SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended January 31, 2002
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.)
Route 66; PO Box C; Randolph, VT 05060
(Address of principal executive offices) (Zip Code)
(802) 728-3600
(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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class March 14, 2002
----- ----------------
Common Stock, $.001 Par Value 21,084,743
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
INDEX
Page Number
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of
January 31, 2002 (unaudited) and
October 31, 2001 3
Consolidated Statements of Operations
(unaudited) for the Three Months ended
January 31, 2002 and 2001 4
Consolidated Statements of Cash Flow
(unaudited) for the Three Months ended
January 31, 2002 and 2001 5
Notes to Consolidated Financial Statements
(unaudited) 6-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11-15
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 16-17
Part II - Other Information 18-22
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signature 23
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 31, October 31,
2002 2001
------------------- ------------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 760,290 $ 1,099,223
Accounts receivable - net of allowance 7,053,826 7,470,152
Inventories 3,719,317 3,147,985
Current portion of deferred tax asset 2,313,000 2,313,000
Other current assets 1,209,148 2,297,358
------------------- ------------------
TOTAL CURRENT ASSETS 15,055,581 16,327,718
------------------- ------------------
PROPERTY AND EQUIPMENT - net of accumulated depreciation 22,763,588 21,231,954
------------------- ------------------
OTHER ASSETS:
Intangible assets - net of accumulated amortization 71,250,128 66,100,712
Deferred tax asset 2,301,000 2,301,000
Other assets 319,257 255,046
------------------- ------------------
TOTAL OTHER ASSETS 73,870,385 68,656,758
------------------- ------------------
TOTAL ASSETS $ 111,689,554 $ 106,216,430
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,539,072 $ 4,102,235
Current portion of customer deposits 164,055 155,943
Accrued expenses 2,793,047 3,291,923
Unrealized loss on derivatives 811,792 973,537
Line of credit 2,788,093 -
Current portion of long term debt 4,190,128 3,560,128
------------------- ------------------
TOTAL CURRENT LIABILITIES 13,286,187 12,083,766
Long term debt 50,535,981 47,851,386
Customer deposits 2,570,199 2,443,100
------------------- ------------------
TOTAL LIABILITIES 66,392,367 62,378,252
------------------- ------------------
STOCKHOLDERS' EQUITY:
Preferred stock - $.001 par value, 500,000 authorized shares, none
issued and outstanding Common stock - $.001 par value, 50,000,000
authorized shares, 21,073,735 issued and outstanding
shares at January 31, 2002 and 20,767,670 at October 31, 2001 21,074 20,768
Paid in capital 56,549,516 55,562,599
Accumulated deficit (10,461,611) (10,771,652)
Other comprehensive loss (811,792) (973,537)
------------------- ------------------
TOTAL STOCKHOLDERS' EQUITY 45,297,187 43,838,178
------------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 111,689,554 $ 106,216,430
=================== ==================
See notes to consolidated financial statements
3
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended
January 31,
-------------------------------------
2002 2001
----------------- -----------------
(unaudited)
SALES $ 15,187,165 $ 14,218,724
COST OF GOODS SOLD 6,730,615 6,227,265
----------------- -----------------
GROSS PROFIT 8,456,550 7,991,459
----------------- -----------------
OPERATING EXPENSES:
Selling, general and administrative expenses 6,067,766 5,415,031
Advertising expenses 822,303 578,060
Amortization 58,050 634,444
----------------- -----------------
TOTAL OPERATING EXPENSES 6,948,119 6,627,535
----------------- -----------------
INCOME FROM OPERATIONS 1,508,431 1,363,924
----------------- -----------------
OTHER INCOME (EXPENSE):
Interest (1,185,169) (1,343,607)
Miscellaneous 203,700 3,500
----------------- -----------------
TOTAL OTHER (981,469) (1,340,107)
----------------- -----------------
INCOME BEFORE INCOME TAXES 526,962 23,817
----------------- -----------------
INCOME TAX EXPENSE (216,921) -
----------------- -----------------
NET INCOME $ 310,041 $ 23,817
----------------- -----------------
NET INCOME PER SHARE - BASIC $ 0.01 $ 0.00
================= =================
NET INCOME PER SHARE - DILUTED $ 0.01 $ 0.00
================= =================
Weighted Average Shares Used in Computation - Basic 21,060,348 20,167,773
================= =================
Weighted Average Shares Used in Computation - Diluted 22,021,469 20,216,865
================= =================
See notes to consolidated financial statements
4
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended
January 31,
--------------------------------
2002 2001
--------------- ---------------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 310,041 $ 23,817
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation 1,032,062 849,534
Amortization 58,051 634,443
Gain on disposal of property and equipment (19,475) (3,500)
Non cash compensation 52,400 -
Changes in assets and liabilities (net of effect of acquisitions):
Accounts receivable 416,326 207,915
Inventory (571,332) (755,325)
Other current assets 1,118,317 (30,622)
Other assets (64,211) (230,437)
Accounts payable (1,563,164) (1,229,657)
Customer deposits (60,162) 59,374
Accrued expenses (498,877) (565,572)
--------------- ---------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 209,976 (1,040,030)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (1,914,721) (671,676)
Proceeds from sale of money market investment - 3,301,064
Proceeds from sale of fixed assets 20,000 3,500
Cash used for acquisitions - net of cash acquired (4,987,073) -
--------------- ---------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (6,881,794) 2,632,888
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of line of credit 2,788,093 2,175,000
Proceeds from debt 4,200,000 -
Principal payments of debt (885,404) (3,881,877)
Exercise of stock options 133,150 -
Sale of common stock 97,046 20
--------------- ---------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 6,332,885 (1,706,857)
--------------- ---------------
NET DECREASE IN CASH (338,933) (114,000)
CASH AND CASH EQUIVALENTS - Beginning of year 1,099,223 1,408,158
--------------- ---------------
CASH AND CASH EQUIVALENTS - End of period $ 760,290 $ 1,294,158
=============== ===============
See notes to consolidated financial statements
5
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited 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 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 applied consistently with
the Annual Report on Form 10-K of Vermont Pure Holdings, Ltd. (the
"Company") for the year ended October 31, 2001.
Certain information and footnote disclosures normally included in
financial statements presented in accordance with generally accepted
accounting principles have been condensed or omitted. The accompanying
consolidated financial statements should be read in conjunction with
the financial statements and notes thereto incorporated by reference
from the Company's Annual Report on Form 10-K for the year ended
October 31, 2001.
2. NEW ACCOUNTING PRONOUNCEMENTS ADOPTED
In July 2001, the Financial Accounting Standards Board issued,
Statement of Financial Accounting Standards ("SFAS") No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS 141 is effective for all business
combinations completed after June 30, 2001. SFAS 142 is effective for
fiscal years beginning after December 15, 2001. Effective November 1,
2001, the Company elected early adoption of SFAS No. 142. SFAS No. 142
eliminates the amortization for goodwill and other intangible assets
with indefinite lives. Intangible assets with lives restricted by
contractual, legal, or other means will continue to be amortized over
their useful lives. Goodwill and other intangible assets not subject
to amortization are tested for impairment annually or more frequently
if events or changes in circumstances indicate that the asset might be
impaired. SFAS No. 142 requires a two-step process for testing
impairment. First, the fair value of each reporting unit is compared
to its carrying value to determine whether an indication of impairment
exists. If an impairment is indicated, then the implied fair value of
the reporting unit's goodwill is determined by allocating the unit's
fair value to its assets and liabilities (including any unrecognized
intangible assets) as if the reporting unit had been acquired in a
business combination. The amount of impairment for goodwill and other
intangible assets is measured as the excess of its carrying value over
its implied fair value. The Company will conduct the initial test of
the carrying value of its goodwill, as required by SFAS No. 142,
during the second quarter of fiscal 2002. If a portion of the
Company's goodwill or intangible assets is impaired, then the Company
will have to include an impairment charge on its statement of
operations which will have the effect of reducing net income.
6
In accordance with SFAS No. 142, the Company discontinued amortization
of goodwill effective November 1, 2001. The pro forma effects of the
adoption of SFAS No. 142 on net income and basic and diluted earnings
per share are as follows:
January 31, 2002 January 31, 2001
---------------- ----------------
Net income, as reported $310,041 $ 23,817
Intangible amortization net of $0 tax - 609,612
-------- --------
Net income, pro forma $310,041 $633,429
======== ========
Basic earnings per share:
Net income, as reported $.01 $.00
Intangible amortization net of $0 tax - .03
------ -------
Net income, pro forma $.01 $.03
==== ====
Diluted earnings per share:
Net income, as reported $.01 $.00
Intangible amortization net of $0 tax - .03
----- -----
Net income, pro forma $.01 $.03
==== ====
3. NEW ACCOUNTING PRONOUNCEMENTS
The Emerging Issues Task Force ("EITF") of the Financial Accounting
Standards Board took definitive action on two issues during 2001 that
potentially affect the Company's accounting policies. The issues
relate to "Accounting for Certain Sales Incentives" (EITF 00-14) and
"Vendor Income Statement Characterization of Consideration Paid to the
Reseller of the Vendors Products" (EITF 00-25). The Company is
required to implement these pronouncements in the second quarter of
fiscal 2002. The implementation of the pronouncement is expected to
reduce sales and decrease operating expenses. The Company does not
expect net income to be effected.
4. SEGMENTS
During the first quarter of fiscal 2002, the Company started
accounting for its business in two separate segments, "retail" and
"home and office." Reorganization and integration of operations in
fiscal year 2001 has resulted in management's preparation of more
detailed information to evaluate these businesses.
The segments are identifiable based on the types of products and their
distribution channels.
Home and Office - characterized by the sale of five gallon bottles of
water and water coolers delivered by the Company's trucks and
employees, and other products that are sold through this distribution
channel which are ancillary to the primary product, such as office
refreshments.
7
Retail - characterized by the sale of water in small, portable
containers that are constructed from clear PET plastic. Bottle sizes
range from 8 oz. to 1.5 L. These products are sold to wholesale
beverage distributors, supermarkets, and convenience stores.
The Company allocates costs directly when possible and uses various
applicable allocation methods to allocate shared costs such as
insurance. Costs incurred by the holding company have not been
allocated and are accounted for as "Corporate" for the purposes of
reconciling to net income before taxes. There are no inter-segment
revenues for the period reported.
For the three months ending January 31, 2002 and 2001:
Home & Office Retail Corporate Total
(000's $) 2002 2001 2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ---- ---- ----
Sales $11,555 $11,232 $3,632 $2,987 $15,187 $14,219
Cost of Goods Sold 4,466 4,461 2,265 1,766 6,731 6,227
----- ----- ----- ----- ----- -----
Gross Profit 7,089 6,771 1,367 1,221 8,456 7,992
Operating Expenses 4,884 5,019 1,381 1,068 $683 $541 6,948 6,628
----- ----- ----- ----- ---- ---- ----- -----
Operating Income 2,205 1,752 (14) 153 (683) (541) 1,508 1,364
Interest (Expense) (1,185) (1,344) (1,185) (1,344)
Other Income 4 204 204 4
---------- ---------- --------- --------- ----------- ---------- ------- --------
Income Before Taxes $2,205 $1,756 $190 $153 $(1,868) $(1,885) $527 $24
========== ========== ========= ========= =========== ========== ======== =========
5. MERGERS AND ACQUISITIONS
On November 1, 2001, the Company acquired substantially all the assets
of Iceberg Springs Water, Inc. The acquired assets were merged into the
Company's home and office operations in Connecticut.
The purchase price paid for Iceberg Springs Water, Inc. is as follows:
Cash $ 4,833,856
Issuance of Common Stock 704,627
-------------
Total $ 5,538,483
=============
8
Goodwill from the acquisition has been calculated as follows:
Purchase Price $ 5,538,483
Fair Value of Assets Acquired (1,314,481)
Fair Value of Liabilities Assumed 195,373
Acquisition Costs 158,374
-------------
Goodwill $ 4,577,749
=============
The stock price of Vermont Pure for purposes of the acquisition was $
3.29 per share. As a result, the number of Vermont Pure Holdings
common shares issued was 213,912.
The following table summarizes the pro forma consolidated results of
operations (unaudited) of the Company for the respective quarters
ending January 31, 2002 and 2001 as though the acquisition had been
consummated at the beginning of the periods presented:
Three Months Ended
January 31, 2002 January 31, 2001
Total Revenue $ 15,187,165 $14,916,433
Net Income (Loss) 310,041 50,725
Net Income (Loss) Per Share 0.01 .00
Weighted Average Number Of Shares 21,060,348 20,381,685
========== ==========
6. DEBT
During the three months ending January 31, 2002 the Company borrowed
$2,788,000 from its working capital line of credit with Webster Bank.
As of January 31, 2002 the total obligation outstanding under this
facility was $2,788,000. The line of credit has a limit of $5,000,000
and matures on October 5, 2002. In addition, letters of credit
totaling $515,188 secured by the line were issued on the Company's
behalf, reducing the availability of the line by that amount. Webster
Bank also agreed to modify its lending agreement with the Company in
order to provide $4,200,000 of additional debt to facilitate the
acquisition of Iceberg Springs Water, Inc. (see note 5).
Based on the Company's 2001 year end results, its applicable margin on
the outstanding facilities from Webster decreased 25 basis points
effective March 1, 2002. On March 15, 2002, the Bank approved an
amendment to the Loan and Security Agreement to allow $1,800,000 of
capital expenditures to be excluded from capital expenditures under
the debt service covenant effective January 30, 2002.
9
7. COMPREHENSIVE INCOME
The following table shows the comprehensive transactions for the three
months ending January 31, 2002 and January 31, 2001:
January 31, 2002 January 31, 2001
---------------- ----------------
Net Income $ 310,041 $ 23,817
Other Comprehensive Income (Loss)
Unrealized gains on derivatives
designated as cash flow hedges. 161,745 -
---------------- ----------------
Comprehensive Income $ 471,086 $ 23,817
================ ================
8. EMPLOYEE STOCK PURCHASE PLAN
On June 15, 1999 the Company's shareholders approved the "Vermont Pure
Holdings, Ltd. 1999 Employee Stock Purchase Plan." On January 1, 2001,
employees commenced participation in the plan. The total number of
shares issued under this plan during the three months ending January
31, 2002 was 28,048.
9. EARNINGS 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
and uses the treasury stock method to calculate the applicable number
of shares. The following calculation provides the reconciliation of the
denominators used in the calculation of basic and fully diluted
earnings per share:
Three months ending
-------------------
January 31, January 31,
2002 2001
---- ----
Net Income $ 310,041 $ 23,817
----------- ------------
Denominator:
Basic Weighted Average Shares
Outstanding 21,060,348 20,167,773
Effect of Stock Options 961,148 49,092
------------ -------------
Diluted Weighted Average Shares
Outstanding 22,021,496 20,216,865
------------ -------------
Basic Earnings Per Share $.01 $.00
Diluted Earnings Per Share $.01 $.00
10
PART I - Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto as filed in the Company's Annual Report
on Form 10-K of Vermont Pure Holdings, Ltd. (the "Company") for the year ended
October 31, 2001.
Forward-Looking Statements
When used in the Form 10-Q and in future filings by the Company with the
Securities and Exchange Commission, the words or phrases "will likely result,"
"the Company expects," "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. The Company wishes to 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 bottling capacity constraints in the face of
significant growth, dependence on outside distributors, and reliance on
commodity price fluctuations as they influence raw material pricing. The Company
has 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
During 2001, the Company integrated and consolidated operations as a result of
the Crystal Rock merger in October 2000. This process effectively created
operating segments that are defined by the kind of product and its distribution
channel; specifically a home and office segment and a retail segment.
Accordingly, over that time, management has developed reporting that evaluates
the Company by these segments. Starting with the first quarter of 2002, the
Company has incorporated this segmental reporting into its financial statements
as a means for readers to evaluate the Company more closely. For the purposes of
segmental reporting, management has allocated all costs for which there is a
justifiable basis of allocation but has maintained administrative and interest
charges incurred by the holding company in a "corporate" classification.
Sales - Sales for the first quarter of fiscal year 2002 were $15,187,000
compared to $14,219,000 for fiscal year 2001, an increase of $968,000, or 7%.
Sales for the home and office segment for the first quarter of fiscal 2002 were
$11,555,000 compared to the combined total of $11,232,000 for the corresponding
period of fiscal year 2001, an increase of $323,000 or 3%. The increase is
primarily the result of consistent market demand for water and coolers and
higher average selling prices. Sales also increased as a result of an
acquisition completed November 1, 2001 in the Company's core Connecticut market.
Of the total home and office segment sales for the quarter, water sales totaled
11
$5,498,000, an increase of 9% from the same period a year ago and equipment
rental was $2,208,000, an increase of 12% over the combined total for same
period a year ago. Sales growth in this segment was reduced by a significant
decrease in demand for certain other products sold in the home and office
distribution system including coffee and the ancillary products associated with
it. Sales of coffee and other products were $3,849,000, a decrease of 9%
compared to the same period a year ago. The decrease in coffee and related
products is attributable to an unseasonably warm winter in the Company's market
area.
Sales for the retail segment for the first quarter of fiscal 2002 were
$3,632,000 compared to a combined total of $2,987,000 for the corresponding
period of fiscal year 2001, an increase of $645,000 or 22%. For the first
quarter of the fiscal year, sales of private label brands increased 89% compared
to the first quarter a year ago. Growth of private label brands reflects both
new account acquisitions and market share gain in the established customer base
during the period. Sales of the Vermont Pure and Hidden Spring brands decreased
9% and 20% compared to the first quarter a year ago, respectively. The decrease
was attributable to increased competition in established markets. Average
selling prices of retail-size products for the three months ending January 31,
2002 were the same as the corresponding period in fiscal year 2001.
Cost of Goods Sold/Gross Profit - For the first three months of fiscal 2002,
cost of goods sold was $6,731,000 compared to $6,227,000 for the same period in
fiscal 2001, or an increase of 8%. Gross profit for the first quarter was
$8,456,000 compared to $7,992,000 for the corresponding period a year ago. Both
years' results, as a percentage of sales, were 56%. Gross profit for the home
and office segment was $7,089,000, or 61% of sales, in the first quarter of
fiscal 2002 compared to $6,771,000, or 60% of sales, for the comparable period
in 2001. The increase in gross profit was primarily due to generally higher
sales volume and an increase in average selling price. The increase in average
selling price also affected the increase in the gross profit as a percentage of
sales. Gross profit for the retail segment was $1,367,000, or 38% of sales, in
the first quarter of fiscal 2002 compared to $1,221,000, or 41% of sales, for
the comparable period in 2001. The increase in gross profit, in absolute terms,
was the result of higher sales volume, while gross profit, as a percentage of
sales, decreased as the result of production inefficiencies temporarily
experienced during the installation of additional bottling equipment. The
installation period will extend into the second quarter of fiscal 2002.
Operating Expenses - For the first three months of fiscal year 2002 compared to
the corresponding period in fiscal year 2001, total operating expenses were
$6,948,000 and $6,628,000, respectively, an increase of $320,000. Selling,
general and administrative expenses ("SG&A") increased by $653,000, or 10%, for
the first quarter of fiscal 2002 compared to the corresponding period a year
ago. The increase in SG&A expenses was primarily due to increased sales for the
period and increases to administrative infrastructure required to support future
sales in the home and office segment and corporate public entity operations.
Advertising and promotional expense increased $244,000, or 42%, during the first
quarter of 2002 compared to the corresponding period a year earlier. The
Company's advertising and promotion expenses are predominantly associated with
sales in the retail segment. On a per case basis, advertising and promotional
costs increased to $1.04 in the first quarter of fiscal 2002 from $.67 in the
comparable period of 2001. Higher advertising and promotional expense incurred
in the retail segment in the first quarter was a result of slotting fees and is
12
expected to benefit the Company through the rest of the fiscal year. Advertising
and promotional costs in the retail segment in 2002 are expected to be
comparable to 2001 for the full fiscal year. For the first quarter of fiscal
year 2002, amortization decreased $577,000 to $58,000 from $635,000 for the same
period a year ago. Amortization decreased because the Company implemented
Statement of Financial Accounting Standards No. 142 in the first quarter of 2002
which stipulates that goodwill will not be amortized. All amortization is
accounted for in the home and office segment. The pronouncement also stipulates
that goodwill will be assessed periodically for impairment. The Company is
currently undertaking that process. Other intangible assets continue to be
amortized on schedule.
Income from Operations - Income from operations for the first three months of
fiscal 2002 was $1,508,000 as compared to $1,364,000 for the corresponding
period last year, an improvement of $144,000, or 11%. The increased income is
primarily the result of higher sales and lower operating expenses. The reduction
of operating expenses is due to the substantial decrease in amortization
discussed above. Income from operations in the home and office segment increased
to $2,205,000 in the first quarter of 2002 from $1,752,000 in the first quarter
of 2001 primarily because of the decrease in amortization expense. Income from
operations in the retail segment decreased to a loss of $14,000 in the first
quarter of 2002 compared to income of $153,000 in the first quarter of 2001. The
decrease in this segment is attributable to the increase in advertising and
promotion expense for the period.
Other Income/Expense - Interest expense decreased $158,000 to $1,185,000 in the
first quarter of fiscal 2002 from $1,344,000 in the first quarter of fiscal year
2001. The decrease in interest expense was a result of significantly lower
interest rates on the Company's senior debt. As of January 31, 2002, the Company
had $16,000,000 outstanding under its senior facility at a variable rate. The
variable rate is determined by adding 1.75% to the 30 day LIBOR rate. The 30 day
LIBOR rate was 1.83% and 5.62% at the end of January, 2002 and 2001,
respectively. The lower variable rate more than offset increased interest (at 30
day LIBOR plus 2.75%) on $4.2 million borrowed for for the purchase of Iceberg
Springs Water, Inc., a Connecticut based home and office products distributor,
during the quarter. The Company also recognized $204,000 from the sale of a
trademark, net of legal expenses incurred on the transaction.
Income Before Income Taxes - The Company's net income before taxes for the first
three months of fiscal year 2002 was $527,000 compared to net income before
taxes of $24,000 for the corresponding period last year. The increase of
$503,000 is attributable to higher sales, decreased amortization and interest
charges that more than offset increases in other operating expenses, and the
one-time gain from the sale of the trademark, described in the preceding
paragraph. As a result of this gain, income before taxes in the retail segment
increased to $190,000 in the first quarter of 2002 from $153,000 in the first
quarter of 2001.
Income Tax/Net Income - The Company accrued income tax expense at an effective
rate of 40% for the quarter ending January 31, 2002. Based on the availability
of tax loss carryforwards, the Company accrued no income taxes for the quarter
ending January 31, 2001. Net income for the quarter was $310,000 in 2002
compared to $24,000 in 2001, an increase of $286,000.
13
Future Effects/Trends - In 2001, the Emerging Issues Task Force of the Financial
Accounting Standards Board took definitive action on several issues relating to
sales incentives and other consideration paid to resellers. The Company is
required to implement these pronouncements in its second fiscal quarter.
Although it has yet to determine the quantitative effect of implementation on
financial results, the Company believes that the effect will decrease sales and
decrease promotional costs in equal amounts from those that would have been
booked prior to implementation. The Company does not expect these pronouncements
to materially affect its net income.
Liquidity and Capital Resources
As of January 31, 2002 the Company had working capital of $1,769,000 compared to
$4,244,000 on October 31, 2001. The decrease in working capital was a result of
seasonal cash needs and capital expenditures associated with installation of a
second bottling line for retail products in its Randolph facility. The Company
borrowed $2,788,000 from its operating line of credit as a source of cash during
the quarter for these needs.
Cash used for operating activities during the quarter was largely attributable
to paying down accrued expenses and accounts payable during the quarter which
management believes is a traditional seasonal trend in the business. In
addition, cash was used to build up retail inventory. The seasonal inventory
build up in preparation for the summer selling season occurred earlier than the
prior year due to scheduled equipment installations.
The Company used $1,915,000 for equipment purchases. Approximately $1,260,000 of
this amount was used for the installation of the second bottling line. This
project was substantially completed during the quarter.
During the quarter, the Company paid $885,000 to make scheduled debt repayments
to Webster Bank. To complete the $5,538,000 acquisition of Iceberg Springs
Water, Inc., the Company borrowed $4,200,000 from Webster Bank during the
quarter by amending its Loan and Security Agreement with the bank. The term of
the loan is for five years and is to be repaid in equal monthly installments
over that time. The additional borrowings are at an interest rate 100 basis
points higher than the original term debt specified in the agreement. The
Company also funded the acquisition with $634,000 of cash, stock valued at
$705,000, and assumed liabilities of $195,000.
The Company's line of credit with Webster Bank has a limit of $5,000,000 and
matures October 5, 2002. As of January 31, 2002, there was and outstanding
balance of $2,788,000 as well as $750,000 committed for letters of credit. The
Company expects that its cash on hand and the cash generated from its future
operations combined with the operating line of credit with Webster Bank will
provide sufficient capital for the current fiscal year. However, no assurance
can be given that this will be the case and that adequate financing at
reasonable interest rates will be secured if more cash is needed either prior to
or subsequent to the maturity of the line of credit.
Effective January 30, 2002, the bank approved an amendment to the Loan and
Security Agreement to allow $1,800,000 of non-recurring capital expenditures
made during the last four fiscal quarters to expand bottling capacity to be
excluded from capital expenditures under the debt service covenant defined in
the agreement. The covenant is intended to measure the Company's capability to
generate cash to cover repayment of debt and routine capital expenditures. If
14
the agreement had not been amended, the Company would not have been in
compliance with that covenant at the end of the quarter.
15
PART I - Item 3
QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to the Company's operations result primarily from changes
in interest rates and commodity prices.
Interest Rate Risks
At January 31, 2002 the Company had approximately $16,000,000 of long term
debt subject to variable interest rates. Under the loan and security agreement
with Webster Bank the Company paid interest at a rate of LIBOR plus a margin of
1.75% through its first fiscal quarter. The margin is subject to change based on
the Company's performance as outlined in the agreement with Webster Bank and
decreased to 1.50% as of March 1, 2002. A hypothetical 100 basis increase in the
LIBOR rate would result in an additional $161,000 of interest expense on an
annualized basis. Conversely, a decrease would result in a proportionate
interest cost savings.
The Company uses interest rate "swap" agreements to curtail interest rate
risk. On November 3, 2000, the Company entered into a swap agreement with
Webster Bank to fix $8,000,000 of its long term debt at 8.32% interest for three
years. On April 2, 2001, the Company entered into a swap agreement with Webster
Bank to fix an additional $4,000,000 of its long term debt at 7.03% interest for
three years. On July 24, 2001, the Company entered into a swap agreement with
Webster Bank to fix an additional $4,000,000 of its long term debt at 6.75%
interest for three years.
In aggregate, the Company has fixed the interest rate on this $16,000,000
of debt at 7.5% over the next two to three years. Currently, management believes
that this is above market rates though the agreements are based on three year
rate projections. They serve to stabilize the Company's cash flow and expense
but ultimately may cost more or less in interest than if the Company had carried
all of its debt at a variable rate over the swap term. Since significantly
increasing its debt in October 2001, management's strategy has been to keep the
fixed and variable portions of its senior debt approximately equal to offset and
minimize the risks of rising and falling interest rates. Future low rates may
compel management to fix the interest rate on a higher portion of the Company's
debt in order to further stabilize cash flow and expenses.
Commodity Price Risks
Plastic - PET
Although the Company has a three-year contract with its vendors that sets
the purchase price of its PET bottles, the vendors are entitled to pass on to
the Company any resin price increases. These prices are related to supply and
demand market factors for PET and, to a lesser extent, the price of petroleum,
an essential component of PET. A hypothetical resin price increase of $.05 per
pound would result in an approximate price increase per bottle of $.005 or, at
current volume levels, $350,000 a year.
16
Coffee
The cost of the Company's coffee purchases are dictated by commodity
prices. The Company enters into contracts to mitigate market fluctuation of
these costs by fixing the price for certain periods. Currently it has fixed the
price of its anticipated supply through December 31, 2002 at "green" prices
ranging from $.46 - $.57 per pound. The Company is not insulated from price
fluctuations beyond that date. At existing sales levels, an increase in pricing
of $.10 per pound would result in approximately $100,000 of additional cost
annually to the Company. In this case, competitors that had fixed pricing might
have a competitive advantage.
17
PART II - Other Information
Item 1 - Legal Proceedings
None.
Item 2 - Changes in Securities
(a) None.
(b) None.
(c) On November 1, 2001, the Company acquired substantially all of
the assets of Iceberg Springs Water, Inc. for total consideration
valued at $5,538,483, of which $633,856 was paid in cash,
$4,395,373 in debt and assumed liabilities, and $704,627 by the
issuance of 213,912 shares of the Company's common stock. The
transaction was exempt from registration under the Securities Act
of 1933 as a private placement under Section 4(2) thereof.
Item 3 - Defaults upon Senior Securities
None.
Item 4 - Submission of Matters to a Vote of Security Holders
- ------
None.
Item 5 - Other Information
None.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
2.1 Agreement and Plan of Merger and Contribution by and among Vermont
Pure Holdings, Ltd., Crystal Rock Spring Water Company, VP Merger
Parent, Inc., VP Acquisition Corp., and the stockholders named
therein, dated as of May 5, 2000. (Incorporated by reference to
Appendix A to the Form S-4 Registration Statement filed by Vermont
Pure Holdings, Ltd., f/k/a VP Merger Parent, Inc., File No. 333-45226,
on September 6, 2000 (the "S-4 Registration Statement").)
18
Exhibit
Number Description
2.2 Amendment to Agreement and Plan of Merger and Contribution by and
among Vermont Pure Holdings, Ltd., Crystal Rock Spring Water Company,
VP Merger Parent, Inc., VP Acquisition Corp., and the stockholders
named therein, dated as of August 28, 2000. (Incorporated by reference
to Exhibit 2.1 of the S-4 Registration Statement.)
2.3 Amendment to Agreement and Plan of Merger and Contribution by and
among Vermont Pure Holdings, Ltd., Crystal Rock Spring Water Company,
VP Merger Parent, Inc., VP Acquisition Corp. and the stockholders
named therein, dated as of September 20, 2000. (Incorporated by
reference to Exhibit 2.2 of the Report on Form 8-K filed by the
Company on October 19, 2000 (the "Merger 8-K").)
3.1 Certificate of Incorporation of the Company. (Incorporated by
reference to Exhibit B to Appendix A to the Proxy Statement in cluded
in the S-4 Registration Statement.
3.2 Certificate of Amendment of Certificate of Incorporation of the
Company filed October 5, 2000. (Incorporated by reference to Exhibit
4.2 of the Merger 8-K.)
3.3 By-laws of the Company. (Incorporated by reference from Exhibit 3.3 to
Form 10-Q for the Quarter ended July 31, 2001.)
4.1 Form of Lockup Agreement among the Company, Peter K. Baker, Henry E.
Baker and John B. Baker. (Incorporated by reference to Exhibit N to
Appendix A to the Proxy Statement included in the S-4 Registration
Statement.)
4.2 Registration Rights Agreement among the Company, Peter K. Baker, Henry
E. Baker, John B. Baker and Ross Rapaport. (Incorporated by reference
to Exhibit 4.6 of the Merger 8-K.)
10.1* 1993 Performance Equity Plan. (Incorporated by reference from Exhibit
10.9 of Registration Statement 33-72940.)
10.2* 1998 Incentive and Non-Statutory Stock Option Plan, as amended.
(Incorporated by reference to Appendix C to the Proxy Statement
included in the S-4 Registration statement.)
10.3* 1999 Employee Stock Purchase Plan. (Incorporated by reference to
Exhibit A of the 1999 Proxy Statement of Vermont Pure Holdings, Ltd.)
19
Exhibit
Number Description
10.5 Convertible Debenture Agreement dated September 30, 1999 between
Vermont Pure Holdings, Ltd. and Middlebury Venture Partners, Inc.
(f/k/a Marcon Capital Corporation) in the amount of $975,000.
(Incorporated by reference from Exhibit 10.27 of Form 10-K for the
Year Ended October 30, 1999.)
10.6* Employment Agreement between the Company and Timothy G. Fallon.
(Incorporated by reference to Exhibit 10.13 of the S-4 Registration
Statement.)
10.7* Employment Agreement between the Company and Bruce S. MacDonald.
(Incorporated by reference to Exhibit 10.14 of the S-4 Registration
Statement.)
10.8* Employment Agreement between the Company and Peter K. Baker.
(Incorporated by reference to Exhibit 10.15 of the S-4 Registration
Statement.)
10.9* Employment Agreement between the Company and John B. Baker.
(Incorporated by reference to Exhibit 10.16 of the S-4 Registration
Statement.)
10.10* Employment Agreement between the Company and Henry E. Baker.
(Incorporated by reference to Exhibit 10.17 of the S-4 Registration
Statement.)
10.11 Lease of Buildings and Grounds in Watertown, Connecticut from the
Baker's Grandchildren Trust. (Incorporated by reference to Exhibit
10.22 of the S-4 Registration Statement.)
10.12 Lease of Grounds in Stamford, Connecticut from Henry E. Baker.
(Incorporated by reference to Exhibit 10.24 of the S-4 Registration
Statement.)
10.13 Lease of Building in Stamford, Connecticut from Henry E. Baker.
(Incorporated by reference to Exhibit 10.23 of the S-4 Registration
Statement.)
10.14 Amended and Restated Loan and Security Agreement between the company
and Webster Bank dated November 1, 2001. (Incorporated by reference
from Exhibit 10.14 to Form 10-K for the year ended October 31, 2001.)
10.15 Term Note from the Company to Webster Bank dated October 5, 2000. .
(Incorporated by reference from Exhibit 10.15 to Form 10-K for the
year ended October 31, 2001.)
10.16 Subordinated Note from the Company to Henry E. Baker dated October 5,
2000. (Incorporated by reference to Exhibit 10.16 of Form 10-K for the
year ending October 31, 2000.)
20
Exhibit
Number Description
10.17 Subordinated Note from the Company to Joan Baker dated October 5,
2000. (Incorporated by reference to Exhibit 10.17 of Form 10-K for the
year ending October 31, 2000.)
10.18 Subordinated Note from the Company to John B. Baker dated October 5,
2000. (Incorporated by reference to Exhibit 10.18 of Form 10-K for the
year ending October 31, 2000.)
10.19 Subordinated Note from the Company to Peter K. Baker dated October 5,
2000. (Incorporated by reference to Exhibit 10.19 of Form 10-K for the
year ending October 31, 2000.)
10.20 Subordinated Note from the Company to Ross S. Rapaport, Trustee, dated
October 5, 2000. (Incorporated by reference to Exhibit 10.20 of Form
10-K for the year ending October 31, 2000.)
10.21 Reaffirmation of Subordination and Pledge Agreement from Henry E.
Baker to Webster Bank Dated November 1, 2001. (Incorporated by
reference to Exhibit 10.21 of Form 10-K for the year ending October
31, 2001.)
10.22 Reaffirmation of Subordination and Pledge Agreement from Joan Baker to
Webster Bank Dated November 1, 2001. (Incorporated by reference to
Exhibit 10.22 of Form 10-K for the year ending October 31, 2001.)
10.23 Reaffirmation of Subordination and Pledge Agreement from John B. Baker
to Webster Bank Dated November 1, 2001. (Incorporated by reference to
Exhibit 10.23 of Form 10-K for the year ending October 31, 2001.)
10.24 Reaffirmation of Subordination and Pledge Agreement from Peter K.
Baker to Webster Bank Dated November 1, 2001. (Incorporated by
reference to Exhibit 10.23 of Form 10-K for the year ending October
31, 2001.)
10.25 Reaffirmation of Subordination and Pledge Agreement from Ross S.
Rapaport, Trustee, to Webster Bank Dated November 1, 2001.
(Incorporated by reference to Exhibit 10.25 of Form 10-K for the year
ending October 31, 2001.)
10.26 Agreement between Vermont Pure Springs, Inc. and Zuckerman-Honickman
Inc. dated October 15, 1998. (Incorporated by reference to the S-4
Registration Statement.)
21
Exhibit
Number Description
10.27 Term Note from the Company to Webster Bank dated November 1, 2001.
(Incorporated by reference to Exhibit 10.27 of Form 10-K for the year
ending October 31, 2001.)
10.28 Amended and Restated Revolving Line of Credit Note between the Company
and Webster Bank. (Incorporated by reference to Exhibit 10.28 of Form
10-K for the year ending October 31, 2001.)
* Relates to compensation
(b) Reports on Form 8-K
None.
22
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: March 18, 2002
Randolph, Vermont
VERMONT PURE HOLDINGS, LTD.
By: /s/ Bruce S. MacDonald
-------------------------
Bruce S. MacDonald
Vice President, Chief Financial Officer
(Principal Accounting Officer and
Principal Financial Officer)
23