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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to _________
Commission file number __________________
SPARKLING SPRING WATER GROUP LIMITED
(Exact name of Registrant as specified in its charter)
Province of Nova Scotia, Canada
(Jurisdiction of incorporation or organization)
19 Fielding Avenue
Dartmouth, Nova Scotia, Canada
B3B 1C9
(902) 481-6955
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
None
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
11.5% Senior Subordinated Notes due 2007 and Guarantees
of 11.5% Senior Subordinated Notes due 2007
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
N/A
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 X No
--- ---
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 Item 18 X
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SPARKLING SPRING WATER GROUP LIMITED
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS................................................. 1
PART I........................................................................ 2
Item 1. Identity of Directors, Senior Management and Advisers............. 2
Item 2. Offer Statistics and Expected Timetable........................... 2
Item 3. Key Information................................................... 2
Item 4. Information on the Company........................................11
Item 5. Operating and Financial Review and Prospects......................17
Item 6. Directors, Senior Management and Employees........................26
Item 7. Major Shareholders and Related Party Transactions.................32
Item 8. Financial Information.............................................36
Item 9. The Offer and Listing.............................................37
Item 10. Additional Information............................................37
Item 11. Quantitative and Qualitative Disclosures About Market Risk........41
Item 12. Description of Securities other than Equity Securities............41
PART II.......................................................................41
Item 13. Defaults, Dividend Arrearages and Delinquencies...................41
Item 14. Material Modifications to the Rights of Security Holders and
use of Proceeds............................................................41
Item 15. [Reserved]........................................................41
Item 16. [Reserved]........................................................41
PART III......................................................................41
Item 17. Financial Statements..............................................41
Item 18. Financial Statements..............................................42
Item 19. Exhibits..........................................................42
INTRODUCTION AND USE OF CERTAIN TERMS
Unless indicated otherwise, all references in this Annual Report to we,"
"our," "us" and similar words or phrases or "Sparkling Spring" or the "Company"
refer collectively to Sparkling Spring Water Group Limited and its subsidiaries.
For the sake of clarification, each operating subsidiary of Sparkling Spring
Water Group Limited is legally separate from all other subsidiaries and manages
its business independently through its local management body.
For purposes of this Annual Report, all references to dollar amounts are
expressed in United States dollars unless otherwise specified. All references in
this Annual Report to "adjusted EBITDA" mean operating profit plus depreciation,
amortization and integration and related expenses. All references to "SSWHL"
mean Sparkling Spring Water Holdings Limited, our parent. Unless otherwise
indicated, all statistical data and information contained in this Annual Report
is as of December 31, 2001.
FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements, including
statements regarding, among other items:
o expectations as to the completion of an initial public offering by our
parent, SSWHL, and the use of proceeds, if any, from that offering;
o expectations as to funding our future capital requirements
o our future earnings and other operating results;
o our growth strategy and measures to implement our growth strategy;
o our ability to effectively and profitably integrate acquired business;
o our ability to effectively satisfy our customers' drinking water needs;
o competition in the bottled water industry and in our markets; and
o other discussions of future plans, strategies, objectives, expectations,
intentions and other matters that involve predictions of future events.
Other statements contained in this Annual Report are forward-looking statements
and may not be based on historical fact, such as statements containing the words
"believes," "may," "will," "estimates," "continue," "anticipates," "intends,"
"plans," "expects" and words of similar import.
These forward-looking statements are subject to risks, uncertainties and
assumptions, including those discussed in "Item 3. - Risk Factors," "Item 4. -
Information on the Company," "Item 5. - Operating and Financial Review and
Prospects" and elsewhere in this Annual Report. The risks, uncertainties and
assumptions involve known and unknown risks and are inherently subject to
significant uncertainties and contingencies, many of which are beyond our
control.
Actual results may differ materially from those projected in
forward-looking statements. You should not unduly rely on these forward-looking
statements, which are based on our current expectations. Factors that could
cause actual results to differ materially include the factors described in "Item
3. - Risk Factors."
We undertake no obligation to update any forward-looking statement to
reflect events or circumstances after the date on which such statement is made
or to reflect the occurrence of unanticipated events, except as required by law.
New factors emerge from time to time, and it is not possible for us to predict
all of these factors. Further, we cannot assess the effect of each such factor
on our business or the extent to which any factor, or combination of factors,
may cause actual results to be materially different from those contained in any
forward-looking statement.
1
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
SELECTED FINANCIAL DATA
The following selected historical consolidated financial data for the five
years ended December 31, 2001 has been derived from our consolidated financial
statements. The information set forth below should be read in conjunction with
"Item 5. - Operating and Financial Review and Prospects" and our consolidated
financial statements and accompanying notes, included in Item 18 of this Annual
Report.
(U.S. DOLLARS IN THOUSANDS EXCEPT RATIOS, PER SHARE AND LOCATION DATA)
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1998 1999 2000 2001
------- ------- ------- ------- -------
INCOME STATEMENT DATA:
Revenue (1) 42,074 56,410 63,918 69,296 74,831
Cost of sales 7,992 10,658 11,585 12,819 12,183
Selling, delivery and administrative expenses (2) 22,869 34,040 35,196 37,284 39,679
Integration and related expenses (3) -- 1,829 93 464 1,499
Depreciation and amortization (4) 5,692 8,880 10,319 11,168 13,066
Operating profit 5,521 1,003 6,725 7,561 8,404
Interest and related expenses (5) 5,018 9,714 11,661 8,079 12,279
Net loss before extraordinary items and
cumulative effect of changes in accounting
policies (1) (2) (4) (4,524) (8,711) (4,473) (1,016) (4,484)
Net income (loss) (1) (2) (4) (5,358) (8,711) (1,769) 44 (7,206)
Net income (loss) per share before
extraordinary items and cumulative effect of
changes in accounting principles (2.69) (5.80) (3.22) (0.73) (3.23)
Basic and diluted net income (loss)
per share (3.18) (5.80) (1.27) 0.03 (5.19)
OTHER DATA:
Adjusted EBITDA (6) 11,213 11,712 17,137 19,193 22,969
Adjusted EBITDA margin (6) 26.7% 20.8% 26.8% 27.7% 30.7%
Ratio of adjusted EBITDA to interest and
related expenses (6) 2.23 1.21 1.47 2.38 1.87
Cash provided by (used in) operating
Activities (495) (1,441) 4,803 3,207 11,285
Cash used in investing activities 33,898 24,618 11,156 16,148 15,123
Cash provided by (used in) financing activities 60,005 8,598 (3,381) 14,659 3,889
Net capital expenditures (7) 6,038 8,094 9,372 10,901 8,773
Water cooler rental and customer
locations (8) 107,000 149,000 160,300 182,600 207,000
2
(U.S. DOLLARS IN THOUSANDS EXCEPT RATIOS, PER SHARE AND LOCATION DATA)
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1997 1998 1999 2000 2001
--------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Cash and cash equivalents 27,507 9,728 97 556 287
Total assets 106,998 107,863 103,061 106,746 105,858
Long-term debt (9) 104,799 112,316 107,426 115,191 117,429
Common shareholder's equity (deficiency) (8,960) (19,560) (19,839) (23,285) (30,823)
Capital stock 6,269 5,933 6,418 6,123 5,674
Number of shares as adjusted to reflect changes
in capital 1,383,325 1,389,188 1,389,188 1,389,188 1,389,188
- ----------
(1) In 2001, we began deferring amounts we received in advance for water
cooler rental leases and recognizing those amounts as revenue over the
period of the lease. In prior years, we recorded revenue from water
cooler rentals when we billed our customer. The new method of
accounting for water cooler leases was adopted in 2001 to more
appropriately match revenue earned from water cooler leases to the
period to which the lease relates. The effect of the change on our
operating results in 2001 was to increase the net loss before
extraordinary items by approximately $109,000. The cumulative effect of
the change in our method of accounting for water cooler rental leases
in prior years increased our net loss in 2001 by $3.2 million.
(2) Selling, delivery and administrative expenses include, for 1998, a
one-time charge of $1.8 million resulting from the effect of a change
in the way we account our reserve for doubtful accounts. For the year
ended December 31, 2001, selling, delivery and administrative expenses
exclude approximately $2.5 million of administrative expenses
(including amounts owed to C.F. Capital Corporation pursuant to the
Management Agreement; see "Item 7. - Related Party Transactions -
Management Agreement") assumed by our parent company, Sparkling Spring
Water Holdings Limited, which otherwise would have been our expense.
(3) Integration and related expenses represent non-recurring costs incurred
in integrating acquired businesses into our existing business and
include severance, relocation and related personnel costs, the cost of
converting the acquired business' computer systems to our systems,
facility closure costs, and the cost of blending new customers into our
existing routes.
(4) In 1999, we began computing depreciation of fixed assets using the
straight-line method. In prior years, we computed depreciation of fixed
assets using the declining balance method. We adopted the new method of
depreciation to more appropriately amortize the cost of fixed assets
over their estimated useful lives. The effect of the change in 1999 was
to decrease net loss before extraordinary items by approximately
$141,000. The cumulative effect of the change in our depreciation
method from the declining balance method to the straight-line method
(after reduction for income taxes of $0.9 million) decreased our net
loss in 1999 by $1.7 million.
(5) Related expenses refer to amortization of deferred financing costs and
gains or losses on foreign currency swaps.
(6) "Adjusted EBITDA" means operating profit plus depreciation,
amortization and integration and related expenses. Our adjustments to
more typical measures of EBITDA are intended to facilitate a better
understanding of our operating results net of the effect of
non-recurring or non-operating items, such as extraordinary gains or
losses, changes in accounting principles and integration expenses.
EBITDA is presented because it is considered by many financial analysts
to be a meaningful indicator of a company's ability to meet its future
financial obligations. However, EBITDA is not required by generally
accepted accounting principles in the United States and should not be
considered as an alternative to net income (loss) as a measure of
operating
3
results or to cash flow from operations as a measure of liquidity in
accordance with generally accepted accounting principles. Because
EBITDA is not calculated in the same manner by all companies, our
presentation may not be comparable to other similarly-titled measures
reported by other companies.
(7) Net capital expenditures represent (a) our maintenance capital
expenditures to replace assets that support our current customer base
plus (b) capital expenditures to support growth in our customer base,
consisting of the purchase of additional water bottles, water coolers
and delivery trucks, the addition of bottling lines at existing
facilities and the construction of new bottling facilities, less (c)
amounts we receive when disposing of assets.
(8) Each individual water cooler owned by us at a customer location counts
as a separate water cooler rental location. A customer who has
purchased a product or service in the 84 days prior to the measurement
date and does not have a water cooler owned by us is counted as an
other customer location. Number of locations is presented at the end of
period.
(9) Includes total long-term liabilities, including current portion of
long-term debt, less other liabilities.
The financial information set forth above reflects the effects of the
Customer Service Agreement dated July 1, 2001, whereby the home and office
customers of our parent, Sparkling Spring Water Holdings Limited, through its
subsidiary Polaris Water Company, Inc. are managed by us and the home and office
customers of our Cullyspring Water Co., Inc. subsidiary are managed by Sparkling
Spring Water Holdings Limited. Pursuant to the Customer Service Agreement, we
receive the all of the revenue generated by home and office customers of Polaris
and include that revenue and related expense and all other related financial
information in our results. Conversely, we do not recognize revenue or any
expense related to the Cullyspring home and office customers. We receive monthly
fees totalling $40,000 under the Customer Service Agreement. At the time we
entered into the Customer Service Agreement in July 2001, we began managing
approximately 14,000 Polaris water cooler rental and customer locations and
SSWHL began managing approximately 11,000 Cullyspring water cooler rental and
customer locations. See "Item 7. - Related Party Transactions - Customer Service
Agreement."
RISK FACTORS
You should carefully consider all of the information set forth in this
Annual Report and the following risk factors. The risks below are not the only
ones we face. Additional risks not currently known to us or that we presently
deem immaterial may also impair our business operations. Our business, financial
condition and results of operations could be materially adversely affected by
any of these risks. This Annual Report also contains forward-looking statements
that involve risks and uncertainties. Our results could materially differ from
those anticipated in these forward-looking statements as a result of certain
factors, including the risks we face as described below and elsewhere. See
"Forward-Looking Statements."
OUR HIGH LEVEL OF DEBT COULD LIMIT OUR OPERATIONAL FLEXIBILITY AND ADVERSELY
AFFECT OUR FINANCIAL CONDITION.
We are a highly-leveraged company. At March 31, 2002, we had an aggregate
of approximately $114.2 million of outstanding indebtedness on a consolidated
basis, consisting of $29.2 million in borrowings under our secured senior credit
facility, $81.1 million in aggregate principal amount of our outstanding senior
subordinated notes, and $3.9 million of capital leases or other indebtedness.
Because of existing debt and the potential for a higher level of debt in the
future:
o a significant portion of our cash flow will or could be used to make
interest and principal payments on our debt, reducing the funds that
would otherwise be available to us for capital expenditures,
acquisitions, working capital and other purposes;
4
o our flexibility in planning for, and reacting to, changes in our
business and the bottled water industry may be limited;
o we may be at a competitive disadvantage relative to any less
highly-leveraged competitors;
o we may not be able to borrow additional funds on terms acceptable to
us, even when necessary to maintain adequate liquidity;
o we may be more vulnerable to general economic downturns and adverse
developments in our business and the bottled water industry; and
o the results of our operations may be adversely affected by an increase
in interest rates since a portion of our debt is, and any future debt
may be, subject to variable interest rates.
WE MAY REQUIRE ADDITIONAL CAPITAL AND FAILURE TO OBTAIN ADDITIONAL CAPITAL
COULD CURTAIL OUR GROWTH.
We may require additional capital for, among other purposes, acquiring
other businesses, integrating acquired companies, acquiring new equipment and
maintaining the condition of existing equipment. If cash generated from
operations is insufficient to fund capital requirements, we will require
additional debt or equity financing. Covenants in our existing financing
arrangements, our existing leverage and our future financial performance may
limit our ability to obtain additional financing. Additional financing may not
be available or, if available, may not be available on terms satisfactory to us.
Additional financing may result in significantly increased financial leverage or
shareholder dilution. If we fail to obtain sufficient additional capital in the
future, we could be forced to curtail our growth strategy by reducing or
delaying capital expenditures and acquisitions, selling assets, restructuring
our operations, reducing our workforce or refinancing indebtedness.
WE MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT OUR STRATEGY OF ACQUIRING OTHER
BOTTLED WATER BUSINESSES, AND ANY FAILURE TO DO SO WOULD ADVERSELY AFFECT OUR
GROWTH.
One of our strategies is to increase our revenue and the number of markets
we serve through the acquisition of additional bottled water home and office
delivery businesses. We may not be able to identify suitable candidates for
acquisition and, if suitable candidates are identified, we may not be able to
complete acquisitions on acceptable terms. Competition for attractive
acquisition candidates in the bottled water home and office delivery market
industry is increasing, which could limit our ability to complete acquisitions
and increase the purchase price or make other acquisition terms less favorable
to us. Some of the companies we compete with for acquisitions may be in a better
financial position to bid for and complete acquisitions. Our ability to expand
through acquisitions is also dependent upon the availability of debt or equity
financing on acceptable terms. If we are unable to identify suitable acquisition
candidates and complete acquisitions on acceptable terms, we may be unable to
expand our operations into new markets and achieve the size in new and existing
markets necessary to achieve desired growth and operating efficiencies.
WE MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE ANY FUTURE ACQUISITIONS.
We intend to continue to acquire businesses in the bottled water home and
office delivery market. We may not be able to successfully integrate any future
acquisitions into our operations. Our strategy of growth through acquisitions
involves business risks commonly encountered in acquisitions of companies,
including:
o disruption of our ongoing business;
5
o difficulties in integrating the operations and personnel of acquired
companies;
o diversion of our management's attention from our existing business;
o adverse effects on relationships with our existing suppliers and
customers, and those of the companies we acquire;
o difficulties entering geographic markets in which we have no or limited
experience; and
o loss of key employees of acquired companies.
Our failure to effectively integrate any businesses we may acquire in the future
will harm our business and results of operations.
IMPLEMENTING OUR STRATEGY OF GROWTH THROUGH ACQUISITIONS MAY ADVERSELY AFFECT
OUR FINANCIAL CONDITION AND PERFORMANCE.
Future acquisitions may not be profitable to us at the time of their
acquisition and may not generate revenues sufficient to justify our investment.
In addition, our acquisition growth strategy exposes us to risks that may
adversely affect our results of operations and financial condition, including
risks that we may:
o fail to realize anticipated benefits, such as cost-savings and revenue
enhancements;
o decrease our liquidity by using a significant portion of our available
cash or borrowing capacity to finance acquisitions;
o incur additional indebtedness, which may result in significantly
increased interest expense or financial leverage, or issue additional
equity securities to finance acquisitions, which may result in
significant shareholder dilution;
o incur or assume unanticipated liabilities, losses or costs associated
with the business acquired; or
o incur other significant charges, such as impairment of goodwill or
other intangible assets, asset devaluation or restructuring charges.
THE STRAIN THAT GROWTH PLACES UPON OUR SYSTEMS AND MANAGEMENT RESOURCES MAY
ADVERSELY AFFECT OUR BUSINESS.
Our growth has placed and will continue to place significant demands on our
management, operational and financial resources. We have grown from
approximately 480 employees at December 31, 1997 to over 800 employees at March
31, 2002. As we expand our operations, we must effectively manage and monitor
operations, control costs and maintain effective quality and inventory control
in geographically dispersed facilities. Our future growth and financial
performance will also depend on our ability to:
o recruit, train, manage and motivate our employees to support our
expanded operations; and
o continue to improve our production and delivery systems, customer
support, financial controls and information systems.
These efforts may not be successful and may not occur in a timely or efficient
manner. Failure to effectively manage our growth and the system and procedural
transitions required by expansion could harm our business.
IF WE DO NOT PROVIDE A HIGH LEVEL OF CUSTOMER SERVICE, OUR ABILITY TO ATTRACT
AND RETAIN CUSTOMERS WILL SUFFER.
6
We believe that quality of service and reliability of delivery are key
competitive factors in the bottled water home and office delivery business. To
remain competitive we must:
o reliably deliver bottled water on schedule;
o meet unexpected customer shortages with the quick delivery of refills;
o provide regular maintenance and sanitization of water coolers; and
o adequately staff our customer call center to promptly answer incoming
telephone calls and respond to customer inquiries.
Our ability to attract and retain customers likely will decrease and our
business will suffer if we are unable to maintain a high level of customer
service as we seek to expand our operations.
INTENSE COMPETITION COULD LEAD TO PRODUCT PRICE DECREASES AND LOSS OF
BUSINESS.
The home and office delivery bottled water industry is highly competitive
and rapidly consolidating. We compete directly with other multi-national,
regional and local bottled water home and office delivery companies. We compete
indirectly with companies that distribute water through retail sales and vending
machines and with providers of on-premises filtration systems. We also compete
with warehouses and retail stores for the sale of water coolers, particularly in
Canada. Some of our competitors possess substantially greater financial,
personnel, marketing and other resources than us and may possess greater name
recognition and be better able to compete than us in our markets or markets we
may enter. We may encounter increased competition in the future from existing
competitors or new competitors that enter our markets. Increased competition
could result in decreased revenue or downward price pressure on our products,
either of which would adversely affect our profitability.
A SIGNIFICANT PORTION OF OUR COSTS ARE RELATIVELY FIXED IN NATURE, AND A
DECLINE IN OUR REVENUE COULD HAVE A DISPROPORTIONATE ADVERSE EFFECT ON OUR
PROFITABILITY.
A significant portion of our costs, including costs relating to our water
bottling and distribution facilities, are relatively fixed in the short term. As
a result, if revenue in one or more of our markets falls below the level we
anticipate, we may be unable to reduce our costs rapidly enough to compensate
for this shortfall. Accordingly, a decline in our revenue, or the inability to
achieve anticipated revenue, could have a disproportionate adverse effect on our
profitability.
OUR OPERATING RESULTS ARE SUBJECT TO SEASONAL AND WEATHER FLUCTUATIONS, AND
COULD DECLINE AS A RESULT OF UNSEASONABLY COOL WEATHER.
Customer demand for bottled water may fluctuate with outdoor air
temperature. Seasonal weather variations may result in quarter-to-quarter
volatility in our results of operations. Demand for our bottled water is
typically weaker in the winter months as a result of lower temperatures and
water consumption in the Northern Hemisphere during such months. As a result,
additions of new customers and our revenue from the sale of bottled water have
historically been weaker and our customer cancellations have increased, during
our fiscal quarters ended March 31 and December 31. In addition, unseasonably
cool weather during any particular period could result in less consumption of
water than anticipated and reduce our revenue from the sale of bottled water
below expectations.
CONTAMINATION OF OUR WATER SOURCES OR BOTTLING PROCESSES COULD RESULT IN
PRODUCT LIABILITY CLAIMS OR RECALLS AND SERIOUSLY HARM OUR BUSINESS.
Our ability to retain customers and maintain our reputation are dependent
upon our ability to maintain the integrity of our water resources and to guard
against defects in, or tampering with, our purification and bottling processes.
Our water supplies or products could potentially become contaminated by a
variety of
7
occurrences, including naturally occurring phenomena, a failure in our efforts
to remove impurities from our water, pollution, environmental accidents or
terrorist activity. The loss of integrity in our water resources, or defects in
or tampering with our processes or products, could harm our reputation and lead
to product liability claims, product recalls or customer illnesses that could
adversely affect our business. Product liability litigation, even if it were
unsuccessful, would be time consuming and costly to defend. Although we
currently have product liability insurance, not all potential liability claims
may be covered by our insurance and we may not be able to obtain such insurance
in the future at acceptable premiums, if at all.
CONTAMINATION DISCOVERED IN A COMPETITOR'S PRODUCT COULD RESULT IN CONSUMER
CONCERNS ABOUT BOTTLED WATER QUALITY AND SAFETY GENERALLY AND REDUCE DEMAND
AND SALES OF BOTTLED WATER, INCLUDING OUR BOTTLED WATER.
The bottled water industry has grown in large part due to public concerns
relating to the quality of tap water and consumer preferences for healthy
products. If a competitor's bottled water were discovered to be contaminated,
consumer concern may arise regarding the quality, safety and health benefit of
bottled water generally, including our bottled water. This could lead to reduced
demand for and sales of our bottled water.
HIGHER PETROLEUM PRICES WOULD INCREASE THE EXPENSE OF OPERATING OUR FLEET OF
WATER DELIVERY TRUCKS AND COULD INCREASE THE COST OF OUR WATER BOTTLES AND
COOLER COMPONENTS, WHICH WOULD ADVERSELY AFFECT OUR PROFITABILITY.
We operate a sizeable fleet of trucks that deliver water to our customers
in each of the markets in which we operate. The cost of fuel used to operate
these trucks in our business is a significant expense. These trucks consume fuel
at a high rate since they are loaded heavily, make many stops and, in some
cases, are driven in congested metropolitan areas. In addition, petroleum-based
resins are used in the manufacture of the water bottles and some of the
components of the water coolers we purchase for use in our business. In the
event of an increase in the cost of petroleum, our expenses to operate these
trucks and transport water to some of our bottling facilities would, and our
expenses to purchase water bottles and coolers could, increase and our operating
results would suffer. In the past, we have experienced significant increases in
the cost of fuel in the markets in which we operate and have not always been
able to pass that cost on to our customers. The cost of petroleum may increase
as a result of fluctuations in its production or supply as a result of natural
disasters, political issues or otherwise. Our business could also be harmed if
we were unable to obtain sufficient fuel to deliver our products.
INTERRUPTIONS IN THE SUPPLY OF WATER COOLERS OR BOTTLES TO US COULD IMPAIR OUR
ABILITY TO PROVIDE WATER COOLERS OR BOTTLED WATER TO EXISTING OR POTENTIAL
CUSTOMERS, WHICH WOULD HARM OUR BUSINESS.
We currently purchase our water coolers and bottles from a limited number
of suppliers. We do not have long-term supply contracts with these suppliers. If
our supply of these products is interrupted, we may be unable to locate
alternative sources able to supply an adequate quantity of water coolers or
bottles to us in a timely manner or at favorable prices. Any replacement
suppliers may charge more than existing suppliers for water coolers or bottles,
which would increase our expenses and reduce our margins. If we were unable to
obtain sufficient water coolers or bottles, we might be unable to sell or rent
water coolers to potential customers and existing customers may cancel our
services. This would result in the loss of sales and harm our business and
results of operations.
BECAUSE WE RELY ON LIMITED SOURCES OF WATER IN EACH OF THE MARKETS IN WHICH WE
OPERATE, INTERRUPTIONS IN THE ABILITY OF OUR WATER SOURCES TO SUPPLY AN
ADEQUATE AMOUNT OF WATER COULD HARM OUR BUSINESS.
We obtain our water from a limited number of sources in the markets in
which we operate, primarily from public and natural water sources. Geologic or
other natural events, such as earthquakes or drought, could constrict or
eliminate our water
8
supply from these sources. Pollution, environmental accidents, terrorist
activity or other events could contaminate or effectively eliminate our water
supply from our water sources. We may not be able to locate and secure adequate
or comparable replacement sources if the availability of water to us is
interrupted or we may incur significant costs in transporting water from more
distant sources. Any interruption in the availability of water to us could lead
to lost sales and customers or increase the cost of obtaining water, either of
which could harm our operating results.
CHANGING CONSUMER TASTES OR PREFERENCES COULD RESULT IN DECREASED DEMAND FOR
AND SALES OF OUR PRODUCTS.
Our future success is highly dependent on consumer tastes and preferences.
The bottled water industry has grown in large part due to consumer preferences
for healthy products and consumer taste preferences for bottled water over tap
water and other beverages. These factors may not continue to benefit our
business to the same extent in the future or in new markets in which we may seek
to establish operations. Any change in consumer preferences away from bottled
water could result in decreased demand for and sales of our products.
THE LOSS OF KEY PERSONNEL OR OUR POTENTIAL INABILITY TO HIRE ADDITIONAL
PERSONS COULD ADVERSELY AFFECT OUR BUSINESS.
Our future performance and growth will depend to a significant extent on
the efforts and abilities of G. John Krediet, our Chairman and Chief Executive
Officer, Stewart E. Allen, our Vice Chairman, K. Dillon Schickli, our President,
Chief Operating Officer, Chief Financial Officer and a member of our Board of
Directors, and our other officers. The loss of the services of one or more of
these individuals or other senior managers could harm our ability to effectively
operate. We do not maintain key man insurance for any of our officers or
employees.
In addition, we expect to continue to hire additional management and other
personnel to support the planned expansion of our business. These include
delivery truck drivers, who interact directly with our customers and play a key
role in the efficiency of our operations and the quality of our customer
service. Our ability to expand our business operations will suffer if we are
unable to attract and retain additional qualified personnel as needed.
COMPLIANCE WITH VARIOUS REGULATORY AND ENVIRONMENTAL LAWS COULD INCREASE THE
COST OF OPERATING OUR BUSINESS.
Our operations and properties are subject to regulation by various
governmental entities and agencies. Compliance with, or any violation of,
current and future laws or regulations could require material expenditures by us
and may prohibit us from selling our product in certain jurisdictions. As a
producer of beverages, we are subject to production, packaging, quality, and
labeling and distribution standards in each of the countries where we have
operations. The operations of our production and distribution facilities are
subject to various environmental laws and workplace regulations. We are subject
to environmental laws in the jurisdictions in which we operate due to our
ownership and use of real property, the use of ozone in our bottling processes,
and the storage of fuel and other regulated substances at our facilities. These
environmental laws may impose liability on us for conditions at properties
formerly owned or operated by another entity as well as to conditions of
properties at which wastes or other contamination attributable to another entity
have been sent or otherwise come to be located on our property. Additional
consumer health protection and environmental or other laws and regulations may
be adopted that could limit our ability to do business or further increase the
cost of our doing business.
EXPOSURE TO CURRENCY EXCHANGE RATE FLUCTUATIONS AND OUR HEDGING TRANSACTIONS
COULD RESULT IN FLUCTUATIONS IN OUR REVENUE AND EXPENSES.
We generate a majority of our revenue and incur a substantial portion of
our expenses in currencies other than the U.S. dollar. For the twelve months
ended December 31, 2001, 46.9% of our revenue was generated in Canadian dollars,
33.2% of
9
our revenue was generated in British pounds sterling, and 19.9% of our revenue
was generated in U.S. dollars. Changes in the U.S. dollar relative to these or
other foreign currencies that may be relevant to our business could result in
fluctuations in our revenue and expenses, which we report in U.S. dollars.
Additionally, we occasionally enter into foreign currency forward transactions
and swaps to hedge anticipated expenses or income denominated in currencies
other than U.S. dollars. Our exposure to foreign currency exchange rate
fluctuations and transactions that we may enter into in an attempt to reduce
that exposure may result in losses that could harm our results of operations and
financial condition.
ADVERSE CHANGES IN ECONOMIC CONDITIONS GENERALLY OR IN OUR MARKETS COULD
RESULT IN INCREASED CANCELLATIONS BY OUR CUSTOMERS OR DECREASED BUSINESS
FORMATION, WHICH WOULD HARM OUR BUSINESS.
In periods of economic slowdown, either generally or in the markets in
which we operate, we historically have experienced an increase in cancellations
of water cooler rentals and a decrease in product purchases by our customers as
some of our customers consider the delivery of bottled water to be a
discretionary purchase. Economic slowdowns may also result in decreased business
formation. Because a significant portion of our revenue is derived from sales
and rentals to businesses, decreased business formation would reduce expansion
opportunities for us in the affected markets. Increases in cancellations or a
decrease in the expansion of office demand for our products would adversely
affect our results of operations.
WORK STOPPAGES, STRIKES OR LABOR UNREST COULD HINDER OUR SUPPLY OF WATER FROM
SOME SOURCES OR OUR ABILITY TO OPERATE OUR BUSINESS AND DELIVER OUR PRODUCTS
TO CUSTOMERS.
We depend upon third parties to transport to some of our facilities the
spring water we use in our products. We also depend upon our delivery truck
drivers to distribute our products to customers and on other employees to
process and bottle our water. Work stoppages, strikes or labor unrest could
prevent us from producing or distributing our products in affected areas, which
would adversely affect our business. As of April 30, 2002, approximately 160 of
our employees, including our drivers and production employees, in our British
Columbia operations were represented by unions. Our collective bargaining
agreement for our home and office delivery employees in Vancouver, British
Columbia is subject to renegotiation in October 2002. From time to time, our
employees engage in unionizing activities that may or may not result in a
collective bargaining agreement.
INCREASED ABSENTEEISM BY OFFICE WORKERS COULD RESULT IN DECREASED CONSUMPTION
OF OUR BOTTLED WATER.
A significant amount of the water we sell is consumed by office workers.
Any widespread or prolonged absenteeism by office workers in the markets in
which we operate could result in decreased consumption of our water. Some
factors that could cause absenteeism include labor strikes, fuel embargoes or
severe weather. For example, the United Kingdom experienced a fuel embargo in
2000, which caused many businesses to temporarily close and employees not to go
to work where they otherwise would consume bottled water. This resulted in
reduced revenue and adversely affected our results of operations.
BECAUSE WE RELY ON A SINGLE VENDOR TO SUPPLY AND MODIFY SOFTWARE WE USE TO
OPERATE OUR MANAGEMENT SYSTEMS, ANY INTERRUPTION IN OUR ACCESS TO SOFTWARE
UPDATES OR RELEVANT NEW PROGRAMS MAY LIMIT OUR ABILITY TO IMPROVE OUR
MANAGEMENT SYSTEMS AND TO ACCOMMODATE CHANGES IN OUR BUSINESS.
We obtain from a single vendor the operating software for our management
systems, which we often update as we expand and our business changes. We rely on
this vendor to modify the software to accommodate changes to our management
systems and business. Our access to modifications and updates to the existing
software we have purchased from this vendor or to potential new software
programs from this vendor is dependent upon the vendor's ongoing operations and
ability to program and develop such modifications, updates or new programs. Due
to our reliance on this vendor, if we were unable to obtain software
modifications, updates or relevant new software
10
programs from this vendor, our ability to effectively manage our business may
suffer.
ITEM 4. INFORMATION ON THE COMPANY
COMPANY OVERVIEW
We are a leading provider of bottled water delivered directly to
residential and commercial customers in the United States, Canada and the United
Kingdom. Our primary focus is on the bottling and delivery of high-quality
drinking water in three- and five-gallon bottles to homes and offices, and the
rental of water coolers. We also engage in other bottled water-related
activities, including the sale of water in small-sized (i.e., 2.5 gallon or
smaller) containers, cups, coffee, water filtration devices, water through
vending machines and cooler sanitization and maintenance services. As of March
31, 2002, we provided bottled water or other related products or services to a
base of approximately 207,000 water cooler rental and customer locations,
consisting of approximately 164,000 water coolers rented from us and
approximately 43,000 customers who did not rent our water coolers but purchased
our bottled water or other products or services.
BUSINESS AND PRODUCTS
We generated approximately 83% of our 2001 revenue from the sale of bottled
water used in water coolers and the rental of water coolers. We generated
approximately 5% of 2001 revenue from the sale of bottled water in smaller
retail-sized containers, and approximately 12% of 2001 revenue from related
activities, including the sale of cups, coffee, water filtration devices, water
through vending machines and cooler sanitization and maintenance services.
BOTTLED WATER. We generated approximately 62% of our 2001 revenue from the
sale of bottled water used in water coolers. We sell bottled water for water
coolers primarily in five-gallon bottles. In each market, we also offer a
smaller three-gallon bottle for customers who may not be capable of lifting the
larger bottle or who may have storage constraints. Our bottles are made of
durable polycarbonate to extend their useful lives and to facilitate storage.
All bottles are fitted with non-spill caps.
We also sell water in smaller-sized, plastic containers (such as 2.5
gallon, one gallon, 1.5 liter and 500 ml) to our existing home and office
customers and to retail stores and distributors. In 2001, we generated
approximately 5% of our total revenue from these smaller-sized containers.
We primarily offer three types of water: spring, premium drinking and
steam-distilled.
SPRING WATER. Spring water, which has been naturally filtered by its
passage through various geological layers, is drawn from an underground
reservoir called an aquifer. Spring water is then either bottled at the source
or transported in stainless steel tankers to a more strategically located
bottling facility. Before bottling, spring water is passed through a micron
filter, which removes sediment and microbial pathogens while retaining the
natural mineral content of the water. The water is then disinfected through a
government and industry standard process known as ozonation. The ozonation
process is a significantly more effective disinfectant than chlorination and
does not leave a residual taste or odor.
PREMIUM DRINKING WATER. We draw water to produce our premium drinking water
from public sources or aquifers. The water is then passed through a series of
carbon and sand filters, processed by reverse osmosis, ozonated and finally
bottled. The reverse osmosis process forces water through a semi-permeable
membrane at high pressure that separates water molecules from impurities.
Premium drinking water has 99.9% of all impurities removed, including its
natural mineral content. In the United Kingdom, we add back minerals to our
premium drinking water to accommodate local taste preferences.
11
STEAM-DISTILLED WATER. We obtain water to produce our steam-distilled water
from public sources or aquifers. The water is first converted to steam. Once the
steam condenses, it is ozonated and bottled. Steam-distilled water is similar to
premium drinking water since it has 99.9% of all impurities removed.
We offer all three types of water in each of our geographic markets, except
in the United Kingdom, where we do not currently offer steam-distilled water.
The following table summarizes the brand names of water sold in our existing
markets:
REGION BRAND NAMES
- ------------------ --------------
Western Canada............................................ Canadian Springs
Cool Spring
Misty Mountain
Sparta
Maritime Provinces........................................ Misty Mountain
Sparking Springs
United Kingdom............................................ Nature Springs
Water At Work
United States............................................. Crystal Springs
WATER COOLERS AND OTHER PRODUCTS AND SERVICES. As of March 31, 2002, we had
a base of approximately 207,000 water cooler rental and customer locations in
the markets we serve, consisting of the rental of approximately 164,000
company-owned water coolers and approximately 43,000 customers who did not rent
our water coolers but purchased our bottled water or other products or services.
WATER COOLERS. In 2001, we generated approximately 21% of our revenue from
the rental of water coolers. Customers who rent coolers typically sign a
one-year contract, providing us with a stream of relatively stable revenue from
a monthly, quarterly or annual water cooler rental charge. Our large, installed
water cooler rental base creates operating efficiencies by allowing us to
utilize more fully our infrastructure to service new customers at a relatively
low marginal cost.
The following table presents certain information relating to our water
cooler rental and customer location base as of March 31, 2002:
UNITED UNITED
CANADA KINGDOM STATES
------- ------- ------
Water Cooler Rental Locations.................... 97,531 37,958 28,400
Other Customer Locations......................... 34,767 2,496 6,100
------- ------ ------
TOTAL.......................................... 132,298 40,454 34,500
======= ====== ======
We purchase water coolers and bottles from various suppliers. We attempt to
maintain relationships with two or three main water cooler suppliers and five to
ten water bottle suppliers in order to preserve quality and consistency.
However, from time to time we will switch suppliers for price, quality or other
reasons.
There are numerous suppliers of water coolers and water bottles. We
maintain a stock of spare parts and new and returned water coolers at delivery
depots, and we have not experienced any shortage of water coolers. Although we
believe that we have quality water bottle suppliers, we have experienced
instances where shipments of water bottles were delayed because a supplier could
not meet demand. Because we maintain a supply of bottles and our bottles are
returned by customers seeking to receive their deposits back, we have been able
to ensure an adequate number of bottles to meet our customers' needs.
We estimate that the average life of a water cooler is ten years. The
typical payback period for our water cooler investment (assuming only rental
revenue and standard maintenance and redeployment costs) has been approximately
20 months. In the event of termination of the rental agreement, we have been
able to redeploy water coolers at a relatively low cost to us. Prior to
installing a returned water cooler, we strip down the cooler and then clean it.
In addition, in some markets we charge a water cooler collection fee when a
customer cancels the rental agreement.
12
OTHER PRODUCTS AND SERVICES. The remaining approximately 12% of our 2001
revenue was generated through the sale of cups, coffee, water filtration
devices, water through vending machines and cooler sanitization and maintenance
services. Sales of accessory water products, such as cups and sanitization and
maintenance services, grow at approximately the same rate as sales of our
bottled water. Growth in this area is largely dependent on our ability to
cross-sell to our existing customers. Sales of other products and services, such
as coffee and water through vending machines, occur in a highly competitive
environment and have grown at rates significantly below those for our home and
office delivery business.
SALES AND MARKETING
Our sales by geographic market for each of the past three fiscal years are
as follows:
MARKET 1999 2000 2001
- ------ ------- ------- -------
(U.S. DOLLARS IN THOUSANDS)
Canada........................................... $25,199 $29,653 $35,076
United Kingdom................................... 25,002 24,713 24,818
United States.................................... 13,717 14,930 14,937
------- ------- -------
TOTAL.......................................... $63,918 $69,296 $74,831
======= ======= =======
Currency Conversion Rates:(1)
Canadian Dollar................................ 0.6730 0.6732 0.6457
British Pounds Sterling........................ 1.6172 1.5156 1.4396
- ----------
(1) For purposes of this chart, we based the currency conversion rates on
the average exchange rates prevailing during the given year.
We market our products principally through telephone directory yellow page
advertisements, newspaper advertisements, mall shows, coupons, product
sponsorship programs, direct mail, radio and television commercials, and various
referral programs. Our marketing activities were supported by the efforts of
approximately 137 sales and customer service personnel as of March 31, 2002.
Almost half of our new customers are derived from incoming telephone calls
resulting from yellow page advertisements, our key advertising vehicle. To
supplement this effort, our marketing team solicits potential new customers in
specific geographical areas in which we desire to increase the density of
existing routes or in which we desire to establish new routes. A potential new
customer may be offered various introductory promotions, including a free trial
offer. Our marketing activity emphasizes the benefits of bottled water and the
convenience of a water cooler, including the associated regular delivery of
bottled water, and, to a lesser extent, the opportunity to receive ancillary
products or services in the form of cups, coffee, water filtration devices and
water cooler sanitization and maintenance services.
We focus our marketing and customer service strategy on retaining
customers. To improve our customer retention rate, we have implemented customer
care groups and loyalty programs and we are focusing on increasing customer
awareness about the benefits of drinking bottled water. Our primary strategy for
increasing our retention rate is to focus on outstanding customer service. We
compensate customer service representatives for the customers they help retain.
WATER SUPPLY
We own natural water sources that supply water for our Maritime Provinces,
Scotland and British Columbia operations. We currently lease or have established
similar water rights in all our geographic markets other than the Maritime
Provinces. We have obtained the contractual right to draw water from natural
sources in England and Scotland. We currently have exclusive rights to the
source in England. The contract for the natural source near our former Scottish
facility includes a minimum payment provision. Due to its distance from our new
Scottish facility, we currently do not draw water from this Scottish source. For
our British Columbia, Alberta and United States operations, we draw water for
our premium and steam-distilled products from public sources pursuant to
standard terms for the
13
municipality or from local sources pursuant to non-exclusive contracts. These
contracts generally provide us the right but not the obligation to draw water.
THE BOTTLING PROCESS
We draw water for our premium and steam-distilled drinking water products
at our bottling facilities, saving the cost of transportation. In all of our
markets where we offer spring water, we currently transport the spring water to
one of our bottling facilities by dedicated stainless steel tankers, except in
the Maritime Provinces of Canada, where we bottle spring water at the source. In
most instances, we hire a third party to transport the spring water.
We operate 10 bottling facilities located in British Columbia, Alberta and
the Maritime Provinces of Canada, the states of Oregon and Washington in the
United States, and England and Scotland in the United Kingdom. Each facility
contains purification and related equipment to appropriately process the water
and an automated bottling line with various bottling capacities that bottles and
seals the water for delivery to one of our distribution centers. Our bottling
plants operate at our high-quality standards through constant review and
monitoring of Good Manufacturing Practices under relevant regulations governing
such plants. See "-- Facilities" for a more detailed description of our bottling
facilities.
DISTRIBUTION
As of March 31, 2002, we owned or leased approximately 283 beverage trucks
and employed 390 people in our distribution operations. We generally deliver our
products to neighborhoods within a 90 minute drive from one of our 29
distribution centers. Each truck has an average useful life of between 7 to 12
years and can hold 120 to 300 five-gallon bottles. Since our drivers are
generally paid on a per delivered bottle basis, we promote higher utilization of
our delivery trucks by encouraging our drivers to assist us in enhancing
delivery efficiency. On average, a delivery driver services between 500 and
1,100 water cooler rental and other customer locations. The average customer
typically receives delivery once every two weeks. In addition, our drivers
actively generate sales and are compensated for each new customer contract they
originate.
We believe that one of the most important success factors in the delivered
bottled water business is delivery route efficiency, as the average cost of
local delivery per bottle is over five times the cost of preparing and filling
one bottle for distribution. However, the marginal distribution cost of
delivering an additional bottle on an existing route is relatively low.
FACILITIES
As of March 31, 2002, our various businesses operated through a total of 30
offices, 29 distribution facilities and 10 bottling sites, aggregating over
400,000 square feet.
Generally, our policy is to maintain technologically-advanced and modern
facilities. Our facilities are either leased or owned. We own all of our
bottling lines and purification and related equipment. All our owned facilities
are subject to a security interest granted to secure indebtedness under our
senior credit facility. See "Item 5. - Liquidity and Capital Resources." Our
Scotland facilities are subject to a separate mortgage. We believe that our
production plants and distribution facilities are well maintained and generally
adequate to meet our needs in our existing markets for the foreseeable future.
The following table sets forth certain information relating to our
principal offices, each of our active bottling facilities and each of our other
active facilities over 20,000 square feet in size. We have no material inactive
facilities.
14
SIZE OWNED/ LEASED/
LOCATION (SQ. FT.) PURPOSE LEASE EXPIRATION
- ------------------------------- --------- ------------ ---------------------
WESTERN CANADA:
Calgary, Alberta.................. 27,600 Offices, Owned
Bottling,
Distribution
Edmonton, Alberta................. 25,000 Offices, Leased; November 2012
Bottling,
Distribution
Vancouver, British Columbia....... 45,000 Offices, Leased; April 2011
Bottling,
Distribution
Kamloops, British Columbia........ 10,000 Offices, Leased; February 2003
Bottling,
Distribution
Prince George, British Columbia... 9,000 Offices, Leased; May 2005
Bottling,
Distribution
Victoria, British Columbia(1)..... 7,250 Offices, Leased; February 2003
Bottling,
Distribution
MARITIME PROVINCES:
Dartmouth, Nova Scotia............ 14,000 Offices, Leased; July 2004
Distribution
Valley, Nova Scotia............... 4,000 Offices, Owned
Bottling,
Distribution
ENGLAND:
High Wycombe...................... 18,000 Bottling Leased; December 2006
SCOTLAND:
Hamilton.......................... 33,000 Offices, Owned
Bottling,
Distribution
UNITED STATES:
Portland, Oregon.................. 30,000 Offices, Leased; December 2007
Bottling,
Distribution
Burlington, Washington............ 24,000 Distribution, Leased; October 2016
Offices
- ----------
(1) Our Victoria plant is scheduled to be relocated to a larger, modern
facility in January 2003. We are negotiating construction costs and
lease terms.
COMPETITION
We compete in the bottled water market directly with other home and office
delivery companies in our geographic markets. We compete with these companies in
both the sale and delivery of bottled water and the rental of water coolers.
The home and office delivery market is highly fragmented, with the vast
majority of the companies being operated as small entrepreneurial and
family-owned businesses. However, we compete with such large companies as
Nestle, Suntory, Danone/McKesson, A.S. Watson and Culligan. Each of those
companies possesses greater financial, personnel, marketing and other resources
than us, and may possess greater name recognition.
15
Quality of service and reliability of delivery are the primary competitive
factors in the bottled water home and office delivery market and we believe we
compete favorably in both of those areas.
In addition to other bottled water home and office delivery companies, we
also compete with warehouse and retail stores for the sale of water coolers,
particularly in Canada.
We compete indirectly for water sales with tap water producers and
companies that distribute water through retail stores and vending machines and
with other beverage companies. Some of the companies in the retail bottled water
market are large and well-capitalized and have well-recognized brand names.
These companies include PepsiCo., selling Aquafina, Coca-Cola, selling Dasani,
Danone/McKesson, selling Evian, and Nestle, selling Perrier. We believe any of
these or other companies could choose to enter our markets and compete with us
or expand their presence in our markets.
We also compete with providers of on-premises water filtration systems,
including systems distributed through retail outlets. In certain markets, we
market and provide on-premises water filtration systems.
CUSTOMERS
We have grown from a base of approximately 107,000 water cooler rental and
customer locations at December 31, 1997 to a base of approximately 207,000 water
cooler rental and customer locations as of March 31, 2002, consisting of
approximately 164,000 water coolers rented from us and approximately 43,000
customers who do not rent our water coolers but purchase our bottled water or
other products or services. We believe that the diversity of our customer base
protects us from reliance on any one customer or customers in a particular
industry.
ORGANIZATIONAL STRUCTURE AND COMPANY HISTORY
Sparkling Spring Water Limited, or SSWL, was founded in 1971 in Halifax,
Nova Scotia to operate in the bottled water industry. In 1988, SSWL was acquired
by Maritime Beverages Limited, a Pepsi-Cola bottler, which was managed by G.
John Krediet, Stewart E. Allen and K. Dillon Schickli. When Maritime Beverages
Limited sold its soft drink bottling holdings to Pepsi-Cola Canada Limited in
1992, Mr. Krediet retained his interest in SSWL and he and Mr. Allen focussed
their efforts on growing and improving its bottled water business.
Sparkling Spring Water Holdings Limited, or SSWHL, was formed under the
laws of Nova Scotia, Canada on October 20, 1997. We were formed on October 22,
1997 and acquired all of the shares of SSWL. In the fourth quarter of 1998, we
were reorganized through (1) the exchange of certain shares, and options to
acquire shares, of us on a one-for-one basis for shares, and options to acquire
shares, of SSWHL and (2) the acquisition by SSWHL of all of our remaining shares
and options. The reorganization resulted in SSWHL owning 100% of our issued and
outstanding shares as of December 31, 1998. At the end of 2000, SSWL was
amalgamated with us. The new amalgamated company continues under the name
Sparkling Spring Water Group Limited.
We own, directly or indirectly, 100% of all of our subsidiaries. Our
significant subsidiaries are as follows:
SUBSIDIARY JURISDICTION OF ORGANIZATION
- ----------------------------------------- ----------------------------
Canadian Springs Water Company AB Limited.......... Nova Scotia
639540 B.C. Ltd.................................... British Columbia
Cullyspring Water Co., Inc......................... Washington
Spring Water Incorporated.......................... Delaware
Crystal Spring Acquisition Inc. ................... Delaware
Nature Springs Water Company Limited............... England
Water at Work Limited.............................. Scotland
16
REGULATIONS
Our operations and properties are subject to regulation by various
governmental entities and agencies.
As a beverage producer, we are subject to production, packaging, quality,
label and distribution standards in each of the countries where we operate. In
addition, we are a member of the International Council of Bottled Water
Associations and of Bottled Water Associations in the United States, Canada and
the United Kingdom. These associations set higher water quality standards than
those set by governmental agencies. The standards are enforced by the members
and member associations and compliance with the standards is a requirement of
membership.
The International Council of Bottled Water Associations requires, as a
condition of membership, that we submit to annual, unannounced plant inspections
administered by the National Sanitation Foundation or another approved
independent, internationally-recognized inspection agency. These inspections
audit quality and testing records, review all areas of plant operations and the
bottling process, and check compliance with relevant national standards, Good
Manufacturing Practices, and any other local regulations. The Food and Drug
Administration in the United States and similar governmental agencies in the
other jurisdictions in which we operate also periodically inspect our
facilities. We have consistently met or exceeded inspection criteria. We provide
a bonus to our Quality Control Managers and certified plant operators and
production employees based on their operation receiving an excellent rating from
the associations.
Our properties and the operations of our production and distribution
facilities are also subject to various environmental laws and workplace
regulations. We are subject to environmental laws in the jurisdictions in which
we operate due to our ownership and use of real property, the use of ozone in
our bottling processes, and the storage of fuel and other regulated substances
at our facilities. These environmental laws may impose joint and several
liability and may apply to conditions at properties presently or formerly owned
or operated by an entity or its predecessor as well as to conditions of
properties at which wastes or other contamination attributable to an entity or
its predecessor have been sent or otherwise come to be located. No environmental
claims have been made known to us. However, future events, such as new
information, changes in existing environmental laws or their interpretation, and
more vigorous enforcement policies of regulatory agencies, may give rise to
additional expenditures or liabilities.
SEASONALITY
Bottled water sales are subject to seasonal variations, with decreased
sales during cold weather months and increased sales during warm weather months.
Water cooler rentals are typically paid monthly and partially mitigate the
seasonal effect of water sales.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following operating and financial review and prospects should be read
in conjunction with our consolidated financial statements included in this
Annual Report. The consolidated financial statements and the financial
information discussed below have been prepared in accordance with generally
accepted accounting principals in the United States.
OVERVIEW
We are a leading provider of bottled water delivered directly to
residential and commercial customers in the United States, Canada and the United
Kingdom. Our primary focus is on the bottling and delivery of high-quality
drinking water in three- and five-gallon bottles to homes and offices, and the
rental of water coolers. We also engage in other bottled water-related
activities, including the sale of water in small-sized (i.e., 2.5 gallon or
smaller) containers, cups, coffee, water filtration devices, water through
vending machines and cooler sanitization and maintenance services. In 2001, we
derived 62.1% of our revenue from the sale of bottled water used in water
coolers, 21.4% from the rental of water coolers, 4.6% from the sale of bottled
water in small-sized containers and 11.9% from related
17
activities. In 2001, 19.9% of our revenue came from sales in the United States,
46.9% in Canada and 33.2% in the United Kingdom.
We recognize revenue from the sale of bottled water and other products and
services when we deliver the products or perform the services. Prior to 2001, we
recognized revenue from water cooler rentals when we billed our customer. When
we entered into a one-year water cooler rental lease with a customer, we billed
the customer for the entire year and recognized the entire amount as revenue at
that time. In 2001, we began recognizing those amounts as revenue over the
period of the lease. We adopted the new method of accounting to more
appropriately match revenues earned from water cooler leases to the period to
which the lease relates. The effect of the change on operating results in 2001
was to increase the net loss before extraordinary items by approximately
$109,000. The cumulative effect of the change in our method of accounting for
water cooler rental leases in prior years increased our net loss in 2001 by $3.2
million.
Our cost of sales primarily consists of the cost of materials, including:
o water, labels and caps;
o variable overhead, such as routine equipment maintenance, energy costs
at the bottling facilities, pallets and laboratory testing;
o direct production labor; and
o production management.
Our gross margins may vary depending upon the level of sales of bottled
water to home and offices compared to the level of sales of smaller,
retail-sized containers of bottled water to retail stores. In 2000 and 2001, the
average product margin (excluding the allocation of production overhead) we
realized on sales of bottled water in small-sized containers to retail stores
was approximately 34% and 40%, compared to approximately 94% and 94% for bottled
water delivered to home and offices. While we do not focus our sales effort on
sales of small-sized containers of bottled water to retail stores, home and
office delivery businesses that we acquire may have a larger percentage of this
type of business than we do, thus impacting our gross margins when we combine
our businesses.
Our selling, delivery and administrative expenses, which typically equal
over 50% of our revenues, primarily consist of
o administrative overhead;
o the cost to deliver bottled water to homes and offices, including the
cost of delivery drivers, maintenance of delivery trucks and gasoline;
and
o selling expenses, which include the cost of our call centers and sales
staff.
Of our total selling, delivery and administrative expenses in 2000 and 2001,
administrative expenses were approximately 40% and 41% of the total, delivery
expenses were approximately 42% and 43%, and selling expenses were approximately
18% and 16%. Selling, delivery and administrative expenses as a percentage of
revenue are affected by, among other factors, the proportion of our revenue that
represents sales of small-sized water bottles to retail stores, which sales have
relatively lower associated delivery and administrative expenses than our home
and office delivery sales.
We define "adjusted EBITDA" to mean operating profit plus depreciation,
amortization and integration and related expenses. Our adjustments to more
typical measures of EBITDA are intended to facilitate a better understanding of
our operating results net of the effect of nonrecurring or nonoperating items,
such as extraordinary gains or losses, changes in accounting principles and
integration expenses. Neither EBITDA nor adjusted EBITDA is required by
generally accepted accounting principles in the United States. Because EBITDA is
not calculated in the same manner by all companies, our presentation may not be
comparable to other similarly-titled measures reported by other companies.
18
Prior to 1999, we computed depreciation of fixed assets using the declining
balance method. In 1999, we began computing depreciation of fixed assets using
the straight-line method. We adopted the new method of depreciation to more
appropriately amortize the cost of fixed assets over their estimated useful
lives. The effect of the change in 1999 was to decrease net loss before
extraordinary items by approximately $141,000. The cumulative effect of the
change in our depreciation method from the declining balance method to the
straight-line method (after reduction for income taxes of $0.9 million)
decreased our net loss in 1999 by $1.7 million.
Our interest and related expenses include interest we pay on our senior
credit facility and senior subordinated notes, as well as payments we make under
capital lease obligations and non-competition agreements and amortization of
financial costs. On May 15, 2002, our parent Sparkling Spring Water Holdings
Limited, or SSWHL, filed a registration statement with the SEC in connection
with its proposed initial public offering of its common shares. SSWHL intends to
cause us to redeem or repurchase our outstanding 11.5% senior subordinated notes
due 2007 with the net proceeds from the proposed initial public offering.
Through March 31, 2002, we had repurchased or redeemed an aggregate of $18.9
million principal amount of senior subordinated notes. Our extraordinary items
in each of 1999, 2000 and 2001 represent gains from these repurchases. In 2001,
we paid $8.9 million in interest on our senior subordinated notes. As of April
30, 2002, we had $81.1 million of senior subordinated notes outstanding which
would require annual cash net interest payments of $9.3 million. If we redeem
our senior subordinated notes the first time the notes become redeemable in
November 2002 with the net proceeds from SSWHL's proposed offering, we will take
a one-time charge in the fourth quarter of 2002 of an estimated $6.6 million,
representing a $4.7 million redemption premium and a $1.9 million adjustment to
write-off the balance of unamortized deferred finance costs associated with the
senior subordinated notes. If we choose to repurchase senior subordinated notes
prior to November 2002, we will take a charge or gain for the difference between
the price at which we repurchase the notes and the principal amount of the notes
we repurchase, plus a charge for the unamortized deferred finance costs
associated with the notes repurchased in the quarter in which the repurchase
took place. See "-- Liquidity and Capital Resources." We cannot give any
assurance that SSWHL will complete its proposed initial public offering or that
the amount of net proceeds, if any, from that offering will be sufficient to
repay any of our debt.
In addition to redeeming or repurchasing our senior subordinated notes,
SSWHL intends to use any remaining net proceeds from its initial public offering
to repay a portion of the debt outstanding under our senior credit facility. We
expect to reborrow the amount repaid and may borrow additional amounts under the
senior credit facility or other credit facilities as needed to implement our
acquisition strategy and expand our operations.
We transact business in currencies other than the U.S. dollar, but report
in U.S. dollars. In 2001, approximately 47% of our revenue was generated in
Canadian dollars, 33% in British pounds sterling, and 20% in U.S. dollars.
Accordingly, movements in foreign currency exchange rates can affect our
results.
Bottled water sales are subject to seasonal variations, with decreased
sales during cold weather months and increased sales during warm weather months.
Water cooler rentals are typically paid monthly and partially mitigate the
seasonal effect of water sales.
We have grown significantly in recent years through both internal growth
and acquisitions. To expand our geographic presence and enhance profitability in
our existing markets, we have acquired 22 businesses since April 1993. We have
accounted for our acquisitions using the purchase method of accounting, and
included the results of the acquired companies in our results from the date of
the acquisition. We incur integration and related expenses in connection with
integrating acquired businesses into our existing business. These expenses are
non-recurring costs incurred to reduce and relocate staff, convert the acquired
businesses' computer systems, close acquired facilities and blend new customers
into our existing routes. Prior to 2002, we amortized the goodwill associated
with our acquisitions in
19
accordance with generally accepted accounting principles. Effective January 1,
2002, we ceased amortization of that goodwill in accordance with changes to
those accounting principles and instead we will write-down goodwill if and when
we determine that the goodwill has been impaired, as provided by recently
established accounting guidelines. See "-- Recently Issued Accounting
Standards." In addition, prior to 2001 we amortized the cost of non-competition
agreements that we obtained in connection with our acquisitions. In 2001, we
wrote-off all of the unamortized portion of our existing non-competition
agreements after we determined that those agreements no longer had value.
In May 2001, SSWHL acquired Polaris Water Company, Inc. that conducts
business in the greater Vancouver, British Columbia area. Polaris sells a
significant amount of small-container bottled water to retail stores. On July 1,
2001, we entered into a Customer Service Agreement whereby the home and office
customers of Polaris are managed by us and the home and office customers of our
subsidiary, Cullyspring Water Co., Inc., are managed by SSWHL. Pursuant to the
Customer Service Agreement, we receive all of the revenue generated by home and
office customers of Polaris and include that revenue and related expense and all
other related financial information in our results. Conversely, we do not
recognize revenue or any expense related to the Cullyspring home and office
customers. We receive monthly fees totaling $40,000 under the Customer Service
Agreement. At the time we entered into the Customer Service Agreement in July
2001, we began managing approximately 14,000 Polaris water cooler rental and
customer locations and SSWHL began managing approximately 11,000 Cullyspring
water cooler rental and customer locations. See Note 4 to our financial
statements included elsewhere in this prospectus for details concerning our
acquisitions over the last three years.
20
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain of our
statements of operations and other data as a percent of revenue.
YEAR ENDED DECEMBER 31
-----------------------------------
1999 2000 2001
---- ---- ----
Revenue 100% 100% 100%
Cost of sales 18.1 18.5 16.3
Selling, delivery and administrative
expenses 55.1 53.8 53.0
Adjusted EBITDA 26.8 27.7 30.7
Depreciation and amortization 16.1 16.1 17.5
Interest and related expenses 18.2 11.7 16.4
Net loss before
extraordinary items and
cumulative effect of changes
in accounting principles (7.0) (1.5) (6.0)
Net income (loss) (2.8) 0.1 (9.6)
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
REVENUE. Revenue increased $5.5 million, or 8.0%, to $74.8 million in 2001
compared to $69.3 million in 2000. This increase was primarily due to
incremental revenue from customers of Polaris Water Company being managed
pursuant to the Customer Service Agreement, acquisitions completed in 2001 and
mid-year 2000, and the internal growth of our existing home and office delivery
business. The increase was partially offset by a decrease in reported revenue of
$2.8 million as a result of unfavorable foreign currency translations to U.S.
dollars due to declines in the exchange rates of the British pound sterling and
Canadian dollar relative to the U.S. dollar.
COST OF SALES. Cost of sales decreased $0.6 million, or 5.0%, to $12.2
million in 2001 compared to $12.8 million in 2000. Cost of sales as a percentage
of revenue decreased 2.2% to 16.3% in 2001 from 18.5% in 2000. The decrease was
primarily the result of increases in the average price per bottle we realized
from our customers (before the effect of exchange rates), and a reduction in
costs of other inputs, such as the average cost of small pack water bottles to
us.
SELLING, DELIVERY AND ADMINISTRATIVE EXPENSES. Selling, delivery and
administrative expenses increased $2.4 million, or 6.4%, to $39.7 million in
2001 compared to $37.3 million in 2000. Selling, delivery and administrative
expenses as a percentage of revenue decreased 0.8% to 53.0% in 2001 from 53.8%
in 2000. This decrease is primarily attributable to SSWHL agreeing in 2001 to
absorb an additional $1.1 million of our executive and administrative expenses
compared to 2000, as well as our improved efficiency from our managing the
customers of Polaris Water Company and SSWHL managing the customers of
Cullyspring Water Co. pursuant to the Customer Service Agreement. Delivery
expenses in 2001 were also favorably affected by lower fuel costs and improved
operational efficiencies from enhanced route density and other benefits of a
growing customer base. Sales expense decreased as a percentage of revenues as a
result of the fixed costs of operating our call centers being spread across a
larger customer base.
ADJUSTED EBITDA. Adjusted EBITDA increased by $3.8 million, or 19.7%, to
$23.0 million in 2001 from $19.2 million in 2000, as a result of increased
revenues combined with decreases in cost of sales and selling, delivery and
administrative expenses as a percentage of revenues. The increase in adjusted
EBITDA in 2001 was partially offset by $0.9 million due to significant decreases
in the exchange rates of the British pound sterling and Canadian dollar relative
to the U.S. dollar during 2001 compared to 2000.
INTEGRATION AND RELATED EXPENSES. Integration and related expenses
increased by $1.0 million, to $1.5 million in 2001 from $0.5 million in 2000.
This increase was
21
primarily the result of our acquisitions in 2001 of CC Beverage (US) Corporation
and the integration of the home and office customers of Polaris Water Co., Inc.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $1.9 million, or 17.0%, to $13.1 million in 2001 from $11.2 million in
2000. This increase was due principally to significant increases in fixed assets
and goodwill as a result of both the acquisitions consummated in 2000 and 2001
and our capital expenditure program, including a full year of depreciation from
the purchase and outfitting of our Scotland production and distribution facility
in 2000, and our decision to replace the six gallon water bottles with five
gallon water bottles in England. Amortization also increased due to the $0.4
million write-off of the value of non-competition agreements associated with
certain acquisitions.
INTEREST AND RELATED EXPENSES. Interest and related expenses increased $4.2
million, or 52.0%, to $12.3 million in 2001 from $8.1 million in 2000. We
experienced a reduction in interest and related expenses in 2000 due to a
one-time gain of $4.4 million realized on our foreign currency swap prior to the
swap being closed out in September 2000. See "-- Exchange Rate Exposure and Risk
Management." Excluding the effect of the swap, interest expense in 2001
decreased $0.1 million from 2000, due to lower average borrowing rates and the
repurchase of higher interest rate senior subordinated notes, partially offset
by higher average levels of borrowing for acquisitions and capital expenditures
completed in mid-year 2000 and 2001.
NET LOSS. Net income decreased $7.2 million from a net income of $44,000 in
2000 to net loss of $7.2 million in 2001. The decrease was principally due to
higher depreciation and interest and related expenses in 2001, and the $3.2
million cumulative effect of a change in our method of accounting for water
cooler rental leases in 2001 which, in the aggregate, more than offset the $3.8
million increase in adjusted EBITDA. For a description of the accounting change,
please see Note 3 to our financial statements included in Item 18 of this Annual
Report.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
REVENUE. Revenue increased $5.4 million, or 8.4%, to $69.3 million in 2000
compared to $63.9 million in 1999. The increase was due to $3.6 million of
revenue that resulted from the acquisitions of Mr. Softwater Ltd. in May 2000
and Rocky Mountain Springs Water Inc. in July 2000, the purchase of the assets
of Sparta Water Inc. in August 2000 and the inclusion of full year results for
Misty Mountain, the assets of which were acquired in November 1999. The increase
also reflected an increase of $3.5 million of revenue that resulted from
internal growth of our existing home and office delivery business. These
increases were partially offset by a decrease in reported revenue of $1.7
million as a result of unfavorable foreign currency translations due to a
decline in the exchange rates for the British pound sterling and Canadian dollar
relative to the U.S. dollar.
COST OF SALES. Cost of sales increased $1.2 million, or 10.7%, to $12.8
million in 2000 compared to $11.6 million in 1999. Cost of sales as a percentage
of revenue increased to 18.5% in 2000 from 18.1% in 1999, primarily due to an
increase in sales of our lower-margin, small-sized containers as a percentage of
total sales, resulting from acquisitions completed late in 1999 and in 2000.
SELLING, DELIVERY AND ADMINISTRATIVE EXPENSES. Selling, delivery and
administrative expenses increased $2.1 million, or 5.9%, to $37.3 million in
2000 compared to $35.2 million in 1999. Selling, delivery and administrative
expenses as a percentage of revenue decreased 1.3% to 53.8% in 2000 from 55.1%
in 1999. This decrease as a percentage of revenue is primarily attributable to
$1.6 million of executive and administrative expenses absorbed by SSWHL and
reduced charges for bad debts. The decrease was partially offset by higher fuel
costs and other delivery expenses.
ADJUSTED EBITDA. Adjusted EBITDA increased by $2.1 million, or 12.0%, to
$19.2 million in 2000 from $17.1 million in 1999, as a result of increased
revenue and a decrease in selling, delivery and administrative expenses as a
percentage of revenue. The increase in adjusted EBITDA in 2000 was partially
offset by $0.7 million
22
due to a significant decrease in the exchange rate for the British pound
sterling relative to the U.S. dollar during 2000 compared to 1999. As a
percentage of revenue, adjusted EBITDA increased to 27.7% in 2000 from 26.8% in
1999.
INTEGRATION AND RELATED EXPENSES. Integration and related expenses
increased by $0.4 million to $0.5 million in 2000 from $0.1 million in 1999.
This increase was primarily the result of completing three acquisitions in 2000
compared to only one acquisition in 1999.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $0.9 million, or 8.2%, to $11.2 million in 2000 from $10.3 million in
1999. This increase was due to the effect on depreciation of significant
increases in fixed assets and goodwill as a result of acquisitions we
consummated in 1999 and 2000, and our capital expenditure program that included
purchase and outfitting of our Scotland production and distribution facility in
2000. In both 1999 and 2000, we calculated depreciation using the straight-line
method that we adopted commencing in 1999.
INTEREST AND RELATED EXPENSES. Interest and related expenses decreased $3.6
million, or 30.7%, to $8.1 million in 2000 from $11.7 million in 1999. Interest
expense was reduced in 2000 by a one-time gain of $4.4 million realized on our
foreign currency swap closed out in 2000, compared to a $1.1 million reduction
in interest expense related to the mark-to-market adjustment on our swaps in
1999. See "-- Exchange Rate Exposure and Risk Management." Excluding the swaps,
our interest expense in 2000 decreased $0.2 million from 1999, due to lower
average interest rates resulting from the repurchase in 1999 and 2000 of higher
interest rate senior subordinated notes, partially offset by increased interest
on the higher levels of borrowings for acquisitions and capital expenditures in
2000.
NET INCOME. Net income increased $1.8 million from a net loss of $1.8
million in 1999 to a net income of $44,000 in 2000. The increase in net income
was due to an increase in adjusted EBITDA and a reduction in interest and
related expense. These factors were partially offset by higher depreciation and
amortization and income taxes in 2000, and the $1.7 million increase in income
in 1999 arising from the cumulative effect of a change in our depreciation
method from the declining balance method to the straight-line method in 1999.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have funded our capital and operating requirements with a
combination of cash flow from operations, borrowings under bank credit
facilities, the issuance of senior subordinated notes and the sale of capital
stock. We have utilized these sources of funds for operations, and to make
acquisitions, fund capital expenditures and service debt.
Net cash provided by operating activities was $11.3 million in 2001, $3.2
million in 2000 and $4.8 million in 1999. The change from 2000 to 2001 was
primarily due to a $2.7 million increase in adjusted EBITDA (for this purpose,
after integration and related expenses) in 2001 compared to 2000, and a
reduction in our working capital requirements of $2.4 million in 2001 compared
to a $2.8 million increase in working capital requirements in 2000. The change
from 1999 to 2000 was primarily due to the a $1.7 million growth in adjusted
EBITDA (after integration and related expenses) from 1999 to 2000, which was
offset by a $2.8 million increase in working capital requirements in 2000.
Net cash used in investment activities was $15.1 million in 2001, $16.2
million in 2000 and $11.2 in 1999. Our investment activities involve the
purchase of fixed assets, such as water bottles, water coolers, delivery trucks,
bottling machines and the building of facilities, the acquisition of home and
office delivery businesses, and the disposal of fixed assets. Our net capital
expenditures are determined by adding our purchases of fixed assets and
subtracting our disposals of fixed assets. Our net capital expenditures were
$8.8 million in 2001, $10.9 million in 2000 and $9.4 million in 1999. Higher
customer growth drives capital expenditures, as each net new customer requires
water bottles, a cooler and, for approximately every 1,000 net new customers, a
new delivery truck. We expect that our net capital expenditures will total
approximately $8.1 million in 2002.
23
Our $6.4 million of acquisitions in 2001 were primarily related to the
purchases of the home and office bottled water divisions of CC Beverage (US)
Corporation in May 2001, and Canada's Choice Spring Water in November 2001. Our
$5.2 million of acquisitions in 2000 were primarily related to the purchases of
Mr. Softwater Ltd., Rocky Mountain Springs Water Inc. and the assets of Sparta
Water, Inc. In 1999, we spent $1.8 million on the acquisition of the assets of
the Misty Mountain division of Baxter Foods Limited.
As of March 31, 2002, our total debt was $114.2 million, compared to $117.4
million as of December 31, 2001, and $115.2 million as at December 31, 2000. Our
total debt primarily consists of our 11.5% senior subordinated notes due 2007
and our senior credit facility, both of which are guaranteed by our
subsidiaries. Our senior subordinated notes had $81.1 million principal amount
outstanding as of March 31, 2002.
Our senior credit facility consists of a $15 million operating line which
is renewable annually by April 30th, an $8.5 million acquisition facility that
matures on April 30, 2006 and a $12 million term loan that matures on October
31, 2005. The term loan facility was used by us to repurchase certain of our
outstanding senior subordinated notes. Our operating line facility has been
renewed to April 30, 2003. Our payment obligations under the senior credit
facility are secured by a first priority security interest over substantially
all of the assets of us and our subsidiaries. As of March 31, 2002, we had
approximately $7.2 million in direct borrowings and $2.4 million in letters of
credit outstanding under the operating line facility, $8.5 million outstanding
under the acquisition facility and $11.9 million outstanding under the term
loan. In addition, we had $1.6 million in borrowings outstanding under other
local credit facilities secured by letters of credit outstanding under our
senior credit facility. The acquisition facility is required to be reduced by
varying amounts annually through April 30, 2006. The term loan is required to be
reduced by $3.0 million on October 31, 2002, and by varying amounts annually
thereafter to October 31, 2005.
At March 31, 2002, we had $5.4 million available to borrow under the
operating line facility, $1.5 million available under the acquisition loan
facility (no amount available at April 30, 2002 when the facility was reduced
from $10 million to $8.5 million), and $0.8 million available in the aggregate
under other local credit facilities secured by letters of credit under our
senior credit facility. Amounts outstanding under the senior credit facility
bear interest at specified rates based on the Canadian prime rate, U.S. prime
rate, U.S. base rate, Sterling LIBOR and U.S. LIBOR.
On May 15, 2002, SSWHL filed a registration statement with the SEC with
respect to a proposed initial public offering of its common shares. SSWHL
intends to cause us to use the net proceeds from the offering to redeem in
November 2002 or, if advantageous, repurchase in the open market, all of the
outstanding senior subordinated notes and a portion of the debt outstanding
under our senior credit facility. We expect to reborrow the amounts repaid under
the senior credit facility, and, if appropriate, borrow additional amounts under
that facility or other credit facilities as needed to implement our acquisition
strategy and expand our operations. We cannot give any assurance that SSWHL will
complete its proposed initial public offering or that the amount of net
proceeds, if any, from that offering will be sufficient to repay any of our
debt.
The agreements governing the senior credit facility require us and our
subsidiaries to maintain certain financial ratios based on our consolidated
EBITDA and the agreement governing the senior credit facility and the senior
subordinated notes provide for restrictions on paying dividends and certain
other payments, merging, selling assets, making investments and capital
expenditures and incurring additional debt.
In addition to our senior credit facility and senior subordinated notes, we
had capital lease and other debt obligations of $3.9 million as of March 31,
2002 and $4.3 million as of December 31, 2001.
We believe that existing cash balances, cash generated from operations and
available borrowings under our existing credit facility will be sufficient to
finance our working capital and capital expenditure requirements for at least
the next 12 months. However, if we elect to pursue acquisition opportunities or
expand our existing operations more rapidly than we anticipate, our cash needs
may
24
significantly increase. In that case, we may require additional financing within
that period. We cannot assure you that additional financing will be available on
satisfactory terms or at all.
EXCHANGE RATE EXPOSURE AND RISK MANAGEMENT
We transact business in currencies other than the U.S. dollar, but report
in U.S. dollars. In 2001, approximately 47% of our revenue was generated in
Canadian dollars, 33% in British pounds sterling, and 20% in U.S. dollars.
Accordingly, movements in foreign currency exchange rates can affect our
results.
As a result of our foreign currency exposure, exchange rate fluctuations
have a significant impact in the form of both translation risk and transaction
risk on our income statement. Translation risk is the risk that our consolidated
financial statements for a particular period or as of a certain date may be
affected by changes in the prevailing rates of the various currencies of the
jurisdictions in which we do business against the U.S. dollar. Transaction risk
is the risk that currency fluctuations may impact the local currency value of
transactions executed in currencies other than the local currency.
We occasionally enter into swaps, short-term foreign currency forward
transactions and other derivative transactions to hedge known payments
denominated in currencies other than U.S. dollars or future cash flows from our
operations outside of the United States. In December 1997, we entered into
cross-currency swap transactions in Canadian dollars (notional amount of U.S.$28
million) and British pound sterling (notional amount of U.S.$30 million) for the
purpose of managing risks associated with future foreign currency fluctuations.
The Canadian dollar swap was terminated in October 1998, generating cash
proceeds to us of $3.4 million and the British pound sterling swap was
terminated in September 2000, realizing cash proceeds to us of $4.1 million.
Concurrent with the termination of the British pound sterling swap, we entered
into a new $30 million Canadian dollar swap. In December 2000, we received cash
proceeds of $0.9 million for entering into a mirror swap to the new Canadian
dollar swap. Subsequent to year-end 2000, we closed out the Canadian dollar swap
and the mirror swap, for no net proceeds.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets," effective for fiscal years beginning after December 15,
2001. Under the new rules, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to annual
impairment tests. We adopted the new rules as of January 1, 2002. As a result,
we no longer amortize goodwill. The impact on our net income from goodwill
amortization was to increase net loss in 2001 by $1.2 million and to increase
net loss in 2000 by $1.1 million. While we are currently evaluating the
provisions of the new rules related to impairment testing, we do not expect, as
of March 31, 2002, that such tests will result in any material effect on our
results of operations or financial position.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This Statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. We are required to adopt SFAS
No. 143 as of January 1, 2003. The adoption of this Statement is not expected to
have a material impact on our financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supercedes FASB No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." This new Statement also supercedes certain aspects of
Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations
- -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," with
regard to reporting the effects of a disposal of a segment of a business. The
new rule requires operating losses from discontinued operations to be reported
in future periods, as incurred. In addition, businesses below the operating
segment level may qualify for discontinued operations treatment.
25
We adopted the provisions of the Statement as of January 1, 2002. Adoption of
the Statement will primarily affect us if and when qualifying future business
dispositions occur.
CERTAIN CRITICAL ACCOUNTING POLICIES
In December 2001, the SEC issued a financial reporting release, FR-60,
"Cautionary Advice Regarding Disclosure About Critical Accounting Policies." In
this connection, the following information has been provided about certain
critical accounting policies that are important to the consolidated financial
statements and that entail, to a significant extent, the use of estimates,
assumptions and the application of management's judgment.
Our allowance for doubtful accounts related to accounts receivables is
primarily based upon historical experience, as well as management judgment as to
the economic and business environment. In determining the allowance, management
evaluates both internal credit metrics and historical write-off and recovery
rates. To the extent historical experience is not indicative of future
performance, or other assumptions used by management do not prevail, losses
could differ significantly, resulting in either higher or lower allowances, as
applicable.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
DIRECTORS AND SENIOR MANAGEMENT
Our directors and executive officers and their positions and ages as of
April 30, 2002 are listed below:
NAME AGE POSITIONS
- ---- --- ---------
G. John Krediet..................................... 51 Chairman of the Board of Directors and
Chief Executive Officer
Stewart E. Allen.................................... 43 Vice Chairman and Director
K. Dillon Schickli.................................. 49 President, Chief Operating Officer, Chief
Financial Officer and Director
C. Sean Day......................................... 52 Director
Joseph J. Heffernan................................. 56 Director
Jan Niessen......................................... 38 Director
Kenneth B. Rotman................................... 35 Director
Joost E. Tjaden..................................... 52 Director
Certain biographical information about each of these individuals is set
forth below:
G. JOHN KREDIET has been our Chairman of the Board of Directors and Chief
Executive Officer since 1993. From 1987 to 1993 he served as Chairman of the
Board of Maritime Beverages Limited, a Pepsi-Cola franchisee and former parent
company of Sparkling Spring Water Limited. From 1987 through 1993, Mr. Krediet
also served as Chairman of the Board of Eastcan Beverages Ltd., the Pepsi-Cola
franchise for the territory in and around Ottawa, Ontario, Canada. In 1987, Mr.
Krediet founded C.F. Capital Corporation, a consulting and management company.
Prior to 1987, Mr. Krediet worked for Citibank from 1976 to 1980, AMRO Bank from
1980 to 1983 and General Electric Credit Corporation from 1983 to 1986. Mr.
Krediet received his graduate degree in economics from Erasmus University in
Rotterdam.
STEWART E. ALLEN has been our Vice Chairman of the Board of Directors since
January 2002, and has served as a member of the Board of Directors since 1992.
Mr. Allen was our President and Chief Operating Officer from 1992 through 2001.
Mr. Allen was a director of the Canadian Bottled Water Association from 1993 to
1997 and was President of that association in 1997. He has been a member of the
Board of Directors of the International Bottled Water Association since 1998 and
a director of the International Council of Bottled Water Association since 1996
and was Chairman of the Council from 1999 to 2000. He served as Vice President
of Sales and Marketing for Maritime Beverages Limited from 1988 to 1992.
26
K. DILLON SCHICKLI has been our President and Chief Operating Officer since
January 2002 and our Chief Financial Officer since 1998. Mr. Schickli has been a
member of the Board of Directors since March 2000. Since 1998, Mr. Schickli has
been the President of C.F. Capital Corporation, a position he previously held
from 1987 to 1992. Mr. Schickli has over 15 years of beverage industry
experience, including service as a member of the Board of Directors and the
Executive Committee of Maritime Beverages Limited from 1987 to 1992, and Chief
Financial Officer from 1981 to 1986 of Mid-South Bottling Company, a Pepsi-Cola
franchise bottler. From 1993 to 1995, Mr. Schickli was Chief Operating Officer
and a member of the Board of Directors of Affinity Group, Inc., a database
marketing and membership management company. In 1996, Mr. Schickli served as
President and a member of the Board of Directors of Ivid Communications, Inc., a
leading multimedia training company. From 1997 to 1998, Mr. Schickli was
Chairman, Chief Executive Officer and a co-owner of Affinity Development Group,
Inc., a consulting firm. Mr. Schickli earned an MBA in Accounting from the
University of Chicago, a BA from Carleton College and has a Certificate of
Public Accountancy from the University of Illinois.
C. SEAN DAY has served as a member of our Board of Directors since 1997.
Since 1999, Mr. Day has been Chairman of the Board of Directors of Teekay
Shipping Corporation (NYSE: TK), a world leader in the marine oil transportation
industry, and has served on Teekay's Board of Directors since 1998. Mr. Day has
also been Chairman of the Board of Directors of Seagin International LLC since
1999. From 1989 until 1999, Mr. Day was President and Chief Executive Officer of
Navios Corporation, a company engaged in the worldwide operation of ocean-going
bulkships. Mr. Day is also a member of the Board of Directors of Kirby
Corporation (NYSE: KEX), Genesee & Wyoming, Inc. (NASDAQ: GNWR), CBS Personnel,
California Pellett Mills and Transmarine Navigation Corp. Mr. Day received a
B.B.S. in finance from the University of Cape Town and an MA in jurisprudence
from Oxford University.
JOSEPH J. HEFFERNAN has served on our Board of Directors since June 2001.
Mr. Heffernan has been the Chairman of the Board of Directors of Rothmans Inc.,
Canada's second-largest tobacco company, since 1999, and he served as Rothmans
Inc.'s President and Chief Executive Officer from 1990 to 1999. Mr. Heffernan
also held positions with Rothmans International B.V. as Deputy Chief Executive
(Americas, Asia and Pacific regions) from 1998 to 1999, and as Chief Executive
(Americas region) from 1995 to 1998. From 1990 to 1998, he was also the
President and Chief Executive Officer for Rothmans, Benson & Hedges Inc. Mr.
Heffernan is also currently a member of the Boards of Directors of Rothmans,
Benson & Hedges Inc., Co-Steel Inc. and Clairvest Group Inc. Mr. Heffernan
received a Master of Science in Management from MIT and his BSc in Chemical
Engineering from the University of Alberta.
JAN NIESSEN has served on our Board of Directors since 2000. Since 1999,
Mr. Niessen has been the Managing Director of Egeria B.V., an Amsterdam (NL)
based private equity fund. Before joining Egeria, Mr. Niessen was Director of
CVC Capital Partners B.V. from 1996 to 1999. Mr. Niessen is Chairman of the
Board of Directors of World View Investment Management and a Member of the Board
of Directors of Koninklijke Ahrend. Mr. Niessen received his graduate degree in
economics at the Erasmus University of Rotterdam. He also holds an MBA from New
York University.
KENNETH B. ROTMAN has served as a member of our Board of Directors since
1996. Since 1995, Mr. Rotman has been Managing Director of Clairvest, a
Toronto-based merchant bank. Mr. Rotman also served as Clairvest's Co-President
from 1999 to 2000, and has served as Clairvest's Co-Chief Executive Officer
since 2000. Mr. Rotman also serves on the Board of Directors of Allied Global
Holdings, Inc., NRI Industries, Voxcom Inc., Signature Security Group Inc. and
Clairvest. Mr. Rotman received a BA in Economics from Tufts University, a M.Sc.
from the London School of Economics, and an MBA from New York University.
JOOST E. TJADEN has served on our Board of Directors since March 2002. Mr.
Tjaden has been the Managing Director of Janivo Holding B.V. since 1993. Mr.
Tjaden serves on the boards of several companies in the Netherlands and the
United States, including Tele Atlas N.V., Rhein Biotech NV (Neuer Markt
Frankfurt), Atex Media Solutions, Inc. (Norway Stock Exchange), and Fidelio
Properties. Mr. Tjaden received an MBA in Business Administration from the
University of Delft.
27
The business address of our directors and executive officers is care of 19
Fielding Avenue, Dartmouth, Nova Scotia, Canada B3B 1C9.
BOARD COMPOSITION
Our Board of Directors consists of eight members. There is no requirement
in our Memorandum and Articles of Association or Nova Scotia law that our
directors must retire at a certain age.
Pursuant to a Shareholder Agreement among SSWHL, us and SSWHL's
shareholders, specified shareholders have the right to appoint members to the
Board of Directors. In accordance with the Shareholder Agreement, Clairvest
Group Inc. has appointed Messrs. Heffernan and Rotman to our Board of Directors;
Egeria B.V. has appointed Messrs. Niessen and Schickli; Janivo Holding B.V. has
appointed Mr. Tjaden; and G. John Krediet has appointed himself and Messrs.
Allen and Day. See "Item 7. -- Related Party Transactions -- Shareholder
Agreement."
BOARD COMMITTEES
The Board of Directors of SSWHL has standing Compensation and Finance and
Audit Committees, but no standing nominating committee. Each Board committee has
a written charter outlining its duties and responsibilities, and a chair for
each committee is elected by the Board of Directors of SSWHL. We follow the
recommendations of SSWHL's Compensation and Finance and Audit Committees.
The Compensation Committee is comprised of three to five directors, and
reviews and approves compensation policies and programs, including share option
programs and other incentive-based compensation. It is responsible for reviewing
and approving the compensation paid to selected key executives and reviewing the
performance of the Chairman and Chief Executive Officer. The Compensation
Committee from time to time seeks outside advice to support recommendations and
decisions. Current members of the Compensation Committee are Messrs. Day,
Niessen and Rotman, who are all outside directors.
The Finance and Audit Committee is comprised of three to five directors who
are required to have sufficient financial experience and ability to enable them
to capably discharge their responsibilities. The Finance and Audit Committee
oversees and monitors audit procedures and results, accounting and internal
audit procedures, and banking and treasury activities. Current members of the
Finance and Audit Committee are Messrs. Niessen, Rotman and Tjaden, who are all
outside directors.
COMPENSATION OF DIRECTORS
Prior to January 1, 2002, members of our Board of Directors were not
compensated for their services as directors other than for serving on Board
committees. Committee members received $1,000 per committee meeting. Beginning
on January 1, 2002, each year directors will receive options to purchase 1,000
of SSWHL's common shares plus an additional 1,000 options to purchase SSWHL's
common shares for each Board committee on which they serve. The exercise price
of the options will be equal to the fair market value of SSWHL's common shares
on the grant date. Directors are reimbursed for travel and other related
expenses associated with the performance of their duties. There are no service
contracts between SSWHL, us and any of our directors providing benefits to a
director upon termination of service as a director.
COMPENSATION OF EXECUTIVE OFFICERS
The following table indicates the compensation earned for services rendered
to us in all capacities for 2001 by our three executive officers.
28
LONG TERM
COMPENSATION
AWARDS
------------
NUMBER OF
ANNUAL COMPENSATION SECURITIES
------------------------ UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITIONS SALARY($) BONUS($) OPTIONS COMPENSATION
- ---------------------------- --------- -------- ------------ ------------
G. JOHN KREDIET...................................... (1) (1) -- (1)
Chairman of the Board of
Directors and Chief Executive
Officer
STEWART E. ALLEN..................................... $285,000 $125,000 30,000 $9,000(2)
Vice Chairman and Director
K. DILLON SCHICKLI...................................
President, Chief Operating (1) (1) 130,000 (1)
Officer, Chief Financial
Officer and Director
- ----------
(1) Prior to 2002, Messrs. Krediet and Schickli were paid indirectly by SSWHL
or us through C.F. Capital Corporation pursuant to the terms of a
Management Agreement. According to the Management Agreement, C.F. Capital
Corporation received a management fee from us in exchange for providing
executive management and other services. The amount of the fee paid C.F.
Capital Corporation in any year was based, in part, on our earnings
performance. The Management Agreement also provided for us to pay up to
$100,000 annually of the reasonable out-of-pocket disbursements and office
expenses incurred by C.F. Capital Corporation in performing under the
Management Agreement and to pay fees to C.F. Capital Corporation for
investment banking services rendered by C.F. Capital Corporation. In
connection with the Management Agreement, SSWHL paid C.F. Capital
Corporation an aggregate of $1.3 million in 2001 on our behalf. Effective
as of January 1, 2002, we terminated the Management Agreement that was in
effect during 2001 and SSWHL replaced it with a new one-year Management
Agreement that provides for a payment of $1.0 million per year plus an
annual bonus of up to $500,000 based on SSWHL's and our financial
performance. The new Management Agreement provides for Messrs. Krediet and
Schickli to render management services to us. SSWHL's Compensation
Committee intends to review the new Management Agreement annually. The new
Management Agreement provides for expense reimbursement up to $100,000
annually but does not provide for C.F. Capital Corporation to receive
consideration for investment banking advisory services. C.F. Capital
Corporation is a consulting and management company owned by Mr. Krediet and
its sole activity is to provide management services to SSWHL and us. See
"Item 7. -- Related Party Transactions -- Management Agreement."
(2) Contribution to defined contribution plan.
The following table provides information relating to options to purchase
SSWHL's common shares granted to each of our three executive officers during the
fiscal year ended December 31, 2001. In 2001, no stock appreciation rights were
granted to the executive officers and none of our executive officers exercised
options to purchase SSWHL's common shares.
OPTION GRANTS TO EXECUTIVE OFFICERS IN 2001
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES PRICE PER EXPIRATION
NAME GRANTED DURING PERIOD SHARE DATE
- ---- ---------- ------------- --------- ----------
G. John Krediet................. -- -- -- --
Stewart E. Allen................ 30,000 16.6% $11.69 3/2/06
K. Dillon Schickli.............. 130,000 71.8% $11.69 12/14/11(a)
- ----------
(a) Includes 30,000 options that expire March 2, 2006.
In addition, in March 2002, Messrs. Krediet, Allen and Schickli received
options to purchase 25,000, 25,000 and 50,000 common shares of SSWHL, which
together
29
represented 51% of the total options granted during the first four months of
2002. These options have an exercise price of $15.00 and expire in March 2012.
STOCK OPTION PLAN
SSWHL's Board of Directors adopted a Stock Option Plan in 1998. The Stock
Option Plan permits SSWHL to grant options to purchase its common shares. These
grants have been made to our directors, officers, employees and consultants. The
Stock Option Plan allows for the issuance of up to 1,837,464 common shares. As
of April 30, 2002, options to purchase 1,032,464 common shares are outstanding
under the Stock Option Plan and options to purchase 805,000 common shares remain
available for grant.
The Stock Option Plan is interpreted and administered by the Board of
Directors or the Compensation Committee of SSWHL. Subject to the provisions of
the Plan, SSWHL's Board of Directors or Compensation Committee selects the
individuals eligible to receive awards, determines the terms and conditions of
the awards granted, including the number of common shares covered by each option
and the time or times when options will be granted and exercisable. An
optionee's rights under the Stock Option Plan are not transferable or
assignable.
The exercise price of options granted under the Stock Option Plan is
determined by the Board of Directors or the Compensation Committee of SSWHL.
Options may not be granted with an exercise price less than the fair market
value of the underlying common shares on the date of grant. Options typically
are subject to vesting schedules and terminate 10 years from the date of grant
unless otherwise stipulated by the Board of Directors or the Compensation
Committee of SSWHL. Upon the exercise of options, the option exercise price must
be paid in full in cash or in an alternative manner approved by SSWHL's Board of
Directors or Compensation Committee.
The Stock Option Plan provides that in the event of any capital
reorganization, amalgamation or transfer of all or substantially all of SSWHL's
assets, all outstanding options will accelerate and become fully vested. The
Board of Directors may at any time amend or discontinue the Stock Option Plan
and, in some circumstances, make adjustments to the number of shares subject to
the Plan and to outstanding options.
30
The following table sets forth information with respect to options
outstanding at April 30, 2002. Unless otherwise stated, dollar amounts are in
U.S. dollars.
NUMBER OF
SHARES EXERCISE EXPIRATION
BENEFICIAL HOLDER UNDER OPTION PRICE DATE
----------------- ------------ -------- ----------
EXECUTIVE OFFICERS AND DIRECTORS
G. John. Krediet.......................... 33,000 $ 5.00 10/30/06
25,000 $ 15.00 3/01/12
Stewart E. Allen.......................... 146,084 Cdn$0.455 10/30/06
158,380 $ 1.0815 10/30/06
40,000 $ 5.00 10/30/06
6,000 $ 7.7325 5/31/04
30,000 $ 11.69 3/02/06
25,000 $ 15.00 3/01/12
C. Sean Day............................... 4,000 $ 7.7325 5/31/04
15,000 $ 11.69 12/31/05
2,000 $ 15.00 3/01/12
Kenneth B. Rotman......................... 3,000 $ 15.00 3/01/12
K. Dillon Schickli........................ 14,000 $ 7.7325 1/01/03
64,000 $ 7.7325 2/28/04
6,000 $ 7.7325 5/31/04
100,000 $ 11.69 12/14/11
30,000 $ 11.69 3/02/06
50,000 $ 15.00 3/01/12
Jan Niessen............................... 3,000 $ 15.00 3/01/12
Joe Heffernan............................. 1,000 $ 15.00 3/01/12
Joost Tjaden.............................. 2,000 $ 15.00 3/01/12
EMPLOYEES
The table below sets forth the breakdown of the total average number of our
full time equivalent employees by main category of activity and geographic area
for the past three years.
FOR THE YEAR ENDED FINANCE,
DECEMBER 31, 2001 SALES & CUSTOMER ADMINISTRATION &
(FULL TIME EQUIVALENTS) PRODUCTION DISTRIBUTION SERVICE MANAGEMENT TOTAL
- ----------------------- ---------- ------------ ---------------- ---------------- -----
United States 18 55 12 28 113
Canada 102 182 80 90 454
U.K. 26 149 37 52 264
--- --- --- --- ---
TOTAL 146 386 129 170 831
=== === === === ===
FOR THE YEAR ENDED FINANCE,
DECEMBER 31, 2000 SALES & CUSTOMER ADMINISTRATION &
(FULL TIME EQUIVALENTS) PRODUCTION DISTRIBUTION SERVICE MANAGEMENT TOTAL
- ----------------------- ---------- ------------ ---------------- ---------------- -----
United States 27 60 22 20 129
Canada 80 157 73 85 395
U.K. 23 156 42 50 271
--- --- --- --- ---
TOTAL 130 373 137 155 795
=== === === === ===
FOR THE YEAR ENDED FINANCE,
DECEMBER 31, 1999 SALES & CUSTOMER ADMINISTRATION &
(FULL TIME EQUIVALENTS) PRODUCTION DISTRIBUTION SERVICE MANAGEMENT TOTAL
- ----------------------- ---------- ------------ ---------------- ---------------- -----
United States 27 57 16 14 114
Canada 63 118 69 68 318
U.K. 23 144 45 44 256
--- --- --- --- ---
TOTAL 113 319 130 126 688
=== === === === ===
31
At March 31, 2002, we had approximately 160 unionized employees in British
Columbia who worked in the areas of production and distribution. Most of these
employees are parties to a collective bargaining agreement that expires in
October 2002. We have not experienced any material slow downs or work stoppages
in recent years, and we consider our employee relations to be good. From time to
time, our employees engage in unionizing activities that may or may not result
in collective bargaining agreements.
SHARE OWNERSHIP OF DIRECTORS AND SENIOR MANAGEMENT
For the share ownership of our directors and executive officers, please see
"Item 7. -- Principal Shareholders."
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
PRINCIPAL SHAREHOLDERS
Sparkling Spring Water Holdings Limited, or SSWHL, owns all of our
outstanding shares.
The following table contains information relating to the beneficial
ownership of SSWHL's common shares as of April 30, 2002 by:
o each person who beneficially owns more than 5% of SSWHL's common shares;
o each of our directors;
o each of our three executive officers; and
o all of our directors and executive officers as a group.
Beneficial ownership is determined based on the rules of the SEC. The
column entitled "Number of Shares Beneficially Owned" excludes the number of
common shares subject to options or warrants held by that person. The number of
shares subject to options or warrants that each beneficial owner has the right
to acquire within 60 days of April 30, 2002 are listed separately under the
column entitled "Number of Shares Underlying Rights Exercisable Within 60 Days."
These shares are deemed beneficially owned for the purposes of computing the
percentage ownership of that person, but are not deemed outstanding for purposes
of computing the percentage ownership of any other person. Unless otherwise
indicated in the footnotes, these shareholders have sole voting or investment
power with respect to all shares, subject to applicable community property laws.
The percentage of beneficial ownership is based on 8,434,656 Class A voting
common shares and 209,372 Class B non-voting common shares outstanding as of
April 30, 2002. Unless otherwise noted, the address for each shareholder is care
of 19 Fielding Avenue, Dartmouth, Nova Scotia, Canada B3B 1C9.
NUMBER
NUMBER OF NUMBER OF OF SHARES
CLASS A CLASS B UNDERLYING PERCENTAGE
SHARES SHARES RIGHTS OF
BENEFICIALLY BENEFICIALLY EXERCISABLE CLASS
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OWNED WITHIN 60 DAYS OUTSTANDING
- ------------------------------------ ------------ ------------ -------------- -----------
Egeria B.V. ................................... 2,852,397 -- 33.82%
Nieuwe Herengracht 51 74,360 -- 35.52%
1018 VN Amsterdam
The Netherlands
G. John Krediet(1) ............................ 2,493,408 44,852 29.93%
-- 33,000 13.62%
32
NUMBER
NUMBER OF NUMBER OF OF SHARES
CLASS A CLASS B UNDERLYING PERCENTAGE
SHARES SHARES RIGHTS OF
BENEFICIALLY BENEFICIALLY EXERCISABLE CLASS
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OWNED WITHIN 60 DAYS OUTSTANDING
- ------------------------------------ ------------ ------------ -------------- -----------
Clairvest Group Inc. .......................... 1,377,507 26,920 16.60%
1700 22 St. Clair Avenue East -- -- --
Toronto, Ontario
M4T 2S3
Janivo Holding B.V. ........................... 674,764 -- 8.00%
Post Box 544 2,666 -- 1.27%
3700 AM Zeist
The Netherlands
Stephen L. Larson(2) .......................... 480,356 7,520 5.78%
c/o Cornerstone Equity Investors LLC 28,000 -- 13.37%
717 Fifth Avenue
New York, NY 12022
Stewart E. Allen(3) ........................... 23,048 360 *
6,000 360,464 64.31%
K. Dillon Schickli(4) ......................... -- -- --
29,000 81,200 37.93%
C. Sean Day(5) ................................ * * *
33,750 14,000 21.38%
Joseph J. Heffernan(6) ........................ -- -- --
-- -- --
Jan Niessen(7) ................................ -- -- --
-- -- --
Kenneth B. Rotman(8) .......................... -- -- --
-- -- --
Joost E. Tjaden(9) ............................ -- -- --
-- -- --
- ----------
* Less than one percent
(1) Excludes 25,000 Class B non-voting common shares issuable upon
exercise of options first exercisable more than 60 days after April
30, 2002. See "Item 6. -- Stock Option Plan" for details regarding
options. Also excludes 480,356 shares owned by Mr. Larson which are
subject to a voting agreement which may give Mr. Krediet the right to
vote the shares on all matters but with respect to which Mr. Krediet
disclaims beneficial ownership.
(2) Includes 480,356 Class A common shares owned by Mr. Larson which are
subject to a voting agreement which may give Mr. Krediet the right to
vote the shares on all matters but with respect to which Mr. Krediet
disclaims beneficial ownership.
(3) Excludes 45,000 Class B non-voting common shares issuable upon
exercise of options first exercisable more than 60 days after April
30, 2002. See "Item 6. -- Stock Option Plan" for details regarding
options.
(4) Excludes 182,800 Class B non-voting common shares issuable upon
exercise of options first exercisable more than 60 days after April
30, 2002. See "Item 6. -- Stock Option Plan" for details regarding
options.
(5) Excludes 7,000 Class B non-voting common shares issuable upon exercise
of option first exercisable more than 60 days after April 30, 2002.
See "Item 6. -- Stock Option Plan" for details regarding options.
(6) Excludes 1,404,427 common shares and warrants for common shares held
by Clairvest Group Inc., a public company of which Mr. Heffernan is a
Director
33
and a beneficial owner. Also excludes 1,000 Class B non-voting common
shares issuable upon exercise of options first exercisable more than
60 days after April 30, 2002. See "Item 6. -- Stock Option Plan" for
details regarding options.
(7) Excludes 2,926,757 common shares held by Egeria B.V., of which Mr.
Niessen is Managing Director, and with respect to which Mr. Niessen
disclaims beneficial ownership. Also excludes 3,000 Class B non-voting
common shares issuable upon exercise of options first exercisable more
than 60 days after April 30, 2002, the proceeds of which Mr. Niessen
intends to transfer to Egeria B.V. See "Item 6. -- Stock Option Plan"
for details regarding options.
(8) Excludes 1,404,427 common shares and warrants for common shares held
by Clairvest Group Inc., a public company of which Mr. Rotman is
Co-Chief Executive Officer, a Managing Director and a beneficial
owner. Also excludes 3,000 Class B non-voting common shares issuable
upon exercise of options first exercisable more than 60 days after
April 30, 2002. See "Item 6. -- Stock Option Plan" for details
regarding options.
(9) Excludes 677,430 common shares and warrants for common shares held by
Janivo Holding B.V., of which Mr. Tjaden is a Director, and with
respect to which Mr. Tjaden disclaims beneficial ownership. Also
excludes 2,000 Class B non-voting common shares issuable upon exercise
of options first exercisable more than 60 days after April 30, 2002.
See "Item 6. -- Stock Option Plan" for details regarding options.
As of April 30, 2002, we believe there were four U.S. holders of SSWHL's
common shares holding an aggregate of 12.7% of the then outstanding common
shares.
WARRANTS
In May 1999, SSWHL issued warrants to purchase an aggregate of 88,000 of
its common shares at a purchase price of $7.73 per share. The warrants are
exercisable at any time prior to the earliest of May 26, 2004, 60 days following
the death of the holder and 30 days following the occurrence of the approval by
SSWHL's Board of Directors of a takeover bid for at least 90% of SSWHL. The
warrants were issued to G. John Krediet, Stewart E. Allen, C. Sean Day,
Clairvest Group, Inc. and certain other investors in connection with a financing
used to repurchase options to purchase our common shares held by a financial
institution. The warrants are now warrants to purchase the common shares of
SSWHL.
RECENT CHANGES IN OUR PRINCIPAL SHAREHOLDERS AND RECENT SALES OF COMMON SHARES
In 2000, Egeria B.V. acquired 1,301,436 of SSWHL's common shares, which
represented 19.4% of its outstanding common shares at December 31, 2000. Egeria
B.V. acquired an additional 1,625,321 of SSWHL's common shares in 2001, which
represented 18.8% of its outstanding common shares at December 31, 2001. In
2001, Janivo Holdings B.V. acquired 677,430 of SSWHL's common shares, which
represented 7.8% of it outstanding common shares at December 31, 2001.
RELATED PARTY TRANSACTIONS
MANAGEMENT AGREEMENT
PRIOR MANAGEMENT AGREEMENT. Effective January 1, 2002, we terminated a
Management Agreement between us, C.F. Capital Corporation, G. John Krediet (our
Chairman of the Board and Chief Executive Officer and Director) and Stephen L.
Larson. C.F. Capital Corporation is a consulting and management business owned
by Mr. Krediet. The Management Agreement, which was entered into in 1993 with us
and subsequently amended, provided that C.F. Capital Corporation would perform
certain management services for us, including managing our operations,
negotiating contracts and managing our financial arrangements. Extraordinary
actions, such as material acquisitions, capital expenditures in excess of 10% of
our annual budget, issuances of securities, the sale or disposition of a
material portion of our business or assets, mergers, liquidations, the
declaration of dividends, and the determination
34
of our annual budget required approval from our Board of Directors. In
consideration for these services, including Messrs. Krediet and K. Dillon
Schickli (our President, Chief Operating Officer, Chief Financial Officer and
Director) acting as our officers, we or SSWHL paid an annual fee to C.F. Capital
Corporation plus additional bonuses based on our financial performance. We or
SSWHL also paid up to $100,000 annually of the reasonable out-of-pocket
disbursements and office expenses incurred by C.F. Capital Corporation in
performing services under the Management Agreement and paid fees to C.F. Capital
Corporation in consideration of investment banking advisory services rendered in
connection with our or SSWHL's acquisitions of other businesses. In connection
with the Management Agreement, we or SSWHL paid C.F. Capital Corporation an
aggregate of $1.0 million in 1999, $1.4 million in 2000 and $1.3 million in
2001.
In addition, the Management Agreement provided that we could compensate
Messrs. Krediet and Schickli with stock options, incentives or other
remuneration in accordance with industry standards. See "Item 6. -- Stock
Option Plan" and "Item 6. -- Compensation of Executive Officers."
NEW MANAGEMENT AGREEMENT. Effective January 1, 2002, SSWHL entered into a
new Management Agreement with C.F. Capital Corporation, G. John Krediet and K.
Dillon Schickli. Pursuant to the new Management Agreement, C.F. Capital
Corporation has agreed to perform services for SSWHL and us similar to the
services performed under the prior Management Agreement, including the provision
of management services of Messrs. Krediet and Schickli. C.F. Capital
Corporation's sole activity is to provide management services to SSWHL and us.
The new Management Agreement provides for a payment to C.F. Capital Corporation
of $1.0 million per year plus an annual bonus of up to $500,000 based on SSWHL's
and our financial performance. The Management Agreement has a term of one year
that automatically renews for subsequent one-year terms unless terminated by
either party 30 days prior to its renewal. SSWHL's Compensation Committee
intends to review the new Management Agreement annually. The new Management
Agreement provides for expense reimbursement up to $100,000 annually but does
not provide for C.F. Capital Corporation to receive consideration for investment
banking advisory services.
SHAREHOLDER AGREEMENT
On July 31, 2000, SSWHL entered into a Shareholder Agreement with G. John
Krediet, Clairvest Group, Inc., Egeria B.V., Stephen L. Larson, Lucy Stitzer,
Stewart E. Allen, K. Dillon Schickli and other of its shareholders. SSWHL
supplemented the Shareholder Agreement in March 2001 with a Supplemental
Shareholder Agreement. The Shareholder Agreement provides registration rights,
preemptive rights, rights of first refusal, voting and other rights in
connection with specified matters of corporate governance and other rights and
obligations of the shareholders and SSWHL.
CUSTOMER SERVICE AGREEMENT
In an effort to realize operational efficiencies following the acquisitions
of Polaris Water Company, Inc. and Cullyspring Water Co., Inc., we and SSWHL
entered into a Customer Service Agreement, dated July 1, 2001, which
consolidated operations in the State of Washington and the Province of British
Columbia. Under the Customer Service Agreement, the home and office customers,
assets and liabilities associated with the British Columbia operations of
Polaris, a wholly-owned subsidiary of SSWHL, were transferred to us and absorbed
into our established British Columbia operations. Likewise, the home and office
customers, assets and liabilities associated with the State of Washington
operations of our wholly-owned subsidiary Cullyspring, were transferred to SSWHL
to be absorbed into their established operations in that region. As part of the
Customer Service Agreement, we paid to SSWHL $6,491, which is the excess of the
transferred assets over the transferred liabilities of Polaris, and SSWHL paid
to us $368,079, which is the excess of the transferred assets over the
transferred liabilities of Cullyspring. SSWHL also purchased the small pack
business of Cullyspring, for $366,740. In addition, SSWHL pays fees to us and
Spring Water, Inc., of $30,000 and $10,000 per month, respectively, in
consideration for services provided in managing the former Polaris' customers.
The Customer Service Agreement is automatically renewed for a one-year
35
term each December starting in 2002, but may be terminated at any time with six
months' notice by either party.
SHARE TRANSACTIONS WITH EXECUTIVE OFFICERS
In December 1996, we received a promissory note from Stewart E. Allen, our
Vice Chairman, in the amount of $108,000, in connection with his purchase of our
common shares, which shares were subsequently exchanged for common shares of
SSWHL. This promissory note bore interest at a rate of 7% and was scheduled to
mature on January 31, 1998, with principal and interest due on that date. The
promissory note was cancelled by us and replaced with a promissory note from Mr.
Allen in the principal amount of $116,300, which bore interest at a rate of 6%
and was due to mature on January 31, 1999. On January 31, 1999, Mr. Allen paid
interest due of $6,978. On January 31, 2000, 2001 and 2002, Mr. Allen paid
interest on his note, and on each such date the promissory note of the preceding
year was either extended or cancelled by us and replaced with a new promissory
note in the same amount and due one year after that date. Mr. Allen repaid the
note in May 2002.
In May of 1999, SSWHL issued common shares and warrants or options to
purchase common shares to its shareholders, including its and our officers,
directors and employees, at a price of $7.7325 per common share. In connection
with these sales, SSWHL issued 6,000, 6,360 and 44,852 of its common shares and
a like amount of warrants or options to purchase its common shares to K. Dillon
Schickli, Stewart E. Allen, and Gaspar Limited, a company owned by a trust
established for the benefit of Mr. Krediet and his children. The common shares
and warrants purchased by Gaspar Limited were acquired by G. John Krediet in
1999. See "-- Principal Shareholders -- Warrants."
In July 2000, K. Dillon Schickli purchased 4,000 of SSWHL's common shares
from it for $11.69 per share.
SHARE AND OPTION EXCHANGE AGREEMENTS
In connection with our reorganization in 1998, we exchanged our equity
interests for SSWHL's common shares and options to purchase SSWHL's common
shares pursuant to share and option exchange agreements. See "Item 4. --
Organizational Structure and Company History." Some of our directors, officers
and other employees were parties to the share and option exchange agreements.
Some of these agreements, among other things, provide SSWHL rights of first
refusal with respect to the sale of the shares and provide SSWHL the right to
purchase, and the holders the right to sell, the shares at fair market value.
ITEM 8. FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See Item 18 below.
LEGAL PROCEEDINGS
From time to time, we are a party to routine legal proceedings incidental
to our business. We do not expect that these proceedings will individually, or
in the aggregate, have a material adverse effect on us.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
intend to retain earnings, if any, to fund the operation and growth of our
business and do not anticipate paying any cash dividends in the foreseeable
future. In addition, our ability to pay dividends is effectively limited by the
terms of some of the debt instruments of our subsidiaries, which significantly
restrict their ability to pay dividends directly or indirectly to us.
36
SIGNIFICANT CHANGES
We do not believe that we have incurred any significant changes in our
business, operations, assets, or financial condition since December 31, 2001,
the date of our audited financial statements included elsewhere in this Annual
Report, that have not been previously addressed in this Annual Report.
ITEM 9. THE OFFER AND LISTING
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
MEMORANDUM AND ARTICLES OF ASSOCIATION
Set forth below is a summary of the material provisions of our Memorandum
of Association (the "Memorandum") and Articles of Association (the "Articles")
and of the Companies Act (Nova Scotia) relating to us.
OBJECTS AND POWERS. The objects and powers are found in the Memorandum,
which provides that there are no restrictions on the objects and powers of
Sparkling Spring and that we have the express powers to (a) sell or dispose of
our undertaking, or a substantial part thereof; (b) distribute any of our
property in specie among our members; and (c) amalgamate with any company or
other body of persons. Our corporate registry number is 3052090.
DIRECTORS. The Articles provide that a director is not disqualified by
entering into contracts with us, either as vendor, purchaser, or otherwise. No
contract or arrangement entered into by us in which any director is in any way
interested, either directly or indirectly, can be avoided. The Articles also
provide that a director is not liable to account to us for any profit realized
by any such contract or arrangement by reason only of such director holding that
office or of having a fiduciary relationship, provided the director makes a
declaration or gives a general notice in accordance with the Companies Act (Nova
Scotia).
The Companies Act (Nova Scotia) permits a director to vote notwithstanding
a conflict of interest provided that such conflict is declared. The Articles
prohibit voting by an interested director but allow the shareholders to modify
this restriction.
The Articles provide that, until otherwise determined, one director
constitutes a quorum and may hold a meeting. The directors may fix the
remuneration, which remuneration may be by way of any or all of salary,
commission and participation in profits. The directors are authorized to
determine remuneration to be paid to one or more directors who are called upon
to perform extra services or to make any special exertions in going or residing
abroad or otherwise for any of our purposes or business. Directors also have the
power to divide among them the remuneration that the shareholders determine by
resolution be paid to the directors for their services. Directors may also be
paid reasonable expenses incurred in the execution of their duties as directors.
The Articles give the directors the express borrowing powers on behalf of
us to:
o raise or borrow money;
o give security for the repayment of borrowed money;
o sign or endorse bills, notes, acceptances, cheques, contracts, and
other evidence of, or securities for, funds borrowed;
o pledge debentures as security for loans; and
o guarantee obligations of any person.
Because the directors' borrowing powers are stated in the Articles, these powers
can only be varied by special resolution of our shareholders amending the
Articles.
37
Under the Corporations Miscellaneous Provisions Act (Nova Scotia), one or
more or all the directors of a company may be removed by special resolution of
the shareholders at a special meeting called for the purpose. The Articles
provide that we may, by special resolution or in any manner provided by statute,
remove any director before the expiration of that director's term of office. A
director also loses office under the Articles if the director becomes bankrupt
or makes an assignment for the benefit of creditors or is, or is found by a
court of competent jurisdiction to be, of unsound mind. Directors are not
required to retire upon reaching a specified age limit.
The Articles do not require directors to hold our shares in order to be
qualified as a director.
CLASSES OF SHARES. We currently have two classes of authorized shares:
common shares and special preferred shares, issuable in series. The special
preferred shares may at any time and from time to time be issued in one or more
series as determined by our board of directors or any duly authorized committee
thereof, however no series of special preferred shares has yet been created.
Accordingly, only common shares are currently issued and outstanding.
The Companies Act (Nova Scotia) does not address the payment of dividends
and it is generally understood that the common law of Nova Scotia permits the
payment of dividends out of profits and in any case where payment would not
impair the capital of the company. English authority, which we believe is
authoritative, interprets these provisions broadly. The Articles permit the
directors to declare such dividend as they deem proper out of the profits,
retained earnings or contributed surplus of the company upon shares of the
company so long as such dividends are declared in accordance with the respective
rights thereto of common shares and special shares as set forth in the
Memorandum.
The Articles provide that no shareholder may recover by action or other
legal process against us any dividend represented by a cheque that has not been
duly presented to our banker for payment or that otherwise remains unclaimed for
6 years from the date on which it was payable.
The conditions attaching to the special preferred shares provide that the
special preferred shares shall rank in priority to common shareholders with
respect to priority to, and payment of, dividends.
Common shareholders are entitled to one vote per common share held. The
voting preference of series of special preferred shares is to be determined by
the directors at the time of creation of the series of special preferred shares.
The Articles provide that at the dissolution of every ordinary general
meeting at which their successors are elected, all the directors shall retire
from office and be succeeded by the directors elected at such meeting. Retiring
directors shall be eligible for re-election. Each ordinary general meeting must
be held not later than fifteen months after the preceding ordinary general
meeting.
The Companies Act (Nova Scotia) does not specifically regulate cumulative
voting and the Articles do not provide for cumulative voting.
Shareholders may share in our profits by way of receiving dividends
declared from time to time by the directors.
The conditions attaching to the special preferred shares provide that the
holders of such shares are entitled to priority on the distribution of our
assets in the event of liquidation, dissolution or winding-up of the company,
whether voluntary or involuntary, or any other distribution of our assets among
our shareholders for the purpose of winding up our affairs. Common shareholders
also have the right to share in any surplus in the event of liquidation.
The redemption preference of series of special preferred shares is to be
determined by the directors at the time of creation of the series of special
preferred shares. Common shares may not be redeemed, however, they may be
38
repurchased by us in accordance with the Companies Act (Nova Scotia), which
permits us to purchase or otherwise acquire, our shares, subject to certain
solvency tests and certain exceptions, only upon authorization of the
shareholders of the company by special resolution.
There are currently no sinking fund provisions attaching to any class of
our shares.
Our shareholders are not subject to liability to further capital calls by
us. Shareholders are liable for calls in respect of all amounts unpaid on the
shares held by them.
There are no provisions in the Memorandum or Articles discriminating
against any existing or prospective holder of securities as a result of such
shareholder owning a substantial number of shares.
CHANGES TO SHAREHOLDER RIGHTS. The rights of common shareholders may only
be changed by altering our Articles, which requires a special resolution of all
of our shareholders. Changes to the conditions attaching to our special
preferred shares require the approval of the holders of special preferred shares
in accordance with the special preferred share conditions.
A holder of shares of any class or series of shares entitled to vote
separately as a class or series upon any such amendment may dissent if we
resolve to amend our Memorandum or Articles to increase or decrease any maximum
number of authorized shares of such class, or increase any maximum number of
authorized shares of a class having rights or privileges equal or superior to
the shares of such class, effect an exchange, reclassification or cancellation
of all or part of the shares of such class, add, change or remove the rights,
privileges, restrictions or conditions attached to the shares of such class and,
without limiting the generality of the foregoing, remove or change prejudicially
rights to accrued dividends or rights to cumulative dividends, add, remove or
change prejudicially redemption rights, reduce or remove a dividend preference
or a liquidation preference, or add, remove or change prejudicially conversion
privileges, options, voting, transfer or pre-emptive rights, or rights to
acquire securities of the company, or sinking fund provisions, increase the
rights or privileges of any class of shares having rights or privileges equal or
superior to the shares of such class, create a new class of shares equal or
superior to the shares of such class, make any class of shares having rights or
privileges inferior to the shares of such class equal or superior to the shares
of such class, effect an exchange or create a right of exchange of all or part
of the shares of another class into the shares of such class or constrain the
issue or transfer of the shares of such class or extend or remove such
constraint.
MEETINGS. Our ordinary general meetings are to be held at least once in
every calendar year, at such time and place as may be determined by the
directors, and not later than fifteen months after the preceding ordinary
general meeting. All other meetings are called special general meetings.
Ordinary or special general meetings may be held either within or without the
Province of Nova Scotia. Under the Companies Act (Nova Scotia) special meetings
of shareholders may be called as provided in the articles of association or, on
the requisition of the holders of not less than five per cent of the shares of
the company carrying the right to vote at the meeting sought to be held. The
Articles provide that special meetings of the shareholders may be called upon
seven days' prior written notice by the President, a vice president or the
directors. The accidental omission to give notice to a shareholder or
non-receipt of a notice by a shareholder does not invalidate any resolution
passed at any general meeting. There are no provisions in our Articles with
respect to the conditions of admission to our meetings.
LIMITATION ON RIGHT TO OWN SECURITIES. We are a private company for the
purposes of the Securities Act (Nova Scotia), and accordingly the Articles
provide the following restrictions on the issuance of securities:
(1) no transfer of any share or prescribed security of the company shall
be effective unless or until approved by the directors;
39
(2) the number of holders of our issued and outstanding prescribed
securities or shares, exclusive of persons who are in our employment
or in the employment of an affiliate of ours and exclusive of persons
who, having been formerly in our employment or the employment of an
affiliate of ours, were, while in that employment, and have continued
after termination of that employment, to own at least one prescribed
security or share of us, shall not exceed 50 in number, two or more
persons or companies who are the joint registered owners of one or
more prescribed securities or shares being counted as one holder; and
(3) we shall not invite the public to subscribe for any of our shares or
prescribed securities.
The Investment Canada Act (Canada) provides restrictions on foreign ownership of
Canadian companies which have assets exceeding prescribed thresholds.
CHANGE OF CONTROL RESTRICTIONS. Under the Companies Act (Nova Scotia), with
certain exceptions, any merger, consolidation or sale of all or substantially
all the assets of a company must be approved by the company's board of directors
and a majority of the outstanding shares entitled to vote. In addition, a
statutory amalgamation requires the approval of a three-quarters majority of the
votes cast by the holders of shares entitled to vote, and if any class or series
is entitled to vote thereon as a class, the affirmative vote of two-thirds of
the shares within each class or series entitled to vote separately. The
amalgamation must also be approved by the court before it becomes effective.
The Companies Act (Nova Scotia) provides for class voting in order to approve
certain matters including sales of substantially all of a company's assets,
whether or not the shares otherwise carry the right to vote. Such matters shall
be deemed to be adopted by the shareholders when, in addition to any other
action required to be taken by shareholders under the Act, approved by the
holders of each class and series by a majority of not less than two thirds of
the votes cast with respect thereto. Under Nova Scotia law, a holder of shares
of any class of a company may dissent if the company resolves to, among other
things, change or remove any restriction upon the business or businesses that
the company may carry on, amalgamate with another company, other than any
wholly-owned subsidiary of the company, be continued under the laws of another
jurisdiction, or sell, lease or exchange all or substantially all its property
other than in the ordinary course of business of the company.
Under the Companies Act (Nova Scotia), a shareholder of a corporation
participating in certain major corporate transactions may, under varying
circumstances, be entitled to dissenters' rights or to appraisal rights pursuant
to which such shareholder may receive cash in the amount of the fair market
value of the shares held by such shareholder (as determined by a court or by
agreement of the corporation and the stockholder) in lieu of the consideration
such shareholder would otherwise receive in the transaction.
OWNERSHIP THRESHOLD. There are no provisions in the Memorandum or Articles
governing the ownership threshold above which shareholder ownership must be
disclosed.
CHANGES TO CAPITAL. Under the Companies Act (Nova Scotia), no amendment
may be made to the Memorandum except as expressly permitted. Those provisions of
the Memorandum concerning capital may be altered by majority vote or special
resolution, depending on the particular amendment proposed. In addition, under
the Companies Act (Nova Scotia), the holders of outstanding shares of a class or
series will ordinarily be entitled to vote as a class or series upon a proposed
amendment, whether or not entitled to vote thereon by the provisions of the
company's Memorandum.
MATERIAL CONTRACTS
o Indenture, dated November 19, 1997, among Sparkling Spring Water Group
Limited, as Issuer, the Subsidiary Guarantors Named therein, and
Bankers Trust
40
Company, as Trustee, as supplemented. See "Item 5.- Liquidity and
Capital Resources."
o Amended and Restated Credit Agreement, dated as of May 17, 1999,
between Sparkling Spring Water Group Limited, Sparkling Spring Water
Holdings Limited (as successor-in-interest to Sparkling Spring Water
Limited), Nature Springs Water Company Limited, Spring Water, Inc.,
The Toronto-Dominion Bank, Toronto Dominion (Texas), Inc., and The
Toronto-Dominion Bank, London Branch, as amended. See "Item 7. -
Related Party Transactions."
EXCHANGE CONTROLS
There are no Nova Scotia or Canadian governmental laws, decrees or
regulations that restrict the export or import of capital, including any foreign
exchange controls, or that affect the remittance of dividends or other payments
to non-residents or non-citizens of Canada who hold shares or senior
subordinated notes of Sparkling Spring.
DOCUMENTS ON DISPLAY
Documents concerning us that are referred to herein may be inspected at our
principal executive offices at 19 Fielding Avenue, Dartmouth, Nova Scotia,
Canada B3B 1C9. Those documents electronically filed via the Electronic Data
Gathering, Analysis, and Retrieval (EDGAR) system may also be obtained from the
Securities and Exchange Commission's (SEC) website at www.sec.gov or from the
SEC public reference room at Judiciary Plaza, 450 Fifth Street, Washington, D.C.
20549. Further information on the operation of the public reference room may be
obtained by calling the SEC at 1-800-SEC-0330. Copies of documents can be
requested from the SEC public reference room for a copying fee.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See "Item 5 - Exchange Rate Exposure and Risk Management."
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.
As of March 31, 2002, we were in compliance with all financial covenants
under debt instruments.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS.
None.
ITEM 15. [RESERVED]
ITEM 16. [RESERVED]
PART III
ITEM 17. FINANCIAL STATEMENTS.
Not applicable.
41
ITEM 18. FINANCIAL STATEMENTS.
The following financial statements are filed as part of this Annual Report
on Form 20-F.
Page
Auditors' Report F-1
Consolidated Balance Sheet F-2
Consolidated Statements of Operations F-3
Consolidated Statement of Shareholder's Equity (Deficiency) F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6
ITEM 19. EXHIBITS.
EXHIBITS
1.1 Memorandum and Articles of Association of Sparkling Spring Water Group
Limited(1)
2.1 Indenture, dated November 19, 1997, among Sparkling Spring Water Group
Limited, as Issuer, the Subsidiary Guarantors Named therein, and
Bankers Trust Company, as Trustee, as Supplemented(1)
4.1 Management Agreement, as amended and restated January 12, 1996, among
Sparkling Spring Water Limited, C.F. Capital Corporation, G. John
Krediet and Stephen L. Larson(1)
4.2 Amendment Agreement, dated October 22, 1997, among Sparkling Spring
Water Group Limited, Sparkling Spring Water Limited, C.F. Capital
Corporation, G. John Krediet and Stephen L. Larson(1)
4.3 Amended and Restated Credit Agreement, dated as of May 17, 1999,
between Sparkling Spring Water Group Limited, Sparkling Spring Water
Holdings Limited (as successor-in-Interest to Sparkling Spring Water
Limited), Nature Springs Water Company Limited, Spring Water, Inc.,
The Toronto-Dominion Bank, Toronto Dominion (Texas), Inc., and The
Toronto-Dominion Bank, London Branch(2)
4.4 First Amending Agreement to Amended and Restated Credit Agreement,
dated as of May 30, 2000, between Sparkling Spring Water Group
Limited, Sparkling Spring Water Holdings Limited (as
successor-in-interest to Sparkling Spring Water Limited), Nature
Springs Water Company Limited, Spring Water, Inc., The
Toronto-Dominion Bank, Toronto Dominion (Texas), Inc., and The
Toronto-Dominion Bank, London Branch(3)
4.5 Second Amending Agreement to Amended and Restated Credit Agreement,
dated as of April 30, 2001, between Sparkling Spring Water Group
Limited, Nature Springs Water Company Limited, Spring Water, Inc., The
Toronto-Dominion Bank, Toronto Dominion (Texas), Inc., and The
Toronto-Dominion Bank, London Branch(4)
4.5 Lease, dated March 19, 1999, between Riverpointe Strategies
Partnership, as Landlord, Canadian Springs Water Company, as Tenant,
and Sparkling Spring Water Limited, as Indemnifier
4.6 Counterpart Lease, dated March 29, 1996, between Moatstar Limited,
Sparkling Spring Water UK Limited and Sparkling Spring Water
Limited(5)
8.1 List of significant subsidiaries of Sparkling Spring Water Group
Limited
------------------
(1) Previously filed as an exhibit to our Registration Statement on Form
F-4, filed with the SEC on December 12, 1997 (SEC File No. 333-43061),
and hereby incorporated by reference to such Registration Statement.
42
(2) Previously filed as an exhibit to our Report on Form 6-K, filed with
the SEC on August 16, 1999, and hereby incorporated by reference to
such Quarterly Report.
(3) Previously filed as an exhibit to our Report on Form 6-K, filed with
the SEC on August 16, 2000, and hereby incorporated by reference to
such Quarterly Report.
(4) Previously filed as an exhibit to our Report on Form 6-K, filed with
the SEC on August 15, 2001, and hereby incorporated by reference to
such Quarterly Report.
(5) Previously filed as an exhibit to Sparkling Spring Water Holdings
Limited's Registration Statement on Form F-1, filed with the SEC on
May 15, 2002 (SEC File No. 333-88246), and hereby incorporated by
reference to such Registration Statement.
43
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, on this 24th day of May, 2002.
SPARKLING SPRING WATER GROUP LIMITED
By: /s/ Kent Dillon Schickli
-----------------------------------------
Kent Dillon Schickli
President
44
AUDITORS' REPORT
To the Shareholder of
Sparkling Spring Water Group Limited
We have audited the consolidated balance sheets of Sparkling Spring
Water Group Limited as at December 31, 2001 and 2000 and the consolidated
statements of operations, shareholder's equity (deficiency) and cash flows for
each of the years in the three-year period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with Canadian and United States
generally accepted auditing standards. Those standards require that we plan and
perform an audit to obtain reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly,
in all material respects, the financial position of the Company as at December
31, 2001 and 2000 and the results of its operations and its cash flows for each
of the years in the three year period ended December 31, 2001 in accordance with
United States generally accepted accounting principles.
As discussed in note 3 to the consolidated financial statements, in
2001 the Company changed its method of accounting for water cooler rental
revenue.
Halifax, Canada /s/ ERNST & YOUNG LLP
March 8, 2002 Chartered Accountants
F-1
SPARKLING SPRING WATER GROUP LIMITED
CONSOLIDATED BALANCE SHEETS
(in thousands of U.S. dollars) AS AT DECEMBER 31
--------------------------
2000 2001
-------- --------
ASSETS [notes 13 and 14]
Current assets
Cash and cash equivalents $ 556 $ 287
Accounts receivable (net of allowance
for doubtful accounts of $717;
2000 - $782 [notes 5 and 21]) 11,650 11,639
Inventories [note 6] 1,635 1,508
Prepaid expenses 2,083 1,964
------- -------
Total current assets 15,924 15,398
Fixed assets [notes 7 and 11] 39,842 41,266
Goodwill and deferred charges [note 8] 48,814 47,322
Other assets [note 9] 2,166 1,872
-------- --------
Total assets $106,746 $105,858
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIENCY)
Current liabilities
Accounts payable and accrued liabilities $ 7,697 $ 8,419
Income tax payable 418 377
Customer deposits 5,810 6,684
Unearned revenue [note 3] -- 3,772
Current portion of long-term debt [note 10] 3,779 5,723
-------- --------
Total current liabilities 17,704 24,975
-------- --------
Obligations under capital leases and
other debt [note 11] 3,035 2,858
Obligations under non-compete agreements [note 12] 247 126
Senior bank debt [note 13] 24,530 27,617
Subordinated notes payable [note 14] 83,600 81,105
Other liabilities [note 15] 915 --
-------- --------
Total long-term liabilities 112,327 111,706
-------- --------
SHAREHOLDER'S EQUITY (DEFICIENCY)
Capital Stock [note 16]
Authorized
11,383,328 Class D Voting Common
Shares, without nominal or par value
9,993,500 Class E Non-Voting
Common Shares, without nominal or par value
10,000,000 Special Preferred
Shares, par value Cdn $1.00, issuable in series
Issued and outstanding:
Class D Common Shares - 1,383,328 5,954 5,517
Class E Common Shares - 5,860 169 157
-------- --------
6,123 5,674
Additional paid-in capital [note 14] -- 1,809
Cumulative translation adjustment (4,733) (6,425)
Deficit (24,675) (31,881)
-------- --------
Total shareholder's equity (deficiency) (23,285) (30,823)
-------- --------
Total liabilities and
shareholder's equity (deficiency) $106,746 $105,858
======== ========
Commitments [notes 11, 12, 13 and 19]
See accompanying notes
F-2
SPARKLING SPRING WATER GROUP LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands of U.S. dollars) YEAR ENDED DECEMBER 31
-----------------------------------------------
1999 2000 2001
------- ------- -------
Revenue:
Water $41,220 $45,295 $49,883
Rental 14,960 15,594 16,048
Other 7,738 8,407 8,900
------- ------- -------
Total revenue 63,918 69,296 74,831
------- ------- -------
Cost of sales:
Water 8,682 9,749 9,200
Other 2,903 3,070 2,983
------- ------- -------
Total cost of sales 11,585 12,819 12,183
------- ------- -------
Gross profit 52,333 56,477 62,648
Expenses:
Selling, delivery and administrative
[notes 21 and 22] 35,196 37,284 39,679
Integration and related expenses [note 23] 93 464 1,499
Depreciation 8,623 9,397 10,874
Amortization 1,696 1,771 2,192
------- ------- -------
Operating profit 6,725 7,561 8,404
Interest and related expenses [note 24] 11,661 8,079 12,279
------- ------- -------
Loss before the following (4,936) (518) (3,875)
Provision (recovery) for income taxes [note 20] (463) 498 609
------- ------- -------
Net loss before extraordinary items
and cumulative effect of changes in
accounting principles (4,473) (1,016) (4,484)
Extraordinary items [note 17] 1,004 1,060 480
Cumulative effect on prior years
of changes in accounting principles [note 3] 1,700 -- (3,202)
------- ------- -------
Net income (loss) (1,769) 44 (7,206)
Other comprehensive income (loss):
Foreign currency translation adjustment 1,005 (3,195) (1,692)
------- ------- -------
Comprehensive loss $ (764) $(3,151) $(8,898)
======= ======= =======
Basic and diluted loss per share
before extraordinary items and
cumulative effect of changes in
accounting principles $ (3.22) $ (0.73) $ (3.23)
Extraordinary items 0.72 0.76 0.35
Cumulative effect on prior years
of changes in accounting principles 1.23 -- (2.31)
------- ------- -------
Basic net income (loss) per share $ (1.27) $ 0.03 $ (5.19)
======= ======= =======
Diluted net income (loss) per share $ (1.27) $ 0.03 $ (5.19)
======= ======= =======
See accompanying notes
F-3
SPARKLING SPRING WATER GROUP LIMITED
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY (DEFICIENCY)
(in thousands of U.S. dollars
except share amounts) FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
-------------------------------------------------------------------------
ADDITIONAL CUMULATIVE
COMMON STOCK PAID -IN TRANSLATION
SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT
---------- ------ ---------- ----------- ---------
Balance January 1, 1999 1,389,188 5,933 -- (2,543) (22,950)
Comprehensive income (loss) -- -- -- 1,005 (1,769)
Foreign currency translation -- 485 -- -- --
--------- ------ ----- ------- --------
Balance December 31, 1999 1,389,188 6,418 -- (1,538) (24,719)
Comprehensive income (loss) -- -- -- (3,195) 44
Foreign currency translation -- (295) -- -- --
--------- ------ ----- ------- --------
Balance December 31, 2000 1,389,188 6,123 -- (4,733) (24,675)
Comprehensive loss -- -- -- (1,692) (7,206)
Contribution of Notes [note 14] -- -- 1,809 -- --
Foreign currency translation -- (449) -- -- --
--------- ------ ----- ------- --------
Balance December 31, 2001 1,389,188 $5,674 $1,809 $(6,425) $(31,881)
========= ====== ====== ======= ========
See accompanying notes
F-4
SPARKLING SPRING WATER GROUP LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of U.S. dollars) YEAR ENDED DECEMBER 31,
------------------------------------------------
1999 2000 2001
-------- -------- --------
OPERATING ACTIVITIES
Net income (loss) $ (1,769) $ 44 $ (7,206)
Items not requiring cash
Depreciation 8,623 9,397 10,874
Amortization 1,696 1,771 2,192
Deferred taxes (599) (308) (139)
Amortization of deferred financing costs 623 540 456
Cumulative effect of changes in
accounting principles [note 3] (1,700) -- 3,202
Extraordinary items (1,004) (1,060) (480)
Cross currency swap [note 14] (1,072) (4,387) --
-------- -------- --------
4,798 5,997 8,899
Net change in non-cash working capital
balances [note 18] 5 (2,790) 2,386
-------- -------- --------
Cash provided by operating activities 4,803 3,207 11,285
-------- -------- --------
INVESTING ACTIVITIES
Purchase of fixed assets (9,560) (11,308) (9,356)
Sale of fixed assets, net 188 407 583
Acquisitions [note 4] (1,784) (5,247) (6,350)
-------- -------- --------
Cash used in investing activities (11,156) (16,148) (15,123)
-------- -------- --------
FINANCING ACTIVITIES
Increase in long-term debt 8,486 15,044 5,928
Repayment of long-term debt (1,703) (2,235) (1,364)
Redemption of subordinated notes payable (9,963) (3,000) --
Increase in deferred charges (258) (80) (54)
Unwinding of cross currency swap [note 14] -- 5,040 --
Decrease (increase) in other assets 57 (110) (438)
Decrease in other liabilities -- -- (183)
-------- -------- --------
Cash provided by (used in) financing activities (3,381) 14,659 3,889
-------- -------- --------
Effect of foreign currency translation on cash 103 (1,259) (320)
-------- -------- --------
Increase (decrease) in cash and cash equivalents during the year (9,631) 459 (269)
Cash and cash equivalents, beginning of year 9,728 97 556
-------- -------- --------
Cash and cash equivalents, end of year $ 97 $ 556 $ 287
======== ======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid $ 12,392 $ 12,255 $ 11,733
======== ======== ========
Income taxes paid $ 181 $ 527 $ 975
======== ======== ========
See accompanying notes
F-5
SPARKLING SPRING WATER GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
1. DESCRIPTION OF BUSINESS
Sparkling Spring Water Group Limited ("Sparkling Spring") is
incorporated under the laws of the Province of Nova Scotia, Canada and provides
containered water to home and office markets in British Columbia, Alberta, and
the Maritime provinces of Canada, England, Scotland and the Pacific Northwestern
United States.
2. SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared by
management in accordance with accounting principles generally accepted in the
United States ("US GAAP"), the more significant of which are as follows:
BASIS OF CONSOLIDATION
These consolidated financial statements include the accounts of
Sparkling Spring and its wholly-owned subsidiaries, principally Nature Springs
Water Company Limited, Spring Water Inc. and the subsidiaries referred to in
note 4 (collectively referred to as the "Company"). Significant intercompany
accounts and transactions have been eliminated on consolidation.
FOREIGN CURRENCY TRANSLATION
The Company uses the U.S. dollar as its reporting currency. Balance
sheet accounts of all non-U.S. entities which are considered to be
self-sustaining are translated into U.S. dollars at the exchange rates in effect
at the balance sheet date. Income statement accounts of all non-U.S. entities
are translated into U.S. dollars at average exchange rates prevailing during the
year. Gains and losses on translation are included in a separate component of
shareholder's equity titled "cumulative translation adjustment".
Balance sheet accounts denominated in foreign currencies and translated
at year-end exchange rates have been translated to U.S. dollars at the following
rates:
1999 2000 2001
------ ------ ------
Canadian Dollars $0.693 $0.667 $0.628
U.K. Pounds Sterling $1.615 $1.495 $1.454
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, cash in banks and cash
equivalents, which are highly liquid investments with a maturity of three months
or less when purchased.
INVENTORIES
Inventories are valued at the lower of cost, determined on a first-in,
first-out basis, and net realizable value.
FIXED ASSETS
Fixed assets are recorded at cost less related government grants and
investment tax credits. Depreciation is calculated on a straight-line basis
(note 3) over the estimated useful lives of the assets as follows:
<Table>
Well, buildings and roadways 40 years
Coolers 10 years
Machinery and equipment 10 years
Computer equipment and software 3 years
Motor vehicles 5-10 years
Returnable bottles 3-4 years
</Table>
Leasehold improvements are amortized on a straight-line basis over the
term of the related lease.
F-6
ACQUISITIONS, GOODWILL, NON-COMPETE AGREEMENTS
On the acquisition of businesses, the excess of the purchase price over
the fair value of the underlying net identifiable assets acquired is recognized
as goodwill. Goodwill is amortized on a straight-line basis over 40 years. The
method used to assess if there has been a permanent impairment in the value of
goodwill is based on projected and discounted cash flows. Amounts payable
pursuant to non-compete agreements are amortized on a straight-line basis over
the life of the agreements.
DEFERRED FINANCING COSTS
Deferred financing costs represent professional fees and other related
costs incurred in relation to long-term financing agreements. These costs are
amortized on a straight-line basis over the term of the related financing and
charged to interest expense.
UNEARNED REVENUE (NOTE 3)
Unearned revenue represents the prepayment of cooler lease and bottled
water charges. These amounts are recognized as revenue over the period to which
the lease relates or the product is provided.
ADVERTISING
Advertising expenditures are expensed as incurred.
FINANCIAL INSTRUMENTS
The difference between the carrying values and the fair market values
of the Company's primary financial instruments are not material due to the
short-term maturities and or the credit terms of those instruments, except as
disclosed in note 14.
The Company has at any one time a significant number of commitments to
extend credit. Accounts receivable are owed from a large number of customers on
normal credit terms and therefore there is minimal customer concentration.
CROSS CURRENCY SWAPS
The Company enters into cross currency swaps to hedge net assets and
expected future cash flows of operations denominated in currencies other than
the U.S. dollar. To the extent cross currency swaps hedge net assets in
currencies other than the U.S. dollar, unrealized gains or losses arising from
changes in forward foreign exchange rates are recorded as an adjustment to the
cumulative translation adjustment account with a corresponding entry to other
assets or liabilities, as appropriate.
To the extent cross currency swaps are entered into to hedge future
expected cash flows of subsidiaries operating outside of the U.S., unrealized
gains or losses resulting from changes in forward foreign exchange rates are
recognized in income as a decrease or increase in interest expense and offset
with a corresponding entry to assets or liabilities, as appropriate. The initial
premium or discount associated with cross currency swaps of this nature is
recorded as an other asset or liability, as appropriate, and amortized to income
over the life of the swap.
EARNINGS PER SHARE
Basic earnings per share is calculated using the weighted average
number of common shares outstanding during the year. Diluted earnings per share
is calculated using the treasury method and is adjusted for the effect of the
exercise of all outstanding options and warrants in accordance with SFAS 128.
The weighted average shares calculated under this method for basic and diluted
earnings per share are 1,389,188 (2000 - 1,389,188; 1999 - 1,389,188).
LEASES
Leases are classified as capital or operating leases. Capital leases
are recorded as assets when the substantial benefits and risks of ownership have
been transferred to the Company. Obligations recorded under capital leases are
reduced by lease payments, net of imputed interest. For operating leases, rental
payments are expensed as incurred.
F-7
USE OF ESTIMATES
The preparation of financial statements in conformity with United
States generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from these estimates.
INCOME TAXES
The Company records income taxes in accordance with SFAS 109,
"Accounting for Income Taxes". Under SFAS 109, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse.
The Company and its subsidiaries file separate federal, state, and
foreign income tax returns, and accordingly provide for such income taxes on a
separate company basis.
NEW ACCOUNTING STANDARDS
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 141, "Business Combinations" which supersedes Accounting
Principles Board ("APB") Opinion No. 16, "Business Combinations". SFAS 141
eliminates the pooling-of-interests method of accounting for business
combinations and modifies the application of the purchase accounting method for
transactions initiated after June 30, 2001. In July 2001, the FASB also issued
Statement of Financial Accounting Standards No. 142, "Goodwill and Intangible
Assets" which supersedes APB Opinion No. 17, "Intangible Assets". SFAS 142
eliminates the current requirement to amortize goodwill, addresses the
impairment testing for goodwill and intangible assets and addresses the
amortization of intangible assets with a defined life. SFAS 142 is effective for
fiscal years beginning after December 15, 2001. Effective January 1, 2002, the
Company will cease amortization of its goodwill balances. For the year ended
December 31, 2001, amortization of goodwill was $1,270,000.
3. CHANGE IN ACCOUNTING PRINCIPLES
Commencing in 1999, the Company computed depreciation of fixed assets
using the straight line method. Depreciation of fixed assets in prior years was
computed using the declining balance method. The new method of depreciation was
adopted to more appropriately amortize the cost of fixed assets over their
estimated useful lives. The change in depreciation method was applied
retroactively. The retroactive adjustment of $1.7 million (after reduction for
income taxes of $0.9 million) is included in income in 1999.
Commencing in 2001, amounts received in advance for water cooler rental
leases have been deferred and recognized as revenue over the period of the
lease. In prior years, the Company recorded revenue from water cooler rentals
when billed. The new method of accounting for water cooler leases was adopted in
2001 to more appropriately match the revenues earned from water cooler leases to
the period to which the lease relates. This accounting policy change was applied
retroactively. The effect of the change in 2001 was to increase the loss before
extraordinary items by approximately $109,000 ($0.08 per share). The retroactive
adjustment of $3.2 million is deducted from income in 2001. The pro forma
amounts adjusted for the effect of retroactive application of the new accounting
policy for cooler rental revenues are not determinable as the required
information is not readily available.
F-8
4. ACQUISITIONS
The acquisitions described below have been accounted for under the
purchase method of accounting and accordingly the results of operations since
the dates of acquisition have been included in the consolidated statements of
operations.
2001
During 2001 the Company completed the following acquisitions:
Acquisition Interest Acquisition
Company Location Date Acquired Cost
------- ----------------------- ------------- -------- ------------
(000's)
Home and office bottled water assets of
CC Beverage (US) Corporation Burlington, Washington, May, 2001 100% $ 4,859
USA
Assets of the home and office bottled water
division of Canada's Choice Calgary, Edmonton, November, 2001 100% 1,338
Alberta -------
6,197
Adjustment for acquisitions completed prior to 2001 153
-------
$ 6,350
=======
The following summarizes the transactions (in thousands):
Net working capital $ (174)
Fixed assets 4,958
Debt assumed (1,256)
Goodwill 2,822
-------
Total cash consideration $ 6,350
=======
2000
During 2000 the Company completed the following acquisitions:
Acquisition Interest Acquisition
Company Location Date Acquired Cost
------- ----------------------- ------------- -------- ------------
(000's)
Mr. Softwater Ltd. Calgary, Alberta May, 2000 100% $ 4,000
Rocky Mountain Springs Water, Inc. Edmonton, Alberta July, 2000 100% 710
Assets of Sparta Water, Inc. Calgary, Edmonton, August, 2000 100% 670
Grande Prairie, -------
Alberta 5,380
Adjustment for acquisitions completed prior to 2000 (133)
-------
$ 5,247
=======
The following summarizes the transactions (in thousands):
Net working capital $ (794)
Fixed assets 3,636
Goodwill 2,405
-------
Total cash consideration $ 5,247
=======
F-9
1999
During 1999 the Company purchased the assets of the Misty Mountain
Water division of Baxter Foods Limited located in the Maritime provinces of
Canada.
The following summarizes the transaction (in thousands):
Net working capital $ (94)
Fixed assets 1,114
Goodwill 332
------
Total cash consideration 1,352
Adjustment for acquisitions completed prior to 1999 432
------
$1,784
======
The following unaudited pro forma information presents a summary of
consolidated results of operations as if the acquisitions of the home and office
bottled water assets of CC Beverage (US) Corporation and Canada's Choice, Mr.
Softwater Ltd., Rocky Mountain Springs Water, Inc. and the assets of Sparta
Water, Inc had occurred at January 1, 2000. Balances of non-U.S. entities are
translated into U.S. dollars at the average exchange rates prevailing in each of
the respective years.
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2000 2001
--------- ---------
(thousands of dollars except per share amounts)
Total revenue $74,837 $76,309
Net loss before extraordinary items and cumulative
effect of changes in accounting principles (1,957) (4,641)
Net loss (897) (7,363)
Basic loss per share 0.65) (5.30)
5. ALLOWANCE FOR DOUBTFUL ACCOUNTS
<Caption>
(thousands of dollars)
Balance January 1, 1999 $ 1,915
Additions 1,231
Write-offs (2,176)
------
Balance December 31, 1999 970
Additions 1,341
Write-offs (1,529)
-------
Balance December 31, 2000 782
Additions 877
Write-offs (942)
-------
Balance December 31, 2001 $ 717
=======
Accounts receivable over 120 days, net of the allowance for doubtful
accounts, was $595,000 at December 31, 2001 (2000 - $634,000, 1999 - $708,000)
representing 5.6% (2000 - 5.9%, 1999 - 6.5%) of total trade accounts receivable.
6. INVENTORIES
2000 2001
------ ------
(thousands of dollars)
Packaging materials $ 408 $ 268
Coolers not yet in service 228 318
Goods for resale 563 554
Cooler parts 271 262
Other 165 106
------ ------
$1,635 $1,508
====== ======
F-10
7 . FIXED ASSETS
2000 2001
------------------------- --------------------------
ACCUMULATED ACCUMULATED
COST DEPRECIATION COST DEPRECIATION
(thousands of dollars) ------- ------------ ------- ------------
Land and well $ 628 $ 17 $ 1,478 $ 55
Buildings and roadways 5,684 425 5,566 560
Coolers 31,607 17,248 33,809 19,290
Machinery and equipment 11,908 5,489 13,086 6,155
Computer equipment and software 3,635 2,729 3,975 3,187
Motor vehicles 10,428 4,250 14,167 6,388
Motor vehicles under capital lease 2,286 992 692 212
Leasehold improvements 2,386 1,225 2,529 1,675
Returnable bottles 9,914 6,259 11,501 8,015
------- ------- ------- -------
78,476 38,634 86,803 45,537
Accumulated depreciation 38,634 45,537
------- -------
Net book value $39,842 $41,266
======= =======
8. GOODWILL AND DEFERRED CHARGES
2000 2001
------------------------- --------------------------
ACCUMULATED ACCUMULATED
COST DEPRECIATION COST DEPRECIATION
(thousands of dollars) ------- ------------ ------- ------------
Goodwill $50,028 $4,936 $50,990 $ 6,003
Non-compete agreements 2,392 1,483 2,370 2,370
Deferred financing costs 4,094 1,321 4,038 1,744
Other 94 54 109 68
------- ------ ------- -------
56,608 7,794 57,507 10,185
Accumulated amortization 7,794 10,185
------- -------
Net book value $48,814 $47,322
======= =======
9. OTHER ASSETS
2000 2001
------- ------
(thousands of dollars)
Unsecured loan to parent company
maturing September 2003, bearing interest at 15%,
interest payable annually, principal due
at maturity $1,247 $1,657
Cross currency swap [note 14] 732 --
Promissory note [note 21] 116 116
Other 71 99
------ ------
$2,166 $1,872
====== ======
Accrued interest on the loan to parent company of $ nil (2000 -
$91,000) is included in accounts receivable.
F-11
10. CURRENT PORTION OF LONG-TERM DEBT
2000 2001
------ ------
(thousands of dollars)
Current portion of obligations
under capital leases [note 11] $ 557 $ 695
Current portion of other debt [note 11] 412 477
Current portion of obligations under non-compete agreements [note 12] 123 100
Current portion of Acquisition and Term Loan Facilities [note 13] 2,687 4,451
------ ------
$3,779 $5,723
====== ======
11. OBLIGATIONS UNDER CAPITAL LEASES AND OTHER DEBT
The obligations under capital leases are recorded net of the related
imputed interest calculated at an average rate of 10%. Total minimum annual
lease commitments are as follows (thousands of dollars):
2002 $ 831
2003 666
2004 391
2005 315
2006 95
------
2,298
Less imputed interest 364
------
1,934
Less portion due within one year 695
------
$1,239
======
Other debt consists of the following (tabular amounts in thousands of dollars):
2000 2001
------ ------
Mortgage payable bearing interest at the UK base rate plus 1.5%
repayable in monthly installments of principal
and interest of (pound)15,992, maturing in 2010. $2,006 $1,799
Unsecured term loan bearing interest at 9%, repayable in
annual installments of principal and interest of
$321,000, maturing 2002. 567 297
------ ------
2,573 2,096
Less portion due within one year 412 477
------ ------
$2,161 $1,619
====== ======
The following repayment schedule represents the required annual
principal repayments of other debt for the next five years (thousands of
dollars):
2002 $477
2003 190
2004 201
2005 212
2006 223
12. OBLIGATIONS UNDER NON-COMPETE AGREEMENTS
Obligations under non-compete agreements are unsecured and are payable
as follows (thousands of dollars):
2002 $100
2003 50
2004 50
2005 26
----
226
Less portion due within one year 100
----
$126
====
F-12
13. SENIOR BANK DEBT
The Company has available a $37 million multi-currency facility that
provides for a $15 million operating line (the "Operating Line Facility") which
is renewable annually by April 30th, a $10 million acquisition line maturing
April 30, 2006 (the "Acquisition Facility") and a $12 million term loan maturing
October 31, 2005 (the "Term Loan Facility") which was available for the Company
to repurchase, at its discretion, certain of the Company's outstanding
Subordinated Notes Payable. Subsequent to year-end, the Company's Operating Line
Facility was renewed to April 30, 2003. The Acquisition Facility will be reduced
by $1.5 million on April 30, 2002 and varying amounts annually thereafter to
April 30, 2006. The Term Loan Facility will be reduced by $3.0 million on
October 31, 2002 and varying amounts annually thereafter to October 31, 2005.
The Company has pledged as collateral a first priority security interest granted
in favor of the lenders over substantially all of the assets of the Company. The
Company's obligations under the facility rank senior to the payment of the
Company's Subordinated Notes Payable. The average effective rate on the
Company's Senior Bank Debt for 2001 was approximately 7.5% (2000 - 8.5%).
Amounts outstanding at December 31, 2001 and 2000 are as follows (thousands of
dollars):
FACILITY INTEREST RATE 2000 2001
-------- ------------- ------- -------
Operating Line Canadian Prime + 1 1/4% $ -- $ 228
Operating Line US Prime + 1 1/4% 2,000 614
Operating Line US Prime - 1 1/2% 498 746
Operating Line UK Base Rate + 1% 1,117 1,075
Operating Line US Libor + 2 3/4% -- 6,000
Operating Line Sterling Libor + 2 3/4% 5,533 1,454
Acquisition US Libor + 2 3/4% -- 4,250
Acquisition Sterling Libor + 2 3/4% 5,982 5,817
Term Loan US Libor + 3 1/2% 1,000 4,600
Term Loan Canadian Prime + 2% 11,087 7,284
------- -------
27,217 32,068
Less: Current portion of Acquisition and Term Loan Facilities 2,687 4,451
------- -------
$24,530 $27,617
======= =======
At December 31, 2001, the Company had approximately $2.5 million (2000
- - $2.6 million) in letters of credit outstanding which are pledged as collateral
for outstanding bank operating lines in Scotland and the US.
14. SUBORDINATED NOTES PAYABLE
2000 2001
------- -------
(thousands of dollars)
Senior subordinated notes payable,
maturing November 2007, bearing interest at
11.5%, interest payable semi-annually, principal
due at maturity $83,600 $81,105
======= =======
In February 2001, Sparkling Spring Water Holdings Limited ("Holdings"),
parent of Sparkling Spring, paid approximately $1.8 million plus accrued
interest to repurchase $2.495 million face value of Sparkling Spring's
outstanding Subordinated Notes Payable (the "Notes"). In May 2001, the Notes
were contributed to Sparkling Spring as additional paid-in capital and the Notes
were retired. A gain of $480,000 related to the repurchase and retirement of the
Notes has been recorded net of applicable income taxes and costs incurred in
connection with the issuance of the Notes (note 17).
In 2000, the Company repurchased, in the public market, $4.5 million
face value (1999 - $11.9 million) of its outstanding Notes. A gain of $1.1
million (1999 - $1.0 million) related to the repurchase of the Notes has been
recorded, net of applicable income taxes and costs incurred with the issuance of
the Notes (note 17).
The approximate fair market value of the Notes was $63.3 million at
December 31, 2001 (2000 - $55.2 million) based on quoted market prices.
Each of the Company's subsidiary guarantors has fully and
unconditionally guaranteed, on a senior subordinated basis, jointly and
severally, to each holder of the Notes and the trustee under the indenture
pursuant to which the Notes were issued, the full and prompt performance of the
Company's obligations under the indenture and the Notes, including the payment
of principal and interest on the Notes. The guarantees are subordinated to
guarantor senior indebtedness (as defined in the indenture). As of December 31,
2001, the subsidiary guarantors had approximately $35.8 million (2000 - $30.6
million) of guarantor senior indebtedness outstanding including $32.1 million
(2000 - $27.2 million) of outstanding Senior Bank Debt.
F-13
Separate audited financial statements of the guarantor subsidiaries
have not been provided as Sparkling Spring has no subsidiaries which are
nonguarantor subsidiaries and does not believe that this information would be
meaningful to investors. All of Sparkling Spring's subsidiaries are wholly
owned. There are no restrictions as to the payment of dividends or loans by
Sparkling Spring's subsidiaries to Sparkling Spring or as to the granting of any
upstream guarantees not constituting a fraudulent conveyance or fraudulent
transfer under applicable law.
In 1997, the Company entered into a cross currency interest rate swap
in pounds sterling which was scheduled to mature on November 15, 2003. In
September 2000, the Company closed out this swap realizing cash proceeds of $4.1
million. Concurrent with the termination of the pounds sterling swap, the
Company entered into a new $30 million U.S. three year cross currency interest
rate swap in Canadian dollars (the "Canadian Swap"). In December 2000, the
Company received cash proceeds of $0.9 million pursuant to entering into a
mirror swap to the Canadian Swap (the "Mirror Swap"). The Canadian Swap and the
Mirror Swap were transacted with a Canadian bank with a counter party credit
rating of `AA Low' (Dominion Bond Rating Service). At December 31, 2000 the
aggregate fair value of the Canadian Swap and the Mirror Swap was $0.7 million
which was included in other assets (note 9) and other liabilities (note 15)
respectively. In 2001, the Company closed out the Canadian Swap and the Mirror
Swap for proceeds of nil.
Interest expense in 2001 was reduced by nil (2000 - $4.4 million
decrease, 1999 - $1.1 million decrease) as a result of the swap activity
completed during the year.
15. OTHER LIABILITIES
2000 2001
---- ----
(thousands of dollars)
Cross currency swap [note 14] 732 --
Other 183 --
---- ----
$915 $ --
==== ====
16. CAPITAL STOCK
There are warrants for 51,100 shares of Sparkling Spring outstanding.
The warrants are exercisable for cash consideration of $0.01 each and have no
expiry date. All outstanding warrants are owned by Holdings.
The following summarizes the status of the Company's stock option plan.
NUMBER OF RANGE OF AVERAGE
OPTIONS EXERCISE PRICE EXERCISE PRICE
--------- -------------- --------------
Outstanding and exercisable at December 31, 1999 and
2000 47,787 $4.33 - 20.00 $6.29
EXPIRED (47,787) $4.33 - 20.00 $6.29
- ------------------------------------------------------------------------------------------------------------------
Outstanding and exercisable at
December 31, 2001 NIL N/A N/A
- ------------------------------------------------------------------------------------------------------------------
Holdings maintains a stock option plan for management and directors
where options to acquire common shares are issued with strike prices
approximating the estimated value of the shares at the date of issuance.
17. EXTRAORDINARY ITEMS
In February 2001, Holdings paid approximately $1.8 million plus accrued
interest to repurchase $2.495 million face value of Sparkling Spring's
outstanding Subordinated Notes Payable. In May 2001, the Notes were contributed
to Sparkling Spring as additional paid-in capital and the Notes were retired. A
gain of $480,000 related to the repurchase and retirement of the Notes has been
recorded net of applicable income taxes of $139,000 and costs of $67,000
representing a write-off of a proportionate amount of deferred charges incurred
in connection with the issuance of the Subordinated Notes in November of 1997.
In 2000, the Company paid $3.0 million (1999 - $9.9 million) to
repurchase $4.5 million (1999 - $11.9 million) face value of its outstanding
Notes. A gain of $1.1 million (1999 - $1.0 million) related to the repurchase of
the Notes has been recorded, net of income taxes of $0.3 million (1999 - $0.5
million) and costs of $0.1 million (1999 - $0.5 million) representing a write
off of a proportionate amount of deferred charges incurred in connection with
the issuance of the Notes in November of 1997.
F-14
18. NET CHANGE IN NON-CASH WORKING CAPITAL BALANCES
(thousands of dollars) 1999 2000 2001
----- ------ ------
(Increase) decrease in
Accounts receivable $(508) $ (167) $ 11
Inventories (97) (153) 127
Prepaid expenses (133) (630) 119
----- ------- ------
(738) (950) 257
----- ------- ------
Increase (decrease) in
Accounts payable and accrued liabilities 450 (1,282) 722
Income taxes payable (27) 42 (41)
Customer deposits 433 344 874
Unearned revenue -- -- 3,772
----- ------- -------
856 (896) 5,327
----- ------- -------
Net change in non-cash working
capital balances 118 (1,846) 5,584
Less net working capital acquired
on acquisitions [note 4] (94) (794) (174)
Less change in accounting principle -- -- (3,202)
Effect of translation (19) (150) 178
----- ------- -------
$ 5 $(2,790) $ 2,386
===== ======= =======
Net working capital acquired on acquisitions has been excluded from
cash flows from operations as it has been included in acquisitions in investing
activities.
19. OPERATING LEASE COMMITMENTS
The Company is committed under operating leases for premises and
vehicles extending for various periods to 2012. Future minimum lease payments
are as follows:
(thousands of dollars)
2002 $1,545
2003 1,292
2004 1,244
2005 1,186
2006 1,128
Thereafter in aggregate 2,578
------
$8,973
======
Lease costs of $1.8 million (2000 - $1.6 million; 1999 - $1.5 million)
have been expensed during the year.
F-15
20. INCOME TAXES
A reconciliation of the reported provision for income taxes to
the equivalent provision based on the combined federal and provincial statutory
income tax rates of 44% (2000 - 45%, 1999 - 45%) is as follows (thousands of
dollars):
1999 2000 2001
------- ------ -------
Provision for income taxes
at statutory rates $(2,221) $ (233) $(1,705)
Non-deductible expenses 385 379 588
Non-taxable portion of net gain on swaps (482) (743) --
Difference in foreign tax rates (214) (69) 135
Valuation allowance and other 2,069 1,164 1,591
------- ------ -------
$ (463) $ 498 $ 609
======= ====== =======
The provision for income taxes includes (thousands of dollars):
1999 2000 2001
----- ----- -----
Current income taxes - Canada $ 154 $ 805 $ 748
- Foreign 12 -- --
----- ----- -----
166 805 748
----- ----- -----
Deferred income taxes - Canada (617) (307) (139)
- Foreign (12) -- --
----- ----- -----
(629) (307) (139)
----- ----- -----
$(463) $ 498 $ 609
===== ===== =====
The deferred tax asset is comprised of the following (thousands of
dollars):
2000 2001
------- -------
Excess (deficiency of) accounting expenses compared to tax $ (387) $ 424
Non-capital loss carry forwards 6,425 8,376
Excess of tax over book depreciation (1,804) (124)
Other differences (334) --
------- -------
3,900 8,676
Valuation allowance (3,900) (8,676)
------- -------
$ -- $ --
======= =======
The Company has non-capital losses available for carry forward that
expire as follows (thousands of dollars):
2005 $4,804
2006 4,792
2007 4,024
2008 1,032
2019 2,223
2020 2,206
No expiry 1,411
21. RELATED PARTY TRANSACTIONS
The Company has entered into a management agreement (the "Agreement")
with CF Capital Corporation ("CFCC"), a company affiliated by common significant
shareholdings, and CFCC's shareholder and executive officer who is also a
shareholder of Holdings. Under the terms of the Agreement, CFCC manages the
operations of the Company and negotiates contracts, financial agreements and
other arrangements. The Agreement provides that CFCC shall receive a base fee,
which is adjusted yearly based on annual Company revenues. An annual bonus,
calculated as a percentage of the base fee, is due to CFCC in the event the
Company achieves certain targeted levels of per share earnings before
depreciation, amortization and income taxes. Commencing in 2000, the obligation
for all amounts owed by the Company pursuant to the Agreement were assumed by
Holdings. The 1999 financial statements include fees of approximately $950,000
paid to CFCC which have been included in selling, delivery and administrative
expenses.
F-16
CFCC also receives fees for investment banking advisory services
rendered to the Company in connection with successful acquisitions. In 2001, the
Company paid CFCC $78,900 (2000 - $93,900; 1999 - $27,200) for investment
banking advisory services which have been included in integration and related
expenses. As at December 31, 2001 accounts payable includes $3,000 (2000 -
$14,400) due to CFCC.
During the year, Holdings acquired all of the outstanding shares of
Pure Water Corporation ("Pure Water"), located in Seattle, Washington and
Polaris Water Company Inc. ("Polaris"), located in Vancouver, Canada. Holdings
then entered into a Customer Service Agreement with the Company whereby the
Company will manage the approximate 20,000 home and office bottled water
customers of Holding's Vancouver location and Holdings will manage the
approximate 14,000 bottled water customers of the Company's Seattle location. In
2001, Holdings paid the Company $240,000 related to this Customer Service
Agreement. As part of this Agreement, Holdings transferred to the Company
certain assets related to its home and office bottled water operations. This
transfer took place at carrying value. Included in accounts receivable at
December 31, 2001 is $670,000 (2000 - nil) due from Pure Water and Polaris.
In connection with the purchase of shares of common stock of the
Company, a promissory note of $116,000 bearing interest at a rate of 6% was
issued by an officer of the Company. The promissory note was scheduled to mature
on January 31, 2002 with principal and interest due on that date. The promissory
note was cancelled by the Company and replaced with a promissory note which
bears interest at a rate of 6% and matures on January 31, 2003 with principal
and interest due on that date. At the time of purchase, the purchased common
shares of Sparkling Spring were pledged as security for the promissory note.
Subsequently, the common shares of Sparkling Spring pledged as security for the
promissory note were exchanged for common shares of Holdings, and the shares of
Holdings acquired were pledged as security for the outstanding promissory note.
22. SELLING, DELIVERY AND ADMINISTRATIVE EXPENSES
Selling, delivery and administration expenses include advertising and
promotional expenses of $1.5 million (2000 - $1.4 million; 1999 - $1.1 million).
23. INTEGRATION AND RELATED EXPENSES
The Company completed two acquisitions in 2001, three acquisitions in
2000 and one acquisition in 1999 (note 4). In integrating these acquisitions
into the Company's existing business, non-recurring costs were incurred to
reduce and relocate staff, convert the acquired business' computer systems,
close acquired facilities and blend acquired customers into the Company's
existing routes. The components of the acquisition, integration and related
charges are as follows:
(thousands of dollars) 1999 2000 2001
---- ---- ------
Severance, relocation and related costs $ -- $ 20 $ 323
Conversion of computer systems 11 59 65
Route blending 30 30 8
Facility closure and other integration 52 355 1,103
--- ---- ------
$ 93 $464 $1,499
==== ==== ======
24. INTEREST AND RELATED EXPENSES
(thousands of dollars) 1999 2000 2001
------- ------- -------
Interest on long-term debt $12,110 $11,926 $11,823
Amortization of deferred financing costs 623 540 456
Gain on swaps (1,072) (4,387) --
------- ------- -------
$11,661 $ 8,079 $12,279
======= ======= =======
25. SUMMARY OF BUSINESS SEGMENTS
The Company operates in three primary business segments: Canada, the
United Kingdom and the United States. Segment selection is determined based upon
internal organizational structure, the way in which the Company's operations are
managed and their performance evaluated by management, and materiality
considerations. The accounting policies of the segments are the same as those
described in note 2 - Significant Accounting Policies.
F-17
Segment Products and Services
The Company's business segments derive substantially all their revenues
from the sale of bottled water and the rental of water coolers.
Method of Determining Segment Profit or Loss
Management evaluates the performance of its business segments
separately to directly monitor the different factors affecting financial
performance. Segment profit or loss includes all of the segment's direct cost of
sales, selling, delivery and administrative expenses and integration and related
expenses.
Segment information is summarized as follows:
(thousands of dollars) 1999 2000 2001
------- -------- --------
Revenue
Canada $ 25,199 $ 29,653 $ 35,076
United Kingdom 25,002 24,713 24,818
United States 13,717 14,930 14,937
-------- -------- --------
$ 63,918 $ 69,296 $ 74,831
======== ======== ========
Net income before depreciation,
interest, income taxes, extraordinary
items and cumulative effect of changes
in accounting principles
Canada $ 6,720 $ 8,433 $ 10,392
United Kingdom 9,163 8,211 7,821
United States 3,514 3,398 4,012
Unallocated corporate overhead (2,353) (1,313) (755)
-------- -------- --------
$ 17,044 $ 18,729 $ 21,470
======== ======== ========
Total assets
Canada $ 44,902 $ 46,150 $ 44,795
United Kingdom 32,676 34,222 33,338
United States 25,483 26,374 27,725
-------- -------- --------
$103,061 $106,746 $105,858
======== ======== ========
Average Exchange Rates:
Canadian Dollar $ 0.6730 $ 0.6732 $ 0.6457
U.K. Pounds Sterling $ 1.6172 $ 1.5156 $ 1.4396
26. COMPARATIVE FIGURES
Certain of the comparative figures have been reclassified to conform
with the presentation adopted in the current year.
F-18
27. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
AS AT AND FOR THE YEAR ENDED DECEMBER 31, 2001
--------------------------------------------------------------
GROUP GUARANTOR
LIMITED SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------
Current assets $ 5,349 $ 10,049 $ -- $ 15,398
Non-current assets 121,107 56,853 (87,500) 90,460
-------- -------- -------- --------
TOTAL ASSETS $126,456 $ 66,902 $(87,500) $105,858
======== ======== ======== ========
Current liabilities $ 14,504 $ 10,471 $ -- $ 24,975
Non-current liabilities 127,237 44,472 (60,003) 111,706
Equity (deficit) (15,285) 11,959 (27,497) (30,823)
-------- -------- -------- --------
TOTAL LIABILITIES AND EQUITY $126,456 $ 66,902 $(87,500) $105,858
======== ======== ======== ========
REVENUE $ 37,829 $ 44,169 $ (7,167) $ 74,831
EARNINGS (LOSS) FROM OPERATIONS 9,254 2,720 (3,570) 8,404
NET (LOSS) EARNINGS (3,253) (3,312) (641) (7,206)
AS AT AND FOR THE YEAR ENDED DECEMBER 31, 2000
--------------------------------------------------------------
GROUP GUARANTOR
LIMITED SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------
Current assets $ 6,590 $ 9,334 $ -- $ 15,924
Non-current assets 80,630 91,510 (81,318) 90,822
-------- -------- -------- --------
TOTAL ASSETS $ 87,220 $100,844 $(81,318) $106,746
======== ======== ======== ========
Current liabilities $ 1,220 $ 17,515 $ (1,031) $ 17,704
Non-current liabilities 85,516 75,256 (48,445) 112,327
Equity (deficit) 484 8,073 (31,842) (23,285)
-------- -------- -------- --------
TOTAL LIABILITIES AND EQUITY $ 87,220 $100,844 $(81,318) $106,746
======== ======== ======== ========
REVENUE $ 9,879 $ 70,366 $(10,949) $ 69,296
EARNINGS (LOSS) FROM OPERATIONS 8,595 7,180 (8,214) 7,561
NET (LOSS) EARNINGS 3,446 (2,004) (1,398) 44
F-19