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 April 30, 2006
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.)
1050 Buckingham St., Watertown, CT 06795
(Address of principal executive offices) (Zip Code)
(860) 945-0661
(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 June 7, 2006
----- ---------------------
Common Stock, $.001 Par Value 21,645,641
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
April 30, 2006 and October 31, 2005 (unaudited) 3
Condensed Consolidated Statements of Operations
for the Three and Six Months ended
April 30, 2006 and 2005 (unaudited) 4
Condensed Consolidated Statements of Cash
Flows for the Six Months ended April 30, 2006
and 2005 (unaudited) 5
Notes to Condensed Consolidated Financial
Statements (unaudited) 6-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-21
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 22-23
Item 4. Controls and Procedures 24
Part II - Other Information
Item 1 Legal Proceedings 25
Item 1a. Risk Factors 25
Item 4 Submission of Matters to a Vote of Security
Holders 25-26
Item 6. Exhibits 26
Signature 27
2
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
April 30, October 31,
2006 2005
------------ ------------
(unaudited) (unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 517,657 $ 1,895,810
Accounts receivable - net 7,407,944 7,249,801
Inventories 1,276,905 1,133,315
Current portion of deferred tax asset 796,662 796,662
Other current assets 1,206,158 1,699,370
Unrealized gain on derivatives 210,810 168,582
------------ ------------
TOTAL CURRENT ASSETS 11,416,136 12,943,540
------------ ------------
PROPERTY AND EQUIPMENT - net of accumulated depreciation 10,900,556 10,890,376
------------ ------------
OTHER ASSETS:
Goodwill 74,747,130 74,755,851
Other intangible assets - net of accumulated amortization 3,534,802 3,569,818
Deferred tax asset 654,729 654,729
Other assets 75,000 75,000
------------ ------------
TOTAL OTHER ASSETS 79,011,661 79,055,398
------------ ------------
TOTAL ASSETS $101,328,353 $102,889,314
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long term debt $ 3,327,000 $ 3,266,750
Accounts payable 1,619,568 2,582,105
Accrued expenses 2,897,382 2,990,129
Current portion of customer deposits 726,412 732,835
------------ ------------
TOTAL CURRENT LIABILITIES 8,570,362 9,571,819
------------ ------------
Long term debt, less current portion 36,750,000 37,975,000
Customer deposits 2,914,546 2,933,732
------------ ------------
TOTAL LIABILITIES 48,234,908 50,480,551
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock - $.001 par value, 50,000,000 authorized shares
21,717,191 issued and 21,645,641 outstanding shares as of
April 30, 2006 and 21,744,817 issued and 21,673,267
outstanding as of October 31, 2005 21,717 21,744
Additional paid in capital 58,176,182 58,207,645
Treasury stock, at cost, 71,550 shares as of April 30, 2006
and October 31, 2005 (264,735) (264,735)
Unearned compensation -- (134,250)
Accumulated deficit (5,050,529) (5,590,223)
Accumulated other comprehensive income, net of tax 210,810 168,582
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 53,093,445 52,408,763
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $101,328,353 $102,889,314
============ ============
See notes to the condensed consolidated financial statements.
3
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended Six months ended
April 30, April 30,
------------------------- -------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
(unaudited) (unaudited)
NET SALES $15,240,516 $14,755,872 $29,854,230 $28,719,632
COST OF GOODS SOLD 6,475,807 6,167,839 12,875,043 12,099,715
----------- ----------- ----------- -----------
GROSS PROFIT 8,764,709 8,588,033 16,979,187 16,619,917
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Selling, general and administrative expenses 6,698,666 6,896,252 13,500,280 13,673,106
Advertising expenses 220,504 294,709 490,131 550,548
Amortization 217,980 193,611 426,787 388,893
(Gain) loss on disposal of property and
equipment (9,924) 6,009 (11,705) (11,885)
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES 7,127,226 7,390,581 14,405,493 14,600,662
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 1,637,483 1,197,452 2,573,694 2,019,255
----------- ----------- ----------- -----------
OTHER EXPENSE:
Interest (759,042) (850,156) (1,575,238) (1,660,914)
Miscellaneous -- -- -- --
----------- ----------- ----------- -----------
TOTAL OTHER EXPENSE (759,042) (850,156) (1,575,238) (1,660,914)
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 878,441 347,296 998,456 358,341
INCOME TAX EXPENSE (403,630) (142,573) (458,762) (147,105)
----------- ----------- ----------- -----------
NET INCOME $ 474,811 $ 204,723 $ 539,694 $ 211,236
=========== =========== =========== ===========
NET INCOME PER SHARE - BASIC: $ 0.02 $ 0.01 $ 0.02 $ 0.01
=========== =========== =========== ===========
NET INCOME PER SHARE - DILUTED: $ 0.02 $ 0.01 $ 0.02 $ 0.01
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES USED IN COMPUTATION - BASIC 21,645,641 21,624,827 21,627,496 21,582,605
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES USED IN COMPUTATION -
DILUTED 21,645,641 21,635,277 21,627,496 21,591,115
=========== =========== =========== ===========
See notes to the condensed consolidated financial statements.
4
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended April 30,
--------------------------
2006 2005
----------- ------------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 539,694 $ 211,236
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 2,048,168 2,505,794
Bad debt provision 185,348 223,492
Amortization 426,787 388,893
Non cash interest expense 51,941 --
Gain on disposal of property and equipment (11,705) (11,885)
Non cash compensation 14,064 28,600
Changes in assets and liabilities:
Accounts receivable (343,491) (668,990)
Inventories (143,590) (16,029)
Other current assets 389,328 (497,899)
Other assets -- 461,000
Accounts payable (962,537) (790,754)
Customer deposits (25,609) 45,845
Accrued expenses (92,747) 72,571
----------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,075,651 1,951,874
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (1,708,736) (1,496,326)
Proceeds from sale of fixed assets 94,669 102,604
Cash used for acquisitions (363,682) --
----------- ------------
NET CASH USED IN INVESTING ACTIVITIES (1,977,749) (1,393,722)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit 772,973 2,000,000
Payments on line of credit (772,973) (2,100,000)
Proceeds from debt -- 28,000,000
Principal payment on debt (1,564,750) (27,882,128)
Payments of debt issuance costs -- (185,000)
Sale of common stock 88,695 78,610
----------- ------------
NET CASH USED IN FINANCING ACTIVITIES (1,476,055) (88,518)
----------- ------------
NET INCREASE (DECREASE) IN CASH (1,378,153) 469,634
CASH - Beginning of period 1,895,810 783,445
----------- ------------
CASH - End of period $ 517,657 $ 1,253,079
=========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION,
EXCLUDING NON-CASH FINANCING AND INVESTING ACTIVITIES
Cash paid for interest $ 1,637,117 $ 1,736,779
=========== ============
Cash paid for income taxes $ 75,258 $ 194,400
=========== ============
NON-CASH FINANCING AND INVESTING ACTIVITIES:
Property, plant and equipment financed with
proceeds from debt $ 400,000 $ --
=========== ============
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 in the United States of America
("GAAP"), applied consistently with the Annual Report on Form 10-K of
Vermont Pure Holdings, Ltd. (the "Company") for the year ended October 31,
2005.
Certain information and footnote disclosures normally included in audited
consolidated financial statements presented in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted. The accompanying condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on
Form 10-K for the year ended October 31, 2005. The results of operations
for the interim periods are not necessarily indicative of the results to be
expected for the full year.
The financial statements herewith reflect the consolidated operations and
financial condition of Vermont Pure Holdings Ltd. and its wholly owned
subsidiary Crystal Rock, LLC.
Certain amounts have been reclassified in the 2005 condensed consolidated
financial statements to conform to the 2006 presentation.
2. STOCK BASED COMPENSATION
Effective November 1, 2005, the Company adopted the provisions of SFAS No.
123, "Share-Based Payments (revised 2004)" (SFAS No. 123R). SFAS No. 123R
requires companies to measure the cost of employee services received in
exchange for an award of equity instruments based on the grant date fair
value of the award. That cost will be recognized over the period during
which an employee is required to provide services in exchange for the
award, the requisite service period (usually the vesting period). SFAS No.
123R also requires companies to measure the cost of employee services
received in exchange for Employee Stock Purchase Plan ("ESPP") awards and
the Company is required to expense the grant date fair value of the
Company's ESPP awards.
The Company has several stock-based compensation plans under which
incentive and non-qualified stock options and restricted shares are
granted, and an Employee Stock Purchase Plan (ESPP). In November 1993, the
Company adopted the 1993 Performance Equity Plan (the "1993 Plan"). The
1993 Plan authorizes the granting of awards for up to 1,000,000
6
shares of common stock to key employees, officers, directors and
consultants until November 2003. Grants can take the form of stock options
(both qualified and non-qualified), restricted stock awards, deferred stock
awards, stock appreciation rights and other stock based awards. During
fiscal 2004 and 2003 there were no options issued under this plan. The plan
prohibits issuances of options after November 2004.
In April 1998, the Company's shareholders approved the 1998 Incentive and
Non Statutory Stock Option Plan. In April 2003, the Company's shareholders
approved an increase in the authorized number of shares to be issued under
its 1998 Incentive and Non-Statutory Stock Option Plan from 1,500,000 to
2,000,000. This plan provides for issuances of up to 2,000,000 options to
purchase the Company's common stock under the administration of the
compensation committee of the Board of Directors. The intent of the plan is
to reward options to officers, employees, directors, and other individuals
providing services to the Company. The following table summarizes the
activity related to stock options and outstanding stock option balances
during the six months ended April 30, 2006:
Outstanding Options Weighted Average
(Shares) Exercise Price
------------------- ----------------
Balance at October 31, 2005 2,626,490 $2.96
Exercised (5,000) 1.80
Expired (1,804,303) 2.96
----------
Balance at October 31, 2003 817,187 2.95
==========
The following table summarizes information pertaining to outstanding stock
options as of April 30, 2006:
Weighted Average Weighted Weighted
Exercise Outstanding Remaining Average Exercisable Average
Price Options Contractual Exercise Options Exercise
Range (Shares) Life Price (Shares) Price
- ------------- ----------- ---------------- -------- ----------- --------
$1.80 - $2.60 329,500 6.6 $2.37 329,500 $2.37
$2.81 - $3.38 412,687 3.9 3.22 412,687 3.22
$3.50 - $4.25 70,000 4.2 3.99 70,000 3.99
$4.28 - $4.98 5,000 5.7 4.98 5,000 4.98
------- -------
817,187 $2.95 817,187 $2.95
======= =======
All incentive and non-qualified stock option grants had an exercise price
equal to the market value of the underlying common stock on the date of
grant. Effective January 1, 2006 ESPP shares are granted at 95% of the
lower of the fair market value at the commencement of the offering or the
last day of the payroll payment period. The following table illustrates the
effect on net income and earnings per share if the Company had applied the
fair value recognition provisions of FASB Statement No. 123, "Accounting
for Stock-Based Compensation," to stock-based employee compensation:
The grant-date fair value of the share options issued in 2005 was estimated
using the Black-Scholes option-pricing model with the following
assumptions: an expected life averaging 5 years; an average volatility of
36%; no dividend yield; and a risk-free interest rate averaging
7
3%. Based on this information and the vesting schedule of the options the
Company recognized $1,136 before taxes as compensation, or $614 after
taxes, under SFAS No. 123R for the first six months of fiscal year 2006.
The Company did not grant any equity based compensation in the first six
months of fiscal year 2006.
Prior to the adoption of SFAS No. 123R, the Company followed 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. Accordingly, no
compensation expense was recognized for stock option awards because the
exercise price of the Company's stock options equaled or exceeded the
market price of the underlying stock on the date of the grant. The Company
has elected the modified prospective method under SFAS 123R and accordingly
has not restated prior periods. Had compensation cost for the Company's
stock option awards and the stock purchase plan been determined based on
the fair value at the grant dates for the awards under those plans,
consistent with the provisions of SFAS No. 123R, the Company's net income
and net income per share for the second quarter and first six months ended
April 30, 2005 would have been impacted as follows:
Three Months Six Months
Ended April Ended April
30, 2005 30, 2005
------------ -----------
Net Income - as reported $204,723 $211,236
Effect of compensation expense determined under
fair value method valuation for all awards, net
of income tax 135,256 177,552
-------- --------
Pro forma net income $ 69,467 $ 33,684
======== ========
Basic net income per share:
as reported $ .01 $ .01
======== ========
pro forma $ .00 $ .00
======== ========
Diluted net income per share:
as reported $ .01 $ .01
======== ========
pro forma $ .00 $ .00
======== ========
The fair value of each stock option was estimated on the date of the grant
using the Black-Scholes option-pricing using the assumptions detailed
above.
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 Company issued 51,934
shares of common stock under this plan during the six months ended April
30, 2006 for proceeds of $79,695. The Company
8
recognized $14,064 in the first six months of fiscal year 2006 as non-cash
compensation related to the plan since the total discount to the employees
exceeded 5% of the offer price under the plan at the date of purchase. The
compensation recognized represents the total discount to the employees.
Effective January 1, 2006, the total discount from the offer price to the
employees, as calculated under the plan, is 5%.
The total number of shares of common stock issued under this plan during
the six months ended April 30, 2005 was 51,666 for proceeds of $78,610.
Restricted Shares
75,000 shares on the Company's common stock that were granted on a
restricted basis, and recorded as equity, in 2005 under the 2004 Stock
Incentive Plan were forfeited in the first fiscal quarter of 2006. As a
result, no compensation was recorded during the six months ended April 30,
2006.
3. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company uses interest rate swaps to fix certain 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 loan 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 agreement
in conjunction with its new senior financing (the "May 2005 Swap"). The new
credit agreement requires that the Company fix the interest rate on its
term debt for the life of the loan. The May 2005 Swap fixes the interest
rate at 4.66%, plus the applicable margin, 2.25% at April 30, 2006, and
amortizes concurrently with the loan principal to fix the interest rate
with respect to 75% of the outstanding principal. In addition to the May
2005 Swap, the Company has another swap (the "Original Swap") which is in
the notional amount of $10 million and a fixed rate of 1.74%, plus the
applicable margin. When the Original Swap matures in June 2006 the balance
of the May 2005 Swap will increase to hedge 75% of the term loan on an
amortizing basis. As of April 30, 2006, the total notional amount committed
to swap agreements was $18.75 million.
Based on the floating rate for respective six month periods ended April 30,
2006 and 2005, the Company paid $127,000 less and $21,000 less in interest,
respectively, than it would have without the swaps.
These swaps are considered hedges under SFAS Nos. 133 and 137. Since the
instruments are intended to hedge against variable cash flows, they are
considered cash flow hedges. As a result, the changes in the fair values of
the derivatives are recognized as comprehensive income or loss until the
hedged item is recognized in earnings.
9
4. COMPREHENSIVE INCOME
The following table summarizes comprehensive income for the respective
periods:
Three Months Ended Six Months Ended
April 30, April 30,
------------------- -------------------
2006 2005 2006 2005
-------- -------- -------- --------
Net income $474,811 $204,723 $539,694 $211,236
Other comprehensive income (loss):
Unrealized gain (loss) on derivatives designated
as cash flow hedges - net of tax 73,804 (1,434) 42,228 32,926
-------- -------- -------- --------
Comprehensive income $548,615 $203,289 $581,922 $244,162
======== ======== ======== ========
5. NOTE RECEIVABLE
On March 1, 2006 the Company extended the term of the $500,000 note
receivable due to it on that date. The note was a portion of the proceeds
related to the sale of the assets of the Company's retail segments on March
1, 2004. The note receivable is now due on March 1, 2007. The remaining
terms of the note remain substantially unchanged.
6. INVENTORIES
Inventories consisted of the following at:
April 30, October 31,
2006 2005
---------- -----------
Finished Goods $1,135,074 $ 994,240
Raw Materials 141,831 139,075
---------- ----------
Total Inventories $1,276,905 $1,133,315
========== ==========
7. 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:
10
Three Months Ended Six Months Ended
April 30, April 30,
------------------------- -------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
Net Income $ 474,811 $ 204,723 $ 539,694 $ 211,236
Denominator:
Basic Weighted Average Shares Outstanding 21,645,641 21,624,827 21,627,496 21,582,605
Dilutive effect of Stock Options 0 10,450 0 8,510
----------- ----------- ----------- -----------
Diluted Weighted Average Shares Outstanding 21,645,641 21,635,277 21,627,496 21,591,115
----------- ----------- ----------- -----------
Basic Income Per Share $ .02 $ .01 $ .02 $ .01
=========== =========== =========== ===========
Diluted Income Per Share $ .02 $ .01 $ .02 $ .01
=========== =========== =========== ===========
There were 817,187 and 2,648,490 options outstanding as of April 30, 2006
and 2005, respectively. For the three month and six month periods ended
April 30, 2006, there were no options used to calculate dilution because
all of the options' exercise price exceeded the market price of the
underlying common shares. For the three month and six month periods ended
April 30, 2005, there were 65,000 options used to calculate the effect of
dilution and there were 2,583,490 options not included in the dilution
calculation because the options' exercise price exceeded the market price
of the underlying common shares.
8. DEBT
As of April 30, 2006 the Company had $1,000,000 outstanding on its
acquisition line. There no outstanding loan balance but two letters of
credit totaling $1,523,000 were outstanding on its revolving line of
credit. There was $25,000,000 outstanding on the term loan. As of April 30,
2006, there was $6,500,000 available on the acquisition lines and
$4,477,000 available on the revolving lines of credit.
The Company's Loan and Security agreement 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 2.75 to 1. As of April 30, 2006, the Company was in
compliance with all of the financial covenants of its senior credit
facility.
9. GOODWILL AND OTHER INTANGIBLE ASSETS
Major components of intangible assets at April 30, 2006 and October 31,
2005 consisted of:
April 30, 2006 October 31, 2005
----------------------------- -----------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------ -------------- ------------
Amortizable Intangible Assets:
Customer Lists and Covenants Not to
Compete $4,975,342 $1,933,250 $4,655,238 $1,527,060
Other Intangibles 685,113 192,403 633,168 191,528
---------- ---------- ---------- ----------
Total $5,660,455 $2,125,653 $5,288,406 $1,718,588
========== ========== ========== ==========
11
Amortization expense for the three month periods ending April 30, 2006 and
April 30, 2005 was $217,980 and $193,611, respectively. Amortization
expense for the six month periods ending April 30, 2006 and April 30, 2005
was $426,787 and $388,893, respectively.
The changes in the carrying amount of goodwill for the fiscal periods
ending April 30, 2006 and October 31, 2005 are as follows:
April 30, 2006 October 31, 2005
-------------- ----------------
Beginning Balance $74,755,851 $74,772,591
Goodwill acquired during the period 7,626 36,390
Goodwill disposed of during the period (16,347) (53,130)
----------- -----------
Balance as of the end of the period $74,747,130 $74,755,851
=========== ===========
10. SUBSEQUENT EVENTS
Litigation
On May 1, 2006, the Company filed a lawsuit in the Superior Court
Department, County of Suffolk, Massachusetts, alleging malpractice and
other wrongful acts against three law firms that had been representing the
Company in litigation involving Nestle Waters North America, Inc.: Hagens
Berman Sobol Shapiro LLP, Ivey & Ragsdale, and Cozen O'Connor. The case is
Vermont Pure Holdings, Ltd. vs. Thomas M. Sobol et al., Massachusetts
Superior Court CA No. 06-1814.
Until May 2, 2006, when the Company terminated their engagement, the three
defendant law firms represented the Company in litigation in federal
district court in Massachusetts known as Vermont Pure Holdings, Ltd. vs.
Nestle Waters North America, Inc. (the Nestle litigation). The Company
filed the Nestle litigation in early August 2003.
The Company's lawsuit alleges that the three defendant law firms wrongfully
interfered with a proposed June 2003 settlement with Nestle. The complaint
includes counts involving negligence, breach of contract, breach of the
implied covenant of good faith and fair dealing, breach of fiduciary duty,
tortuous interference with economic relations, civil conspiracy, and other
counts, and seeks declaratory relief and compensatory and punitive damages.
There was a hearing on the case on May 4, 2006, in which the Court
established timetables for various procedural aspects of the case.
On May 15, 2006, the Company entered into an agreement with Nestle Waters
North America Inc. to resolve pending litigation known as Vermont Pure
Holdings, Ltd. v Nestle Waters North America Inc., which is in the United
States District Court for the District of Massachusetts. In this lawsuit,
filed in August 2003, the Company had made claims under the federal Lanham
Act against Nestle. The parties provided mutual releases and have
stipulated to dismissal of the case, with neither side admitting liability
or wrongdoing.
12
Nestle will pay the Company $750,000 by July 1, 2006 in connection with the
agreement. No amounts have been recorded in the accompanying financial
statements as of and for the periods ended April 30, 2006 related to this
settlement.
13
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 for the year ended October 31, 2005 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 April 30, 2006 (Second Quarter)
Compared to the Three Months Ended April 30, 2005
Sales
Sales for the three months ended April 30, 2006 were $15,241,000 compared to
$14,756,000 for the corresponding period in 2005, an increase of $485,000 or 3%.
Excluding acquisitions, sales were up 1% for the three months ended April 30,
2006 compared to the corresponding period in 2005. The increase was primarily
the result of the growth of existing product lines that more than offset a
decline in equipment rental revenue in fiscal year 2005.
The comparative breakdown of sales of the product lines for the respective three
month periods ended April 30, 2006 and 2005 is as follows:
Product Line 2006 2005 Difference % Diff.
------------ ------- ------- ---------- -------
(in thousands)
Water $ 6,985 $ 7,043 ($58) (1%)
Coffee and Other Products 6,014 5,373 641 12%
Equipment Rental 2,242 2,340 (98) (4%)
------- ------- -----
Total $15,241 $14,756 $ 485 3%
======= ======= =====
Water - Sales of water and related products decreased as a result of a 1%
increase in volume net of a 2% decrease in price. Net of acquisitions, water
sales decreased 2% compared to the second quarter of fiscal year 2005.
14
Coffee and Other Products - Sales of coffee and other products increased 4% from
sales volume obtained in acquisitions. Net of acquisitions, sales increased 8%.
This 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
30%, to $1,684,000 in the second quarter of fiscal year 2006 compared to
$1,291,000 in the same period in fiscal year 2005. In addition, "other product"
sales include fuel adjustments charged to customers to offset increased fuel
costs. The fees, which totaled $244,000 for the second quarter of fiscal year
2006, were not charged in the second quarter of fiscal year 2005 and accounted
for 5% of the total 12% increase for the category.
Equipment Rental - Equipment rental revenue decreased in the second quarter
compared to the same period in fiscal year 2005 primarily as a result of a
decline in average cooler rental pricing which decreased 3%. Also, cooler
placements declined approximately 1%. The decrease in price and placements is
directly attributable to continuing competition from other rental and retail
outlets. Net of acquisitions, equipment rental decreased 5% compared to the
second quarter of fiscal year 2005.
Gross Profit/Cost of Goods Sold - For the three months ended April 30, 2006,
gross profit increased $177,000, or 2%, to $8,765,000 from $8,588,000 for the
comparable period in 2005. The increase in gross profit was primarily due to
higher sales. Gross profit, as a percentage of sales, decreased almost 1%
compared to the second quarter of fiscal year 2005. The decrease in gross
profit, as a percentage of sales, was a result of a change in product sales mix
as the sales increase was attributable to lower margin products. Most notably,
the profit margin on single serve coffee is less than water and traditional
coffee products.
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 reported 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 Expenses and Income from Operations
Total operating expenses decreased to $7,127,000 in the second quarter of fiscal
year 2006 from $7,391,000 in the comparable period in fiscal year 2005, a
decrease of $264,000, or 4%.
Selling, general and administrative (SG&A) expenses decreased $197,000, or 3%,
to $6,699,000 in the second quarter of fiscal year 2006 compared to $6,896,000
in the same period of fiscal 2005. Of total SG&A expenses, route distribution
costs increased $38,000, or 1%, to $3,335,000 in the second quarter of fiscal
year 2006 from $3,297,000 for the comparable period a year ago. The increase is
attributable to route labor costs which increased $80,000, or 4% as a result of
increased sales. The increase in was partially offset by a decrease in other
route costs, primarily lease, fuel, utility, and insurance costs. Selling costs
decreased $28,000, or 4%, as a result of the elimination of external sales
staff. Administration costs decreased $207,000, or 7%, primarily as a result of
a decrease in legal and consulting fees. In the second quarter of fiscal year
2005 administration costs included consulting costs totaling $65,000 related to
regulatory compliance and legal costs totaling $208,000
15
associated with the refinancing of the senior debt facility with Bank of America
that did not recur in the same quarter of the current year.
Advertising expenses were $221,000 in the second quarter of fiscal year 2006
compared to $295,000 in the second quarter of fiscal year 2005, a decrease of
$74,000, or 25%. The decrease in advertising costs is related to a decrease in
yellow page and other print advertising.
Amortization increased $24,000, or 12%, to $218,000 in the second quarter of
fiscal year 2006 from $194,000 in the second quarter of fiscal year 2005. The
increase is attributable to intangible assets that were acquired as part of
several acquisitions in fiscal year 2005.
Income from operations for the three months ended April 30, 2006 was $1,637,000
compared to $1,197,000 in the same period in 2005, an increase of $440,000, or
4%. The increase was a result of higher sales and gross margin and lower
operating costs.
Interest, Taxes, and Other Expenses
Interest expense was $759,000 for the three months ended April 30, 2006 compared
to $850,000 in the three months ended April 30, 2005, a decrease of $91,000.
Lower interest costs were primarily a result of lower outstanding debt and fixed
rates for the majority of the balance despite higher market interest rates for
the variable portion.
Income tax expense for the second quarter of fiscal year 2006 was $404,000 and
was based on the expected effective tax rate of 46% for the entire fiscal year
2006. We recorded a tax expense of $143,000 related to income from operations in
the second quarter of fiscal year 2005 based on an effective tax rate of 41%.
The effective tax rates were calculated by estimating the federal tax liability,
combined with the pertinent taxes in the states in which we operate and
non-deductible permanent items, for the full fiscal year.
Net Income
Net income increased $270,000 to $475,000 for the three months ended April 30,
2006 from net income of $205,000 in the corresponding period in fiscal year
2005. The increase is attributable to higher sales, improved gross profit, and
lower operating and interest expenses in the second quarter of fiscal year 2006
as compared to the same period in fiscal year 2005.
Results of Operations for the Six Months Ended April 30, 2006 Compared to the
Six Months Ended April 30, 2005
Sales
Sales for the first six months of 2006 were $29,854,000 compared to $28,720,000
for the first six months of 2005, an increase of $1,134,000 or 4%. The increase
was primarily the result of acquisitions as well as increases in prices of all
of our product categories, excluding equipment rental, as well as higher volume
of single-serve coffee products. Net of acquisitions, sales increased 3% over
the corresponding period in the prior year.
16
The comparative breakdown of sales of the product lines for the first six months
of 2006 and 2005 is as follows:
Product Line 2006 2005 Difference % Diff.
------------ ------------ ------------ ------------ -------
(in 000's $) (in 000's $) (in 000's $)
Water $13,498 $13,483 $ 15 --
Coffee and Other Products 11,843 10,542 1,301 12%
Equipment Rental 4,513 4,695 (182) (4%)
------- ------- ------
Total $29,854 $28,720 $1,134 4%
======= ======= ======
Water - Water sales increased 3% related to price and decreased 3% related to
volume which resulted in sales being essentially unchanged from a year ago.
Average selling price increased as result of increases in list prices. Water
sales were substantially unaffected by acquisitions in the first six months of
fiscal year 2006.
Coffee and Other Products - Net of acquisitions, revenues in the category
increased 9%. 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 34%, to $3,249,000 in the first half of fiscal year 2006 compared to
$2,433,000 in the same period in fiscal year 2005. Fuel adjustments charged to
customers totaled $451,000 for the first six months of fiscal year 2006. These
adjustments were not charged in the second quarter of fiscal year 2005 and
accounted for 4% of the total 12% increase for the category.
Equipment Rental -Equipment rental increased as a result of water cooler
placements and rental of single serve coffee equipment. Average price decreased
3% and placements were not materially different than a year ago. Equipment
rental has been substantially unaffected by acquisitions in the first six months
of fiscal year 2006.
Gross Profit/Cost of Goods Sold
Gross profit increased $359,000, or 2%, to $16,979,000 for the first six months
of 2006 from $16,620,000 for the first six months of 2005. The increase in gross
profit was attributable to higher sales. As a percentage of sales, gross profit
decreased to 56% of sales from 58% for the respective periods. The decrease in
gross profit, as a percentage of sales, was attributable to a change in product
sales mix as the sales increase was attributable to lower margin products. Most
notably, the profit margin on single serve coffee is less than water and
traditional coffee products.
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 reported 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.
17
Income from Operations/Operating Expenses
Total operating expenses in the first six months of 2006 were $14,405,000 in the
first six months of 2005 compared to 14,601,000 for the comparable period in
fiscal 2005, a decrease of $196,000 or 1%.
Selling, general and administrative (SG&A) expenses were $13,500,000 and
$13,673,000 for the first six months of 2006 and 2005, respectively, a decrease
of $173,000 or 1%. Of total SG&A expenses, route distribution costs increased
$65,000, or 1%, 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 half of fiscal year 2006 were $6,629,000
compared to $6,564,000 for the same period in fiscal year 2005. In addition,
selling costs increased $25,000, or 2% as a result of increased sales staffing.
Administration costs decreased $263,000, or 5%, to $5,428,000 from $5,681,000 as
a result of a decrease in legal and consulting costs. In the second quarter of
2005, $208,000 in legal fees were incurred to refinance the senior debt facility
and $65,000 in consulting fees was incurred related to regulatory compliance.
These costs did not re-occur in the second quarter of 2006.
Advertising expenses were $490,000 in the first six months of 2006 compared to
$551,000 in the first six months of 2005, a decrease of $61,000, or 11%. The
decrease in advertising costs is related to lower yellow page and other print
advertising.
Amortization increased to $427,000 in the first six months of 2006 from $389,000
in the first six months of 2005, an increase of $38,000, or 10%. The increase is
attributable to intangible assets that were acquired as part of several
acquisitions in fiscal year 2005.
Income from operations for the first six months of 2006 was $2,574,000 compared
to $2,019,000 in the first six months of 2005, an increase of $555,000 or 27%.
The increase was a result of higher sales and gross margin and lower operating
costs.
Interest, Taxes, and Other Expenses
Interest expense was $1,575,000 for the first six months of 2006 compared to
$1,661,000 in the first six months of 2005, a decrease of $86,000. Lower
interest costs were primarily a result of lower amounts of senior and
subordinated debt while largely avoiding market rate increases by fixing rates.
Income tax expense of $459,000 for the first six months of 2006 is an increase
of $312,000 from tax expense of $147,000 for the same period a year ago. The tax
expense and benefit were determined by using an annual effective tax rate of 46%
for fiscal year 2006 and 41% for fiscal year 2005, which represents the
estimated federal and state income tax expense for the respective years. The
effective tax rates were calculated by estimating the federal tax liability,
combined with the pertinent taxes in the states in which we operate and
non-deductible permanent items, for the full fiscal year.
Net Income
Net income of $540,000 for the six months of 2006 was attributable to continuing
operations. This represented an improvement of $329,000 from net income of
$211,000 in the first six months of 2005.
18
Trends
While our year to year sales have continued to grow, net of acquisitions, recent
increases have primarily been generated by our non-core products, most notably
single serve coffee. As we have discussed in the past, industry dynamics have
created a more competitive environment for our core products in most markets in
recent years. Accordingly, despite the small decrease in water sales in the
second quarter, we expect water sales to continue to grow modestly and rental
revenues to continue to decrease slowly or to remain flat from year to year. The
decrease in rental revenues will be offset to some extent by the sale of coolers
and coffee machines. Going forward, we expect single-serve coffee sales to
continue to increase at a rate comparable to the past 12 months. However, coffee
sales and the sale of equipment have lower profit margins than our traditional
core products. We expect to increase net income in 2006, but the extent of the
increase is dependant upon coffee and ancillary products and new product
offerings that leverage our distribution system.
In June of 2006, Green Mountain Coffee Roasters, Inc. is expected to complete
its previously announced acquisition of 100% of the stock of Keurig Premium
Coffee Systems, which supplies our single-serve coffee systems. GMCR previously
owned 35% of Keurig. We do not expect this transaction to have any effect on our
business with Keurig.
Operating costs continue to be threatened by outside conditions such as fuel,
insurance, and administrative expenses related to regulatory requirements. The
SEC has extended the period to comply with Section 404 of the Sarbanes-Oxley Act
for non-accelerated filers. We incurred some of this compliance cost in fiscal
year 2005 and expect that most of the remainder of the anticipated cost to
comply will be incurred in fiscal year 2007 and 2008.
We have offset increased fuel costs with additional charges to customers for
that particular purpose. We expect to keep the charges in place for as long as
these costs remain high, or to convert the charges to price increases on our
products. Although the market has been receptive to the additional charges, no
assurance can be given that customers will be receptive to higher prices for our
products if fuel prices stay at current market levels or increase.
In May 2006, we entered into an agreement with Nestle Waters North America Inc.
to resolve pending litigation known as Vermont Pure Holdings, Ltd. v Nestle
Waters North America Inc., which is in the United States District Court for the
District of Massachusetts. Nestle will pay the Company $750,000 by July 1, 2006
in connection with the agreement. However, the Company has incurred legal
expenses in conjunction with that settlement and expects to incur significant
legal expenses relating to a suit brought against its former attorneys by the
Company. It is expected that most, if not all, of the funds from the settlement,
net of tax, will be used for legal fees.
The potential of growth through acquisitions remains viable. We have ample
opportunities to acquire businesses through small acquisitions and will take
advantage of these opportunities based on price, potential synergies, and access
to capital.
19
Liquidity and Capital Resources
As of April 30, 2006 we had working capital of $2,846,000 compared to $3,372,000
as of October 31, 2005, a decrease of $526,000. The decrease in working capital
is reflective of a decrease in cash of $1,378,000 due to seasonal affects and
$364,000 used for an acquisition, and a reduction in prepaid expenses of
$594,000 primarily related to insurance costs. The reduction in these current
assets combined with smaller increases in accounts receivable, inventories and
notes receivable, $398,000 in aggregate, more than offset a seasonal decrease in
accounts payable of $962,000.
On March 1, 2006 the Company extended the term of the $500,000 note receivable
due to us on that date. The note was a portion of the proceeds related to the
sale of the assets of the Company's retail segments on March 1, 2004. The note
receivable is now due on March 1, 2007. The remaining terms of the note remain
substantially unchanged.
We routinely use cash for capital expenditures and repayment of debt. In the
first half of fiscal year 2006 we spent $2,109,000 on capital expenditures
including coolers, brewers, bottles and racks related to home and office
distribution as well as bottling equipment and leasehold improvements.
In the first half of fiscal year 2006 we paid $1,500,000 to pay down our term
debt with Bank of America and an additional $112,000 to pay a note to the seller
related to the purchase of a business. During the second quarter we borrowed
$400,000 from our acquisition and capital expenditure line of credit to purchase
a packaging machine and as of April 30, 2006 we had $1,000,000 outstanding on
that line of credit. There was no outstanding loan balance but $1,523,000 of
letters credit outstanding on our revolving line of credit. Consequently, as of
April 30, 2006 there was $6,500,000 and $4,477,000 available on the acquisition
and revolving lines of credit, respectively.
Our Loan and Security agreement requires that we be in compliance with certain
financial covenants at the end of each fiscal quarter. The covenant requirements
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 2.75 to 1. As of April 30, 2006 we were in compliance with all of the
financial covenants of our senior credit facility.
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 April 30, 2006:
PAYMENT DUE BY PERIOD
------------------------------------------------------------------
REMAINDER
CONTRACTUAL OBLIGATIONS TOTAL OF 2006 2007-2008 2009-2010 AFTER 2010
- ----------------------- ----------- ---------- ----------- ----------- -----------
Debt $40,077,000 $1,702,000 $ 7,375,000 $ 8,800,000 $22,200,000
Interest on Debt (1) 17,324,000 1,766,000 6,424,000 5,252,000 3,882,000
Operating Leases 9,546,000 1,339,000 4,866,000 3,072,000 269,000
Coffee Purchase Commitments 422,000 316,000 106,000 -- --
----------- ---------- ----------- ----------- -----------
Total $67,369,000 $5,123,000 $18,771,000 $17,124,000 $26,351,000
=========== ========== =========== =========== ===========
(1) Interest based on 75% of outstanding senior debt at the hedged interest
rate discussed above, 25% of outstanding senior debt at a variable rate of
7.27%, and subordinated debt at a rate of 12%.
20
As of the date of this report, we have no other material contractual obligations
or commitments.
Subsequent to April 30, 2006, we settled a lawsuit that we had brought against a
competitor. The terms of the settlement require that payment of $750,000 be made
to us by July 31, 2006. We have not fully assessed the tax consequences of this
settlement. In addition, in May 2006, we received $118,000 in full payment of
principal and interest, of a note receivable that was due on January 31, 2008.
21
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. At April 30,
2006, we had approximately $7,000,000 of long-term debt subject to variable
interest rates. Under the credit agreement with Bank of America, we pay interest
at a rate of LIBOR plus a margin of 1.90% on our term debt, or 6.92% at April
30, 2006. The applicable margin is 1.65% for our acquisition and operating lines
of credit. A hypothetical 100 basis point increase in the LIBOR rate would
result in an additional $70,000 of interest expense on an annualized basis.
Conversely, a decrease would result in a proportionate interest cost savings.
As of April 30, 2006, we have fixed the interest rate on $10 million of debt at
3.99% with a swap agreement until June 2006 (the "Original Swap"). On May 3,
2005, we entered into a second swap in conjunction with our senior financing
(the "May 2005 Swap"). Our credit agreement requires that we fix the interest
rate on 75% of our term debt for the life of the loan. The May 2005 Swap fixes
the interest rate at 4.66%, plus the applicable margin, 1.90% at April 30, 2006,
and amortizes concurrently with the loan principal to fix the interest rate with
respect to 75% of the outstanding principal, including the Original Swap. When
the Original Swap matures in June 2006 the balance of the May 2005 swap will
increase to fix the interest rate on 75% of the term loan on an amortizing
basis. As of April 30, 2006, the total notional amount committed to swap
agreements was $18.75 million.
As of April 30, 2006, these were rates favorable to the market. We will continue
to evaluate swap rates as the market dictates. They serve to stabilize our cash
flow and expense 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. To date we have
fixed rates as required by our credit agreement with the bank. Future low rates
may compel us to fix a higher portion to further stabilize cash flow and
expenses as we monitor short and long term rates and debt balances.
COMMODITY PRICE RISKS
Coffee
The cost of our coffee purchases is dictated by commodity prices. We enter into
contracts to mitigate market fluctuation of these costs by fixing the price with
our suppliers for certain periods. Currently, we have fixed the price of our
anticipated supply through September 2006 at "green" prices ranging from $1.00
to $1.15 per pound. We are not insulated from price fluctuations beyond that
date. At our existing sales levels, an increase in pricing of $.10 per pound
would increase our total cost for coffee $75,000, on an annual basis. In this
case, competitors that had fixed pricing might have a competitive advantage.
22
Diesel Fuel
We operate vehicles to deliver product to customers. The cost of fuel to operate
these vehicles fluctuates over time. Over the last year, fuel prices increased
significantly. We estimate that a $0.10 increase per gallon in fuel cost would
result in an increase to operating costs of approximately $60,000 on an annual
basis. In aggregate, we have spent approximately an additional $237,000 on fuel
as a result of higher prices in the first six months of fiscal year 2006
compared to the comparable period of 2005. We have offset some of this cost by
adjusting our price to our customers on a monthly basis while fuel prices are
higher.
23
ITEM 4. CONTROLS AND PROCEDURES
Our chief executive officer, our chief financial officer, and other members of
our senior management team have evaluated the effectiveness of our disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) as April 30, 2006. 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 April 30, 2006, there were no changes in our
internal control over financial reporting that materially affected, or were
reasonably likely to materially affect, our internal control over financial
reporting.
24
PART II - Other Information
ITEM 1 LEGAL PROCEEDINGS
On May 1, 2006, the Company filed a lawsuit in the Superior Court Department,
County of Suffolk, Massachusetts, alleging malpractice and other wrongful acts
against three law firms that had been representing the Company in litigation
involving Nestle Waters North America, Inc.: Hagens Berman Sobol Shapiro LLP,
Ivey & Ragsdale, and Cozen O'Connor. The case is Vermont Pure Holdings, Ltd. vs.
Thomas M. Sobol et al., Massachusetts Superior Court CA No. 06-1814.
Until May 2, 2006, when the Company terminated their engagement, the three
defendant law firms represented it in litigation in federal district court in
Massachusetts known as Vermont Pure Holdings, Ltd. vs. Nestle Waters North
America, Inc. (the Nestle litigation). The Company filed the Nestle litigation
in early August 2003.
The Company's lawsuit alleges that the three defendant law firms wrongfully
interfered with a proposed June 2003 settlement with Nestle. The complaint
includes counts involving negligence, breach of contract, breach of the implied
covenant of good faith and fair dealing, breach of fiduciary duty, tortuous
interference with economic relations, civil conspiracy, and other counts, and
seeks declaratory relief and compensatory and punitive damages. There was a
hearing on the case on May 4, 2006, in which the Court established timetables
for various procedural aspects of the case.
On May 15, 2006, the Company entered into an agreement with Nestle Waters North
America Inc. to resolve pending litigation known as Vermont Pure Holdings, Ltd.
v Nestle Waters North America Inc., which is in the United States District Court
for the District of Massachusetts. In this lawsuit, filed in August 2003, the
Company had made claims under the federal Lanham Act against Nestle. The parties
provided mutual releases and have stipulated to dismissal of the case, with
neither side admitting liability or wrongdoing. Nestle will pay the Company
$750,000 in connection with the agreement.
ITEM 1A. RISK FACTORS
There have been no material changes in our Risk Factors since they were
disclosed in Form 10-K for the period ended October 31, 2005.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 26, 2006, we held our annual stockholders meeting at the offices of
Pepe & Hazard LLP, 30 Jelliff Lane, Southport, Connecticut 06890 commencing at
11:00 a.m. local time. There was only one matter of business requiring a
stockholder vote.
A total of 16,532,511 votes were cast and the following directors were elected
to one year terms with the corresponding vote tally:
25
Director For Withheld
-------- ---------- ---------
Henry E. Baker 15,456,460 1,076,051
John B. Baker 15,447,163 1,085,348
Peter K. Baker 15,464,388 1,068,123
Phillip Davidowitz 16,253,289 279,222
Martin A. Dytrych 16,265,375 267,136
John M. LaPides 18,263,905 268,606
Ross S. Rapaport 15,459,079 1,073,432
ITEM 6. EXHIBITS
Exhibit
Number Description
- ------- -----------
3.1 Certificate of Incorporation (Incorporated by reference to Exhibit B
to Appendix A to our registration statement on Form S-4, File No.
333-45226, filed with the SEC on September 6, 2000)
3.2 Certificate of Amendment of Certificate of Incorporation (Incorporated
by reference to Exhibit 4.2 of our current report on Form 8-K, filed
with the SEC on October 19, 2000)
3.3 By-laws, as amended (Incorporated by reference to Exhibit 3.3 to our
quarterly report on Form 10-Q, filed with the SEC on September 14,
2001)
10.1 Agreement dated May 5, 2006 with Nestle Waters of North America Inc.
to discontinue the Civil Action Vermont Pure Holdings, Ltd. v. Nestle
Waters of North America Inc.
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
26
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: June 14, 2006
VERMONT PURE HOLDINGS, LTD.
By: /s/ Bruce S. MacDonald
------------------------------------
Bruce S. MacDonald
Vice President, Chief Financial
Officer
(Principal Accounting Officer and
Principal Financial Officer)
27
Exhibits Filed Herewith
Exhibit
Number Description
- ------- -----------
10.1 Agreement dated May 5, 2006 with Nestle Waters of North America Inc.
to discontinue the Civil Action Vermont Pure Holdings, Ltd. v. Nestle
Waters of North America Inc.
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.
28