UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended January 31, 2005
Commission File No. 000-31797
VERMONT PURE HOLDINGS, LTD.
(Exact name of registrant as specified in its charter)
Delaware 03-0366218
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
45 Krupp Drive, Williston, VT 05495
(Address of principal executive offices) (Zip Code)
(802) 860-1126
(Registrant's telephone number, including area code)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares outstanding at
Class March 10, 2005
----- ---------------------
Common Stock, $.001 Par Value 21,624,877
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY
Table of Contents
Page Number
-----------
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
as of January 31, 2005 (unaudited) and
October 31, 2004 (unaudited) 3
Condensed Consolidated Statements of
Operations for the Three Months ended
January 31, 2005 and 2004 (unaudited) 4
Condensed Consolidated Statements of Cash
Flows for the Three Months ended January 31,
2005 and 2004 (unaudited) 5
Notes to Condensed Consolidated Financial
Statements (unaudited) 6-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11-16
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 17
Item 4. Controls and Procedures 18
Part II - Other Information 19-20
Item 6. Exhibits
Signature 21
2
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
January 31, October 31,
2005 2004
------------ ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 277,957 $ 783,445
Accounts receivable - net 6,756,836 7,065,530
Inventories 1,078,515 1,069,834
Current portion of deferred tax asset 1,439,446 1,439,446
Other current assets 1,486,769 1,665,831
Unrealized gain on derivatives 137,460 103,100
------------ ------------
TOTAL CURRENT ASSETS 11,176,983 12,127,186
------------ ------------
PROPERTY AND EQUIPMENT - net of accumulated depreciation 11,688,496 12,147,200
------------ ------------
OTHER ASSETS:
Goodwill 74,762,545 74,772,591
Other intangible assets - net of accumulated amortization 3,543,644 3,734,899
Deferred tax asset 665,271 665,271
Other assets 536,000 536,000
------------ ------------
TOTAL OTHER ASSETS 79,507,460 79,708,761
------------ ------------
TOTAL ASSETS $102,372,939 $103,983,147
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long term debt $ 6,640,007 $ 6,140,635
Accounts payable 1,834,609 2,828,787
Accrued expenses 2,251,325 2,318,486
Current portion of customer deposits 198,909 202,244
------------ ------------
TOTAL CURRENT LIABILITIES 10,924,850 11,490,152
------------ ------------
Long term debt, less current portion 36,745,046 37,853,696
Customer deposits 3,127,827 3,168,483
------------ ------------
TOTAL LIABILITIES 50,797,723 52,512,331
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock - $.001 par value, 50,000,000 authorized
shares 21,696,377 issued and 21,624,827 outstanding
shares as of January 31, 2005 and 21,569,711 issued
and 21,498,161 outstanding as of October 31, 2004 21,696 21,569
Additional paid in capital 58,082,143 57,869,411
Treasury stock, at cost, 71,550 shares as of January 31,
2005 and October 31, 2004 (264,735) (264,735)
Unearned Compensation, Restricted Stock (134,250)
Accumulated deficit (6,267,098) (6,258,529)
Accumulated other comprehensive income 137,460 103,100
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 51,575,216 51,470,816
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $102,372,939 $103,983,147
============ ============
See the notes to the condensed consolidated financial statements.
3
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended January 31,
------------------------------
2005 2004
----------- -----------
(Unaudited)
NET SALES $13,963,760 $11,997,568
COST OF GOODS SOLD 5,931,876 5,359,938
----------- -----------
GROSS PROFIT 8,031,884 6,637,630
----------- -----------
OPERATING EXPENSES:
Selling, general and administrative expenses 6,776,854 5,698,866
Advertising expenses 281,419 214,183
Amortization 195,282 73,454
Other compensation -- 18,951
----------- -----------
TOTAL OPERATING EXPENSES 7,253,555 6,005,454
----------- -----------
INCOME FROM OPERATIONS 778,329 632,176
----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (810,758) (1,014,214)
Gain on disposal of property and equipment 17,894 --
Miscellaneous -- (6,136)
----------- -----------
TOTAL OTHER EXPENSE (792,864) (1,020,350)
----------- -----------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAX BENEFIT (14,535) (388,174)
INCOME TAX BENEFIT 5,967 69,180
----------- -----------
LOSS FROM CONTINUING OPERATIONS (8,568) (318,994)
DISCONTINUED OPERATIONS:
Income from discontinued operations -- 107,453
Income tax expense from discontinued operations -- (45,131)
----------- -----------
INCOME FROM DISCONTINUED OPERATIONS -- 62,322
----------- -----------
NET LOSS $ (8,568) $ (256,672)
=========== ===========
NET LOSS PER SHARE - BASIC
Continuing operations $ -- (0.01)
Discontinued operations -- --
----------- -----------
NET LOSS PER SHARE - BASIC $ -- $ (0.01)
=========== ===========
NET LOSS PER SHARE - DILUTED
Continuing operations $ -- (0.01)
Discontinued operations -- --
----------- -----------
NET LOSS PER SHARE - DILUTED $ -- $ (0.01)
=========== ===========
WEIGHTED AVERAGE SHARES USED IN COMPUTATION - BASIC 21,611,933 21,445,458
=========== ===========
WEIGHTED AVERAGE SHARES USED IN COMPUTATION - DILUTED 21,611,933 21,445,458
=========== ===========
See notes to the condensed consolidated financial statements.
4
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended January 31,
------------------------------
2005 2004
----------- -----------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (8,568) $ (256,672)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation 1,244,541 1,387,026
Provision for bad debts 184,523 125,000
Amortization 195,282 73,455
Change in deferred tax asset -- (15,259)
(Gain) loss on disposal of property and equipment (17,894) 2,136
Non cash compensation 18,951
Changes in assets and liabilities:
Accounts receivable 124,171 (120,001)
Inventories (8,681) (259,664)
Other current assets 179,062 207,009
Other assets -- 3,879
Accounts payable (994,178) (602,111)
Accrued expenses (67,161) (332,069)
Customer deposits (43,991) 37,439
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 787,106 269,119
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment, and customer accounts (802,886) (905,482)
Proceeds from sale of property and equipment 40,962 15,554
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (761,924) (889,928)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit borrowings 4,034,495 203,918
Payments on line of credit (3,768,774) --
Principal payments of debt (875,001) (852,224)
Proceeds from sale of common stock 78,610 98,794
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (530,670) (549,512)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (505,488) (1,170,321)
CASH AND CASH EQUIVALENTS - beginning of period 783,445 1,170,321
----------- -----------
CASH AND CASH EQUIVALENTS - end of period $ 277,957 $ --
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest $ 820,790 $ 1,041,301
=========== ===========
Cash paid for income taxes $ 128,447 $ 42,863
=========== ===========
See the notes to the condensed consolidated financial statements.
5
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with Form 10-Q instructions and in the opinion
of management contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the condensed consolidated financial
position, results of operations, and cash flows for the periods presented.
The results have been determined on the basis of generally accepted
accounting principles and practices of the United States of America
("GAAP"), applied consistently with the Annual Report on Form 10-K of
Vermont Pure Holdings, Ltd. (the "Company") for the year ended October 31,
2004.
Certain information and footnote disclosures normally included in audited
consolidated financial statements presented in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted. The accompanying condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on
Form 10-K for the year ended October 31, 2004. The results of operations
for the interim periods are not necessarily indicative of the results to be
expected for the full year.
In fiscal 2004 the Company merged all of its subsidiaries into the parent,
Vermont Pure Holdings, Ltd. In 2005, it then created Crystal Rock LLC as a
wholly owned sub to hold its operating assets. The financial statements
herewith reflect the consolidated operations and financial condition of
Vermont Pure Holdings Ltd. and its wholly owned subsidiary Crystal Rock,
LLC.
2. STOCK BASED COMPENSATION
The Company follows the accounting treatment prescribed by Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" when accounting for stock-based compensation granted to
employees and directors.
Pro-forma information regarding net loss and net loss per share is
presented below as if the Company had accounted for its employee stock
options under the fair value method using Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock Based Compensation", net
of tax. Such pro forma information is not necessarily representative of the
effects on reported results of operations for future years due primarily to
option vesting periods and to the fair value of additional options in
future years.
6
Three Months Ended
January 31,
--------------------
2005 2004
-------- ---------
Net Loss - As Reported $ (8,568) $(256,672)
Effect of compensation expense determined under
fair value method valuation for all awards,
net of income tax 42,296 52,221
-------- ---------
Pro Forma Net Loss $(50,864) $(308,892)
======== =========
Basic Net Loss Per Share:
As Reported $ .00 $ (.01)
======== =========
Pro Forma $ .00 $ (.01)
======== =========
Diluted Net Loss Per Share:
As Reported $ .00 $ (.01)
======== =========
Pro Forma $ .00 $ (.01)
======== =========
Stock Issued to Directors
The Company issued 5,430 shares of its common stock to directors in lieu of
cash for board fees in the first three months of fiscal year 2004. Expense
of approximately $19,000 for that quarter was based on the market price on
the date of issuance.
Employee Stock Purchase Plan
On June 15, 1999 the Company's stockholders approved the Vermont Pure
Holdings, Ltd. 1999 Employee Stock Purchase Plan. On January 1, 2001,
employees commenced participation in the plan. The total number of shares
of common stock issued under this plan during the three months ended
January 31, 2005 was 51,666 for proceeds of $78,610. The total number of
shares of common stock issued under this plan during the three months ended
January 31, 2004 was 37,983 for proceeds of $98,794.
Restricted Shares
On January 2, 2005, the Company issued 75,000 shares of restricted stock
for a contractual award under the 2004 Stock Incentive Plan. These awards
vest over a three year period contingent on certain criteria related to the
financial performance of the Company.
3. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company routinely uses interest rate swaps to fix its long term
interest rates. The swap rates are based on the floating 30-day LIBOR rate
and are structured such that if the loan rate for the period exceeds the
fixed rate of the swap then the bank pays the Company to lower
7
the effective interest rate. Conversely, if the rate is lower than the
fixed rate, the Company pays the bank additional interest. As of January
31, 2005, the Company had one swap in the notional amount of $10 million
maturing in June, 2006. As of January 31, 2004 the Company had three swap
agreements for a total notional amount of $18 million. Two of the
agreements, with an aggregate notional amount of $8 million, expired in
fiscal year 2004.
Based on the floating rate for the three months ended January 31, 2005 and
2004, the Company paid $14,000 less and $102,000 more in interest,
respectively, than it would have without the swaps.
This instrument is considered a hedge under SFAS Nos. 133 and 137. Since
the instrument is intended to hedge against variable cash flows, it is
considered a cash flow hedge. As a result, the change in the fair value of
the derivative is recognized as comprehensive income or loss until the
hedged item is recognized in earnings.
4. COMPREHENSIVE (LOSS) INCOME
The following table summarizes comprehensive income for the respective
first quarters:
Three Months Ended
January 31,
-------------------
2005 2004
------- ---------
Net Loss $(8,568) $(256,672)
Other Comprehensive Income:
Change in unrealized gain on derivatives
designated as cash flow hedges - net of tax 34,360 38,468
------- ---------
Comprehensive Income (Loss) $25,792 $(218,204)
======= =========
5. INVENTORIES
Inventories consisted of the following at:
January 31, October 31,
2005 2004
----------- -----------
Finished Goods $ 900,042 $ 900,917
Raw Materials 178,473 168,917
---------- ----------
Total Inventories $1,078,515 $1,069,834
========== ==========
6. LOSS PER SHARE AND WEIGHTED AVERAGE SHARES
The Company considers outstanding in-the-money stock options as potential
common stock in its calculation of diluted earnings per share, unless the
effect would be anti-dilutive, and uses the treasury stock method to
calculate the applicable number of shares. The following calculation
provides the reconciliation of the denominators used in the calculation of
basic and fully diluted earnings per share:
8
Three Months Ended
January 31,
-------------------------
2005 2004
----------- -----------
Net Loss $ (8,568) $ (256,672)
----------- -----------
Denominator:
Basic Weighted Average Shares Outstanding 21,611,933 21,445,458
Dilutive effect of Stock Options -- --
----------- ----------
Diluted Weighted Average Shares Outstanding 21,611,933 21,445,458
----------- -----------
Basic Loss Per Share $ .00 $ (.01)
=========== ===========
Diluted Loss Per Share $ .00 $ (.01)
=========== ===========
For the three month periods ended January 31, 2005 and 2004 no options were
considered common stock equivalents since, as a result of the net loss for the
quarters, to do so would have been anti-dilutive. There were 2,648,490 and
2,543,821 options outstanding as of January 31, 2005 and 2004, respectively.
7. DEBT
During the three months ended January 31, 2005 the Company borrowed a net
amount of $266,000 from its working capital line of credit with Webster
Bank increasing the line balance to $1,766,000. In addition, letters of
credit totaling $1,050,000 are secured by the line reducing the
availability of the line by that amount to $5,450,000.
As of January 31, 2005, the Company was in compliance with all of the
financial covenants of its senior credit facility.
8. GOODWILL AND OTHER INTANGIBLE ASSETS
Major components of intangible assets at January 31, 2005 and October 31,
2004 consisted of:
January 31, 2005 October 31, 2004
------------------------- -------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
---------- ------------ ---------- ------------
Amortizable Intangible
Assets:
Customer Lists and Covenants
Not to Compete $4,152,840 $ 945,519 $4,152,840 $759,591
Other Intangibles 517,631 181,308 513,604 171,954
---------- ---------- ---------- --------
Total $4,670,471 $1,126,827 $4,666,444 $931,545
========== ========== ========== ========
Amortization expense for the periods ending January 31, 2005 and January
31, 2004 were $195,282 and $73,455 respectively.
9
The changes in the carrying amount of goodwill for the fiscal periods
ending January 31, 2005 and October 31, 2004 are as follows:
January 31, 2005 October 31, 2004
---------------- ----------------
Beginning Balance $74,772,591 $72,899,355
Goodwill acquired during the period 3,271 1,875,263
Goodwill disposed of during the period (13,317) (2,027)
----------- -----------
Balance as of the end of the period $74,762,545 $74,772,591
=========== ===========
9. SUBSEQUENT EVENT
On March 9, 2005 the Company signed a commitment letter with Bank of
America to refinance its senior credit facility. The new commitment is
intended to replace the senior credit facility with Webster Bank and would
provide a $28 million term loan for a term of seven years to replace the
existing term and acquisition debt and repay $3.6 million of subordinated
debt. There would be no prepayment penalty as a result of the pay down of
the senior or subordinated debt. It would also make available to the
Company a $6 million operating line of credit and $7.5 million acquisition
line of credit for a term of three years. Interest rates for the term loan
would range from 1.50% to 2.50% over the 30-day LIBOR and interest rates
for the line of credit would range from 1.25% to 2.25% over the 30-day
LIBOR contingent on the Company's ratio of senior debt to earnings before
interest, taxes, depreciation, and amortization ("EBITDA"). In addition to
that ratio, the Company would be required to comply with total and senior
fixed charge ratios which measure the Company's ability to service its
scheduled debt payments. The principal repayment schedule of the proposed
term loan would escalate the annual amounts over the term from $3 million
to $4.75 million per year.
Closing the new facility may require that the Company recognize a gain or
loss for bank fees, interest rate swaps or the changes in the fair value of
the debt instruments in the period in which the Company closes. The effect
of the potential gains and losses to be recognized will be quantified when
the transaction closes. The closing is expected to be complete by April 1,
2005.
In the event the new facility cannot be closed and the existing credit
facility cannot be refinanced, cash flows from operations would have to be
used to pay the outstanding balance of the working capital line on April 1,
2005 and additional sources of working capital would be sought to
supplement operating cash flows during our peak business cycle. If the
working capital line of credit cannot be paid upon maturity, it would
constitute an event of default and the entire balance of the facility,
approximately $25.1 million as of January 31, 2005, would become due and
payable. Although the probability of not being able to close the new
facility is remote, no assurance can be given that adequate financing at
reasonable interest rates will be secured if more cash is needed other than
that generated from operations.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto as filed in our Annual Report on Form
10-K for the year ended October 31, 2004 as well as the condensed consolidated
financial statements and notes contained herein.
Forward-Looking Statements
When used in the Form 10-Q and in our future filings with the Securities and
Exchange Commission, the words or phrases "will likely result," "we expect,"
"will continue," "is anticipated," "estimated," "project," "outlook," or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. We caution
readers not to place undue reliance on any such forward-looking statements, each
of which speaks only as of the date made. Such statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical earnings and those presently anticipated or projected. Among
these risks are water supply and reliance on commodity price fluctuations. We
have no obligation to publicly release the result of any revisions which may be
made to any forward-looking statements to reflect anticipated or unanticipated
events or circumstances occurring after the date of such statements.
Results of Operations
Results of Operations for the Three Months Ended January 31, 2005 (First
Quarter) Compared to the Three Months Ended January 31, 2004
Sales
Sales for the three months ended January 31, 2005 were $13,964,000 compared to
$11,998,000 for the corresponding period in 2004, an increase of $1,966,000 or
16%. The increase was the result of the growth of existing product lines and
acquisitions. Net sales growth from acquisitions for the first quarter totaled
$1,029,000, accounting for a 9% increase in total sales. Excluding acquisitions,
sales were up 7% for the three months ended January 31, 2005 compared to the
corresponding period in 2004.
The comparative breakdown of sales of the product lines for the respective three
month periods ended January 31, 2005 and 2004 is as follows:
Product Line 2005 2004 Difference % Diff.
------------ ------- ------- ---------- -------
(in thousands)
Water $ 6,440 $ 5,509 $ 931 17%
Coffee and Other Products 5,169 4,298 871 20%
Equipment Rental 2,355 2,191 164 7%
------- ------- ------
Total $13,964 $11,998 $1,966 16%
======= ======= ======
11
Water - Sales of water and related products increased as a result of a 12%
increase in volume and 5% increase in price. The increase in volume was a result
of acquisitions. Average selling price increased as result of increases in list
prices. Net of acquisitions, water sales increased 4%.
Coffee and Other Products - Sales of coffee and other products increased 2% from
sales volume obtained in acquisitions. Net of acquisitions, sales increased 18%.
The increase in sales was attributable to increased volume of all products in
this category but primarily to the growth of single serve coffee, which grew
52%, to $1,142,000 in the first quarter of fiscal year 2005 compared to $753,000
in the same period in fiscal year 2004.
Equipment Rental - Water cooler rentals were up 6% in the first quarter compared
to the same period in fiscal year 2004 as a result of more cooler placements and
up an additional 1% as a result of higher average rental prices. Net of
acquisitions, cooler placements were down 3% in the first quarter compared the
same period in fiscal year 2004. The decrease in placements is attributable to
competition in the retail market.
Gross Profit/Cost of Goods Sold - For the three months ended January 31, 2005,
gross profit increased $1,394,000, or 21%, to $8,032,000 from $6,638,000 for the
comparable period in 2004. The increase in gross profit was primarily due to
higher sales. As a percentage of sales, gross profit increased to 58% of sales
from 55% for the respective period in fiscal year 2004. The increase in gross
profit, as a percentage of sales, was attributable to higher pricing and lower
cost of goods sold. Lower cost of sales are a result of lower production and
transportation costs for water, most notably, for our new production locations
in Vermont and western New York.
Income from Operations/Operating Expenses
Total operating expenses increased to $7,254,000 in the first three months of
fiscal year 2005 from $6,005,000 in the comparable period in fiscal year 2004,
an increase of $1,249,000, or 21%.
Selling, general and administrative (SG&A) expenses were $6,777,000 and
$5,699,000 for the first quarters of fiscal years 2005 and 2004, respectively,
an increase of $1,078,000, or 19%. Of total SG&A expenses, route distribution
costs, primarily related to labor for commission-based sales, fuel, vehicle, and
insurance costs, increased 15%. In addition, selling costs increased 17% as a
result of increased sales staffing. Administration costs increased 23% primarily
as a result of the costs of legal and consulting costs related to regulatory
compliance.
Advertising expenses were $281,000 in the first quarter of fiscal year 2005
compared to $214,000 in the first quarter of fiscal year 2004, an increase of
$67,000, or 31%. The increase in advertising costs is related to increased
yellow page and other print advertising.
Amortization increased to $195,000 in the first quarter of fiscal year 2005 from
$73,000 in the first quarter of fiscal year 2004. This increase is attributable
to intangible assets that were acquired as part of several acquisitions in
fiscal year 2004.
Other compensation of $19,000 for the three months ended January 31, 2004
related to directors fees paid in our common stock in lieu of cash.
12
Income from operations for the three months ended January 31, 2005 was $778,000
compared to $632,000 in the same period in 2004, an increase of $146,000, or
23%. The increase was a result of higher sales and gross margin.
Interest, Taxes, and Other Expenses - Income from Continuing Operations
Interest expense was $811,000 for the three months ended January 31, 2005
compared to $1,014,000 in the three months ended January 31, 2004, a decrease of
$203,000. Lower interest costs were primarily a result of lower amounts of
senior and subordinated debt combined with lower fixed rate commitments compared
the same period in fiscal year 2004.
Gain on disposal of property and equipment of $18,000 was related to the sale of
five gallon bottling equipment during the quarter ended January 31, 2005.
The loss from continuing operations before income taxes was $15,000 for the
three months ended January 31, 2005 compared to a loss from continuing
operations before income taxes of $388,000 in the corresponding period in fiscal
year 2004, an improvement of $373,000. The tax benefit for the first quarter of
fiscal year 2005 was $6,000 compared to a tax benefit of $69,000 for the same
period in fiscal year 2004 and was based on the expected effective tax rate of
41% for fiscal year 2005 and 18% for fiscal year 2004, respectively. The
effective tax rate for the first quarter of fiscal year 2005 was calculated by
estimating the federal tax liability, combined with the pertinent taxes in the
states in which we operate, for the full fiscal year. The reason for the lower
effective rate in the first quarter of fiscal year 2004 is that certain state
taxes are not income based and require minimum payments so the full benefit was
not accrued based on our annual effective tax rate and larger net loss for the
quarter.
For the three months ended January 31, 2005, the loss from continuing operations
was $9,000 compared to $319,000 for the corresponding period of 2004, an
improvement of $310,000.
Discontinued Operations
The income from operations for discontinued retail segments for the three months
ended January 31, 2004 was $107,000. The corresponding income tax expense of
$45,000 was allocated at an effective tax rate of 42% based upon expected
liability for federal and state taxes for fiscal year 2005 for the income
generated by the discontinued operations. Consequently, income from discontinued
operations for the first quarter of fiscal year 2004 was $62,000. The disposal
of the retail segments was completed in the second quarter of fiscal year 2004.
Consequently, there is no effect from discontinued operations in fiscal year
2005.
Net Income
The net loss of $9,000 for the three months ended January 31, 2005 was a result
of the loss from operations. The loss was an improvement of $248,000 from a net
loss of $257,000 in the corresponding period in fiscal year 2004 which included
a loss from continuing operations and income from discontinued operations.
13
Trends
Although our operations resulted in a loss in the first quarter on fiscal year
2005, we feel the improvement in the loss from continuing operations compared to
the first quarter in fiscal year 2004 is reflective of changing business trends
and that we will be profitable for fiscal year 2005. While growth for water and
coffee products in some markets has remained relatively flat, we have seen
encouraging growth trends in several markets. As mentioned above, pricing has
been a key reason for improved financial performance. Prices have increased in
all markets over the last year for all significant products and services. We
continue to experience competition from retail outlets for coolers but the
effect of that competition, though still reducing our base business, appears to
be leveling off. We are also experiencing growth in customers that are
purchasing our water services without renting a cooler. We believe that this
trend will increase over the next year but may not offset a decline in cooler
rentals.
In addition, the potential of growth through acquisitions remains viable. We
have ample opportunities to acquire businesses through small acquisitions and
will take advantage of this based on price, potential synergies, and access to
capital.
However, profitability continues to be threatened by costs controlled by outside
conditions such as fuel, insurance, and administrative expenses related to
regulatory requirements. The SEC recently issued a notice extending the period
to comply with Section 404 of the Sarbanes-Oxley Act for non-accelerated filers.
This effectively provides us with an additional year to comply. Consequently, we
expect that this will postpone a substantial portion of our anticipated cost for
this compliance from fiscal year 2005 to fiscal year 2006.
We feel that the general improvement in market conditions, combined with
acquisitions and cost efficiencies, will continue to improve profitability as
long as these conditions and opportunities exist.
Liquidity and Capital Resources
As of January 31, 2005 we had working capital of $252,000 compared to $637,000
as of October 31, 2004, a decrease of $385,000. The lower amount of working
capital was primarily a result of our operating line of credit being due April
1, 2005. The outstanding amounts were $1.8 million on the operating line of
credit and $5.3 million on the acquisition line as of January 31, 2005. We
expect to use an additional $500,000 for seasonal cash needs from the operating
line of credit before it is due.
On March 9, 2005 we signed a commitment letter with Bank of America to refinance
our senior credit facility with a new $41.5 million facility. We intend to close
the new facility by April 1, 2005. Proceeds from the new facility would be used
to pay off the existing line of credit as well as the acquisition line and term
loan with Webster Bank. In addition, we expect proceeds to be available from the
new facility to pay down $3.6 million of our 12% subordinated debt. There would
be no prepayment penalty as a result of the pay down of the senior or
subordinated debt. The total term debt with Bank of America would be $28 million
with an amortization schedule for pay back over seven years. Bank of America
would also make $6 million available for an operating line of credit and $7.5
million available for acquisitions for a term of three years. Interest rates for
the proposed
14
term loan would range from 1.50% to 2.50% over the 30-day LIBOR and interest
rates for the line of credit range from 1.25% to 2.25% over the 30-day LIBOR
contingent on our ratio of senior debt to earnings before interest, taxes,
depreciation, and amortization. In addition to that ratio, we would be required
to comply with total and senior fixed charge ratios which would measure our
ability to service our scheduled debt payments. The principal repayment schedule
of the proposed term loan would escalate the annual amounts over the term from
$3 million to $4.75 million per year.
The new facility would lower the annual principal payment on the term debt
between $500,000 and $1,000,000 annually, $900,000 the first year, and would
extend the pay back schedule two years. We expect to save approximately $250,000
annually in interest with the pay down of a portion of the subordinated debt.
The new facility would also allow us to make additional payments on subordinated
debt principal if certain leverage targets are met. Interest rates in the new
facility would be lower than rates in our existing facility but future effective
interest rates related to the facility may be favorably or unfavorably affected
by the use of interest rate swaps. Closing the new facility may require that we
recognize a gain or loss for bank fees, interest rate swaps or the changes in
the fair value of the debt instruments in the period in which we close. The
effect of the potential gains and losses to be recognized will be quantified
when the transaction closes.
In the event we cannot close the new facility and cannot refinance our current
credit facility we would use cash flows from operations to pay the outstanding
balance of the working capital line on April 1, 2005 and would seek additional
sources of working capital to supplement operating cash flows during our peak
business cycle. If we cannot pay the working capital line of credit upon
maturity, it would constitute an event of default and the entire balance of the
facility, approximately $25.1 million as of January 31, 2005, would become due
and payable. We expect the balance of the operating line of credit to be $2.3
million as of April 1, 2005. Although, we feel the probability of not being able
to close the new facility is remote, no assurance can be given that adequate
financing at reasonable interest rates will be secured if more cash is needed
other than that generated from operations.
We are in compliance with the financial covenants of our financing agreements as
of January 31, 2005 and current on our scheduled interest and principal payments
for all of our financing arrangements.
We routinely use cash for capital expenditures and repayment of debt. In the
first three months of fiscal year 2005 we spent $803,000 on capital expenditures
including coolers, brewers, bottles and racks related to home and office
distribution. During the first three months of fiscal year 2005, we paid
$875,000 for regularly scheduled debt repayments on our senior credit facility.
Also, we used $1,061,000 to pay accounts payable and accrued expenses. The
reduction of these balances is seasonal and will increase in the summer months.
As of January 31, 2005, we had $10 million of fixed rate debt in an outstanding
swap agreement. During the first quarter of fiscal year 2005, we recorded
$34,000 of comprehensive income related to the appreciation of the value of our
swap agreement. For a schedule and further explanation of our fixed debt
instruments, see Item 3.
15
In addition to our senior and subordinated debt commitments, we have significant
future cash commitments, primarily in the form of operating leases that are not
reported on the balance sheet. The following table sets forth our contractual
commitments as of January 31, 2005:
Interest on Coffee
Fixed Rate Operating Purchase
Fiscal Year Debt Debt Leases Commitments(1) Total
- ----------- ----------- ----------- ---------- -------------- -----------
2005 $ 5,532,000 $1,584,000 $1,644,000 $487,000 $ 9,247,000
2006 4,627,000 2,112,000 2,020,000 162,000 8,921,000
2007 5,081,000 2,112,000 1,709,000 0 8,902,000
2008 28,145,000 1,232,000 1,478,000 0 30,855,000
2009 0 0 1,059,000 0 1,059,000
Thereafter 0 0 995,000 0 995,000
----------- ---------- ---------- -------- -----------
Total $43,385,000 $7,040,000 $8,905,000 $649,000 $59,979,000
=========== ========== ========== ======== ===========
(1) Please refer to "Commodity Price Risks -- Coffee" on page 17 of this report
for additional information on our coffee supply agreements.
The debt obligation in fiscal year 2005 includes payoff of the operating line of
credit balance as of January 31, 2005 which matures in April 2005. As of the
date of this report, we have no other material contractual obligations or
commitments.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Market risks relating to our operations result primarily from changes in
interest rates and commodity prices.
INTEREST RATE RISKS
We use interest rate "swap" agreements to curtail interest rate risk. Currently,
we have one outstanding swap agreement, expiring June 11, 2006, in the notional
amount of $10 million. It fixes our interest rate on the notional amount at
1.74% plus the applicable margin in our facility. At January 31, 2005, we had
approximately $15.8 million of long term debt subject to variable interest
rates. Under the loan and security agreement with Webster Bank, we currently pay
interest at a rate of LIBOR plus a margin of 2.50% (5.09%, at January 31, 2005).
A hypothetical 100 basis point increase in the LIBOR rate would result in an
additional $158,000 of interest expense on an annualized basis. Conversely, a
decrease would result in a proportionate interest cost savings.
The new facility with Bank of America would require us to fix 75% of our term
debt with interest rate swaps. This will require that we increase our fixed rate
date by executing more swap arrangements during the second quarter of fiscal
year 2005, if we close the loan. Swap agreements serve to stabilize our cash
flow and expenses but ultimately may cost more or less in interest than if we
had carried all of our debt at a variable rate over the swap term.
COMMODITY PRICE RISKS
Coffee
The cost of our coffee purchases is affected by commodity prices. We enter into
contracts to mitigate market fluctuation of these costs by fixing the price for
certain periods with our suppliers. Currently we have fixed the price of our
anticipated supply through December 2005 at "green" prices ranging from $.95 to
$1.12 per pound. We are not insulated from price fluctuations beyond that date.
At our existing sales levels, an increase in pricing of $.10 per pound would
increase our total cost for coffee $75,000, on an annual basis. In this case,
competitors that had fixed pricing might have a competitive advantage.
Diesel Fuel
We own and operate vehicles to deliver product to customers. The cost of fuel to
operate these vehicles fluctuates over time. During the quarter ended January
31, 2005, fuel prices have increased significantly. We estimate that a $0.10
increase per gallon in fuel cost would result in an increase to annual operating
costs of approximately $60,000. In aggregate, we have spent approximately an
additional $107,000 on fuel as a result of higher prices in the first quarter of
fiscal year 2005 compared to the comparable period in fiscal year 2004.
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ITEM 4. CONTROLS AND PROCEDURES
Our chief executive officer, our chief financial officer, and other members of
our senior management team have evaluated the effectiveness of our disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)). Based on such evaluation, our chief executive officer and chief
financial officer have concluded that our disclosure controls and procedures, as
of the end of the period covered by this report, were adequate and effective to
provide reasonable assurance that information required to be disclosed by us,
including our consolidated subsidiary, in reports that we file or submit under
the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported, within the time periods specified in the Commission's
rules and forms.
The effectiveness of a system of disclosure controls and procedures is subject
to various inherent limitations, including cost limitations, judgments used in
decision making, assumptions about the likelihood of future events, the
soundness of internal controls, and fraud. Due to such inherent limitations,
there can be no assurance that any system of disclosure controls and procedures
will be successful in preventing all errors or fraud, or in making all material
information known in a timely manner to the appropriate levels of management.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the three months ended January 31, 2005, there were no changes in our
internal control over financial reporting.
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PART II - Other Information
ITEM 6. EXHIBITS
Exhibit
Number Description
- ------- -----------
3.1 Certificate of Incorporation (Incorporated by reference to Exhibit B
to Appendix A to our registration statement on Form S-4, File No.
333-45226, filed with the SEC on September 6, 2000)
3.2 Certificate of Amendment of Certificate of Incorporation (Incorporated
by reference to Exhibit 4.2 of our current report on Form 8-K, filed
with the SEC on October 19, 2000)
3.3 By-laws, as amended (Incorporated by reference to Exhibit 3.3 to our
quarterly report on Form 10-Q, filed with the SEC on September 14,
2001)
10.1* Employment Agreement dated January 1, 2005 with Timothy G. Fallon
(Incorporated by reference to Exhibit 10.4 of our annual report on
Form 10-K, filed with the SEC on January 31, 2005)
10.2* Employment Agreement dated January 1, 2005 with Peter K. Baker
(Incorporated by reference to Exhibit 10.6 of our annual report on
Form 10-K, filed with the SEC on January 31, 2005)
10.3* Employment Agreement dated January 1, 2005 with John B. Baker
(Incorporated by reference to Exhibit 10.7 of our annual report on
Form 10-K, filed with the SEC on January 31, 2005)
10.4 Amended and Restated Loan and Security Agreement dated December 29,
2004 among Webster Bank, M &T Bank, Banknorth Group, Rabobank and us
(Incorporated by reference to Exhibit 10.12 of our annual report on
Form 10-K, filed with the SEC on January 31, 2005)
10.5 Form of Amended and Restated Term Note dated December 29, 2004 issued
to Webster Bank (Incorporated by reference to Exhibit 10.13 of our
annual report on Form 10-K, filed with the SEC on January 31, 2005)
10.6 Reaffirmation of Subordination dated December 29, 2004 of Henry E.
Baker to Webster Bank (Incorporated by reference to Exhibit 10.19 of
our annual report on Form 10-K, filed with the SEC on January 31,
2005)
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10.7 Reaffirmation of Subordination dated December 29, 2004 of Joan Baker
to Webster Bank (Incorporated by reference to Exhibit 10.20 of our
annual report on Form 10-K, filed with the SEC on January 31, 2005)
10.8 Reaffirmation of Subordination dated December 29, 2004 of John B.
Baker to Webster Bank (Incorporated by reference to Exhibit 10.21 of
our annual report on Form 10-K, filed with the SEC on January 31,
2005)
10.9 Reaffirmation of Subordination dated December 29, 2004 of Peter K.
Baker to Webster Bank (Incorporated by reference to Exhibit 10.22 of
our annual report on Form 10-K, filed with the SEC on January 31,
2005)
10.10 Reaffirmation of Subordination dated December 29, 2004 of Ross S.
Rapaport to Webster Bank (Incorporated by reference to Exhibit 10.23
of our annual report on Form 10-K, filed with the SEC on January 31,
2005)
10.11 Form of Amended and Restated Acquisition/Capital Line of Credit Note
dated December 29, 2004 issued to Webster Bank (Incorporated by
reference to Exhibit 10.24 of our annual report on Form 10-K, filed
with the SEC on January 31, 2005)
10.12 Form of Amended and Restated Revolving Line of Credit Note dated
December 29, 2004 issued to Webster Bank (Incorporated by reference to
Exhibit 10.25 of our annual report on Form 10-K, filed with the SEC on
January 31, 2005)
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
* Management contract or compensatory plan.
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SIGNATURE
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.
Dated: March 17, 2005
VERMONT PURE HOLDINGS, LTD.
By: /s/ Bruce S. MacDonald
---------------------------------------
Bruce S. MacDonald
Vice President, Chief Financial Officer
(Principal Accounting Officer and
Principal Financial Officer)
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Exhibits Filed Herewith
Exhibit
Number Description
- ------- -----------
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
22