SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO.)
FILED BY THE REGISTRANT [X] FILED BY A PARTY OTHER THAN THE REGISTRANT [ ]
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Check the appropriate box:
[ ] Preliminary Proxy Statement
[X] Definitive proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material pursuant to sec.240.14a-11(c) or sec.240.14a-12
[ ] Confidential, for Use of the commission only (as permitted by Rule
14a-6(e)(2))
VERMONT PURE HOLDINGS, LTD.
(Name of Registrant as Specified In Its Charter)
NAME OF COMPANY
(Name of Person(s) Filing Proxy Statement)
PAYMENT OF FILLING FEE (CHECK THE APPROPRIATE BOX):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies :
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
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VERMONT PURE HOLDINGS, LTD.
1050 BUCKINGHAM STREET
WATERTOWN, CONNECTICUT 06795
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 26, 2006
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The Annual Meeting of Stockholders of Vermont Pure Holdings, Ltd. will be
held at the offices of Pepe & Hazard LLP, 30 Jelliff Lane, Southport,
Connecticut 06890 on Wednesday, April 26, 2006, at 11:00 a.m. local time, for
the following purposes:
1. to elect seven directors to hold office until the Annual Meeting of
Stockholders in 2007 and until their respective successors have been
duly elected and qualified; and
2. to transact such other business as may properly come before the
meeting and any adjournment(s) of the meeting.
The record date for the Annual Meeting is March 1, 2006. Only stockholders
of record at the close of business on March 1, 2006 will be entitled to notice
of, and to vote at, the meeting and any adjournments thereof.
PLEASE READ THE ATTACHED PROXY STATEMENT, WHICH CONTAINS INFORMATION ABOUT
THE ACTIONS TO BE TAKEN AT THE MEETING. IN ORDER TO ASSURE THE PRESENCE OF A
QUORUM, WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING IN PERSON, PLEASE SIGN
AND DATE THE ACCOMPANYING PROXY CARD AND MAIL IT PROMPTLY IN THE ENCLOSED
ENVELOPE. YOU MAY REVOKE YOUR PROXY IF YOU SO DESIRE AT ANY TIME BEFORE IT IS
VOTED.
By Order of the Board of Directors
Bruce S. MacDonald
Secretary
Watertown, Connecticut
March 15, 2006
VERMONT PURE HOLDINGS, LTD.
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PROXY STATEMENT
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GENERAL INFORMATION
We are providing you with this Proxy Statement and the enclosed form of
proxy in connection with solicitation of proxies by the Board of Directors, or
the Board, of Vermont Pure Holdings, Ltd. to be used at our Annual Meeting of
Stockholders to be held on April 26, 2006, and any adjournment(s) of the
meeting. The matters to be considered at the Annual Meeting are set forth in the
Notice of Meeting.
Our executive offices are located at 1050 Buckingham Street, Watertown,
Connecticut 06795 and our telephone number is 860-945-0661. We are sending this
Proxy Statement and the enclosed form of proxy to stockholders of record on or
about March 15, 2006.
RECORD DATE AND OUTSTANDING SHARES
The Board has fixed the close of business on March 1, 2006 as the record
date for the determination of stockholders entitled to notice of, and to vote
at, the Annual Meeting. Only stockholders of record at the close of business on
that date will be entitled to vote at the Annual Meeting or any and all
adjournments of the meeting. As of February 22, 2006, we had 21,655,645 shares
of Common Stock outstanding at a par value of $.001 per share. Each of our
stockholders will be entitled to one vote for each share of Common Stock held of
record by that stockholder.
SOLICITATION AND REVOCATION
Proxies in the form enclosed are solicited by and on behalf of the Board.
The persons named in the proxy have been designated as proxies by the Board. Any
proxy given in response to this solicitation and received in time for the Annual
Meeting will be voted as specified in the proxy. If no instructions are given,
proxies will be voted
"FOR" the election of the nominees listed below under "Election of
Directors,"
and in the discretion of the proxies named on the proxy card with respect to any
other matters properly brought before the meeting and any adjournments of the
meeting. If any other matters are properly presented at the Annual Meeting for
action, the persons named in the proxy will vote the proxies in accordance with
their best judgment. Any proxy given in response to this solicitation may be
revoked by the stockholder at any time before it is exercised by written
notification delivered to our Secretary, by voting in person at the Annual
Meeting, or by delivering another proxy bearing a later date.
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QUORUM
The presence, in person or by proxy, of a majority of the shares of Common
Stock issued and outstanding and entitled to vote at the Annual Meeting will
constitute a quorum at the Annual Meeting. A proxy submitted by a stockholder
may indicate that all or a portion of the shares represented by such proxy are
not being voted with respect to a particular matter. The shares subject to a
proxy which are not being voted on a particular matter will not be considered
shares entitled to vote on such matter. These shares, however, may be considered
present and entitled to vote on other matters and will count for purposes of
determining the presence of a quorum.
VOTING
If a quorum is present at the Annual Meeting, the persons nominated for
election as directors will be elected by a plurality of the shares of Common
Stock voted at the Annual Meeting. "Plurality" means that the nominees who
receive the highest number of votes will be elected as the directors for the
ensuing year.
We know of no other matter to be presented at the Annual Meeting. If any
other matter should be presented at the Annual Meeting upon which a vote
properly may be taken, shares represented by all proxies we receive will be
voted on that matter in accordance with the best judgment of the persons named
in the proxies.
PROPOSAL 1 -- ELECTION OF DIRECTORS
Vermont Pure is a "controlled company" under the Corporate Governance
Rules of the American Stock Exchange (AMEX), which means that a majority of its
issued and outstanding voting stock is controlled by a single person or related
group of persons, and that the company has elected controlled company status.
A controlled company is exempted from certain rules otherwise applicable
to companies whose securities are listed on AMEX, including (1) the requirement
that a the company have a majority of independent directors; (2) the requirement
that nominations to the company's Board be either selected or recommended by a
nominating committee consisting solely of independent directors; and (3) the
requirement that officers' compensation be either determined or recommended by a
compensation committee consisting solely of independent directors.
The Board has nominated the seven incumbent directors to serve as
candidates for election as director, to serve until the next annual meeting of
stockholders and until their respective successors have been elected and
qualified.
For more information about our nominations procedures and other corporate
governance matters, see the section entitled, "Corporate Governance" in this
Proxy Statement. In case any of these nominees should become unavailable for
election to the Board, an event which is not anticipated, the persons named as
proxies, or their substitutes, will have full discretion and authority to vote
or refrain from voting for any other nominee in accordance with their judgment.
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Unless otherwise specified in the form of proxy, the proxies solicited by
the management will be voted "FOR" the election of the seven candidates.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning each of our
directors continuing in office and each of our current executive officers. Henry
E. Baker is the father of Peter K. Baker and John B. Baker.
NAME AGE POSITION
- ---------------------- --- -------------------------------------------------
Ross S. Rapaport...... 63 Chairman of the Board
Henry E. Baker........ 73 Director, Chairman Emeritus
Peter K. Baker........ 46 Chief Executive Officer, President, and Director
John B. Baker......... 51 Executive Vice President and Director
Phillip Davidowitz.... 74 Director
Martin A. Dytrych..... 49 Director
John M. LaPides....... 46 Director
Bruce S. MacDonald.... 47 Chief Financial Officer, Treasurer, and Secretary
The business experience during at least the last five years of each of
these individuals is as follows:
Ross S. Rapaport became a director in October 2000. Since June 2002, Mr.
Rapaport has been of counsel to Pepe & Hazard LLP, a law firm with offices in
Hartford and Southport, Connecticut, and Boston, Massachusetts, that we employ
from time to time. He has practiced in the area of corporate and general
business law for more than 35 years. He has provided legal advice to Crystal
Rock, which became a subsidiary of Vermont Pure Holdings in 2000, since 1974 and
serves as trustee of the Baker family trusts.
Henry E. Baker became a director and our chairman emeritus in October
2000. From 1947 to October 2000, he was employed at Crystal Rock. He was
appointed president of Crystal Rock and became chairman of its board of
directors in 1965. Mr. Baker served on the board of directors of the
International Bottled Water Association, or IBWA, for two decades. He was
inducted into the Beverage World Bottled Water Hall of Fame in 1990.
Peter K. Baker became a director and our president in October 2000. In
November 2005, he was named our Chief Executive Officer while retaining his
other positions. From 1977 to October 2000, he was employed at Crystal Rock,
serving as its co-president from 1993 to 2000. He has served on the board of
directors of the IBWA and as its chairman during the 1998-1999 term.
John B. Baker became our executive vice president in October 2000 and a
director in September 2004. From 1975 to October 2000, he was employed at
Crystal Rock, serving as its co-president from 1993 to 2000.
Phillip Davidowitz has been a director since June 1998 and serves on our
audit and compensation committees. Mr. Davidowitz, who is retired, was president
of TSC Clearing
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Services, Inc. from 1980 to 2001 and a member of the New York Stock Exchange and
vice chairman of Transatlantic Securities Company from 1988 to 2001. TSC
Clearing Services was a wholly-owned subsidiary of Transatlantic Securities
Company. Transatlantic Securities Company was a member of the New York Stock
Exchange and executed orders for clients on an agency basis only and cleared its
own transactions.
John M. LaPides became a director in November 2005 and serves on our audit
and compensation committees. Since 1987, he has served as the President of Snow
Valley, Inc., a home and office refreshment company located in Maryland that he
established. He is a past President of the IBWA, where he has served 14 years as
a director and nine years as a member of the IBWA executive committee. Since
2001, Mr. LaPides has been an Entrepreneur in Residence at the Dingman Center
for Entrepreneurship at the Robert Smith School of Business at the University of
Maryland.
Martin A. Dytrych became a director in November 2005 and serves on our
audit and compensation committees. He is a certified public accountant and since
1981 has been with the accounting firm Lamn, Krielow, Dytrych & Co., P.A. He has
been a stockholder of that firm since 1985. He is a member of the AICPA, the
Florida Institute of CPAs and the Association of Certified Fraud Examiners. He
is also a Diplomat of the American Board of Forensic Accounting Examiners.
Bruce S. MacDonald has been our chief financial officer and treasurer
since May 1993. He has also served as our secretary since June 1999. From 1987
to May 1993, Mr. MacDonald was controller of Cabot Cooperative Creamery
Incorporated.
REMUNERATION OF EXECUTIVE OFFICERS AND DIRECTORS
EXECUTIVE COMPENSATION
Summary compensation table. The following table sets forth certain
information about the compensation we paid or accrued with respect to our chief
executive officer and our most highly compensated officers (other than our chief
executive officer) who served as executive officers during our fiscal year ended
October 31, 2005 and whose annual compensation exceeded $100,000 for fiscal
2005. Effective November 1, 2005, Timothy G. Fallon resigned as our Chief
Executive Officer and a director.
Other annual compensation in the form of perquisites and other personal
benefits has been omitted as the aggregate amount of those perquisites and other
personal benefits was less than $50,000 and constituted less than ten percent
(10%) of the executive officers' respective total annual salary and bonus.
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SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION
--------------------- ----------------------------
RESTRICTED SECURITIES ALL OTHER
STOCK UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) AWARD(S)($) OPTIONS(#) (1)($)
- --------------------------- ---- ---------- --------- ------------ ----------- -------------
Timothy G. Fallon 2005 $ 212,500 $168,000 $ 140,250 (2) 100,000 $ 273,453 (3)
Chief Executive Officer 2004 $ 275,000 $ 95,000 $ 35,200 200,000 $ 16,398
2003 $ 275,000 $102,000 -0- -0- $ 16,269
Peter K. Baker 2005 $ 200,000 $120,378 -0- -0- $ 13,622
President 2004 $ 250,000 -0- -0- -0- $ 9,772
2003 $ 250,000 $ 40,715 -0- -0- $ 9,285
John B. Baker 2005 $ 200,000 $119,622 -0- -0- $ 14,378
Executive Vice President 2004 $ 250,000 -0- -0- -0- $ 3,081
2003 $ 250,000 $ 50,000 -0- -0- -0-
Bruce S. MacDonald 2005 $ 132,692 $ 63,000 -0- 50,500 $ 15,000
Chief Financial Officer, 2004 $ 118,000 -0- $ 22,000 -0- $ 12,331
Treasurer, and Secretary 2003 $ 115,000 -0- -0- -0- $ 15,000
- ----------
(1) Includes automobile and life and disability insurance allowances. For
fiscal year 2005, we paid the following:
Automobile Insurance
---------- ---------
Timothy Fallon $13,033 $10,420
Peter Baker $13,622 -
John Baker $14,378 -
Bruce MacDonald $10,454 $ 4,546
(2) Shares were granted in January 2005, did not vest and were retired upon
the resignation of the officer. The value of these shares as of October
31, 2005 was $153,000.
(3) Includes $250,000 accrued in fiscal year 2005 in conjunction with the
Severance Agreement with Mr. Fallon, whose resignation was effective
November 1, 2005. These payments will be made to Mr. Fallon from May, 2006
to October 2007.
Option grants table. The following table sets forth certain information
about stock options granted during the 2005 fiscal year by us to the executive
officers named in the summary compensation table.
Amounts reported in the last two columns above represent hypothetical
values that may be realized upon exercise of the options immediately before the
expiration of their term, assuming the specified compounded rates of
appreciation of the price of our common stock over the term of the options.
These numbers are calculated based on the rules of the Securities and Exchange
Commission and do not represent our estimate of future stock price growth.
Actual gains, if any, on stock option exercises and common stock holdings depend
on the timing of the exercise of the option and the sale of the common stock, as
well as the future performance of the common stock. The rates of appreciation
assumed in this table may not be achieved and the officers may never receive the
amounts reflected. This table does not take into account any change in the price
of the common stock after the date of grant. The values shown are net of the
option exercise price, but do not include deductions for taxes or other expenses
associated with the exercise.
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OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANT
---------------------- POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM
OPTIONS IN LAST PRICE EXPIRATION ----------------------
NAME GRANTED(#) YEAR ($/SH) DATE 5%($) 10%($)
- ------------------ ---------- ---------- -------- ---------- ---------- ---------
Timothy G. Fallon 100,000 (1) 42% $ 2.36 1/20/15 $ 148,000 $ 376,000
Bruce S. MacDonald 50,500 (1) 21% $ 2.36 1/20/15 $ 75,000 $ 190,000
- ----------
(1) Stock options were granted at the fair market value of our common stock on
the date of the grant. The stock option is fully vested and expires ten
years from the date of grant.
Fiscal year-end option table. The following table sets forth certain
information regarding stock options held as of October 31, 2005 by the executive
officers named in the summary compensation table.
The value realized upon the exercise of options is based on the last sale
prices of the common stock on the respective dates of exercise, as reported by
the AMEX, less the applicable option exercise prices. The value of unexercised
in-the-money options at fiscal year end is based on $2.04 per share, the last
sale price of our common stock on October 31, 2005, as reported on the AMEX.
Actual gains, if any, will depend on the value of the common stock on the date
of the sale of the shares.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL
YEAR-END OPTION VALUES
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY OPTIONS AT
UNDERLYING UNEXERCISED FY-END
OPTIONS AT FY-END (#) ($)
SHARES ACQUIRED VALUE ---------------------- --------------------------
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------ --------------- ------------ ----------- ------------- ----------- -------------
Timothy G. Fallon -0- -0- 1,080,000(1) - 0 - - 0 - - 0 -
Bruce S. MacDonald -0- -0- 266,500(2) - 0 - - 0 - - 0 -
- ----------
(1) Options expired on December 1, 2006 as a result of the resignation of the
officer.
(2) Options for 26,000 shares expired on December 6, 2005 under the terms of
the option agreement.
EMPLOYMENT CONTRACTS, CHANGE-IN-CONTROL ARRANGEMENTS AND SEVERANCE CONTRACTS
We have employment agreements with our executive officers. The executive
officer agreements in effect as of February 1, 2006 were as follows:
Peter K. Baker and John B. Baker
We have agreements with Peter Baker and John Baker dated January 1, 2005
and expiring December 31, 2007, subject to earlier termination as set forth in
the agreement. Peter Baker is currently employed as our Chief Executive Officer
and President; John Baker, as our Executive Vice President. Each receives an
initial base salary of $200,000, subject to annual
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review by the Compensation Committee of the Board, and they are eligible to
receive bonuses. The size of the bonus ranges from $40,000 to $96,000 depending
on our ability to achieve stated levels of target earnings before interest,
taxes, depreciation, and amortization (EBITDA); no bonus is due if we do not
achieve at least 90% of our EBITDA target level. Each officer earned $64,000
under this provision for fiscal year 2005. The size of the maximum bonus for
achieving quarterly business goals is $20,000 per year. They each earned the
maximum amount of the quarterly bonuses in 2005. In fiscal 2006, the quarterly
business goal is dependant upon compliance with the financial covenants set
forth in the credit agreement with our senior lender.
We will reimburse each of the Bakers up to $50,000 for buying disability
and other insurance that we do not offer as an employee benefit, if he elects to
obtain it, and leasing and operating an automobile. To the extent that the
actual costs incurred by the officer are less than $50,000, we will pay him the
unapplied balance in the form of a guaranteed bonus. Subject to the fiduciary
duties of the Board, we will use our best efforts to have each of the Bakers
elected as a member of the Board of Directors, and Peter Baker elected as a
member of the Executive Committee of the Board, should the Board have an
Executive Committee. (Under a separate agreement, members of the Baker family
may have rights with respect to election to the Board even if they cease to be
employees.) The agreements with the Messrs. Baker contain confidentiality
provisions and a non-competition clause that prohibits competition during the
term of employment and while the officer is receiving severance benefits or for
a period of 12 months in the event the officer is terminated without entitlement
to severance benefits.
We can terminate the employment of the Messrs. Baker at any time and for
any reason. If we decide to do so, we can give the officer a special notice
during the period November 1, 2006 to December 31, 2006 that his agreement will
terminate without cause on December 31, 2007. This is called a notice of planned
termination. If we give such a notice, at the end of the contract we will pay
the officer an amount equal to the sum of his annual base salary at December 31,
2007, plus $150,000, payable over 12 months. If we do not give the special
notice, and we terminate the officer's employment without cause or the contract
otherwise expires, we would be required to pay him an amount equal to (x) two
times the sum of (i) his annual base salary at the termination date, plus (ii)
$50,000, plus (y) $100,000, payable over 24 months. If there is a "change of
control," as defined in the agreement, of the company, followed within 30 days
by the termination of the officer's employment for any reason, then we would be
required to pay him an amount equal to the sum of his annual base salary at the
termination date, plus $150,000, payable over 24 months. If we determine that
federal tax law requires the suspension of any post-termination payments for six
months, then we have the right to suspend and accrue such payments for six
months, at which point we will pay the accrued amount to the officer and monthly
payments will resume.
Henry E. Baker
Our agreement with Henry Baker provides that he will be Chairman Emeritus
from July 1, 2005 to June 30, 2008. Mr. Baker is required to make himself
reasonably available to us for consultation for at least 20 hours per calendar
month. His base annual salary is $47,000, subject to annual review by the Board.
We provide him with an automobile allowance of up to $12,000 per year for his
actual cost of leasing and operating an automobile. Subject to the fiduciary
duties of the Board, we use our best efforts to have Mr. Baker elected as a
member of the Board,
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so long as the former stockholders of Crystal Rock hold in the aggregate at
least 40% of our outstanding shares.
Henry Baker's employment agreement is substantially the same as the
agreements with other officers with respect to confidentiality and
non-competition. His agreement regarding severance following termination
requires us to pay him monthly severance benefits for the remaining term of his
agreement at an annual rate equal to his base annual salary, subject to various
limits. If he leaves employment for "good reason," which means if we require him
to relocate his home a distance of more than 50 miles, if we assign him duties
materially inconsistent with his position, or we materially breach our agreement
with him, he will be entitled to the same payments as if we had terminated his
employment without cause. Finally, if there is a "change of control," as defined
in the agreement, of the company, followed within 30 days by the termination of
Mr. Baker's employment for any reason, then we would be required to pay him
monthly severance benefits for 24 months or the remaining term of his agreement,
whichever is less, at the same annual rate that applies in case of termination.
Bruce S. MacDonald
Our agreement with Mr. MacDonald became effective March 24, 2005,
terminates on December 31, 2007, and provides that he will be our Chief
Financial Officer, Vice President of Finance and Treasurer. The agreement
specifies that he will receive an annual salary of $135,000, subject to annual
review by the Compensation Committee of the Board, and he is eligible to receive
an annual bonus of $30,000 to $72,000 depending on our ability to achieve stated
levels of target EBITDA. In fiscal year 2005, Mr. MacDonald earned a bonus under
this provision, based on our performance, of $48,000. He is also eligible to
receive a quarterly bonus. The size of the maximum bonus for achieving quarterly
business goals is $15,000 per year. He earned the maximum amount of the
quarterly bonuses set forth in the agreement in fiscal year 2005. In fiscal
2006, the quarterly business goal is dependant upon compliance with the
financial covenants set forth in the credit agreement with our senior lender.
We will reimburse Mr. MacDonald for up to $15,000 for buying insurance
that we do not offer as an employee benefit, if he elects to obtain it, and
leasing and operating an automobile. The agreement with Mr. MacDonald also
contains confidentiality provisions and a non-competition clause substantially
the same as those described above for the Messrs. Baker.
We can terminate the employment of Mr. MacDonald at any time and for any
reason. If we decide to do so, we can give the officer a special notice during
the period November 1, 2006 to December 31, 2006 that his agreement will
terminate without cause on December 31, 2007. This is called a notice of planned
termination. If we give such a notice, at the end of the contract we will pay
him monthly severance benefits for 12 months equal to: (i) his annual base
salary at December 31, 2007, plus (ii) $75,000, and (iii) fringe benefits as
defined in the agreement, subject to various limitations.
If we terminate Mr. MacDonald's employment before the agreement expires
and without cause or there is a "change of control," as defined in the
agreement, followed within 30 days by the termination of Mr. MacDonald's
employment for any reason, we will be required to pay him monthly severance
benefits for 24 months equal to: (i) twice his base annual salary, plus (ii)
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$75,000 upon termination without cause or before the agreement expires and
$150,000 upon a change of control and (iii) fringe benefits as defined in the
agreement, subject to various limits.
If we determine that federal tax law requires the suspension of any
post-termination payments for six months, then we have the right to suspend and
accrue such payments for six months, at which point we will pay the accrued
amount to the officer and monthly payments will resume.
Timothy G. Fallon
In a letter dated August 29, 2005, Timothy G. Fallon resigned as our Chief
Executive Officer and director effective November 1, 2005, thereby terminating
most of the provisions of his Employment Agreement with us dated January
1, 2005.
In conjunction with Mr. Fallon's resignation, we entered into a Severance
Agreement which provides for severance payments totaling $200,000, payable
$50,000 on May 1, 2006 followed by 18 equal monthly payments of $8,333, ending
November 1, 2007. Mr. Fallon has agreed to provide consulting services with
regard to general business matters (for two years) and with respect to our
pending lawsuit against Nestle Waters North America (until that lawsuit is
concluded). For his consulting services, we have agreed to pay Mr. Fallon a
consulting fee of $50,000 on May 1, 2006, plus his reasonable travel and other
out-of-pocket expenses. The total amount of the payments under the agreement was
expensed on our financial statements for fiscal year 2005.
The Severance Agreement includes customary provisions regarding the
confidentiality of our information and clarifies or modifies several provisions
of his Employment Agreement. First, we agreed that Mr. Fallon's fiscal year 2005
bonus under the Employment Agreement would not be less than $110,000. Second,
the Severance Agreement clarifies that none of the 75,000 shares of restricted
stock granted to Mr. Fallon pursuant to the Employment Agreement vested, and
that all of those shares were forfeited. Third, the parties extended the
non-competition provisions of Mr. Fallon's Employment Agreement from 12 months
to 24 months. Mr. Fallon has also given us a general release of claims. In case
of a willful or intentional failure by Mr. Fallon to provide consulting services
as agreed, then he will be liable for the return of his entire consulting fee,
and he will forfeit any portion of his severance payments that are not yet due
and payable. If there is a change of control or a sale of all or substantially
all of our assets prior to November 1, 2007, then all amounts under the
Severance Agreement that have not yet been paid to Mr. Fallon will become due
and payable.
In February 2006, we paid Mr. Fallon $138,000 as a bonus based on the
performance criteria in his Employment Agreement to complete our total bonus
obligation under the agreement.
COMPENSATION OF DIRECTORS
Commencing with our 2006 fiscal year, compensation for the Board of
Directors for all services by non-employee directors (currently, our chairman
and three other directors) will be $25,000 per year, payable quarterly in
arrears. Directors who are also employees will not receive
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any separate compensation for their service as directors other than outlined in
the agreements above.
Previously, in fiscal year 2005, non-employee directors received $1000 per
Board meeting ($400 per committee meeting) attended and $7,500 per year, subject
to reduction if the director failed to attend a specified number of meetings.
The former Chairman of the Board received an additional $10,000 annually.
Non-employee directors also received grants of 5,000 stock options per year,
plus an additional 5,000 stock options per year if certain attendance criteria
were met. On November 1, 2005, each non-employee director serving on that date
was entitled to an automatic option grant of 5,000 shares. All of the directors
entitled to this option refused the grant. Automatic option grants for directors
were terminated as of November 2, 2005.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This table and its accompanying footnotes set forth certain information as
of March 1, 2006 with respect to the stock ownership of (i) those persons or
groups who beneficially own more than 5% of our common stock, (ii) each of our
directors and nominees for director, (iii) our executive officers named in the
summary compensation table, except for Mr. Fallon, who resigned as our chief
executive officer and a director effective November 2, 2005, and (iv) all of our
directors and executive officers as a group (based upon information furnished by
such persons). The business address of the group constituting a 5% shareholder
and each officer and director is c/o Vermont Pure Holdings, Ltd., 1050
Buckingham Street, Watertown, Connecticut 06795.
AMOUNT AND NATURE OF
NAME BENEFICIAL OWNERSHIP PERCENT OF CLASS
- -------------------------------------------------------- -------------------- ----------------
Henry E. Baker, John B. Baker, Peter K. Baker and Ross
S. Rapaport, individually and as a trustee, as a group 10,932,155(1) 48.2%(2)
Ross S. Rapaport, individually and as trustee 4,119,358(3)(4) 18.2%
Henry E. Baker 1,065,219 4.7%
Peter K. Baker 2,871,289 12.7%
John B. Baker 2,876,289 12.7%
Phillip Davidowitz 116,200(5) *
Martin A. Dytrych - -
John M. LaPides - -
Bruce S. MacDonald 280,065(6) 1.2%
All executive officers and directors as a group
(8 individuals) 11,328,420(7) 50.0%
- ----------
* Beneficially owns less than one percent
(1) Information is based on a Schedule 13D/A filed with the SEC on September
16, 2005 by Henry E. Baker, John B. Baker, Ross S. Rapaport, as an
individual and in his capacity as a trustee (the Baker Family Group). The
Schedule 13D/A states that as of that date, the Baker Family Group held
10,812,855 shares, as follows: Henry Baker has sole voting and dispositive
power with respect to 1,065,219 shares, John Baker has sole voting and
dispositive power with respect to
- 11 -
2,876,289 shares, Peter Baker has sole voting and dispositive power with
respect to 2,871,289 shares, and Mr. Rapaport has sole voting and
dispositive power with respect to 4,000,058 shares (including (i)
3,910,018 shares held as a trustee U/T/A dated 12/16/91 F/B/O Joan Baker
et al., Peter K. Baker Life Insurance Trust, and John B. Baker Life
Insurance Trust, (ii) 12,040 shares held individually and (iii) 78,000
shares issuable pursuant to stock options held individually). Subsequent
to the filing of Schedule 13D/A, Mr. Rapaport, in his capacity as trustee
U/T/A dated 12/16/91 F/B/O Joan Baker et al., purchased an additional
119,300 shares in the open market, bringing the total beneficially owned
by the Baker Family Group to 10,932,155 shares.
(2) Percentages in this column are determined in accordance with SEC Rule
13d-3. Based upon stock actually owned (that is, excluding Company options
held by Mr. Rapaport and by all other Company option holders), the Baker
Family Group currently owns a majority of the Company's issued and
outstanding common stock.
(3) Includes 78,000 shares of common stock issuable upon exercise of stock
options exercisable within 60 days of March 1, 2006.
(4) Includes 4,005,472 shares of common stock U/T/A dated 12/16/91 F/B/O Joan
Baker et. al.. of which Mr. Rapaport is trustee; 11,923 shares for each of
Peter K. Baker and John B. Baker Life Insurance Trusts, of which Mr.
Rapaport is trustee; and 12,040 individually owned by Mr. Rapaport.
(5) Includes 111,200 shares of common stock issuable upon exercise of stock
options exercisable within 60 days of March 1, 2006.
(6) Includes 240,500 shares of common stock issuable upon exercise of stock
options exercisable within 60 days of March 31, 2006.
(7) Includes 429,700 shares of common stock issuable upon exercise of stock
options exercisable within 60 days of March 1, 2006.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth additional information as of October 31,
2005, about shares of our Common Stock that may be issued upon the exercise of
options and other rights under our existing equity compensation plans and
arrangements, divided between plans approved by our stockholders and plans or
arrangements that were not required to be and were not submitted to our
stockholders for approval.
(a) (b) (c)
-------------------------- ------------------------- -------------------------
Number of Securities
remaining available for
Number of Securities to be Weighted-average exercise future issuance under
issued upon exercise of price of outstanding equity compensation plans
outstanding options, options, warrants and (excluding securities
Plan Category warrants and rights rights reflected in column (a)).
- ----------------------------- -------------------------- ------------------------- -------------------------
Equity compensation plans
approved by security holders 2,470,490(1) $ 2.99 61,197
Equity compensation plans not
approved by security holders 156,000(2) $ 2.50 -0-
--------- ------ ------
Total 2,626,490 $ 2.96 61,697
--------- ------ ------
- 12 -
(1) Includes options to purchase 1,479,200 shares of our common stock issued
to the former chief executive officer and several directors. These options
expired in December 2005 in connection with the resignation of such
officer and directors from our company.
(2) Represents options to purchase 156,000 shares of our common stock issued
to several former directors. These options expired in December 2005 in
connection with the resignation of such directors from our company.
CORPORATE GOVERNANCE
We believe that good corporate governance and fair and ethical business
practices are crucial not only to our proper operation, but also to building and
maintaining confidence in the integrity, reliability and transparency of the
securities markets. We have kept abreast of the actions taken by Congress, the
SEC and the American Stock Exchange to improve and enhance corporate governance,
and we take our responsibilities in this area very seriously. This section
explains some of the things we have done, or are considering, to improve the way
we run Vermont Pure.
CODE OF ETHICS
Our Board of Directors has adopted a code of ethics that applies to all of
our employees, officers and directors. The code covers compliance with law; fair
and honest dealings with us, with competitors and with others; fair and honest
disclosure to the public; and procedures for compliance with the code. You can
review our code of ethics on our website located at www.vermontpure.com under
the section entitled "Directors and Officers."
BOARD, COMMITTEE AND STOCKHOLDER MEETINGS
Rules of the American Stock Exchange require that our Board of Directors
meet at least quarterly. During the fiscal year ended October 31, 2005, the
Board met four times in person and five times by telephone conference. The audit
committee met four times in person and four times by telephone conference, the
compensation committee met one time in person and one time by telephone
conference and the executive committee met seven times during the year by
telephone conference. No incumbent director attended fewer than 75% of the total
number of meetings of the Board and committees of the Board on which he served.
It is our policy that all members of the Board of directors attend the
annual meeting of stockholders in person, although we recognize that directors
occasionally may be unable to attend for personal or professional reasons. We
generally hold a meeting of the Board on the same date as the annual stockholder
meeting. In 2005, all directors attended the annual stockholder meeting in
person except for John Baker, Philip Davidowitz, and Beat Schlagenhauf. Messrs.
Baker and Davidowitz participated by conference telephone in the Board meeting
held that day.
BOARD AND COMMITTEE INDEPENDENCE
Board of Directors. Vermont Pure is a "controlled company" under the
Corporate Governance Rules of the American Stock Exchange (AMEX), which means
that a majority of its
- 13 -
issued and outstanding voting stock is controlled by a single person or related
group of persons, and that the company has elected controlled company status.
A controlled company is exempted from certain rules otherwise applicable
to companies whose securities are listed on AMEX, including (1) the requirement
that a the company have a majority of independent directors; (2) the requirement
that nominations to the company's Board be either selected or recommended by a
nominating committee consisting solely of independent directors; and (3) the
requirement that officers' compensation be either determined or recommended by a
compensation committee consisting solely of independent directors.
Of our seven current directors, we have determined that three of them -
Philip Davidowitz, Martin Dytrych and John LaPides - are independent directors.
(Of the eleven Board members who served during fiscal 2005, we determined that
Philip Davidowitz, Robert Getchell, Carol Lintz, David Preston, Norman Rickard
and Beat Schlagenhauf were independent. All of these directors, except for Mr.
Davidowitz, resigned effective November 1, 2005.)
Under the rules of the American Stock Exchange, no director qualifies as
independent until the board makes an affirmative determination to that effect.
In making this determination, the board must affirmatively conclude that the
director does not have a material relationship with us that would interfere with
the exercise of his or her independent judgment in carrying out the
responsibilities of a director. The Board considered, among other factors, the
director's current and historic relationships with us and our competitors,
suppliers, customers and auditors, including compensation directly or indirectly
paid to the director; the director's professional and family relationships with
management and other directors; the relationships that the director's current
and former employers may have with us; and the relationships between us and
other companies of which the director may be a director or executive officer.
AMEX rules require that the independent directors meet on a regular basis as
often as necessary to fulfill their responsibilities, including at least
annually in executive session. The independent directors met four times in
person during fiscal year 2005.
In fiscal 2006, as a result of this review, the Board determined that
Messrs. Davidowitz, Dytrych and LaPides are independent.
Chairman and Chief Executive Officer. The Chairman of the Board is Ross
Rapaport, and the Chief Executive Officer is Peter Baker. Although most major
companies in the United States have CEOs who also hold the position of chairman
of the board, a number of studies on corporate governance have recommended that
the positions be held by two different persons. Neither Mr. Rapaport nor Mr.
Baker is an independent director.
Compensation Committee. Although as a controlled company Vermont Pure does
not have to have an independent compensation committee, we have elected to do
so. The Board has determined that Messrs. Davidowitz, Dytrych and LaPides, as
the members of the compensation committee, are independent. For more information
about this committee and its functions, see "Committee Reports -- Compensation
Committee Report" in this proxy statement.
Audit Committee. Under AMEX rules, the Board is required to make certain
findings about the independence and qualifications of the members of the audit
committee. In addition to
- 14 -
assessing the independence of the members under the AMEX rules, the Board also
considered the requirements of Section 10A(m)(3) and Rule 10A-3 under the
Securities Exchange Act of 1934. As a result of its review, the Board determined
that Messrs. Davidowitz, Dytrych and LaPides, as the members of the audit
committee, are independent. Mr. Dytrych serves as the chairman of the audit
committee.
In addition, the Board determined that:
- each member of the audit committee is, as required by AMEX rules, is
able to read and understand fundamental financial statements; and
- at least one member of the committee, Mr. Dytrych, is "financially
sophisticated" under the AMEX rules and is an "audit committee
financial expert" under applicable provisions of the federal
securities laws.
If you would like more information about this committee and its functions,
see "Committee Reports -- Audit Committee Report" in this proxy statement.
NOMINATING PROCESS
Nominations. Vermont Pure is a "controlled company" under the Corporate
Governance Rules of the American Stock Exchange (AMEX), which means that a
majority of its issued and outstanding voting stock is controlled by a single
person or related group of persons, and that the company has elected controlled
company status.
A controlled company is exempted from certain rules otherwise applicable
to companies whose securities are listed on AMEX, including (1) the requirement
that a the company have a majority of independent directors; (2) the requirement
that nominations to the company's Board be either selected or recommended by a
nominating committee consisting solely of independent directors; and (3) the
requirement that officers' compensation be either determined or recommended by a
compensation committee consisting solely of independent directors.
Accordingly, nominations to our Board were made by the full Board of
Directors. The Board has nominated the seven incumbent directors to serve as
candidates for election as director, to serve until the next annual meeting of
stockholders and until their respective successors have been elected and
qualified.
Nominations by Stockholders. Since 2000, we have had a by-law provision
that authorizes a stockholder of record to submit to us the name of any person
whom the stockholder wishes to nominate as a candidate for election to the
board. In general, such a submission must be received by our corporate secretary
at our principal office in Vermont at least 90 days prior to the scheduled date
of the annual stockholder meeting, and must contain all information about the
candidate that would be required to be disclosed in a proxy statement prepared
and filed under federal and state law, as well as the proposed nominee's consent
to be named as a nominee and to serve if elected. The stockholder must also
provide information about his or her identity and the number of shares owned. If
the nomination is made by a stockholder holding shares in "street name," then
the identity and ownership information must be furnished about the
- 15 -
beneficial owner of the shares. A candidate submitted by a stockholder as a
nominee need not be nominated by the independent directors.
Our by-laws do not obligate us to include information about the candidate
in our proxy materials, nor does it require us to permit the stockholder to
solicit proxies for the candidate using our proxy materials. The by-laws relate
only to the procedure by which a stockholder may nominate a candidate for
director. To date, no stockholder has proposed a candidate pursuant to our
by-laws. We are not currently seeking new directors. If a stockholder should
propose a candidate, we anticipate that the independent directors will evaluate
that candidate on the basis of the criteria noted above. For additional
information, please refer to Section 4.5 of our by-laws and the section entitled
"Stockholder Proposals for the Next Annual Meeting" in this proxy statement.
Recently adopted SEC rules that may require us to include in our future
proxy statements information about a recommended stockholder nominee, but only
when the following criteria are met:
- the proposed nomination is received by a date not later than the
120th day before the date of our proxy statement released to
stockholders in connection with the prior year's annual meeting; and
- the stockholder or stockholder group making the proposal has
beneficially owned more than 5% of our common stock for at least a
year.
If these criteria are met, and provided that we have written consent from the
proposed candidate and from the stockholder or stockholder group, we would be
obliged to identify in our proxy statement the name of the candidate and the
stockholder or stockholder group making the nomination, and to disclose our
position regarding the nomination. By way of illustration, since this proxy
statement was first sent to stockholders on or about March 15, 2006, the
deadline for submission of a candidate's name by an eligible stockholder
pursuant to this new SEC rule would be November 15, 2006 for the 2007 annual
stockholder meeting.
STOCKHOLDER COMMUNICATIONS
Our stockholders may communicate directly with the members of the Board of
Directors or the chair of Board committees by writing directly to those
individuals c/o Vermont Pure Holdings, Ltd. at the following address: 1050
Buckingham Street, Watertown, Connecticut 06795. Our policy is to forward, and
not to intentionally screen, any mail received at our corporate office that is
sent directly to an individual.
COMMITTEE REPORTS
AUDIT COMMITTEE REPORT
The information set forth in this report is not "soliciting material" and
is not "filed" with the SEC or subject to Regulation 14A under, or the
liabilities of Section 18 of the Securities Exchange Act of 1934, except to the
extent we specifically request that the information be treated as soliciting
material or specifically incorporates it by reference into a document filed
under the Securities Act of 1933 or the Securities Exchange Act of 1934.
- 16 -
Role of the Audit Committee
The primary purpose of the audit committee is to assist the board in
fulfilling its oversight responsibilities relating to (a) the quality and
integrity of our financial statements and other financial reports, (b) our
system of internal accounting controls, (c) the performance of our independent
auditors and (d) our compliance with legal and regulatory requirements. The
committee meets privately with the independent auditors, has the sole authority
to retain and dismiss the independent auditors and reviews their performance and
independence from management. The independent auditors have unrestricted access
and report directly to the committee. The audit committee has the sole authority
to approve transactions that may involve actual or apparent conflicts of
interest. Additionally, the audit committee has responsibilities and authority
necessary to comply with Exchange Act rules relating to (i) direct
responsibility for the appointment, compensation, retention and oversight of our
accountants, (ii) treatment of complaints and concerns relating to accounting,
internal accounting controls and auditing matters, (iii) the engagement of
independent counsel and other advisors, and (iv) determining appropriate funding
for audit and audit-committee related expenses. These and other aspects of the
audit committee's authority are more particularly described in the audit
committee charter, filed as Annex A to our proxy statement filed with the SEC on
March 1, 2004.
Review of our Audited Financial Statements for the Fiscal Year ended October 31,
2005
The audit committee has reviewed and discussed our audited financial
statements for the fiscal year ended October 31, 2006 with management. The audit
committee has discussed with Deloitte & Touche LLP, our independent registered
public accounting firm, the matters required to be discussed by SAS 61
(Codification of Statements on Auditing Standards, AU Section 380), as may be
modified or supplemented.
The audit committee has also received the written disclosures and the
letter from Deloitte & Touche LLP required by Independence Standards Board
Standard No. 1 (Independence Standards Board Standard No. 1, Independence
Discussions with Audit Committees), as may be modified or supplemented, and the
audit committee has discussed the independence of Deloitte & Touche LLP with the
firm. In evaluating the independence of Deloitte & Touche LLP, the Audit
Committee considered that the only non-audit service that Deloitte & Touche LLP
provides is preparation of our federal and state income tax returns.
Based on the audit committee's review and discussions noted above, the
audit committee recommended to the board of directors that our audited financial
statements be included in our annual report on Form 10-K for the fiscal year
ended October 31, 2005.
AUDIT COMMITTEE
Philip Davidowitz
Martin Dytrych, Chairman
John LaPides
- 17 -
COMPENSATION COMMITTEE REPORT
The compensation committee of the Board is currently composed of three
directors, Messrs. Davidowitz, Dytrych and LaPides, who were appointed at the
beginning of fiscal year 2006.
The committee is charged with the responsibility of reviewing and
approving executive officers' compensation and approving discretionary grants of
stock options and restricted stock under our stock option and incentive plans,
which it administers.
Although as a controlled company Vermont Pure is not required to have an
independent compensation committee, we have decided to maintain that committee's
independence. For companies other than controlled companies, AMEX rules require
that the compensation of the chief executive officer be determined, or
recommended to the board for its determination, by either a majority of
independent directors or a wholly-independent compensation committee. We intend
to continue to use our existing compensation committee, the members of which are
independent, for this purpose. AMEX rules prohibit a CEO from being present
during voting or deliberations with respect to his compensation. Compensation of
all other executive officers is required to be determined in the same manner,
except that the CEO is permitted to be present during voting or deliberations
with respect to the compensation of executive officers other than himself. AMEX
rules do not require that a compensation committee have a written charter, and
our compensation committee does not have a written charter at this time.
The following describes the compensation programs in effect during fiscal
2005.
Compensation Policy
Our compensation policies are designed to pay executives an annual salary
that is industry competitive and an annual bonus that is based both on our
performance and on individual goals established for each of the executives for
the fiscal year. Historically, we have also had longer term incentives based on
stock-based compensation, consisting of options and restricted stock, but the
current compensation committee intends to reduce the significance of stock-based
compensation in our compensation scheme, preferring instead to emphasize the
payment of cash bonuses based upon the attainment of performance goals. This
lessened reliance on stock-based compensation reflects in part the fact that our
two most senior executives have very significant ownership positions in our
stock, which helps to ensure that their economic interests align with those of
the other stockholders. All of the components of compensation are reviewed
annually by the committee.
Salaries for executive officers are based on the duties and
responsibilities of the position held by the executive compared with executive
officers of other companies in the industry. Salaries are reviewed and
established within the parameters set forth in employment agreements. When
appropriate, the committee reviews various industry salary surveys in
establishing compensation.
The officer's performance over the prior year is assessed by comparing it
to objectives and goals that are established by the Board of Directors, the
committee and management in a strategic planning process. Payment of bonuses is
currently determined by reference to specific
- 18 -
performance related formulas in the employment agreements. The committee
approves all such determinations.
In fiscal year 2005, we granted restricted stock and stock options to some
of our executives and key employees as a means of creating a long-term incentive
and benefit. Restricted stock is generally awarded to vest on a future date;
vesting may be based on certain performance criteria in order to reward an
executive's commitment and success. Stock options are granted at the fair market
value of shares of common stock on the date of grant. Thus, no benefit will
accrue to the executive or key employee from the stock option grant until the
common stock appreciates. This creates a long-term goal for appreciation of the
common stock which coincides with the interests of the stockholders.
Fiscal Year 2005 Compensation Committee Activity
In a transitional year for the company, the committee focused its
activities on (a) administering awards under existing executive employment
agreements and (b) finalizing new agreements that reflect a downsized
organization and provide incentives for future success.
The committee granted the Chief Executive Officer and the Chief Financial
Officer restricted stock awards and stock options during fiscal 2005. The
restricted stock awards included performance elements. The stock options vested
over time. Mr. Fallon's restricted stock and stock options were forfeited or
expired following his resignation. All of our executive officers earned
performance-based bonuses in accordance with their respective employment
agreements, which, in general, provided for bonuses based upon the percentage of
targeted earnings before interest, taxes, depreciation, and amortization
(EBITDA) that the Company achieved in fiscal 2005.
Following the sale of the retail segments of our business, the Board asked
the committee to develop new contracts for our senior executives to replace
those which were due to expire in October 2005. The committee accordingly
established a series of principles to be applied to these agreements that
reflected the company's new operating environment as well as the need to retain
an experienced and proven management team.
Effective January 1, 2005, the committee authorized new employment
agreements with the Chief Executive Officer, Timothy Fallon; the President,
Peter Baker; and the Executive Vice President, Jack Baker. Subsequently, the
committee authorized employment agreements with the Chief Financial Officer,
Bruce MacDonald, on March 24, 2005, and the Chairman Emeritus, Henry Baker, on
July 1, 2005. For detailed discussion of these contracts, please refer to
"Employment Contracts, Change-in-Control Arrangements and Severance Contracts"
The committee considered that, for a period of time, Vermont Pure is going
to be somewhat smaller, and that meeting financial and operational business
targets is critical to maintaining both financing support and the company's
strategic position. The new contracts have the following features reflecting the
committee's resolution of these concerns:
- moderately lower base salaries going forward and a slightly lower
level of overall target compensation for the team;
- 19 -
- a greater percentage of compensation to be earned through enhancing
the profitability of the company as measured by EBITDA; and
- a focus on quarterly business targets, determined yearly, based on
the importance of timely achievement. In 2005 and 2006 these targets
are financial covenants related to the company's credit agreement.
In the case of the Chairman Emeritus, the committee wished to ensure his
continued availability in light of his many years of experience in the industry.
Following his resignation, Mr. Fallon entered into a Severance Agreement
with us which was approved by the current compensation committee. The Severance
Agreement, which is also described under "Employment Contracts and
Change-in-Control Arrangements," provided us with Mr. Fallon's consulting
services for two years in connection with our general business and until the
conclusion of the lawsuit in connection with pending litigation, and extended
Mr. Fallon's non-competition agreement from one year to two years. In exchange,
we agreed to pay Mr. Fallon severance compensation of $200,000 over an 18-month
period beginning May 1, 2006, and a consulting fee of $50,000 payable May 1,
2006.
In fiscal 2006, we authorized the payment of a one-time discretionary
bonus of $15,000 to Mr. MacDonald as a reward for his significant contributions
to the Company during the period of transition from the prior Board of Directors
and management to the current Board and management.
Respectfully submitted,
COMPENSATION COMMITTEE
Philip Davidowitz
Martin Dytrych
John LaPides
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal year 2005, David Preston and Robert Getchell served on our
compensation committee. The current members are Philip Davidowitz, Martin
Dytrych and John LaPides. Persons serving on our compensation committee had no
relationships with us other than their relationship as directors entitled to the
receipt of standard compensation as directors and members of certain committees
of our board and their relationship to us as stockholders. No person serving on
our compensation committee or on our board of directors is an executive officer
of another entity for which any of our executive officers serves on the board of
directors or on that entity's compensation committee.
- 20 -
PERFORMANCE GRAPH
The following Performance Graph compares the performance of our cumulative
stockholder return with that of the AMEX market index and a published industry
index (the SIC Code Index for Grocery Related Products) for each of the most
recent five fiscal years. The cumulative stockholder return for shares of our
Common Stock and each of the indices is calculated assuming that $100 was
invested on October 31, 2001. We paid no cash dividends during the periods
shown. The performance of the indices is shown on a total return (dividends
reinvested) basis. The graph lines merely connect year-end dates and do not
reflect fluctuations between those dates.
(Graphics Omitted)
2001 2002 2003 2004 2005
------ ------ ------ ------ ------
Vermont Pure Holdings, LTD. 100.00 126.67 112.67 59.67 68.00
SIC Code Index 100.00 68.03 90.84 103.69 121.42
Amex Market Index 100.00 116.55 134.42 136.94 147.97
- 21 -
CERTAIN TRANSACTIONS
Subordinated Notes Issued to Significant Stockholders
In October 2000, we issued the stockholders of Crystal Rock (members of
the Baker family and related family trusts) subordinated promissory notes due in
2007 in the original principal amount of $22,600,000. In fiscal 2004, we paid
$5,000,000 in principal on these notes with part of the proceeds from the sale
of the assets of our retail business. In fiscal 2005, we paid $3,600,000 in
principal on the notes in conjunction with the refinancing of our senior debt
facility. As part of the refinancing, we restructured the terms of the
subordinated notes. The following table shows the holder, the remaining
principal amount on October 31, 2005 and the amount paid each holder for
interest and principal.
PRINCIPAL PRINCIPAL PAID IN INTEREST PAID IN
RELATED PARTY BALANCE FISCAL YEAR 2005 FISCAL YEAR 2005
- ------------------------------------- ----------- ----------------- ----------------
Henry E. Baker $ 3,089,000 400,000 $ 405,000
John B. Baker $ 4,700,000 500,000 $ 607,000
Peter K. Baker $ 4,700,000 500,000 $ 607,000
Joan A. Baker $ 1,511,000 - $ 182,000
Ross S. Rapaport, Trustee U/T/A dated
12/16/91 F/B/O Joan Baker et al. - $ 2,200,000 $ 181,000
----------- ----------- -----------
Total $14,000,000 $ 3,600,000 $ 1,982,000
Henry Baker and his sons, John and Peter Baker, are directors and
executive officers. Joan Baker is the wife of Henry and the mother of Peter and
John. During fiscal 2005, Ross Rapaport was associated with Pepe & Hazard LLP, a
law firm which we engage regularly for various legal matters. During 2005, we
paid the firm $118,000.
As restructured in 2005, the subordinated notes bear interest at 12%,
compounded quarterly, with payments due on the 20th of February, May, August and
November. The notes mature in 2012 and we are required to pay interest only
until maturity. There is a balloon payment of the full principal amount at
maturity. The subordinated notes become due and payable in case of liquidation,
dissolution, insolvency, sale of the business or acceleration of the senior
debt. Our senior debt facility makes funds available for repayment of the
subordinated notes if we attain certain financial criteria. There is no
prepayment penalty for repaying the subordinated notes.
The subordinated notes are secured by all of our assets, but the
subordinated notes and security interest are junior and subordinated to the
senior debt owed to and the security interest in favor of Bank of America and
its successors. Under the related subordination agreement, we may pay, and the
holders of the subordinated notes may accept, quarterly interest payments so
long as there is no default on the senior debt and the payment would not cause
such a default. The holders of the subordinated notes can accrue unpaid
interest, and we may pay those amounts, if such payments would not result in a
default on the senior debt. The holders of the subordinated notes have pledged a
continuing security interest in the subordinated notes to Bank of America.
- 22 -
Related Party Leases
We lease a 72,000 square foot facility in Watertown, Connecticut from
Henry E. Baker, as trustee of the Baker Grandchildren's Trust, and a 22,000
square foot facility in Stamford, Connecticut from Henry E. Baker, both of which
expire in 2010. Annual rent payments for the ten year leases are as follows:
2000 - 2005 2005 - 2010
----------- -----------
Watertown $ 360,000 $ 414,000
Stamford $ 216,000 $ 248,400
The Watertown, Connecticut facility contains a water purification and
bottling plant, warehouse space, a truck garage and office space. We lease this
property on a "triple net" basis, for a ten year term which began in October
2000, with an option to extend the lease for a negotiated rent for an additional
five years. We believe that the rent we pay for this facility is at least as
favorable as we could have obtained in an arm's-length transaction. In fiscal
year 2005, the fifth year of the lease, we paid $365,000 in rent which reflects
the change of the annual rate as dictated by the lease.
The Stamford property includes warehouse space, a truck garage and office
space. We entered into this lease in October 2000 and have an option to extend
this ten year "triple net" lease for a negotiated rent for an additional five
years. Either party may terminate the lease prior to expiration upon nine
months' notice to the other, but if we terminate, we must pay a termination fee
equal to six months' rent. We believe that the rent we pay for this facility is
at least as favorable as we could have obtained in an arm's-length transaction.
In fiscal year 2005, the fifth year of the lease, we paid $219,000 in rent which
reflects the change of the annual rate as dictated by the lease.
Related Party Supplier
We own approximately 24% of the common equity of a software company named
Computer Design Systems, Inc. (d/b/a Voyageur Software), or CDS. Peter K. Baker,
our president and director, is a member of the board of directors of CDS. We use
software designed, sold and serviced by CDS in our home and office delivery
system to manage customer service, deliveries, inventory, billing and accounts
receivable. During fiscal year 2005, we paid CDS $218,000 for service, software
and hardware.
INDEPENDENT PUBLIC ACCOUNTANTS
Current Independent Registered Public Accounting Firm
The audit committee engaged Deloitte & Touche LLP as our independent
registered public accounting firm for the fiscal years ending October 31, 2005,
2004, and 2003. A representative of Deloitte & Touche LLP is expected to be
present at the meeting and will have an opportunity to make a statement if he
desires to do so. He is also expected to be able to respond to appropriate
questions.
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The audit committee has not yet selected an independent registered public
accounting firm to audit our financial statements for fiscal 2006.
Independent Registered Public Accounting Firm Fees
The following is a summary of the fees for professional services rendered
by Deloitte & Touche LLP for the fiscal years ended October 31, 2005 and 2004:
FEES
--------------------
FEE CATEGORY 2005 2004
- ------------------ -------- --------
Audit fees $203,000 $116,000
Audit-related fees - -
Tax fees 80,000 100,000
All other fees - -
-------- --------
Total fees $283,000 $216,000
======== ========
Audit Fees: Audit fees were for professional services rendered for the
audit of our annual financial statements, the review of quarterly financial
statements and the preparation of statutory and regulatory filings.
Audit-Related Fees: Audit-related fees were for professional services
rendered in connection with employee benefit plan audits, accounting
consultations, due diligence and audits in connection with acquisitions.
Tax Fees: Tax fees consist of fees billed for professional services for
tax compliance, tax planning and tax advice. These services include assistance
regarding federal and state tax compliance and planning, tax audit defense, and
mergers and acquisitions.
All Other Fees: All other fees includes assistance with miscellaneous
reporting requirements and interpretation of technical issues.
The audit committee considered and determined that the provision of
non-audit services provided by Deloitte & Touche LLP is compatible with
maintaining the firm's independence.
PRE-APPROVAL POLICIES AND PROCEDURES
At present, our audit committee approves each engagement for audit and
non-audit services before we engage Deloitte & Touche LLP to provide those
services.
Our audit committee has not established any pre-approval policies or
procedures that would allow our management to engage Deloitte & Touche LLP to
provide any specified services with only an obligation to notify the audit
committee of the engagement for those services. None of the services provided by
Deloitte & Touche LLP for fiscal 2005 was obtained in reliance on the waiver of
the pre-approval requirement afforded in SEC regulations.
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SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our officers, directors and persons who beneficially own more than 10% of a
registered class of our common stock to file reports of ownership and changes in
ownership with the Securities and Exchange Commission, or SEC. Officers,
directors and ten-percent-stockholders are charged by the SEC to furnish us with
copies of all Section 16(a) forms they file.
Based solely upon a review of Forms 3, 4 and 5 and amendments to those
forms furnished to us during fiscal 2005, and, if applicable, written
representations that a Form 5 was not required, we believe that all Section
16(a) filing requirements applicable to our officers, directors and
ten-percent-stockholders were fulfilled in a timely manner.
SOLICITATION OF PROXIES
We are soliciting proxies in the enclosed form and paying the cost of the
solicitation. In addition to the use of the mails, we may solicit proxies
personally or by telephone or telegraph using the services of our directors,
officers and regular employees at nominal cost. We will reimburse banks,
brokerage firms and other custodians, nominees and fiduciaries for expenses
incurred in sending proxy material to beneficial owners of our common stock.
STOCKHOLDER PROPOSALS FOR THE NEXT ANNUAL MEETING
In order to be eligible for inclusion in our proxy statement and form of
proxy for the annual meeting scheduled to be held in 2007, stockholder proposals
must comply with SEC Rule 14a-8 and any other applicable rules and must be
delivered to our principal executive offices at least 120 days prior to the
anniversary date of mailing of this proxy statement. This proxy statement was
sent on or about March 15, 2006, so the date by which proposals are required to
be received under Rule 14a-8 will be November 15, 2006.
Section 3.7 of our by-laws requires that a stockholder who wishes to bring
an item of business before the annual meeting must provide notice of such item
of business to us at our principal executive offices not less than 90 days
before the date for such meeting. We currently anticipate that next year's
annual meeting will take place at approximately the same time of the year, or on
or about April 25, 2006. In that case, the deadline for submission of notice
will be January 25, 2006. Section 4.5 of our by-laws imposes the same deadline
on the nomination by a stockholder of a candidate for election to the board of
directors. For a meeting scheduled on April 25, 2006, any proposal or nomination
submitted after January 25, 2006 will be untimely. Our by-laws contain a number
of other substantive and procedural requirements which should be reviewed by any
interested stockholder. Finally, SEC rules require us to disclose in our proxy
materials certain information about candidates for nomination to the board who
are recommended by a stockholder or group of stockholders owning more than 5% of
our common stock. The deadline for notice to us of such a recommendation is 120
days prior to the anniversary date of mailing of this proxy statement, or
November 15, 2006.
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AVAILABILITY OF FORM 10-K
We are providing, without charge, to each person solicited by this proxy
statement a copy of our annual report on Form 10-K for the fiscal year ended
October 31, 2005, including our financial statements but excluding the exhibits
to the Form 10-K. The Form 10-K includes a list of the exhibits that were filed
with it, and we will furnish a copy of any such exhibit to any person who
requests it upon the payment of our reasonable expenses in providing the
requested exhibit. For further information, contact Bruce S. MacDonald, Chief
Financial Officer, Vermont Pure Holdings, Ltd., 1050 Buckingham Street,
Watertown, Connecticut 06795, telephone 802-860-1126. Our annual report on Form
10-K and our other filings with the SEC, including the exhibits, are also
available for free on our website (http://www.vermontpure.com) and the SEC's
website (http://www.sec.gov).
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VERMONT PURE HOLDINGS, LTD. - PROXY
SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING TO BE HELD ON APRIL 26, 2006
The undersigned Stockholder(s) of VERMONT PURE HOLDINGS, LTD., a Delaware
corporation ("Company"), hereby appoints Ross S. Rapaport and Peter K. Baker, or
either of them, with full power of substitution and to act without the other, as
the agents, attorneys and proxies of the undersigned, to vote the shares of
stock held by the undersigned or which the undersigned may be entitled to vote
at the Annual Meeting of Stockholders of the Company to be held on April 26,
2006 and at all adjournments thereof. This proxy will be voted in accordance
with the instructions given on the reverse and in the discretion of the proxies
upon all other matters that may properly come before the Meeting. IF NO
INSTRUCTIONS ARE GIVEN, THIS PROXY WILL BE VOTED FOR ALL OF THE FOLLOWING
PROPOSALS.
The undersigned hereby revokes all proxies, if any, hitherto given by him
to others for said Meeting.
(CONTINUED, AND TO BE SIGNED, ON OTHER SIDE.)
PLEASE DATE, SIGN AND MAIL YOUR
PROXY CARD BACK AS SOON AS POSSIBLE!
ANNUAL MEETING OF STOCKHOLDERS
VERMONT PURE HOLDINGS, LTD.
APRIL 26, 2006
PLEASE DETACH AND MAIL IN THE ENVELOPE PROVIDED
- --------------------------------------------------------------------------------
A [X] Please mark your
votes as in this
example
1. Election of the following directors:
Henry E. Baker Martin A. Dytrych
John B. Baker John M. LaPides
Peter K. Baker Ross S. Rapaport
Phillip Davidowitz
[ ] FOR all nominees listed above except as marked to the contrary below.
[ ] WITHHOLD AUTHORITY to vote for all nominees listed above.
INSTRUCTIONS: To withhold authority to vote for any individual nominee,
write that nominee's name in the space below.
____________________
2. In their discretion, the proxies are authorized to vote upon such other
business as may come before the meeting or any adjournment thereof.
I PLAN ON ATTENDING THE ANNUAL MEETING [ ]
Signature ____________________
Signature if held jointly ________________________ Dated _____________, 2006
NOTE: Please sign exactly as name appears above. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporate name by President or other authorized officer. If a
partnership, please sign in partnership name by authorized person.