 and no shares outstanding at December 31, 1995 7,500 0
Common Stock, $.01 par value; 10,000,000 shares authorized;
2,449,512 shares (net of treasury stock) and 2,378,700
shares (net of treasury stock) outstanding at December 31,
1996 and 1995, respectively 24,508 23,800
Additional-paid-in-capital 3,853,589 2,987,533
Accumulated deficit (2,698,160) (2,028,762)
Less Treasury Stock, 1,300 shares and 1,300 shares at
December 31, 1996 and 1995, respectively, at cost (6,500) (6,500)
----------- -----------
Total shareholders' equity 1,180,937 976,071
----------- -----------
$ 6,263,378 $ 6,605,834
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
GREAT PINES WATER COMPANY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues:
Water $4,771,397 $4,486,907 $ 3,972,182
Equipment rental 2,479,313 2,461,455 1,968,345
Other 244,335 173,046 135,963
---------- ---------- ----------
7,495,045 7,121,408 6,076,490
---------- ---------- ----------
Costs and expenses:
Operating costs 1,391,491 1,283,816 949,823
Transportation costs 1,744,733 1,802,216 1,533,821
Depreciation and amortization 1,064,449 1,148,503 821,541
Commissions and other selling costs 1,231,151 1,140,913 1,486,930
General and administrative expenses 2,084,423 2,091,285 2,238,890
---------- ---------- ----------
7,516,247 7,466,733 7,031,005
---------- ---------- ----------
Loss from operations (21,202) (345,325) (954,515)
Other expense (income)
Interest expense 409,897 441,040 363,673
Interest income (4,743) (8,146) (21,168)
Other expense (income) 217,792 0 0
---------- ---------- ----------
622,946 432,894 342,505
---------- ---------- ----------
Loss before income taxes (644,148) (778,219) (1,297,020)
Income tax expense (benefit) 0 (44,540) (317,161)
---------- ---------- ----------
Net Loss (644,148) (733,679) (979,859)
Dividends on Preferred Stock 25,250 0 0
---------- ---------- ----------
Loss attributable to Common Stock $ (669,398) $ (733,679) $ (979,859)
========== ========== ===========
Loss per common share $(0.28) $(0.31) $(0.41)
========== ========== ===========
Weighted average number of common shares outstanding 2,409,948 2,375,931 2,376,745
========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
GREAT PINES WATER COMPANY, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
--------------- ----------------- Paid-in (Accumulated Treasury
Shares Amount Shares Amount Capital Deficit) Stock Total
------ ------ ------ ------ ------- -------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 2,375,000 $23,750 $2,972,583 (315,224) $ 0 $2,681,109
Purchase of 2,000 shares
of Treasury Stock (10,000) (10,000)
Sale of 680 shares
of Treasury Stock 3,400 3,400
Net loss (979,859) (979,859)
--------- ------- ---------- ----------- -------- ----------
Balances, December 31, 1994 2,375,000 $23,750 2,972,583 (1,295,083) (6,600) 1,694,650
Issuance of Common Stock 5,000 50 14,950 15,000
Sale of 20 shares
of Treasury Stock 100 100
Net loss (733,679) (733,679)
--------- ------- ---------- ----------- -------- ----------
Balances, December 31, 1995 2,380,000 $23,800 $2,987,533 $(2,028,762) $ (6,500) $ 976,071
Issuance of Common Stock 70,812 708 221,056 221,764
Issuance of Preferred Stock 7,500 $7,500 645,000 652,500
Dividends on Preferred Stock (25,250) (25,250)
Net loss (644,148) (644,148)
----- ------ --------- ------- ---------- ----------- -------- ----------
Balances, December 31, 1996 7,500 $7,500 2,450,812 $24,508 $3,853,589 $(2,698,160) $ (6,500) $1,180,937
===== ====== ========= ======= ========== =========== ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
GREAT PINES WATER COMPANY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating actives:
Net loss $ (644,148) $ (733,679) $ (979,859)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 1,064,449 1,148,503 821,541
Loss on disposition of assets 8,188 13,060 0
Provision for lost coolers 18,000 36,000 44,760
Noncash charges 176,364 0 0
Deferred income tax expense (benefit) 0 (44,540) (317,161)
Affect of net changes in operating accounts:
Accounts receivable, net (56,444) 4,629 (154,425)
Inventory (14,267) 11,299 (83,458)
Prepaid expenses (55,380) 47,540 77,918
Other assets (13,950) (32,885) 12,587
Accounts payable (50,559) 41,428 87,844
Customer deposits, accrued liabilities,
and other current liabilities 271,385 215,727 276,930
---------- ----------- -----------
Net cash provided by (used in) operating activities 703,638 707,082 (213,323)
---------- ----------- -----------
Cash flows from investing activities:
Additions to property and equipment (380,815) (184,889) (411,030)
Proceeds from fixed asset retirements 27,000 0 0
---------- ----------- -----------
Net cash used in investing activities (353,815) (184,889) (411,030)
---------- ----------- -----------
Cash flows from financing activities:
Proceeds from note payable and long term debt 279,104 612,286 119,825
Payments on note payable and long term debt (921,244) (1,117,562) (681,323)
Payments on capital lease obligations (126,008) (147,655) (130,101)
Proceeds from issuance of Common Stock, net 45,400 15,000 0
Proceeds from issuance of Preferred Stock, net 652,500 0 0
Dividends on Preferred Stock (25,250) 0 0
Sale (purchase) of treasury stock, net 0 100 (6,600)
---------- ----------- -----------
Net cash used in financing activities (95,498) (637,831) (698,199)
---------- ----------- -----------
Increase (decrease) in cash and cash equivalents 254,325 (115,638) (1,322,552)
Cash and cash equivalents, beginning of year 61,611 177,249 1,499,801
---------- ----------- -----------
Cash and cash equivalents, end of year $ 315,936 $ 61,611 $ 177,249
========== =========== ===========
Supplemental cash flow information:
Interest paid $ 425,476 $ 494,373 $ 282,427
========== =========== ===========
Equipment acquired under capital lease $ 0 $ 0 $ 180,548
========== =========== ===========
Equipment acquired in exchange for long-term debt $ 0 $ 4,983 $ 3,808,341
========== =========== ===========
Stock issued for services and settlement of lawsuits $ 176,364 $ 0 $ 0
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
GREAT PINES WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Great Pines Water Company, Inc. (the "Company") was incorporated in Texas in
November 1986 and is engaged in the bottling and sale of drinking, purified and
spring water and the rental of related dispensing equipment under the "Texas
Premium Waters" proprietary brand name. Substantially all of the Company's
customers are located in the Houston and Dallas-Fort Worth areas.
INVENTORY: Inventory consists primarily of cups, bottling materials and water
cooler repair parts, and is valued at the lower of cost or market using the
first-in, first-out method of accounting.
PROPERTY AND EQUIPMENT: Property, equipment and leasehold improvements are
carried at cost less accumulated depreciation and amortization. Depreciation is
determined using the straight-line method over the estimated useful lives of the
assets of three to ten years. Amortization of leasehold improvements and
equipment acquired under capital leases is provided on the straight-line method
over the shorter of the lease term or the estimated useful life of the assets.
Machinery and equipment is depreciated over four to ten years, water coolers are
depreciated over ten years, office equipment is depreciated over five to seven
years, trucks are depreciated over three to seven years and leasehold
improvements are amortized over five years. During 1995 the company changed the
estimated useful life of water bottles from five to four years. The change was
made to better reflect the estimated period during which the water bottles will
remain in service. The change had the effect of increasing depreciation expense
and decreasing net income by approximately $40,284 ($.02 per share).
Ordinary maintenance and repairs are charged to income. Expenditures which
extend the physical or economic life of the assets are capitalized. Gains or
losses on disposition of fixed assets are recognized in income and the related
assets and accumulated depreciation accounts are adjusted accordingly.
OTHER ASSETS: Other assets include prepaid loan costs which are being amortized
over the term of the loan.
REVENUES: Revenues from water sales are recognized upon delivery. Equipment
rental revenues are recognized as the equipment is used under the terms of the
lease agreements.
SALES COMMISSIONS: Sales commissions are paid as new customers are acquired and
are expensed as earned.
INCOME TAXES: In accordance with SFAS 109, the Company provides for income
taxes based upon amounts currently due and for temporary differences between the
financial and tax basis of its assets and liabilities.
NET INCOME (LOSS) PER SHARE: Net income (loss) per share is based on the
weighted average number of shares of Common Stock and Common Stock equivalents
outstanding during the years presented. Dilutive securities with an
antidilutive effect are not included in the calculation of net income (loss) per
share.
CASH EQUIVALENTS: For purposes of the Statement of Cash Flows, the Company
considers all highly liquid investments with a maturity of three months or less
as of the date of purchase to be cash equivalents.
IMPAIRMENT OF LONG-LIVED ASSETS: The Company reviews its long-lived assets for
impairment when circumstances indicate that the carrying amount of an asset may
not be recoverable.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The Company's only financial instruments
are cash, short-term trade receivables and payables and long-term debt.
Management believes the carrying amounts of the financial instruments classified
as current assets and liabilities approximate their fair values because of their
short-term nature. Management believes the interest rates on its long-term debt
represent fair market rates, and therefore the carrying value of its long-term
debt approximates fair value.
28
<PAGE>
CONCENTRATIONS OF CREDIT RISK: Financial instruments which potentially subject
the Company to concentrations of credit risk consist principally of cash and
trade receivables. The Company places its cash with financial institutions it
believes to be creditworthy and limits the amount of credit exposure to any one
financial institution. Substantially all the Company's sales are to customers
in the Houston and Dallas-Fort Worth areas. The Company generally extends
credit to these customers and, therefore, collection of receivables is affected
by the economy in those markets. There were no sales to any single third-party
customer which aggregated in excess of 1% of revenues for 1996, 1995 or 1994.
RECENT ACCOUNTING PRONOUNCEMENTS: In 1995, the Company adopted Statement of
Financial Accounting Standards ("SFAS") NO. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
requires that long-lived assets and certain identifiable intangibles to be held
and used be reported at the lower of carrying amounts or fair values. Assets to
be disposed of and assets not expected to provide any future service potential
to the Company are recorded at the lower of carrying amount or fair value less
cost to sell. The adoption of SFAS NO. 121 did not have a material effect on the
Company's financial position or results of operations.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS: 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 amount of
revenues and expenses during the reporting period. Actual results could differ
from these estimates.
RECLASSIFICATIONS: Certain amounts in prior years' financial statements have
been reclassified to conform with the current years' presentation.
NOTE 2 - NOTE PAYABLE
As of December 31, 1996, the Company has a note payable with a financial
institution for payment of an insurance policy. The note is due in monthly
installments of $24,379 including interest at 7.4%, through September 1997. At
December 31, 1995, the Company had a note payable with a financial institution
for payment of an insurance policy. The note was due in monthly installments of
$16,359 including interest of 7.95%, and was paid off in September 1996.
29
<PAGE>
NOTE 3 - LONG-TERM DEBT
The following is a summary of long-term debt at December 31, 1996, and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Note with a bank under credit facility due in monthly installments of $16,862, including interest, through
October 1998. The note is collateralized by accounts receivable, inventory, equipment, vehicles, assignment
of a life insurance policy on a shareholder, and the shares of Common Stock held by two principal
shareholders, and is guaranteed by the two principal shareholders. The credit facility is also guaranteed by
a corporation related through common ownership up to the lesser of $375,000 or 37.5% of the outstanding
principal balance of the loan. In March 1996, the interest rate was changed from 8.5% to prime + 2%,
adjusted quarterly (10.25% at December 31, 1996). $ 335,415 $ 491,821
Note payable to a bank due in monthly installments $600 with floating interest
at prime +2% through June 1999; collateralized by transportation equipment. 17,993 0
Note payable to a bank due in monthly installments of $2,506 with interest at
9.5% through October, 1997; collateralized by transportation equipment. 23,928 50,350
Various notes payable to a financing corporation due in monthly installments
totaling $56,622 including interest at rates ranging from 8.0% to 10.75%,
through November 2001; collateralized by equipment. 2,448,965 2,956,848
Note with a financial institution due in monthly installments of $2,622
including interest at 8.5%, through February 1999; collateralized by
communications equipment. 61,933 87,077
Convertible Note with a water cooler manufacturer due in monthly installments
of $8,465 including interest beginning in June 1996 through May 2002 with
interest at 11%. Accrued interest of $44,723 was added to the principal balance
at May 1, 1996. The Note is convertible into Common Stock at market price in
the event of default. 408,470 400,000
----------------------
3,296,704 3,986,096
Less Current Portion (760,406) (779,289)
----------------------
$2,536,298 $3,206,807
======================
</TABLE>
The Company's former principal financing agreement, contained a secured debt
arrangement and a capital lease arrangement, required the Company to maintain
tangible net worth of at least $1,600,000; funded debt, including leases, of
$5,200,000; and a debt to net worth ratio of funded debt, other than capital
infusions and subordinated debt, to net worth of 3.25 to 1.0. During 1995 the
Company was not in compliance with the financial covenants.
30
<PAGE>
During 1996, the bank issued a wavier for all non-compliance during 1995 and the
debt arrangement was refinanced with another bank with no restrictive financial
covenants and a release of 1,366,667 shares of Common Stock, owned by two
principal shareholders, leaving 400,000 shares of Common Stock held as
collateral. There are certain other nonfinancial covenants relating to the sale
of Company assets, compensation to officers and dividend restrictions.
During 1996, the Company obtained a waiver from the lender and the Small
Business Administration to pay dividends on the Series A Preferred Stock. The
capital lease arrangement remained with the original bank and was amended to
require the Company to maintain tangible net worth of at least $650,000 and to
require as of the last day of each January, April, July and October, the amount
of net income plus depreciation, amortization and other non-cash expenses for
the preceding three month period to equal or exceed $270,000. During 1996, the
Company was in default with a financial covenant of the capital lease
arrangement. Subsequent to year end, the Company obtained a waiver for all non-
compliance during 1996. The capital lease arrangement was amended to require
the Company to maintain tangible net worth of at least $650,000 and to require
as of the last day of each January, April, July and October, the amount of net
income plus depreciation, amortization and other non-cash expenses for the
preceding three month period to equal or exceed $75,000.
Maturities of long-term debt for the years ended December 31 are as follows:
1997 $ 760,406
1998 764,431
1999 643,747
2000 699,207
2001 387,558
Thereafter 41,355
----------
$3,296,704
==========
31
<PAGE>
NOTE 4 - PROPERTY AND EQUIPMENT
The following is a summary of property and equipment:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
---- ----
<S> <C> <C>
Equipment $ 7,957,608 $ 7,650,036
Vehicles 681,693 687,108
Leasehold improvements 31,322 31,322
Office equipment 205,462 254,333
Furniture and fixtures 12,998 12,998
-------------------------
8,889,083 8,635,797
Less accumulated depreciation and
amortization (4,027,540) (3,042,718)
-------------------------
$ 4,861,543 $ 5,593,079
=========================
</TABLE>
Property and equipment includes the following items held under capital lease
agreements at:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
----------------------------
<S> <C> <C>
Vehicles $ 54,640 $ 128,981
Equipment 540,210 540,210
----------------------------
594,850 669,191
Less accumulated depreciation (298,192) (311,861)
----------------------------
$ 296,658 $ 357,330
============================
</TABLE>
The Company leases water dispensing equipment to customers under month to month
operating leases. The carrying values of such equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
-------------------------
<S> <C> <C>
Water dispensing equipment $ 6,180,042 $ 6,198,042
Less accumulated depreciation (2,476,262) (1,817,877)
-------------------------
$ 3,703,780 $ 4,380,165
=========================
</TABLE>
32
<PAGE>
NOTE 5 - INCOME TAXES
The Company follows SFAS No. 109, which requires the use of the asset and
liability approach for financial accounting and reporting purposes. A deferred
income tax liability or asset is recognized for temporary differences between
the tax bases of assets and liabilities and their reported amounts in the
financial statements that will result in net taxable or deductible amounts in
future years as well as the recognition, in certain instances, of the tax
effects of operating loss and tax credit carryforwards.
Temporary differences which give rise to deferred tax assets and liabilities at
December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss credit carryforwards $1,242,677 $ 928,612
Less valuation allowance 564,006 75,568
------------------------------
Deferred tax asset 678,671 767,217
------------------------------
Deferred tax liabilities:
Property, plant and equipment (596,732) (767,217)
Other (81,939) (85,827)
------------------------------
Deferred tax liability (678,671) (767,217)
------------------------------
Net deferred tax asset (liability) $ 0 $ 0
==============================
</TABLE>
The effective income tax rate is different from the U.S. federal income tax rate
of 34% due to the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Federal income tax benefit at statutory rate $ (219,010) $(264,594)
Loss generated not able to be utilized 232,128 163,996
Other net (13,118) 56,058
-------------------------------
Total (benefit) expense $ 0 $ (44,540)
===============================
</TABLE>
As of December 31, 1996, the Company had net operating loss carry forwards for
tax reporting purposes of approximately $3,654,933 available to offset future
taxable income. The net operating loss carry forwards expire beginning in 2008
through 2011.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
33
<PAGE>
At December 31, 1996, the Company leased certain equipment and vehicles under
capital leases. Payments under these leases are due in monthly installments
totaling $9,463, including imputed interest at 8.75%. These leases are 5 year
leases which mature from May 1996 to March 1999.
The Company leases warehouses, office facilities and vehicles under
noncancelable operating leases. Substantially all costs of operating and
maintaining the property and equipment under both the operating and capital
leases are borne by the Company.
The future minimum lease payments under the Company's capital and noncancelable
operating leases for the years ended December 31, are as follows:
<TABLE>
<CAPTION>
Capital Operating
Year Ending December 31, Leases Leases
------------------------ -------- ----------
<S> <C> <C>
1997 $112,554 $395,647
1998 77,873 228,904
1999 13,566 17,381
--------------------
203,993 $641,932
========
Less: Amounts representing interest on capital leases (20,944)
--------
Present value of future minimum lease payments $183,049
========
</TABLE>
Total rental expense under noncancelable operating leases amounted to
approximately $450,000, $435,000 and $385,000 for the years ended December 31,
1996, 1995 and 1994, respectively.
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. Management believes, based on discussions with
its legal counsel that the outcome of these legal actions will not have a
material adverse effect upon the financial position or results of operations of
the Company.
NOTE 7 - STOCK OPTION PLANS
The Company's Option Plan was adopted in 1993. An aggregate of 225,000 shares
of common stock were reserved for issuance pursuant to the Option Plan. The
Option Plan is administered by the Board of Directors or a stock option
committee established by the Board of Directors (the "Plan Administrator"). The
Plan Administrator determines, subject to the provisions of the Option Plan, the
employees to whom options are granted and the number of options to be granted.
The Plan Administrator may grant (i) "incentive stock options" within the
meaning of Section 422 of the Internal Revenue Code of 1986, and (ii) "non-
qualified stock options" (options which do not meet the requirements of Section
422). Incentive stock options granted under the Option Plan must have an
exercise price equal to at least the fair market value of the Common Stock at
the date the option is granted. Each option granted under the Option Plan may
have a term of up to ten years, except that incentive stock options granted to a
shareholder who, at the time of grant, owns more than 10% of the voting stock of
the Company, may have a term of up to five years. The exercise price of
incentive stock options granted shareholders possessing more than 10% of the
total combined voting stock of the Company must be not less than 110% of the
fair market value of the Company's Common Stock on the date of grant.
34
<PAGE>
The Company's Non-Employee Director Stock Option Plan (the "Non-Employee
Director Plan") was also adopted in 1993. An aggregate of 25,000 shares of
Common Stock were reserved for issuance pursuant to the Plan. Options to
purchase 5,000 shares of Common Stock will be automatically granted to each
person, elected for the first time as director of the Company, who is not an
employee of the Company. An option to acquire an additional 1,000 shares will
be automatically granted each year thereafter that such director is re-elected.
Options granted under the Non-Employee Director Plan will not qualify as
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986. Options granted under the Non-Employee Director Plan
expire ten years after date of grant.
The Company's Incentive Stock Plan (the "Incentive Plan") was adopted in 1995.
An aggregate of 500,000 shares of Common Stock were reserved for issuance
pursuant to the Incentive Plan. The Incentive Plan is administered by the
compensation committee. The compensation committee determines, subject to the
provisions of the Incentive Plan, to whom incentives are to be awarded. The
compensation committee may award (i) "incentive stock options" within the
meaning of Section 422 of the Internal Revenue Code of 1986, (ii) "non-qualified
stock options" (options which do not meet the requirements of Section 422),
(iii) shares of "restricted stock", and (iv) "stock bonuses." Subject to the
terms of the Incentive Plan, the compensation committee will also determine the
prices, expiration dates and other material features of the incentive awards.
During 1996 and 1995, the Company issued 45,612 shares and 5,000 shares,
respectively, of Common Stock under the Incentive Plan to consultants and in
settlement of lawsuits.
Stock option transactions under the plans during 1994, 1995, and 1996 were as
follows:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
OPTION PLAN
Options outstanding at January 1 30,000 211,000 211,000
Granted 211,000 0 3,750
Canceled 30,000 0 15,600
Exercised 0 0 25,200
---------------------------------------
Options outstanding at December 31 211,000 211,000 173,950
=======================================
Exercise price range at December 31 $2.00-2.20 $2.00-2.20 $2.00-2.948
=======================================
Weighted average exercise price at
December 31 $2.14 $2.14 $2.18
=======================================
Vested options exercisable at
December 31 0 183,000 156,200
=======================================
NON-EMPLOYEE DIRECTOR PLAN
Options outstanding at January 1 5,000 15,000 15,000
Granted 10,000 0 2,000
Canceled 0 0 5,000
Exercised 0 0 0
---------------------------------------
Options outstanding at December 31 15,000 15,000 12,000
=======================================
Exercise price range at December 31 $2.00-4.25 $2.00-4.25 $2.00-3.375
=======================================
Weighted average exercise price at
December 31 $2.00 $2.00 $2.23
=======================================
Vested options exercisable at
December 31 0 15,000 10,000
=======================================
INCENTIVE PLAN
Options outstanding at January 1 0 0 8,000
Granted 0 8,000 30,000
Canceled 0 0 0
Exercised 0 0 0
---------------------------------------
Options outstanding at December 31 0 8,000 38,000
=======================================
Exercise price range at December 31 n/a $2.50 $2.50-5.00
=======================================
Weighted average exercise price at
December 31 n/a $2.50 $4.47
=======================================
Vested options exercisable at
December 31 n/a 2,000 4,000
=======================================
</TABLE>
35
<PAGE>
The following table summarizes information about stock options outstanding as of
December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding
-----------------------------
Weighted Options Exercisable
Average --------------------------------
Range of Number Remaining Weighted Number Weighted
Exercise Outstanding Contractual Average Exercisable at Average
Years Granted Prices at 12/31/96 Life in Years Exercise Price 12/31/96 Exercise Price
- ------------- ------ ----------- ------------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
OPTION PLAN
1994 $2.00-2.20 170,200 3.58 $2.18 156,200 $2.19
1995 n/a n/a n/a n/a n/a n/a
1996 $2.948 3,750 9.52 $2.948 0 n/a
-----------------------------------------------------------------------------------------------------------
Totals $2.00-2.948 173,950 3.71 $2.18 156,200 $2.19
===========================================================================================================
NON-EMPLOYEE DIRECTOR PLAN
1994 2.00 10,000 7.99 $2.00 10,000 $2.00
1995 n/a n/a n/a n/a n/a n/a
1996 $3.375 2,000 9.47 $3.375 0 n/a
-----------------------------------------------------------------------------------------------------------
Totals $2.00-3.375 12,000 8.24 $2.23 10,000 $2.00
===========================================================================================================
INCENTIVE PLAN
1994 n/a n/a n/a n/a n/a n/a
1995 $2.50 8,000 8.82 $2.50 4,000 $2.50
1996 $5.00 30,000 9.81 $5.00 0 n/a
-----------------------------------------------------------------------------------------------------------
Totals $2.50-5.00 38,000 9.60 $4.47 4,000 $2.50
===========================================================================================================
</TABLE>
Statement of Financial Accounting Standards No. 13, "Accounting for Stock-Based
Compensation" (SFAS No. 123) encourages, but does not require companies to
record compensation cost for stock-based employee compensation plans at fair
value as determined by generally recognized option pricing models such as the
Black-Scholes model or the binomial mode. Because of the inexact and subjective
nature of deriving non-freely-traded employee stock option values using these
methods, the Company has adopted the disclosure-only provisions of SFAS No. 123
and continues to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees." Had compensation cost for the Company's stock
option plans been determined based on the fair value at the grant date for the
awards consistent with the provisions of SFAS No. 123, the Company's net loss
and loss per share would have increased by approximately $13,000 or $0.005,
respectively, in 1996, and would have been immaterial in 1995. The pro forma
fair value of options at date of grant for options granted during 1996 was
estimated using the Black-Scholes model and the weighted average assumptions are
as follows:
Non-
Employee
Option Plan Director Plan Incentive Plan
----------- ------------- --------------
Expected life (years) 5 5 5
Interest Rate 6.45% 6.45% 6.45%
Volatility 75% 75% 75%
Dividend yield n/a n/a n/a
Weighted average fair value
at grant date $2.31 $2.23 $3.31
The Company has adopted the provisions of SFAS No. 123 for non-employee stock
options and grants.
NOTE 8 - SHAREHOLDERS' EQUITY
During August 1993, the Company issued 575,000 shares of common stock at $5.00
per share in conjunction with its Initial Public Offering. Proceeds from the
Initial Public Offering were approximately $2,322,500, net of offering expenses.
In connection with the offering, the Company sold, for nominal consideration,
warrants to underwriters to purchase 50,000 shares of Common Stock at $6.00 per
share. The warrants expire on August 10, 1998. The warrants are not redeemable
by the Company, and contain certain anti-dilution provisions and registration
rights with respect to the Common Stock issuable upon exercise of such warrants.
The costs of registering with the Securities and Exchange Commission of any
Common Stock issuable upon exercise of the warrants are to paid by the Company.
As of December 31, 1996, the price per share of the Company's Common Stock was
$6 7/64.
In April 1994, the Company acquired 2,000 shares of its Common Stock as treasury
stock. During April 1994 through January 1995 the Company issued 700 shares of
the treasury stock as incentives to customers. Costs of $3,500 were expensed as
selling costs. The Company does not intend to retire the 1,300 treasury shares
remaining as of December 31, 1996.
In July 1995, the Company issued 5,000 shares of its Common Stock under the 1995
Stock Incentive Plan as payment to a consultant. Costs of $15,000 were expensed
as professional fees.
In April 1996 and August 1996, the Company issued 10,000 and 5,000,
respectively, shares of its Common Stock under the 1995 Stock Incentive Plan as
payment to an attorney. Costs of $53,000 were expensed as professional fees.
In July 1996, the Company issued 4,112 shares of its Common Stock under the 1995
Stock Incentive Plan for settlement of a lawsuit. Costs of $14,000 were
expensed as other expenses. In December 1996, the Company issued 4,000 shares of
its Common Stock under the 1995 Stock Incentive Plan to a consultant. Costs of
$23,000 were expensed as professional fees.
During the fourth quarter of 1996, the Company completed a private placement of
7,500 shares of Series A Preferred Stock, $1.00 par, at $100 per share under
Rule 506 of Regulation D of the Securities and Exchange Act of 1933. The
Preferred Stock has a 12% cumulative dividend rate payable in monthly
installments. The Preferred Stock is convertible into 24 shares of the
Company's Common Stock at a conversion price of $4.17 per share. Rule 144
promulgated under the Securities Act requires, among other conditions, that two
years elapse from the date the purchaser purchases the shares before the
purchaser can resell (in limited amounts) the shares (or the shares of Common
Stock of the Company issuable upon conversion of the shares) without having to
satisfy the registration requirements under the Securities Act. The Preferred
Stock is redeemable for cash at any time after March 1, 1998 in whole or in
part, at the option of the Company, at redemption prices that will decline from
$106 per share on March 1, 1998 to $100 per share on September 1, 1999, at a
rate of $1 per three month period, plus any accrued and unpaid dividends through
the redemption date. As of December 31, 1996, 7,500 shares of the Preferred
Stock of the Company were issued. Proceeds of $652,500 will be used for
commissions and other selling costs and working capital.
The Board of Directors is authorized to issue Preferred Stock in any series and
is authorized to fix and determine the relative preference rights of any shares
issued.
36
<PAGE>
NOTE 9 - RELATED PARTY
An affiliated company, under common ownership of two of the majority
shareholders of the Company, paid certain expenses on behalf of the Company.
Transactions totaling $13,917 were paid by the affiliate and expensed by the
Company during 1995 and 1994. The Company plans to reimburse the affiliated
company during 1997.
During 1994 the Company entered a consulting agreement with one of its
directors. The agreement provided for the compensation to the director of
$3,000 per month and an option to purchase 50,000 shares of Common Stock at
$2.23 per share with a guarantee as to the amount to be realized on exercise.
The contract is no longer in effect and the director did not stand for re-
election at the Company's 1994 annual meeting. The Company paid the director an
aggregate of $17,500 under the agreement. During 1996, the Company granted
15,000 shares of Common Stock under the Incentive Plan and paid $5,000 to the
former director to resolve certain issues relating to the stock option and
guaranteed payment. Costs of $87,000 were expensed as other expenses.
37
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS'
Great Pines Water Company, Inc.
We consent to the incorporation of by reference in the following Registration
Statements on Form S-8, the 1993 Stock Option Plan of Great Pines Water Company,
Inc., the 1993 Non-Employee Director Stock Option Plan of Great Pines Water
Company, Inc. and the 1995 Incentive Stock Plan of Great Pines Water Company,
Inc. appearing in this Annual Report on Form 10-K of Great Pines Water Company,
Inc. for the year ended December 31, 1996.
[SIGNATURE APPEARS HERE]
DELOITTE & TOUCHE LLP
Houston, Texas
March 28, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 315,936
<SECURITIES> 0
<RECEIVABLES> 827,838
<ALLOWANCES> (143,014)
<INVENTORY> 99,808
<CURRENT-ASSETS> 1,341,259
<PP&E> 8,889,083
<DEPRECIATION> (4,027,540)
<TOTAL-ASSETS> 6,263,378
<CURRENT-LIABILITIES> 2,465,361
<BONDS> 2,617,080
7,500
0
<COMMON> 24,508
<OTHER-SE> 1,148,929
<TOTAL-LIABILITY-AND-EQUITY> 6,263,378
<SALES> 7,495,045
<TOTAL-REVENUES> 7,495,045
<CGS> 0
<TOTAL-COSTS> 7,516,247
<OTHER-EXPENSES> 213,049
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 409,897
<INCOME-PRETAX> (644,148)
<INCOME-TAX> 0
<INCOME-CONTINUING> (644,148)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (644,148)
<EPS-PRIMARY> (0.28)
<EPS-DILUTED> (0.28)
</TABLE>
