SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
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VERMONT PURE HOLDINGS, LTD.
(Name of Registrant as Specified In Its Charter)
NAME OF COMPANY
(Name of Person(s) Filing Proxy Statement)
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VERMONT PURE HOLDINGS, LTD.
March 9, 2004
Dear Stockholder,
As you may have read in the press, on March 2, 2004 we completed the sale
of our retail PET business to Micropack Bottled Water, a company based in
Natick, Massachusetts. The purpose of this letter is to provide you with some
information about that transaction, and to tell you why we proceeded with it. We
also refer you to our recent press release and to our forthcoming report with
the Securities and Exchange Commission that will describe this matter.
Specifically, we sold the assets of Vermont Pure Springs, Inc. that we
used in the processing, bottling, marketing, production, distribution and sale
of spring water to retail channels of distribution in PET packages of 1 gallon
or smaller. This included our retail consumer business under our own brands, as
well as the private label business that we packed for others. The sale includes
the springs, the manufacturing facility, the inventory, and the related
machinery and equipment located in Randolph Center, Vermont.
We will retain the Vermont Pure(R) trademark and continue to distribute
water under that brand throughout our Home & Office distribution area, while
licensing it to Micropack for use in the bottling and distribution of retail
products. Micropack has acquired our Hidden Spring(R) trademark and will license
it back to us for Home & Office distribution. We will relocate our five gallon
Home & Office bottling operations from Randolph to another location in Vermont,
and source our spring water under an existing water supply agreement. We will
relocate our corporate headquarters to our Williston, Vermont facility. The sale
of our retail PET business should make our financial results somewhat less
subject to seasonal effects, although we expect that some seasonality will
remain.
The purchase price consisted of cash in the amount of $10,095,000, plus
a two-year 5% subordinated note in the principal amount of $500,000 from
Micropack, with no principal payments until maturity. These proceeds, net of
transaction costs, will be used to pay debt. In my view, this sale, and the
subsequent use of proceeds, strengthens our balance sheet by reducing our debt,
while it focuses our operations by dedicating management to the growth of the
Home & Office segment of our business.
Although we are proud of the business and brands we built in the retail
consumer market, the goal of this transaction was to enable us to concentrate on
our higher margin, and more profitable, Home & Office business, which
distributes the Crystal Rock(R) brand of water, as well as our Vermont Pure(R)
water, coffee and other products. It is the culmination of a strategy that we
began pursuing in 1996, when we originally diversified into the Home & Office
segment. Over time, the retail PET business has become unprofitable to us as
margins have
been squeezed by intense competition in this segment of the market. The next
section of this letter shows this in more detail.
It may be helpful to look at some information about our three business
segments. In our financial statements for the three years ended October 31,
2003, which we filed with our most recent Annual Report on Form 10-K, we
disclosed in Note 5 certain financial information about the three segments. The
segments we just sold to Micropack are Retail and Retail - Gallons. The segment
we are retaining is Home & Office. You can read Note 5 in context, in its
entirety, in the enclosed copy of our Annual Report. As a convenience to you, I
have included copies of the tables in Note 5 at the end of this letter.
In fiscal 2003, sales in the Home & Office segment were $49,854,000,
operating income was $7,038,000, and income before taxes was $2,926,000. In
contrast, fiscal 2003 sales in the Retail segment were $22,382,000, operating
(loss) was ($592,000), and (loss) before taxes was ($889,000). In the Retail -
Gallons segment, fiscal 2003 sales were $3,959,000, operating income was
$212,000, and income before taxes was $166,000. While positive, the contribution
of the Retail - Gallons segment to these line items and to our bottom line was
small.
What does this mean? It means that although 35% of our sales were in our
two retail segments, in fiscal 2003 these segments taken together had an
operating (loss) and a (loss) before taxes. In other words, on a company-wide
basis, our positive operating income and positive income before taxes in 2003
were principally derived from the Home & Office segment of our business. That is
the segment on which we can now focus all our energy.
As you review these figures, I want to caution you not to rely excessively
on our segment disclosure, for two reasons. First, segment information for
Retail and Retail - Gallons includes a portion of our corporate overhead and
interest expense that we allocated to these two segments. Note 5 shows the
interest amounts, but not the separate overhead amounts. But clearly, without
these expenses, the performance of the two segments would have been somewhat
better. At the same time, with the proceeds from this sale, we will pay down a
significant amount of our corporate debt, which, other things being equal,
should reduce the amount of remaining interest expense that must be carried by
the Home & Office segment. That should improve the results for Home & Office.
When we file our report with the Securities and Exchange Commission describing
this transaction, we will provide pro forma information that shows the effect of
these changes. I urge you to read that information when it becomes available.
If you look at fiscal 2002 and fiscal 2001, the same story is essentially
repeated. In fiscal 2002 and 2001, our retail segments contributed 32% and 27%,
respectively, of our total sales, but each time the primary contributor to our
positive results was the Home & Office segment.
Based on this trend, we felt that strategically, selling the PET business
was the right thing for us to do. I should add that products in the Retail and
Retail - Gallons segments were sold in a different distribution pattern from our
Home & Office products, and to a distinct customer base, so this sale will also
help us to rationalize our distribution systems.
Our challenge now is to continue to grow our Home & Office business and to
improve our balance sheet. To that end, we intend to continue our strategy of
making acquisitions of
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other Home & Office companies when we perceive the fit with our business to be
advantageous. Our ultimate goal is to enhance the value of your stock.
Sincerely yours,
Timothy G. Fallon
Chairman and CEO
* * * * *
SEGMENT INFORMATION
Here is the tabular segment information for each of the past three fiscal
years that we reported in Note 5 to our financial statements included in our
Annual Report on Form 10-K for the Fiscal Year Ended October 31, 2003. The
information relates to our core Home & Office segment, which we retained, and to
the now-divested Retail and Retail - Gallons segments that are shaded gray
below. Our financial statements did not contain information on the Retail -
Gallons segment in fiscal 2001 because we did not treat this business as a
distinct segment at that time. This information is qualified entirely by
reference to, and should be read in conjunction with, our audited financial
statements in our 2003 Form 10-K. Of course, we are not making any
representation that our past results will be indicative of our future
performance.
FISCAL YEAR ENDED OCTOBER 31, 2003
(000's $) Home & Office Retail Retail-Gallons Total
--------- ------------- ------ -------------- -----
Sales $ 49,854 $ 22,382 $ 3,959 $ 76,195
Cost of Goods Sold 20,800 17,153 3,290 41,243
-------- -------- -------- --------
Gross Profit 29,054 5,229 669 34,952
Operating Expenses 22,016 5,821 457 28,294
-------- -------- -------- --------
Operating Income (Loss) 7,038 (592) 212 6,658
Interest 4,110 257 46 4,413
Other 2 40 -- 42
-------- -------- -------- --------
Income (Loss) Before Taxes $ 2,926 $ (889) $ 166 $ 2,203
======== ======== ======== ========
Assets
Cash $ 772 $ 398 $ -- $ 1,170
Other current assets 8,475 4,985 489 13,949
Goodwill and Other Intangible assets 74,147 -- -- 74,147
Other non current assets 14,111 7,957 -- 22,068
-------- -------- -------- --------
Total Assets $ 97,505 $ 13,340 $ 489 $111,334
======== ======== ======== ========
Liabilities
Payables and accruals $ 3,287 $ 3,212 $ 433 $ 6,932
Short term debt 2,204 881 63 3,148
Long term debt 33,792 13,517 965 48,274
Other non current liabilities 2,656 -- -- 2,656
-------- -------- -------- --------
Total Liabilities $ 41,939 $ 17,610 $ 1,461 $ 61,010
======== ======== ======== ========
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FISCAL YEAR ENDED OCTOBER 31, 2002
(000's $) Home & Office Retail Retail-Gallons Total
--------- ------------- ------ -------------- -----
Sales $ 49,068 $ 21,197 $ 1,455 $ 71,720
Cost of Goods Sold 19,059 15,465 1,059 35,583
-------- -------- -------- --------
Gross Profit 30,009 5,732 396 36,137
Operating Expenses 20,720 6,004 300 27,024
-------- -------- -------- --------
Operating Income 9,289 (272) 96 9,113
Interest 4,250 285 18 4,553
Other 310 (11) -- 299
-------- -------- -------- --------
Income (Loss) Before Taxes $ 4,729 $ (546) $ 78 $ 4,261
======== ======== ======== ========
Assets
Cash $ 456 $ 196 $ -- $ 652
Other current assets 9,906 5,088 179 15,173
Goodwill and Other Intangible assets 71,076 -- -- 71,076
Other non current assets 14,373 8,060 -- 22,433
-------- -------- -------- --------
Total Assets $ 95,811 $ 13,344 $ 179 $109,334
======== ======== ======== ========
Liabilities
Payables and accruals $ 4,420 $ 2,652 $ 98 $ 7,170
Short term debt 4,150 688 44 4,882
Long term debt 39,559 6,562 419 46,540
Other non current liabilities 2,803 -- -- 2,803
-------- -------- -------- --------
Total Liabilities $ 50,932 $ 9,902 $ 561 $ 61,395
======== ======== ======== ========
FISCAL YEAR ENDED OCTOBER 31, 2001
Retail-
(000's $) Home & Office Retail Gallons Total
--------- ------------- ------ ------- -----
Sales $ 47,551 $ 17,307 $-- $ 64,858
Cost of Goods Sold 18,059 11,744 -- 29,803
--------- --------- --- ---------
Gross Profit 29,492 5,563 -- 35,055
Operating Expenses 22,668 5,510 -- 28,178
--------- --------- --- ---------
Operating Income (Loss) 6,824 53 -- 6,877
Interest 4,131 903 -- 5,034
Other (6) -- -- (6)
--------- --------- --- ---------
Loss Before Taxes $ 2,699 $ (850) $-- $ 1,849
========= ========= === =========
Assets
Cash $ 626 $ 473 $-- $ 1,099
Other current assets 9,756 5,387 -- 15,143
Goodwill and Other Intangible assets 66,101 -- -- 66,101
Other non current assets 16,496 7,292 -- 23,788
--------- --------- --- ---------
Total Assets $ 92,979 $ 13,152 $-- $ 106,131
========= ========= === =========
Liabilities
Payables and accruals $ 4,437 $ 4,002 $-- $ 8,439
Short term debt 3,026 534 -- 3,560
Long term debt 40,673 7,178 -- 47,851
Other non current liabilities 2,443 -- -- 2,443
--------- --------- --- ---------
Total Liabilities $ 50,579 $ 11,714 $-- $ 62,293
========= ========= === =========
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