UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
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Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended October 31, 2008.
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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from
to
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Commission File Number 000-31797
VERMONT PURE HOLDINGS, LTD.
(Exact name of registrant as specified in its charter)
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Delaware
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03-0366218
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State or other jurisdiction of incorporation
or organization
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I.R.S. Employer Identification Number
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1050 Buckingham St., Watertown, CT 06795
(Address of principal executive offices and zip code)
Registrants telephone number, including area code:
(860) 945-0661
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Securities registered pursuant to Section 12(b) of the Act:
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Common Stock, par value $.001 per share
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NYSE Alternext US
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Title of each class
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Name of exchange on which registered
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes
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No
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes
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No
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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
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No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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(Do not check if smaller reporting company)
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Smaller Reporting Company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes
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No
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The aggregate market value of the voting and non-voting common equity held by non-affiliates of the
registrant, computed by reference to the last sale price per share of common stock on April 30,
2008, the last business day of the registrants most recently completed second fiscal quarter, as
reported on the NYSE Alternext US, was $14,768,000.
The number of shares outstanding of the registrants Common Stock, $.001 par value, was 21,547,227
on January 9, 2009.
Documents Incorporated by Reference
Portions of the registrants definitive proxy statement, to be filed not later than 120 days after
the registrants fiscal year ended October 31, 2008, and delivered in connection with the
registrants annual meeting of stockholders, are incorporated by reference into Part III of this
Form 10-K.
Table of Contents
Note: Items 6 and 7A are not required for smaller reporting companies and therefore are not
furnished.
***************
In this annual report on Form 10-K, Vermont Pure, the Company, we, us and our refer to
Vermont Pure Holdings, Ltd. and its subsidiary, taken as a whole, unless the context otherwise
requires.
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This Annual Report on Form 10-K contains references to trade names, label design, trademarks and
registered marks of Vermont Pure Holdings, Ltd. and its subsidiary and other companies, as
indicated. Unless otherwise provided in this Annual Report on Form 10-K, trademarks identified by
(R) are registered trademarks or trademarks, respectively, of Vermont Pure Holdings, Ltd. or its
subsidiary. All other trademarks are the properties of their respective owners.
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Except for historical facts, the statements in this annual report are forward-looking statements.
Forward-looking statements are merely our current predictions of future events. These statements
are inherently uncertain, and actual events could differ materially from our predictions.
Important factors that could cause actual events to vary from our predictions include those
discussed in this annual report under the heading Risk Factors. We assume no obligation to
update our forward-looking statements to reflect new information or developments. We urge readers
to review carefully the risk factors described in this annual report and in the other documents
that we file with the Securities and Exchange Commission. You can read these documents at
www.sec.gov.
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PART I
ITEM 1. BUSINESS.
Introduction and Company Background
Vermont Pure Holdings, Ltd., incorporated in Delaware in 1990, is engaged in the production,
marketing and distribution of bottled water and the distribution of coffee, ancillary products, and
other office refreshment products. We operate primarily as a distribution business to homes and
offices, using our own trucks for distribution throughout New England, New York, and New Jersey.
Our distribution sales and services evolved from our initial business, sales of bottled water and
cooler rentals. We bottle our water and also have it bottled for us. All of our water products are
still, non-sparkling waters as opposed to sparkling waters. In addition to water and related
services our other significant offerings have grown to include distribution of coffee and ancillary
products, and other refreshment products including soft drinks and snacks. To a lesser extent, we
distribute these products through third party distributors and directly through vending machines.
Bottled water is a mainstream beverage and the centerpiece of many consumers healthy living
lifestyles. In addition, we believe that the development and continued growth of the bottled water
industry reflects growing public awareness of the potential contamination and unreliability of
municipal water supplies. Conversely, bottled water has been the recent focus of publicity
regarding concerns about the environmental and health effects of using polycarbonate plastic
bottles (these are described in more detail in Item 1A, Risk Factors).
Coffee, a product that is counter seasonal to water, is the second leading product in the
distribution channel, accounting for 23% of our total sales in fiscal year 2008. Because coffee is
a commodity, coffee sales are affected by volatility in the world commodity markets. An
interruption in supply or a dramatic increase in pricing could have an adverse effect on our
business.
The increase in coffee sales in recent years has been driven by the market growth of single-serve
coffee products. This development has revolutionized the marketplace and, while we expect the
growth of these products to continue, innovation and changes in distribution will play a
significant role in the profitability of the products.
Water Sources, Treatment, and Bottling Operations
Water from local municipalities is the primary raw source for the Crystal Rock
®
brand. The raw
water is purified through a number of processes beginning with filtration. Utilizing carbon and
ion exchange filtration systems, we remove chlorine and other volatile compounds and dissolved
solids. After the filtration process, impurities are removed by reverse osmosis and/or
distillation. We ozonate our purified water (by injecting ozone into the water as an agent to
prohibit the formation of bacteria) prior to storage. Prior to bottling, we add pharmaceutical
grade minerals to the water, including calcium and potassium, for taste. The water is again
ozonated and bottled in a fully enclosed clean room with a high efficiency particulate air, or
HEPA, filtering system designed to prevent any airborne contaminants from entering the bottling
area, in order to create a sanitary filling environment.
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If for any reason this municipal source for Crystal Rock
®
water were curtailed or eliminated, we
could, though probably at greater expense, purchase water from other sources and have it shipped to
our manufacturing facilities.
In conjunction with our acquisition of their Home and Office distribution assets, we entered into a
contract with Mayer Brothers of Buffalo, New York to bottle our Crystal Rock
®
brand in that market.
The primary source of our natural spring water (primarily sold under the Vermont Pure
®
brand) is a
spring owned by a third party in Stockbridge, Vermont that is subject to a 50- year water supply
contract. We also obtain water, under similar agreements with third parties, from springs in
Bennington and Tinmouth, Vermont. These three springs are approved by the State of Vermont as
sources for natural spring water. The contractual terms for these springs provide spring water in
excess of our current needs and within the apparent capacity of the springs, and accordingly we
believe that we can readily meet our bulk water supply needs for the foreseeable future.
Percolation through the earths surface is natures best filter of water. We believe that the
exceptionally long percolation period of natural spring water assures a high level of purity.
Moreover, the long percolation period permits the water to become mineralized and pH balanced.
We believe that the age and extended percolation period of our natural spring water provides the
natural spring water with certain distinct attributes: a purer water, noteworthy mineral
characteristics (including the fact that the water is sodium free and has a naturally balanced pH),
and a light, refreshing taste.
An interruption or contamination of any of our spring sites would materially affect our business.
We believe that we could find adequate supplies of bulk spring water from other sources, but that
we might suffer inventory shortages or inefficiencies, such as increased purchase or transportation
costs, in obtaining such supplies.
We are highly dependent on the integrity of the sources and processes by which we derive our
products. Natural occurrences beyond our control, such as drought, earthquake or other geological
changes, a change in the chemical or mineral content or purity of the water, or environmental
pollution may affect the amount and quality of the water emanating from the springs or municipal
sources that we use. There is a possibility that characteristics of the product could be changed
either inadvertently or by tampering before consumption. Even if such an event were not
attributable to us, the products reputation could be irreparably harmed. Consequently, we would
experience economic hardship. Occurrence of any of these events could have an adverse impact on
our business. We are also dependent on the continued functioning of our bottling processes. An
interruption may result in an inability to meet market demand and/or negatively impact the cost to
bottle the products.
We have no material contractual commitments to the owners of our outside sources and bottling
facilities other than for the products and services we receive.
We use outside trucking companies to transport bulk spring water from the source site to our
bottling facilities.
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Products
We sell our three major brands in three and five gallon bottles to homes and offices throughout New
England, New York, and New Jersey. In general, Crystal Rock
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is distributed in southern New England
and upstate and western New York, while Vermont Pure
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is primarily distributed throughout northern
New England and upstate New York and secondarily in southern New England. Hidden Spring
®
is
generally sold to distributors in New England. We rent and sell water coolers to customers to
dispense bottled water. Our coolers are available in various consumer preferences such as cold, or
hot and cold, dispensing units. In addition, we sell and rent units to commercial accounts that
filter water from the existing source on site. We also distribute a variety of coffee, tea and
other hot beverage products and related supplies, as well as other consumable products used around
the office. We offer vending services in some locations. We rent and sell single-serve coffee
brewing equipment to customers. In addition, we supply whole beans and coffee grinders for fresh
ground coffee and cappuccino machines to restaurants. We are the exclusive office coffee
distributor of Baronet Coffee in New England, New York and New Jersey. In addition to Baronet
Coffee, we sell other national brands, most notably, Green Mountain Coffee Roasters.
Marketing and Sales of Branded Products
Our water products are marketed and distributed in three and five gallon bottles as premium
bottled water. We seek brand differentiation by offering a choice of high quality spring and
purified water along with a wide range of coffee and office refreshment products, and value-added
service. Home and Office sales are generated and serviced using our own facilities, employees and
vehicles.
We support this sales effort through promotional giveaways and Yellow Pages advertising, as well as
radio, television and billboard advertising campaigns. We also sponsor local area sporting events,
participate in trade shows, and endeavor to be highly visible in community and charitable events.
We market our Home and Office delivery service throughout most of New England and New York and
parts of New Jersey. Telemarketers and outside/cold-call sales personnel are used to market our
Home and Office delivery.
Advertising and Promotion
We advertise our products primarily through Yellow Pages and radio and billboard advertising.
Radio and billboard has primarily been used in the southern New England market. We have also
actively promoted our products through sponsorship of various local organizations and sporting
events to endeavor to be highly visible in the communities that we serve. In recent years, we have
sponsored professional minor league baseball and various charitable and cultural organizations,
such as Special Olympics and the Multiple Sclerosis Society.
Sales and Distribution
We sell and deliver products directly to our customers using our own employees and route delivery
trucks. We make deliveries to customers on a regularly scheduled basis. We bottle our water at
our facilities in Watertown, Connecticut, White River Junction, Vermont, and Halfmoon, New York and
have water bottled for us in Buffalo and Edmeston, New York. We maintain numerous distribution
locations throughout our market area. From these locations we also distribute dispensing
equipment, a variety of coffee, tea and other refreshment products, and related supplies. We ship
between our production and distribution sites using both our own and contracted carriers.
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Supplies
We currently source all of our raw materials from outside vendors. As one of the largest Home and
Office distributors in the country, we are able to capitalize on volume to continue to reduce
costs.
We rely on trucking to receive raw materials and transport and deliver our finished products.
Consequently, the price of fuel significantly impacts the cost of our products. We purchase our
own fuel for our Home and Office delivery and use third parties for transportation of raw materials
and finished goods between our warehouses. While volume purchases can help control erratic fuel
pricing, market conditions ultimately determine the price. In 2008, we experienced substantial
increases in fuel prices as a result of market influences. Continued increases in fuel prices
would likely affect our profitability if we are not able to adjust our pricing accordingly without
losing sales volume.
No assurance can be given that we will be able to obtain the supplies we require on a timely basis
or that we will be able to obtain them at prices that allow us to maintain the profit margins we
have had in the past. We believe that we will be able to either renegotiate contracts with these
suppliers when they expire or, alternatively, if we are unable to renegotiate contracts with our
key suppliers, we believe that we could replace them. Any raw material disruption or price
increase may result in an adverse impact on our financial condition and prospects. For instance,
we could incur higher costs in renegotiating contracts with existing suppliers or replacing those
suppliers, or we could experience temporary dislocations in our ability to deliver products to our
customers, either of which could have a material adverse effect on our results of operations.
Seasonality
Our business is seasonal. The period from June to September, when we have our highest water sales,
represents the peak period for sales and revenues due to increased consumption of cold beverages
during the summer months in our core Northeastern United States market. Conversely, coffee, which
represented 23% of our sales in 2008, has a peak sales period from November to March.
Competition
We believe that bottled water historically has been a regional business in the United States. The
market includes several large regional brands owned by multi-national companies that operate
throughout contiguous states. We also compete with smaller, locally-owned bottlers that operate in
specific cities or market areas within single states.
With our Crystal Rock
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and Vermont Pure
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brands, we compete on the basis of pricing, customer
service, quality of our products, attractive packaging, and brand recognition. We consider our
trademarks, trade names and brand identities to be very important to our competitive position and
defend our brands vigorously. In addition, in 2008 we began offering PET plastic as an alternative
bottle and have converted customers with health concerns about polycarbonate plastic to this
container.
We feel that installation of filtration units in the home or commercial setting poses a competitive
threat to our business. To address this, we have continued to develop our plumbed-in filtration
business.
In the past five years, cheaper water coolers from offshore sources have become more prevalent,
making customer purchasing a more viable alternative to leasing. Traditionally, the rental of
water coolers for offices and homes has been a very profitable business for us. As coolers have
become
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cheaper and more readily available at retail outlets, our cooler rental revenue has
declined. Although this rental revenue is very profitable for us, it may continue to decline or
become less profitable in the future as a result of this relatively new form of competition.
As discussed above, coffee is another significant component of our overall sales. The growth of
this product line has been driven by single serve packages. Since these packages are relatively
new, distribution channels are not yet fully developed. Increased competition for sales most
likely will develop from other food and beverage distributors, retailers, and the internet. In
addition, machines to brew these packages are different from traditional machines and packages
ideally need to be brewed in machines that accommodate the specific package. It is conceivable
that the popularity of a certain machine or brand may dictate what products are successful in the
marketplace. Consequently, our success, both from a sales and profitability perspective, may be
affected by our access to distribution rights for certain products and machines and our decisions
concerning which equipment to invest in.
We believe that it has become increasingly important to our competitive advantage to decrease the
impact of our business on the environment. We traditionally use five gallon containers that are
placed on coolers and are reused many times. Recently we have taken additional steps to green
our business including:
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Completed an extensive solar electricity generation installation in our Watertown
facility to supply a significant amount of the energy for that facility.
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Upgraded the lighting in most of our facilities to high efficiency lighting.
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Instituted no-idling and other driving policies in all of our locations.
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Upgraded many of our older vehicles to new, more energy efficient vehicles.
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Trademarks
We own the trade names of the principal water brands that we sell, Vermont Pure Natural Spring
Water
®
and Crystal Rock
®
. We own or have rights to other trade names that currently are not a
significant part of our business. Our trademarks as well as label designs are, in general,
registered with the United States Patent and Trademark Office.
Government Regulation
The Federal Food and Drug Administration (FDA) regulates bottled water as a food. Accordingly,
our bottled water must meet FDA requirements of safety for human consumption, of processing and
distribution under sanitary conditions and of production in accordance with the FDA good
manufacturing practices. To assure the safety of bottled water, the FDA has established quality
standards that address the substances that may be present in water which may be harmful to human
health as well as substances that affect the smell, color and taste of water. These quality
standards also require public notification whenever the microbiological, physical, chemical or
radiological quality of bottled water falls below standard. The labels affixed to bottles and
other packaging of the water are subject to FDA restrictions on health and nutritional claims for
foods under the Fair Packaging and Labeling Act. In addition, all drinking water must meet
Environmental Protection Agency standards established under the Safe Drinking Water Act for mineral
and chemical concentration and drinking water quality and treatment that are enforced by the FDA.
We are subject to the food labeling regulations required by the Nutritional Labeling and Education
Act of 1990. We believe we are in compliance with these regulations.
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We are subject to periodic, unannounced inspections by the FDA. Upon inspection, we must be in
compliance with all aspects of the quality standards and good manufacturing practices for bottled
water, the Fair Packaging and Labeling Act, and all other applicable regulations that are
incorporated in the FDA quality standards. We believe that we meet the current regulations of the
FDA, including the classification as spring water.
We also must meet state regulations in a variety of areas to comply with purity, safety, and
labeling standards. From time to time, our facilities and sources are inspected by various state
departments and authorities. The jurisdiction of such regulation varies from state to state.
Our product labels are subject to state regulation (in addition to the federal requirements) in
each state where the water products are sold. These regulations set standards for the information
that must be provided and the basis on which any therapeutic claims for water may be made.
The bottled water industry has a comprehensive program of self-regulation. We are a member of the
International Bottled Water Association, or IBWA. As a member, our facilities are inspected
annually by an independent laboratory, the National Sanitation Foundation, or NSF. By means of
unannounced NSF inspections, IBWA members are evaluated on their compliance with the FDA
regulations and the associations performance requirements, which in certain respects are more
stringent than those of the federal and various state regulations.
In the past year, there has been an increasing amount of proposed legislative and executive action
in state and local governments that would ban the use of bottled water in municipal buildings,
enact local taxes on bottled water, and limit the sale by municipalities of water supplies to
private companies for resale. To date, none of this action has affected our business but such
regulation could adversely affect our business and financial results. For additional information,
see Risk Factors below.
The laws that regulate our activities and properties are subject to change. As a result, there can
be no assurance that additional or more stringent requirements will not be imposed on our
operations in the future. Although we believe that our water supply, products and bottling
facilities are in substantial compliance with all applicable governmental regulations, failure to
comply with such laws and regulations could have a material adverse effect on our business.
Employees
As of January 9, 2009, we had 330 full-time employees and 17 part-time employees. None of the
employees belong to a labor union. We believe that our relations with our employees are good.
Additional Available Information
Our principal website is www.vermontpure.com. We make our annual, quarterly and current reports,
and amendments to those reports, available free of charge on www.vermontpure.com, as soon as
reasonably practicable after we electronically file such material with, or furnish it to, the
Securities and Exchange Commission (SEC). Reports of beneficial ownership of our common stock, and
changes in that ownership, by directors and officers on Forms 3, 4 and 5 are likewise available
free of charge on our website.
The information on our website is not incorporated by reference in this annual report on Form 10-K
or in any other report, schedule, notice or registration statement filed with or submitted to the
SEC.
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The SEC maintains an Internet site that contains reports, proxy and information statements, and
other information regarding issuers that file electronically at www.sec.gov. You may also read and
copy the materials we file with the SEC at the SECs Public Reference Room at 100 F Street, N.E.,
Room 1580, Washington, D.C. 20549. You may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330.
ITEM 1A. RISK FACTORS.
We operate in a competitive business environment that is influenced by conditions that are both
controllable and beyond our control. These conditions include, but are not limited to, the
regional economy, monetary policy, and the political and regulatory environment. The following
summarizes important risks and uncertainties that may materially affect our business in the future.
Over a period of years, we have borrowed substantial amounts of money to finance acquisitions. If
we are unable to meet our debt service obligations to our senior and subordinated lenders, we would
be in default under those obligations, and that could hurt our business or even result in
foreclosure, reorganization or bankruptcy.
The underlying loans are secured by substantially all of our assets. If we do not repay our
indebtedness in a timely fashion, our secured creditors could declare a default and foreclose upon
our assets, which would likely result in harmful disruption to our business, the sale of assets for
less than their fully realizable value, and possible bankruptcy. We must generate enough cash flow
to service this indebtedness until maturity.
Fluctuations in interest rates could significantly increase our expenses. We will have significant
interest expense for the foreseeable future, which in turn may increase or decrease due to interest
rate fluctuations. To partially mitigate this risk, we have established fixed interest rates on
75% of our outstanding senior term debt.
As a result of our large amount of debt, we may be perceived by banks and other lenders to be
highly leveraged and close to our borrowing ceiling. Until we repay some of our debt, our ability
to access additional capital may be limited. In turn, that may limit our ability to finance
transactions and to grow our business. In addition, our senior credit agreement limits our ability
to incur incremental debt without our lenders permission.
Our senior credit agreement contains numerous covenants and restrictions that affect how we conduct
our business.
The Baker family currently owns a majority of our voting stock and controls the company. Such
control affects our corporate governance, and could also have the effect of delaying or preventing
a change of control of the company.
The Baker family group, consisting of four current directors Henry Baker (Chairman Emeritus), Peter
Baker (CEO), John Baker (Executive Vice President) and Ross Rapaport (Chairman), as trustee,
together own a majority of our common stock. Accordingly, these stockholders, acting together, can
exert a controlling influence over the outcome of matters requiring stockholder approval, such as
the election of directors, amendments to our certificate of incorporation, mergers and various
other matters. The concentration of ownership could also have the effect of delaying or preventing
a change of control of the company.
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As permitted under the corporate governance rules of the NYSE Alternext US (NYSE Alternext), we
have, at the direction of the Baker family group, elected controlled company status under those
rules. A controlled company is exempted from these NYSE Alternext corporate governance rules: (1)
the requirement that a listed company have a majority of independent directors, (2) the requirement
that nominations to the companys board of directors be either selected or recommended by a
nominating committee consisting solely of independent directors, and (3) the requirement that
officers compensation be either determined or recommended by a compensation committee consisting
solely of independent directors. We do not currently utilize exemption (3) as we have a
compensation committee consisting solely of three independent directors.
Our success depends on the continued services of key personnel.
Our continued success will depend in large part upon the expertise of our senior management. Peter
Baker, our Chief Executive Officer and President, John Baker, our Executive Vice President, and
Bruce MacDonald, our Chief Financial Officer, Treasurer and Secretary, have entered into employment
agreements with Vermont Pure Holdings, Ltd. These at will employment agreements do not prevent
these employees from resigning. The departure or loss of any of these executives individually
could have an adverse effect on our business and operations.
The personal interests of our directors and officers create a conflict.
As mentioned above, the Baker family group owns a majority of our common stock. In addition, in
connection with the acquisition of Crystal Rock Spring Water Company in 2000, we issued members of
the Baker family group 12% subordinated promissory notes secured by all of our assets. The current
balance on these notes is approximately $14,000,000. We also lease important facilities in
Watertown and Stamford, Connecticut from Baker family interests. These interests of the Baker
family create various conflicts of interest.
We face competition from companies with far greater resources than we have. In addition, methods
of competition in the distribution of home and office refreshment products continue to change and
evolve. If we are unable to meet these changes, our business could be harmed.
We operate in highly competitive markets. The principal methods of competition in the markets in
which we compete are distribution capabilities, brand recognition, quality, reputation, and price.
We have a significant number of competitors, some of which have far greater resources than us.
Among our principal competitors are Nestlé Waters North America, large regional brands owned by
private groups, and local competitors in the markets that we serve. Price reductions and the
introduction of new products by our competitors can adversely affect our revenues, gross margins,
and profits.
In addition, the industry has been affected by the increasing availability of water coolers in
discount retail outlets. This has negatively impacted our rental revenue stream in recent years as
more customers choose to purchase coolers rather than rent them. The reduction of rental revenue
has been somewhat offset by the increase in coolers that we sell but not to the extent that rentals
have declined. We do not expect retail sales to replace rentals completely because we believe that
the purchase option does not provide the quality and service that many customers want. However,
third party retail cooler sales may continue to negatively impact our rental revenues in the
future.
The bottled water industry is regulated at both the state and federal level. If we are unable to
continue to comply with applicable regulations and standards in any jurisdiction, we might not be
able to sell our products in that jurisdiction, and our business could be seriously harmed.
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The FDA regulates bottled water as a food. Our bottled water must meet FDA requirements of safety
for human consumption, labeling, processing and distribution under sanitary conditions and
production in accordance with FDA good manufacturing practices. In addition, all drinking water
must meet Environmental Protection Agency standards established under the Safe Drinking Water Act
for mineral and chemical concentration and drinking water quality and treatment, which are enforced
by the FDA. We also must meet state regulations in a variety of areas. These regulations set
standards for approved water sources and the information that must be provided and the basis on
which any therapeutic claims for water may be made. We have received approval for our drinking
water in Connecticut, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island and Vermont.
However, we can give no assurance that we will receive such approvals in the future.
Legislative and executive action in state and local governments banning the use of municipal funds
for purchasing bottled water, enacting local taxes on bottled water or water extraction, and
restricting water withdrawal and usage rights from public and private sources could adversely
affect our business and financial results.
Recent initiatives have taken place in several major cities regarding bottled water, principally
the smaller sizes sold in stores to retail consumers. Regulations have been proposed in some
localities that would ban the use of public funds to purchase bottled water and enact local taxes
on bottled water or water extraction, and restrict the withdrawal of water from public and private
sources. These actions are purportedly designed to discourage the use of bottled water due in
large part to concerns about the environmental effects of producing and discarding large numbers of
plastic bottles. In developing these stories, local and national media have reported on the growth
of the bottled water industry and on the pros and cons of consuming bottled water as it relates to
solid waste disposal and energy consumption in manufacturing as well as conserving the supply of
water available to the public.
We believe that the adverse publicity associated with these reports is generally aimed at the
retail, small bottle segment of the industry that is now a minimal part of our business, and that
our customers can readily distinguish our products from the retail bottles that are currently the
basis for concern in some areas. Our customers typically buy their water in reusable five gallon
containers that are placed on coolers and are reused many times and only approximately 4% of our
total sales is from water sold in single serve packages. In addition, we continue to take steps to
green our business by means of solar electricity generation, high efficiency lighting, no-idling
and other driving policies, and the use of biodiesel.
While we believe that to date we have not directly experienced any adverse effects from these
concerns, and that our products are sufficiently different from those under scrutiny, there is no
assurance that adverse publicity about any element of the bottled water industry will not affect
consumer behavior by discouraging buyers from buying bottled water products generally. In that
case, our sales and other financial results could be adversely affected.
Various media outlets have reported that a chemical, bisphenol A, used in packaging and other
products can possibly have adverse health effects on consumers, particularly on young children.
Bisphenol A is contained in the three- and five- gallon polycarbonate plastic bottles that we use
to bottle our water. Any significant change in perception by our customers or government
regulation of polycarbonate plastic in food and beverage products could adversely affect our
operations and financial results.
We feel that the scientific evidence suggests that polycarbonate plastic has been, and will
continue to be, a safe packing material for all consumers. National and international organizations
responsible for consumer safety, including the Food and Drug Administration, have continued to
recognize the
11
safety of this packaging. Nonetheless, media reports have prompted concern in our
marketplace among customers and potential customers.
To date, this situation has not adversely affected our business. However, it is possible that
developments surrounding this issue could lead to adverse effects on our business. Such
developments could include:
|
|
|
Increased publicity that changes perception regarding packaging that uses bisphenol A,
so that significant numbers of consumers stop purchasing products that are packaged in
polycarbonate plastic.
|
|
|
|
|
The emergence of new scientific evidence that proves polycarbonate plastic is unsafe, or
interpretations of existing evidence by regulatory agencies that lead to prohibitions on
the use of polycarbonate plastic as packaging for consumable products.
|
|
|
|
|
Inability of sellers of consumable products to find an adequate supply of alternative
packaging if polycarbonate plastic becomes an undesirable package.
|
If such events, or any of them, were to occur, our sales and operating results could be materially
adversely affected.
We have begun offering PET plastic as an alternative bottle and have converted customers with a
concern about polycarbonate plastic to this container. However, at this point, no assurance can be
given that this is an adequate solution if materially adverse developments such as those noted
above should occur.
We depend upon maintaining the integrity of our water resources and manufacturing process. If our
water sources or bottling processes were contaminated for any reason, our business would be
seriously harmed.
Our ability to retain customers and the goodwill associated with our brands is dependent upon our
ability to maintain the integrity of our water resources and to guard against defects in, or
tampering with, our manufacturing process. The loss of integrity in our water resources or
manufacturing process could lead to product recalls and/or customer illnesses that could
significantly reduce our goodwill, market share and revenues. Because we rely upon natural spring
sites for sourcing some of our water supply, acts of God, such as earthquakes, could alter the
geologic formation of the spring sites, constricting water flow.
In addition, we do not own any of our water sources. Although we feel the long term rights to our
spring and municipal sources are well secured, any dispute over these rights that resulted in
prolonged disruption in supply could cause an increase in cost of our product or shortages that
would not allow us to meet the market demand for our product.
Fluctuations in the cost of essential raw materials and commodities, including fuel costs, for the
manufacture and delivery of our products could significantly impact our business.
We rely upon the raw material of polycarbonate, a commodity that is subject to fluctuations in
price and supply, for manufacturing our bottles. Bottle manufacturers also use petroleum-based
products. Increases in the cost of petroleum will likely have an impact on our bottle costs.
Our transportation costs increase as the price of fuel rises. Because trucks are used extensively
in the delivery of our products, the rising cost of fuel has impacted and can be expected to
continue to
12
impact the profitability of our operations unless we are able to pass along those costs
to our customers. Further, limitations on the supply or availability of fuel could inhibit our
ability to get raw materials and distribute our products, which in turn could have an adverse
affect on our business.
A significant portion of our sales, 23% in fiscal year 2008, is derived from coffee. The supply
and price of coffee may be limited by climate, by international political and economic conditions,
and by access to transportation, combined with consumer demand. An increase in the wholesale price
of coffee could result in a reduction in our profitability. If our ability to purchase coffee were
impaired by a market shortage, our sales might decrease, which would also result in a reduction of
profitability.
We have a limited amount of bottling capacity. Significant interruptions of our bottling
facilities could adversely affect our business.
We own three bottling facilities, and also contract with third parties, to bottle our water. If
any of these facilities were incapacitated for an extended period of time, we would likely have to
relocate production to an alternative facility. The relocation and additional transportation could
increase the cost of our products or result in product shortages that would reduce sales. Higher
costs and lower sales would reduce profitability.
We rely upon a single software vendor that supplies the software for our route accounting system.
Our route accounting system is essential to our overall administrative function and success. An
extended interruption in servicing the system could result in the inability to access information.
Limited or no access to this information would likely inhibit the distribution of our products and
the availability of management information, and could even affect our compliance with public
reporting requirements. Our supplier is Innovations in Software, or IIS, which has a limited
number of staff that has proprietary information pertaining to the operation of the software.
Changes in personnel or ownership in the firm might result in disruption of service. Any of these
consequences could have a material adverse impact on our operations and financial condition.
Our customer base is located in New England, New York and New Jersey. If there were to be a
material decline in the economy in these regions, our business would likely be adversely affected.
Essentially all of our sales are derived from New England, New York and New Jersey. A significant
negative change in the economy of any of these regions, changes in consumer spending in these
regions, or the entry of new competitors into these regional markets, among other factors, could
result in a decrease in our sales and, as a result, reduced profitability.
Our business is seasonal, which may cause fluctuations in our stock price.
Historically, the period from June to September represents the peak period for sales and revenues
due to increased consumption of beverages during the summer months in our core Northeastern United
States markets. Warmer weather in our geographic markets tends to increase water sales, and cooler
weather tends to decrease water sales. To the extent that our quarterly results are affected by
these patterns, our stock price may fluctuate to reflect them.
13
Acquisitions may disrupt our operations or adversely affect our results
We regularly evaluate opportunities to acquire other businesses. The expenses we incur evaluating
and pursuing acquisitions could have a material adverse effect on our results of operations. If we
acquire a business, we may be unable to manage it profitably or successfully integrate its
operations with our own. Moreover, we may be unable to realize the financial, operational, and
other benefits we anticipate from these acquisitions. Competition for future acquisition
opportunities in our markets could increase the price we pay for businesses we acquire and could
reduce the number of potential acquisition targets. Further, acquisitions may involve a number of
special financial and business risks, such as:
|
|
|
charges related to any potential acquisition from which we may withdraw;
|
|
|
|
|
diversion of our managements time, attention, and resources;
|
|
|
|
|
decreased utilization during the integration process;
|
|
|
|
|
loss of key acquired personnel;
|
|
|
|
|
increased costs to improve or coordinate managerial, operational, financial, and
administrative systems including compliance with the Sarbanes-Oxley Act of 2002;
|
|
|
|
|
dilutive issuances of equity securities, including convertible debt securities;
|
|
|
|
|
the assumption of legal liabilities;
|
|
|
|
|
amortization of acquired intangible assets;
|
|
|
|
|
potential write-offs related to the impairment of goodwill;
|
|
|
|
|
difficulties in integrating diverse corporate cultures; and
|
|
|
|
|
additional conflicts of interests.
|
We are required to be in full compliance with Section 404 of the Sarbanes-Oxley Act as of our
fiscal year ending October 31, 2009. Under current regulations, the financial cost of compliance
with Section 404 is significant. Failure to achieve and maintain effective internal control in
accordance with Section 404 could have a material adverse effect on our business and our stock
price.
We are in the process of finally implementing the requirements of Section 404 of the Sarbanes-Oxley
Act of 2002, which requires management to assess the effectiveness of our internal controls over
financial reporting and include an assertion in our annual report as to the effectiveness of its
controls. The cost to comply with this law will affect our net income adversely. In addition,
managements effort and cost are no assurance that our independent auditors will attest to the
effectiveness of our internal controls in its report required by the law. If that is the case, the
resulting report from our auditors may have a negative impact on our stock price.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
14
ITEM 2. PROPERTIES.
As part of our Home and Office delivery operations, we have entered into or assumed various lease
agreements for properties used as distribution points and office space. The following table
summarizes these arrangements and includes our bottling facilities:
|
|
|
|
|
|
|
|
|
|
|
Location
|
|
Lease expiration
|
|
Sq. Ft.
|
|
Annual Rent
|
Williston, VT
|
|
June 2009
|
|
|
10,000
|
|
|
$
|
70,936
|
|
Southborough, MA
|
|
December 2013
|
|
|
15,271
|
|
|
$
|
114,533
|
|
Bow, NH
|
|
June 2010
|
|
|
9,600
|
|
|
$
|
48,360
|
|
Rochester, NY
|
|
January 2012
|
|
|
15,000
|
|
|
$
|
60,000
|
|
Buffalo, NY
|
|
September 2010
|
|
|
10,000
|
|
|
$
|
62,500
|
|
Syracuse, NY
|
|
December 2010
|
|
|
10,000
|
|
|
$
|
38,333
|
|
Halfmoon, NY
|
|
October 2011
|
|
|
22,500
|
|
|
$
|
148,500
|
|
Plattsburgh, NY
|
|
May 2010
|
|
|
5,000
|
|
|
$
|
24,000
|
|
Watertown, CT
|
|
October 2016
|
|
|
67,000
|
|
|
$
|
414,000
|
|
Stamford, CT
|
|
October 2010
|
|
|
22,000
|
|
|
$
|
248,400
|
|
White River Junction, VT
|
|
June 2009
|
|
|
12,000
|
|
|
$
|
76,647
|
|
Watertown, CT
|
|
May 2013
|
|
|
15,000
|
|
|
$
|
57,960
|
|
Groton, CT
|
|
June 2009
|
|
|
7,500
|
|
|
$
|
56,375
|
|
All locations are used primarily for warehousing and distribution and have limited office space for
location managers and support staff. The exception is the Watertown, Connecticut location, which
has a substantial amount of office space for sales, accounting, information systems, customer
service, and general administrative staff.
In 2000, we entered into 10-year lease agreements to lease the buildings that are utilized for
operations in Watertown and Stamford, Connecticut. Subsequently, on August 29, 2007, we finalized
an amendment to our existing lease for the Watertown facility. The lease was scheduled to expire
in October, 2010. Annual rent payments for the remainder of the original lease were scheduled to
be $414,000 annually.
The amended lease extends the term of the lease six years, to 2016, with an option to extend it an
additional five years. Annual lease payments over the extended term of the lease are as follows:
|
|
|
|
|
Years 1-2
|
|
$
|
452,250
|
|
Years 3-4
|
|
$
|
461,295
|
|
Years 4-5
|
|
$
|
475,521
|
|
The rent during the extended option term is to be negotiated by the parties or, in the event there
is no agreement, by appraisers selected by them. Otherwise the lease remained substantially
unchanged.
The principal reason for seeking to amend the lease was our decision to construct solar panels on
the roof of the facility, in order to generate a portion of our electricity needs more cheaply than
we currently pay to purchase that electricity. We determined that the economic payback period of
the solar panels would exceed the remaining term of the lease unless we sought and obtained an
amendment extending the term of the lease.
After finalizing the lease amendment, we entered into agreements for the construction of the solar
panels as well as grant agreements from the State of Connecticut to subsidize the project in part.
We believe that certain federal and state tax credits will also help to reduce the effective cost
of the project.
15
The landlord for the buildings in Stamford and Watertown, Connecticut is a trust with which Henry,
John, and Peter Baker, and Ross Rapaport are affiliated. We believe that the rent charged under
these leases is not more than fair market rental value.
We expect that these facilities will meet our needs for the next several years.
ITEM 3. LEGAL PROCEEDINGS.
On May 1, 2006, the Company filed a lawsuit in the Superior Court Department, County of Suffolk,
Massachusetts, alleging malpractice and other wrongful acts, seeking damages in an unspecified
amount, against three law firms that had been representing the Company in litigation involving
Nestlé Waters North America, Inc.: Hagens Berman Sobol Shapiro LLP, Ivey & Ragsdale, and Cozen
OConnor. The case is Vermont Pure Holdings, Ltd. vs. Thomas M. Sobol et al., Massachusetts
Superior Court CA No. 06-1814.
Until May 2, 2006, when the Company terminated their engagement, the three defendant law firms
represented the Company in litigation in federal district court in Massachusetts known as Vermont
Pure Holdings, Ltd. vs. Nestlé Waters North America, Inc. (the Nestlé litigation). The Company
filed the Nestlé litigation in early August 2003.
The Companys lawsuit alleges that the three defendant law firms wrongfully interfered with, and/or
negligently failed to take steps to obtain, a proposed June 2003 settlement with Nestlé. The
complaint includes counts involving negligence, breach of contract, breach of the implied covenant
of good faith and fair dealing, breach of fiduciary duty, tortuous interference with economic
relations, civil conspiracy, and other counts, and seeks declaratory relief and compensatory and
punitive damages.
In July 2006, certain of the defendants filed a counterclaim against the Company seeking recovery
of their fees and expenses in the Nestlé litigation. In August 2007, certain of the defendants
filed a counterclaim against the Company that includes an abuse of process count in which it is
alleged that our claims against them are frivolous and were not advanced in good faith, as well as
a
quantum meruit
count in which these defendants allege that their services were terminated
wrongfully and in bad faith and seek approximately $2.2 million in damages.
Discovery of fact witnesses and expert witnesses has been completed. In September 2008, the
defendants in the lawsuit filed summary judgment motions seeking dismissal of the Companys claims
in their entirety, which the Company opposed. The Superior Court Judge denied these motions in a
ruling dated December 26, 2008. No trial date for this lawsuit has been set.
Management intends to pursue its claims, and to the extent of the counterclaims, defend itself
vigorously.
On May 15, 2006, the Company entered into an agreement with Nestlé Waters North America Inc. to
resolve pending litigation known as Vermont Pure Holdings, Ltd. v Nestlé Waters North America Inc.,
which was in the United States District Court for the District of Massachusetts. In this lawsuit,
filed in August 2003, the Company had made claims under the federal Lanham Act against Nestlé. The
parties provided mutual releases and have stipulated to dismissal of the case, with neither side
admitting liability or wrongdoing. Nestle paid the Company $750,000 in June 2006 in connection
with the agreement. The Company recorded $750,000 as other income in the third quarter of 2006,
related to this settlement.
16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the quarter ended October 31, 2008.
17
PART II
|
|
|
ITEM 5.
|
|
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES.
|
NYSE Euronext completed its acquisition of the American Stock Exchange (AMEX) on October 1, 2008.
Post merger, the AMEX equities business has been re-branded NYSE Alternext US LLC (NYSE Alternext).
Our Common Stock is traded on the NYSE Alternext under the symbol VPS. The table below indicates
the range of the high and low daily closing prices per share of Common Stock as reported by the
exchange.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
Low
|
Fiscal Year Ended October 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
1.72
|
|
|
$
|
1.38
|
|
Second Quarter
|
|
$
|
1.60
|
|
|
$
|
1.36
|
|
Third Quarter
|
|
$
|
1.41
|
|
|
$
|
1.27
|
|
Fourth Quarter
|
|
$
|
1.41
|
|
|
$
|
.94
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended October 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
1.75
|
|
|
$
|
1.38
|
|
Second Quarter
|
|
$
|
1.98
|
|
|
$
|
1.75
|
|
Third Quarter
|
|
$
|
1.94
|
|
|
$
|
1.79
|
|
Fourth Quarter
|
|
$
|
1.93
|
|
|
$
|
1.61
|
|
The last reported sale price of our Common Stock on the NYSE Alternext on January 15, 2009 was $.90
per share.
As of that date, we had 422 record owners and believe that there were approximately 2,000
beneficial holders of our Common Stock.
No dividends have been declared or paid to date on our Common Stock. Our senior credit agreement
prohibits us from paying dividends without the prior consent of the lender. It is unlikely that we
will pay dividends in the foreseeable future.
18
Issuer Purchase of Equity Securities
The following table summarizes the stock repurchases, by month, that were made during the fourth
quarter of the fiscal year ended October 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
Purchased as
|
|
|
Shares that May
|
|
|
|
Total Number of
|
|
|
|
|
|
|
Part of Publicly
|
|
|
Yet be
|
|
|
|
Shares
|
|
|
Average Price
|
|
|
Announced
|
|
|
Purchased Under
|
|
Period
|
|
Purchased
|
|
|
Paid per Share
|
|
|
Program (1)
|
|
|
the Program (1)
|
|
August 1-31
|
|
|
0
|
|
|
$
|
|
|
|
|
0
|
|
|
|
207,000
|
|
September 1-30
|
|
|
0
|
|
|
$
|
|
|
|
|
0
|
|
|
|
207,000
|
|
October 1-31
|
|
|
8,700
|
|
|
$
|
1.16
|
|
|
|
8,700
|
|
|
|
198,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8,700
|
|
|
$
|
1.16
|
|
|
|
8,700
|
|
|
|
|
|
|
|
|
(1)
|
|
On June 16, 2006, we announced a program to repurchase up to 250,000 shares of our
common stock at the discretion of management. We completed the repurchase of 250,000
shares in June 2008. On July 16, 2008 we announced that we would continue to repurchase
shares up to an additional 250,000 shares. There is no expiration date for the plan to
repurchase additional shares and the share limit may not be reached.
|
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following Managements Discussion and Analysis (MD&A) is intended to help the reader understand
our company. The MD&A should be read in conjunction with our consolidated financial statements and
the accompanying notes. This overview provides our perspective on the individual sections of the
MD&A, as well as a few helpful hints for reading these pages. The MD&A includes the following
sections:
|
|
|
Business Overview
a brief description of fiscal year 2008.
|
|
|
|
|
Results of Operations
an analysis of our consolidated results of operations for
the three years presented in our consolidated financial statements.
|
|
|
|
|
Liquidity and Capital Resources
an analysis of cash flows, sources and uses of
cash, and contractual obligations and a discussion of factors affecting our future cash
flow.
|
|
|
|
|
Critical Accounting Policies
a discussion of accounting policies that require
critical judgments and estimates. Our significant accounting policies, including the
critical accounting policies discussed in this section, are summarized in the notes to
the accompanying consolidated financial statements.
|
Business Overview
For our fiscal year ended October 31, 2008, we experienced a goodwill impairment (a non-cash
charge) in the amount of $22,359,000, which materially reduced our income from continuing
operations and net income. At October 31, 2008, the valuation by which we measure goodwill
impairment was significantly affected by the lower value of our stock price which, among other
things, was affected by general market conditions. Impairment of goodwill does not affect the
Companys liquidity or indicate its profitability prospects in the future. Nevertheless, it was a
19
substantial component of our Loss from operations of $15,862,000 and Net loss of $19,836,000. But
for the impairment of goodwill, all of those line items would have shown income, not losses.
Except for the goodwill impairment charge, the financial performance of our business for fiscal
year 2008 improved over fiscal year 2007. The improvement was a result of increased sales and gross
profit and a reduction in interest expense, offset by higher selling, general, and administrative
expenses. The increase in sales was generated primarily by non-traditional products, most notably
single serve coffee and price increases to offset increasing fuel costs and, to a lesser extent,
acquisitions. Product margins decreased, as a percentage of sales, as a result of the product mix
skewing away from non-water products.
Excluding the non-cash impairment charge to goodwill, the financial performance of our business for
fiscal 2008 improved over fiscal 2007. Over the first three quarters, the improvement reflected
increased sales, an improved gross margin notwithstanding increased selling, general, and
administrative expenses, and lower interest. The sales increase was generated primarily by
non-water-related revenue, notably single-serve coffee and price increases to offset increasing
fuel costs. To a lesser extent, acquisitions also contributed to revenues. However, the fourth
quarter, again excluding the impairment charge, was less profitable than the prior years fourth
quarter due to slower sales, lower margins, and higher administrative expenses. We believe that
our fourth quarter financial performance in large measure reflected the overall softening of the
economy. If, as many observers expect, the national and regional economy remains in a recession in
2009, we are likely to experience lower profitability going forward.
Results of Operations
Fiscal Year Ended October 31, 2008 Compared to Fiscal Year Ended October 31, 2007
Sales
Sales for fiscal year 2008 were $69,237,000 compared to $65,231,000 for 2007, an increase of
$4,006,000 or 6%. Sales attributable to acquisitions in fiscal year 2008 were $501,000. Net of
the acquisitions, sales increased 5%.
The comparative breakdown of sales is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Line
|
|
2008
|
|
|
2007
|
|
|
Difference
|
|
|
% Diff.
|
|
|
|
(in 000s $)
|
|
|
(in 000s $)
|
|
|
(in 000s $)
|
|
|
|
|
|
Water
|
|
$
|
29,250
|
|
|
$
|
29,560
|
|
|
$
|
(310
|
)
|
|
|
(1
|
%)
|
Coffee and Related
|
|
|
21,197
|
|
|
|
19,341
|
|
|
|
1,856
|
|
|
|
10
|
%
|
Equipment Rental
|
|
|
8,909
|
|
|
|
9,143
|
|
|
|
(234
|
)
|
|
|
(3
|
%)
|
Other
|
|
|
9,881
|
|
|
|
7,187
|
|
|
|
2,694
|
|
|
|
37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
69,237
|
|
|
$
|
65,231
|
|
|
$
|
4,006
|
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water
The aggregate decrease in water sales was a result of 2% increase in price and a 3%
decrease in volume. The increase in price was attributable to general increases in list prices.
The decrease in volume was primarily a result of lower market demand. Volume was favorably
impacted by several small acquisitions completed during the year. Sales increased 1% as a result of
these acquisitions. So, net of acquisitions, total water sales decreased 2% in fiscal year 2008.
Coffee
The increase in sales was primarily due to the growth of single serve coffee,
which grew 25% to $9,184,000 in fiscal year 2008 compared to $7,328,000 in fiscal year 2007.
Traditional coffee products and related products grew 4% in fiscal year 2008 compared to the year
earlier. Acquisitions accounted for 1% of the growth in this category.
20
Equipment Rental
Equipment rental revenue decreased in fiscal year 2008 compared to the
prior year primarily as a result of a decrease in the average rental price that more than offset an
increase in placements of equipment. Sales were 1% higher in 2008 due to increased equipment
placements and 4% lower as a result of lower rental prices as compared to 2007. Acquisitions had no
impact on equipment rental revenue.
Other
The substantial increase in other revenue is reflective of fees that are charged as
a result of higher energy costs for delivery and freight, raw materials, and bottling operations.
These charges increased to $3,207,000 in fiscal year 2008 from $1,444,000 in 2007. Sales of other
products such as single-serve drinks, cups, and vending items, in aggregate, increased 5% in 2008
compared to last year. In addition, the improvement in sales in this category reflects the fact
that in the second quarter of 2007, we had a charge of $201,000 because our estimate of container
deposit liability from a departing customer was too low. This effect did not recur in 2008.
Acquisitions had no effect on other sales.
Gross Profit/Cost of Goods Sold
Gross profit increased $1,868,000, or 5% in fiscal year 2008 compared to 2007, from $37,042,000 to
$38,910,000. As a percentage of sales, gross profit decreased to 56.2% of sales from 56.8% for the
respective period. The dollar increase in gross profit was attributable to higher sales. The
decrease in gross profit, as a percentage of sales, was attributable to a change in product sales
mix. Product mix was influenced by higher volume growth of single serve coffee which has a lower
profit margin than water and traditional coffee products.
Cost of goods sold includes all costs to bottle water, costs of purchasing and receiving products
for resale, including freight, as well as costs associated with product quality, warehousing and
handling costs, internal transfers, and the repair and service of rental equipment, but does not
include the costs of distributing our product to our customers. We include distribution costs in
selling, general, and administrative expense, and the amount is reported below. Other companies
may include distribution costs in their cost of goods sold, in which case, on a comparative basis,
such other companies may have a lower gross margin as a result.
(Loss) Income from Operations/Operating Expenses
The loss from operations was $15,862,000 in 2008 compared to income from operations of $6,643,000
in 2007, a decrease of $22,505,000. The most significant component of this decrease was goodwill
impairment of $22,359,000 in 2008. There was no such impairment in 2007. Total operating expenses
increased to $54,773,000 for the year, an increase from $30,399,000 the prior year, an increase of
$24,374,000. Once again, the most significant contributor to the higher operating expenses in 2008
was the impairment charge of $22,359,000. Net of impairment, operating expenses increased
moderately. The increase was a result of additional expenses due to increased sales as well as
higher benefits expense and professional fees.
Selling, general and administrative (SG&A) expenses were $30,132,000 in fiscal year 2008 and
$27,969,000 in 2007, an increase of $2,163,000, less than 8%. Of total SG&A expenses:
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|
|
Route sales costs increased 5%, or $669,000, to $14,227,000 in fiscal year 2008 from
$13,558,000 in fiscal year 2007, primarily related to labor for commission-based sales
from increased sales and higher fuel costs. Total direct distribution related costs
increased $596,000, or 5%, to $13,526,000 in fiscal year 2008 from $12,930,000 in
fiscal year 2007;
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21
|
|
|
Selling costs increased 19%, or $453,000, to $2,825,000 in fiscal year 2008 from
$2,732,000 in fiscal year 2007, as a result of an increase in labor for
commission-based sales from increased sales; and
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|
|
|
|
Administrative costs increased 12%, or $1,401,000, to $13,080,000 in fiscal year
2008 from $11,679,000 in fiscal year 2007, as a result of higher health insurance
costs, professional fees related to compliance and litigation, and a provision for bad
debts of $532,043 on notes receivable that more than offset a reduction of accounting
and computer-related fees.
|
Advertising expenses decreased to $1,530,000 in fiscal year 2008 from $1,602,000 in 2007, a
decrease of $72,000, or 4%. The decrease in advertising costs is primarily related to the non
recurrence of the southern New England advertising campaign that was implemented in the third
quarter of 2007.
Amortization increased to $888,000 in fiscal year 2008 from $846,000 in 2007. Amortization is
attributable to intangible assets that were acquired as part of acquisitions in recent years.
We had a gain from the sale of miscellaneous assets in fiscal year 2008 of $136,000 compared to a
gain on the sale of assets of $18,000 in fiscal year 2007. The sales are of miscellaneous assets no
longer used in the course of business.
In fiscal year 2008, we incurred an impairment loss of $22,359,000. The impairment loss was a
non-cash charge and was a result of the assessment of our goodwill as of October 31, 2008.
Goodwill had been recorded for acquisitions from 1996 through 2008. Our assessment concluded that
goodwill on our books exceeded the value as prescribed by SFAS No. 142. In determining the
impairment, we followed the two step approach provided in paragraphs 19-22 of SFAS 142. In step one
and in determining the fair value of the Company (the reporting unit), we used a weighted average
of three different market approaches: 1) Quoted stock price (30%); 2) Value comparisons to publicly
traded companies (see note 1) believed to have comparable reporting units (20%); and 3) Discounted
net cash flow (50%). We believe that this approach, consistent with paragraph 23 of SFAS 142,
provided a reasonable estimation of the value of the Company and took into consideration our thin
trading volume (which reflects, in part, the fact that Company is a controlled company under the
governance rules of the NYSE Alternext), market comparable valuations, and expected results of
operations. We compared the resulting estimated fair value to the equity value of the Company as of
October 31, 2008 and determined that there was an impairment of goodwill. In step two, we then
allocated the estimated fair value to all of the assets and liabilities of the Company (including
unrecognized intangible assets) as if the Company had been acquired in a business combination and
the estimated fair value was the price paid. We then recognized impairment in the amount by which
the carrying value of goodwill exceeded the implied value of goodwill as determined in this
allocation.
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|
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|
|
Company Name
|
|
Exchange
|
|
Symbol
|
Coca Cola Bottling Co. Consolidated
|
|
NYSE
|
|
COKE
|
Farmer Bros. Co.
|
|
NASDAQ
|
|
FARM
|
Green Mountain Coffee Roasters, Inc.
|
|
NASDAQ
|
|
GMCR
|
Hansen Natural, Corp.
|
|
NASDAQ
|
|
HANS
|
Coca Cola Inc.
|
|
NYSE
|
|
CCE
|
National Beverage Corp.
|
|
NASDAQ
|
|
FIZZ
|
PepsiAmericas, Inc.
|
|
NYSE
|
|
PAS
|
Pepsi Bottling Group, Inc.
|
|
NYSE
|
|
PBG
|
22
We believe that the impairment was primarily the result of a decline in the quoted market prices of
our stock at year-end below our book carrying value, and was not due to any changes in our core
business. There was no event or change in circumstance that would more likely than not reduce the
fair value of our underlying net assets below their carrying amount prior to the annual impairment
test.
We conducted a similar assessment of goodwill as of October 31, 2007 and concluded that goodwill
was not impaired as of that date.
Other Income and Expense, Income Taxes, and (Loss) Income from Operations
Interest expense was $3,005,000 for fiscal year 2008 compared to $3,250,000 for fiscal year 2007, a
decrease of $245,000. The decrease is attributable to lower outstanding debt and variable interest
rates that more than offset higher interest rates. Higher interest rates were a result of fixing
senior debt at a long term rate higher than short term market rates when the debt was re-financed
in 2007.
Loss before income taxes in fiscal year 2008 was $18,867,000, compared to income before income
taxes in fiscal year 2007 of $3,393,000, a decrease of $22,260,000. As noted above, the most
significant component of the loss before income taxes in fiscal 2008 was goodwill impairment of
$22,359,000. Aside from the impairment charge, operating results improved slightly as a result of
higher sales, stable cost of goods sold and lower interest expense offset by higher operating
costs. The tax expense for fiscal year 2008 was $969,000 compared to $1,317,000 for fiscal year
2007 and resulted in an effective tax rate of (5%) in 2008 and 39% in 2007. The negative tax rate
in 2008 is attributable to the exclusion of the impairment loss from the determination of taxable
income. In addition, the effective tax rate was impacted by the affect of expected tax credits for
the installation of solar electricity generating equipment during fiscal year 2008 and by a
valuation allowance set up for the write off of the notes for $532,043 referenced above. Our total
effective tax rate is a combination of federal and state rates for the states in which we operate.
Net Income (Loss)
The net loss in fiscal year 2008 was $(19,836,000) compared to net income of $2,076,000 in 2007, a
decrease of $21,912,000. As noted above, the most significant component of the net loss in 2008
was goodwill impairment of $22,359,000. Net income (loss) was completely attributable to
continuing operations.
Based on the weighted average number of shares of Common Stock outstanding of 21,564,000 (basic and
diluted), loss per share in fiscal year 2008 was ($.92) per share. This was a decrease of $1.02
per share from fiscal year 2007, when the weighted average number of shares of Common Stock
outstanding was 21,624,000 (basic and diluted) and we had net income of $.10 per share.
The fair value of our swaps decreased $422,000 during fiscal year 2008 compared to a decrease of
$244,000 in 2007. This resulted in unrealized losses of $263,000 and $144,000, net of taxes,
respectively, for the fiscal years ended October 31, 2008 and 2007. The decrease during the year
has been recognized as an adjustment to net income (loss) to arrive at comprehensive income (loss)
as defined by the applicable accounting standards. Further, the cumulative adjustment over the
life of the instrument has been recorded as a current liability and accumulated other comprehensive
loss on our consolidated balance sheet.
23
Fiscal Year Ended October 31, 2007 Compared to Fiscal Year Ended October 31, 2006
Sales
Sales for fiscal year 2007 were $65,231,000 compared to $62,774,000 for 2006, an increase of
$2,457,000 or 4%. Sales attributable to acquisitions in fiscal year 2007 were $493,000. Net of
the acquisitions, sales increased 3%.
The comparative breakdown of sales is as follows:
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|
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|
|
|
|
|
|
|
|
|
|
|
Product Line
|
|
2007
|
|
|
2006
|
|
|
Difference
|
|
|
% Diff.
|
|
|
|
(in 000s $)
|
|
|
(in 000s $)
|
|
|
(in 000s $)
|
|
|
|
|
|
Water
|
|
$
|
29,560
|
|
|
$
|
28,886
|
|
|
$
|
674
|
|
|
|
2
|
%
|
Coffee and Related
|
|
|
19,341
|
|
|
|
17,430
|
|
|
|
1,911
|
|
|
|
11
|
%
|
Equipment Rental
|
|
|
9,143
|
|
|
|
9,013
|
|
|
|
130
|
|
|
|
1
|
%
|
Other
|
|
|
7,187
|
|
|
|
7,445
|
|
|
|
(258
|
)
|
|
|
(3
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
65,231
|
|
|
$
|
62,774
|
|
|
$
|
2,457
|
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water
The aggregate increase in water sales was a result of 3% increase in price and a 1%
decrease in volume. The increase in price was attributable to general increases in list prices.
The decrease in volume was primarily a result of a decrease in bottles sold to distributors. Sales
to distributors, which are 3% of total water sales, decreased 15%. Bottles sold in our route system
increased 1%. Volume was favorably impacted by several small acquisitions completed during the
year. Sales increased 1% as a result of these acquisitions.
Coffee
The increase in sales was primarily due to the growth of single serve coffee,
which grew 17% to $7,328,000 in fiscal year 2007 compared to $6,260,000 in fiscal year 2006. The
profit margin on single serve coffee products increased in 2007 compared to 2006 but is lower than
that for traditional water and coffee products. Acquisitions had no impact on coffee sales in
2007.
Equipment Rental
Rental equipment placements increased 6% in fiscal year 2007 compared to
fiscal year 2006. Average rental charges for equipment decreased 3% in 2007 compared to 2006 and
was primarily a result of retail competition and a higher demand for single serve coffee units.
Coffee brewers generally have lower rental charges than water coolers. The impact of acquisitions
on equipment rental was not material.
Other
Other revenue decreased as a result of a change of approximately $201,000 in the
estimate of container deposit liability brought about by the loss of a customer as well as higher
miscellaneous discounts. Otherwise, sales of other products such as soft drinks, single serve
water, cups, and vending items increased 9%.
Gross Profit/Cost of Goods Sold
Gross profit increased $742,000, or 2% in fiscal year 2007 compared to 2006, to $37,042,000 from
$36,300,000. As a percentage of sales, gross profit decreased to 56.8% of sales from 57.8% for the
respective period. The dollar increase in gross profit was attributable to higher sales. The
decrease in gross profit, as a percentage of sales, was attributable to a change in product sales
mix as well as a higher container return charge in the second quarter. Product mix was influenced
by higher volume growth of single serve coffee which has a lower profit margin than water and
traditional coffee products.
Cost of goods sold includes all costs to bottle water, costs of purchasing and receiving products
for resale, including freight, as well as costs associated with product quality, warehousing and
handling costs, internal transfers, and the repair and service of rental equipment, but does not
include the costs of distributing our product to our customers. We include distribution costs in
selling, general, and administrative expense, and the amount is reported below. Other companies
may include
24
distribution costs in their cost of goods sold, in which case, on a comparative basis,
such other companies may have a lower gross margin as a result.
Income from Operations/Operating Expenses
Income from operations was $6,643,000 in 2007 compared to a loss from operations of $16,470,000 in
2006, an improvement of $23,113,000. The most significant component of this improvement was
goodwill impairment of $22,950,000 in 2006. There was no such impairment in 2007. Total operating
expenses decreased to $30,399,000 for the year, down from $52,771,000 the prior year, a decrease of
$22,372,000. Once again, the most significant contributor to the higher operating expenses in 2006
was the impairment charge of $22,950,000. Net of impairment, operating expenses increased
slightly. The increase, in general, was a result of additional expenses due to increased sales.
Selling, general and administrative (SG&A) expenses were $27,969,000 in fiscal year 2007 and
$27,934,000 in 2006, an increase of $35,000, less than 1%. Of total SG&A expenses, route sales
costs increased 1%, or $163,000, to $13,558,000 in fiscal year 2007 from $13,395,000 in fiscal year
2006, primarily related to labor for commission-based sales from increased sales. Included in our
SG&A expenses, total direct distribution related costs increased $189,000, or 1%, to $12,930,000 in
fiscal year 2007 from $12,741,000 in fiscal year 2006. Selling costs decreased 11%, or $329,000, to
$2,732,000 in fiscal year 2007 from $3,061,000 in fiscal year 2006, as a result of a decrease in
staffing costs. Administrative costs increased 2%, or $201,000, to $11,679,000 in fiscal year 2007
from $11,478,000 in fiscal year 2006, as a result of higher compensation expense.
Advertising expenses increased to $1,602,000 in fiscal year 2007 from $1,083,000 in 2006, an
increase of $519,000, or 48%. The increase in advertising costs was related to higher print
advertising, advertising production and an advertising campaign in southern New England comprised
of radio, billboards, and distribution of samples to increase brand awareness.
Amortization decreased to $846,000 in fiscal year 2007 from $878,000 in 2006. This decrease is
attributable to some intangible assets acquired in prior years being fully amortized.
We had a gain from the sale of miscellaneous assets in fiscal year 2007 of $18,000. We had a gain
on the sale of assets of $74,000 in fiscal year 2006 that was primarily generated by the sale of a
small portion of our customer lists.
In fiscal year 2006, we incurred an impairment loss of $22,950,000. The impairment loss was a
non-cash charge and was a result of the assessment of our goodwill as of October 31, 2006.
Goodwill had been recorded for acquisitions from 1996 through 2006. Our assessment concluded that
goodwill on our books exceeded the value as prescribed by SFAS No. 142. The loss was a result of
the acquisitions not yielding the anticipated economic benefit. We conducted a similar assessment
of goodwill as of October 31, 2007 and concluded that goodwill was not impaired as of that date.
Other Income and Expense, Income Taxes, and Income from Operations
Interest expense was $3,250,000 for fiscal year 2007 compared to $3,268,000 for fiscal year 2006, a
decrease of $18,000. Lower interest costs were primarily a result of reduced amounts of senior
debt. Lower loan balances were partially offset by higher market interest rates and fixing new
senior debt at higher rates.
We recorded $750,000 as other income in fiscal year 2006 related to the settlement of our case
against Nestle. In fiscal year 2007 we had no legal settlements.
25
Income from operations before income taxes in fiscal year 2007 was $3,393,000, compared to a loss
from continuing operations before income tax expense in fiscal year 2006 of $18,989,000, an
improvement of $22,382,000. As noted above, the most significant component of loss from continuing
operations in fiscal 2006 was goodwill impairment of $22,950,000. In addition, there was not a
recurrence of the legal settlement in 2007 that occurred in 2006. Aside from those two items, the
improvement reflected higher sales in 2007. The tax expense for fiscal year 2007 was $1,317,000
compared to $1,682,000 for fiscal year 2006 and resulted in an effective tax rate of 39% in 2007
and (9%) in 2006. The decrease in income tax expense is primarily a result of lower taxable
income. The negative tax rate in 2006 is attributable to the exclusion of the impairment loss from
taxable income. Our total effective tax rate is a combination of federal and state rates for the
states in which we operate.
Net Income (Loss)
Net income in fiscal year 2007 was $2,076,000 compared to a net loss of $20,670,000 in 2006, an
improvement of $22,746,000. As noted above, the most significant component of the net loss in 2006
was goodwill impairment of $22,950,000. Net income (loss) was completely attributable to
continuing operations.
Based on the weighted average number of shares of Common Stock outstanding of 21,624,000 (basic and
diluted), earnings per share in fiscal year 2007 was $.10 per share. This was an improvement of
$1.06 per share over fiscal year 2006, when the weighted average number of shares of Common Stock
outstanding in 2006 was 21,631,000 (basic and diluted) and we had a net loss of $(.96) per share.
The fair value of our swaps decreased $244,000 during fiscal year 2007 compared to a decrease of
$134,000 in 2006. This resulted in unrealized losses of $144,000 and $92,000, net of taxes,
respectively, for the fiscal years ended October 31, 2007 and 2006. The decrease during the year
has been recognized as an adjustment to net income (loss) to arrive at comprehensive income (loss)
as defined by the applicable accounting standards. Further, the cumulative adjustment over the
life of the instrument has been recorded as a current liability and accumulated other comprehensive
loss on our consolidated balance sheet.
26
Liquidity and Capital Resources
As of October 31, 2008, we had working capital of $3,103,000 compared to $2,608,000 as of October
31, 2007, an increase of $495,000. The increase is primarily a result of an increase in other
current assets related to prepaid income taxes. The prepaid income taxes in 2008 reflect an
anticipated refund for fiscal year 2008 compared to an expected liability for the previous fiscal
year. The difference accounted for a net increase of $1,015,000. This more than offset a decrease
in cash of $692,000.
Net cash provided by operating activities decreased $425,000, or 6%, to $6,521,000 from $6,946,000.
The decrease was attributable to cash used for the reduction of accrued expenses that more than
offset the net loss plus the non-cash goodwill impairment and other non-cash expenses. The usual
non-cash expenses also included a provision for bad debt expense for two notes receivable described
in more detail below.
We use cash provided by operations to repay debt and fund capital expenditures. In fiscal year
2008, we used $3,282,000 primarily for scheduled repayments of our term debt. We used $3,982,000
for capital expenditures and borrowed $422,000 from our line of credit to finance those
expenditures. Capital expenditures were substantially higher than the same period last year because
of $933,000 expended on our solar electricity generation project and in addition to routine
expenditures for coolers, brewers, bottles and racks related to home and office distribution. The
expenditures on the solar project are net of $1,159,000 received from a grant for the project
through October 31, 2008. The total cost of the project was $2,092,000 and we anticipate receiving
an additional $128,000 in related grant revenue in the next fiscal year. The grant is subject to
certain conditions that management anticipates being able to comply with completely.
In the second quarter of fiscal year 2008, we recorded a provision for bad debt expense against the
entire balance of an unsecured subordinated note that was receivable from Trident LLC. The note,
which was due in full in 2011 and had a principal balance of $475,000, represented the remaining
portion of the sales price that was receivable from the sale of our retail operations in March,
2004. The note was considered fully impaired primarily based on information from Trident that it
had closed its principal facility and generally ceased its operations due to cash flow problems.
We have also made a provision of $57,000 in 2008 against another note receivable that represents
the portion that we estimate to be uncollectible.
As of October 31, 2008 we had outstanding balances of $16,800,000 on our term loan, and $1,000,000
on our $10,000,000 acquisition line of credit with Bank of America. As of that date there was no
balance outstanding on our $6,000,000 revolving line of credit with Bank of America. In addition,
there was an outstanding letter of credit for $1,485,000 issued against the revolving line of
credits availability. As of October 31, 2008 there was $9,000,000 and $4,515,000 available on the
acquisition and revolving lines of credit, respectively.
As of October 31, 2008, we had an interest rate swap agreement with Bank of America in effect. The
intent of the instrument is to fix the interest rate on 75% of the outstanding balance on the Term
Loan as required by the credit facility. The swap fixes the interest rate for the swapped amount
at 6.62% (4.87% plus the applicable margin, 1.75%). As of October 31, 2008, we had approximately $5
million of debt subject to variable interest rates. Under the credit facility with Bank of
America, interest is paid at a rate of LIBOR plus a margin of 1.75% on term debt and 1.50% on the
line of credit resulting in variable interest rates of 5.56% and 5.31% respectively at October 31,
2008.
27
Our credit facility requires that we be in compliance with certain financial covenants at the end
of each fiscal quarter. The covenants include senior debt service coverage as defined of greater
than 1.25 to 1, total debt service coverage as defined of greater than 1 to 1, and senior debt to
EBITDA as defined of no greater than 2.5 to 1. As of October 31, 2008, we were in compliance with
all of the financial covenants of our credit facility and we expect to be in compliance in the
foreseeable future.
We used $243,000 of cash to purchase shares of our common stock on the open market during fiscal
year 2008.
The net deferred tax liability at October 31, 2008 represents temporary timing differences,
primarily attributable to depreciation and amortization, between book and tax calculations. We
have used all of our federal net operating loss carryforwards and will have to fund our tax
liabilities with cash in the current fiscal year and in the future.
In addition to our senior and subordinated debt commitments, we have significant future cash
commitments, primarily in the form of operating leases that are not reported on the balance sheet.
These operating leases are described in Note 16 to our Audited Consolidated Financial Statements.
The following table sets forth our contractual commitments as of October 31, 2008:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment due by Period
|
|
Contractual Obligations
|
|
Total
|
|
|
2009
|
|
|
2010-2011
|
|
|
2012-2013
|
|
|
After 2013
|
|
Debt
|
|
$
|
31,877,000
|
|
|
$
|
3,315,000
|
|
|
$
|
6,820,000
|
|
|
$
|
6,900,000
|
|
|
$
|
14,842,000
|
|
Interest on Debt (1)
|
|
|
12,961,000
|
|
|
|
2,686,000
|
|
|
|
4,716,000
|
|
|
|
3,862,000
|
|
|
|
1,697,000
|
|
Operating Leases
|
|
|
12,728,000
|
|
|
|
3,346,000
|
|
|
|
4,909,000
|
|
|
|
3,062,000
|
|
|
|
1,411,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
57,566,000
|
|
|
$
|
9,347,000
|
|
|
$
|
16,445,000
|
|
|
$
|
13,824,000
|
|
|
$
|
17,950,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Interest based on 75% of outstanding senior debt at the hedged interest rate discussed above,
25% of outstanding senior debt at a variable rate of 5.31%, and subordinated debt at a rate of 12%.
|
As of the date of this Annual Report on Form 10-K, we have no other material contractual
obligations or commitments.
Inflation has had no material impact on our performance.
Factors Affecting Future Cash Flow
Generating cash from operating activities and access to credit is integral to the success of our
business. We continue to generate cash from operating activities to service scheduled debt
repayment and fund capital expenditures. In addition, we have borrowed from our acquisition line
of credit for capital expenditures and acquisitions. We also lease a significant amount of our
vehicles. Our current revolving and acquisition lines of credit mature in April 2010.
Recent adverse economic conditions nationally have negatively impacted many businesses revenue and
profitability and severely restricted credit availability. We began to experience the effect of
this environment late in fiscal year 2008. Through the end of the year this impact has not
materially jeopardized our cash flow or our credit standing but we expect that it will continue,
possibly more severely based on many trends and forecasts, into 2009. Like most businesses, we are
taking steps to preserve cash flow but no assurance can be given that the future economic
environment will not adversely affect our cash flow and results of operations or that we will have
adequate access to credit.
28
Factors Affecting Quarterly Performance
Our business and financial trends vary from quarter to quarter based on, but not limited to,
seasonal demands for our products, climate, and economic and geographic trends. Consequently,
results for any particular fiscal quarter are not necessarily indicative, through extrapolation, or
otherwise, of results for a longer period.
Critical Accounting Policies
Our financial statements are prepared in accordance with generally accepted accounting principles.
Preparation of the statements in accordance with these principles requires that we make estimates,
using available data and our judgment for such things as valuing assets, accruing liabilities, and
estimating expenses. We believe that the estimates, assumptions and judgments involved in the
accounting policies described below have the greatest potential impact on our financial statements,
so we consider these to be our critical accounting policies and estimates. Because of the
uncertainty inherent in these matters, actual results could differ from the estimates we use in
applying the critical accounting policies. We base our ongoing estimates on historical experience
and other various assumptions that we believe to be reasonable under the circumstances.
Accounts Receivable Allowance for Doubtful Accounts
We routinely review our accounts receivable, by customer account aging, to determine if the amounts
due are collectible based on information we receive from the customer, past history, and economic
conditions. In doing so, we adjust our allowance accordingly to reflect the cumulative amount that
we feel is uncollectible. This estimate may vary from the proceeds that we actually collect. If
the estimate is too low, we may incur higher bad debt expenses in the future resulting in lower net
income. If the estimate is too high, we may experience lower bad debt expense in the future
resulting in higher net income.
Fixed Assets Depreciation
We maintain buildings, machinery and equipment, and furniture and fixtures to operate our business.
We estimate the life of individual assets to allocate the cost over the expected life. The basis
for such estimates is use, technology, required maintenance, and obsolescence. We periodically
review these estimates and adjust them if necessary. Nonetheless, if we overestimate the life of
an asset or assets, at a point in the future, we would have to incur higher depreciation costs and
consequently, lower net income. If we underestimate the life of an asset or assets, we would
absorb too much depreciation in the early years resulting in higher net income in the later years
when the asset is still in service.
Goodwill Intangible Asset Impairment
We have acquired a significant number of companies. The difference between the value of the assets
and liabilities acquired, including transaction costs, and the purchase price is recorded as
goodwill. If goodwill is not impaired, it would remain as an asset on our balance sheet at the
value acquired. If it is impaired, we would be required to write down the asset to an amount that
accurately reflects its estimated value. We completed a valuation of the Company performed as of
October 31, 2007, and goodwill was not impaired as of that date. As of October 31, 2008, using a
similar valuation process, comparing the fair value to the carrying value of the Company, we
determined that goodwill was impaired at that time. As a result of this process, the Company
recorded an impairment loss on goodwill of $22,359,000 in 2008. In determining these valuations we
relied, in part, on our projections of future cash flows. If these projections change in the
future,
29
there may be a material impact on the valuation of the Company, which may result in an
additional impairment of goodwill.
Income Taxes
In accordance with SFAS No. 109 Accounting for Income Taxes, we recognize deferred tax assets and
liabilities based on temporary differences between the financial statement carrying amount of
assets and liabilities and their corresponding tax basis. The valuation of these assets and
liabilities is based on estimates that are dependent on rate and time assumptions. If these
estimates do not prove to be correct in the future, we may have over or understated income tax
expense and, as a result, earnings.
Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, is an interpretation of FASB Statement 109 (FIN 48). This statement clarifies the
criteria that an individual tax position must satisfy for some or all of the benefits of that
position to be recognized in a companys financial statements. FIN 48 prescribes a recognition
threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or
expected to be taken on a tax return in order for those tax positions to be recognized in the
financial statements. The Company adopted the provisions of FIN 48 at the beginning of fiscal year
2008.
Stock Based Compensation
At the beginning of fiscal year 2006, we adopted SFAS No. 123(R) Share-based Payments (revised
2004), which requires us to recognize the cost of equity issued in exchange for services. The cost
of equity is determined using interest rate, volatility, and expected life assumptions. This
pronouncement did not have a material impact on our financial position in fiscal years 2006, 2007,
or 2008 since we had an immaterial amount of equity (options) issued or vesting during the period.
In prior years, following the accounting treatment prescribed by APB Opinion No. 25, Accounting
for Stock Issued to Employees, we have recognized no compensation expense for our stock option
awards because the exercise price of our stock options equaled the market price of the underlying
stock on the date of option grant. If our compensation committee chose to award options at lower
than market prices, we would have been required to recognize compensation expense. The
compensation committee issued restricted shares of our stock and we recorded compensation expense
over the vesting period as a result of the issuance.
We estimate a risk free rate of return based on current (at the time of option issuance) U. S.
Treasury bonds and calculate the volatility of its stock price over the past twelve months from the
option issuance date. The fluctuations in the volatility assumption used in the calculation over
the years reported is a direct result of the increases and decrease in the stock price over that
time. All other factors being equal, a 10% increase in the volatility percentage results in
approximately a 12% increase in the fair value of the options, net of tax.
Off-Balance Sheet Arrangements
We lease various facilities and equipment under cancelable and non-cancelable short and long term
operating leases, which are described in Note 16 to our Audited Consolidated Financial Statements
contained in this Annual Report on Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our Consolidated Financial Statements and their footnotes are set forth on pages F-1 through F-27.
30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A(T). CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and our Chief Financial Officer, and other members of our senior
management team, have evaluated the effectiveness of our disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on such evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure controls and
procedures, as of the end of the period covered by this report, were adequate and effective to
provide reasonable assurance that information required to be disclosed by us, including our
consolidated subsidiary, in reports that we file or submit under the Exchange Act, is recorded,
processed, summarized and reported, within the time periods specified in the SECs rules and forms.
The effectiveness of a system of disclosure controls and procedures is subject to various
inherent limitations, including cost limitations, judgments used in decision making, assumptions
about the likelihood of future events, the soundness of internal controls, and fraud. Due to such
inherent limitations, there can be no assurance that any system of disclosure controls and
procedures will be successful in preventing all errors or fraud, or in making all material
information known in a timely manner to the appropriate levels of management.
Internal Control Over Financial Reporting
a) Managements Annual Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate
internal control over financial reporting for the Company. Internal control over financial
reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act
of 1934 as a process designed by, or under the supervision of, the Companys principal executive
and principal financial officers and effected by the Companys board of directors, management and
other personnel, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles and includes those policies and procedures that:
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pertain to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of the assets of the Company;
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provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company; and
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provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Companys assets that could have a material effect on
the financial statements.
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31
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
The Companys management assessed the effectiveness of the Companys internal control over
financial reporting as of October 31, 2008. In making this assessment, the Companys management
used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control-Integrated Framework.
Based on our assessment, management concluded that, as of October 31, 2008, the Companys internal
control over financial reporting is effective based on those criteria.
This annual report does not include an attestation report of the Companys registered public
accounting firm regarding internal control over financial reporting. Managements report was not
subject to attestation by the Companys registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the Company to provide only
managements report in this annual report.
b) Changes in Internal Control Over Financial Reporting
No change in our internal control over financial reporting occurred during the fiscal quarter ended
October 31, 2008 that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
32
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information required by this Item is incorporated by reference to the sections captioned
Directors, Our Executive Officers, Section 16(a) Beneficial Ownership Reporting Compliance
and Corporate Governance in our 2009 proxy statement to be filed with the SEC within 120 days
after the end of our fiscal year ended October 31, 2008.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to the sections captioned
Compensation of Executive Officers and Compensation of Non-Employee Directors in our 2009 proxy
statement to be filed with the SEC within 120 days after the end of our fiscal year ended October
31, 2008.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
Securities Authorized for Issuance Under Equity Compensation Plans.
The following table sets forth certain information as of October 31, 2008 about shares of our
Common Stock that may be issued upon the exercise of options and other rights under our existing
equity compensation plans and arrangements, divided between plans approved by our stockholders and
plans or arrangements that were not required to be and were not submitted to our stockholders for
approval.
Equity Compensation Plan Information
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(a)
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(b)
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(c)
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Number of Securities
remaining available for
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Number of Securities to be
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Weighted-average exercise
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future issuance under
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issued upon exercise of
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price of outstanding
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equity compensation plans
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outstanding options,
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options, warrants and
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(excluding securities
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Plan Category
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warrants and rights
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rights
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reflected in column (a)).
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Equity compensation
plans approved by
security holders
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592,700
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$
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2.91
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1,631,300
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Equity compensation
plans not approved
by security holders
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-0-
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-0-
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Total
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592,700
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$
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2.91
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1,631,300
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Additional information required by this Item is incorporated by reference to the section captioned
Security Ownership of Certain Beneficial Owners and Management in our 2009 proxy statement to be
filed with the SEC within 120 days after the end of our fiscal year ended October 31, 2008.
33
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information required by this Item is incorporated by reference to the section captioned
Corporate Governance in our 2009 proxy statement to be filed with the SEC within 120 days after
the end of our fiscal year ended October 31, 2008.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required by this Item is incorporated by reference to the sections captioned
Independent Registered Public Accounting Firm Fees and Pre-Approval Policies and Procedures in
our 2009 proxy statement to be filed with the SEC within 120 days after the end of our fiscal year
ended October 31, 2008.
34
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
a) The following documents are filed as part of this report:
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(1) Financial Statements
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Report of Independent Registered Public Accounting Firm
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F-1
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Consolidated Balance Sheets as of October 31, 2008 and 2007
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F-2
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Consolidated Statements of Operations for the years
ended October 31, 2008, 2007 and 2006
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F-3
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Consolidated Statements of Shareholders Equity and
Comprehensive income (loss) for the years ended October
31, 2008, 2007 and 2006
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F-4
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Consolidated Statements of Cash Flows for the years ended
October 31, 2008, 2007 and 2006
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F-5
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Notes to Consolidated Financial Statements
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F-6 - F-27
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(2) Schedules
None
(3) Exhibits
:
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Filed with
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Exhibit
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this Form
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Incorporated by Reference
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No.
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Description
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10-K
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Form
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Filing Date
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Exhibit No.
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3.1
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Certificate of Incorporation
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S-4
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September 6, 2000
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Exhibit B to
Appendix A
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3.2
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Certificate of Amendment to
Certificate of Incorporation
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8-K
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October 19, 2000
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4.2
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3.3
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By-laws
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10-Q
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September 14, 2001
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3.3
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4.1
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Registration Rights Agreement
with Peter
K. Baker,
Henry
E.
Baker,
John B. Baker and Ross
Rapaport
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8-K
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October 19, 2000
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4.6
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10.1
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*
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1998 Incentive and Non-Statutory
Stock Option Plan, as amended
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14A
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March 10, 2003
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A
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10.2
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*
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1999 Employee Stock Purchase Plan
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14A
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March 15, 1999
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A
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10.3
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*
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2004 Stock Incentive Plan
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14A
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March 9, 2004
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B
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10.4
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*
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Instrument of Amendment dated
September 22, 2005 amending the
1999 Employee Stock Purchase
Plan
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8-K
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September 28, 2005
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10.1
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10.5
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*
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Employment Agreement dated May
2, 2007 with Peter K. Baker
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8-K
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May 2, 2007
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10.1
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10.6
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*
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Employment Agreement dated May
2, 2007 with Bruce S. MacDonald
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8-K
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May 2, 2007
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10.3
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10.7
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*
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Employment Agreement dated May
2, 2007 with John B. Baker
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8-K
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May 2, 2007
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10.2
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10.8
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Lease of Grounds in Stamford,
Connecticut from Henry E. Baker
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S-4
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September 6, 2000
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10.24
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10.9
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Lease of Buildings and Grounds
in Watertown, Connecticut from
the Bakers Grandchildren Trust
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S-4
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September 6, 2000
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10.22
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35
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Filed with
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Exhibit
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this Form
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Incorporated by Reference
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No.
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Description
|
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10-K
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Form
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Filing Date
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Exhibit No.
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10.10
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Lease of Building in Stamford,
Connecticut from Henry E. Baker
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S-4
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September 6, 2000
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10.23
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10.11
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First Amendment to the Lease of
Buildings and Grounds in
Watertown, Connecticut from the
Bakers Grandchildren Trust
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10-Q
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September 14, 2007
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10.4
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10.12
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Credit Agreement dated April 5,
2005 with Bank of America and
Webster Bank
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10-Q
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July 8, 2005
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10.1
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10.13
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Form of Term Note dated April 5,
2005 issued to Bank of America
and Webster Bank
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10-Q
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July 8, 2005
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10.2
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10.14
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Form of Subordination and Pledge
Agreement dated April 5, 2005
between Henry E. Baker, Joan
Baker, John B. Baker, Peter K.
Baker and Bank of America
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10-Q
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July 8, 2005
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10.3
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10.15
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Form of Second Amended and
Restated Promissory Note dated
April 5, 2005 issued to Henry E.
Baker, Joan Baker, John B. Baker
and Peter K. Baker
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10-Q
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July 8, 2005
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10.4
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10.16
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Form of Acquisition Note dated
April 5, 2005 issued to Bank of
America and Webster Bank
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10-Q
|
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July 8, 2005
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10.5
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10.17
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Form of Revolving Credit Note
dated April 5, 2005 issued to
Bank of America and Webster Bank
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10-Q
|
|
July 8, 2005
|
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10.6
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10.18
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First Amendment to the Credit
Agreement dated April 5, 2005
with Bank of America
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|
10-Q
|
|
September 14, 2007
|
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10.1
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10.19
|
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|
Second Amendment to the Credit
Agreement dated April 5, 2005
with Bank of America
|
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|
10-Q
|
|
September 14, 2007
|
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10.2
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10.20
|
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|
Third Amendment to the Credit
Agreement dated April 5, 2005
with Bank of America
|
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|
10-Q
|
|
September 14, 2007
|
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10.3
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10.21
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Form of Indemnification
Agreement dated November 2, 2005
with each of Henry E. Baker,
John B. Baker, Peter K. Baker,
Phillip Davidowitz,David
Jurasek, Bruce S. MacDonald and
Ross S. Rapaport
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|
10-K
|
|
January 30, 2006
|
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10.21
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10.22
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|
Form of Indemnification
Agreement dated November 2, 2005
with each of John M. Lapides and
Martin A. Dytrych
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|
10-K
|
|
January 30, 2006
|
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10.22
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10.23
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|
|
Purchase and Sale Agreement
dated March 1, 2004 with
MicroPack Corporation
|
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|
10-Q
|
|
March 16, 2004
|
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10.27
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10.24
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Supply and License Agreement
dated March 1, 2004 with
MicroPack Corporation
|
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|
10-Q
|
|
March 16, 2004
|
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10.29
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10.25
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|
|
Agreement dated May 5, 2006 with
Nestle Waters of North America
Inc. to discontinue the Civil
Action
Vermont Pure Holdings,
Ltd. v. Nestle Waters of North
America Inc.
|
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|
10-Q
|
|
June 14, 2006
|
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|
10.1
|
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10.26
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|
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Installation Agreement with
American Capital Energy, Inc.
dated August 29, 2007
|
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|
|
10-K
|
|
January 29, 2008
|
|
|
10.29
|
|
|
|
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10.27
|
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|
Financial Assistance Agreement
with Connecticut Innovations
dated August 20, 2007
|
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|
|
10-K
|
|
January 29, 2008
|
|
|
10.30
|
|
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|
|
|
|
|
|
|
|
|
|
|
10.28
|
|
|
Fourth Amendment to the Credit
Agreement dated April 5, 2005
with Bank of America
|
|
|
|
10-Q
|
|
September 15, 2008
|
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21.1
|
|
|
Subsidiary
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23.1
|
|
|
Consent of Wolf & Company, P.C.
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.1
|
|
|
Certification of Chief Executive
Officer pursuant to Section 302
of the Sarbanes-Oxley Act of
2002
|
|
X
|
|
|
|
|
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Filed with
|
|
|
Exhibit
|
|
|
|
this Form
|
|
Incorporated by Reference
|
No.
|
|
Description
|
|
10-K
|
|
Form
|
|
Filing Date
|
|
Exhibit No.
|
|
31.2
|
|
|
Certification of Chief Financial
Officer pursuant to Section 302
of the Sarbanes-Oxley Act of
2002
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32.1
|
|
|
Certification of Chief Executive
Officer pursuant to Section 906
of the Sarbanes-Oxley Act of
2002
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32.2
|
|
|
Certification of Chief Financial
Officer pursuant to Section 906
of the Sarbanes-Oxley Act of
2002
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Management contract or compensatory plan.
|
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
Vermont Pure Holdings, Ltd. has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
|
|
|
|
|
|
|
|
VERMONT PURE HOLDINGS, LTD.
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Peter K. Baker
|
|
|
Dated: January 29, 2009
|
|
|
|
Peter K. Baker, Chief Executive Officer
|
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
Name
|
|
Title
|
|
Date
|
|
/s/ Ross S. Rapaport
Ross S. Rapaport
|
|
Chairman of the Board of Directors
|
|
January 29, 2009
|
|
|
|
|
|
/s/ Henry E. Baker
Henry E. Baker
|
|
Director, Chairman Emeritus
|
|
January 29, 2009
|
|
|
|
|
|
/s/ John B. Baker
John B. Baker
|
|
Executive Vice President and Director
|
|
January 29, 2009
|
|
|
|
|
|
/s/ Peter K. Baker
Peter K. Baker
|
|
Chief Executive Officer and Director
|
|
January 29, 2009
|
|
|
|
|
|
/s/ Phillip Davidowitz
Phillip Davidowitz
|
|
Director
|
|
January 29, 2009
|
|
|
|
|
|
/s/ Martin A. Dytrych
Martin A. Dytrych
|
|
Director
|
|
January 29, 2009
|
|
|
|
|
|
/s/ John M. Lapides
John M. Lapides
|
|
Director
|
|
January 29, 2009
|
|
|
|
|
|
/s/ Bruce S. MacDonald
Bruce S. MacDonald
|
|
Chief Financial Officer, Chief
Accounting Officer and Secretary
|
|
January 29, 2009
|
38
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
PAGE
|
|
|
|
|
|
F-1
|
|
|
|
Financial Statements:
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
|
F-3
|
|
|
|
|
|
F-4
|
|
|
|
|
|
F-5
|
|
|
|
|
|
F-6 - F-27
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders,
Vermont Pure Holdings, Ltd.
Watertown, Connecticut
We have audited the accompanying consolidated balance sheets of Vermont Pure Holdings, Ltd. and subsidiary as of
October 31, 2008 and 2007, and the related consolidated
statements of operations, comprehensive income (loss),
stockholders equity, and cash flows for each of the three years in
the period ended October 31, 2008. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). 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 consolidated financial statements referred to above present fairly, in all material
respects, the financial position of Vermont Pure Holdings, Ltd. and subsidiary as of October 31,
2008 and 2007, and the results of their operations and their cash flows for each of the three
years in the period ended October 31, 2008, in conformity with U.S. generally accepted accounting
principles.
/s/ Wolf & Company, P.C.
Boston, Massachusetts
January 27, 2009
F-1
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
|
October 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,181,737
|
|
|
$
|
1,873,385
|
|
Accounts receivable, trade net of reserve of $414,301 and
$354,825 for 2008 and 2007, respectively
|
|
|
7,842,819
|
|
|
|
7,522,831
|
|
Inventories
|
|
|
1,669,949
|
|
|
|
1,711,366
|
|
Current portion of deferred tax asset
|
|
|
744,087
|
|
|
|
499,441
|
|
Other current assets
|
|
|
1,612,605
|
|
|
|
683,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT ASSETS
|
|
|
13,051,197
|
|
|
|
12,290,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT net
|
|
|
10,563,388
|
|
|
|
10,697,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
32,080,669
|
|
|
|
54,423,997
|
|
Other intangible assets net
|
|
|
2,084,542
|
|
|
|
2,653,488
|
|
Other assets
|
|
|
152,333
|
|
|
|
696,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL OTHER ASSETS
|
|
|
34,317,544
|
|
|
|
57,773,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
57,932,129
|
|
|
$
|
80,760,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Current portion of long term debt
|
|
$
|
3,315,079
|
|
|
$
|
3,260,030
|
|
Accounts payable
|
|
|
2,542,711
|
|
|
|
2,101,399
|
|
Accrued expenses
|
|
|
2,859,277
|
|
|
|
3,454,487
|
|
Current portion of customer deposits
|
|
|
699,921
|
|
|
|
755,965
|
|
Unrealized loss on derivatives
|
|
|
531,673
|
|
|
|
109,722
|
|
|
|
|
|
|
|
|
TOTAL CURRENT LIABILITIES
|
|
|
9,948,661
|
|
|
|
9,681,603
|
|
|
|
|
|
|
|
|
|
|
Long term debt, less current portion
|
|
|
28,561,928
|
|
|
|
31,441,667
|
|
Deferred tax liability
|
|
|
3,403,696
|
|
|
|
3,123,091
|
|
Customer deposits
|
|
|
2,666,870
|
|
|
|
2,910,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
44,581,155
|
|
|
|
47,157,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
Common stock $.001 par value, 50,000,000 authorized shares,
21,862,739 issued and 21,489,489 outstanding shares as of
October 31, 2008 and 21,800,555 issued and 21,606,305
outstanding as of October 31, 2007
|
|
|
21,863
|
|
|
|
21,800
|
|
Additional paid in capital
|
|
|
58,395,551
|
|
|
|
58,307,395
|
|
Treasury stock, at cost, 373,250 shares as of October 31, 2008
and 194,250 shares as of October 31, 2007
|
|
|
(717,301
|
)
|
|
|
(474,441
|
)
|
Accumulated deficit
|
|
|
(44,019,502
|
)
|
|
|
(24,183,977
|
)
|
Accumulated other comprehensive (loss) income
|
|
|
(329,637
|
)
|
|
|
(67,136
|
)
|
|
|
|
|
|
|
|
TOTAL STOCKHOLDERS EQUITY
|
|
|
13,350,974
|
|
|
|
33,603,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
|
|
$
|
57,932,129
|
|
|
$
|
80,760,877
|
|
|
|
|
|
|
|
|
See the accompanying notes to the consolidated financial statements.
F-2
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended October 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
NET SALES
|
|
$
|
69,237,456
|
|
|
$
|
65,230,997
|
|
|
$
|
62,773,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF GOODS SOLD
|
|
|
30,327,137
|
|
|
|
28,188,533
|
|
|
|
26,473,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
38,910,319
|
|
|
|
37,042,464
|
|
|
|
36,300,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
30,131,964
|
|
|
|
27,968,022
|
|
|
|
27,934,390
|
|
Advertising expenses
|
|
|
1,530,000
|
|
|
|
1,602,327
|
|
|
|
1,082,725
|
|
Amortization
|
|
|
887,813
|
|
|
|
846,160
|
|
|
|
877,855
|
|
Gain on disposal of property and equipment
|
|
|
(136,204
|
)
|
|
|
(17,511
|
)
|
|
|
(74,092
|
)
|
Impairment loss goodwill
|
|
|
22,359,091
|
|
|
|
|
|
|
|
22,950,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL OPERATING EXPENSES
|
|
|
54,772,664
|
|
|
|
30,398,998
|
|
|
|
52,770,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM OPERATIONS
|
|
|
(15,862,345
|
)
|
|
|
6,643,466
|
|
|
|
(16,470,353
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
(3,004,626
|
)
|
|
|
(3,249,999
|
)
|
|
|
(3,268,192
|
)
|
Miscellaneous income (expense)
|
|
|
|
|
|
|
|
|
|
|
750,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL OTHER EXPENSE, NET
|
|
|
(3,004,626
|
)
|
|
|
(3,249,999
|
)
|
|
|
(2,518,192
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE INCOME TAXES
|
|
|
(18,866,971
|
)
|
|
|
3,393,467
|
|
|
|
(18,988,545
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX EXPENSE
|
|
|
968,554
|
|
|
|
1,317,103
|
|
|
|
1,681,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
(19,835,525
|
)
|
|
$
|
2,076,364
|
|
|
$
|
(20,670,118
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) PER SHARE BASIC:
|
|
$
|
(0.92
|
)
|
|
$
|
0.10
|
|
|
$
|
(0.96
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) PER SHARE DILUTED:
|
|
$
|
(0.92
|
)
|
|
$
|
0.10
|
|
|
$
|
(0.96
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE SHARES USED IN COMPUTATION BASIC
|
|
|
21,564,384
|
|
|
|
21,624,381
|
|
|
|
21,630,739
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE SHARES USED IN COMPUTATION DILUTED
|
|
|
21,564,384
|
|
|
|
21,624,381
|
|
|
|
21,630,739
|
|
|
|
|
|
|
|
|
|
|
|
See the accompanying notes to the consolidated financial statements.
F-3
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
AND COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
Treasury
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Stock
|
|
|
Paid in
|
|
|
Unearned
|
|
|
Treasury
|
|
|
Stock
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
|
Comprehensive
|
|
|
|
Issued
|
|
|
Par Value
|
|
|
Capital
|
|
|
Compensation
|
|
|
Shares
|
|
|
Amount
|
|
|
Deficit
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
Income (Loss)
|
|
Balance, October 31, 2005
|
|
|
21,744,817
|
|
|
$
|
21,744
|
|
|
$
|
58,207,645
|
|
|
$
|
(134,250
|
)
|
|
|
71,550
|
|
|
$
|
(264,735
|
)
|
|
$
|
(5,590,223
|
)
|
|
$
|
168,582
|
|
|
$
|
52,408,763
|
|
|
$
|
936,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued under employee
stock purchase plan
|
|
|
82,315
|
|
|
|
82
|
|
|
|
124,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124,431
|
|
|
|
|
|
Non cash compensation
|
|
|
|
|
|
|
|
|
|
|
14,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,064
|
|
|
|
|
|
Restricted stock forfeiture
|
|
|
(75,000
|
)
|
|
|
(75
|
)
|
|
|
(134,175
|
)
|
|
|
134,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
5,000
|
|
|
|
5
|
|
|
|
8,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,000
|
|
|
|
|
|
Share retirements
|
|
|
(9,560
|
)
|
|
|
(9
|
)
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares repurchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67,100
|
|
|
|
(104,927
|
)
|
|
|
|
|
|
|
|
|
|
|
(104,927
|
)
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,670,118
|
)
|
|
|
|
|
|
|
(20,670,118
|
)
|
|
$
|
(20,670,118
|
)
|
Unrealized loss on derivatives, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(91,922
|
)
|
|
|
(91,922
|
)
|
|
|
(91,922
|
)
|
|
|
|
Balance, October 31, 2006
|
|
|
21,747,572
|
|
|
|
21,747
|
|
|
|
58,220,887
|
|
|
|
|
|
|
|
138,650
|
|
|
|
(369,662
|
)
|
|
|
(26,260,341
|
)
|
|
|
76,660
|
|
|
|
31,689,291
|
|
|
$
|
(20,762,040
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued under employee
stock purchase plan
|
|
|
52,983
|
|
|
|
53
|
|
|
|
86,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86,561
|
|
|
|
|
|
Shares repurchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,600
|
|
|
|
(104,779
|
)
|
|
|
|
|
|
|
|
|
|
|
(104,779
|
)
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,076,364
|
|
|
|
|
|
|
|
2,076,364
|
|
|
$
|
2,076,364
|
|
Unrealized loss on derivatives, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(143,796
|
)
|
|
|
(143,796
|
)
|
|
|
(143,796
|
)
|
|
|
|
Balance, October 31, 2007
|
|
|
21,800,555
|
|
|
|
21,800
|
|
|
|
58,307,395
|
|
|
|
|
|
|
|
194,250
|
|
|
|
(474,441
|
)
|
|
|
(24,183,977
|
)
|
|
|
(67,136
|
)
|
|
|
33,603,641
|
|
|
$
|
1,932,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued under employee
stock purchase plan
|
|
|
62,184
|
|
|
|
63
|
|
|
|
88,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88,219
|
|
|
|
|
|
Shares repurchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
179,000
|
|
|
|
(242,860
|
)
|
|
|
|
|
|
|
|
|
|
|
(242,860
|
)
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,835,525
|
)
|
|
|
|
|
|
|
(19,835,525
|
)
|
|
$
|
(19,835,525
|
)
|
Unrealized loss on derivatives, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(262,501
|
)
|
|
|
(262,501
|
)
|
|
|
(262,501
|
)
|
|
|
|
Balance, October 31, 2008
|
|
|
21,862,739
|
|
|
$
|
21,863
|
|
|
$
|
58,395,551
|
|
|
$
|
|
|
|
|
373,250
|
|
|
$
|
(717,301
|
)
|
|
$
|
(44,019,502
|
)
|
|
$
|
(329,637
|
)
|
|
$
|
13,350,974
|
|
|
$
|
(20,098,026
|
)
|
|
|
|
See the accompanying notes to the consolidated financial statements.
F-4
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended October 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(19,835,525
|
)
|
|
$
|
2,076,364
|
|
|
$
|
(20,670,118
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
4,063,178
|
|
|
|
4,118,134
|
|
|
|
4,041,448
|
|
Provision for bad debts
|
|
|
345,812
|
|
|
|
326,435
|
|
|
|
300,811
|
|
Provision for bad debts on notes receivable
|
|
|
532,043
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
887,813
|
|
|
|
846,160
|
|
|
|
877,855
|
|
Impairment loss goodwill
|
|
|
22,359,091
|
|
|
|
|
|
|
|
22,950,018
|
|
Non cash interest expense
|
|
|
110,450
|
|
|
|
105,783
|
|
|
|
103,881
|
|
Deferred tax expense
|
|
|
195,408
|
|
|
|
174,594
|
|
|
|
1,323,734
|
|
Gain on disposal of property and equipment
|
|
|
(136,204
|
)
|
|
|
(17,511
|
)
|
|
|
(74,092
|
)
|
Non cash compensation
|
|
|
|
|
|
|
|
|
|
|
14,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(665,800
|
)
|
|
|
(637,212
|
)
|
|
|
(262,427
|
)
|
Inventories
|
|
|
41,417
|
|
|
|
(519,080
|
)
|
|
|
(58,971
|
)
|
Other current assets
|
|
|
(929,392
|
)
|
|
|
200,819
|
|
|
|
211,454
|
|
Other assets
|
|
|
11,763
|
|
|
|
74,073
|
|
|
|
|
|
Accounts payable
|
|
|
441,312
|
|
|
|
96,116
|
|
|
|
(576,822
|
)
|
Accrued expenses
|
|
|
(595,210
|
)
|
|
|
(30,865
|
)
|
|
|
423,907
|
|
Customer deposits
|
|
|
(305,049
|
)
|
|
|
132,231
|
|
|
|
(131,958
|
)
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY OPERATING ACTIVITIES
|
|
|
6,521,107
|
|
|
|
6,946,041
|
|
|
|
8,472,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment net of debt
|
|
|
(3,560,014
|
)
|
|
|
(3,468,690
|
)
|
|
|
(4,131,441
|
)
|
Proceeds from sale of property and equipment
|
|
|
253,725
|
|
|
|
93,722
|
|
|
|
190,999
|
|
Cash used for acquisitions
|
|
|
(429,608
|
)
|
|
|
(290,540
|
)
|
|
|
(409,277
|
)
|
Cash used for purchase of trademark
|
|
|
(40,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN INVESTING ACTIVITIES
|
|
|
(3,775,897
|
)
|
|
|
(3,665,508
|
)
|
|
|
(4,349,719
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments on debt
|
|
|
(3,282,217
|
)
|
|
|
(3,509,041
|
)
|
|
|
(3,927,268
|
)
|
Purchase of treasury stock
|
|
|
(242,860
|
)
|
|
|
(104,779
|
)
|
|
|
(104,927
|
)
|
Proceeds from issuance of common stock
|
|
|
88,219
|
|
|
|
86,561
|
|
|
|
133,431
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN FINANCING ACTIVITIES
|
|
|
(3,436,858
|
)
|
|
|
(3,527,259
|
)
|
|
|
(3,898,764
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (DECREASE) INCREASE IN CASH
|
|
|
(691,648
|
)
|
|
|
(246,726
|
)
|
|
|
224,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS beginning of year
|
|
|
1,873,385
|
|
|
|
2,120,111
|
|
|
|
1,895,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS end of year
|
|
$
|
1,181,737
|
|
|
$
|
1,873,385
|
|
|
$
|
2,120,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION, EXCLUDING NON-CASH FINANCING AND INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
2,922,374
|
|
|
$
|
3,297,499
|
|
|
$
|
3,239,583
|
|
Cash paid for taxes
|
|
$
|
2,354,300
|
|
|
$
|
895,373
|
|
|
$
|
182,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CASH FINANCING AND INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction in notes payable for acquisition
|
|
$
|
|
|
|
$
|
|
|
|
$
|
23,668
|
|
Notes payable issued in acquisitions
|
|
$
|
36,000
|
|
|
$
|
100,407
|
|
|
$
|
167,750
|
|
Note receivable for sale of assets
|
|
$
|
|
|
|
$
|
|
|
|
$
|
195,212
|
|
Equipment purchased by acquisition line
|
|
$
|
421,527
|
|
|
$
|
663,678
|
|
|
$
|
|
|
See the accompanying notes to the consolidated financial statements.
F-5
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1.
|
|
BUSINESS OF THE COMPANY AND BASIS OF PRESENTATION
|
|
|
|
Vermont Pure Holdings, Ltd. and Subsidiary (collectively, the Company) is engaged in the
production, marketing and distribution of bottled water and distribution of coffee,
ancillary products, and other office refreshment products. The Company operates exclusively
as a home and office delivery business, using its own trucks to distribute throughout New
England, New York, and New Jersey.
|
|
|
|
The consolidated financial statements of the Company include the accounts of Vermont Pure
Holdings, Ltd. and its wholly-owned subsidiary, Crystal Rock LLC. All inter-company
transactions and balances have been eliminated in consolidation.
|
|
|
|
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Such estimates relate
primarily to the estimated lives of property and equipment and other intangible assets, the
values for the purpose of calculating goodwill impairment and the value of equity
instruments issued. Actual results could differ from those estimates.
|
|
2.
|
|
SIGNIFICANT ACCOUNTING POLICIES
|
|
|
|
Cash Equivalents
The Company considers all highly liquid temporary cash
investments with an original maturity of three months or less to be cash equivalents.
|
|
|
|
Accounts Receivable
Accounts receivable are carried at original invoice amount
less an estimate made for doubtful accounts. Management establishes the allowance for
doubtful accounts by regularly evaluating past due balances, collection history as well as
general economic and credit conditions. Individual accounts receivable are written off when
deemed uncollectible, with any future recoveries recorded as income when received.
|
|
|
|
Inventories
Inventories primarily consist of products that are purchased for
resale and are stated at the lower of cost or market on a first in, first out basis.
|
|
|
|
Property and Equipment
Property and equipment are stated at cost net of
accumulated depreciation. Depreciation is calculated on the straight-line method over the
estimated useful lives of the assets, which range from three to ten years for machinery and
equipment, and from seven to thirty years for buildings and improvements, and three to seven
years for other fixed assets. Leasehold improvements are depreciated over the shorter of the
estimated useful life of the leasehold improvement or the term of the lease.
|
|
|
|
Goodwill and Other Intangibles
Intangible assets with lives restricted by
contractual, legal, or other means are amortized over their useful lives. Based on Statement
of
|
F-6
|
|
Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, the
Company defines an assets useful life as the period over which the asset is expected to
contribute to the future cash flows of the entity. Goodwill and other intangible assets not
subject to amortization are tested for impairment annually or more frequently if events or
changes in circumstances indicate that the asset might be impaired. The amount of
impairment for goodwill and other intangible assets is measured as the excess of their
carrying values over their implied fair values. The Company conducted assessments of the
carrying value of its goodwill as required by SFAS No. 142, using an independent third party
valuation as of October 31, 2008 and 2006, and determined that goodwill was impaired. A
similar valuation was conducted and concluded that goodwill was not impaired as of October
31, 2007. Other than goodwill, intangible assets consist primarily of customer lists and
covenants not to compete, with estimated lives ranging from 3 to 10 years.
|
|
|
|
Impairment for Long-Lived and Intangible Assets
The Company reviews long-lived
assets and certain identifiable intangible assets for impairment whenever circumstances and
situations change such that there is an indication that the carrying amounts may not be
recovered. Recoverability is assessed based on estimated undiscounted future cash flows.
As of October 31, 2008 and 2007, the Company believes that there has been no impairment of
its long-lived and intangible assets, other than goodwill as described above.
|
|
|
|
Stock-Based Compensation
The Company has several stock-based compensation plans
under which incentive and non-qualified stock options and restricted shares are granted, and
an Employee Stock Purchase Plan (ESPP). Effective November 1, 2005, the Company adopted the
provisions of SFAS No. 123, Share-Based Payments (revised 2004), (SFAS No. 123R) which
requires the Company to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant date fair value of the award. That cost is
recognized over the period during which an employee is required to provide services in
exchange for the award, the requisite service period (usually the vesting period). Under
SFAS No. 123R, the Company provides an estimate of forfeitures at initial grant date. The
Company elected the modified prospective transition method under SFAS No. 123R and
accordingly has not restated periods prior to adoption. The pronouncement had no material
impact on the Companys 2006, 2007, or 2008 results of operations since no options were
issued or vested during those years.
|
|
|
|
Prior to the adoption of SFAS No. 123R, the Company followed the accounting treatment
prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations when accounting for stock-based compensation granted to employees and
directors. Accordingly, no compensation expense was recognized for stock option awards
because the exercise price of the Companys stock options equaled or exceeded the market
price of the underlying stock on the date of the grant.
|
|
|
|
Net Income (Loss) Per Share
Net income (loss) per share is based on the weighted
average number of common shares outstanding during each period. Potential common shares are
included in the computation of diluted per share amounts outstanding during each period that
income is reported. In periods in which the Company reports a loss,
|
F-7
|
|
potential common shares are not included in the diluted earnings per share calculation since
the inclusion of those shares in the calculation would be anti-dilutive. As required by
SFAS No. 128, Earnings per Share, the Company considers outstanding in-the-money stock
options, if any, as potential common stock in its calculation of diluted earnings per share
and uses the treasury stock method to calculate the applicable number of shares.
|
|
|
|
Advertising Expenses
The Company expenses advertising costs at the commencement of
an advertising campaign.
|
|
|
|
Customer Deposits
Customers receiving home or office delivery of water pay the
Company a deposit for the water bottle that is refunded when the bottle is returned. Based
on historical experience, the Company uses an estimate of the deposits it expects to refund
over the next twelve months to determine the current portion of the liability, and
classifies the remainder of the deposit obligation as a long term liability.
|
|
|
|
Income Taxes
The Company applies the provisions of SFAS No. 109, Accounting for
Income Taxes, when calculating its tax expense and the value of tax related assets and
liabilities. This requires that the tax impact of future events be considered when
determining the value of assets and liabilities in its financial statements and tax returns.
The Company accounts for income taxes under the liability method. Under the liability
method, a deferred tax asset or liability is determined based upon the tax effect of the
differences between the financial statement and tax basis of assets and liabilities as
measured by the enacted rates that will be in effect when these differences reverse. A
valuation allowance is recorded if realization of the deferred tax assets is not likely.
|
|
|
|
Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, is an interpretation of FASB Statement 109 (FIN 48). This
statement clarifies the criteria that an individual tax position must satisfy for some or
all of the benefits of that position to be recognized in a companys financial statements.
FIN 48 prescribes a recognition threshold of more-likely-than-not, and a measurement
attribute for all tax positions taken or expected to be taken on a tax return in order for
those tax positions to be recognized in the financial statements. The Company adopted the
provisions of FIN 48 at the beginning of fiscal year 2008.
|
|
|
|
Derivative Financial Instruments
The Company accounts for derivative instruments
in accordance with SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities,
which requires that the Company record all derivatives on the balance sheet at
fair value.
|
|
|
|
The Company utilizes interest rate swap agreements to hedge variable rate interest payments
on its long-term debt. The interest rate swaps are recognized on the balance sheet at their
fair value as stated by the bank and are designated as cash flow hedges. Accordingly, the
resulting changes in fair value of the Companys interest rate swaps are recorded as a
component of other comprehensive income. The Company assesses, both at a hedges inception
and on an ongoing basis, whether the derivatives that are used in hedging transactions are
highly effective in offsetting changes in cash flows of the related
|
F-8
|
|
hedged items. Gains and losses that are related to the ineffective portion of a hedge or
terminated hedge are recorded in earnings.
|
|
|
|
Fair Value of Financial Instruments
The carrying amounts reported in the
consolidated balance sheet for cash equivalents, trade receivables, and accounts payable
approximate fair value based on the short-term maturity of these instruments. The carrying
value of senior debt approximates its fair value since it provides for variable market
interest rates. The Company uses a swap agreement to hedge the interest rates on its long
term debt. The swap agreement is carried at its estimated settlement value based on
information from the financial institution. Subordinated debt is carried at its approximate
market value based on periodic comparisons to similar instruments in the market place.
|
|
|
|
Revenue Recognition
Revenue is recognized when products are delivered to
customers. A certain amount of the Companys revenue is derived from leasing water coolers
and coffee brewers. These leases are generally for the first 12 months of service and are
accounted for as operating leases. To open an account that includes the rental of
equipment, a customer is required to sign a contract that recognizes the receipt of the
equipment, outlines the Companys ownership rights, the customers responsibilities
concerning the equipment, and the rental charge for twelve months. In general, the customer
does not renew the agreement after twelve months, and the rental continues on a month to
month basis until the customer returns the equipment in good condition. The Company
recognizes the income ratably over the life of the lease. After the initial lease term
expires, rental revenue is recognized monthly as billed.
|
|
|
|
Shipping and Handling Costs
The Company distributes its home and office products
directly to its customers on its own trucks. The delivery costs related to the Companys
route system, which are reported under selling, general, and administrative expenses, were
approximately $13,526,000, $12,930,000, and $12,741,000 for fiscal years 2008, 2007, and
2006 respectively.
|
|
3.
|
|
RECENT ACCOUNTING PRONOUNCEMENTS
|
|
|
|
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement
No. 157, Fair Value Measurements. This Statement defines fair value, establishes a
framework for measuring fair value in accordance with generally accepted accounting
principles, and expands disclosures about fair value measurements. The definition of fair
value retains the exchange price notion in earlier definitions of fair value. This
Statement clarifies that the exchange price is the price in an orderly transaction between
market participants to sell the asset or transfer the liability in the market in which the
reporting entity would transact for the asset or liability, that is, the principal or most
advantageous market for the asset or liability. Emphasis is placed on fair value being a
market-based measurement, not an entity-specific measurement, and therefore a fair value
measurement should be determined based on the assumptions that market participants would use
in pricing the asset or liability. As a basis for considering these market participant
assumptions, a fair value hierarchy has been established to distinguish between (1) market
participant assumptions developed based on market data obtained from sources independent of
the reporting entity (observable inputs) and (2) the
|
F-9
|
|
reporting entitys own assumptions about market participant assumptions developed based on
the best information available in the circumstances (unobservable inputs). In February
2008, the FASB issued a Staff Position which delays the effective date of Statement No. 157
for non-financial assets and non-financial liabilities, except for items that are recognized
or disclosed at fair value in the financial statements on a recurring basis, to fiscal years
beginning after November 15, 2008 which is fiscal year 2010 for the Company. The provisions
of SFAS No.157 are effective for the Companys fiscal year commencing after November 15,
2008 which is fiscal 2010 for the Company.
|
|
|
|
In October, 2008, the FASB issued FASB Staff Position No. FAS 157-3, Determining the Fair
Value of a Financial Asset When the Market for That Asset Is Not Active (FSP 157-3). FSP
157-3 clarifies the application of SFAS No. 157 in a market that is not active and provides
an example to illustrate key considerations in determining the fair value of a financial
asset when the market for that financial asset is not active. FSP 157-3 was effective
immediately upon issuance and adoption of SFAS No. 157, and includes prior periods for which
financial statements have not been issued. The provisions of SFAS No.157 are effective for
the Companys fiscal year commencing November 1, 2009. The Company is currently evaluating
the potential impact, if any, the adoption of SFAS No. 157 will have on its consolidated
financial statements.
|
|
|
|
In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities Including an amendment of FASB Statement No. 115. This
Statement permits entities to choose to measure many financial instruments and certain other
items at fair value. It has the objective of improving financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having to apply complex hedge
accounting provisions. The pronouncement is expected to expand the use of fair value
measurement. An entity will report unrealized gains and losses on items for which the fair
value option has been elected in earnings at each subsequent reporting date. The fair value
option may generally be applied instrument by instrument and is irrevocable. This Statement
is effective as of the beginning of an entitys first fiscal year that begins after
November 15, 2007, which is fiscal year 2009 for the Company. The Company is currently
reviewing the impact, if any, that this new accounting standard will have on their financial
statements.
|
|
|
|
In December 2007, the FASB issued Statement No. 141 (revised 2007), Business Combinations
(Statement No. 141(R)). Statement No. 141(R) establishes principles and requirements for
how the acquirer in a business combination recognizes and measures identifiable assets
acquired, liabilities assumed, and noncontrolling interests in the acquired company.
Statement No. 141(R) further addresses how goodwill acquired or a gain from a bargain
purchase is to be recognized and measured and determines what disclosures are needed to
enable users of the financial statements to evaluate the effects of the business
combination. Statement No. 141(R) is effective prospectively for business combinations for
which the acquisition date is on or after the beginning of the first annual reporting period
beginning on or after December 15, 2008, which is fiscal 2010 for the Company. Earlier
application is not permitted.
|
F-10
|
|
In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements An amendment of ARB No. 51. Statement No. 160 amends
ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity
that should be reported as equity in the consolidated financial statements. SFAS No. 160 is
effective for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008, which is fiscal 2010 for the Company.
|
|
|
|
In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments
and Hedging Activities an amendment of FASB Statement No. 133. This Statement changes
the disclosure requirements for derivative instruments and hedging activities. Entities are
required to provide enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are accounted for under
SFAS 133 and its related interpretations, and (c) how derivative instruments and related
hedged items affect an entitys financial position, financial performance, and cash flows.
This Statement is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early application encouraged. The Company
is currently assessing the impact, if any, this pronouncement will have on its reporting and
when, if necessary, to implement enhanced reporting.
|
|
|
|
In May 2008, the FASB issued Statement No. 162, The Hierarchy of Generally Accepted
Accounting Principles. This Statement identifies the sources of accounting principles and
the framework for selecting the principles to be used in the preparation of financial
statements of nongovernmental entities that are presented in conformity with generally
accepted accounting principles (GAAP) in the United States. The FASB believes that the GAAP
hierarchy should be directed to entities because it is the entity (not its auditor) that is
responsible for selecting accounting principles for financial statements that are presented
in conformity with GAAP. The FASB does not believe this Statement will result in a change in
current practice. Statement No. 162 is effective 60 days following the SECs approval of the
Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of
Presents Fairly in Conformity With Generally Accepted Accounting Principles.
|
|
|
|
In December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, Disclosures by Public
Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable
Interest Entities. This FSP amends FASB Statement No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, to require public
entities to provide additional disclosures about transfers of financial assets. It also
amends FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable
Interest Entities, to require public enterprises, including sponsors that have a variable
interest in a variable interest entity, to provide additional disclosures about their
involvement with variable interest entities. Additionally, this FSP requires certain
disclosures to be provided by a public enterprise that is (a) a sponsor of a qualifying
|
F-11
|
|
special purpose entity (SPE) that holds a variable interest in the qualifying SPE but was
not the transferor (nontransferor) of financial assets to the qualifying SPE and (b) a
servicer of a qualifying SPE that holds a significant variable interest in the qualifying
SPE but was not the transferor (nontransferor) of financial assets to the qualifying SPE.
This FSP was effective upon issuance and did not have a material impact on the Companys
consolidated financial statements.
|
|
4.
|
|
MERGERS AND ACQUISITIONS
|
|
|
|
During fiscal years 2008, 2007 and 2006, Vermont Pure Holdings, Ltd. made four acquisitions
in each year. The purchase price paid for the acquisitions for the respective years is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (including acquisition costs)
|
|
$
|
429,608
|
|
|
$
|
290,540
|
|
|
$
|
409,277
|
|
Notes Payable
|
|
|
36,000
|
|
|
|
100,407
|
|
|
|
167,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
465,608
|
|
|
$
|
390,947
|
|
|
$
|
577,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The allocation of purchase price related to these acquisitions for the respective years is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Accounts Receivable
|
|
$
|
|
|
|
$
|
|
|
|
$
|
637
|
|
Equipment
|
|
|
65,528
|
|
|
|
40,161
|
|
|
|
40,307
|
|
Identifiable Intangible Assets
|
|
|
389,317
|
|
|
|
343,200
|
|
|
|
523,206
|
|
Goodwill
|
|
|
15,763
|
|
|
|
7,586
|
|
|
|
12,877
|
|
Customer deposits
|
|
|
(5,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase Price
|
|
$
|
465,608
|
|
|
$
|
390,947
|
|
|
$
|
577,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During fiscal year 2007, $5,251 of intangible assets was written off related to price
adjustments of previous acquisitions. During fiscal year 2006, $37,317 of intangible
assets, and $19,723 of accumulated amortization, was written off related to price
adjustments of previous acquisitions.
|
|
|
|
The following table summarizes the pro forma consolidated condensed results of operations
(unaudited) of the Company for the fiscal years ended October 31, 2008, 2007, and 2006 as
though all the acquisitions had been consummated at the beginning of fiscal year 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Net Sales
|
|
$
|
69,705,846
|
|
|
$
|
65,805,496
|
|
|
$
|
63,864,511
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(19,801,096
|
)
|
|
$
|
2,113,651
|
|
|
$
|
(20,587,113
|
)
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Per
Share-Diluted
|
|
$
|
(.92
|
)
|
|
$
|
.10
|
|
|
$
|
(.95
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common
Shares
Outstanding-Diluted
|
|
|
21,564,384
|
|
|
|
21,624,381
|
|
|
|
21,630,739
|
|
|
|
|
|
|
|
|
|
|
|
F-12
|
|
The operating results of the acquired entities have been included in the accompanying
statements of operations since their respective dates of acquisition.
|
|
5.
|
|
EQUIPMENT RENTAL
|
|
|
|
The carrying cost of the equipment rented to customers, which is included in property and
equipment in the consolidated balance sheets, is calculated as follows:
|
|
|
|
|
|
Original Cost
|
|
$
|
3,125,883
|
|
Accumulated Depreciation
|
|
$
|
2,130,685
|
|
|
|
|
|
Carrying Cost
|
|
$
|
995,198
|
|
|
|
|
|
|
|
We expect to have revenue of $683,000 from the rental of such equipment over the next twelve
months.
|
|
6.
|
|
ACCOUNTS RECEIVABLE
|
|
|
|
The activity in the allowance for doubtful accounts for the years ended October 31, 2008,
2007, and 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Balance, beginning of year
|
|
$
|
354,825
|
|
|
$
|
352,844
|
|
|
$
|
289,837
|
|
Provision
|
|
|
345,812
|
|
|
|
326,435
|
|
|
|
300,811
|
|
Write-offs
|
|
|
(286,336
|
)
|
|
|
(324,454
|
)
|
|
|
(237,804
|
)
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
414,301
|
|
|
$
|
354,825
|
|
|
$
|
352,844
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
|
INVENTORIES
|
|
|
|
Inventories at October 31 consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Finished Goods
|
|
$
|
1,557,914
|
|
|
$
|
1,546,168
|
|
Raw Materials
|
|
|
112,035
|
|
|
|
165,198
|
|
|
|
|
|
|
|
|
Total Inventories
|
|
$
|
1,669,949
|
|
|
$
|
1,711,366
|
|
|
|
|
|
|
|
|
|
|
Finished goods inventory consists of products that the Company sells such as, but not
limited to, coffee, cups, soft drinks, and snack foods. Raw material inventory consists
primarily of bottle caps.
|
F-13
8.
|
|
PROPERTY AND EQUIPMENT, NET
|
|
|
|
Property and equipment at October 31 consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful
|
|
|
|
|
|
|
|
|
Life
|
|
2008
|
|
|
2007
|
|
Leasehold improvements
|
|
Shorter of useful life of
|
|
$
|
1,812,689
|
|
|
$
|
813,486
|
|
|
|
asset or lease term
|
|
|
|
|
|
|
|
|
Machinery and equipment
|
|
3 10 yrs.
|
|
|
20,467,805
|
|
|
|
19,518,020
|
|
Bottles, racks and vehicles
|
|
3 7 yrs.
|
|
|
6,125,618
|
|
|
|
6,913,808
|
|
Furniture, fixtures and office equipment
|
|
3 7 yrs.
|
|
|
2,235,166
|
|
|
|
2,029,532
|
|
Construction in progress
|
|
|
|
|
|
|
136,005
|
|
|
|
330,296
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment before
accumulated depreciation
|
|
|
|
|
|
|
30,777,283
|
|
|
|
29,605,142
|
|
Less accumulated depreciation
|
|
|
|
|
|
|
20,213,895
|
|
|
|
18,908,124
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment,
net of accumulated depreciation
|
|
|
|
|
|
$
|
10,563,388
|
|
|
$
|
10,697,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2008, the Company completed an extensive solar electricity generation installation in
its Watertown facility to supply a significant amount of the energy for that facility. The
expenditures of the solar project are net of $1,159,000 received from a grant for the
project through October 31, 2008. The total cost of the project was $2,092,000 and the
Company anticipates receiving an additional $128,000 in related grant revenue in the next
fiscal year subject to certain conditions that management anticipates being able to comply
with completely.
|
|
|
|
Depreciation expense for the fiscal years ended October 31, 2008, 2007 and 2006 was
$4,063,178, $4,118,134, and $4,041,448, respectively.
|
9.
|
|
GOODWILL AND OTHER INTANGIBLE ASSETS
|
|
|
|
Components of other intangible assets at October 31 consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
Amortized Intangible Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer Lists and Covenants
Not to Compete
|
|
$
|
5,866,981
|
|
|
$
|
4,113,807
|
|
|
$
|
5,477,663
|
|
|
$
|
3,227,854
|
|
Other Identifiable Intangibles
|
|
|
528,254
|
|
|
|
196,886
|
|
|
|
598,705
|
|
|
|
195,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,395,235
|
|
|
$
|
4,310,693
|
|
|
$
|
6,076,368
|
|
|
$
|
3,422,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for amortizable intangible assets for fiscal years 2008, 2007, and 2006
was $887,813, $846,160, and $877,855, respectively.
|
F-14
|
|
Estimated amortization expense for the next five years is as follows:
|
|
|
|
|
|
Fi
s
cal Year Ending
|
|
Amount
|
October 31, 2009
|
|
$
|
722,000
|
|
October 31, 2010
|
|
|
447,000
|
|
October 31, 2011
|
|
|
308,000
|
|
October 31, 2012
|
|
|
161,000
|
|
October 31, 2013
|
|
|
82,000
|
|
|
|
The average remaining term of identifiable intangible assets with balances remaining to be
amortized is 33 months.
|
|
|
|
An assessment of the carrying value of goodwill was conducted as of October 31, 2008, 2007,
and 2006. In 2008 and 2006, based on the analysis, it was determined at that time that
goodwill was impaired. In the second phase of the assessment process it was determined that
goodwill on the Companys books was overvalued by $22,359,091 and $22,950,018 on the
assessment date for the respective years, resulting in a non-cash impairment loss of those
amounts for the respective years. In 2007 it was determined that goodwill was not impaired.
The changes in the carrying amount of goodwill for the fiscal years ended October 31, 2008
and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Beginning balance
|
|
$
|
54,423,997
|
|
|
$
|
54,421,662
|
|
Goodwill acquired during the year
|
|
|
15,763
|
|
|
|
7,586
|
|
Goodwill disposed of during the year
|
|
|
|
|
|
|
(5,251
|
)
|
Impairment loss
|
|
|
(22,359,091
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of October 31
|
|
$
|
32,080,669
|
|
|
$
|
54,423,997
|
|
|
|
|
|
|
|
|
|
|
The Company recognized an impairment charge for the year ended October 31, 2008 as a result
of our annual impairment test of goodwill as of that date. In determining the impairment, it
followed the two step approach provided in paragraphs 19-22 of SFAS No.142. In step one and
in determining the fair value of the Company, we used a weighted average of three different
market approaches quoted stock price, value comparisons to publicly traded companies
believed to have comparable reporting units, and discounted net cash flow. This approach
provided a reasonable estimation of the value of the Company and took into consideration the
Companys thinly traded stock, market comparable valuations, and expected results of
operations. The Company compared the resulting estimated fair value to its equity value as
of October 31, 2008 and determined that there was an impairment of goodwill. In step two,
the Company then allocated the estimated fair value to all of its assets and liabilities
(including unrecognized intangible assets) as if the Company had been acquired in a business
combination and the estimated fair value was the price paid. It then recognized an
impairment in the amount by which the carrying value of goodwill exceeded the implied value
of goodwill as determined in this allocation. The company is a single reporting unit as it
does not have separate management of product lines and shares sales, purchasing and
distribution resources among the lines.
|
F-15
|
|
Impairment was primarily the result of a decline in the quoted market prices of the
Companys stock at year-end below its book carrying value, and was not due to any changes in
the core business. There was no event or change in circumstance that would more likely than
not reduce the fair value of our underlying net assets below their carrying amount prior to
the annual impairment test.
|
|
10.
|
|
OTHER ASSETS
|
|
|
|
At October 31 the balance of other assets is itemized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Note receivable, unsecured, due March 1, 2011
|
|
$
|
|
|
|
$
|
475,000
|
|
Note receivable, unsecured, due August 8,
2011, interest 0% per annum (net of an
allowance for bad debt of $57,043 for 2008)
|
|
|
113,333
|
|
|
|
179,830
|
|
Ownership interests
|
|
|
39,000
|
|
|
|
39,000
|
|
Accrued interest
|
|
|
|
|
|
|
2,309
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
152,333
|
|
|
$
|
696,139
|
|
|
|
|
|
|
|
|
|
|
In fiscal year 2008, the Company recorded a provision for bad debt expense on an unsecured,
subordinated note receivable from Trident LLC. The note, which was due in full in 2011 and
had a principal balance of $475,000, represented the remaining portion of the sales price
that was receivable from the sale of our retail operations in March, 2004. The note was
considered fully impaired primarily based on advice from Trident that it had closed its
principal facility and generally ceased its operations due to cash flow problems. The
provision for bad debt expense is reflected in selling, general and administrative expenses
for the year ended October 31, 2008.
|
|
11.
|
|
ACCRUED EXPENSES
|
|
|
|
Accrued expenses as of October 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Payroll and Vacation
|
|
$
|
1,575,787
|
|
|
$
|
1,606,748
|
|
Interest
|
|
|
491,875
|
|
|
|
516,652
|
|
Income Taxes
|
|
|
|
|
|
|
557,832
|
|
Health Insurance
|
|
|
403,325
|
|
|
|
341,000
|
|
Accounting and Legal
|
|
|
160,500
|
|
|
|
160,000
|
|
Miscellaneous
|
|
|
227,790
|
|
|
|
272,255
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,859,277
|
|
|
$
|
3,454,487
|
|
|
|
|
|
|
|
|
12.
|
|
DEBT
|
|
|
|
Senior Debt
|
|
|
|
The Company has a senior credit facility with Bank of America that provides a Term Loan, a
Revolving Credit Loan of $6 million for working capital and letters of credit, and up to $10
million in an Acquisition Loan to be used for acquisitions and capital
|
F-16
|
|
expenditures. The Term Loan may also provide funds for future principal payment of the
Companys subordinated debt if certain financial covenants are met after the first two years
of the loan.
|
|
|
|
On July 5, 2007 the Company and the Bank amended the facility. The amendment extended the
working capital and acquisition lines of credit by changing the Acquisition Loan termination
date and Revolving Credit Loan maturity date to April 5, 2010 from April 5, 2008 and
extended the Term Loan maturity date to January 5, 2014. In conjunction with the extension
of the maturity date, the monthly amortization amount on the Term Loan was fixed at $270,833
for the duration of the loan. Prior to the amendment, the Term Loan maturity date was May
5, 2012 and the remaining amortization was scheduled to be monthly amounts, increasing from
year to year, ranging from $312,500 to $395,833. In addition, the amendment increased the
Acquisition Loan availability to $10,000,000 and made up to $3,000,000 available from the
Revolving Credit Loan for repurchase of Company stock or for repayment of subordinated debt
and $2,200,000 available from the Acquisition Loan for installation of solar panels for
electricity generation at the Companys leased property in Watertown, Connecticut. The
amendment has provisions for amortization of the additional borrowed amounts over the
remaining life of the loans starting approximately two years after disbursement. It also
alters some of the financial covenant calculations to provide for the additional borrowing.
|
|
|
|
Interest on the loans is based on the 30-day LIBOR plus an applicable margin based on the
Companys financial performance. The applicable margin may vary from 125 to 225 basis
points for the Acquisition and Revolving Credit Loans and 150 to 250 basis points for the
Term Loan based on the level of senior debt to earnings before interest, taxes,
depreciation, and amortization (EBITDA). The applicable margins as of October 31, 2008 were
1.75% for the Term Loan and 1.5% for the Acquisition and Revolving Credit Loans, resulting
in total variable interest rates of 5.56% and 5.31%, respectively. The facility is secured
by substantially all of the Companys assets. As of October 31, 2008, there was $16,792,000
outstanding on the Term Loan, and $1,000,000 outstanding on the Acquisition Loan. There
were no borrowings outstanding but there was an outstanding letter of credit of $1,485,000
issued against the Revolving Credit Loan availability as of the end of the fiscal year.
|
|
|
|
The facility with Bank of America requires that the Company be in compliance with certain
financial covenants at the end of each fiscal quarter. The covenants include senior debt
service coverage as defined of greater than 1.25 to 1, total debt service coverage as
defined of greater than 1 to 1, and senior debt to EBITDA as defined of no greater than 2.50
to 1. As of October 31, 2008 and 2007, the Company was in compliance with all of the
financial covenants of the facility.
|
|
|
|
Subordinated Debt
As part of the acquisition agreement in 2000 with the former shareholders of Crystal Rock
Spring Water Company, the Company issued subordinated notes in the amount of $22,600,000.
The notes have an effective date of October 5, 2000, were for an original term of seven
years (subsequently extended to 2012 as part of the senior credit facility refinancing
described above) and bear interest at 12% per year. Scheduled repayments
|
F-17
|
|
are made quarterly and are interest only for the life of the note unless specified financial
targets are met. In April 2004, the Company repaid $5,000,000 of the outstanding principal.
In April, 2005, the Company repaid an additional $3,600,000 of this principal. As of
October 31, 2008, payments of interest only of $420,000 are due quarterly with a principal
payment of $14,000,000 due at maturity.
|
|
|
|
The notes are secured by all of the assets of the Company but specifically subordinated,
with a separate agreement between the debt holders, to the senior credit facility described
above.
|
|
|
|
Annual Maturities
|
|
|
|
Annual maturities of debt as of October 31, 2008 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
|
|
|
Credit Lines
|
|
|
Subordinated
|
|
|
Other
|
|
|
Total
|
|
Fiscal year ending
October 31,
2009
|
|
$
|
3,250,000
|
|
|
|
|
|
|
|
|
|
|
$
|
65,000
|
|
|
$
|
3,315,000
|
|
2010
|
|
|
3,250,000
|
|
|
|
100,000
|
|
|
|
|
|
|
|
20,000
|
|
|
|
3,370,000
|
|
2011
|
|
|
3,250,000
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
3,450,000
|
|
2012
|
|
|
3,250,000
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
3,450,000
|
|
2013 and after
|
|
|
3,792,000
|
|
|
|
500,000
|
|
|
$
|
14,000,000
|
|
|
|
|
|
|
|
18,292,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt
|
|
$
|
16,792,000
|
|
|
$
|
1,000,000
|
|
|
$
|
14,000,000
|
|
|
$
|
85,000
|
|
|
$
|
31,877,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.
|
|
INTEREST RATE SWAP AGREEMENTS
|
|
|
|
The Company uses interest rate swaps to effectively convert variable rate debt to a fixed
rate. The swap rates are based on the floating 30-day LIBOR rate and are structured such
that if the loan rate for the period exceeds the swap rate, then the bank pays the Company
to lower the effective interest rate. Conversely, if the loan rate is lower than the swap
rate, the Company pays the bank additional interest.
|
|
|
|
On October 5, 2007, the Company entered into an interest rate hedge swap agreement in
conjunction with an amendment to its facility with Bank of America. The intent of the
instrument is to fix the interest rate on 75% of the outstanding balance on the Term Loan
with Bank of America as required by the facility. The swap fixes the interest rate for the
swapped amount at 6.62% (4.87% plus the applicable margin, 1.75%). Also on October 5, 2007,
the Company terminated interest rate hedge agreements that it had consummated on July 5,
2007 (the July 2007 swap) and May 3, 2005 (the May 2005 swap). On that date, the
Company was obligated to pay an amount of $99,200 to terminate both swaps.
|
|
|
|
The July 2007 swap was structured to fix the interest rate on 75% of the outstanding balance
on the Term Loan, as amended on the same date, taking into account the May 2005 swap when
the facility was originally entered in to. The July 2007 swap fixed the interest rate at
7.73% (5.98%, plus the applicable margin, 1.75%) for the term debt. The May 2005 swap fixed
the interest rate at 6.41% (4.66%, plus the applicable margin,
|
F-18
|
|
1.75%) and amortized concurrently with the loan principal to fix the interest rate with
respect to 75% of the outstanding principal prior to the July 5, 2007 amendment. As of
October 31, 2008, the total notional amount committed to the swap agreement was $12.6
million. On that date, the variable rate on the remaining 25% of the term debt was 5.56%.
|
|
|
|
Based on the floating rate for respective years ended October 31, 2008 and 2007, the Company
paid $208,000 more and $100,000 less in interest, respectively, than it would have without
the interest rate swap agreements.
|
|
|
|
These swaps are considered cash flow hedges under SFAS No. 133 because they are intended to
hedge, and are effective as a hedge, against variable cash flows. As a result, the changes
in the fair values of the derivatives, net of tax, are recognized as comprehensive income or
loss until the hedged item is recognized in earnings.
|
|
14.
|
|
STOCK BASED COMPENSATION
|
|
|
|
Stock Option and Incentive Plans
|
|
|
|
In April 1998, the Companys shareholders approved the 1998 Incentive and Non Statutory
Stock Option Plan (the 1998 Plan). In April 2003, the Companys shareholders approved an
increase in the authorized number of shares to be issued under the 1998 Plan from 1,500,000
to 2,000,000. This plan provides for issuance of up to 2,000,000 options to purchase the
Companys common stock under the administration of the compensation committee of the Board
of Directors. The intent of this plan is to issue options to officers, employees,
directors, and other individuals providing services to the Company. Of the total amount of
shares authorized under this plan, 443,700 option shares are outstanding and 1,556,300
option shares are available for grant at October 31, 2008.
|
|
|
|
In April 2004, the Companys shareholders approved the 2004 Stock Incentive Plan (the 2004
Plan). This plan provides for issuances of awards of up to 250,000 restricted or
unrestricted shares, or incentive or non-statutory stock options, of the Companys common
stock. Of the total amount of shares authorized under this plan, 149,000 option shares are
outstanding, 26,000 restricted shares have been granted, and 75,000 shares are available for
grant at October 31, 2008.
|
|
|
|
All incentive and non-qualified stock option grants had an exercise price equal to the
market value of the underlying common stock on the date of grant. The following table
summarizes the activity related to stock options and outstanding stock option balances
during the last three fiscal years:
|
F-19
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options
|
|
Weighted Average
|
|
|
(Shares)
|
|
Exercise Price
|
Balance at October 31, 2005
|
|
|
2,626,490
|
|
|
$
|
2.96
|
|
Exercised
|
|
|
(5,000
|
)
|
|
|
1.80
|
|
Expired
|
|
|
(1,864,303
|
)
|
|
|
2.96
|
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2006
|
|
|
757,187
|
|
|
|
2.96
|
|
Expired
|
|
|
(97,687
|
)
|
|
|
2.61
|
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2007
|
|
|
659,500
|
|
|
|
3.01
|
|
Expired
|
|
|
(66,800
|
)
|
|
|
3.84
|
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2008
|
|
|
592,700
|
|
|
|
2.91
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2008, the 66,800 options that expired related to the 1998 Plan.
|
|
|
|
The total shares available for grant under all plans are 1,631,300 at October 31, 2008.
|
|
|
|
The following table summarizes information pertaining to outstanding stock options, all of
which are exercisable, as of October 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
|
Outstanding
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
|
Options
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Intrinsic
|
|
Exercise Price Range
|
|
(Shares)
|
|
|
Life
|
|
|
Price
|
|
|
Value
|
|
$1.80 $2.60
|
|
|
234,500
|
|
|
|
6.21
|
|
|
$
|
2.32
|
|
|
$
|
|
|
$2.81 $3.38
|
|
|
313,200
|
|
|
|
2.05
|
|
|
|
3.22
|
|
|
|
|
|
$3.50 $4.25
|
|
|
40,000
|
|
|
|
3.25
|
|
|
|
3.80
|
|
|
|
|
|
$4.28 $4.98
|
|
|
5,000
|
|
|
|
3.17
|
|
|
|
4.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
592,700
|
|
|
|
3.79
|
|
|
$
|
2.91
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All of the outstanding options as of October 31, 2008 and 2007 were vested.
|
|
|
|
The intrinsic value of the options exercised during the fiscal year ended October 31, 2006
was $3,230.
|
|
|
|
Outstanding options were granted with lives of 10 years and provide for vesting over a term
of 0-5 years.
|
|
|
|
Employee Stock Purchase Plan (ESPP)
|
|
|
|
The Company maintains an ESPP, under which, as originally approved, 500,000 shares of common
stock were reserved for issuance. On March 29, 2007 the Companys stockholders approved an
increase in the number of shares available under the plan from 500,000 to 650,000 shares.
The ESPP enables eligible employees to subscribe, through payroll deductions, to purchase
shares of the Companys common stock at a purchase price equal to 95% of the fair market
value on the last day of the payroll payment period. At October 31, 2008, 552,499 shares
have issued since the inception of the plan including 62,184 shares issued for proceeds of
$88,219 in fiscal year 2008. In fiscal years 2007 and 2006, respectively, 52,983 and 82,315
shares were issued from the plan for proceeds of $86,561 and $124,431, respectively.
|
F-20
15.
|
|
RETIREMENT PLAN
|
|
|
|
The Company has a defined contribution plan which meets the requirements of Section 401(k)
of the Internal Revenue Code. All employees of the Company who are at least twenty-one years
of age are eligible to participate in the plan. The plan allows employees to defer a portion
of their salary on a pre-tax basis and the Company contributes 25% of amounts contributed by
employees up to 6% of their salary. Company contributions to the plan amounted to $145,000,
$134,000, and $123,000, for the fiscal years ended October 31, 2008, 2007, and 2006,
respectively.
|
|
16.
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
Operating Leases
|
|
|
|
The Companys operating leases consist of trucks, office equipment and rental property.
|
|
|
|
Future minimum rental payments, including related party leases described below, over the
terms of various lease contracts are approximately as follows:
|
|
|
|
|
|
Fiscal Year Ending October 31,
|
|
2009
|
|
$
|
3,346,000
|
|
2010
|
|
|
2,858,000
|
|
2011
|
|
|
2,051,000
|
|
2012
|
|
|
1,574,000
|
|
2013
|
|
|
1,488,000
|
|
Thereafter
|
|
|
1,411,000
|
|
|
|
|
|
Total
|
|
$
|
12,728,000
|
|
|
|
|
|
|
|
Rent expense was $3,586,000, $3,004,000, and $2,898,000 for the fiscal years ended October
31, 2008, 2007, and 2006, respectively.
|
|
17.
|
|
RELATED PARTY TRANSACTIONS
|
|
|
|
Directors and Officers
|
|
|
|
The Baker family group, consisting of four current directors Henry Baker (Chairman
Emeritus), Peter Baker (CEO), John Baker (Executive Vice President) and Ross Rapaport
(Chairman), as trustee, together own a majority of our common stock. In addition, in
connection with the acquisition of Crystal Rock Spring Water Company in 2000, we issued
members of the Baker family group 12% subordinated promissory notes secured by all of our
assets. The current balance on these notes is $14,000,000.
|
|
|
|
Henry Baker, had an employment contract with the Company through July 1, 2008. His contract
entitled him to annual compensation of $47,000 as well as a leased Company vehicle. Since
then he has been employed by the Company as an at-will employee at the discretion of
management. Mr. Bakers sons, John Baker and Peter Baker, have employment contracts with the
Company through December 31, 2009. They are also directors. The two contracts entitle the
respective shareholders to annual compensation of $320,000 each and other bonuses and
prerequisites.
|
F-21
|
|
The Company leases a 67,000 square foot facility in Watertown, Connecticut and a 22,000
square foot facility in Stamford, Connecticut from a Baker family trust. The lease in
Stamford expires in October 2010. On August 29, 2007 the Company finalized an amendment to
our existing lease in Watertown which extended that lease to 2016.
|
|
|
|
Future minimum rental payments under these leases are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ending October 31,
|
|
Stamford
|
|
|
Watertown
|
|
|
Total
|
|
2009
|
|
$
|
248,400
|
|
|
$
|
414,000
|
|
|
$
|
662,400
|
|
2010
|
|
|
248,400
|
|
|
|
414,000
|
|
|
|
662,400
|
|
2011
|
|
|
|
|
|
|
452,250
|
|
|
|
452,250
|
|
2012
|
|
|
|
|
|
|
452,250
|
|
|
|
452,250
|
|
2013
|
|
|
|
|
|
|
461,295
|
|
|
|
461,295
|
|
2014
|
|
|
|
|
|
|
461,295
|
|
|
|
461,295
|
|
2015
|
|
|
|
|
|
|
475,521
|
|
|
|
475,521
|
|
2016
|
|
|
|
|
|
|
475,521
|
|
|
|
475,521
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
496,800
|
|
|
$
|
3,606,132
|
|
|
$
|
4,102,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys Chairman of the Board, Ross S. Rapaport, who also acts as Trustee in various
Baker family trusts is employed by Pepe & Hazard LLP a business law firm that the Company
uses from time to time. During fiscal 2008, 2007 and 2006, the Company paid approximately
$63,000, $44,000, and $81,000 respectively, for services provided by Pepe & Hazard LLP.
|
|
|
|
Investment in Voyageur
|
|
|
|
The Company had an equity position in a software company named Voyageur Software, Inc.
(Voyageur) formerly Computer Design Systems, Inc. One of the Companys directors was a
member of the board of directors of Voyageur. The Companys equity investment in Voyageur
represented approximately 24% of the outstanding shares of the company. In 2004, the
Company determined that its investment in Voyageur was impaired and wrote off the carrying
value of its investment. On February 29, 2008, Voyageur sold substantially all of its
assets to another software company and the proceeds were insufficient to provide a return to
Voyageurs shareholders. As a result of the sale, Voyageur ceased its operations. Software
development and maintenance previously provided by Voyageur to the Company will now be
provided by the buyer, an unrelated party.
|
|
|
|
During fiscal years 2008, 2007, and 2006, the Company paid $45,011, $384,997, and $294,649,
respectively, for service, software, and hardware.
|
F-22
18.
|
|
INCOME TAXES
|
|
|
|
The following is the composition of income tax expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended October 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
412,009
|
|
|
$
|
960,353
|
|
|
$
|
147,239
|
|
State
|
|
|
361,137
|
|
|
|
182,156
|
|
|
|
210,600
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
773,146
|
|
|
|
1,142,509
|
|
|
|
357,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
183,582
|
|
|
|
169,588
|
|
|
|
1,177,739
|
|
State
|
|
|
11,826
|
|
|
|
5,006
|
|
|
|
145,995
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
195,408
|
|
|
|
174,594
|
|
|
|
1,323,734
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
968,554
|
|
|
$
|
1,317,103
|
|
|
$
|
1,681,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets (liabilities) at October 31, 2008 and October 31, 2007, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
|
|
2008
|
|
|
2007
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
157,434
|
|
|
$
|
134,834
|
|
Accrued compensation
|
|
|
296,118
|
|
|
|
304,930
|
|
Accrued liabilities and reserves
|
|
|
88,499
|
|
|
|
17,091
|
|
Interest rate swap
|
|
|
202,036
|
|
|
|
42,586
|
|
Capital loss carry forward
|
|
|
83,057
|
|
|
|
|
|
Valuation allowance
|
|
|
(83,057
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
744,087
|
|
|
|
499,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(1,576,065
|
)
|
|
|
(1,603,022
|
)
|
Amortization
|
|
|
(1,827,631
|
)
|
|
|
(1,520,069
|
)
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(3,403,696
|
)
|
|
|
(3,123,091
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
(2,659,609
|
)
|
|
$
|
(2,623,650
|
)
|
|
|
|
|
|
|
|
|
|
During 2008, the Company established a valuation allowance of $83,057 related to the capital
loss carry forward deferred tax asset.
|
F-23
|
|
Income tax expense differs from the amount computed by applying the statutory tax rate to
net (loss) income before income tax expense as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year Ended October 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Income tax expense
(benefit) computed at the
statutory rate
|
|
$
|
(6,414,770
|
)
|
|
$
|
1,153,778
|
|
|
$
|
(6,456,105
|
)
|
Goodwill impairment
|
|
|
7,602,091
|
|
|
|
|
|
|
|
7,803,000
|
|
Energy Credit
|
|
|
(508,260
|
)
|
|
|
|
|
|
|
|
|
Other differences
|
|
|
43,337
|
|
|
|
39,799
|
|
|
|
99,326
|
|
State income taxes
|
|
|
246,156
|
|
|
|
123,526
|
|
|
|
235,352
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
968,554
|
|
|
$
|
1,317,103
|
|
|
$
|
1,681,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company adopted Financial Accounting Standards Board (FASB) Interpretation 48,
Accounting for Uncertainty in Income Taxes (FIN 48), at the beginning of the fiscal year
ended October 31, 2008. As a result of the implementation of FIN 48, the Company did not
recognize an increase to tax liability for uncertain tax positions. The Company files
income tax returns in the U.S. federal jurisdiction and various state and local
jurisdictions. Generally, the Company is no longer subject to U.S. federal, state and local
tax examinations by tax authorities for years before October 31, 2004.
|
|
|
|
A reconciliation of the beginning and ending amount of unrecognized tax benefits including
interest and penalties is as follows:
|
|
|
|
|
|
Balance at November 1, 2007
|
|
$
|
119,000
|
|
Increases related to current year tax positions
|
|
|
|
|
Increases related to the prior year tax positions
|
|
|
17,000
|
|
Decreases related to prior year tax positions
|
|
|
|
|
Settlements
|
|
|
|
|
Expiration of Statutes
|
|
|
|
|
|
|
|
|
Balance at October 31, 2008
|
|
$
|
136,000
|
|
|
|
Included in this balance at October 31, 2008 is a state tax exposure of approximately
$118,000. The Company expects a net decrease to its unrecognized tax benefits of
approximately $118,000 within the next year.
|
|
|
|
The Company recognizes interest and penalties related to the unrecognized tax benefits in
tax expense. During the year ended October 31, 2008, the Company recognized $17,000 of
interest and penalties. The Company had approximately $62,000 of interest and penalties
accrued at October 31, 2008.
|
|
19.
|
|
NET INCOME (LOSS) PER SHARE
|
|
|
|
The following calculation provides the reconciliation of the denominators used in the
calculation of basic and fully diluted earnings per share:
|
F-24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended October 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Net Income (Loss)
|
|
$
|
(19,835,525
|
)
|
|
$
|
2,076,364
|
|
|
$
|
(20,670,118
|
)
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Weighted Average Shares
Outstanding
|
|
|
21,564,384
|
|
|
|
21,624,381
|
|
|
|
21,630,739
|
|
Effect of Stock Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Weighted Average Shares
Outstanding
|
|
|
21,564,384
|
|
|
|
21,624,381
|
|
|
|
21,630,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Net Income (Loss) Per Share
|
|
$
|
(.92
|
)
|
|
$
|
.10
|
|
|
$
|
(.96
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Net Income (Loss) Per Share
|
|
$
|
(.92
|
)
|
|
$
|
.10
|
|
|
$
|
(.96
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
There were 592,700, 659,500 options, and 757,187 options outstanding for the years ended
October 31, 2008, 2007 and 2006, respectively, that were not included in the dilution
calculation because the options exercise price exceeded the market price of the underlying
common shares.
|
|
20.
|
|
CONCENTRATION OF CREDIT RISK
|
|
|
|
The Company maintains its cash accounts at various financial institutions. The balances at
times may exceed federally insured limits. At October 31, 2008, the Company had cash in
deposits exceeding the insured limit by approximately $888,000. On October 3, 2008,
President George W. Bush signed the Emergency Economic Stabilization Act of 2008, which
temporarily raised the basic limit on federal deposit insurance coverage from $100,000 to
$250,000 per depositor. The temporary increase in deposit insurance coverage became
effective immediately upon the Presidents signature. The legislation provides that the
basic deposit insurance limit will return to $100,000 after December 31, 2009. In
addition, the Companys deposits are maintained in various financial institutions that are
participating in the Federal Deposit Insurance Corporations Temporary Liquidity Guarantee
Program. This program provides a full guarantee for all noninterest-bearing transaction
accounts maintained at the various financial institutions through December 31, 2009.
Accordingly, all of the Companys cash accounts are fully guaranteed at October 31, 2008.
|
|
21.
|
|
LITIGATION
|
|
|
|
On May 1, 2006, the Company filed a lawsuit in the Superior Court Department, County of
Suffolk, Massachusetts, alleging malpractice and other wrongful acts against three law firms
that had been representing the Company in litigation involving Nestlé Waters North America,
Inc.: Hagens Berman Sobol Shapiro LLP, Ivey & Ragsdale, and Cozen OConnor. The case is
Vermont Pure Holdings, Ltd. vs. Thomas M. Sobol et al.
, Massachusetts Superior Court CA No.
06-1814.
|
|
|
|
Until May 2, 2006, when the Company terminated their engagement, the three defendant law
firms represented the Company in litigation in federal district court in Massachusetts
|
F-25
|
|
known as Vermont Pure Holdings, Ltd. vs. Nestlé Waters North America, Inc. (the Nestlé
litigation). The Company filed the Nestlé litigation in early August 2003.
|
|
|
|
The Companys lawsuit alleges that the three defendant law firms wrongfully interfered with,
and/or negligently failed to take steps to obtain, a proposed June 2003 settlement with
Nestlé. The complaint includes counts involving negligence, breach of contract, breach of
the implied covenant of good faith and fair dealing, breach of fiduciary duty, tortuous
interference with economic relations, civil conspiracy, and other counts, and seeks
declaratory relief and compensatory and punitive damages.
|
|
|
|
In July 2006, certain of the defendants filed a counterclaim against the Company seeking
recovery of their fees and expenses in the Nestlé litigation. In August 2007, certain of
the defendants filed a counterclaim against the Company that includes an abuse of process
count in which it is alleged that our claims against them are frivolous and were not
advanced in good faith, as well as a
quantum meruit
count in which these defendants allege
that their services were terminated wrongfully and in bad faith and seek approximately $2.2
million in damages.
|
|
|
|
Discovery of fact witnesses and expert witnesses has been completed. In September 2008, the
defendants in the lawsuit filed summary judgment motions seeking dismissal of the Companys
claims in their entirety, which the Company opposed. The Superior Court Judge denied these
motions in a ruling dated December 26, 2008. No trial date for this lawsuit has been set.
|
|
|
|
Management intends to pursue its claims, and to the extent of the counterclaims, defend
itself vigorously.
|
|
|
|
On May 15, 2006, the Company entered into an agreement with Nestlé Waters North America Inc.
to resolve pending litigation known as
Vermont Pure Holdings, Ltd. v Nestlé Waters North
America Inc.
, which was in the United States District Court for the District of
Massachusetts. In this lawsuit, filed in August 2003, the Company had made claims under the
federal Lanham Act against Nestlé. The parties provided mutual releases and have stipulated
to dismissal of the case, with neither side admitting liability or wrongdoing. Nestle paid
the Company $750,000 in June 2006 in connection with the agreement. The Company recorded
$750,000 as other income in the third quarter of 2006, related to this settlement.
|
|
22.
|
|
REPURCHASE OF COMMON STOCK
|
|
|
|
In January 2006, the Companys Board of Directors approved the
purchase of up to 250,000 of the Companys common shares at the
discretion of management. In May 2008, the Companys Board of
Directors approved the purchase of up to an additional 250,000 of the
Companys common shares at the discretion of management. Subsequently,
the Company purchased, in the open market, 67,100 shares from July
through October 2006, for an aggregate purchase price of $104,927. In
fiscal years 2008 and 2007, the Company purchased an additional
179,000 and 55,600 shares, respectively, for an aggregate purchase
price of $242,860 and $104,779, respectively. The Company expects to
continue to purchase stock in the open market but total purchases may
not
|
F-26
|
|
ultimately reach the limit established. The Company has used internally generated cash to
fund these purchases.
|
F-27
EXHIBITS TO VERMONT PURE HOLDINGS, LTD.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2008
Exhibits Filed Herewith
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
21.1
|
|
Subsidiary
|
23.1
|
|
Consent of Wolf & Company, P.C.
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
32.1
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
32.2
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
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