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 July 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 by check mark whether the registrant is a shell company (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 September 6, 2005
----- ---------------------
Common Stock, $.001 Par Value 21,673,317
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 July 31, 2005 October 31, 2004 (unaudited) 3
Condensed Consolidated Statements of Operations for the
Three and Nine Months ended July 31, 2005 and 2004
(unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months ended July 31, 2005 and 2004 (unaudited) 5
Notes to Condensed Consolidated Financial Statements
(unaudited) 6-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-19
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 20
Item 4. Controls and Procedures 21
Part II - Other Information 22
Item 6. Exhibits
Signature 23
2
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
July 31, October 31,
2005 2004
------------ ------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,097,114 $ 783,445
Accounts receivable - net 8,437,280 7,065,530
Inventories 1,164,214 1,069,834
Current portion of deferred tax asset 1,439,446 1,439,446
Other current assets 2,096,913 1,379,104
Unrealized gain on derivatives 79,640 103,100
------------ ------------
TOTAL CURRENT ASSETS 14,314,607 11,840,459
------------ ------------
PROPERTY AND EQUIPMENT - net of accumulated
depreciation 10,691,999 12,147,200
------------ ------------
OTHER ASSETS:
Goodwill 74,745,495 74,772,591
Other intangible assets - net of accumulated
amortization 3,392,749 3,734,899
Deferred tax asset 717,061 749,713
Other assets 75,000 536,000
------------ ------------
TOTAL OTHER ASSETS 78,930,305 79,793,203
------------ ------------
TOTAL ASSETS $103,936,911 $103,780,862
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long term debt $ 3,298,036 $ 6,140,635
Accounts payable 2,404,082 2,828,789
Accrued expenses 2,766,156 2,318,486
Current portion of customer deposits 732,835 202,244
------------ ------------
TOTAL CURRENT LIABILITIES 9,201,109 11,490,154
------------ ------------
Long term debt, less current portion 39,787,500 37,853,696
Customer deposits 2,942,931 3,168,483
------------ ------------
TOTAL LIABILITIES 51,931,540 52,512,333
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock - $.001 par value, 50,000,000
authorized shares 21,744,817 issued and
21,673,267 outstanding shares as of
July 31, 2005 and 21,569,711 issued and
21,498,161 outstanding as of
October 31, 2004 21,744 21,569
Additional paid in capital 58,207,672 57,869,411
Treasury stock, at cost, 71,550 shares as
of July 31, 2005 and October 31, 2004 (264,735) (264,735)
Unearned compensation (139,043) --
Accumulated deficit (5,867,255) (6,460,816)
Accumulated other comprehensive income, net
of tax 46,988 103,100
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 52,005,371 51,268,529
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $103,936,911 $103,780,862
============ ============
See notes to the condensed consolidated financial statements.
3
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended July 31, Nine months ended July 31,
--------------------------- --------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
(unaudited) (unaudited)
NET SALES $15,305,521 $13,554,893 $44,025,153 $38,734,674
COST OF GOODS SOLD 6,257,544 5,745,224 18,357,259 17,064,773
----------- ----------- ----------- -----------
GROSS PROFIT 9,047,977 7,809,669 25,667,894 21,669,901
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Selling, general and administrative expenses 6,897,220 6,041,838 20,570,326 17,534,354
Advertising expenses 437,029 285,596 987,577 760,979
Amortization 188,820 95,548 577,713 258,512
Other compensation -- -- -- 18,951
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES 7,523,069 6,422,982 22,135,616 18,572,796
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 1,524,908 1,386,687 3,532,278 3,097,105
----------- ----------- ----------- -----------
OTHER EXPENSE:
Interest (876,363) (789,526) (2,537,277) (2,719,825)
Miscellaneous 37 57,663 11,922 49,266
----------- ----------- ----------- -----------
TOTAL OTHER EXPENSE (876,326) (731,863) (2,525,355) (2,670,559)
----------- ----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 648,582 654,824 1,006,923 426,546
INCOME TAX EXPENSE (266,257) (264,867) (413,362) (170,304)
----------- ----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS 382,325 389,957 593,561 256,242
DISCONTINUED OPERATIONS:
Loss from discontinued operations -- -- -- (78,555)
Gain on disposal of segments of business -- -- -- 352,535
Income tax expense from discontinued operations -- -- -- (113,759)
----------- ----------- ----------- -----------
INCOME FROM DISCONTINUED OPERATIONS -- -- -- 160,221
----------- ----------- ----------- -----------
NET INCOME $ 382,325 $ 389,957 $ 593,561 $ 416,463
=========== =========== =========== ===========
NET INCOME PER SHARE - BASIC:
Continuing Operations $ 0.02 0.02 $ 0.03 0.01
Discontinued Operations -- -- -- 0.01
----------- ----------- ----------- -----------
NET INCOME $ 0.02 $ 0.02 $ 0.03 $ 0.02
=========== =========== =========== ===========
NET INCOME PER SHARE - DILUTED:
Continuing Operations $ 0.02 0.02 $ 0.03 0.01
Discontinued Operations -- -- -- 0.01
----------- ----------- ----------- -----------
NET INCOME $ 0.02 $ 0.02 $ 0.03 $ 0.02
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES USED IN COMPUTATION - BASIC 21,640,974 21,519,378 21,602,061 21,476,292
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES USED IN COMPUTATION - DILUTED 21,641,358 21,572,515 21,607,873 21,641,331
=========== =========== =========== ===========
See notes to the condensed consolidated financial statements.
4
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended July 31,
--------------------------
2005 2004
----------- ------------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 593,561 $ 416,463
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 3,635,774 3,802,248
Bad debt provision 309,989 --
Amortization 577,713 258,512
Non cash interest expense 5,892
Deferred tax benefit -- 204,399
Gain on disposal of property and equipment (11,922) (74,025)
Gain on the sale of segments of business -- (352,535)
Non cash compensation 48,653 18,951
Changes in assets and liabilities:
Accounts receivable (1,681,739) 143,154
Inventories (94,380) (561,159)
Other current assets (684,236) (475,520)
Other assets 461,000 257,667
Accounts payable (424,707) (380,232)
Customer deposits 305,039 344,865
Accrued expenses 447,670 (759,652)
----------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,488,307 2,843,136
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (2,211,981) (2,917,766)
Proceeds from sale of fixed assets 57,720 453,676
Proceeds from the sale of segments of business -- 9,017,523
Cash used for acquisitions - net of purchase
price adjustments (77,324) (994,505)
----------- ------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (2,231,585) 5,558,928
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit 2,000,000 2,808,500
Payments on line of credit (2,200,000) --
Proceeds from debt 28,223,332 --
Principal payments on debt 28,932,128) (12,438,725)
Payments of debt issuance costs (185,000) --
Sale of common stock 150,743 262,849
----------- ------------
NET CASH USED IN FINANCING ACTIVITIES (943,053) (9,367,376)
----------- ------------
NET INCREASE (DECREASE) IN CASH 313,669 (965,312)
CASH - Beginning of period 783,445 1,170,321
----------- ------------
CASH - End of period $ 1,097,114 $ 205,009
=========== ============
Cash paid for interest $ 2,565,763 $ 2,908,418
=========== ============
Cash paid for income taxes $ 221,973 $ 270,263
=========== ============
See 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/A 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 GAAP 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/A 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. Subsequently, the parent organized Crystal Rock
LLC as a wholly owned subsidiary to hold the Company's operating assets.
The financial statements presented herewith reflect the consolidated
operations and financial condition of Vermont Pure Holdings, Ltd. and
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 income and net income 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. 123R, "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 Nine Months Ended
July 31, July 31,
--------------------- ---------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Net Income - As Reported $ 382,325 $ 389,957 $ 593,561 $ 416,463
Add: Stock based employee compensation
expense included in net income, net of
related tax effects 14,300 -- 42,900 --
--------- --------- --------- ---------
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects (173,725) (154,232) (308,981) (257,104)
--------- --------- --------- ---------
Pro Forma Net Income $ 222,900 $ 235,725 $ 327,480 $ 159,359
========= ========= ========= =========
Basic Net Income Per Share:
As Reported $ .02 $ .02 $ .03 $ .02
========= ========= ========= =========
Pro Forma $ .01 $ .01 $ .02 $ .01
========= ========= ========= =========
Diluted Net Income Per Share:
As Reported $ .02 $ .02 $ .03 $ .02
========= ========= ========= =========
Pro Forma $ .01 $ .01 $ .02 $ .01
========= ========= ========= =========
Stock Issued to Directors
The Company issued 3,059 and 5,430 shares of its common stock to directors
in lieu of cash for board fees in the first nine months of fiscal year 2005
and 2004, respectively. Compensation expense of approximately $6,000 and
$19,000 was recorded for those respective periods 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 nine months ended July
31, 2005 was 97,047 for proceeds of $150,743. The total number of shares of
common stock issued under this plan during the nine months ended July 31,
2004 was 72,040 for proceeds of $179,850.
Restricted Shares
On January 2, 2005, the Company issued 75,000 shares of restricted stock
under the 2004 Stock Incentive Plan. These shares vest in equal
installments over a three year period on the annual anniversary dates
contingent on certain criteria related to the financial performance of the
Company. Compensation expense related to these shares will be incurred when
it is
7
determined that it is probable the performance criteria will be met. No
expense has been recorded related to the issuance of these shares though
July 31, 2005.
3. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company 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 the effective interest
rate. Conversely, if the rate is lower than the fixed rate, the Company
pays the bank additional interest.
On May 3, 2005, the Company entered into an interest rate hedge ("swap")
agreement in conjunction with its new senior financing. The new credit
agreement requires that the Company fix the interest rate on its term debt
for the life of the loan. The swap fixes the interest rate at 4.66%, plus
the applicable margin, currently 2.50%, and amortizes concurrently with the
loan principal to fix the interest rate with respect to 75% of the
outstanding principal. The swaps constituting 75% of fixed rate principal
include the Company's existing swap which is in the notional amount of $10
million and matures in June 2006. As of July 31, 2005, the total notional
amount committed to swap agreements was $20.4 million.
As of July 31, 2004, the Company had two swap agreements for a total
notional amount of $14 million. One of the agreements, with a notional
amount of $4 million, expired in fiscal year 2004.
Based on the floating rate for nine month periods ended July 31, 2005 and
2004, the Company paid $18,000 less and $236,000 more in interest,
respectively, than it would have without the swaps.
These swaps are 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 INCOME
The following table summarizes comprehensive income for the respective
periods:
8
Three Months Ended Nine Months Ended
July 31, July 31,
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
Net Income $382,325 $389,957 $593,561 $416,463
Other Comprehensive Income (Loss):
Change in unrealized gain on derivatives
designated as cash flow hedges - net of tax (89,038) 58,023 (56,112) 179,931
-------- -------- -------- --------
Comprehensive Income $293,287 $447,980 $537,449 $596,394
======== ======== ======== ========
5. INVENTORIES
Inventories consisted of the following at:
July 31, October 31,
2005 2004
---------- -----------
Finished Goods $1,018,548 $ 900,917
Raw Materials 145,666 168,917
---------- ----------
Total Inventories $1,164,214 $1,069,834
========== ==========
6. NET INCOME 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:
Three Months Ended Nine Months Ended
July 31, July 31,
------------------------- -------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net Income $ 382,325 $ 389,957 $ 593,561 $ 416,463
Denominator:
Basic Weighted Average Shares Outstanding 21,640,974 21,519,378 21,602,061 21,476,292
Dilutive effect of Stock Options 384 53,137 5,812 165,039
----------- ----------- ----------- -----------
Diluted Weighted Average Shares Outstanding 21,641,358 21,572,515 21,607,873 21,641,331
=========== =========== =========== ===========
Basic Income Per Share $ .02 $ .02 $ .03 $ .02
=========== =========== =========== ===========
Diluted Income Per Share $ .02 $ .02 $ .03 $ .02
=========== =========== =========== ===========
There were 2,648,490 and 2,684,790 options outstanding as of July 31, 2005
and 2004, respectively. For the three and nine month periods ended July 31,
2005, in addition to the options included to calculate the effect of
dilution, there were 2,613,490 and 2,583,490
9
options not included in the dilution calculation, respectively. For the
three and nine month periods ended July 31, 2004, there were 1,494,200 and
240,000 additional options not included in the dilution calculation,
respectively. These options were not included in the dilution calculation
because their effect would have been anti-dilutive.
7. DEBT
On April 6, 2005, the Company refinanced its credit facility. The new
lender is Bank of America. Webster Bank is a participant in the new loan.
The new facility refinanced $28 million of existing senior debt in the form
of a seven year term loan, provides a revolving credit facility of $6
million for working capital and letters of credit for a term of three
years, and makes available up to $7.5 million to be used for acquisitions
for a period of three years. The term loan may also provide funds for
future principal payment of the Company's subordinated debt if certain
financial covenants are met after the first two years of the loan.
The term loan amortizes over seven years and the new acquisition debt
amortizes as a term loan for five years after the first three years. During
the first three years of the acquisition debt, interest only is paid on a
monthly basis for amounts drawn down for acquisitions. Interest on the term
loan is tied to the Company's performance based on the 30-day LIBOR plus a
250 basis point margin, while the acquisition and revolving lines have a
225 basis point margin over the 30-day LIBOR. For the respective loans, the
margin may vary from 125 to 225 basis points and 150 to 250 basis points
based on the level of senior debt to earnings before interest, taxes,
depreciation, and amortization (EBITDA).
With the $28 million of term debt, the Company paid off its borrowings owed
to Webster Bank, including $17.5 million under the old term loan and $5.4
million under the old acquisition line of credit as well as $3.6 million of
its subordinated debt. The balance of the new term loan as well as $2
million of the new line of credit was used to pay a balance of $3.5 million
on the revolving line of credit with Webster Bank. At July 31, 2005, the
Company had $1.3 million outstanding on its line of credit with Bank of
America. In addition there were $1.4 million of letters of credit
outstanding, leaving $3.3 million available to borrow from the facility.
There was a balance of $300,000 on the acquisition line as of July 31,
2005.
The credit agreement with Bank of America requires that it be in compliance
with certain financial covenants at the end of each fiscal quarter. The
covenants include senior fixed charge coverage of greater than 1.25 to 1,
total fixed charge coverage of greater than 1 to 1, and senior debt to
EBITDA of greater than 3.25 to 1. As of July 31, 2005, the Company was in
compliance with all of the financial covenants of its new credit facility.
10
8. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the nine month period
ended July 31, 2005 and the year ended October 31, 2004 are as follows:
Nine Months Ended Year Ended
July 31, 2005 October 31, 2004
----------------- ----------------
Beginning Balance $74,772,591 $72,899,355
Goodwill acquired during the period, net of
purchase adjustments (13,780) 1,875,263
Goodwill disposed of during the period (13,316) (2,027)
----------- -----------
Balance as of the end of the period $74,745,495 $74,772,591
=========== ===========
Major components of intangible assets at July 31, 2005 and October 31, 2004
consisted of:
July 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 $4,242,869 $1,318,167 $4,152,840 $759,591
Other Intangibles 659,138 191,091 513,604 171,954
---------- ---------- ---------- --------
Total $4,902,007 $1,509,258 $4,666,444 $931,545
========== ========== ========== ========
Amortization expense for the three month periods ending July 31, 2005 and
July 31, 2004 was $188,820 and $95,548 respectively. Amortization expense
for the nine month periods ending July 31, 2005 and July 31, 2004 was
$577,713 and $258,512, respectively.
11
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
consolidated financial statements and notes thereto as filed in our Annual
Report on Form 10-K/A 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 July 31, 2005 Compared to the
Three Months Ended July 31, 2004
Sales
Sales for the three months ended July 31, 2005 were $15,306,000 compared to
$13,555,000 for the corresponding period in 2004, an increase of $1,751,000 or
13%. The increase was the result of the growth of existing product lines, warmer
weather, and acquisitions. Net sales growth from acquisitions for the third
quarter totaled $945,000, accounting for a 7% increase in total sales. Excluding
acquisitions, sales increased 6% for the three months ended July 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 July 31, 2005 and 2004 is as follows:
Product Line 2005 2004 Difference % Diff.
------------ ------- ------- ---------- -------
(dollars in thousands)
Water $ 7,706 $ 6,734 $ 972 14%
Coffee and Other Products 5,280 4,594 686 15%
Equipment Rental 2,320 2,227 93 4%
------- ------- ------
Total $15,306 $13,555 $1,751 13%
======= ======= ======
12
Water - Sales of water and related products increased as a result of a 10%
increase in volume and 4% increase in price. The increase in volume was
primarily a result of acquisitions. Average selling price increased as result of
increases in list prices. Net of acquisitions, water sales increased 5%. Sales
in the third fiscal quarter of 2005 were favorably impacted by substantially
warmer weather than a year ago.
Coffee and Other Products - Sales of coffee and other products increased 3% from
sales volume obtained in acquisitions. Net of acquisitions, sales in this
category increased 12%. 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 40% to $1,240,000 in the third quarter of fiscal year
2005 compared to $884,000 in the same period in fiscal year 2004.
Equipment Rental - Equipment rental revenue was up in the third quarter compared
to the same period in fiscal year 2004 as a result of more cooler placements and
additional coffee machine rentals from the sale of single serve coffee. Net of
acquisitions, equipment rental revenue was down 3% in the third quarter compared
the same period in fiscal year 2004. Water cooler placements in the third
quarter of fiscal year 2005, net of acquisitions, were down 2% from the
comparable quarter in fiscal year 2004 as a result of competition in the retail
market.
Gross Profit/Cost of Goods Sold - For the three months ended July 31, 2005,
gross profit increased $1,238,000, or 16%, to $9,048,000 from $7,810,000 for the
comparable period in 2004. The increase in gross profit was due to higher sales
and improving margins. As a percentage of sales, gross profit increased to 59%
of sales compared to 58% 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. Production and transportation costs
decreased as a result of our outsourced water bottling in western New York,
which commenced in November 2004 in conjunction with our acquisition of Mayer
Brothers in Buffalo, NY.
Cost of goods sold includes all costs to bottle water, costs of purchasing and
receiving products for resale, including freight, as well as costs associated
with product quality, warehousing and handling costs, internal transfers, and
the repair and service of rental equipment, but does not include the costs of
distributing our product to our customers. We include distribution costs in
selling, general, and administrative expense, and the amount is discussed below.
The reader should be aware that other companies may include distribution costs
in their cost of goods sold, in which case, on a comparative basis, such other
companies may have a lower gross margin as a result.
Operating Expense/Income from Operations
Total operating expenses increased to $7,523,000 in the third quarter of fiscal
year 2005 from $6,423,000 in the comparable period in fiscal year 2004, an
increase of $1,100,000, or 17%.
Selling, general and administrative (SG&A) expenses were $6,897,000 and
$6,042,000 for the third quarters of fiscal years 2005 and 2004, respectively,
an increase of $855,000, or 14%. Of total SG&A expenses, route distribution
costs increased 14%, primarily related to labor for commission-based sales from
increased product volume, fuel due to market prices, vehicle lease and repair
costs, and insurance costs due to market rates and loss experience. Total route
distribution costs for the
13
third quarter of fiscal year 2005 were $3,263,000 compared to $2,858,000 for the
same quarter in fiscal year 2004. In addition, selling costs increased 12% as a
result of increased sales staffing. Administration costs increased 15% as a
result of legal, accounting, and consulting costs attributed to regulatory
compliance.
Advertising expenses were $437,000 in the third quarter of fiscal year 2005
compared to $286,000 in the third quarter of fiscal year 2004, an increase of
$151,000, or 53%. The increase in advertising costs is primarily related to
television and print advertising campaigns run during the quarter.
Amortization increased to $189,000 in the third quarter of fiscal year 2005 from
$96,000 in the third quarter of fiscal year 2004. This increase is attributable
to intangible assets that were acquired as part of several acquisitions in
fiscal year 2004.
Income from operations for the three months ended July 31, 2005 was $1,525,000
compared to $1,387,000 in the same period in 2004, an increase of $138,000, or
10%. The increase was a result of higher sales and an improved gross margin due
to lower production and transportation costs partially offset by higher route
and administrative costs.
Interest, Taxes, and Other Expenses - Income from Continuing Operations
Interest expense was $876,000 for the three months ended July 31, 2005 compared
to $790,000 in the three months ended July 31, 2004, an increase of $86,000.
Higher interest costs were primarily a result of higher market interest rates
and a higher fixed interest rate on the Company's senior debt facility that
closed in April 2005 that more than offset the decrease in the subordinated debt
interest as a result of the paying down subordinated debt.
Income from continuing operations before income taxes was $649,000 for the three
months ended July 31, 2005, compared to $655,000 in the corresponding period in
fiscal year 2004, a decrease of $6,000. The tax expense for the third quarter of
fiscal years 2005 and 2004 was $266,000 and $265,000, respectively. The
respective tax rates were based on the expected effective tax rate of 41% and
40% for the entire fiscal year.
Net Income
Net income of $382,000 for the three months ended July 31, 2005 was a result of
income from operations. It was a decrease of $8,000 from net income of $390,000
in the corresponding period in fiscal year 2004.
Results of Operations for the Nine Months Ended July 31, 2005 Compared to the
Nine Months Ended July 31, 2004
Sales
Sales from continuing operations for the first nine months of 2005 were
$44,025,000 compared to $38,735,000 for the first nine months of 2004, an
increase of $5,290,000 or 14%. The increase was primarily the result of
acquisitions as well as increases in prices of all of our product categories and
14
higher volume of single serve coffee products. Net of acquisitions, sales
increased 6% over the corresponding period in the prior year.
The comparative breakdown of sales of the product lines for the first nine
months of 2005 and 2004 is as follows:
Product Line 2005 2004 Difference % Diff.
------------ ------------ ------------ ------------ -------
(in 000's $) (in 000's $) (in 000's $)
Water $21,189 $18,520 $2,669 14%
Coffee and Other Products 15,821 13,579 2,242 17%
Equipment Rental 7,015 6,636 379 6%
------- ------- ------
Total $44,025 $38,735 $5,290 14%
Water - Of the total increase in water sales, 4% was related to price and 10% to
volume. Average selling price increased as result of increases in list prices.
The increase in volume was primarily related to acquisitions. Net of
acquisitions, water sales increased 4%.
Coffee and Other Products - Net of acquisitions, revenues in the category
increased 13%. The increase in sales was attributable to increased volume of all
products in this category but primarily to growth of single serve coffee, which
grew 39%, to $3,672,000 in the first three quarters of fiscal year 2005 compared
to $2,535,000 in the same period in fiscal year 2004.
Equipment Rental - Equipment rental increased as a result of water cooler
placements and rental of single serve coffee equipment. Average price was
substantially unchanged from the same period a year ago. Cooler placements were
flat as a result of acquisitions. Net of acquisitions, equipment rental income
was down 2%.
Gross Profit/Cost of Goods Sold
Gross profit increased $3,998,000, or 18%, to $25,668,000 for the first nine
months of 2005 from $21,670,000 for the first nine months of 2004. The increase
in gross profit was attributable to higher sales and improving margins. As a
percentage of sales, gross profit increased to 58% of sales from 56% for the
respective period. The gross margin benefited from higher average selling prices
and lower costs of goods sold, most notably bottling efficiencies in our new
production location in Vermont, which opened in May 2004. Production and
transportation costs decreased as a result of our outsourced water bottling in
western New York. In addition, equipment service costs declined after bringing
that function in house midway through fiscal year 2004.
Cost of goods sold includes all costs to bottle water, costs of purchasing and
receiving products for resale, including freight, as well as costs associated
with product quality, warehousing and handling costs, internal transfers, and
the repair and service of rental equipment, but does not include the costs of
distributing our product to our customers. We include distribution costs in
selling, general, and administrative expense, and the amount is discussed below.
The reader should be aware that other companies may include distribution costs
in their cost of goods sold, in which case, on a comparative basis, such other
companies may have a lower gross margin as a result.
15
Operating Expenses/Income from Operations
Total operating expenses increased to $22,136,000 in the first nine months of
2005 from $18,573,000 in the first nine months of 2004, an increase of
$3,563,000, or 19%.
Selling, general and administrative (SG&A) expenses were $20,570,000 and
$17,534,000 for the first nine months of 2005 and 2004, respectively, an
increase of $3,036,000 or 17%. Of total SG&A expenses, route distribution costs
increased 13% primarily related to labor for commission-based sales from
increased product volume, fuel due to market prices, vehicle lease and repair
costs, and insurance costs due to market rates and loss experience. Total route
distribution costs for the first nine months of fiscal year 2005 were $9,827,000
compared to $8,705,000 for the same period in fiscal year 2004. In addition,
selling costs increased 15% as a result of increased sales staffing.
Administration costs increased 24% as a result of legal, accounting, and
consulting costs related to regulatory compliance and costs totaling $208,000
associated with the refinancing of the senior debt facility with Bank of
America.
Advertising expenses were $988,000 in the first nine months of 2005 compared to
$761,000 in the first nine months of 2004, an increase of $227,000, or 30%. The
increase in advertising costs is related to increased yellow page, television,
and print advertising.
Amortization increased to $578,000 in the first nine months of 2005 from
$259,000 in the first nine months of 2004 as a result of intangible assets that
were acquired as part of several acquisitions in fiscal year 2004.
Other compensation in the first nine months of 2004 totaled $19,000. This
expense relates to compensation paid to directors in company stock in lieu of
cash for board fees.
Income from operations for the first nine months of 2005 was $3,532,000 compared
to $3,097,000 in the first nine months of 2004, an increase of $435,000, or 14%.
The increase was a result of higher sales and an improved gross margin partially
offset by higher administrative costs.
Interest, Taxes, and Other Expenses - Income from Continuing Operations
Interest expense was $2,537,000 for the first nine months of 2005 compared to
$2,720,000 in the first nine months of 2004, a decrease of $183,000. Lower
interest costs were primarily a result of lower amounts of senior and
subordinated debt combined with lower fixed rate commitments compared to the
same period in fiscal year 2004. While market rates have risen, as compared to
the first half of fiscal year 2004, our total effective interest rate has
decreased from the year earlier as a result of expiring interest rate swaps and
pay down of subordinated debt. However, the fixed rate on a portion of the
Company's new credit facility, combined with increasing market rates, have
increased the effective rate as the year has progressed. For further discussion
of the Company's interest rate swaps see the Liquidity and Capital Resources
section and Item 3.
Income from continuing operations before income tax expense was $1,007,000 for
the first nine months of 2005, compared to $427,000 in the first nine months of
2004, an improvement of $580,000. The tax expense of $413,000 for the first nine
months of 2005 is an increase of $243,000 from tax expense of $170,000 for the
same period a year ago. The tax expense and benefit were
16
determined by using an estimated annual effective tax rate of 41% for fiscal
year 2005 and 40% for fiscal year 2004, which represents the estimated federal
and state income tax expense for the respective years.
Income from continuing operations of $594,000 for the first nine months of 2005
was a $338,000 improvement from income from operations of $256,000 for the first
nine months of 2004.
Discontinued Operations
In March 2004 we sold substantially all of the assets that comprised the
Retail-PET and Retail-Gallon segments of our business. The loss from operations
for discontinued segments for the nine months ended July 31, 2004 was $79,000.
The corresponding tax expense of loss from discontinued operations combined with
the gain on the sale of $114,000 was calculated at 42%, the estimated effective
annual rate for 2004 at the time of the sale.
Net Income
Net income of $594,000 for the nine months of 2005 was entirely attributable to
continuing operations. This represented an improvement of $178,000 from net
income of $416,000 in the first nine months of 2004. Net income in the first
nine months of 2004 was favorably impacted by the gain on the sale of the
discontinued operations in the second fiscal quarter of 2004.
Trends
We feel the improvement in the results from continuing operations in the first
nine months of the year is reflective of changing business trends and that we
will be profitable for the remainder of the year. 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 for 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, administrative expenses related to
regulatory requirements, and interest costs. In particular, fuel costs increased
substantially in the third quarter and continued to increase in the fourth
quarter in the wake of Hurricane Katrina. If these increases do not abate in the
coming months, our business may be negatively affected by higher material and
transportation costs. (For a further discussion of the impact of fuel costs, see
Item 3 "Commodity Price Risks.") This may also result in a downturn in general
economic conditions which may result in attrition of or customer base or
inability to charge higher prices to recover cost increases. The SEC extended
the period to comply
17
with Section 404 of the Sarbanes-Oxley Act for non-accelerated filers. This
effectively provided 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 July 31, 2005, we had working capital of $5,114,000 compared to $350,000
as of October 31, 2004, an increase of $4,764,000. The increase in working
capital was primarily a result of the new senior debt facility. At the end of
fiscal 2004, the outstanding amount of our operating line of credit was
$1,500,000 which was, along with $200,000 of the acquisition line of credit,
classified as current debt. As a result of the refinancing, the $1,300,000
balance on the operating line of credit on July 31, 2005 was classified as long
term debt. In addition, the payment schedule of the new term loan reduced the
payments over the next 12 months by $900,000. The balance on the operating line
of credit on July 31, 2005 was attributable to funding our operating cash
accounts held at our former bank while we transition them to Bank of America.
During the first nine months of fiscal year 2005, accounts receivable increased
$1,371,000 and inventory increased $94,000 as a result of seasonal increases in
revenue. Other current assets increased $500,000 as a result of a
reclassification of a note receivable from the buyer of our retail segments of
business due in March 2006 from long term to current assets as of July 31, 2005.
We routinely use cash for capital expenditures and repayment of debt. In the
first nine months of fiscal year 2005, we spent $2,212,000 on capital
expenditures including coolers, brewers, bottles and racks related to home and
office distribution.
On April 6, 2005, we refinanced our credit facility. The new lender is Bank of
America, with Webster Bank as a participant in the new loan. The new facility
refinanced $28 million of existing senior debt in the form of a seven year term
loan, provides a revolving credit facility of $6 million for working capital and
letters of credit for a term of three years, and makes available up to $7.5
million to be used for acquisitions for a period of three years. The term loan
may also provide funds for future principal payment of our subordinated debt if
certain financial covenants are met after the first two years of the loan.
The agreement amortizes the payback of the term loan over seven years and
amortizes the payback of the new acquisition debt as a term loan for five years
after the first three years. During the first three years, interest only is paid
on a monthly basis for amounts drawn down for acquisitions. Interest on the term
loan and revolving line of credit is tied to our performance based on the 30 day
LIBOR plus 250 basis points while the acquisition line has a 225 basis point
spread over the 30 day LIBOR.
With the $28 million of term debt, we paid off our borrowings owed to Webster
Bank, including $17.5 million under the term loan and $5.4 million under the
acquisition line of credit as well as $3.6 million of our subordinated debt. The
balance of the new term loan as well as $2 million of
18
the new line of credit was used to pay a balance of $3.5 million on the
revolving line of credit with Webster Bank. There was no prepayment penalty on
the facility. Webster Bank is participant with Bank of America on the new
facility.
Our credit facility requires that we be in compliance with certain financial
covenants at the end of each fiscal quarter. The covenants include senior fixed
charge coverage of greater than 1.25 to 1, total fixed charge coverage of
greater than 1 to 1, and senior debt to EBITDA of greater than 3.25 to 1. As of
July 31, 2005, we were in compliance with all of the financial covenants of our
new credit facility.
As of July 31, 2005, we had $10 million of fixed rate debt in an outstanding
swap agreement. On May 3, 2005, we entered into an additional interest rate
hedge ("swap") agreement in conjunction with our new senior financing. The
credit agreement requires that we fix the interest rate of the term debt for the
life of the loan. The swap fixes the interest rate at 4.66%, plus the applicable
margin, currently 2.50%, and amortizes concurrently with the loan principal to
fix the interest rate with respect to 75% of the outstanding principal. The
swaps constituting 75% of fixed rate principal include our existing swap. For a
further explanation of our fixed debt instruments, see Item 3.
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 July 31, 2005:
Interest on Operating Coffee Purchase
Fiscal Year Debt Debt(2) Leases Commitments(1) Total
- ----------- ----------- ----------- ---------- --------------- -----------
2005 $ 986,000 $ 681,000 $ 572,000 $162,000 $ 2,401,000
2006 3,125,000 3,486,000 2,077,000 382,000 9,070,000
2007 3,500,000 3,257,000 1,951,000 0 8,708,000
2008 5,205,000 2,979,000 1,695,000 0 9,879,000
2009 4,310,000 2,654,000 1,258,000 0 8,222,000
Thereafter 25,960,000 6,468,000 1,095,000 0 33,523,000
----------- ----------- ---------- -------- -----------
Total $43,086,000 $19,525,000 $8,648,000 $544,000 $71,803,000
=========== =========== ========== ======== ===========
(1) Please refer to "Commodity Price Risks -- Coffee" on page 20 of this report
for additional information on our coffee supply agreements.
(2) Interest includes fixed rate debt and variable rate debt assuming a
variable interest rate of 6.2% as of July 31, 2005
As of the date of this report, we have no other material contractual obligations
or commitments.
19
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. As of July
31, 2005, we had two outstanding swap agreements. One, 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. Another
agreement, entered into on May 3, 2005, fixes the interest rate at 4.66%, plus
the applicable margin, currently 2.50%, and amortizes concurrently with the loan
principal to fix the interest rate with respect to 75% of the outstanding
principal.
Our credit facility with Bank of America requires us to fix 75% of our term debt
with interest rate swaps. At July 31, 2005, we had approximately $8.4 million of
long term debt subject to variable interest rates. Under the credit agreement
with Bank of America, we currently pay interest at a rate of LIBOR plus a margin
of 2.50%. A hypothetical 100 basis point increase in the 30-day LIBOR would
result in an additional $84,000 of interest expense on an annualized basis.
Conversely, a decrease would result in a proportionate interest cost savings.
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 approximately through December 2005 at "green" prices ranging
from $1.16 to $1.28 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.
Diesel Fuel
We own and operate vehicles to deliver product to customers. The cost of fuel to
operate these vehicles fluctuates over time. In addition, we contract with
independent freight carriers to transport our products and materials. During the
first nine months of our fiscal year 2005, fuel prices have increased
approximately 25%. 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 $343,000 on fuel and
transportation as a result of higher prices in the first three quarters of
fiscal year 2005 compared to the comparable period in fiscal year 2004. Higher
fuel prices may unfavorably affect some of our material prices as well. Fuel
prices have continued to increase in the fourth quarter. If these increases do
not abate and if we are not able to increase the prices of our products and
services without losing customers, the increase in fuel prices could have a
material adverse effect on our business.
20
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE 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 July 31, 2005, there were no changes in our
internal control over financial reporting.
21
PART II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders
None.
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)
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
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: September 14, 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)
23
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.
24