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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, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
Commission File No 1-12130
GREAT PINES WATER COMPANY, INC.
(Name of small business issuer in its charter)
Texas 76-0203752
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
600 North Shepherd, Suite 303
HOUSTON, TEXAS 77007
(713) 864-6688
(Address and telephone number of principal executive offices and zip code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.01 per share
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days:
Yes [X] No [_]
Check if there is no disclosure of delinquent filers in response to item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year were $9,214,000.
As of March 11, 1999, there were outstanding 2,760,862 shares of the
registrant's Common Stock, par value $.01 per share, 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 the National
Association of Securities Dealers Over The Counter Electronic Bulletin Board
March 11, 1999) was approximately $4,861,000.
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
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.............. 6
PART II................................................................... 7
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......... 7
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION........ 8
ITEM 7. FINANCIAL STATEMENTS............................................. 13
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE............................................. 13
PART III.................................................................. 14
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT................ 14
ITEM 10. EXECUTIVE COMPENSATION........................................... 15
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT... 18
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 18
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K................................. 19
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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
the National Association of Securities Dealers Over The Counter Electronic
Bulletin Board 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 87% of the total market in terms of gallons of water sold in
1996. 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
retail channels.
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. 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, 1998, the
Company owned approximately 36,000 water dispensers, of which approximately
32,500 utilized the closed system and approximately 3,500 utilized the open
system.
As of December 31, 1998, the Company served approximately 16,000 customers in
the Houston area and approximately 12,200 customers in the DFW area. No single
customer represents more than 1% of the Company's gross revenues.
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
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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, 1998, the Company owned or leased 25 "ten-bay" trucks that it
uses to deliver full water bottles to customers and to pick up empty bottles.
Each ten-bay truck is capable of carrying 288 five-gallon water bottles. The
Company believes that a majority of its current competitors primarily use
smaller "eight-bay" beverage trucks, which are generally capable of carrying
only 200 five-gallon water bottles. The Company's larger delivery trucks permit
the Company to service its customers either once every 19 days or 38 days,
depending on the average amount of water delivered, as opposed to the 10 or 20
day cycle of its competitors. The Company believes that its 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 26 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, 1998, the Company owned approximately 120,000 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 3,600 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 5,000-gallon fiberglass tanks where it is stored 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, 1998, the Company's list prices
were $7.95 to $8.85 for a five gallon bottle of spring water (or $1.59 to $1.77
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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, 1998, 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 one bottle of water. Once a potential customer agrees to
accept the trial offer, the Company's goal is to have the water dispenser and
water delivered within an hour of acceptance.
The Company has also implemented a customer retention program. Should a customer
telephone to discontinue delivery service, a special customer service
representative is immediately assigned to the call to address potential problems
and resolve any issues. In the event that the customer still wants to
discontinue service, a representative is sent to personally visit the customer
within forty eight hours. In the Company's experience, its customer retention
program is successful in reversing subscriber cancellations and in retaining the
customer approximately 70% of the time.
COMPETITION
The bottled water market is highly competitive. The Company competes in the non-
sparkling segment of the bottled water market directly with other home delivery
water companies, indirectly with companies that provide water vending machines
and with off-the-shelf marketers. The Company's water products compete not only
with other bottled water products but also with other types of beverages,
including soft drinks, coffee, beer, wine, fruit juices and tap water. The
Company competes with vending water and off-the-shelf marketers on the basis of
(1) taste (many customers claim that water bottled in five-gallon plastic
bottles has better taste compared to water in one-gallon plastic bottles, which
sometimes has a "plastic" taste), (2) the convenience of home delivery, and (3)
the dispenser (i.e. the ability to have heated, chilled or room temperature
water, depending on the type of dispenser rented). Such competition includes
bottlers and distributors of water products, several of which are more
experienced and have greater financial and management resources and have
established proprietary trademarks and distribution facilities. Certain of the
Company's potential customers may use water filtration systems installed in
their homes and businesses. These systems are expensive to purchase, and must be
installed and maintained. The Company believes that these have not had and will
not have a material effect on the Company's operations in the foreseeable
future.
Many bottled water companies in the United States are owned by European or
Japanese companies. Nestle (Swiss) owns the Perrier, Great Bear, Poland Springs,
Ozarka, Oasis, Zephyrhills, Arrowhead, Calistoga, Ice Mountain and Volvic
brands. BSN Group (French) owns the Evian brand. Suntory (Japanese) owns the
Belmont Springs, Crystal, Kentwood, Polar, Willow and Talwonda Springs brands.
Most of these companies are larger and have substantially greater management and
financial resources than the Company. The Company markets the Company's products
as independent "American" products.
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EQUIPMENT SUPPLY
The Company purchases its water dispensers, bottles, caps and water delivery
system components from various vendors. There are numerous manufacturers of
these 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 with any such suppliers, 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 material compliance with
these laws and regulations. Representatives of the City of Houston, the City of
Grand Prairie and the TDH conduct periodic inspections of the Company's
facilities, as well. Should the Company expand its operations outside the
Houston and DFW metropolitan areas, it may become subject to additional laws and
regulations and may have to incur additional costs related to compliance with
such laws and regulations.
INSURANCE
The Company currently maintains $2 million in general liability and $1 million
in product liability insurance. The Company also maintains automobile insurance
for its delivery fleet with coverage up to $1 million per occurrence. The
Company is a subscriber to Texas Workers' Compensation. The Company carries a $4
million umbrella liability insurance policy. The Company believes these
insurance policies are adequate given the nature and size of its business, and
will reevaluate its coverage limits as its management considers prudent. There
can be no assurance that such insurance will be sufficient or effective under
all circumstances.
EMPLOYEES
As of December 31, 1998, the Company had 178 full-time employees, including 46
in administration, 59 in marketing and 73 in production and delivery. All
marketing employees are compensated on a commission basis. Drivers are
compensated on a per-delivered bottle basis. All other employees are paid wages,
on a weekly, 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.
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SEASONALITY
Bottled water sales revenues are seasonal, with sales in the winter months being
lower than sales in the summer months when consumption is greater. Equipment
rental revenues are not seasonal.
IMPACT OF INFLATION
The Company believes that the present relatively low rate of inflation
will not have a significant impact on the Company. Historically, the Company
has increased prices to its customers in excess of inflation, and anticipates
that it will be able to do so for the foreseeable future. In addition, the
Company believes it will enjoy certain economies of scale as it continues to
expand, such as increasing purchasing power for the purchase of water bottles,
dispensers, and ancillary supplies and reduced distribution costs as route
density increases. As a result, the Company does not believe inflation will
have a material adverse impact on 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
sought monetary damages, including lost customers, the cost of replacing
defective equipment, treble damages under the Texas Deceptive Trade Practices
Act, and attorney's fees. During February 1997, the case went to trial and a
jury verdict was reached. Damages of approximately $2.3 million were awarded to
the Company. The verdict is currently being appealed and there can be no
assurance that the Company will recover damages in this, or any amount. Through
December 31, 1998, the Company has not recorded any amounts in the financial
statements related to these damages. Liqui-Box Corporation 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 1998.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since July 29, 1998, the Company's Common Stock has been listed for quotation on
the National Association Securities Dealers Over The Counter Electronic Bulletin
Board. Previously, the Common Stock was listed for quotation on the Nasdaq
Small Capital Market System. 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. On July 28,
1998, the Common Stock was delisted from the Nasdaq Small Capital Market System.
Trading in the Common Stock is 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.
As of March 11, 1999, there were 2,760,862 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 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.
1997 High Low
---- ---- ---
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
1998
----
First Quarter 4 5/8 2 1/2
Second Quarter 4 7/16 2 5/8
Third Quarter 4 1/8 7/8
Fourth Quarter 5 1/2 2
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 May 1998,
the Company completed a private placement of 4,200 shares of Series C Preferred
Stock, $1.00 par, at $100 per share (the "Series C Preferred Stock Offering").
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company. This data
should be read in conjunction with the Company's financial statements and the
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues...................................... $ 9,214 $8,769 $7,495
Operating costs............................... 1,595 1,744 1,391
Transportation costs.......................... 2,114 2,171 1,745
Depreciation and amortization................. 961 988 1,064
Commissions and other selling costs........... 1,675 1,874 1,231
General and administrative costs.............. 2,603 2,190 2,084
------- ------ ------
Gain (loss) from operations................... 266 (198) (21)
Other income (expense)........................ 636 (387) (623)
------- ------ ------
Gain (loss) before income taxes............... 902 (585) (644)
Income tax expense (benefit).................. 0 0 0
------- ------ ------
Income (loss) after income taxes.............. 902 (585) (644)
Dividends on Preferred Stock.................. 189 135 25
------- ------ ------
Income (loss) attributable to Common Stock.... 713 (720) (669)
======= ====== ======
Income (loss) per common share Basic.......... $ .27 $ (.29) $ (.28)
======= ====== ======
Income (loss) per common share Diluted........ $ $.31 $ (.29) $ (.28)
======= ====== ======
BALANCE SHEET DATA:
Total Assets.................................. $ 6,824 $7,479 $6,263
Current and long-term debt and capital lease
obligations.................................. $ 2,590 $3,953 $3,480
OTHER DATA:
EBITDA (1).................................... $ 2,225 $ 797 $ 830
Net cash provided by operating activities..... $ 1,802 $ 486 $ 704
Net cash used in investing activities......... $ (23) $ (490) $ (354)
Net cash provided by (used in) financing
activities................................... $(1,040) $ 31 $ (95)
</TABLE>
(1) EBITDA is defined as the sum of (i) gain or 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, 1998, the Company serviced approximately 28,200 customers. The
Company anticipates that its customer base and revenues will expand as sales of
bottled water increase and the Company continues to
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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 costs 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.
General and administrative expenses include centralized administration and
support costs.
RESULTS OF OPERATIONS
Year Ended December 31, 1998 and 1997
Revenues in 1998 increased 5% to $9,214,000 from $8,769,000 in 1997. The
increase was primarily the result of the addition of new customers, increased
consumption and price increases during 1998.
Operating costs decreased, as a percentage of sales, to 17% or $1,595,000 in
1998 from 20% or $1,744,000 in 1997. This is primarily due to a decrease in
cost of sales for sodas and fruit juices which were discontinued during 1997.
Transportation costs decreased, as a percentage of sales, to 23% or $2,114,000
in 1998 from 25% or $2,171,000 in 1997. This is primarily due to increased
sales prices and bottles delivered without a corresponding increase in expenses,
resulting in improved utilization of the truck fleet.
Depreciation and amortization costs decreased, as a percentage of sales, to 10%
or $961,000 in 1998 from 11% or $988,000 in 1997. The decrease is primarily due
to an increase in sales and by certain fixed assets of the Company becoming
fully depreciated for book purposes during 1998 and 1997.
Commissions and other selling costs decreased, as a percentage of sales, to 18%
or $1,675,000 in 1998 from 21% or $1,874,000 during 1997. The decrease was
primarily due to a reduction of telemarketing expenses, partially offset by an
increase in outside sales expenses. During the Third Quarter of 1997, the
Company completed a preferred stock offering with net proceeds of $826,000. The
Company was able to significantly expand its marketing efforts during 1997 due
to the availability of cash. Management's policy is to use all available cash
from operations and financing activities after debt service for its marketing
activities.
General and administrative expenses, as a percentage of sales, increased to 28%
or $2,603,000 during 1998 from 25% or $2,190,000 during 1997. This is primarily
due to an increase in executive compensation, coupled with an increase in
corporate administrative costs and professional fees.
Interest expense, as a percentage of sales, remained the same at 4% or $362,000
in 1998 compared to 4% or $394,000 in 1997. This is primarily due to reductions
in the average outstanding balance of long term debt.
The Company reported income after income taxes of $902,000 in 1998, compared to
a loss after income taxes of $585,000 in 1997. This is primarily due to
including $967,000 in other income as consideration in behalf of a lawsuit
settlement during the Third Quarter of 1998. In addition, increased revenues
coupled with a reduction in commissions and other selling costs contributed to
the improved results.
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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.
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.
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 1998 was $1,802,000 compared to
$486,000 in 1997. The increase is primarily due to increased net income coupled
with a reduction in accounts receivable.
During 1998, the Company made capital expenditures of $206,000 for equipment,
water bottles and trucks and truck improvements, all of which were paid for
with cash.
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As of December 31, 1998, the Company's long term debt amounted to $9,000 in bank
debt and $2,571,000 in vendor financing. The Company had capital lease
commitments of $10,000 as of December 31, 1998.
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 was due in monthly installments
with interest at prime plus 2%, adjusted quarterly, through October 1998. The
note was 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 was guaranteed by a corporation
related through common ownership up to 37.5% of the outstanding balance and was
guaranteed by the Small Business Administration up to 75% of the outstanding
balance. The new agreement contained no financial covenant restrictions. The
note was paid off in full during September 1998.
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 received a waiver for all non-compliance
during 1997.
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.
Proceeds of $652,500 were used for commissions and other selling costs and
working capital. As of December 31, 1998, 1,550 shares of the Company's Series
A Preferred Stock were outstanding.
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.
Proceeds of $832,000 were used for commissions and other selling costs and
working capital. As of December 31, 1998, 10,000 shares of the Company's
Series B Preferred Stock were outstanding.
During May 1998, the Company completed a private placement of 4,200 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.
Proceeds of $345,000 were used for commissions and other selling costs and
working capital. As of December 31, 1998, 4,200 shares of the Company's Series
C Preferred Stock were outstanding.
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
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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. Because
the Company does not have any plans for significant capital expenditures or
payments of principal during 1999, management believes that the cash generated
from operations will provide sufficient working capital for 1999.
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. During the periods presented in the
financial statements, the Company had no items of comprehensive income.
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 adopted this
statement in the fourth quarter of 1998. Its adoption does not have a material
effect on the Company's financial statements since the Company is engaged in one
segment, the bottling and sale of drinking, purified and spring water and the
rental of related dispensing equipment.
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.
IMPACT OF THE YEAR 2000
The Year 2000 ("Y2K") issue is the result of computer programs having been
written using two digits rather than four to define the applicable year.
Computer equipment, software and other devices with imbedded technology that are
time-sensitive, such as computer systems, related software and telephone systems
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
data, and may materially impact its financial condition.
The Company has undertaken various initiatives to ensure that it is prepared for
the Y2K issue. The Company is in the process of assessing its state of
readiness. Presently, the Company is reviewing its equipment, computer systems
and related software to identify systems which may exhibit Y2K issues. This
review is being performed by internal staff from various disciplines within the
Company. These personnel are currently evaluating the Company's Y2K issues,
and, if necessary, developing remediation plans. As a part of this review the
Company will determine the known risks related to the consequences of a failure
to correct any Y2K deficiencies. The Company is presently not aware of any Y2K
issues that have been encountered by any third party, which could materially
affect the Company's operations.
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If necessary, during 1999, the Company will develop a contingency plan to
address potential Y2K issues. This contingency plan will likely address
problems that the Company identifies during the course of its remediation
efforts and reasonably foreseeable problems that may arise as a result of Y2K,
including, but not limited to computer hardware and software. The contingency
plan will be continually refined as additional information becomes available.
However, it is unlikely that any contingency plan can fully address all events
that may arise.
The Company estimates that the costs associated with the Y2K issue will not be
material, and as such will not have a significant impact on the Company's
financial position or operating results. However, the failure to discover or
correct a material Y2K problem could result in an interruption in the Company's
normal business activities or operations. Such failure could materially and
adversely affect the Company's results of operation, liquidity and financial
condition.
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.
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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:
Name Age Position
- ---- --- --------
Robert A. Hammond, Jr. 44 Chairman of the Board, President and
Chief Executive Officer; Director
Robert A Hammond, Sr. 65 Vice President of Operations and
Secretary; Director
Nick A. Baki 34 Vice President - New Markets
Kevin F. Vigneaux 40 Chief Financial Officer and
Treasurer
Stephen A. Lee (1) 46 Director
(1) Member, Audit Committee
Robert A. Hammond, Jr. founded the Company in 1986 and has served as President
and Chief Executive Officer and 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.
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 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.
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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, LLP. Mr.
Lee is a registered Certified Public Accountant in the state of Texas. Mr. Lee
received a B.A. from Houston Baptist University in 1974, a J.D. from the
University of Houston in 1977 and a L.L.M. (tax) from Georgetown University in
1978.
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 three
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 an Audit Committee. Mr. Lee was
appointed to the Company's Audit Committee 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").
ITEM 10. EXECUTIVE COMPENSATION
The following table reflects all forms of compensation for services to the
Company for the years ended December 31, 1998, 1997, and 1996, 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 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
-----------------------
Annual Compensation Restricted Stock All
------------------------------------- Stock Options Other
Year Salary Bonus Other Awards (Shares) Compensation
- ---------- ------------- --------- --------- ----------- --------- -------------
Robert A. Hammond, Jr., CEO
<S> <C> <C> <C> <C> <C> <C>
1998 $150,000 $0 $0 0 0 $10,000 (1)
1997 $ 97,750 $0 $0 0 0 $10,000 (1)
1996 $ 84,000 $0 $0 0 0 $10,000 (1)
Robert A. Hammond, Sr., Vice President Operations
1998 $150,000 $0 $0 0 0 $10,000 (1)
1997 $ 97,750 $0 $0 0 0 $10,000 (1)
1996 $ 84,000 $0 $0 0 0 $10,000 (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.
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The following table provides information concerning the options held by the
above executive officers as of December 31, 1998 all of which are exercisable.
No options of the Company were exercised by these officers during the year ended
December 31, 1998. No additional options were granted during the year ended
December 31, 1998.
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options at
Name Options at Year End Year End (1)
- --------------------------------------------------------------------------------
Robert A. Hammond, Jr. 75,000 $205,312
Robert A. Hammond, Sr. 75,000 $205,312
(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 reported by the
National Association Securities Dealers Over The Counter Electronic Bulletin
Board market ($4.9375 per share) and the exercise price ($2.20 per share).
Options are in-the-money if the fair market value of the underlying Common
Stock exceeds the exercise price of the option.
STOCK OPTION PLANS
The Company's Option Plan was adopted in 1993. An aggregate of 225,000 shares
of common stock were reserved for issuance pursuant to the Option Plan. The
Option Plan is administered by the Board of Directors or a stock option
committee established by the Board of Directors (the "Plan Administrator").
The Plan Administrator determines, subject to the provisions of the Option
Plan, the employees to whom options are granted and the number of options to
be granted. The Plan Administrator may grant (i) "incentive stock options"
within the meaning of Section 422 of the Internal Revenue Code of 1986, and
(ii) "non-qualified stock options" (options which do not meet the requirements
of Section 422). Incentive stock options granted under the Option Plan must have
an exercise price equal to at least the fair market value of the Common Stock at
the date the option is granted. Each option granted under the Option Plan may
have a term of up to ten years, except that incentive stock option granted to a
shareholder who, at the time of grant, owns more than 10% of the voting stock of
the Company, may have a term of up to ten years, except that an incentive stock
option granted to a shareholder who, at the time of grant, owns more than 10% of
the voting stock of the Company may have a term of up to five years. The
exercise price of incentive stock options granted shareholders possessing more
than 10% of the total combined voting stock of the Company must be not less than
110% of the fair market value of the Company's Common Stock on the date of
grant. As of December 31, 1998, 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 1998, the Company
issued 600 shares for options exercised under the Option Plan. As of
December 31, 1998 options to purchase 165,600 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, 1998, 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, 1998 options to purchase 14,000
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
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the Board of Directors. The Board of Directors determines, subject to the
provisions of the Incentive Plan, to whom incentives are to be awarded. The
Board of Directors 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 Board of Directors will also determine the prices,
expiration dates and other material features of the incentive awards. As of
December 31, 1998, stock options to acquire 120,033 shares of the Company's
Common Stock have been granted under the Incentive Plan at exercise prices
ranging from $2.6875 to $7.375 per share. The options are exercisable beginning
April 23, 1997 through December 1, 2001. During 1998, the Company issued 4,650
shares of common stock to employees under the Incentive Plan. During 1998, the
Company issued no shares for employee options exercised under the Incentive
Plan. As of December 31, 1998 options to purchase 68,367 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 expired on August 10, 1998. The warrants were not
redeemable by the Company, and contained 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 was to
paid by the Company.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company has adopted provisions in its Amended and Restated Articles of
Incorporation (the "Articles") that require the Company to indemnify its
directors and officers and former directors and officers to the fullest extent
permitted by Texas law. Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers or persons
controlling the Company pursuant to the foregoing provisions, the Company has
been informed that, in the opinion of the SEC, such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. These provisions may require the Company, among other things, to
indemnify directors and officers against certain liabilities that may arise by
reason of their status or service as directors and officers and to advance their
expenses incurred as a result if any proceeding against them as to which they
could be indemnified. At the present time, there is no pending litigation or
proceeding involving a director, officer or agent of the Company where
indemnification will be required or permitted. The Company is not aware of any
threatened litigation or proceeding that may result in a claim for such
indemnification.
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ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows the amount of Common Stock owned as of March 11, 1999
by each Director, each named executive officer, and all Directors and officers
as a group, consisting of 5 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:
Number of Percentage of
Name and Address (1) Shares Class
- -------------------- --------- ------------
Robert A. Hammond, Jr. 944,643 34%
Robert A. Hammond, Sr. (2) 570,069 21%
Joshua Slocum Hammond Trust (3) 349,333 13%
Nick A. Baki 23,928 *
Kevin F. Vigneaux 3,992 *
Stephen A. Lee 4,752 *
All Executive Officers and Directors
as a Group (5 persons) 1,547,384 56%
* 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, Sr. 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.
During 1998 the Company engaged a certain law firm to provide general counsel.
A member of the Board of Directors of the Company is a partner in the firm.
Costs for legal services of $55,000 were expensed as general and administrative
expenses.
18
<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 herein 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 herein 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 incorporated herein by reference.
4.1 Specimen stock certificate evidencing shares of Common Stock.
Exhibit 4.1 to the Registration Statement is incorporated herein by
reference.
9.1 Joshua Slocum Hammond Trust Agreement, dated May 11, 1993.
Exhibit 9.1 to the Registration Statement is incorporated herein by
reference.
10.1 Loan Agreement, dated November 1, 1988, by and between Great Pines
Water Company, Inc. and Bank One Texas, National Association, as
amended. Exhibit 10.1 to the Registration Statement is incorporated
herein by reference.
10.2 Authorization and Loan Agreement with the United States Small
Business Administration. Exhibit 10.2 to the Registration Statement
is incorporated herein by reference.
10.3 Lease Agreement, dated April 1, 1990, with DBH Investment Partners
No. 3, as amended. Exhibit 10.3 to the Registration Statement is
incorporated herein by reference.
10.4 1993 Stock Option Plan of Great Pines Water Company, Inc.
Exhibit 10.4 to the Registration Statement is incorporated herein by
reference.
10.5 1993 Non-Employee Director Stock Option Plan of Great Pines Water
Company, Inc. Exhibit 10.5 to the Registration Statement is
incorporated herein by reference.
10.6 Form of Loan Agreement by and between Great Pines Water Company, Inc.
and Dependable Acceptance Company for the purchase of equipment.
Exhibit 10.6 to the Company's annual report on Form 10-KSB for the
fiscal year ended December 31, 1994 is incorporated herein by
reference.
10.7 Amendment dated December 31, 1994 to Loan Agreement, dated
November 1, 1988 by and between Great Pines Water Company, Inc. and
Bank One Texas, N.A. Exhibit 10.7 to the Company's annual report on
Form 10-KSB for the fiscal year ended December 31, 1994 is
incorporated herein by reference.
10.8 1995 Incentive Stock Plan of Great Pines Water Company, Inc.
Exhibit 10.8 to the Company's quarterly report on Form 10-QSB for the
quarter ended September 30, 1995 is incorporated herein by reference.
19
<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
herein 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 herein by reference.
23.1 Consent of independent auditors dated March 30, 1999. Exhibit 23.1 is
filed herein.
27.1 Financial Data Schedule. Exhibit 27.1 is filed herein.
99.1 Press Release dated July 28, 1998. Exhibit 99.1 to the Company's
report on Form 8-K dated July 28, 1998 is incorporated herein by
reference.
(b) Reports on Form 8-K:
The Company filed no current reports on Form 8-K during the quarter ended
December 31, 1998.
20
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, Great Pines Water
Company, Inc. has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized this 31st day of March, 1999:
GREAT PINES WATER COMPANY, INC.
By: /s/ Robert A. Hammond, Jr.
-----------------------------------
Robert A. Hammond, Jr.
President, Chief Executive Officer
In accordance with the requirements of the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Robert A. Hammond, Jr. President, Chief Executive March 31, 1999
- ------------------------------- Officer, Director (Principal
Robert A. Hammond, Jr. Executive Officer)
/s/ Robert A. Hammond, Sr. Secretary, Vice President, March 31, 1999
- ------------------------------- Director
Robert A. Hammond, Sr.
/s/ Kevin F. Vigneaux Chief Financial Officer March 31, 1999
- ------------------------------- and Treasurer (Principal
Kevin F. Vigneaux Financial and Accounting
Officer)
/s/ Stephen A. Lee Director March 31, 1999
- --------------------------------
Stephen A. Lee
21
<PAGE>
GREAT PINES WATER COMPANY, INC.
INDEX TO FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT....................................... 23
BALANCE SHEETS..................................................... 24
STATEMENTS OF OPERATIONS........................................... 25
STATEMENTS OF SHAREHOLDERS' EQUITY................................. 26
STATEMENTS OF CASH FLOWS........................................... 27
NOTES TO FINANCIAL STATEMENTS...................................... 28
22
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Great Pines Water Company, Inc.
Houston, Texas
We have audited the accompanying balance sheets of Great Pines Water Company,
Inc. (the "Company") as of December 31, 1998 and 1997, and the related
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
February 19, 1999
23
<PAGE>
GREAT PINES WATER COMPANY, INC.
Balance Sheets
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
------------------ ------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents including interest-bearing balances of $ 1,081,858 $ 342,310
$735,744 in 1998 and $165,352 in 1997
Marketable securities 0 177,037
Accounts receivable - Trade, net of allowance for doubtful 627,357 941,857
accounts of $56,301 in 1998 and $129,766 in 1997
Inventory 71,582 74,648
Prepaid expenses 18,910 39,332
Prepaid insurance 288,250 286,242
Other current assets 24,757 13,696
----------- -----------
Total current assets 2,112,714 1,875,122
Property and equipment, net 4,672,801 5,556,421
Other assets 38,280 47,078
----------- -----------
Total Assets $ 6,823,795 $ 7,478,621
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable, trade $ 239,211 $ 311,400
Customer deposits 933,994 1,088,261
Accrued liabilities and other current liabilities 292,533 286,006
Note payable 251,553 250,573
Capital lease obligations 10,057 73,692
Current maturities of long term debt 839,653 1,008,075
----------- -----------
Total current liabilities 2,567,001 3,018,007
----------- -----------
Long term debt, net of current portion 1,740,175 2,871,486
Commitments and contingencies
Shareholders' equity:
Preferred stock, $1.00 par value; 1,000,000 shares authorized;
15,750 shares outstanding at December 31, 1998 and 14,050 shares
outstanding at December 31, 1997 (liquidation value of $100 per
share) 15,750 14,050
Common Stock, $.01 par value; 10,000,000 shares authorized;
2,627,304 shares and 2,607,654 shares outstanding at December
31, 1998 and 1997, respectively 26,273 26,076
Additional paid-in capital 5,180,070 4,967,437
Accumulated deficit (2,705,474) (3,418,435)
----------- -----------
Total shareholders' equity 2,516,619 1,589,128
----------- -----------
Total Liabilities and Shareholders' Equity $ 6,823,795 $ 7,478,621
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
GREAT PINES WATER COMPANY, INC.
Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
REVENUES:
Water $6,024,429 $5,567,266 $4,771,397
Equipment rental 3,010,725 2,885,722 2,479,313
Other 179,379 316,148 244,335
---------- ---------- ----------
9,214,533 8,769,136 7,495,045
COST AND EXPENSES:
Operating costs 1,595,176 1,743,464 1,391,491
Transportation costs 2,113,830 2,171,371 1,744,733
Depreciation and amortization 961,298 988,375 1,064,449
Commissions and other selling costs 1,674,561 1,873,603 1,231,151
General and administrative expenses 2,603,329 2,190,086 2,084,423
---------- ---------- ----------
8,948,194 8,966,899 7,516,247
---------- ---------- ----------
Gain (Loss) from operations 266,339 (197,763) (21,202)
OTHER EXPENSE (INCOME):
Interest expense 362,114 393,861 409,897
Interest income (28,687) (6,760) (4,743)
Other expense (income) (2,661) 0 217,792
Litigation settlement (967,048) 0 0
---------- ---------- ----------
(636,282) 387,101 622,946
---------- ---------- ----------
Gain (Loss) before income taxes 902,621 (584,864) (644,148)
Income tax expense (benefit) 0 0 0
---------- ---------- ----------
Net Income (Loss) 902,621 (584,864) (644,148)
Dividends on Preferred Stock 189,660 135,411 25,250
---------- ---------- ----------
Income (Loss) attributable to Common Stock $ 712,961 $ (720,275) $ (669,398)
========== ========== ==========
Income (Loss) per common share:
Basic $0.27 $(0.29) $(0.28)
Diluted $0.31 $(0.29) $(0.28)
Number of common shares outstanding:
Basic 2,613,113 2,474,716 2,409,948
Diluted 2,951,458 2,474,716 2,409,948
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
GREAT PINES WATER COMPANY, INC.
Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
---------------- ------------------- Paid-In Accumulated Treasury
Shares Amount Shares Amount Capital Deficit Stock Total
------ ------ ------- ------ ---------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1,
1996 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
Issuance of Common
Stock 5,250 53 20,347 20,400
Issuance of
Preferred Stock 2,300 2,300 191,830 194,130
Conversions of
Preferred Stock (600) (600) 14,400 144 456 0
Dividends on
Preferred Stock (189,660) (189,660)
Net income 902,621 902,621
------ ------- --------- ------- ---------- ----------- ------ ----------
Balances, December
31, 1998 15,750 $15,750 2,627,304 $26,273 $5,180,070 $(2,705,474) $ 0 $2,516,619
====== ======= ========= ======= ========== =========== ====== ==========
</TABLE>
The accompany notes are an integral part of these financial statements
26
<PAGE>
GREAT PINES WATER COMPANY, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------
1998 1997 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 902,621 $ (584,864) $ (644,148)
Adjustment to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 961,298 988,375 1,064,449
(Gain) loss on disposition of assets (2,662) 0 8,188
Provision for lost coolers 130,500 18,000 18,000
Noncash charges (benefits) (297,848) 114,669 176,364
Effect of net changes in operating accounts:
Accounts receivable, net 314,500 (257,033) (56,444)
Inventory 3,066 25,160 (14,267)
Prepaid expenses 18,414 (92,915) (55,380)
Other assets (7,540) 1,501 (13,950)
Accounts payable (72,189) 90,530 (50,559)
Customer deposits, accrued liabilities, and other
current liabilities (147,740) 182,171 271,385
----------- ----------- ----------
Net cash provided by operating activities 1,802,420 485,594 703,638
----------- ----------- ----------
Cash flows from investing activities:
Additions to property and equipment (206,471) (312,712) (380,815)
Proceeds from fixed assets retirement 27,450 0 27,000
Investment in marketable securities 0 (448,900) 0
Proceeds from sales of marketable securities 155,819 271,863 0
----------- ----------- ----------
Net cash used in investing activities (23,202) (489,749) (353,815)
----------- ----------- ----------
Cash flows from financing activities:
Proceeds from note payable and long term debt 282,258 312,264 279,104
Payments on note payable and long term debt (1,263,963) (1,050,764) (921,244)
Payments on capital lease obligations (63,635) (109,357) (126,008)
Proceeds from issuance of Common Stock, net 1,200 31,138 45,400
Proceeds from issuance of Preferred Stock, net 194,130 982,659 652,500
Dividends on Preferred Stock (189,660) (135,411) (25,250)
----------- ----------- ----------
Net cash (used in) provided by financing activities (1,039,670) 30,529 (95,498)
----------- ----------- ----------
Increase in cash and cash equivalents 739,548 26,374 254,325
Cash and cash equivalents, beginning 342,310 315,936 61,611
=========== =========== ==========
Cash and cash equivalents, ending $ 1,081,858 $ 342,310 $ 315,936
=========== =========== ==========
Supplemental cash flow information:
Interest paid $ 364,543 $ 389,019 $ 425,476
=========== =========== ==========
Equipment acquired in exchange for long-term debt $ 0 $ 1,382,208 $ 0
=========== =========== ==========
Common stock issued for services and settlements of
lawsuits $ 19,200 $ 114,669 $ 176,364
=========== =========== ==========
Cancellation of long-term debt $ 317,048 $ 0 $ 0
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
GREAT PINES WATER COMPANY, INC.
Notes to Financial Statements
For the Years Ended December 31, 1998, 1997, and 1996
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 at December
31, 1997, which were 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. During 1997, 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 Statement of Financial Accounting Standards
("SFAS") No. 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.
NET INCOME (LOSS) PER SHARE: In February 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 128, "Earnings Per Share," which
established new standards for computing, presenting and disclosing earnings per
share ("EPS"). Prior period EPS amounts have been restated to conform to SFAS
No. 128.
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.
28
<PAGE>
IMPAIRMENT OF ASSETS: 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 have been recognized by the Company.
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 1998, 1997 or 1996.
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," which became effective for the
Company's fiscal year ended December 31, 1998, establish additional disclosure
requirements but do not affect the measurement of results of operations. During
the periods presented, the Company had no items of comprehensive income. The
Company adopted SFAS No. 131 in the fourth quarter of 1998. Its adoption did
not have a material effect on the Company's financial statements since the
Company is engaged in one segment, the bottling and sale of drinking, purified
and spring water and the rental of related dispensing equipment.
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, 1998, the Company has a note payable with a financial
institution for payment of an insurance policy premium. The note is due in
monthly installments of $32,197 including interest at 6.34%, through August
1999. At December 31, 1997, the Company had a similar note payable that was
paid off in August 1998.
29
<PAGE>
NOTE 3 - LONG-TERM DEBT
The following is a summary of long-term debt at December 31, 1998, and 1997:
<TABLE>
<CAPTION>
1998 1997
---------------- --------------
<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. In
March 1996, the interest rate was changed from 8.5% to
prime + 2%, adjusted quarterly (10.50% at December 31,
1997). $ 0 $ 154,871
Note payable to a bank due in monthly installments of
$600 with floating interest at prime +2% through June
1999; collateralized by transportation equipment. 3,553 10,753
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. 2,134,926 2,745,942
Various notes payable to a water cooler manufacturer due
in monthly installments of $15,984 including interest
at 9.5%, through August 2001; collateralized by
equipment. 436,161 579,071
Note with a financial institution due in monthly
installments of $2,622 including interest at 8.5%,
through February 1999; collateralized by
communications equipment. 5,188 34,827
Convertible note payable to a water cooler manufacturer
due in monthly installments of $8,465 including
interest beginning in June 1996 through May 2002 at 11%. 0 354,097
---------- -----------
2,579,828 3,879,561
Less Current Portion (839,653) (1,008,075)
---------- -----------
Non-current Portion $1,740,175 $ 2,871,486
========== ===========
</TABLE>
Certain of the Company's debt agreements require compliance with financial and
non-financial covenants. As of December 31, 1998, the Company was in compliance
with these agreements.
The Company has obtained waivers to pay dividends on all of its Preferred Stock.
As of December 31, 1998 there are no dividends in arrears.
30
<PAGE>
Maturities of long-term debt for the years ended December 31 are as follows:
1999 $ 839,653
2000 915,119
2001 542,089
2002 148,342
2003 77,668
Thereafter 56,957
----------
$2,579,828
==========
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%.
During 1998, the Company settled a lawsuit with a vendor, recognizing a gain of
$967,048. In connection with the settlement agreement, the Company was released
from its obligation to repay outstanding debt of $317,048.
31
<PAGE>
NOTE 4 - PROPERTY AND EQUIPMENT
The following is a summary of property and equipment as of December 31:
1998 1997
---- ----
Equipment $ 9,507,250 $ 9,488,748
Vehicles 563,692 743,873
Leasehold improvements 36,649 36,649
Office equipment 283,735 283,735
Furniture and fixtures 12,998 12,998
----------- -----------
10,404,324 10,566,003
Less accumulated depreciation and
amortization (5,731,523) (5,009,582)
----------- -----------
$ 4,672,801 $ 5,556,421
=========== ===========
Property and equipment includes the following items held under capital lease
agreements as of December 31:
1998 1997
---- ----
Vehicles $ 0 $ 54,640
Equipment 430,547 430,547
Office equipment 75,643 75,643
--------- ---------
506,190 560,830
Less accumulated depreciation (332,466) (340,372)
--------- ---------
$ 173,724 $ 220,458
========= =========
The Company leases water dispensing equipment to customers under month to month
operating leases. The carrying values of such equipment as of December 31 are as
follows:
1998 1997
---- ----
Water dispensing equipment $ 7,411,241 $ 7,541,740
Less accumulated depreciation (3,550,444) (2,977,719)
----------- -----------
$ 3,860,797 $ 4,564,021
=========== ===========
32
<PAGE>
NOTE 5 - INCOME TAXES
The Company follows SFAS No. 109, which requires the use of the asset and
liability approach for financial accounting and reporting purposes. A deferred
income tax liability or asset is recognized for temporary differences between
the tax bases of assets and liabilities and their reported amounts in the
financial statements that will result in net taxable or deductible amounts in
future years as well as the recognition, in certain instances, of the tax
effects of operating loss and tax credit carryforwards.
Temporary differences which gave rise to deferred tax assets and liabilities at
December 31, 1998 and 1997 are as follows:
1998 1997
---- ----
Deferred tax assets:
Net operating loss credit carryforwards $1,182,520 $1,554,826
Less valuation allowance 694,174 953,391
Deferred tax asset 488,346 601,435
---------- ----------
Deferred tax liabilities: Property, plant
and equipment (488,346) (601,435)
---------- ----------
Net deferred tax asset (liability) $ 0 $ 0
========== ==========
The effective income tax rate is different than the U.S. federal income
statutory tax rate of 34% due to the following:
1998 1997
---- ----
Federal income tax provision (benefit) at
statutory rate $ 306,891 $(198,854)
Inability to utilize net operating loss 0 198,854
Utilization of net operating loss carryforwards (306,891) 0
--------- ---------
Total (benefit) expense $ 0 $ 0
========= =========
As of December 31, 1998, the Company had net operating loss carry forwards for
tax reporting purposes of approximately $3,478,000 available to offset future
taxable income. These loss carry forwards expire in 2008 through 2012.
33
<PAGE>
NOTE 6 - COMMITMENTS AND CONTINGENCIES
At December 31, 1998, the Company leased certain equipment under a capital
lease. Payments under the lease are due in monthly installments totaling
$3,991, including imputed interest at 8.75%. The lease is a 5 year lease which
matures during 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:
Capital Operating
Year Ending December 31, Leases Leases
------------------------ ------- ---------
1999 $11,973 $ 448,997
2000 0 319,757
2001 0 299,372
2002 0 299,372
2003 0 210,060
Thereafter 0 46,421
------- ----------
11,973 $1,623,979
==========
Less: Amounts representing interest on
capital leases (1,916)
-------
Present value of future minimum lease
payments $10,057
=======
Total rental expense under noncancelable operating leases amounted to
approximately $575,000, $500,000 and $450,000 for the years ended December 31,
1998, 1997 and 1996, 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
34
<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 a 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". 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 Board
of Directors. The Board of Directors determines, subject to the provisions of
the Incentive Plan, to whom incentives are to be awarded. The Board of Directors
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 Board of Directors also determines the prices, expiration dates and other
material features of the incentive awards.
Stock option transactions and information under the plans during 1998, 1997, and
1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ -----------------
<S> <C> <C> <C>
OPTION PLAN
Options outstanding at January 1 166,800 173,950 211,000
Granted 0 0 3,750
Canceled 0 1,800 15,600
Exercised 600 5,350 25,200
Options outstanding at December 31 166,200 166,800 173,950
--------------- ------------- -------------
Exercise price range at December 31 $ 2.00 - 2.20 $ 2.00 - 2.20 $2.00 - 2.948
=============== ============= =============
Weighted average exercise price at December 31 $ 2.18 $ 2.18 $ 2.18
=============== ============= =============
Vested options exercisable at December 31 165,600 160,600 156,200
=============== ============= =============
NON-EMPLOYEE DIRECTOR PLAN
Options outstanding at January 1 14,000 12,000 15,000
Granted 0 2,000 2,000
Canceled 0 0 5,000
Exercised 0 0 0
--------------- ------------- -------------
Options outstanding at December 31 14,000 14,000 12,000
=============== ============= =============
Exercise price range at December 31 $ 2.00 - 5.75 $ 2.00 - 5.75 $2.00 - 3.375
=============== ============= =============
Weighted average exercise price at December 31 $ 2.73 $ 2.73 $ 2.23
=============== ============= =============
Vested options exercisable at December 31 14,000 12,000 10,000
=============== ============= =============
INCENTIVE PLAN
Options outstanding at January 1 61,667 38,000 8,000
Granted 54,200 62,667 30,000
Canceled 0 34,834 0
Exercised 0 4,166 0
--------------- ------------- -------------
Options outstanding at December 31 115,867 61,667 38,000
=============== ============= =============
Exercise price range at December 31 $2.6875 - 7.375 $5.00 - 7.375 $ 2.50 - 5.00
=============== ============= =============
Weighted average exercise price at December 31 $ 4.49 $ 5.85 $ 4.47
=============== ============= =============
Vested options exercisable at December 31 68,367 12,500 4,000
=============== ============= =============
</TABLE>
35
<PAGE>
The following table summarizes information about stock options outstanding as of
December 31, 1998:
<TABLE>
<CAPTION>
Options
Outstanding Options Exercisable
----------- -------------------
Weighted
Average
Number Remaining Weighted Number Weighted
Range of Exercise Outstanding at Contractual Average Exercisable at Average
Year Granted Prices 12/31/98 Life in Years Exercise Price 12/31/98 Exercise Price
------------ ----------------- ---------------- ------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
OPTION PLAN
1994 $ 2.00 - 2.20 166,200 1.50 $ 2.18 165,600 $ 2.18
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
1998 n/a n/a n/a n/a n/a n/a
--------------- ------- ---- ------ ------- ------
Totals $ 2.00 - 2.20 166,200 1.50 $ 2.18 165,600 $ 2.18
=============== ======= ==== ====== ======= ======
NON-EMPLOYEE DIRECTOR PLAN
1994 $ 2.00 10,000 6.00 $ 2.00 10,000 $ 2.00
1995 n/a n/a n/a n/a n/a n/a
1996 $ 3.375 2,000 7.47 $3.375 2,000 $3.375
1997 $ 5.75 2,000 8.47 $ 5.75 2,000 $ 5.75
1998 n/a n/a n/a n/a n/a n/a
--------------- ------- ---- ------ ------- ------
Totals $ 2.00 - 5.75 14,000 6.56 $ 2.73 14,000 $ 2.73
=============== ======= ==== ====== ======= ======
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 7.82 $ 5.00 20,000 $ 5.00
1997 $ 6.00 - 7.375 31,667 5.73 $ 6.65 24,167 $ 6.43
1998 $ 2.6875 - 6.00 54,200 8.90 $ 2.94 24,200 $ 3.26
--------------- ------- ---- ------ ------- ------
Totals $2.6875 - 7.375 115,867 7.75 $ 4.49 68,367 $ 4.89
=============== ======= ==== ====== ======= ======
</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 of the awards consistent with the provisions of SFAS No. 123, the
Company's net income and income per share would have decreased by approximately
$119,700 or $0.046, respectively, in 1998. The Company's net loss and loss per
share would have increased by approximately $115,000 or $0.047, respectively, in
1997, and approximately $13,000 or $0.005, respectively, in 1996. The pro forma
fair value of options at date of grant for options granted during 1998 were
estimated using the Black-Scholes model and the weighted average assumptions are
as follows:
36
<PAGE>
Non-Employee
Option Plan Director Plan Incentive Plan
----------- ------------- --------------
Expected life (years) 5 5 5
Interest rate range 5.7 - 6.68% 5.7 - 6.68% 5.7 - 6.68%
Volatility range 61 - 145% 61 - 145% 61 - 145%
Dividend yield n/a n/a n/a
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 expired on August 10, 1998.
In April and August 1996, the Company issued 10,000 and 5,000 shares,
respectively, 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. Each share
of 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. Proceeds of $652,500 were used for commissions and other
selling costs and working capital. As of December 31, 1998, 1,550 shares of the
Company's Series A Preferred Stock were outstanding.
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 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 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.
37
<PAGE>
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.
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. Each share
of 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. Proceeds of $832,000 were used for commissions and other
selling costs and working capital. As of December 31, 1998, 10,000 shares of
the Company's Series B Preferred Stock were outstanding.
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 May 1998, the Company completed a private placement of 4,200 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. Each share
of 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. Proceeds of $345,000 were used for commissions and other selling costs
and working capital. As of December 31, 1998, 4,200 shares of the Company's
Series C Preferred Stock were outstanding.
In January 1998, the Company issued 744 shares of common stock to an employee
under the Company's 1995 Incentive Stock Plan for a stock bonus. Costs of
$3,600 were expensed as wages.
In March 1998, the Company issued 2,014 shares of common stock to employees
under the Company's 1995 Incentive Stock Plan for stock bonuses. Costs of
$7,800 were expensed as wages.
In March 1998, the Company issued 600 shares of common stock to an employee
under the Company's 1993 Stock Option Plan for exercised vested options.
In April 1998, the Company issued 1,892 shares of common stock to employees
under the Company's 1995 Incentive Stock Plan for stock bonuses. Costs of
$7,800 were expensed as wages.
In May 1998 the Company issued 1,200 shares of the Company's common stock to
holders of 50 shares of Series A Preferred Stock for the exercise of their
conversion options.
In December 1998 the Company issued 13,200 shares of the Company's common stock
to holders of 550 shares of Series A Preferred Stock for the exercise of their
conversion options.
38
<PAGE>
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 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share for the year ended December 31,:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- --------------- ---------------
<S> <C> <C> <C>
Numerator:
Net income (loss) $ 902,621 $ (584,864) $ (644,148)
Dividends on convertible preferred stock 189,660 135,411 25,250
---------- ---------- ----------
Numerator for basic earnings per share - income
available to common shareholders 712,961 (720,275) (669,398)
Effect of dilutive securities:
Dividends on convertible preferred stock 189,660 n/a n/a
---------- ---------- ----------
Numerator for diluted earnings per share $ 902,621 $ (720,275) $ (669,398)
========== ========== ==========
Denominator:
Denominator for basic earnings per share -
weighted average shares 2,613,113 2,474,716 2,409,948
Effect of dilutive securities:
Employee and director stock options 64,431 n/a n/a
Convertible preferred stock 273,914 n/a n/a
---------- ---------- ----------
Dilutive potential common shares 338,345 n/a n/a
---------- ---------- ----------
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed
conversions 2,951,458 2,474,716 2,409,948
========== ========== ==========
Basic earnings (loss) per share $ 0.27 $ (0.29) $ (0.28)
Diluted earnings (loss) per share $ 0.31 $ (0.29) $ (0.28)
</TABLE>
NOTE 10 - RELATED PARTY
During 1996, the Company granted 15,000 shares of Common Stock under the
Incentive Plan and paid $5,000 to a former director to resolve certain issues
relating to a terminated consulting agreement. Costs of $87,000 were expensed
as other expenses.
During 1998 the Company engaged a certain law firm to provide general counsel.
A member of the Board of Directors of the Company is a partner in the firm.
Costs for legal services of $55,000 were expensed as general and administrative
expenses.
39
<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 19, 1999 appearing in this Annual Report on Form
10-KSB of Great Pines Water Company, Inc. for the year ended December 31, 1998.
DELOITTE & TOUCHE LLP
Houston, Texas
March 30, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,082
<SECURITIES> 0
<RECEIVABLES> 683
<ALLOWANCES> (56)
<INVENTORY> 72
<CURRENT-ASSETS> 2,113
<PP&E> 10,404
<DEPRECIATION> (5,731)
<TOTAL-ASSETS> 6,824
<CURRENT-LIABILITIES> 2,567
<BONDS> 1,740
16
0
<COMMON> 26
<OTHER-SE> 2,475
<TOTAL-LIABILITY-AND-EQUITY> 6,824
<SALES> 9,214
<TOTAL-REVENUES> 9,214
<CGS> 0
<TOTAL-COSTS> 8,948
<OTHER-EXPENSES> (969)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 362
<INCOME-PRETAX> 902
<INCOME-TAX> 0
<INCOME-CONTINUING> 713
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 713
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.31
</TABLE>
