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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, 1997
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 IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION)
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
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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 $8,769,000.
As of March 26, 1998, there were outstanding 2,611,012 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 26, 1998) was approximately $2,528,000.
Transitional Small Business Disclosure Format (Check one): Yes ; No X
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GREAT PINES WATER COMPANY, INC.
ANNUAL REPORT ON FORM 10-KSB
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 1. DESCRIPTION OF BUSINESS . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 2. DESCRIPTION OF PROPERTY . . . . . . . . . . . . . . . . . . . . . . 6
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . 6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . 7
PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
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. . . . . . . . . . . . . . . . . . . . . . . . 14
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE. . . . . . . . . . . . . . . . . . . . . . . . 14
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT. . . . . . . . . 15
ITEM 10. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . . . . 16
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. . . 19
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . . . . . 19
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . . . . . . . . 20
</TABLE>
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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 brand 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 Small Capital Market under the symbol "GPWC."
INDUSTRY OVERVIEW
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.
The bottled water market is comprised of three major segments: non-sparkling
(domestic), sparkling (domestic) and imported water (both sparkling and
non-sparkling).
- - NON-SPARKLING, or still, water contains no carbonation and is consumed as
an "alternative to tap water." It is the largest of the three segments and
represented 84.3% of the total market in terms of gallons of water sold in
1995. 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.
- - 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.
INDUSTRY TRENDS
The Company believes the increased demand for bottled water is based
primarily on two trends. First, growing concerns over the quality of tap
water available in homes and offices is causing consumers to develop
alternative sources of supply. 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 these water issues, this article highlights three main problems
with today's municipal tap water: lead content, certain dangerous
carcinogenic chemical by-products resulting from over-chlorinating of some
municipal water, and the 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. Underscoring the public sensitivity
to the nature of the water quality is the signing of the Safe Drinking Water
Reauthorization Act of
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1996 signed by President Clinton on August 6, 1996. This Act requires all
local water utilities to issue annual reports highlighting in straight
forward language the chemicals and bacteria contained in the water.
The Company believes that the second key trend is a heightened awareness
regarding health and diet driving consumers to seek a healthy alternative to
soda, coffee and alcohol. Accordingly, the Company believes that clean
bottled water is emerging as the alternative of choice.
BUSINESS STRATEGY
The Company's strategy is to continue to establish themselves as a strong
regional player in this highly fragmented distribution market. The Company
intends to take advantage of the consumer's growing concern with public tap
water as well as the growing awareness amongst health conscious consumers of
the need for a sugar/alcohol/caffeine free beverage alternative. The Company
intends to execute this strategy by expanding the existing customer base and
establishing new sales routes in existing cities, increasing route density
thereby reducing distribution and administration costs in existing cities,
and finally, by penetrating markets in new cities. In the Company's current
markets as well as future markets, the Company intends to emphasize the
rationalization of the product and the Company's distribution capabilities.
Execution of this plan may result in the acquisition of other regional
bottlers and distributors which may require the payment of cash or the
issuance of debt or equity securities. Such acquisitions could result in
material changes in the Company's financial condition and operating
results.
It should be noted that because 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.
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, 1997, the Company owned approximately 39,500
water dispensers, of which approximately 36,000 utilized the closed system
and approximately 3,500 utilized the open system.
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As of December 31, 1997, the Company served approximately 17,728 customers in
the Houston area and approximately 14,339 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>
DECEMBER 31,
------------
1997 1996 1995
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<S> <C> <C> <C>
Net New Accounts 3,509 1,305 2,003
Total Accounts 32,067 28,558 27,253
Percentage Increase 12% 5% 8%
</TABLE>
DELIVERY AND DISTRIBUTION CAPABILITIES
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.
As of December 31, 1997, the Company owned or leased 28 "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 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 28 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, 1997, 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, sterilized, filled and loaded onto delivery trucks to
satisfy delivery requirements for the next day. On an average day, the
Company delivers approximately 3,500 bottles of water.
BOTTLED WATER PROCESSING AND FACILITIES
Various treatment technologies are used to treat the various bottled waters.
These manufacturing practices, quality levels, and labeling of the Company's
bottled water products are regulated by the Federal Food and Drug
Administration ("FDA") as well as the states and some localities in which
the Company's water is distributed.
NATURAL SPRING WATER. Presently, the Company obtains spring water from
state certified natural springs in Jasper, Texas. "Natural Spring Water", by
law, must be extracted from an underground source which flows continuously to
the surface under its own pressure. Before being certified as a spring, a
hydrogeological report must validate the integrity of the source and safety
of the water-collection operations. The Company purchases its spring water
from the owners of the springs, located in remote, pristine areas wherein the
spring's recharge areas are not impacted by urban development, agricultural
run-off or other pollutants. The spring water is delivered to the Company's
facilities in Houston and Grand Prairie. 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
sanitary bulk
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5,000-gallon fiberglass tanks where it is staged 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.
DRINKING WATER. 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 in order to remove
sedimentation, organic compounds and associated tastes and odors. Certain
food grade minerals (calcium and magnesium) are added to drinking water to
add taste. Purified water is deionized to reduce dissolved minerals in the
final drinking water.
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, 1997, the Company charged $7.95 to $8.85 for a five
gallon bottle of spring water (or $1.59 to $1.77 per gallon) and $6.95 to
$7.85 for a five gallon bottle of drinking or purified water (or $1.39 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,
1997, the Company rented water dispensers for $9.00 to $18.90 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. The Company
intends to remain competitive with its competition and raise the prices of
its bottled water products as market conditions permit.
SALES AND 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
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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, 1997 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.
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.
The Company does not believe that given the nature of the drinking water
treatment components, its business is not materially dependent upon obtaining
patent protection for its various systems.
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
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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
As of December 31, 1997, the Company had 212 full-time employees,
including 55 in administration, 67 in marketing and 90 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, bi-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.
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 its operations for the foreseeable
future.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 22,000 square feet for its offices and its
storage, bottling and distribution facility in Houston, Texas and leases
approximately 25,000 square feet for its Dallas area office and its storage,
bottling and distribution facility in Grand Prairie, Texas.
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
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reached. Damages of approximately $2.3 million were awarded to the Company.
The amount is subject to appeal and there can be no assurance that the
Company will recover damages in this, or any amount. Through December 31,
1997, the Company has not recorded any amounts in the financial statements
related to these damages. Liqui-Box Corporation had net sales of $152.4
million for the year ended December 28, 1996. It is publicly traded under
the ticker symbol LIQB.
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 1997.
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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 26, 1998, there were 2,611,012 outstanding shares of the Common
Stock of the Company 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>
1996 High Low
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<S> <C> <C>
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
1997
----
First Quarter 7 7/8 6 1/8
Second Quarter 7 1/2 4 3/4
Third Quarter 7 1/2 5 3/8
Fourth Quarter 7 13/16 3 9/16
</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. Further, 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 October 1996, the Company completed a private placement of 7,500
shares of Series A Preferred Stock, $1.00 par, at $100 per share (the "Series
A Preferred Stock Offering"). During August 1997, the Company completed a
private placement of 10,000 shares of Series B Preferred Stock, $1.00 par, at
$100 per share (the "Series B Preferred Stock Offering"). During December
1997, the Company started a private placement of 21,000 shares of Series C
Preferred Stock, $1.00 par, at $100 per share (the "Series C Preferred Stock
Offering").
The Common Stock is listed for quotation in Nasdaq Small Capital Market
System. For continued inclusion in Nasdaq Small Capital Market System, the
current minimum qualification requirements include, among other things (i)
total assets of $2 million; (ii) total capital and surplus of $1 million; and
(iii) $1 per share bid price. On August 22, 1997 the Securities and Exchange
Commission (the "Commission") approved new listing standards for companies
listed on the Nasdaq Small Capital Market System. Companies had until
February 23, 1998 to comply with the new continuing inclusion requirements.
The new requirements include, among other things (i) net tangible assets of
$2 million (net tangible assets means total assets, excluding goodwill, minus
total liabilities); (ii) public float of 500,000 shares; and (iii) $1 per
share bid price. The Company was not able to meet the new requirements and
has appealed. If the Company is unable to satisfy the requirements for
continued inclusion in Nasdaq Small Capital Market System, trading, if any,
in the Common Stock would be conducted on the National Association Securities
Dealers Over The Counter Electronic Bulletin Board. As a result, an investor
might find it more difficult to dispose of, or to obtain accurate quotations
as to the price of the Common Stock. There can be no assurance that a
trading market in the Common Stock will be maintained or that the Company
will be able to maintain the minimum qualifications requirements for
continued inclusion in Nasdaq Small Capital Market System.
8
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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>
YEAR ENDED DECEMBER 31,
-------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues. . . . . . . . . . . . . . . . . . . $8,769 $7,495 $7,121
Operating costs . . . . . . . . . . . . . . . 1,744 1,391 1,284
Transportation costs. . . . . . . . . . . . . 2,171 1,745 1,802
Depreciation and amortization . . . . . . . . 988 1,064 1,149
Commissions and other selling costs . . . . . 1,874 1,231 1,141
General and administrative costs. . . . . . . 2,190 2,084 2,091
--------------------------
Loss from operations. . . . . . . . . . . . . (198) (21) (345)
Other expense . . . . . . . . . . . . . . . . 387 623 433
--------------------------
Loss before income taxes. . . . . . . . . . . (585) (644) (778)
Income tax expense (benefit). . . . . . . . . 0 0 (44)
--------------------------
Loss after income taxes . . . . . . . . . . . (585) (644) (734)
Dividends on Preferred Stock. . . . . . . . . 135 25 0
--------------------------
Loss attributable to Common Stock . . . . . . (720) (669) (734)
--------------------------
--------------------------
Loss per common share. . . . . . . . . . . . $ (.29) $ (.28) $ (.31)
--------------------------
--------------------------
BALANCE SHEET DATA:
Total Assets. . . . . . . . . . . . . . . . . $7,479 $6,263 $6,606
Current and long-term debt and capital
lease obligations . . . . . . . . . . . . . . $3,953 $3,480 $4,295
OTHER DATA:
EBITDA (1). . . . . . . . . . . . . . . . . . $ 797 $ 830 $ 811
Net cash provided by operating activities . . $ 335 $ 704 $ 707
Net cash used in investing activities . . . . $ (490) $ (354) $ (185)
Net cash provided by (used in) financing
activities. . . . . . . . . . . . . . . . . . $ 31 $ (95) $ (638)
</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. This information may not be comparable to similarly titled amounts
presented by other companies.
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, 1997, the Company serviced approximately 32,067 customers
as compared to 28,558 at December 31, 1996. This growth in customer accounts
has been accompanied by increased revenues during 1997
9
<PAGE>
and 1996. 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 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 an estimate of the cost of dispensers which
are lost or stolen as a reduction of fixed assets.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 AND 1996
Revenues in 1997 increased 17% to $8,769,000 from $7,495,000 in 1996. The
increase was primarily the result of the addition of new customers and price
increases during 1997.
Operating costs increased, as a percentage of sales, to 20% or $1,744,000 in
1997 from 19% or $1,391,000 in 1996. This is primarily due to an increase in
cost of sales related to an increase in the volume of bottles delivered at a
lower average selling price per bottle. The average selling price decreased
as the total bottles delivered includes customer trials, for which no revenue
is recognized.
Transportation Costs increased, as a percentage of sales, to 25% or
$2,171,000 in 1997 from 23% or $1,745,000 in 1996. This is primarily due to
the leasing of additional trucks and an increase in route driver and route
supervisor wages.
Depreciation and amortization costs decreased, as a percentage of sales, to
11% or $988,000 in 1997 from 14% or $1,064,000 in 1996. The decrease is
primarily due to an increase in sales, by certain fixed assets of the Company
becoming fully depreciated for book purposes during 1997 and 1996, and by the
estimated useful life of coolers being extended from ten to twelve years.
The change in useful life decreased depreciation expense by approximately
$116,000.
Commissions and other selling costs increased, as a percentage of sales, to
21% or $1,874,000 in 1997 from 16% or $1,231,000 during 1996. Management's
policy is to use all available cash from operations and financing activities
after debt service for its marketing activities. During October 1996, the
Company completed the Series A Preferred Stock Offering with net proceeds of
$652,500. During August 1997, the Company completed the Series B Preferred
Stock Offering with net proceeds of $832,000. The Company was able to
significantly expand its marketing efforts due to the availability of cash.
10
<PAGE>
General and administrative expenses, as a percentage of sales, decreased to
25% or $2,190,000 during 1997 from 28% or $2,084,000 during 1996. This is
primarily due to the economies of scale derived from increasing the sales of
the company's products without a proportional increase in general and
administrative expenses.
Interest expense, as a percentage of sales, decreased to 4% or $394,000 in
1997 compared to 5% or $410,000 in 1996. This is primarily due to reductions
in the average outstanding balance of long term debt.
The Company reported a loss after income taxes of $585,000 in 1997, compared
to a loss after income taxes of $644,000 in 1996. The decrease in the loss
during 1997 was caused by increased revenues and improved operating
efficiencies. This was significantly offset by the increase in commissions
and other selling costs of $643,000 during 1997 as compared to 1996.
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 the additions of new customers.
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
Series A Preferred Stock Offering with net proceeds of $652,500.
Accordingly, 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.
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 the 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.
11
<PAGE>
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.
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.
Net cash provided by operating activities in 1997 was $335,000 compared to
$704,000 in 1996. The decrease in the Company's net cash provided by
operating activities was primarily the result of an increase in other assets,
an increase in accounts receivable, and partially offset with an increase in
accounts payable and accrued and other current liabilities.
During 1997, the Company made capital expenditures of $313,000 for equipment,
water bottles and trucks and truck improvements, all of which were financed
through cash. During 1997, the Company acquired $1,382,000 in water coolers,
all of which were financed by the vendors.
As of December 31, 1997, the Company's long term debt amounted to $200,000 in
bank debt, $3,325,000 in vendor financing, and $354,000 in convertible
subordinated debt. The Company had capital lease commitments of $74,000 as
of December 31, 1997.
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 of a financial covenant of the
capital lease arrangement. The Company obtained a waiver for all
non-compliance during 1996. During 1997, the Company was in default with a
financial covenant of the capital lease arrangement. The Company has
requested a waiver for all non-compliance during 1997. As of December 31,
1997 all amounts due under the capital lease arrangement have been classified
as a current liability. This had the effect of increasing current
liabilities by $3,857.
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 October 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
one year 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 were used for commissions and other selling costs and working
capital.
12
<PAGE>
During August 1997, the Company completed a private placement of 10,000
shares of Series B 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 16.67 shares of the
Company's common stock at a conversion price of $6.00 per share. The
Preferred Stock is redeemable for cash at any time after March 1, 1999, in
whole or in part, at the option of the Company, at redemption prices that
will decline from $106 per share on March 1, 1999 to $100 per share on
September 1, 2000, at a rate of $1 per three-month period, plus any accrued
and unpaid dividends through the redemption date. As of December 31, 1997,
10,000 shares of the Company's Series B Preferred Stock were issued.
Proceeds of $832,000 will be used for commissions and other selling costs and
working capital.
In November and December 1997 the Company issued 128,400 shares of the
Company's common stock to holders of 5,350 shares of Series A Preferred Stock
for the exercise of their conversion options. As of December 31, 1997,
2,150 shares of the Company's Series A Preferred Stock were outstanding.
During December 1997, the Company started a private placement of 21,000
shares of Series C 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 16.67 shares of the
Company's common stock at a conversion price of $6.00 per share. The
Preferred Stock is redeemable for cash at any time after December 1, 1998, in
whole or in part, at the option of the Company, at redemption prices that
will decline from $106 per share on December 1, 1998 to $100 per share on May
1, 2000, at a rate of $1 per three-month period, plus any accrued and unpaid
dividends through the redemption date. As of December 31, 1997, 1,900 shares
of the Company's Series C Preferred Stock were issued. Proceeds of $150,000
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 no
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"),
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.
OTHER MATTERS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." This statement establishes standards for reporting
and display of comprehensive income and its components. The Company plans to
adopt this statement in the first quarter of 1998. Its adoption is not
expected to have a material effect on the Company's financial statements.
13
<PAGE>
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." This statement establishes
standards for the way that public business enterprises report information
about operating segments in interim and annual financial statements. The
Company plans to adopt this statement in the fourth quarter of 1998. Its
adoption is not expected to have a material effect on the Company's financial
statements, and any effect will be limited to the form and content of the
disclosure it requires.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share," which
establishes new standards for computing and presenting earnings per share.
This statement was adopted in the fourth quarter of 1997 and had no material
effect on the Company's computation of earnings per share.
IMPACT OF THE YEAR 2000
The Year 2000 Issue is the result of computer programs having been written
using two digits rather than four to define the applicable year. Any
computer programs that have date-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities. The Company
has reviewed its accounting system and determined that it is Year 2000
compliant.
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.
14
<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>
Name Age Position
- ---- --- --------
<S> <C> <C>
Robert A. Hammond, Jr. 43 Chairman of the Board, President and
Chief Executive Officer; Director
Robert A Hammond, Sr. 64 Vice President of Operations and
Secretary; Director
Nick A. Baki 33 Vice President - New Markets
Kevin F. Vigneaux 39 Chief Financial Officer and Treasurer
Stephen A. Lee (1) (2) 45 Director
Edward McCartin (1) (2) 43 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
15
<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. 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, 1997, 1996, 1995, of Robert A.
Hammond, Jr., Chief Executive Officer, and Robert A. Hammond, Sr., Vice
President Operations. No other executive officer of the Company received
compensation that exceeded $100,000 during 1997.
16
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
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>
Robert A. Hammond, Jr., CEO
1997 $97,750 $0 $0 0 0 $10,000 (1)
1996 $84,000 $0 $0 0 0 $10,000 (1)
1995 $84,000 $0 $0 0 0 $25,000 (1)
Robert A. Hammond, Sr., Vice President Operations
1997 $97,750 $0 $0 0 0 $10,000 (1)
1996 $84,000 $0 $0 0 0 $10,000 (1)
1995 $84,000 $0 $0 0 0 $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 that were paid by the Company.
The following table provides information concerning the options held by the
above executive officers as of December 31, 1997 all of which are
exercisable. No options of the Company were exercised by these officers
during the year ended December 31, 1997. No additional options were granted
during the year ended December 31, 1997.
<TABLE>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options at
Name Options at Year End Year End (1)
---------------------------------------------------------------------------------
<S> <C> <C>
Robert A. Hammond, Jr. 75,000 $153,750
Robert A. Hammond, Sr. 75,000 $153,750
</TABLE>
(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 ($4.25 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
17
<PAGE>
grant. As of December 31, 1997, stock options to acquire 197,350 shares of
the Company's Common Stock have been granted under the Option Plan at
exercise prices ranging from $2.00 to $2.20 per share. The options are
exercisable beginning March 28, 1995 through December 28, 1999. During 1997,
the Company issued 5,350 shares for options exercised under the Option Plan.
As of December 31, 1997 options to purchase 160,600 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 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, 1997,
14,000 options have been granted under the Non-Employee Director Plan at
exercise prices of $2.00 to $5.75 per share. As of December 31, 1997 options
to purchase 12,000 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. As of December 31, 1997,
stock options to acquire 65,833 shares of the Company's Common Stock have
been granted under the Incentive Plan at exercise prices ranging from $5.00
to $7.375 per share. The options are exercisable beginning April 23, 1997
through March 10, 2000. During 1997, the Company issued 18,926 shares of
common stock to consultants and in settlement of lawsuits under the Incentive
Plan. During 1997, the Company issued 4,166 shares for employee options
exercised under the Incentive Plan. As of December 31, 1997 options to
purchase 12,500 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, 1997,
the price per share of the Company's Common Stock was $4.25.
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,
18
<PAGE>
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 20,
1998 by each Director, each named executive officer, and all Directors and
officers as a group, consisting of 6 persons. Each individual has 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>
Number of Percentage of
Name and Address (1) Shares Class
-------------------- ------ -----
<S> <C>
Robert A. Hammond, Jr. 895,084 34%
Robert A. Hammond, Sr. (2) 522,800 20%
Joshua Slocum Hammond Trust (3) 349,333 13%
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) 1,418,884 54%
</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) Mr. Hammond is the father of Robert A. Hammond, Jr.
(3) The trust was established by Mr. Hammond, Sr. for the sole benefit
of his minor son, Joshua Slocum Hammond. Cynthia J. Hammond is the sole
trustee 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.
19
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description of Exhibit
- ----------- ----------------------
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.
3.4 Certificate of Designation, Preferences, Rights and Limitations of
Series B Preferred Stock, $1.00 Par Value of Great Pines Water
Company, Inc. Exhibit 3.4 is incorporated by reference.
3.5 Certificate of Designation, Preferences, Rights and Limitations of
Series C Preferred Stock, $1.00 Par Value of Great Pines Water
Company, Inc. Exhibit 3.5 is filed herein.
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.
20
<PAGE>
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.
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 27, 1998. 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, 1997.
21
<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, 1998:
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:
<TABLE>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ ROBERT A. HAMMOND, JR. President, Chief Executive March 31, 1998
- ---------------------------- Officer, Director (Principal
Robert A. Hammond, Jr. Executive Officer)
/s/ ROBERT A. HAMMOND, SR. Secretary, Vice President, March 31, 1998
- ---------------------------- Director
Robert A. Hammond, Sr.
/s/ KEVIN F. VIGNEAUX Chief Financial Officer March 31, 1998
- ---------------------------- and Treasurer (Principal
Kevin F. Vigneaux Financial and Accounting
Officer)
/s/ STEPHEN A. LEE Director March 31, 1998
- ----------------------------
Stephen A. Lee
/s/ EDWARD MCCARTIN Director March 31, 1998
- ----------------------------
Edward McCartin
</TABLE>
22
<PAGE>
GREAT PINES WATER COMPANY, INC.
INDEX TO FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT . . . . . . . . . . . . . . . . . . .24
BALANCE SHEETS . . . . . . . . . . . . . . . . . . . . . . . . . .25
STATEMENTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . .26
STATEMENTS OF SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . . .27
STATEMENTS OF CASH FLOWS . . . . . . . . . . . . . . . . . . . . .28
NOTES TO FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . .29
23
<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, 1997 and 1996 and the related
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Great Pines Water Company,
Inc. as of December 31, 1997 and 1996, and the results of its operations and
its cash flows for each of the three years in period ended December 31, 1997
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
February 13, 1998
24
<PAGE>
GREAT PINES WATER COMPANY, INC.
BALANCE SHEETS
<TABLE>
December 31, December 31,
1997 1997
-------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents including interest-bearing
balances of $165,352 in 1997 and $232,541 in 1996 $ 342,310 $ 315,936
Marketable securities 177,037 0
Accounts receivable - Trade, net of allowance for
doubtful accounts of $129,766 in 1997 and $143,014
in 1996 941,857 684,824
Inventory 74,648 99,808
Prepaid expenses 39,332 16,318
Prepaid insurance 286,242 216,341
Other current assets 13,696 8,032
----------- -----------
Total current assets 1,875,122 1,341,259
Property and equipment, net 5,556,421 4,861,543
Other assets 47,078 60,576
----------- -----------
Total Assets $ 7,478,621 $ 6,263,378
----------- -----------
----------- -----------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable, trade $ 311,400 $ 220,870
Customer deposits 1,088,261 912,496
Accrued liabilities and other current liabilities 286,006 279,600
Note payable 250,573 189,722
Current portion of capital lease obligations 73,692 102,267
Current maturities of long term debt 1,008,075 760,406
----------- -----------
Total current liabilities 3,018,007 2,465,361
----------- -----------
Long term debt, net of current portion 2,871,486 2,536,298
Capital lease obligations, net of current portion 0 80,782
Shareholders' equity:
Preferred stock, $1.00 par value; 1,000,000 shares
authorized; 14,050 shares outstanding at December 31,
1997 and 7,500 shares outstanding at December 31, 1996
(liquidation value of $100 per share) 14,050 7,500
Common Stock, $.01 par value; 10,000,000 shares
authorized; 2,607,654 shares and 2,449,512 shares
(net of treasury stock) outstanding at December 31,
1997 and 1996, respectively 26,076 24,508
Additional paid-in capital 4,967,437 3,853,589
Accumulated deficit (3,418,435) (2,698,160)
Less Treasury Stock, no shares and 1,300 shares at
December 31, 1997 and 1996, respectively, at cost 0 (6,500)
----------- -----------
Total shareholders' equity 1,589,128 1,180,937
----------- -----------
Total Liabilities and Shareholders' Equity $ 7,478,621 $ 6,263,378
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
GREAT PINES WATER COMPANY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Water $5,567,266 $4,771,397 $4,486,907
Equipment rental 2,885,722 2,479,313 2,461,455
Other 316,148 244,335 173,046
---------- ---------- ----------
8,769,136 7,495,045 7,121,408
COST AND EXPENSES:
Operating costs 1,743,464 1,391,491 1,283,816
Transportation costs 2,171,371 1,744,733 1,802,216
Depreciation and amortization 988,375 1,064,449 1,148,503
Commissions and other selling costs 1,873,603 1,231,151 1,140,913
General and administrative expenses 2,190,086 2,084,423 2,091,285
---------- ---------- ----------
8,966,899 7,516,247 7,466,733
---------- ---------- ----------
Gain/(Loss) from operations (197,763) (21,202) (345,325)
OTHER EXPENSE (INCOME):
Interest expense 393,861 409,897 441,040
Interest income (6,760) (4,743) (8,146)
Other expense (income) 0 217,792 0
---------- ---------- ----------
387,101 622,946 432,894
---------- ---------- ----------
Gain/(Loss) before income taxes (584,864) (644,148) (778,219)
Income tax expense (benefit) 0 0 (44,540)
---------- ---------- ----------
Net Income (Loss) (584,864) (644,148) (733,679)
Dividends on Preferred Stock 135,411 25,250 0
---------- ---------- ----------
Income (Loss) attributable to Common
Stock $ (720,275) $ (669,398) $ (733,679)
---------- ---------- ----------
---------- ---------- ----------
Income (Loss) per common share $(0.29) $ (0.28) $ (0.31)
---------- ---------- ----------
---------- ---------- ----------
Weighted average number of common shares
outstanding 2,474,716 2,409,948 2,375,931
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
GREAT PINES WATER COMPANY, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
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>
Balances, January 1, 1995 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
Issuance of Common Stock 28,442 284 137,885 138,169
Issuance of Preferred Stock 11,900 11,900 970,759 982,659
Issuance of Treasury Stock 1,138 6,500 7,638
Conversions of Preferred Stock (5,350) (5,350) 128,400 1,284 4,066 0
Dividends on Preferred Stock (135,411) (135,411)
Net loss (584,864) (584,864)
---------------------------------------------------------------------------------------
Balances, December 31, 1997 14,050 $14,050 2,607,654 $26,076 $4,967,437 $(3,418,435) $ 0 $1,589,128
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements
27
<PAGE>
GREAT PINES WATER COMPANY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(584,864) $ (644,148) $ (733,679)
Adjustment to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 988,375 1,064,449 1,148,503
Loss on disposition of assets 0 8,188 13,060
Provision for lost coolers 18,000 18,000 36,000
Noncash charges 114,669 176,364 0
Deferred income tax benefit 0 0 (44,540)
Effect of net changes in operating accounts:
Accounts receivable, net (257,033) (56,444) 4,629
Inventory 25,160 (14,267) 11,299
Prepaid expenses (92,915) (55,380) 47,540
Other assets 1,501 (13,950) (32,885)
Accounts payable 90,530 (50,559) 41,428
Customer deposits, accrued liabilities, and other
current liabilities 182,171 271,385 215,727
-----------------------------------------
Net cash provided by operating activities 485,594 703,638 707,082
-----------------------------------------
Cash flows from investing activities:
Additions to property and equipment (312,712) (380,815) (184,889)
Proceeds from fixed assets retirement 0 27,000 0
Investment in marketable securities (448,900) 0 0
Proceeds from sales of marketable securities 271,863 0 0
-----------------------------------------
Net cash used in investing activities (489,749) (353,815) (184,889)
-----------------------------------------
Cash flows from financing activities:
Proceeds from note payable and long term debt 312,264 279,104 612,286
Payments on note payable and long term debt (1,050,764) (921,244) (1,117,562)
Payments on capital lease obligations (109,357) (126,008) (147,655)
Proceeds from issuance on Common Stocks, net 31,138 45,400 15,000
Proceeds from issuance on Preferred Stocks, net 982,659 652,500 0
Dividends on Preferred Stock (135,411) (25,250) 0
Sale (purchase) of treasury stock, net 0 0 100
-----------------------------------------
Net cash provided by (used in) financing activities 30,529 (95,498) (637,831)
-----------------------------------------
Increase (decrease) in cash and cash equivalents 26,374 254,325 (115,638)
Cash and cash equivalents, beginning 315,936 61,611 177,249
-----------------------------------------
-----------------------------------------
Cash and cash equivalents, ending $342,310 $ 315,936 $ 61,611
-----------------------------------------
-----------------------------------------
Supplemental cash flow information:
Interest paid $389,019 $ 425,476 $ 494,373
-----------------------------------------
-----------------------------------------
Equipment acquired in exchange for long-term debt $1,382,208 $ 0 $ 4,983
-----------------------------------------
-----------------------------------------
Stock issued for services and settlements of lawsuits $114,669 $ 176,364 $ 0
-----------------------------------------
-----------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
GREAT PINES WATER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
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.
MARKETABLE SECURITIES: All of the Company's marketable securities, which are
comprised of corporate bonds due 2001 to 2011, are classified as "available
for sale" and accordingly, are reflected in the Balance Sheet at cost, which
approximates fair market value. Cost for determining the gains and losses on
sales of marketable securities is determined using the specific
identification method.
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 twelve 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 twelve 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. Effective January 1, 1997, the Company changed the estimated useful
life of coolers from ten to twelve years. The change was made to better
reflect the estimated period during which the coolers will remain in service.
The change had the effect of decreasing depreciation expense and decreasing
the Company's loss by approximately $116,000 ($.047 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 bases of its assets and liabilities.
LOSS PER SHARE: In February 1997, the FASB issued SFAS 128, "Earnings Per
Share," which establishes new standards for computing, presenting and
disclosing earnings per share ("EPS"). Diluted EPS is not presented as the
effect of the Company's outstanding options and convertible preferred stock
would be antidilutive.
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.
29
<PAGE>
IMPAIRMENT OF ASSETS: In 1995, the Company adopted SFAS 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." The Company evaluates long-lived assets for impairment based upon the
recoverability of the asset's carrying value. When it is probable that the
undiscounted future cash flows will not be sufficient to recover the asset's
carrying value, an impairment is recognized. No such impairments were
recognized by the Company during the year ended December 31, 1997.
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 currently available, and
therefore the carrying value of its long-term debt approximates fair value.
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 1997, 1996 or 1995.
RECENT ACCOUNTING PRONOUNCEMENTS: During 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." These statements, which
are effective for the Company's fiscal year ending December 31, 1998,
establish additional disclosure requirements but do not affect the
measurement of results of operations. Management is evaluating what, if any,
additional disclosures may be required when these statements are implemented.
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, 1997, the Company has a note payable with a financial
institution for payment of an insurance policy. The note is due in monthly
installments of $32,197 including interest at 7.4%, through August 1998. At
December 31, 1996, the Company had a note payable with a financial
institution for payment of an insurance policy. The note was due in monthly
installments of $24,379 including interest of 7.4%, and was paid off in
August 1997.
30
<PAGE>
NOTE 3 - LONG-TERM DEBT
The following is a summary of long-term debt at December 31, 1997, and 1996:
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Note with a bank under credit facility due in monthly
installments of $16,235, 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 (10.50%
at December 31, 1997). $ 154,871 $ 335,415
Note payable to a bank due in monthly installments $600 with
floating interest at prime +2% through June 1999;
collateralized by transportation equipment. 10,753 17,993
Note payable to a bank due in monthly installments of $2,506
with interest at 9.5% through October, 1997; collateralized by
transportation equipment. 0 23,928
Various notes payable to a financing corporation due in
monthly installments totaling $71,605 including interest at
rates ranging from 8.0% to 11.50%, through August 2004;
collateralized by equipment. 2,745,942 2,448,965
Various notes with a water cooler manufacturer due in monthly
installments of $15,984 including interest at 9.5%, through
August 2001; collateralized by equipment. 579,071 0
Note with a financial institution due in monthly
installments of $2,622 including interest at 8.5%, through
February 1999; collateralized by communications equipment. 34,827 61,933
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. 354,097 408,470
--------------------------
3,879,561 3,296,704
Less Current Portion (1,008,075) (760,406)
--------------------------
$ 2,871,486 $2,536,298
--------------------------
--------------------------
</TABLE>
31
<PAGE>
The Company's former principal financing agreement, which 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.
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. 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.
During 1997, the Company was in default with a financial covenant of the
capital lease arrangement. The Company has requested a waiver for all
non-compliance during 1997. As of December 31, 1997 all amounts due under
the capital lease arrangement have been classified as a current liability.
This had the effect of increasing current liabilities by $3,857.
Maturities of long-term debt for the years ended December 31 are as follows:
<TABLE>
<S> <C>
1998 $ 1,008,075
1999 913,161
2000 997,134
2001 633,594
2002 189,527
Thereafter 138,070
-----------
$ 3,879,561
-----------
-----------
</TABLE>
During 1997, the Company obtained a waiver from the lender and the Small
Business Administration to pay dividends on the Series B Preferred Stock.
During 1998, the Company obtained a waiver from the lender and the Small
Business Administration to pay dividends on the Series C Preferred Stock.
During 1997, the Company purchased $1,382,208 of water coolers, financed by
the vendors. The related notes are due in monthly installments and mature at
various dates through August 2004 with interest at rates ranging from 9.5% to
11.5%.
32
<PAGE>
NOTE 4 - PROPERTY AND EQUIPMENT
The following is a summary of property and equipment:
<TABLE>
DECEMBER 31,
1997 1996
---- ----
<S> <C> <C>
Equipment $ 9,564,391 $ 7,957,608
Vehicles 743,873 681,693
Leasehold improvements 36,649 31,322
Office equipment 208,092 205,462
Furniture and fixtures 12,998 12,998
----------- -----------
10,566,003 8,889,083
Less accumulated depreciation and amortization (5,009,582) (4,027,540)
----------- -----------
$ 5,556,421 $ 4,861,543
----------- -----------
----------- -----------
</TABLE>
Property and equipment includes the following items held under capital lease
agreements at:
<TABLE>
DECEMBER 31,
------------
1997 1996
---- ----
<S> <C> <C>
Vehicles $ 54,640 $ 54,640
Equipment 542,838 542,838
597,478 597,478
Less accumulated depreciation (314,150) (298,192)
--------- ---------
$ 283,328 $ 299,286
--------- ---------
--------- ---------
</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>
DECEMBER 31,
------------
1997 1996
---- ----
<S> <C> <C>
Water dispensing equipment $ 7,541,740 $ 6,180,042
Less accumulated depreciation (2,977,719) (2,476,262)
----------- -----------
$ 4,564,021 $ 3,703,780
----------- -----------
----------- -----------
</TABLE>
33
<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, 1997 and 1996 are as follows:
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss credit carryforwards $1,554,826 $1,242,677
Less valuation allowance 953,391 564,006
-----------------------
Deferred tax asset 601,435 678,671
-----------------------
Deferred tax liabilities:
Property, plant and equipment (601,435) (596,732)
Other 0 (81,939)
-----------------------
Deferred tax liability (601,435) (678,671)
-----------------------
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>
1997 1996
---- ----
<S> <C> <C>
Federal income tax benefit at statutory rate $(198,854) $(219,010)
Loss generated not able to be utilized 198,854 232,128
Other net 0 (13,118)
--------- ----------
Total (benefit) expense $ 0 $ 0
--------- ----------
--------- ----------
</TABLE>
As of December 31, 1997, the Company had net operating loss carry forwards for
tax reporting purposes of approximately $4,573,018 available to offset future
taxable income. The net operating loss carry forwards expire beginning in 2008
through 2012.
34
<PAGE>
NOTE 6 - COMMITMENTS AND CONTINGENCIES
At December 31, 1997, the Company leased certain equipment and vehicles under
capital leases. Payments under these leases are due in monthly installments
totaling $8,516, including imputed interest at 8.75%. These leases are 5 year
leases which mature from April 1998 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>
Capital Operating
Year Ending December 31, Leases Leases
------------------------ ------- ---------
<S> <C> <C>
1998 $77,873 $264,110
1999 13,566 106,473
2000 0 66,582
2001 0 64,578
2002 0 64,578
Thereafter 0 1,002
------------------
91,439 $567,323
Less: Amounts representing
interest on capital leases (17,747)
--------
Present value of future minimum
lease payments $ 73,692
--------
--------
</TABLE>
Total rental expense under noncancelable operating leases amounted to
approximately $500,000, $450,000 and $435,000 for the years ended December
31, 1997, 1996 and 1995, 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
35
<PAGE>
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.
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.
Stock option transactions and information under the plans during 1995, 1996, and
1997 were as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
OPTION PLAN
Options outstanding at January 1 211,000 211,000 173,950
Granted 0 3,750 0
Canceled 0 15,600 1,800
Exercised 0 25,200 5,350
-----------------------------------------------
Options outstanding at December 31 211,000 173,950 166,800
-----------------------------------------------
-----------------------------------------------
Exercise price range at December 31 $2.00 - 2.20 $2.00 - 2.948 $2.00 - 2.20
-----------------------------------------------
-----------------------------------------------
Weighted average exercise price at December 31 $2.14 $2.18 $2.18
-----------------------------------------------
-----------------------------------------------
Vested options exercisable at December 31 183,000 156,200 160,600
-----------------------------------------------
-----------------------------------------------
NON-EMPLOYEE DIRECTOR PLAN
Options outstanding at January 1 15,000 15,000 12,000
Granted 0 2,000 2,000
Canceled 0 5,000 0
Exercised 0 0 0
-----------------------------------------------
Options outstanding at December 31 15,000 12,000 14,000
-----------------------------------------------
-----------------------------------------------
Exercise price range at December 31 $2.00 - 4.25 $2.00 - 3.375 $2.00 - 5.75
-----------------------------------------------
-----------------------------------------------
Weighted average exercise price at December 31 $2.00 $2.23 $2.73
-----------------------------------------------
-----------------------------------------------
Vested options exercisable at December 31 15,000 10,000 12,000
-----------------------------------------------
-----------------------------------------------
INCENTIVE PLAN
Options outstanding at January 1 0 8,000 38,000
Granted 8,000 30,000 62,667
Canceled 0 0 34,834
Exercised 0 0 4,166
-----------------------------------------------
Options outstanding at December 31 8,000 38,000 61,667
-----------------------------------------------
-----------------------------------------------
Exercise price range at December 31 $2.50 $2.50 - 5.00 $5.00 - 7.375
-----------------------------------------------
-----------------------------------------------
Weighted average exercise price at December 31 $2.50 $4.47 $5.85
-----------------------------------------------
-----------------------------------------------
Vested options exercisable at December 31 2,000 4,000 12,500
-----------------------------------------------
-----------------------------------------------
</TABLE>
36
<PAGE>
The following table summarizes information about stock options outstanding as of
December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------- ------------------------------
WEIGHTED
AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED NUMBER WEIGHTED
EXERCISE OUTSTANDING CONTRACTUAL AVERAGE EXERCISABLE AT AVERAGE
YEAR GRANTED PRICES AT 12/31/97 LIFE IN YEARS EXERCISE PRICE 12/31/97 EXERCISE PRICE
- ------------ ------- ----------- ------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
OPTION PLAN
1994 $2.00 - 2.20 166,800 2.50 $2.18 160,600 $2.19
1995 n/a n/a n/a n/a n/a n/a
1996 n/a n/a n/a n/a n/a n/a
1997 n/a n/a n/a n/a n/a n/a
----------------------------------------------------------------------------------------------
Totals $2.00 - 2.20 166,800 2.50 $2.18 160,600 $2.19
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
NON-EMPLOYEE DIRECTOR PLAN
1994 $2.00 10,000 7.00 $2.00 10,000 $2.00
1995 n/a n/a n/a n/a n/a n/a
1996 $3.375 2,000 8.00 $3.375 2,000 $3.375
1997 $5.75 2,000 9.47 $5.75 0 n/a
----------------------------------------------------------------------------------------------
Totals $2.00 - 5.75 14,000 7.56 $2.73 12,000 $2.23
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
INCENTIVE PLAN
1994 n/a n/a n/a n/a n/a n/a
1995 n/a n/a n/a n/a n/a n/a
1996 $5.00 30,000 8.82 $5.00 10,000 $5.00
1997 $6.00 - 7.375 31,667 6.73 $6.65 2,500 $7.375
----------------------------------------------------------------------------------------------
Totals $5.00 - 7.375 61,667 7.75 $5.85 12,500 $5.48
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
</TABLE>
Statement of Financial Accounting Standards No. 123, "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 model. 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
$115,000 or $0.047, respectively, in 1997, 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 1997 was
estimated using the Black-Scholes model and the weighted average assumptions are
as follows:
<TABLE>
<CAPTION>
NON-
EMPLOYEE
OPTION PLAN DIRECTOR PLAN INCENTIVE PLAN
----------- ------------- --------------
<S> <C> <C> <C>
Expected life (years) 5 5 5
Interest Rate 6.68% 6.68% 6.68%
Volatility 61% 61% 61%
Dividend yield n/a n/a n/a
Weighted average fair value at grant date n/a $3.36 $3.86
</TABLE>
The Company has adopted the provisions of SFAS No. 123 for non-employee stock
options and grants.
37
<PAGE>
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 be paid by the
Company. As of December 31, 1997, the price per share of the Company's Common
Stock was $4.25.
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. In July 1997, the Company transferred 1,300 treasury shares to an
employee as compensation. The fair market value of $7,638 was expensed as
wages.
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 October 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 one year 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 were used for commissions and other selling costs
and working capital.
In March 1997, the Company issued 600 shares of common stock to an employee
under the Company's 1995 Incentive Stock Plan for a stock bonus. Costs of
$4,425 were expensed as wages.
In June 1997, the Company issued 856 shares of its common stock under the 1995
Stock Incentive Plan to a consultant. Costs of $4,334 were expensed as
professional fees.
In July 1997, the Company issued 690 shares of its common stock under the 1995
Stock Incentive Plan to a consultant. Costs of $4,415 were expensed as
professional fees.
In August 1997, the Company issued 653 shares of its common stock under the 1995
Stock Incentive Plan to a consultant. Costs of $3,854 were expensed as
professional fees.
In August 1997, the Company issued 8,000 shares of its common stock under the
1995 Stock Incentive Plan as payment to an attorney. Costs of $44,516 were
expensed as professional fees.
38
<PAGE>
In August 1997, the Company issued 3,750 shares of its common stock under the
1995 Stock Incentive Plan for partial settlement of a lawsuit. Costs of $22,013
were charged against accrued liabilities.
In October 1997, the Company issued 4,000 shares of its common stock under the
1995 Stock Incentive Plan to a consultant. Costs of $21,500 were expensed as
professional fees.
In November 1997, the Company issued 377 shares of common stock to an employee
under the Company's 1995 Incentive Stock Plan for a stock bonus. Costs of
$1,974 were expensed as wages.
During August 1997, the Company completed a private placement of 10,000 shares
of Series B 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 16.67 shares of the Company's common stock
at a conversion price of $6.00 per share. The Preferred Stock is redeemable for
cash at any time after March 1, 1999, in whole or in part, at the option of the
Company, at redemption prices that will decline from $106 per share on March 1,
1999 to $100 per share on September 1,2000, at a rate of $1 per three-month
period, plus any accrued and unpaid dividends through the redemption date. As
of December 31, 1997, 10,000 shares of the Company's Series B Preferred Stock
were issued. Proceeds of $832,000 will be used for commissions and other
selling costs and working capital.
In November and December 1997 the Company issued 128,400 shares of the Company's
common stock to holders of 5,350 shares of Series A Preferred Stock for the
exercise of their conversion options. As of December 31, 1997, 2,150 shares of
the Company's Series A Preferred Stock were outstanding.
During December 1997, the Company started a private placement of 21,000 shares
of Series C 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 16.67 shares of the Company's common stock
at a conversion price of $6.00 per share. The Preferred Stock is redeemable for
cash at any time after December 1, 1998, in whole or in part, at the option of
the Company, at redemption prices that will decline from $106 per share on
December 1, 1998 to $100 per share on May 1, 2000, at a rate of $1 per
three-month period, plus any accrued and unpaid dividends through the
redemption date. As of December 31, 1997, 1,900 shares of the Company's
Series C Preferred Stock were issued. Proceeds of $150,000 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.
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 1998.
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.
39
<PAGE>
CERTIFICATE OF DESIGNATION, PREFERENCES,
RIGHTS AND LIMITATIONS OF
SERIES C PREFERRED STOCK, $1.00 PAR VALUE,
OF
GREAT PINES WATER COMPANY, INC.
Pursuant to Section 2.13 of the Texas Business Corporation Act, Robert A.
Hammond, Jr., President and Robert A. Hammond, Sr., Secretary, of Great Pines
Water Company, Inc., a Texas corporation ("Corporation"),
DO HEREBY CERTIFY that pursuant to the authority conferred upon the Board
of Directors by the Articles of Incorporation of the Corporation, as amended,
and pursuant to Section 2.13 of the Texas Business Corporation Act, said Board
of Directors, by unanimous written consent dated December 1, 1997, duly adopted
resolutions providing for the issuance of a series of 21,000 shares of Series C
Preferred Stock, par value $1.00, which resolutions are and read as follows:
"RESOLVED, that, pursuant to the authority expressly granted and vested in
the Board of Directors of Great Pines Water Company, Inc. (the "Corporation") by
the provisions of the Articles of Incorporation of the Corporation, as amended,
this Board of Directors by this resolution (hereinafter this "Designation")
hereby creates out of the Preferred Stock, par value $1.00 per share, of the
Corporation (the "Preferred Stock") a series of the Preferred Stock to consist
of 21,000 shares, and to be designated as "Series C Preferred Stock"
(hereinafter "Series C Preferred Stock"), and this Board of Directors hereby
fixes the designations, powers, preferences and rights, and the qualifications,
limitations or restrictions thereof, of the shares of such series as follows:
SERIES C PREFERRED STOCK
The relative preferences, powers, rights, qualifications, limitations and
restrictions in respect of the Series C Preferred Stock are as follows:
(a) VOTING RIGHTS. Except as otherwise provided in this Designation
or as required by law, the holders of Series C Preferred Stock shall have
no voting rights, including, without limitation, any class voting rights.
(b) DIVIDEND RIGHTS. Holders of shares of Series C Preferred Stock
will receive an annual dividend payable monthly in arrears commencing the
month after the date of issuance of $12.00 per month. Dividends will be
cumulative, will accumulate from the date of original issuance and will be
payable to holders of record of the Series C Preferred Stock as they appear
on the books of the Corporation on such respective dates, not exceeding 60
days preceding such dividend payment date, as may be fixed by the Board of
Directors of the Corporation in advance of the payment of each particular
dividend.
The Series C Preferred Stock will rank prior to the Corporation's Common
Stock, par value $.01 per share ("Common Stock"), as to dividends. For
purposes of the payment of dividends, the Series C Preferred Stock will
rank pari passu with the Series B Preferred Stock and the Series A
Preferred Stock. Before any dividends (other than dividends payable in
Common Stock) on any class or series of capital stock of the Corporation
ranking junior to the Series C Preferred Stock as to dividends or upon
liquidation shall be declared or paid or set apart for payment, the holders
of shares of Series C Preferred Stock shall be entitled to receive
cumulative cash dividends at the annual rate specified above. No dividends
shall be declared on any class or series of capital stock ranking on a
parity with the Series C Preferred Stock as to dividends in respect of any
dividend period unless there shall likewise be or have been declared on the
Series C Preferred Stock like dividends for all monthly periods coinciding
with or ending before such monthly period ratably in proportion to the
respective annual dividend rates fixes therefor. If the Corporation is in
default with respect to any dividends payable on, or any obligations to
retire shares of, the Series C Preferred Stock, the Corporation may not
declare or pay or set apart for payment any dividends or make any
distribution in cash or other property on, or redeem, purchase or otherwise
acquire, any other class or series of stock ranking junior to the Series C
Preferred Stock either as to dividends or upon liquidation. Accruals of
dividends will not bear interest.
(c) LIQUIDATION RIGHTS. In the event of any liquidation, dissolution
or winding-up of the Corporation, whether voluntary or involuntary, before
any payment or distribution of the assets of the
<PAGE>
Corporation, or proceeds thereof (whether capital or surplus), shall be
made to or set apart for the holders of any class or series of stock of
the Corporation ranking junior to the Series C Preferred Stock (including
Common Stock) upon liquidation, the holders of the Series C Preferred Stock
shall be entitled to receive $100 per share, plus an amount equal to all
dividends (whether or not declared) accrued and unpaid as of the date of
final distribution, but such holders shall not be entitled to any further
payment. For purposes of liquidation rights, the Series C Preferred Stock
will rank pari passu with the Series B Preferred Stock and the Series A
Preferred Stock. If, upon any liquidation, dissolution or winding-up of
the Corporation, the assets of the Corporation, or proceeds thereof,
distributable among the holders of shares of the Series C Preferred Stock
and other class or series or preferred stock ranking prior to or on a
parity with the Series C Preferred Stock as to payments upon liquidation,
dissolution or winding-up shall be insufficient to pay in full the
preferential amount aforesaid, then such assets, or the proceeds thereof,
shall be distributed among such holders pro rata in accordance with the
respective amounts that would be payable on such shares if all amounts
payable thereon were paid in full. The voluntary sale, conveyance, lease,
exchange or transfer (for cash, shares of stock, securities or other
consideration) of all or substantially all the property or assets of the
Company to, or a consolidation or merger of the Corporation with, one or
more other companies (whether or not the Corporation is the corporation
surviving such consolidation or merger) will not be deemed to be a
liquidation, dissolution or winding-up, voluntary or involuntary.
(d) OPTIONAL REDEMPTION. At any time after December 1, 1998, the
shares of Series C Preferred Stock may be redeemed, in whole or in part, by
the Corporation at its sole option. The redemption price shall begin at
$106 per share of Series C Preferred Stock and will decline $1 per share
for each of six three-month periods beginning on December 1, 1998, with a
final redemption price of $100 per share. The redemption price should also
include all accrued and unpaid dividends through the date fixed for
redemption. The Corporation shall, on or prior to the date fixed for
redemption, but not earlier than 45 days prior to the redemption date,
deposit with its transfer agent or other redemption agent, as a trust fund,
a sum sufficient to redeem the shares called for redemption, with
irrevocable instructions and authority to such agent to give or complete
the required notice of redemption and to pay the holders of such shares the
redemption price upon surrender of their certificates. Such deposit shall
be deemed to constitute full payment of such shares to their holders and
from and after the date of such deposit, notwithstanding that any payment
of such shares shall not have been surrendered for cancellation, the shares
represented thereby shall no longer be deemed outstanding, the right to
receive dividends and distributions shall cease to accrue from and after
the redemption date, and all rights of the holders of the Series C
Preferred Stock called for redemption as shareholders of the Corporation
shall cease and terminate, except the for right to receive the redemption
price, without interest, upon the surrender of their respective
certificates, and except for the right to convert their shares of Series C
Preferred Stock until the close of business on the redemption date.
Unless full accumulated dividends on all outstanding shares of the Series C
Preferred Stock shall have been or contemporaneously are declared and paid
or set apart for payment for all past dividend periods, the Preferred Stock
may not be redeemed unless all of the outstanding Series C Preferred Stock
is redeemed, and the Corporation may not purchase any shares of the Series
C Preferred Stock otherwise than pursuant to a purchase offer made on the
terms to all the holders of Series C Preferred Stock, provided that the
Corporation may complete the purchase or redemption of shares of Series C
Preferred Stock for which a purchase contract was entered into, or notice
of redemption of which was initially given, prior to such default.
Notice of redemption shall be mailed to each holder of Series C Preferred
Stock to be redeemed at the address shown on the books of the Corporation
not less than 30 days nor more than 60 days prior to the redemption date.
If less than all of the outstanding shares of Series C Preferred Stock are
to be redeemed, the Corporation will select the shares to be redeemed by
lot, pro rata (as nearly as may be), or in such other equitable manner as
the Board of Directors of the Corporation may determine.
(e) CONVERSION. The shares of Series C Preferred Stock are
convertible into shares of Common Stock at a conversion rate of 16.67
shares of Common Stock for one share of Preferred Stock.
Shares of Series C Preferred Stock surrendered for conversion during the
period from the close of business on any record date for the payment of
dividends on such shares to the opening of business on the corresponding
dividend payment date (except shares called for redemption during such
period) must be accompanied by payment of an amount equal to the dividend
payable on such shares on such dividend payment date. The registered
holder of such shares of Preferred Stock at the close of business on a
<PAGE>
dividend payment record date shall be entitled to receive the dividend
payable on such shares (except shares called for redemption between such
record date and the dividend payment date) on the corresponding dividend
payment date notwithstanding the conversion thereof or the Corporation's
default in payment of the dividend due on such dividend payment date. A
holder of Series C Preferred Stock on a dividend payment record date who
(or whose transferee) converts shares of Series C Preferred Stock on a
dividend payment date will receive the dividend payable on such Preferred
Stock by the Corporation on such date, and the converting holder need not
include payment in the amount of such dividend upon surrender of shares of
Series C Preferred Stock for conversion. No fractional shares will be
issued upon conversion.
The conversion rate shall be automatically adjusted upon the occurrence of
the following events: (i) the issuance of capital stock of the Corporation
as a dividend or a distribution on Common Stock, (ii) subdivisions,
combinations and reclassification of the Common Stock, (iii) the issuance
to all holders of Common Stock of rights or warrants entitling them to
subscribe for or purchase shares of Common Stock at less than the current
market price, and (iv) the distribution to all holders of Common Stock of
evidences of indebtedness of the Company or of assets (other than cash
dividends from retained earnings) or subscription rights to securities of
the Company (other than those referred to above collectively,
"Recapitalization Events"). Upon the occurrence of a Recapitalization
Event, shares of Series C Preferred Stock should thereafter become
convertible into those shares of Common Stock and/or other securities which
the holder of such shares would have held following the Recapitalization
Event had such holder converted such shares into Common Stock immediately
before the Recapitalization Event. Except in these cases, the conversion
rate will not be adjusted for the issuance of Common Stock. No adjustment
of the conversion rate will be required to be made in any case until
cumulative adjustments amount to at least one percent of the current
conversion rate. The Corporation reserves the right to make such increases
in the conversion rate in addition to those required by the foregoing
provisions as the Corporation in its discretion shall determine to be
advisable in order that certain stock related distributions hereafter made
by the Company to its shareholders shall not be taxable.
Except as discussed above, no adjustment upon conversion will be made for
dividends on the Series C Preferred Stock.
Upon the occurrence of any consolidation or merger of the Corporation with
or into any other corporation other than a consolidation or merger in which
the Corporation is the continuing corporation and which does not result in
any reclassification of or changes in outstanding shares of common stock,
or any sale or transfer of all or substantially all the assets of the
Corporation, the holder of each share of Series C Preferred Stock shall
after such consolidation, merger, sale or transfer convert such share of
Series C Preferred Stock only into the kind and amount of securities, cash
and other property which such holder would have been entitled to receive
upon such consolidation, merger, sale or transfer if the holder had held
the common stock issuable upon the conversion of such share of Series C
Preferred Stock immediately prior to such consolidation, merger, sale or
transfer.
IN WITNESS WHEREOF, the undersigned, being the duly elected officers of the
Corporation, hereby declare and certify that the facts herein stated are true
and accordingly execute this instrument as of this 1st day of December, 1997.
GREAT PINES WATER COMPANY, INC.
By:
------------------------------------
Robert A. Hammond, Jr.
ATTEST:
- ----------------------------------
Robert A. Hammond, Sr.
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation of by reference in Registration Statement Nos.
33-92750, 33-92940, and 33-93280 of Great Pines Water Company, Inc. on Forms S-8
of our report dated February 13, 1998 appearing in this Annual Report on Form
10-KSB of Great Pines Water Company, Inc. for the year ended December 31, 1997.
DELOITTE & TOUCHE LLP
Houston, Texas
March 27, 1998
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<PAGE>
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 342
<SECURITIES> 177
<RECEIVABLES> 1,072
<ALLOWANCES> (130)
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<CURRENT-ASSETS> 1,875
<PP&E> 10,566
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<TOTAL-LIABILITY-AND-EQUITY> 7,478
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