UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number
SPARKLING SPRING WATER GROUP LIMITED
(Exact name of Registrant as specified in its charter)
Province of Nova Scotia, Canada
(Jurisdiction of incorporation or organization)
One Landmark Square
Stamford, CT 06901
(203) 325-0077
(Address of principal executive offices)
For information regarding Additional Registrants, see "Table
of Additional Registrants."
Securities registered or to be registered pursuant to
Section 12(b) of the Act.
None
Securities registered or to be registered pursuant to
Section 12(g) of the Act.
None
Securities for which there is a reporting obligation
pursuant to Section 15(d) of the Act.
11.5% Senior Subordinated Notes due 2007 and Guarantees
of 11.5% Senior Subordinated Notes due 2007
(Title of Class)
Indicate the number of outstanding shares of each of the
issuer's classes of capital or common stock as of the close
of the period covered by the annual report.
N/A
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 No X
----- -----
Indicate by check mark which financial statement item the
registrant has elected to follow.
Item 17 Item 18 X
----- -----
TABLE OF ADDITIONAL REGISTRANTS
Primary
State or other Standard
jurisdiction of Industrial
Exact name of registrant as specified incorporation of Classifi-
in its charter organization cation Code
Number
Sparkling Spring Water Limited Nova Scotia 5149
Spring Water, Inc. Delaware 5149
Cullyspring Water Co., Inc. Washington 5149
Crystal Springs of Seattle, Inc. Delaware 5149
Crystal Springs Drinking Water, Inc. Washington 5149
Crystal Springs Acquisition, Inc. Delaware 5149
Mountain Fresh Acquisition Corp. Delaware 5149
Water Jug Enterprises Limited Nova Scotia 5149
Withey's Water Softening & Nova Scotia 5149
Purification Ltd.
Aqua Care Water Softening & Nova Scotia 5149
Purification Inc.
High Valley Water Limited Nova Scotia 5149
3003969 Nova Scotia Limited Nova Scotia 5149
Coastal Mountain Water Corp. British Columbia 5149
Canadian Springs Water Company Limited Nova Scotia 5149
Sparkling Spring Water UK Limited UK 5149
Aquaporte (UK) Limited UK 5149
Marlborough Employment Limited Scotland 5149
Water at Work Limited Scotland 5149
Natural Water Limited Scotland 5149
The address, including zip code and telephone number,
including area code, of the principal executive offices of
each of the Additional Registrants is the same as for
Sparkling Spring Water Group Limited, as set forth on the
facing page of this Report.
Exchange Rate Data
The following table sets forth for both Canadian
dollars and British pounds sterling for the periods
indicated, the high and low exchange rates (i.e., the
highest and lowest exchange rate at which each currency was
sold), the average exchange rate (i.e., the average of each
exchange rate on the last business day of each month during
the applicable period) and the period end exchange rate of
each currency in exchange for the U.S. dollar, as calculated
from the inverse of the exchange rates reported by the
Federal Reserve Bank of New York for cable transfers payable
in Canadian dollars and British pounds sterling for customs
purposes.
Year ended December 31,
1993 1994 1995 1996 1997
Canadian Dollar
High for period 0.807 0.764 0.753 0.753 0.749
Low for period 0.742 0.710 0.710 0.721 0.695
End of period 0.757 0.713 0.733 0.730 0.700
Average for period 0.775 0.732 0.728 0.733 0.722
British Pound Sterling
High for period 1.593 1.643 1.641 1.711 1.7115
Low for period 1.418 1.460 1.527 1.497 1.5797
End of period 1.480 1.564 1.552 1.705 1.642
Average for period 1.501 1.531 1.578 1.560 1.638
SPARKLING SPRING WATER GROUP LIMITED
TABLE OF CONTENTS
Page
PART I
ITEM 1. DESCRIPTION OF BUSINESS 2
ITEM 2. DESCRIPTION OF PROPERTY 17
ITEM 3. LEGAL PROCEEDINGS 18
ITEM 4. CONTROL OF REGISTRANT 18
ITEM 5. NATURE OF TRADING MARKET 19
ITEM 6. EXCHANGE CONTROLS AND OTHER 20
LIMITATIONS AFFECTING SECURITY HOLDERS
ITEM 7. TAXATION 20
ITEM 8. SELECTED FINANCIAL DATA 21
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS 23
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ITEM 9A. QUANTITATIVE AND QUALITATIVE 30
DISCLOSURES ABOUT MARKET RISK
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT 31
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS 34
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM 34
REGISTRANT OR SUBSIDIARIES
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN 35
TRANSACTIONS
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE N/A
REGISTERED (INTENTIONALLY OMITTED)
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES 38
ITEM 16. CHANGES IN SECURITIES, CHANGES IN 38
SECURITY FOR REGISTERED SECURITIES AND
USE OF PROCEEDS
PART IV
ITEM 17. FINANCIAL STATEMENTS N/A
(INTENTIONALLY OMITTED)
ITEM 18. FINANCIAL STATEMENTS 39
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS 39
(a) Financial Statements 39
(b) Exhibits 39
PART I
Unless indicated otherwise, all references in this Report to the
Company refer collectively to Sparkling Spring Water Group Limited and
its direct and indirect subsidiaries.
For purposes of this Annual Report, all references to dollar
amounts are expressed in United States dollars unless otherwise
specified. All references in this Report to "EBITDA" mean operating
profit plus depreciation and amortization and references to "CAGR"
mean compound annual growth rate. Unless otherwise indicated, all
statistical data and information contained in this Report is as of
December 31, 1997.
Statements included in this Report that do not relate to present
or historical conditions are "forward-looking statements" within the
meaning of the Safe Harbor provisions of the Private Securities
Litigation Reform Act of 1995 (the "1995 Reform Act"). Additional
oral or written forward-looking statements may be made by the Company
from time to time and such statements may be included in documents
other than this Report that are filed with the SEC. Such forward-
looking statements involve risks and uncertainties that could cause
results or outcomes to differ materially from those expressed in such
forward-looking statements. Forward-looking statements in this Report
and elsewhere may include, without limitation, statements relating to
the Company's plans, strategies, objectives, expectations, intentions
and adequacy of resources and are intended to be made pursuant to the
Safe Harbor provisions of the 1995 Reform Act irrespective of whether
the 1995 Reform Act is applicable to the Company as a "foreign private
issuer." See Item 9 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Introduction
Sparkling Spring Water Group Limited ("Sparkling Spring" and
together with the Additional Registrants named herein, the "Company")
is incorporated under the laws of the Province of Nova Scotia, Canada
and provides containered water and rental water coolers to home and
office markets in British Columbia and the Maritime Provinces of
Canada, England, Scotland and the Pacific Northwestern United States.
On December 23, 1997, Sparkling Spring filed a Registration
Statement on Form F-4 (Registration No. 333-43061) (the "Registration
Statement") with the Securities and Exchange Commission (the "SEC")
with respect to the registration of its 11.5% Senior Subordinated
Notes due 2007 (the "Notes") and the registration of the Guarantees
("Guarantees") on a subordinated basis by Sparkling Springs' existing
and future subsidiaries (the "Subsidiary Guarantors"). The
Registration Statement was declared effective on April 1, 1998. The
Company is a "foreign private issuer" within the meaning of Rule 405
under the Securities Act of 1933, as amended (the "Securities Act").
ITEM 1. DESCRIPTION OF BUSINESS
Background
Sparkling Spring Water Limited ("SSWL"), a wholly-owned
subsidiary of Sparkling Spring, was founded in 1971 in Halifax, Nova
Scotia to operate in the bottled water industry. In 1988, a
controlling interest in the Company was acquired by Maritime Beverages
Limited ("MBL"), a Pepsi-Cola bottler, which was managed by G. John
Krediet, Kent Dillon Schickli, and Stephen L. Larson, principals of
C.F. Capital Corporation ("CFCC"), an investment and management
company. When MBL sold its soft drink bottling holdings to Pepsi-Cola
Canada Limited in 1992, Messrs. Krediet and Larson retained their
ownership of SSWL. Mr. Schickli left CFCC in 1992 and rejoined the
Company as Chief Financial Officer on April 3, 1998.
Sparkling Spring is one of the world's largest providers of
bottled water delivered directly to residential and commercial
markets. The Company's primary focus is on the bottling and delivery
of high quality drinking water in five-gallon and six-gallon bottles
to homes and offices, and the rental of water coolers. The Company's
strategy has been to achieve significant market positions in a number
of markets and thereby realize the operating leverage that can be
obtained once a distribution system is established. Based upon its own
internal estimates, the Company believes it has approximately 52%
market share in British Columbia, 70% in the Maritime Provinces, 22%
in the United Kingdom, 65% in Scotland, 44% in Oregon and 20% in
Washington. The Company believes it is the market share leader in each
of these markets, except in Washington where it believes it is the
second largest provider. By virtue of its leadership position in its
markets, the Company benefits from several competitive advantages over
smaller operators, including more efficient distribution operations,
purchasing synergies, quality customer service and well-established
infrastructure. Management believes the Company's leadership in each
of its served markets creates a significant barrier to entry for
prospective competitors.
Company sales by geographic market for each of the past three
fiscal years are as follows:
1995 1996 1997
Canada $ 5,061,581 $15,363,998 $19,416,108
United Kingdom 10,287,533 11,962,351 17,658,190
United States -- -- 4,999,586
$15,349,114 $27,326,349 $42,073,884
The Company delivers bottled water to a base of approximately
115,000 water coolers in its served markets consisting of
approximately 91,900 customers who rent water coolers from the Company
and 23,100 customers who own their coolers. Rental customers
typically sign a one-year contract, providing the Company with a
stream of relatively stable revenue from both a monthly cooler rental
charge and the sale of bottled water. Water only customers generate
revenue through the sale of bottled water and ancillary services such
as cooler repairs. The Company believes that direct delivery water
cooler companies enjoy several advantages over retailers of bottled
water. Customers suffer inconvenience and potentially incremental cost
if they choose to switch from one water cooler company to another. In
addition, direct delivery water cooler operators such as the Company
have made significant capital investments in inventories of water
coolers and bottles, a truck fleet and bottling facilities. Management
believes the capital intensity of the water cooler business and the
complexity of direct delivery provide a second significant barrier to
entry.
The Company has a history of completing and integrating
acquisitions, having made fifteen acquisitions since 1993. These
acquisitions have enabled the Company to rapidly expand into
attractive markets and increase production capacity. In addition to
completing the acquisitions of fast-growing bottled water companies,
management has improved the operations and profitability of each
acquired company. For four acquired companies for which the Company
has comparable full-year pre-acquisition and post-acquisition data,
revenue and EBITDA increased, on average, by 18.5% and 64.0%,
respectively, in the first year after the acquisition. Management
believes its reputation as an experienced and well-capitalized
industry consolidator facilitates its access to additional acquisition
candidates and generates unsolicited offers from prospective sellers.
Since January 1, 1997, the Company has completed ten acquisitions
through which it entered the attractive U.S. bottled water market and
expanded its leadership positions in Canada and the United Kingdom.
The results of both significant internal growth and the execution
of the Company's acquisition strategy are evidenced by the growth in
the Company's revenue and EBITDA over the past five years. Revenue
increased at a CAGR of 61.6% from $3.8 million in 1992 to $42.1
million in 1997. Over the same period, EBITDA increased at a CAGR of
83.1% from $0.5 million to $11.2 million, with EBITDA margins
increasing from 14.3% to 26.7%. See Item 9 - Management's Discussion
and Analysis of Financial Condition and Results of Operations.
The Company is led by an experienced senior management team whose
members average more than 13 years in the beverage industry. A trust
for the benefit of G. John Krediet, the Chairman of Sparkling Spring,
and his children, owns 50.9% of the common stock ("Common Stock") of
Sparkling Spring after giving effect to the Reorganization as
described later in this Report. Mr. Krediet successfully executed a
consolidation of Canadian Pepsi-Cola bottlers and, together with other
senior management, identified the bottled water consolidation
opportunity. Mr. Schickli assisted Mr. Krediet in the Canadian Pepsi-
Cola consolidation in the late 1980's and early 1990's and has
significant experience in the acquisition of beverage businesses and
as chief financial officer of mid size beverage operations. Stewart E.
Allen, President of SSWL since 1992, has managed the operations of the
business focusing on profitably increasing the penetration levels in
each of its markets. Mr. Allen previously served as Vice President of
Sales and Marketing for Maritime Beverages Limited, the Pepsi-Cola
business, prior to assuming the Presidency of SSWL. See Item 10 -
Directors and Officers of Registrant.
Industry Overview
Bottled water continues to be one of the fastest growing segments
of the U.S. beverage industry for the past ten years, generating $3.6
billion of sales in 1996. According to Beverage Marketing Corporation,
the U.S. bottled water market experienced a CAGR of 8.5% from 1986 to
1996, and is projected to grow at a slightly lower CAGR of 7.3%
between 1996 and 2001. Bottled water volume in the U.S. increased from
629.7 million gallons in 1980 to 3.1 billion gallons in 1996, and is
projected to reach 4.4 billion gallons in 2001. Furthermore, per
capita bottled water consumption quadrupled from 1980 to 1996 with
annual consumption in the U.S. increasing from 2.8 gallons per capita
in 1980 to 11.7 gallons per capita in 1996. The projected per capita
consumption is expected to reach 15.8 gallons in the U.S. by the year
2001. The water cooler segment generated approximately $1.2 billion of
sales in 1996 or 1.2 billion gallons, representing 38.5% of the total
U.S. bottled water market. The U.S. water cooler market experienced a
CAGR of 3.9% between 1990 and 1996, and is projected to grow at an
annual rate of 6.5% from 1996 to 2001, reaching 1.6 billion gallons by
2001.
According to Zenith International Ltd., the bottled water market
in the U.K. generated (pound)400.0 million of sales in 1996, experienced a
CAGR of 11.6% from 1990 to 1996, and is projected to grow at an annual
rate of 9.0% between 1996 and 2000. Bottled water volume has increased
from 111.0 million gallons in 1990 to approximately 214.0 million
gallons in 1996 and is projected to reach 302.0 million gallons by the
year 2000. Annual consumption of bottled water in the U.K. has
increased from 1.9 gallons per capita in 1990 to 3.6 gallons per
capita in 1996 and is projected to grow to 5.1 gallons per capita by
2000. The water cooler segment generated approximately (pound)65.0 million
or 25.1 million gallons, representing 11.7% of the total U.K. bottled
water market in 1996, increasing from 3.5% in 1990. In addition, the
U.K. water cooler market experienced a CAGR of 36.8% between 1990 and
1996, and is projected to grow at a CAGR of 13.9% from 1996 to 2000,
reaching 42.3 million gallons by the year 2000.
In Canada, industry figures compiled by the Canadian Bottled
Water Association indicate that bottled water consumption totaled 643
million litres in 1997. According to Hidell-Eyster Technical Services
Inc., the estimated growth in the Canadian bottled water market was
10% in 1997, with the home and office delivery business growing at 5%.
It is estimated that there are 500,000 coolers in Canada or 1.6
coolers for every 100 people. Consumption of bottled water in 1997
was estimated to be 21.2 litres per capita.
Management believes the strong industry growth has been and will
continue to be driven by: (i) concerns related to the quality of tap
water sources, (ii) consumer preferences for healthy products,
(iii) taste preferences over tap water and other refreshment beverages
and (iv) favorable demographics.
Tap Water Concerns. The aging of the tap water supply
infrastructure and the high cost of adequately maintaining or
replacing existing water delivery systems have resulted in an increase
of tap water contamination incidences in recent years. Consequently,
there has been a decrease in consumers' confidence in the quality of
tap water, accompanied by an increase in consumption of bottled water.
Management believes that this trend will continue.
Healthy Products. There is a movement toward a healthier
lifestyle and the consumption of healthy products. Within the "healthy
products" segment, clear or natural colored products are experiencing
significant growth. Bottled water is perceived as a product with
strong health and fitness appeal.
Taste Preferences. The taste of tap water is affected by
cleaning substances used to filter water. The products used to
sterilize tap water, such as chlorine, are safe but often produce an
undesirable after-taste and, consequently, many people prefer to drink
bottled water.
Favorable Demographics. Consumption of bottled water is much
more prevalent among younger consumers. According to Beverage
Marketing Corporation, adults between the ages of 25 and 34 comprise
the demographic group most likely to consume bottled water. The
Company believes that, as younger consumers age and their purchasing
power increases, sales of bottled water will continue to grow.
The bottled water industry is highly fragmented in North America.
The bottled water market is comprised of approximately 2,500 companies
generating approximately $4.0 billion of sales. Of these companies,
the five largest companies account for approximately 55% of the total
market, with the remainder comprised of hundreds of small regional
companies. Management believes that the industry will continue to
consolidate as (i) operating leverage of the larger companies makes
the smaller companies uncompetitive, (ii) succession issues at many
smaller, family owned companies lead a number of independent companies
to exit the industry, and (iii) pressure to meet improving water
quality standards eliminates low quality producers.
The Company believes that the competitive structure of the water
cooler segment favors a larger operator with a successful
consolidation track record. As a market leader in the majority of its
geographic markets, the Company believes that it is well-positioned to
benefit from the growth and consolidation trends in the industry.
Business and Products
The Company generated approximately 79.2% of its 1997 revenue
from the sale of bottled water products for water coolers and the
rental of water coolers, 6.0% of its revenue from the sale of bottled
water is smaller retailed sized packages and 14.8% of its revenue from
related activities including the sale of paper cups, coffee, water
filtration devices, water through vending machines and cooler
sanitation services.
Bottled Water. The Company generated approximately 54.6% of its
1997 revenue from the sale of bottled water used in water coolers.
Bottled water for water coolers is primarily sold in two sizes: a
five-gallon (18 litre) bottle and a six-gallon (22 litre) bottle. In
each market, a smaller package (3 gallon or 11 litre) exists for
residential customers who may not be capable of lifting the five or
six-gallon product or who may have storage constraints. The Company
offers water bottles in plastic packaging that facilitates storage,
and has non-spill caps. While its pricing varies from market to market
and the Company frequently offers promotional discounts in certain
markets, the Company charges on average approximately $7 for a
five-gallon bottle of water.
The Company also sells water in smaller retail sized containers
such as one gallon, 1.5 litre and 500 ml sizes. In 1997, the Company
generated approximately 6.0% of its total revenue from these smaller
sized packages.
The Company primarily markets four types of water: spring,
premium drinking, steam-distilled, and fluoridated. The sale of
steam-distilled water and fluoridated water accounted for less than
1.0% of the Company's revenue in 1997. Descriptions of each type of
water follow:
Spring Water. Water, which has been naturally filtered by its
passage through various geological layers, is drawn from a protected
underground reservoir called an aquifer. It can then be either bottled
at the source or transported in stainless steel tankers to a more
strategically located bottling facility.
Before bottling, spring water is passed through a micron filter
which removes sediment while retaining the natural mineral content of
the water. The water is then purified through an industry standard
purification process known as ozonation. This sterilization process is
over 400 times more effective than chlorination and does not leave a
residual taste.
Premium Drinking Water. This water is drawn from local municipal
sources. It is passed through a series of carbon and sand filters,
processed by either reverse osmosis or deionization, ozonated and then
bottled. Premium drinking water has 99.9% of all impurities removed
from it, including its natural mineral content.
Steam-Distilled Water. This water can be obtained from either a
spring or municipal source. The water is then converted to steam. Once
the steam condenses it is then ozonated and bottled. Steam-distilled
water is similar to premium drinking water since it has 99.9% of all
impurities removed.
Fluoridated Water. Fluoridated water is premium drinking water
that has one part per million of fluoride added. It is a niche market
product that appeals to families with young children.
The following table summarizes the Company's operations in its
existing markets:
Region Principal Products Brand Names
British Columbia Premium Drinking Water Canadian Springs
Spring Water
Steam-Distilled
Maritime Provinces Spring Water Sparkling Springs
Distilled Water
United Kingdom Spring Water Nature Springs
Spring Water Water At Work
United States Premium Drinking Water Crystal Springs
Fluoridated Drinking Water
Spring Water
Premium Drinking Water Cullyspring
Steam-Distilled
Water Coolers. The Company generated approximately 24.6% of its
revenue in 1997 from the rental of water coolers. The Company has a
base of approximately 115,000 water coolers in its served markets
consisting of approximately 91,900 customers who rent coolers from the
Company and 23,100 customers who own their coolers. Rental customers
typically sign a one-year contract, providing the Company with a
stream of relatively stable revenue from both a monthly cooler rental
charge and the sale of bottled water. The Company's large installed
customer base creates operating efficiencies by supporting a level of
infrastructure that can be leveraged to support incremental cooler
installations at an attractive marginal profitability rate. While its
pricing varies from market to market and depends on the water cooler
selected by the customer, the Company's current average monthly rental
charge for its coolers is approximately $12.
The following table presents management estimates of certain
information relating to the Company's cooler base as of December 31,
1997:
British Maritime United United
Columbia Provinces Kingdom States
Number of Installed 53,241 13,850 25,336 22,610
Coolers
% Residential Customers 65% 52% 2% 35%
% Commercial Customers 35% 48% 98% 65%
The Company purchases its water coolers from one of three
preferred suppliers and maintains a stock of spare parts at delivery
depots. The Company strips down, cleans, and redeploys returned water
coolers prior to all new installations. The Company's average cost per
water cooler is approximately $150, and the Company estimates that the
average life of a water cooler is ten years. The typical pay back
period on a water cooler investment (assuming only rental revenue) is
approximately 13 months. In the event of termination of the rental
agreement, water coolers can be readily redeployed at a relatively low
cost to the Company. In addition, in certain markets the Company
charges a water cooler collection fee when a customer opts to
discontinue purchasing water.
Other. The remaining 14.8% of the Company's 1997 revenue was
generated through the sale of paper cups, cooler sanitation services,
coffee delivery, the sale of water filtration devices and the sale of
water through vending machines.
Business Strategy
Bottled water continues to be the fastest growing segment of the
beverage industry, growing at a CAGR of 10.5% since 1980 according to
Beverage Marketing Corporation. Management believes this growth stems
primarily from two sources: (i) consumer dissatisfaction with tap
water and (ii) increased consumer health consciousness resulting in
the substitution of water for other less-healthy beverages. The
Company expects to benefit from the growing demand for quality
drinking water by increasing its installed base of water coolers,
increasing the water and related products offered through its
established distribution system, and continuing to be a leader in the
consolidation of the highly fragmented bottled water industry. In
particular, the Company expects to continue to pursue the following
business strategies:
Focus on the Water Cooler Segment Within the Growing "Alternative
to Tap Water" Market. Management believes that the overall growth of
the bottled water industry and the relatively low level of water
cooler penetration in Canada and the U.K., in particular, provide the
Company with significant growth opportunities. The Company believes
that health concerns and problems with the taste and odor of tap water
have generated consumer demand for an "alternative to tap water,"
driving consumers to increasingly rely on bottled water and filtration
systems in order to satisfy their drinking water needs. The Company
intends to take advantage of this growth in demand by offering a
premium product through multiple channels (i.e., direct delivery,
retail and filtration systems), with a specific focus on the "direct
delivery" water cooler segment.
Management believes that the water cooler business enjoys higher
margins, less competition and greater operating leverage than either
the retail bottled water or the water filter businesses. Sales in this
segment are generally less price sensitive than retail sales of
bottled water because the customer is generally more concerned with
service and convenience. In addition, there are inconvenience factors
and potentially increased costs associated with switching suppliers.
Furthermore, water cooler companies generally have lower advertising
costs than companies pursuing retail sales of bottled water because
consumers generally do not select a water cooler provider on the basis
of brand name. The water cooler business is also generally less
competitive than other segments of the bottled water industry due to
the relative capital intensity of the operations and direct delivery
distribution requirements for its business. Finally, the significant
growth potential in the water cooler market and the low levels of
water cooler penetration allow industry participants to focus on
attracting new customers rather than on capturing market share from
competitors.
Leverage Existing Infrastructure. Due to the significantly fixed
distribution system associated with the direct delivery of bottled
water in a geographic area, additional operating leverage can be
achieved by increasing route density through incremental market
penetration. In addition to increasing the overall customer base, the
Company expects to continue to benefit as per capita consumption
continues to climb with each existing customer consuming more water.
Finally, the Company utilizes its route systems to offer products
which are complementary to bottled water, including cups, cooler
sanitation services, coffee and related products.
In addition to benefiting from internal growth in its markets,
the Company leverages its infrastructure with each acquisition in
adjacent or overlapping territories. Specific operating initiatives
employed by the Company typically include: (i) maximizing distribution
route efficiencies, (ii) consolidating bottling facilities,
(iii) eliminating duplicative administrative costs and (iv) utilizing
favorable purchasing opportunities. The Company's existing
infrastructure and scale of operations provide an attractive
opportunity to continue to add incremental customers at a higher
marginal profitability rate. The Company has achieved significant cost
savings in its existing operations as reflected in the increase in its
EBITDA margin from 14.3% in 1993 to 25.2% in 1996 and 26.7% in 1997.
Pursue Strategic Acquisitions. The Company has pursued a
disciplined acquisition strategy to create value by taking advantage
of the consolidation of the highly fragmented bottled water industry.
The Company has developed and implemented a "hub and spoke" approach
to acquiring companies in new markets by identifying one of the
largest bottled water companies as a platform acquisition, and
complementing it with smaller fill-in acquisitions in neighboring or
overlapping geographic territories. The Company is generally unwilling
to enter a market through an acquisition unless the company being
acquired is both one of the market share leaders and provides the
critical mass and local management talent necessary to act as a
platform in that market. While the purchase price paid for a platform
company is typically higher than that for a fill-in acquisition (as
measured using multiples of first year EBITDA), the Company is able
to reduce its average acquisition multiple by opportunistically
acquiring "spoke" distribution routes. These spoke acquisitions can
be acquired at more attractive prices due to the limited strategic
options available to these smaller operators and synergies to be
gained by Sparkling Spring from consolidating these companies into the
'platform' business. The Company's recent acquisitions of Cullyspring
Water Co., Inc. ("Cullyspring") and Crystal Springs Drinking Water,
Inc. ("CSD") demonstrate its plan to continue to expand in the U.S.
Provide Outstanding Customer Service. The Company believes
quality of service and reliability of delivery are the primary
competitive factors in the water cooler business. The quality of
service is measured by the Company's ability to: (i) reliably deliver
bottled water on schedule, (ii) meet customer shortages with the quick
delivery of refills, (iii) provide regular maintenance and sanitation
of water coolers and (iv) effectively address any other needs of a
customer. Management monitors on a monthly basis the Company's
customer "churn" rate (its non-renewal rate with respect to its water
cooler rental agreements) in an effort to continually enhance customer
service. The Company's average churn rate was approximately 2.0% per
month in 1997 which management believes is significantly lower than
the industry average churn rate.
Summary of Business Strategy. All four of the above business
strategies are presently being pursued by the Company and will
continue to be pursued for the foreseeable future. The Company
believes that all four business strategies are important to its
success, but that leveraging its existing infrastructure and focusing
on the "Alternative to Tap Water" market are of the most significance.
Acquisitions
The Company has expanded its operations through a number of
acquisitions designed to consolidate existing markets or enter new
markets. The Company has been successful in integrating acquired
companies into its existing operations and increasing the
profitability of acquired companies through the elimination of
duplicative overhead functions, realization of operating and
purchasing efficiencies and implementation of the Company's management
systems. As a result of these acquisitions, the Company has expanded
its leadership position in Canada, entered the attractive U.S. water
cooler market and further bolstered its leading presence in the U.K.
On April 14, 1993, the Company acquired Crystal Springs Limited
("CSL"). CSL served the Cape Breton, Nova Scotia bottled water and
cooler rental market. CSL was subsequently merged into SSWL.
On June 8, 1994, the Company acquired the water cooler division
of Buxton Mineral Water Company Limited through Sparkling Spring Water
UK Limited ("SSWUK"), a wholly-owned subsidiary of SSWL. The water
cooler industry in the U.K. was identified as being much less
developed than the North American market and, thus, having a
significant growth potential.
On April 26, 1995, the Company acquired Aquaporte (UK) Limited
("Aquaporte UK"). Aquaporte UK had a predominantly London-based
customer list and a depot close to central London. The operation was
merged with SSWUK and the combined businesses became the largest water
cooler company serving the commercial market in the U.K.
On January 18, 1996, the Company acquired Canadian Springs Water
Company Ltd. ("Canadian Springs"). Canadian Springs is the leading
home and office water cooler company in British Columbia, with
operations in Vancouver, Victoria, Kelowna and Nanaimo. The
acquisition served to consolidate the Company's position in Canada
while providing it with access to the fastest growing bottled water
market in Canada.
On May 19, 1996, the Company acquired Water Jug Enterprises
Limited ("Water Jug"). Water Jug, which serves the Kamloops area in
British Columbia, has further solidified the Company's market position
in British Columbia.
On January 2, 1997, the Company acquired D & D and Company, Inc.,
doing business as Mountain Fresh Bottled Water Co. ("Mountain Fresh").
Mountain Fresh is headquartered in Portland, Oregon, and holds the
number three position in the Oregon market.
On January 28, 1997, the Company acquired Withey's Water
Softening & Purification Limited ("Withey's Water"). Withey's Water is
headquartered in Prince George, British Columbia, and is the dominant
supplier of bottled water and filtration systems in the rural market
of upper British Columbia. Withey's Water represents a fill-in
acquisition, strengthening the Company's already leading presence in
the home and office water cooler market in British Columbia.
On January 30, 1997, the Company acquired High Valley Water
Limited ("High Valley"). High Valley is headquartered in Kelowna,
British Columbia and is comprised of four bottled water distributors.
On February 5, 1997, the Company acquired Marlborough Employment
Agency Limited doing business as "Water At Work". Water at Work is
headquartered in Glasgow, Scotland, and is Scotland's largest water
cooler company and the fourth largest in the U.K., serving both the
Glasgow and Edinburgh markets. The acquisition of Water At Work
further bolstered the Company's leadership position in the U.K. market
and established its leading presence in the attractive Scottish
market.
On June 4, 1997, the Company acquired the water cooler operations
of Soja Enterprises, Inc. ("Soja"). Soja serves the commercial
community of Portland, Oregon.
On June 23, 1997, the Company acquired Crystal Springs Bottled
Water Co., Inc. ("Crystal Springs"). Crystal Springs is the second
largest five-gallon distributor serving Oregon and is based in
Portland. This acquisition provided the Company with greater route
density in its established Portland market.
On October 23, 1997, the Company acquired Cullyspring Water Co.,
Inc. Cullyspring is a Seattle, Washington based bottled water company
focusing on the direct delivery of five-gallon containers to homes and
offices and the rental of water coolers.
On December 17, 1997, the Company purchased all of the
outstanding capital stock of Crystal Springs Drinking Water, Inc.
("CSD"). CSD is a Seattle-based bottled water company focusing on the
direct delivery of five-gallon containers to homes and offices and the
rental of water coolers.
On February 24, 1998, the Company purchased all of the
outstanding capital stock of Coastal Mountain Water Corp. ("Coastal").
Coastal is based in Vancouver, British Columbia and focuses on the
direct delivery of eighteen litre containers of water to residential
and commercial customers and the rental of water coolers.
On May 16, 1998 the Company purchased all of the outstanding
capital stock of Krystal Fountain Water Co. Ltd. ("Krystal Fountain").
Krystal Fountain operates primarily in the M25 area in London,
England.
The Bottling Process
The Company draws its spring water from local sources. The spring
water is bottled at the source, in the case of the Maritime Provinces,
or transported to a Company bottling facility by stainless steel
tanker in other locations. Prior to final bottling, the spring water
is filtered and ozonated. Ozonation is a process whereby impurities
not removed through ordinary filtration are removed through the
injection of oxygen. The process involves a special form of oxygen,
ozone, which is the strongest disinfectant and oxidizing agent
available for water treatment. The added oxygen quickly dissipates and
results in tasteless and odorless purification as compared to
chlorination. This process is designed to prevent bacteria and other
contaminants from being transferred from the spring or the tanker to
the finished product.
In addition to spring water, the Company also produces premium
drinking water. The Company accesses local, publicly-available water
supplies and processes and purifies the product through reverse
osmosis to remove chlorine and other chemicals frequently found in tap
water. The product then goes through the ozonation process prior to
bottling as premium drinking water.
The Company has nine bottling facilities located throughout
British Columbia, the Maritime Provinces of Canada, England, Scotland
and the Pacific Northwestern United States.
British Columbia. The Company operates four bottling facilities
located in Vancouver, Victoria, Kamloops and Prince George, British
Columbia. The Vancouver and Prince George facilities produce both
premium drinking water and spring water. The Company transports the
spring water from sources located in the Coastal Mountains pursuant to
a non-exclusive contract without a fixed term. The bottling line in
Victoria is capable of producing both spring water and premium
drinking water but currently only produces premium drinking water.
Maritime Provinces. The Company's bottling line is located in
Valley, Nova Scotia, which is also the site of a spring owned by the
Company. Water is bottled at the source, processed and distributed to
the Company's four depots and distributors in Nova Scotia, New
Brunswick and Prince Edward Island.
England. The Company operates its bottling operations in a
newly-constructed production facility, adjacent to its largest
distribution depot, in Buckinghamshire, England. Completed in January
1997, the cost of construction of the new production operation was
$1.3 million. The new high speed bottling line installed at the
facility is expected to generate significant cost savings in the
future. Spring water is purchased from various sources and transported
to the bottling line for processing.
Scotland. The Company operates a bottling line which processes
water drawn from a 100-year old well in Dumfries, Scotland. The water
is processed and bottled in a bottling line operated by Natural Water
Limited, a wholly-owned subsidiary of Sparkling Spring.
United States. From its Portland, Oregon facilities, the Company
processes premium drinking water, as well as spring water shipped from
a source in the Cascade Mountains pursuant to a non-exclusive contract
without a fixed term. From its Seattle, Washington facility, the
Company processes premium drinking water.
The following table provides certain information regarding the
Company's bottling facilities:
Location Type of Water Bottling Capacity
Vancouver, British Premium Drinking 490 bottles per hour
Columbia Spring
Steam Distilled
Victoria, British Premium Drinking 225 bottles per hour
Columbia
Kamloops, British Premium Drinking 300 bottles per hour
Columbia
Prince George, British Premium Drinking 125 bottles per hour
Columbia Spring
Valley, Nova Scotia Spring 485 bottles per hour
Distilled
Buckinghamshire, England Spring 1,200 bottles per hour
Glasgow, Scotland Spring 200 bottles per hour
Portland, Oregon Premium Drinking 600 bottles per hour
Fluoridated Drinking
Spring
Seattle, Washington Premium Drinking 425 bottles per hour
Steam Distilled
Sales and Marketing
The Company markets its products principally through telephone
directory yellow page advertisements, newspaper advertisements, mall
shows, coupons, product sponsorship programs, direct mail, radio
commercials and various referral programs which are supported by the
efforts of approximately 113 salaried sales and marketing personnel.
Almost half of the Company's new customers are derived from incoming
telephone calls resulting from yellow page advertisements, the key
advertising vehicle for the Company. To supplement this effort, the
Company's marketing team solicits potential new customers in specific
geographical areas in which the Company desires to increase the
density of existing routes or in which it desires to establish new
routes. A potential new customer may be offered various introductory
promotions including a free trial offer. The Company's marketing
activity emphasizes the benefits of bottled water, the convenience of
a water cooler as well as the associated regular delivery of bottled
water and, to a lesser extent, the creation of brand awareness.
An important part of the Company's sales, marketing and customer
service strategy is its focus on retaining customers. The Company
experienced a relatively low average churn rate of its water cooler
rental agreements of 2.0% per month in 1997, which management believes
is significantly lower than the industry average. The Company has also
generally lowered the churn rate of the businesses it has acquired.
Its primary strategy for minimizing its churn rate is a focus on
outstanding customer service. In addition, the Company employs certain
strategies to retain customers who indicate they wish to discontinue
receiving bottled water. Customer service representatives are
compensated for the customers they help to retain.
Distribution
As of December 31, 1997, the Company owned or leased
approximately 150 trucks and employed 215 people in its distribution
operations. The average cost per new truck is approximately $55,000,
and the Company generally delivers to neighborhoods within a ninety
minute drive from its distribution centers. Each truck has a useful
life of 7 to 12 years and can hold 120 to 300 five- or six-gallon
bottles. The Company's drivers are generally paid on a
per-delivered-bottle basis, promoting efficiency and higher
utilization of the delivery trucks. On average, a truck driver
services approximately 1,000 customers. The average customer typically
receives delivery once every two weeks. In addition, the Company's
drivers actively generate sales and are compensated for each new
customer contract they originate.
Management believes that one of the most important success
factors in the delivered bottled water business is delivery route
efficiency. Route efficiency is the critical cost factor in the water
cooler business, as the average cost of local delivery per bottle is
over four times the cost of preparing one bottle for distribution.
However, the marginal distribution cost of an additional bottle on an
existing route is relatively low.
Competition
The Company competes in the "alternative to tap water" market in
two areas. First, it competes directly with other home and office
delivery bottled water companies in its geographic markets. This
segment is highly fragmented with the vast majority of the companies
being operated as small entrepreneurial and family-owned businesses.
The Company believes it has a leading market share position in England
and Scotland in the U.K., British Columbia and the Maritime Provinces
of Canada, and Oregon in the U.S. Furthermore, management believes it
has a second market share position in the state of Washington.
Management believes that its access to capital, professional
management, and sophisticated reporting and accounting systems are
equal to or greater than those of its local competitors in these
markets. The Company believes quality of service and reliability of
delivery are the primary competitive factors in the water cooler
business. Additionally, the Company believes that the capital
intensity of its operations creates significant barriers to entry.
The Company also competes indirectly with companies that
distribute water through retail stores and vending machines.
Management believes that the competitive advantage of water coolers
over these alternative distribution channels is primarily based on the
convenience of home or office delivery and, to a lesser extent, price.
Similarly, the Company competes with providers of on-premises water
filtration systems, including systems distributed through retail
outlets, which the Company believes are aimed at less affluent
consumers. In certain markets the Company itself markets and provides
on-premises water filtration systems.
The "alternative to tap water" industry also includes a number of
well-established, well-capitalized companies, most of which do not
currently compete directly in the Company's markets. These include
Nestle S.A., which owns Perrier and the Perrier Group of America.
Perrier Group of America operates the Arrowhead, Poland Spring,
Zephyrills, Ozarka, Oasis and Great Bear brands. Suntory owns Belmont
Springs, Hinkley & Schmitt, Crystal, Kentwood, and Polar. BSN Group
owns the Evian and Dannon brands and also operates the Crystal Spring
(Toronto), Spring Valley, and Laurentian businesses. McKesson
Corporation operates the Sparkletts business. Ionics Incorporated
operates the Aquacool businesses. In addition, United States Filter
Corp. and Culligan Water Technologies Inc. compete in the water
filtration segment.
Customers
The Company has grown from a base of approximately 8,000 water
coolers in 1991 to a base of approximately 91,900 rental and 115,000
total customers as of December 31, 1997. No customer accounted for
more than 1.0% of the Company's revenue in 1997. Approximately 65% of
the Company's revenue in 1997 was derived from sales to commercial
establishments, with the balance attributable to residential
customers. Substantially all of the Company's U.K. customers are
commercial establishments. The Company's commercial customers include
not only large established businesses, but also smaller regional and
local shops, offices, warehouses and production facilities. The
Company's customers include British Rail, British Telecom, the Bank of
Scotland, Heathrow Airport, National Westminster Bank, Nike, Toronto
Dominion Bank and the Canadian Pacific Railway. Management believes
that the diversity of its customer base protects the Company from
reliance on any one customer or a particular industry segment. In
addition, the Company has a number of short term bottling contracts
with independent beverage companies, including Sobey's and Pepsi-Cola,
as well as with supermarkets such as Fred Meyer, Inc. and Safeway,
Inc.
Employees
As of December 31, 1997, the Company had approximately 523 full-
time employees, of which 113 were in sales and services, 215 in
distribution, 114 in production and warehouse and 81 in
administration. The workforce is non-unionized and temporary workers
are used during peak demand periods. The Company believes that it
enjoys generally good relations with its employees.
Seasonality
Bottled water sales are subject to seasonal variations with
decreased sales during cold weather months and increased sales during
warm weather months. Water cooler rentals are typically paid monthly
and mitigate the seasonal effect of water sales.
Foreign Operations
For the year ended December 31, 1997, 46.2% of the Company's
revenue was generated in Canada in Canadian dollars, 42.0% of the
Company's revenue was generated in the U.K. in pounds sterling and
11.8% of the Company's revenue was generated in the U.S. in U.S.
dollars. In addition, a substantial portion of the expenses incurred
by the Company during that period were denominated in currencies other
than U.S. dollars. Foreign operations are subject to a number of
special risks, including, but not limited to, risks with respect to
fluctuations in currency exchange rates, regional and national
economic conditions, economic and political destabilization, other
disruptions of markets, restrictive actions by foreign governments
(such as restrictions on transfer of funds and unexpected changes in
regulatory environments), changes in foreign laws regarding trade and
investment and foreign tax laws.
The Company does not engage in transactions in the ordinary
course of its business to hedge itself against exposure to currency
risks. However, on December 2, 1997, the Company entered into cross
currency swap transactions in Canadian dollars ($28 million) and
British pounds sterling ($30 million) for the purpose of protecting
itself from future foreign currency fluctuations. To date, the
Company has entered into no other foreign currency swap transactions.
Regulation
The Company's operations are subject to various federal, state
and local laws and regulations, which require the Company, among other
things, to obtain licenses for its business and equipment, to pay
annual license and inspection fees, to comply with certain detailed
design and quality standards regarding the Company's bottling plant
and equipment, and to continuously control the quality and quantity of
the water dispensed. Several jurisdictions have regulations that
require the Company to obtain certification for its bottled water. The
Company believes that it is currently in substantial compliance with
these laws and regulations and has passed all regulatory inspections.
In addition, the Company does not believe that the cost of compliance
with applicable government laws and regulations is material to its
business. However, any failure by the Company to comply with existing
and future laws and regulations could subject it to significant
penalties. Further, governmental laws and regulations are subject to
change and there can be no assurance that such laws or regulations
will not be modified in a manner that imposes additional costs on the
Company or otherwise has a material adverse effect on the Company's
financial position or results of operations.
Each of the Company's operating subsidiaries employs a Quality
Control Manager and follows internal, industry and government testing
requirements. In addition, all water is ozonated to ensure purity of
the Company's product. Ozonation is the government and industry
standard for the treatment of water prior to bottling.
Canada. In Canada, bottled water is considered a food product
and, as such, is governed by the Federal Department of Health and
Welfare--Health Protection Branch under the Food and Drug Act. The
Company's production site is audited annually according to the Good
Manufacturing Practices governing such plants. This inspection is
performed by the National Sanitation Foundation ("NSF") and the Health
Protection Branch.
The Company is in good standing with the International Bottled
Water Association (the "IBWA") and the Canadian Bottled Water
Association (the "CBWA"). The IBWA mandates compliance with strict
quality control standards on a global basis. The CBWA is the Canadian
chapter of the IBWA.
United Kingdom. In the U.K., bottled water is governed by the
European Union's Mineral Water Directive and Drinking Water in
Containers Regulations. In addition, the Company is a member of the
Bottled Water Cooler Association (the "BWCA") and the IBWA, both of
which play a major role in setting industry standards. The BWCA
requires its members to adhere to a Code of Practice and pass an
annual quality inspection conducted by an independent third-party
organization. The current BWCA plant inspection program is
administered by the NSF. The Company believes that it is in good
standing with the BWCA.
United States. In the U.S., bottled water is regulated by the
Federal Food and Drug Administration (the "FDA") and follows the
Quality Standards, Standards of Identity and Current Good
Manufacturing Practices guidelines under the Code of Federal
Regulations. As in the case of Canada and the U.K., inspections of the
Company's production sites in the U.S. are conducted annually by the
NSF.
Environmental Matters
The Company's operations and properties are subject to a wide
variety of federal, state, local and international laws and
regulations, including those governing the use, storage, handling,
generation, treatment, emission, release, discharge and disposal of
certain materials, substances and wastes and the health and safety of
employees (collectively, "Environmental Laws"). Such laws, including
but not limited to, those under the Comprehensive Environmental
Response, Compensation & Liability Act may impose joint and several
liability and may apply to conditions at properties presently or
formerly owned or operated by an entity or its predecessor as well as
to conditions of properties at which wastes or other contamination
attributable to an entity or its predecessor have been sent or
otherwise come to be located. Based upon its experience to date, the
Company believes that it is in substantial compliance with existing
Environmental Laws and that any liability for known environmental
claims pursuant to such Environmental Laws will not have a material
adverse effect on the Company's financial position or results of
operations and cash flows. However, future events, such as new
information, changes in existing Environmental Laws or their
interpretation, and more vigorous enforcement policies of regulatory
agencies, may give rise to additional expenditures or liabilities.
Recent Developments
On February 24, 1998, the Company purchased all of the
outstanding capital stock of Coastal Mountain Water Corp. ("Coastal")
for approximately $4.2 million. Coastal is based in Vancouver, British
Columbia and focuses on the direct delivery of eighteen litre
containers of water to residential and commercial customers and the
rental of water coolers.
Effective April 3, 1998, Stephen L. Larson, resigned from his
positions as Vice Chairman of the Board of Directors and Chief
Financial Officer of Sparkling Spring and as an officer and director
of each of its subsidiaries to pursue other business interests.
Mr. Larson will continue to serve as a director of Sparkling Spring.
Kent Dillon Schickli replaced Mr. Larson as Chief Financial Officer of
Sparkling Spring effective April 3, 1998. See Item 10 - Directors and
Officers of Registrant.
On May 16, 1998 the Company purchased all of the outstanding
capital stock of Krystal Fountain Water Co. Ltd. ("Krystal Fountain").
Krystal Fountain operates primarily in the M25 area in London,
England.
On May 26, 1998, the Company closed a $40 million Senior Credit
Facility with The Toronto-Dominion Bank, Toronto Dominion (Texas),
Inc. and The Toronto-Dominion Bank, London Branch (collectively,
"Toronto-Dominion"). The Senior Credit Facility is for general
corporate purposes including working capital, acquisitions and
capital expenditure financing. See Item 9 - Management's Discussion
and Analysis of Financial Condition and Results of Operations - Senior
Credit Facility.
ITEM 2. DESCRIPTION OF PROPERTY
The Company maintains corporate headquarters in Dartmouth, Nova
Scotia and Stamford, Connecticut. The following table sets forth
certain information relating to each of the Company's facilities:
Size Owned/ Lease
Location sq. ft. Purpose Leased Expiration
Canada:
Dartmouth, Nova Scotia 14,000 Corporate Leased June 2002
Headquarters,
Distribution
Valley, Nova Scotia 14,500 Bottling, Owned N/A
Distribution
Sydney, Nova Scotia 4,500 Offices, Leased May 1999
Distribution
Moncton, New Brunswick 3,700 Office, Distribution Leased June 2001
Saint John, New 4,300 Offices, Leased May 2003
Brunswick Distribution
Vancouver, British 19,600 Offices, Bottling, Leased Oct. 1999
Columbia Distribution
Victoria, British 7,250 Offices, Bottling, Leased Feb. 2003
Columbia Distribution
Nanaimo, British 1,300 Distribution Leased Monthly
Columbia
Kamloops, British 10,000 Offices, Bottling, Leased Feb. 2003
Columbia Distribution
2,500 Surplus Leased May 1999
Prince George, British 7,800 Bottling, Leased June 2002
Columbia Distribution
2,500 Surplus Leased Aug. 1998
United Kingdom:
Tewkesbury, England 8,600 Offices, Leased Apr. 2008
Distribution
High Wycombe, England 18,000 Offices, Leased Dec. 2006
Distribution
High Wycombe, England 18,000 Bottling Leased Dec. 2006
Warrington, England 4,000 Offices, Leased Dec. 2002
Distribution
Arklo Road, England 8,000 Offices, Leased Oct. 2006
Distribution
Glasgow, Scotland 4,000 Offices, Leased June 2004
Distribution
Dumfries, Scotland 4,000 Bottling Leased June 2009
Dundee, Scotland 2,000 Offices, Leased Feb. 2000
Distribution
United States:
Stamford, Connecticut 675 Offices Leased Dec. 1998
Portland, Oregon 30,000 Bottling, Leased Oct. 2007
Distribution,
Offices
Portland, Oregon 10,000 Distribution Leased June 2000
7,000 Bottling, Offices Leased June 2002
Seattle, Washington 25,000 Bottling, Leased Oct. 2002
Distribution,
Offices
All of the Company's bottling and distribution facilities, in the
opinion of the Company's management, have been adequately maintained,
are in good operating condition and generally have sufficient capacity
to handle all present sales volume and all sales volume contemplated
in the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any litigation other than routine
legal proceedings incidental to its business. Management does not
expect that these proceedings will have a material adverse effect on
the Company.
ITEM 4. CONTROL OF REGISTRANT
Gaspar Limited ("Gaspar"), a Barbados corporation wholly-owned by
a trust for the benefit of Mr. Krediet and his children, owns 50.9% of
the outstanding Common Stock of Sparkling Spring. Clairvest Group,
Inc., a Canadian corporation, is the holder of 30.4% of the
outstanding Common Stock of Sparkling Spring. As far as known to the
Company, the Company is not directly or indirectly owned or controlled
by any foreign government.
Sparkling Spring, Gaspar, Clairvest, Stephen L. Larson, Lucy
Stitzer, Stewart E. Allen and certain other shareholders of the
Company are parties to a Shareholder Agreement, dated as of October
22, 1997 (the "Shareholder Agreement") which sets forth various
arrangements, the operation of which could at a subsequent date,
result in a change of control of the Company. For a more detailed
discussion of the provisions of the Shareholder Agreement, see Item 13
- - - Interest of Management in Certain Transactions - Shareholder
Agreement.
Security Ownership Of Certain Beneficial Owners And Management
The following table sets forth as at December 31, 1997 certain
information regarding the ownership of Common Stock of Sparkling
Spring after giving effect to the Reorganization and the issuance of
non-voting shares to key managers, with respect to (i) each person
known by the Company to own beneficially more than 5.0% of the
outstanding shares of Common Stock, (ii) each of Sparkling Spring's
directors, (iii) each person named in the Summary Compensation Table
and (iv) all directors and officers as a group. Except as otherwise
indicated, each of the shareholders has sole voting and investment
power with respect to the shares of Common Stock beneficially owned.
Unless otherwise indicated, the address for each shareholder is in
care of the Company, 19 Fielding Avenue, Dartmouth Nova Scotia, Canada
B3B-1C9.
After giving effect to the Reorganization and the issuance of non-
voting shares to key managers, there were outstanding an aggregate of
1,392,688 shares of Common Stock and an aggregate of 252,197 options
and warrants to purchase shares of Common Stock. All shares of Common
Stock issuable upon exercise of options and warrants are not entitled
to vote on matters submitted to a vote of the shareholders of
Sparkling Spring.
Beneficial Ownership (1)
Shares of
Name of Beneficial Owner Common Stock Percent
Gaspar Limited 713,300(2) 50.9%
Bridgetown, Barbados
Clairvest Group Inc.
Toronto, Ontario 423,190 30.4%
G. John Krediet 8,250(3) *
Stephen L. Larson 172,996(4) 12.0%
Stewart E. Allen 110,378(5) 7.4%
Lucy M. Stitzer 94,010 6.8%
Michael Bregman --(6) --
Kenneth B. Rotman --(7) --
C. Sean Day 8,994 *
All Directors and Executive 1,099,678 70.5%
Officers as a Group (8
persons)
__________________________
* Less than one percent
(1)Shares of Common Stock which an individual or group has a right to
acquire at any time pursuant to the exercise of options or
warrants, whether or not currently vested or exercisable, are
deemed to be outstanding for the purpose of computing the
percentage ownership of that individual or group, but are not
deemed to be outstanding for the purpose of computing the
percentage ownership of any other person shown in the table.
Information in this Report regarding the ownership of the Common
Stock of Sparkling Spring is calculated in accordance with the
foregoing methodology.
(2)Gaspar Limited is a Barbados corporation wholly-owned by a trust
organized for the benefit of G. John Krediet and his children.
Includes 8,250 shares of Common Stock issuable upon exercise of
options held by Mr. Krediet.
(3)Includes 8,250 shares of Common Stock issuable upon exercise of
options. Does not include shares owned by Gaspar Limited.
(4)Includes 53,787 shares of Common Stock issuable upon exercise of
options.
(5)Includes 104,706 shares of Common Stock issuable upon exercise of
options.
(6)Excludes 423,190 shares held by Clairvest Group Inc., of which
Mr. Bregman, a Director of Sparkling Spring, is the Vice Chairman
and a Director, and with respect to which Mr. Bregman disclaims
beneficial ownership.
(7)Excludes 423,190 shares held by Clairvest Group Inc., of which
Mr. Rotman, a Director of Sparkling Spring, is a Managing
Director, and with respect to which Mr. Rotman disclaims
beneficial ownership.
ITEM 5. NATURE OF TRADING MARKET
As of the date of this Report, there is no principal non-United
States or United States trading market for the Notes. As at May 31,
1998, approximately $100.0 million principal amount of the Notes were
held by approximately 13 recordholders in the United States.
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS
AFFECTING SECURITY HOLDERS
As at the date of this Report, there are no governmental laws,
decrees or regulations in Canada that restrict the remittance of
interest or other payments to non-resident holders of the Notes.
ITEM 7. TAXATION
The following summary describes the principal Canadian federal
income tax consequences generally applicable to a holder of a Note who
for purposes of the Income Tax Act (Canada) (the "Canadian Tax Act"),
and at all relevant times, is a non-resident of Canada, deals at arm's
length with the Company, and does not use or hold and is not deemed to
use or hold the Note in the course of carrying on a business in Canada
and is not an insurer that carries on an insurance business in Canada
and elsewhere.
This summary is based on the current provisions of the Canadian
Tax Act and the regulations thereunder (the "Regulations") in force on
the date hereof, the Company's understanding of the current published
administrative and assessing practices and policies of Revenue Canada,
and all specific proposals to amend the Canadian Tax Act and the
Regulations publicly announced by the Minister of Finance (Canada)
prior to the date of this Report (the "Proposed Amendments"). This
summary is not exhaustive of all possible Canadian federal tax
consequences and, except for the Proposed Amendments, does not take
into account or anticipate changes in the law or the administrative or
assessing practices of Revenue Canada, whether by judicial,
governmental or legislative action or interpretation, nor does it take
into account provincial, territorial or foreign tax legislation or
considerations.
The payment by Sparkling Spring of interest, principal or
premium, if any, on the Notes (and payments under the Guarantees by a
Guarantor that is a resident of Canada for purposes of the Canadian
Tax Act) will be exempt from withholding tax under the Canadian Tax
Act.
No other tax on income (including taxable capital gains) will be
payable under the Canadian Tax Act in respect of the holding, sale,
redemption or other disposition of the Notes or the receipt of
interest, principal or premium, if any, thereon.
THIS SUMMARY IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO
BE, AND SHOULD NOT BE INTERPRETED AS, LEGAL OR TAX ADVICE TO ANY
PARTICULAR HOLDER OF A NOTE. ACCORDINGLY, HOLDERS OF THE NOTES ARE
URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THEIR
PARTICULAR CIRCUMSTANCES.
ITEM 8. SELECTED FINANCIAL DATA
The following selected historical consolidated financial data of
the Company for the five years ended December 31, 1997 has been
derived from the consolidated financial statements of the Company
which have been audited by Ernst & Young, independent public
accountants. The information set forth below should be read in
conjunction with Item 9 -Management's Discussion and Analysis of
Financial Condition and Results of Operations, and the Consolidated
Financial Statements of the Company including the notes thereto,
included in Item 18 of this Report.
(dollars in thousands)
Year Ended December 31,
1993 1994 1995 1996 1997
Income Statement Data:
Revenue $3,867 $8,725 $15,349 $27,326 $42,074
Cost of sales 1,139 1,755 2,863 4,676 7,140
Operating expenses 2,175 5,356 9,041 15,756 23,722
Depreciation and 438 1,095 1,465 3,842 5,692
amortization
Interest expense 228 625 1,294 2,481 5,018
Net income (loss) before
extraordinary items (63) (94) 411 166 (4,525)
Net (loss) income (260) (238) 19 (307) (5,358)
Other Data:
EBITDA (1) $ 553 $ 1,614 $ 3,445 $ 6,894 $11,212
EBITDA margin 14.3% 18.5% 22.4% 25.2% 26.7%
Ratio of EBITDA to net
cash interest expense 2.43 2.58 2.66 2.78 2.21
Cash provided by (used
in) operating
activities 237 1,029 1,491 3,216 (804)
Cash used in investing 1,476 7,579 4,219 24,168 33,899
activities
Cash provided by 1,957 5,926 3,551 22,669 60,005
financing activities
Net capital expenditures 1,043 1,257 2,287 6,736 6,038
Water cooler base 11,181 23,838 30,344 68,614 115,037
Balance Sheet Data:
Cash and cash $ 731 $ 67 $ 860 $ 2,231 $ 27,507
equivalents
Total assets 5,398 13,835 18,521 44,409 106,999
Long-term debt (2) 3,227 7,623 11,309 30,474 104,799
Common shareholders' 755 2,331 2,207 6,772 (8,960)
equity (deficit)
___________________
(1) "EBITDA" means operating profit plus depreciation and
amortization. EBITDA is presented because it is a widely accepted
financial indicator of a company's ability to service and/or to
incur indebtedness. However, EBITDA should not be considered as an
alternative to net income as a measure of operating results or to
cash flow from operations as a measure of liquidity in accordance
with generally accepted accounting principles.
(2) Includes amounts due under capital lease obligations and loans
payable including current maturities and the Notes.
The above financial information includes the results of
operations of the following companies from their dates of acquisition
as follows: Crystal Springs Limited: April 14, 1993; Water Cooler
Division of Buxton Mineral Water Company Limited: June 8, 1994;
Aquarporte (UK) Ltd.: April 26, 1995; Canadian Springs Water Company
Limited: January 18, 1996; Water Jug Enterprises Limited: May 19,
1996; D&D and Company, Inc.: January 2, 1997; Withey's Water Softening
& Purification Limited: January 28, 1997; High Valley Water Limited:
January 30,1997; Marlborough Employment Agency Limited: February 5,
1997; Soja Enterprises, Inc. June 4, 1997; Crystal Springs Bottled
Water Co., Inc.: June 23, 1997; Cullyspring Water Co., Inc.: October
23, 1997; and Crystal Springs Drinking Water Inc.: December 17, 1997.
Exchange Rate Data
The following table sets forth for both Canadian dollars and
British pounds sterling for the periods indicated, the high and low
exchange rates (i.e., the highest and lowest exchange rate at which
each currency was sold), the average exchange rate (i.e., the average
of each exchange rate on the last business day of each month during
the applicable period) and the period end exchange rate of each
currency in exchange for the U.S. dollar, as calculated from the
inverse of the exchange rates reported by the Federal Reserve Bank of
New York for cable transfers payable in Canadian dollars and British
pounds sterling for customs purposes.
Year ended December 31,
1993 1994 1995 1996 1997
Canadian Dollar
High for period 0.807 0.764 0.753 0.753 0.749
Low for period 0.742 0.710 0.710 0.721 0.695
End of period 0.757 0.713 0.733 0.730 0.700
Average for period 0.775 0.732 0.728 0.733 0.722
British Pound Sterling
High for period 1.593 1.643 1.641 1.711 1.7115
Low for period 1.418 1.460 1.527 1.497 1.5797
End of period 1.480 1.564 1.552 1.705 1.642
Average for period 1.501 1.531 1.578 1.560 1.638
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the results of
operations of the Company should be read in conjunction with Item 8 -
Selected Financial Data and the Consolidated Financial Statements of
the Company, and the notes thereto, included elsewhere in this Report.
General
The Company is one of the world's largest providers of bottled
water delivered directly to commercial and residential customers in
Canada, the United Kingdom and the United States. The Company's
revenue is primarily generated from two relatively stable and
recurring sources: bottled water sales and the rental and service of
water coolers. Additionally, the Company engages in certain related
activities. The Company's revenue growth in recent years is primarily
attributable to increased water cooler penetration, strategic
acquisitions in existing and new geographic territories and higher
sales of ancillary products sold through the Company's established
distribution channels.
In 1997, the Company generated approximately 24.6% of its total
revenue from the rental of water coolers. The Company typically
charges its customers a monthly water cooler rental charge. Total
rental revenue is a function of the size of the Company's water cooler
base and the monthly cooler rental charge. From December 31, 1995 to
December 31, 1997, the Company's water cooler base increased by 279.1%
from 30,344 to 115,037. The Company's average monthly cooler rental
charge remained relatively stable during this period.
Revenue from the sale of bottled water to commercial and
residential markets, which accounted for 60.6% of the Company's total
revenue in 1997, is driven by a number of factors, including the water
cooler base, consumption of bottled water per customer and the price
charged per bottle of water.
The remaining 14.8% of the Company's total revenue in 1997 was
generated from related activities, including the sale of paper cups,
cooler sanitation services, coffee, water filtration devices and water
through vending machines. The Company plans to continue these
ancillary activities to maximize the profitability of its established
distribution system.
Since 1994, the Company has substantially improved its sales and
profitability by increasing its base of water coolers through internal
growth and acquisitions. The Company's operations are characterized by
relatively high fixed costs due to the significant investment required
to establish a bottling and distribution infrastructure. As the
Company grows its revenue base by acquiring and consolidating new
routes within its existing route structure, operating costs decline as
a percentage of revenue. This operating leverage is driven by the
following factors: (i) improved route efficiency; (ii) consolidation
of production and distribution facilities; (iii) realization of
savings from greater purchasing volume; (iv) elimination of
duplicative administrative costs; (v) improved management control
through centralized accounting and reporting systems; and
(vi) enhanced marketing efficiency. As a result, positive changes in
revenue tend to have a larger corresponding impact on EBITDA and
operating income. The continued consolidation of production and
distribution capabilities is a key component of the Company's business
strategy both within its current markets and in any new markets it may
enter. Consequently, the Company expects operating expenses to grow at
a rate less than that of anticipated revenue growth.
For certain financial information relating to each of the
geographic regions in which the Company operates, see Note 19 to the
Notes to Consolidated Financial Statements of Sparkling Spring Water
Group Limited included in Item 18 of this Report.
Results of Operations
The following table sets forth, for the periods indicated,
certain statement of operations and other data of the Company.
Year Ended December 31
1995 1996 1997
Revenue 100% 100% 100%
Cost of sales 18.7 17.1 17.0
Operating expenses 58.9 57.7 56.4
EBITDA 22.4 25.2 26.7
Depreciation and amortization 9.5 14.1 13.5
Interest expense 8.4 9.1 11.9
Net income (loss) before
extraordinary items 2.7 0.6 (10.8)
Net income (loss) 0.1 (1.1) (12.7)
Year Ended December 31, 1997 to Year Ended December 31, 1996
Revenue. Revenue increased $14.8 million, or 54.0%, to $42.1
million in 1997 compared to $27.3 million in 1996. The water cooler
base increased by 46,423 or 67.7% to 115,037 compared to 68,614 in
1996. Acquisitions completed in fiscal 1997 provided an increase in
the water cooler base of 34,375 and accounted for approximately $11.6
million or 78.7% of the total increase in revenue. The remaining
increase in water coolers of 12,048 and revenue of $3.2 million was
primarily the result of additional water cooler rentals and bottled
water sales in the Company's existing territories and a full year of
revenue being recognized in 1997 for the 1996 acquisitions.
Cost of Sales. Cost of sales increased $2.4 million, or 52.7%,
to $7.1 million in 1997 compared to $4.7 million in 1996 largely as a
result of the acquisitions completed in 1996 and 1997. Cost of sales
as a percentage of revenue decreased slightly to 17.0% in 1997 from
17.1% in 1996.
Operating Expenses. Operating expenses increased $7.9 million or
50.6% to $23.7 million in 1997 compared to $15.8 million in 1996 as a
result of the acquisitions completed in 1996 and 1997. Operating
expenses as a percentage of revenue decreased to 56.3% in 1997 from
57.7% in 1996. This decrease as a percentage of revenue was the result
of incremental sales volumes being applied to relatively fixed
distribution costs; specifically, more efficient utilization of the
existing route fleet through increased route density.
EBITDA. For the reasons stated above, EBITDA in 1997 increased by
$4.3 million, or 62.6%, to $11.2 million from $6.9 million in 1996. As
a percentage of revenue, EBITDA in 1997 increased to 26.7% from 25.2%
in 1996.
Depreciation and Amortization. Depreciation and amortization
expense increased to $5.7 million in 1997 from $3.8 million in 1996.
This increase was due to significant increases in fixed assets as a
result of the acquisitions consummated in the period, the higher
depreciation expense associated with the increased water cooler base,
and the standard levels of capital expenditures for existing
operations.
Interest Expense. Interest expense increased $2.5 million or
102.2% to $5.0 million in 1997 from $2.5 million in 1996. This
increase was a result of increased borrowings made to fund
acquisitions and the issuance of $100 million of Senior Subordinated
Notes bearing interest at a rate of 11.5%.
Year Ended December 31, 1996 to Year Ended December 31, 1995
Revenue. Revenue increased $12.0 million, or 78.0%, to $27.3
million in 1996 compared to $15.3 million in 1995. This increase
resulted from the inclusion of approximately $9.9 million of revenue
from the following acquisitions completed in 1996: (i) Water Jug,
acquired in May 1996, contributed $0.8 million in revenue and 4,200
water cooler customers and (ii) Canadian Springs, acquired in January
1996, contributed $9.1 million in revenue and 29,000 water cooler
customers. The remaining $2.1 million, or 17.5%, was primarily the
result of 5,070 additional water coolers installed in the Company's
existing territories.
Cost of Sales. Cost of sales increased $1.8 million, or 63.3%,
to $4.7 million in 1996 compared to $2.9 million in 1995, largely as a
result of the acquisitions completed in 1995 and 1996. Cost of sales
as a percentage of revenue decreased to 17.1% in 1996 from 18.7% in
1995 based on the elimination of duplicate expenses in connection with
the Company's acquisitions and economies of scale realized from an
increase in volume.
Operating Expenses. Operating expenses increased $6.8 million,
or 74.3%, to $15.8 million in 1996 compared to $9.0 million in 1995 as
a result of acquisitions completed in 1995 and 1996. Operating costs
as a percentage of revenue decreased to 57.7% in 1996 from 58.9% in
1995. This decrease as a percentage of revenue was the result of
incremental sales volume being applied to relatively fixed
distribution costs; specifically, the Company achieved more efficient
utilization of its existing route fleet through increased route
density.
EBITDA. For the reasons stated above, EBITDA in 1996 increased by
$3.5 million, or 100.1%, to $6.9 million from $3.4 million in 1995. As
a percentage of revenue, EBITDA increased to 25.2% in 1996 from 22.4%
in 1995.
Depreciation and Amortization. Depreciation and amortization
expense increased $2.3 million to $3.8 million in 1996 from $1.5
million in 1995. This increase was due to significant increases in the
fixed assets as a result of the acquisitions consummated in such
period and the standard levels of capital expenditures for existing
operations.
Interest Expense. Interest expense increased $1.2 million, or
91.7%, to $2.5 million in 1996 from $1.3 million in 1995. This
increase was a result of increased borrowings made to fund
acquisitions, capital expenditures and working capital requirements.
Liquidity and Capital Resources
Historically, the Company has funded its capital and operating
requirements with a combination of cash flow from operations,
borrowings under bank credit facilities and equity investments from
shareholders. The Company has utilized these sources of funds to make
acquisitions, to fund significant capital expenditures at its
properties, to fund operations and to service debt. The Company
presently expects to fund its future capital and operating
requirements at its existing operations through a combination of cash
generated from operations, excess cash proceeds from the issuance of
the Notes and borrowings under the Senior Credit Facility (see below).
Excluding funds of approximately $4.6 million used to repurchase
options to acquire common shares of the Company, net cash provided by
operating activities was $3.8 million for the year ended December 31,
1997 and $3.2 million for the year ended December 31, 1996. Net cash
used in investment activities was $33.9 million for the year ended
December 31, 1997 and $24.2 million for the year ended December 31,
1996. These amounts relate primarily to eight acquisitions completed
in the year ended December 31, 1997 for $27.9 million and three
acquisitions completed in 1996 for $17.4 million. Capital expenditures
include expenditures related to the addition of bottling lines at
existing facilities, construction of new bottling facilities, and the
purchase of water bottles, water coolers and delivery trucks. The
Company made net capital expenditures of $6.0 million in the year
ended December 31, 1997 and $6.7 million in 1996. Based on the
Company's existing operations, management expects that the Company's
capital expenditures will total approximately $7.5 million in 1998.
The Company believes that the net proceeds from the sale of the
Senior Subordinated Notes together with available cash, cash generated
from operations and available borrowings under the Senior Credit
Facility will be sufficient to finance the Company's working capital
and capital expenditure requirements for 1998 as well as some
acquisitions. However, there can be no assurance that such resources
will be sufficient to meet the Company's anticipated requirements or
that the Company will not require additional financing within this
time frame.
The Notes
Pursuant to a Purchase Agreement dated November 14, 1997,
Sparkling Spring sold unregistered 11.5% Senior Subordinated Notes due
2007 (the "Private Notes") in an aggregate principal amount of $100.0
million to BT Alex. Brown Incorporated and NatWest Capital Markets
Limited (the "Initial Purchasers") in a transaction not registered
under the Securities Act in reliance upon the private offering
exemption under Section 4(2) of the Securities Act. The Initial
Purchasers subsequently placed the Private Notes with qualified
institutional buyers in reliance upon Rule 144A under the Securities
Act and with a limited number of accredited investors (as defined in
Rule 501(a)(1), (2), (3) or (7) under the Securities Act). The net
proceeds to Sparkling Spring from the sale of the Private Notes, after
deduction of discounts and offering expenses, were approximately $96.3
million. Sparkling Spring used approximately $56.5 million of the net
proceeds to repay the entire principal amount and accrued interest
owing under its existing credit facility and approximately $13.9
million was used in connection with the Reorganization (as defined).
The remaining proceeds of the sale of the Private Notes of
approximately $25.9 million, was and will be used for general
corporate purposes including repayment of some of the Company's
outstanding indebtedness and for potential acquisitions.
Pursuant to a Prospectus dated April 1, 1998, under a
Registration Statement declared effective on that date under the
Securities Act, Sparkling Spring commenced an offer (the "Exchange
Offer") to exchange $1,000 principal amount of its registered 11.5%
senior subordinated notes due 2007 (the "Exchange Notes") for each
$1,000 principal amount of the Private Notes. The form and terms of
the Exchange Notes are identical in all material respects to those of
the Private Notes, except for certain transfer restrictions and
registration rights relating to the Private Notes and except for
certain interest provisions relating to such registration rights. The
Exchange Notes also have the same redemption terms as the Private
Notes. The Exchange Notes evidence the same indebtedness as the
Private Notes and were and will be issued pursuant to, and entitled to
the benefits of, an Indenture, dated as of November 19, 1997 governing
the Private Notes and the Exchange Notes (the "Indenture").
The Notes are redeemable at Sparkling Spring's option, in whole
or in part, on and after November 15, 2002 at specified redemption
prices, plus accrued and unpaid interest to the date of redemption. In
addition, at any time on or prior to November 15, 2000, Sparkling
Spring, at its option, may redeem up to $30.0 million of the aggregate
principal amount of the Notes originally issued with the net cash
proceeds of one or more Public Equity Offerings, at a redemption price
equal to 111.50% of the principal amount thereof, plus accrued and
unpaid interest to the date of redemption, provided that at least
$70.0 million of the aggregate principal amount of the Notes
originally issued remains outstanding immediately following any such
redemption.
Upon a Change of Control (as defined in the Indenture), each
holder of the Notes will have the right to require Sparkling Spring to
repurchase such holder's Notes at a price equal to 101% of the
principal amount thereof plus accrued and unpaid interest to the date
of repurchase.
The Notes are general unsecured obligations of Sparkling Spring
and are subordinated in right of payment to all existing and future
Senior Indebtedness (as defined in the Indenture). The Notes rank pari
passu in right of payment with any future senior subordinated
indebtedness of Sparkling Spring and will rank senior in right of
payment to all other subordinated obligations of Sparkling Spring.
Under the Indenture, Sparkling Spring has the ability to incur
additional indebtedness and in May 1998, the Company entered into a
Senior Credit Agreement (the "Senior Credit Facility") with Toronto-
Dominion that provides up to $40.0 million of secured senior debt.
See - Senior Credit Facility (below).
The Notes are fully and unconditionally guaranteed on a senior
subordinated basis by the Subsidiary Guarantors. The Guarantees are
general unsecured obligations of the Subsidiary Guarantors and are
subordinated in right of payment to all existing and future Guarantor
Senior Indebtedness (as defined in the Indenture). The Guarantees rank
pari passu with any future senior subordinated indebtedness of the
Subsidiary Guarantors and rank senior in right of payment to any other
subordinated obligations of the Subsidiary Guarantors.
The Indenture contains certain covenants with respect to
Sparkling Spring and its subsidiaries that restrict, among other
things, (a) the incurrence of additional indebtedness, (b) the payment
of dividends and other restricted payments, (c) the creation of liens,
(d) the sale or other transfer of assets and subsidiary stock, (e) the
existence of limitations on distributions from subsidiaries,
(f) transactions with affiliates and (g) the issuance of preferred
stock by subsidiaries. The Indenture also restricts the ability of
Sparkling Spring and the Subsidiary Guarantors to consolidate or merge
with or into, or to transfer all or substantially all of its assets
to, another person. In addition, under certain circumstances,
Sparkling Spring will be required to offer to purchase Notes, in whole
or in part, at a purchase price equal to 100% of the principal amount
thereof plus accrued interest to the date of repurchase, with the
proceeds of certain Asset Sales (as defined in the Indenture).
Senior Credit Facility
On May 26, 1998, the Company closed a $40 million Senior Credit
Facility (the "Credit Facility") with Toronto-Dominion. The
Credit Facility will be used for general corporate purposes including
working capital, acquisitions and capital expenditure financing.
The Credit Facility is structured as a multi-currency revolving
facility having a term of approximately six and one half years. The
Company's payment obligation under the Credit Facility is secured by a
first priority security interest over substantially all of the assets
of the Company; obligations under the Credit Facility will rank senior
to the payment of the Notes.
Amounts outstanding under the Credit Facility will bear interest
at specified rates based on the Canadian prime rate in the case of
advances made in Canadian dollars, at specified rates based on the
London inter-bank market in the case of advances made in British
pounds sterling or U.S. dollars, and at specified rates based on the
U.S. prime rate in the event of advances made in U.S. dollars.
The Credit Facility contains covenants, customary for
transactions of this type, including, without limitation, (i)
restrictions on the incurrence of indebtedness, leases, liens and
contingent obligations, other than indebtedness represented by the
Notes, indebtedness under the Credit Facility and liens incurred in
the normal course of business, (ii) restrictions on mergers,
acquisitions, sales of assets, investments and transactions with
affiliates, (iii) restrictions on dividends and other payments with
respect to shares of the Company's capital stock and (iv) restrictions
on capital expenditures. Additionally, the Credit Facility contains
the following financial covenants and coverage tests: (i) the ratio of
senior debt (consisting of amounts outstanding under the Credit
Facility, vendor debt, capital leases and permitted encumbrances) to
EBITDA (on a rolling four quarter basis) shall not exceed 2.5:1.0;
(ii) EBITDA (on a rolling four quarter basis) shall not be less than
135% of total interest expense less amortization of non-cash interest
amounts and (iii) EBITDA (on a rolling four quarter basis) less
capital expenditures less income taxes paid shall not be less than
120% of the amount of interest due under the Credit Facility plus
payments of principal under the Credit Facility and permitted
encumbrances.
Events of default under the Credit Facility include, among
others, (i) failure of the Company to repay principal on advances or
interest thereon or other amounts owing under the Credit Facility
within two business days after the due date, (ii) the breach (not
cured within applicable grace or notice periods, if any) by the
Company or any of its subsidiaries of any covenants, representations
or warranties contained in the Credit Facility, (iii) any failure to
pay amounts due under other indebtedness or contingent obligations of
the Company or any of its subsidiaries or defaults that result in or
permit the acceleration of such indebtedness or contingent
obligations, if the aggregate amount of such indebtedness or
contingent obligation exceeds a specified amount, (iv) certain events
of bankruptcy, insolvency or dissolution of the Company or any of its
subsidiaries, (v) certain changes of control of the Company, (vi) a
material adverse change in the financial condition, business condition
or prospects of the Company or any of its subsidiaries and (vii) any
material judgment or award against the Company or any of its
subsidiaries. If an event of default was to occur and remain
outstanding in excess of any applicable cure period, it is expected
that all amounts outstanding under the Credit Facility would
immediately become due and payable.
Year 2000
The Year 2000 issue arises due to computer programs using two
digits rather than four to define an applicable year. Computer
programs may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in system failures or
miscalculations leading to disruptions in the Company's operations.
If the Company or its significant customers or suppliers fail to
adequately address the Year 2000 issue, such failure could have an
adverse impact on the Company's ability to operate its business.
Sparkling Spring has taken action to address and complete the
work associated with the Year 2000. Each of the Company's business
locations has established a team to identify and correct Year 2000
issues. The Company's principal financial and operational computer
systems utilize software developed and supported by an outside
computer software supplier. It is the Company's understanding that
this supplier has completed an analysis of the changes required to
accommodate the Year 2000 and that software upgrades will be completed
and tested by early 1999. In addition, the impact of Year 2000 on
manufacturing plants and building facilities is also being addressed.
The Company is also investigating the Year 2000 capabilities of
suppliers, customers and other external entities, and developing
contingency plans where necessary.
Sparkling Spring does not expect the costs associated with Year
2000 to be material to the Company's consolidated financial position,
results of operations or cash flows. This expectation is based on the
assumption that the Company has contemplated all significant actions
required and that significant costs related to Year 2000 will not be
incurred on behalf of the Company's customers or suppliers.
Impact of Inflation
The Company does not believe that inflation has had a material
impact on its revenue or results of operations.
Safe Harbor Statement Under the Private Securities Litigation Reform
Act of 1995
Statements included in this Report that do not relate to present
or historical conditions are "forward looking statements" within the
meaning of the Safe Harbor provisions of the Private Securities
Litigation Reform Act of 1995 (the "1995 Reform Act"). Additional
oral or written forward-looking statements may be made by the Company
from time to time, and such statements may be included in documents
other than this Report that are filed with the SEC. Such forward-
looking statements involve risks and uncertainties that could cause
results or outcomes to differ materially from those expressed in such
forward-looking statements. Forward-looking statements in this Report
and elsewhere may include without limitation, statements relating to
the Company's plans, strategies, objectives, expectations, intentions
and adequacy of resources and are intended to be made pursuant to the
safe harbor provisions of the 1995 Reform Act. Words such as
"believes," "forecasts," "intends," "possible," "expects,"
"estimates," "anticipates," or "plans" and similar expressions are
intended to identify forward-looking statements. Investors are
cautioned that such forward-looking statements involve risks and
uncertainties including without limitation the following: (i) the
Company's plans, strategies, objectives, expectations and intentions
are subject to change at any time at the discretion of the Company;
(ii) the Company's ability to expand by acquisitions is dependent
upon, and may be limited by, the availability of suitable acquisition
candidates and the availability of financing therefor on suitable
terms; (iii) the Company's ability to obtain financing will be
affected by restrictions contained in the Indenture and the Company's
other existing and future financing arrangements; (iv) the Company's
proposed expansion strategy will be substantially dependent upon the
Company's ability to hire and retain skilled management, financial,
marketing and other personnel; (v) the Company's plans and results of
operations will be affected by the Company's ability to successfully
manage growth (including monitoring operations, controlling costs and
maintaining effective quality and inventory controls; (vi) the market
for attractive acquisitions in the bottled water industry is becoming
increasingly competitive, which could make the Company's acquisition
strategy more difficult to achieve; (vii) the Company's operations are
subject to the jurisdiction of various governmental and regulatory
agencies which regulate the quality of drinking water and other
products and any failure by the Company to comply with existing and
future laws and regulations could subject the Company to significant
penalties or impose additional costs on the Company or otherwise have
a material adverse affect on its financial position or results of
operations; (viii) any interruption in the availability of water to
the Company from municipal sources and local natural springs could
have a material adverse affect on the Company's operations until
suitable replacement sources are located; and (ix) other risks and
uncertainties indicated from time to time in the Company's filings
with the SEC.
ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not engage in transactions in the ordinary
course of its business to hedge itself against exposure to currency
risks. However, on December 2, 1997, the Company entered into cross
currency swap transactions in Canadian dollars ($28 million) and
British pounds sterling ($30 million) for the purpose of protecting
itself from future foreign currency fluctuations. To date, the
Company has entered into no other foreign currency swap transactions.
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT
The following table sets forth certain information as of May 31,
1998 with respect to each of the directors, executive officers and key
management personnel of Sparkling Spring.
Name Age Position with Sparkling Spring
G. John Krediet 47 Chairman of the Board of Directors
and Chief Executive Officer
Stewart E. Allen 39 President and Director
Kent Dillon Schickli 45 Chief Financial Officer
Stephen L. Larson 39 Director
Michael Bregman 43 Director
C. Sean Day 49 Director
Kenneth B. Rotman 31 Director
Lucy M. Stitzer 37 Director
Effective April 3, 1998, Stephen L. Larson, resigned from his
positions as Vice Chairman of the Board of Directors and Chief
Financial Officer of Sparkling Spring and as an officer and director
of each of its subsidiaries to pursue other business interests.
Mr. Larson will continue to serve as a director of Sparkling Spring.
Kent Dillon Schickli replaced Mr. Larson as Chief Financial Officer
effective April 3, 1998.
G. John Krediet has been Chairman of the Board of Directors and
Chief Executive Officer of SSWL since January 1991. From 1988 until
1992 he served as Chairman of the Board of MBL, the Pepsi-Cola
franchisee and former parent company of SSWL. From September 1988
through November 1990 he also served as Chairman of the Board of
Eastern Beverages Ltd., the Pepsi-Cola franchise for the territory in
and around Ottawa, Ontario, Canada. Mr. Krediet initiated and managed
the consolidation of the eastern Canadian Pepsi-Cola bottling business
and arranged its sale to Pepsi-Cola Corporation in 1992. Mr. Krediet
was the founder of CFCC in 1987 and, together with Mr. Larson,
obtained direct control of SSWL in 1992 to use it as an acquisition
vehicle for consolidating the bottled water industry.
Prior to 1987 Mr. Krediet was employed by General Electric Credit
Corporation, AMRO Bank and Citibank, NA. He is a citizen of the
Netherlands and received his graduate degree in economics from Erasmus
University in Rotterdam.
Kent Dillon Schickli replaced Stephen L. Larson as Chief
Financial Officer of Sparkling Spring effective April 3, 1998.
Mr. Schickli will also serve as President of CFCC and previously
served as President of CFCC from 1987 to 1992. Mr. Schickli is 45
years old and has over 12 years of beverage industry experience
including serving as a member of the board of directors and of the
executive committee of MBL from 1987 to 1992. From 1979 to 1981
Mr. Schickli worked for the Pepsi-Cola Company as a manager in the
franchise acquisition department and from 1981 through 1986 was Chief
Financial Officer of a Pepsi-Cola franchise bottling company with
annual revenues in excess of $200 million. Mr. Schickli left CFCC in
1993 to become Chief Operating Officer and a member of the board of
directors of Affinity Group, Inc., a leading database marketing and
membership management company. At Affinity Group, Inc. Mr. Schickli
lead the refinancing of that company, including the issuance of
publicly registered debt securities. In late 1995 Mr. Schickli left
Affinity Group, Inc. to pursue investments in various privately held
companies. In 1996 Mr. Schickli invested in, and served as President
and a member of the board of directors of, Ivid Communications, Inc.,
a leading multimedia training company. From 1997 to 1998 Mr. Schickli
was Chief Executive Officer and co-owner of Affinity Development
Group, Inc., a consulting firm. Mr. Schickli earned an M.B.A. in
Accounting from the University of Chicago, a B.A. from Carleton
College and received a C.P.A. from the State of Illinois.
Stephen L. Larson, prior to his resignation, had been Vice
Chairman of the Board of Directors and Chief Financial Officer of SSWL
since 1992 and had served as a managing director of CFCC since 1990.
He had been with CFCC since 1987. Mr. Larson, in conjunction with
Mr. Krediet, developed the consolidation strategy for the bottled
water industry. Mr. Larson was responsible for qualifying and
selecting acquisition candidates generated by the Company and outside
sources. Mr. Larson was also responsible for negotiating the
acquisition terms and related financing. At CFCC, Mr. Larson acted as
an intermediary arranging financing for corporations primarily
involved in the area of bottling, publishing, outdoor advertising and
other media. Mr. Larson was principally involved in the negotiations
leading to the acquisition of nine Pepsi-Cola franchisees, the related
consolidation and the ultimate sale to Pepsi-Cola Corporation.
Mr. Larson worked as a Senior Associate at Claremont Group
Limited, a management buyout firm, from 1986 to 1987. He began his
career at Arthur Andersen & Co. Mr. Larson earned an M.B.A. in Finance
from the University of Chicago and a Bachelor of Science in Accounting
from the University of Illinois. Mr. Larson is a C.P.A. and a member
of both the American Institutes of Certified Public Accountants and
the Accounting Research Association.
Stewart E. Allen has been President of SSWL since 1992. Mr. Allen
has been responsible for overseeing the daily operations of the
Company, including integrating acquired companies and corporate
strategic planning. Mr. Allen is the President of the Canadian Bottled
Water Association and a member of the International Bottled Water
Association's International Council.
Mr. Allen has over 20 years of experience in the beverage
industry. He served as Vice President of Sales and Marketing for MBL,
the Pepsi-Cola franchisee and former parent of the Company, from 1988
to 1992. Mr. Allen was primarily responsible for consolidating two
other bottlers into MBL and for major cost management initiatives,
including a reduction in salaried employees, closure of four
warehouses and three wage freezes with unionized employees. Prior to
joining MBL, Mr. Allen spent three years with Crush Canada and
Pepsi-Cola Canada. Prior to this, Mr. Allen held several operational
positions in Pepsi-Cola owned bottler operations in Toronto and
Oshawa, Ontario.
Michael Bregman has served as a member of the Board of Directors
of SSWL since October 1997. Mr. Bregman is Vice Chairman of the Board
of Directors of Clairvest, a Toronto-based, publicly traded merchant
bank with a portfolio in excess of $180 million, where his primary
responsibilities include assessing investment transactions, with an
emphasis on the retail food and beverage industries. Mr. Bregman is
the Chairman and Chief Executive Officer and a major shareholder of
The Second Cup Ltd., a coffee retailer in North America. Mr. Bregman
is also a member of the board of directors of Signature Security
Group, Inc. and Vincor International Inc. In addition, Mr. Bregman was
the founder of the now-divested Mmmuffins Inc., a specialty baking
company in Canada. Mr. Bregman received his M.B.A. degree in 1977 from
Harvard Business School and earned a B.S. in Economics from The
Wharton School at the University of Pennsylvania.
C. Sean Day has served as a member of the Board of Directors of
SSWL since March, 1997. Mr. Day is President and Chief Executive
Officer of Navios Corporation, a company engaged in the worldwide
operation of ocean going bulkships. Mr. Day has a wide range of
experience in the shipping, finance and industrial sectors. Prior to
joining Navios Corporation, Mr. Day's prior experience included
positions with Citicorp Venture Capital Ltd. in New York, Fednav Ltd.
in Montreal and Jardine, Matheson & Co., Ltd. in Hong Kong and Taiwan.
Mr. Day is also a member of the board of directors of Kirby
Corporation. Mr. Day is a graduate of University of Cape Town and
Oxford University.
Kenneth B. Rotman has served as a member of the Board of
Directors of SSWL since January 1996. Mr. Rotman is a Managing
Director of Clairvest, a Toronto-based, publicly traded merchant bank
with a portfolio in excess of $180 million. Mr. Rotman's role with
Clairvest involves the sourcing and execution of transactions and
working closely with the management of companies in which Clairvest
has invested. Mr. Rotman also serves on the board of directors of
Consoltex Group Inc., NRI Industries and Signature Security Group Inc.
Mr. Rotman is a volunteer director of The Power Plant art gallery of
Toronto and the Empire Club of Canada. Prior to joining Clairvest in
October, 1993, Mr. Rotman worked in the Venture Banking Division of
E.M. Warburg, Pincus & Co. in New York. Mr. Rotman received a B.A. in
Economics from Tufts University, an M.Sc. from the London School of
Economics, and an M.B.A. from New York University's Stern School of
Business.
Lucy M. Stitzer has served as a member of the Board of Directors
of SSWL since January 1994. Ms. Stitzer has also served on the board
of directors of Cargill Inc. since 1992. From 1990 to 1992,
Ms. Stitzer was employed as an associate at Sandler O'Neill and
Partners, an investment bank. From 1983 to 1990, Ms. Stitzer was
employed by the Consumer Banking Division of Citibank, N.A., where she
attained the position of Assistant Vice President.
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS
Directors and Executive Compensation
The following table sets forth a summary of the compensation of
each executive officer of Sparkling Spring who earned in excess of
$100,000 in annual salary and bonus during Sparkling Spring's year
ended December 31, 1997. The Summary Compensation Table reflects all
compensation paid by Sparkling Spring to its executive officers.
Directors of Sparkling Spring receive no compensation for their
services as Directors. Messrs. Krediet, Larson and effective April 3,
1998, Mr. Schickli, are compensated for their services as executive
officers of Sparkling Spring directly by CFCC. See Item 13 - Interest
of Management in Certain Transactions - Management Agreement.
Sparkling Spring provides a defined contribution pension plan for all
of its employees, including its executive officers but no other
pension, retirement or similar benefits to its executive officers or
Directors.
Summary Compensation Table
Long-Term
Compensation
Awards
Name and Securities
Principal Annual Compensation Other Annual Underlying All Other
Position Year Salary Bonus Compensation Options/SARs Compensation
Stewart E. Allen,
President 1997 $141,744 $36,117 $18,599(1) -- $18,051(2)
(1) Includes $17,336 representing a housing allowance.
(2) Consists of a contribution of $17,109 to a defined contribution
pension plan and annual premiums of $942 in connection with a group
life insurance policy for Mr. Allen.
Employment Agreements
Stewart E. Allen, the President of Sparkling Spring, has an
employment agreement, effective January 1, 1998, with the Company
pursuant to which he is paid a base salary of $210,000. In addition,
his employment agreement provides for a bonus payment to Mr. Allen at
the end of each fiscal year based primarily upon the Company achieving
certain levels of EBITDA. The employment agreement is for a term of
three years.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR
SUBSIDIARIES
No options to purchase the Notes are outstanding. Options to
purchase shares of Common Stock of Sparkling Spring are outstanding.
See Item 4 - Control of Registrant - Security Ownership of Certain
Beneficial Owners and Management, and Item 13 - Interest of Management
in Certain Transactions - Reorganization.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
Management Agreement
Pursuant to the Management Agreement dated December 16, 1993, as
amended and restated (the "Management Agreement"), between SSWL, CFCC,
G. John Krediet and Stephen L. Larson, CFCC has agreed to perform
certain management services for the Company through December 31, 2002.
These services include managing the operations of the Company and
negotiating contracts, financial agreements and other arrangements.
The Management Agreement provides that CFCC shall not take any action
with respect to certain extraordinary transactions without the
approval of the Board of Directors of Sparkling Spring, including
material acquisitions and capital expenditures, issuances of
securities, sale or disposition of a material portion of the business
of the Company, compensation of CFCC, merger of the Company,
liquidation and declaration of dividends.
The Management Agreement provides that CFCC shall receive annual
compensation for its services in the form of a base fee of $400,000
during the fiscal year ended December 31, 1996, and in each successive
year a base fee equal to the prior year's base fee plus an amount
equal to the prior year's base fee multiplied by the percentage
increase or decrease, as the case may be, of the Company's total
annual revenue from the prior year, but the base fee may not exceed
$750,000 in any given year. An annual bonus of up to 75% of the base
fee is due to CFCC each year in the event that the Company achieves
certain targeted levels of per share earnings before depreciation and
amortization. In the event such targets are not met, lesser amounts
may be paid. The Company has also agreed to pay CFCC a fee in respect
of its investment banking advisory services rendered to the Company in
connection with successful acquisitions. The total amounts paid to
CFCC pursuant to the Management Agreement for the years 1995, 1996 and
1997 were $521,000, $769,000 and $1,548,000 respectively. The Company
may also pay to Mr. Krediet and Mr. Schickli non-cash options,
incentives or other remuneration, consistent with industry standards.
The Company is also responsible for reasonable disbursements and
office expenses incurred by CFCC.
In the opinion of management of the Company, the terms and
conditions of the Management Agreement are no less favorable to the
Company than those which could be obtained in the open market in an
arm's length transaction.
Shareholder Agreement
Sparkling Spring, Clairvest Group, Inc. ("Clairvest"), a holder
of 30.4% of the outstanding Common Stock of Sparkling Spring after
giving effect to the Reorganization, Gaspar Limited ("Gaspar"), a
Barbados corporation wholly-owned by a trust organized for the benefit
of G. John Krediet and his children, Stephen L. Larson, Lucy Stitzer,
Stewart E. Allen and certain other shareholders of the Company are
parties to a shareholder agreement, dated as of October 22, 1997 (the
"Shareholder Agreement"), which provides, among other things, for
preemptive rights in favor of the shareholders under certain
circumstances if Sparkling Spring issues additional securities and for
certain registration rights. The Shareholder Agreement also provides
restrictions on the transfer of the Company's capital stock, for
rights of first refusal and for rights of certain shareholders to
require all other shareholders to join with them in their sale of the
Company's capital stock. The Shareholder Agreement fixes the number of
directors comprising Sparkling Spring's Board of Directors at seven,
and provides that Gaspar Limited shall be entitled to nominate four
directors, Clairvest shall be entitled to nominate two directors and
Lucy Stitzer and her affiliates shall be entitled to nominate one
director. Certain actions by the Company require the approval of at
least one of the Clairvest nominees (which approval shall not be
unreasonably withheld). These actions include, among other things, any
acquisition by the Company in excess of Cdn $5.0 million, the making
of certain capital expenditures, the issuance by the Company of debt
or equity securities, the disposition by the Company of a material
part of its business, any change in management compensation, the
declaration of dividends by the Company and the approval of the
Company's annual budget. In addition, under the Shareholder Agreement,
if no liquid public market (as defined in the Shareholder Agreement)
then exists, Clairvest may, any time after March 31, 2003, offer all
of its shares of capital stock of Sparkling Spring for sale to
Sparkling Spring. If Sparkling Spring does not then repurchase those
shares, Clairvest may, under certain circumstances, require the other
parties to the Shareholder Agreement to join with Clairvest in selling
to a third party all of their shares of Common Stock of Sparkling
Spring, which could cause a change of control.
Reorganization
The shareholders of Sparkling Spring and SSWL approved a
reorganization (the "Reorganization") on November 19, 1997 which was
completed in January 1998. As part of the Reorganization, Gaspar,
Clairvest, John Krediet, Stephen Larson, Stewart Allen, Lucy M.
Stitzer (and her spouse Mark Stitzer), C. Sean Day, principal
shareholders and directors and/or executive officers of the Company,
reduced their interest in Sparkling Spring by exchanging shares and
options to acquire shares of common stock of SSWL for a combination of
shares and options to acquire shares of Common Stock of Sparkling
Spring plus cash based on a per share price of $28 as follows:
Sparkling Spring Water Limited Sparkling Spring Water Group Limited
Shares Options Shares Options Cash
Shareholder Exchanged Exchanged Received Received Received
Gaspar 833,840 -- 705,050 -- $ 3,606,120
Clairvest 588,168 -- 423,190 -- 4,619,384
John Krediet -- 154,319 -- 8,250 3,328,727
Stephen Larson 118,209 53,787 118,209 53,787 --
Stewart Allen 5,672 145,787 5,672 104,706 1,097,038
Lucy and Mark 130,659 -- 94,010 -- 1,026,172
Stitzer
C. Sean Day 12,500 -- 8,994 -- 98,168
Other 39,198 89,100 28,203 85,454 394,175
1,728,246 442,993 1,383,328 252,197 $14,169,784
Subsequent to the Reorganization, Sparkling Springs owns 100% of
the issued and outstanding shares of SSWL.
In conjunction with the Reorganization certain key managers of
the Company, subscribed for an aggregate of 9,360 non-voting shares of
Common Stock of Sparkling Spring at $28.00 per share, the same
purchase price per share used for the purpose of the Reorganization.
These managers granted an option to Sparkling Spring enabling
Sparkling Spring to repurchase those shares of Common Stock at any
time at an agreed-upon formula price. The formula price is intended to
approximate the fair market value of the shares of Common Stock at the
time of repurchase. Similarly, Sparkling Spring is obligated, under
certain circumstances, to purchase those shares for the same formula
price at the option of the key managers. The shares were issued in
January 1998.
Other Transactions
Each shareholder of Sparkling Spring pledged all of his, hers or
its outstanding shares of Common Stock as collateral in favor of the
lenders under the Company's previously outstanding credit facility. A
portion of the gross proceeds from the issuance of the Senior
Subordinated Notes was used by Sparkling Spring to repay the entire
principal amount and accrued interest outstanding on this facility.
Upon the repayment of this credit facility, the pledges were
terminated.
In connection with the purchase of shares of common stock of the
Company, promissory notes of $122,000 and $108,000 were received from
Stephen L. Larson and Stewart E. Allen respectively. The promissory
notes bore interest at a rate of 7% and were scheduled to mature on
January 31, 1998 with principal and interest due on that date. The
promissory notes were cancelled by the Company and replaced with
promissory notes to Mr. Larson and Mr. Allen of $131,600 and $116,300
respectively which bear interest at a rate of 6% and mature on January
31, 1999 with principal and interest due on that date. The common
shares purchased by the officers are pledged as security for the
promissory notes.
On June 6, 1994, trusts formed for the benefit of Lucy M.
Stitzer, a Director of Sparkling Spring, and her sister, Alexandra M.
Daitch, together with their father, W. Duncan MacMillan, loaned SSWL
an aggregate of $1,300,000. In return for the loan, SSWL issued
unsecured redeemable subordinated notes, bearing interest at a rate of
8% per annum, and warrants to purchase an aggregate of 60,099 shares
of common stock of SSWL. On January 18, 1996, the Company redeemed the
unsecured redeemable subordinated notes and the attached warrants for
cash consideration of $1,816,041.
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED (INTENTIONALLY
OMITTED)
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
SECURITIES AND USE OF PROCEEDS
There have been no modifications to the Exchange Notes or in the
Guarantees securing the Exchange Notes.
Sparkling Spring did not receive any cash proceeds from issuing
the Exchange Notes. In consideration for issuing the Exchange Notes
as contemplated in its Prospectus, Sparkling Spring has received in
exchange, Private Notes in like principal amounts.
Use of Proceeds
The effective date of the Registration Statement in which the
Prospectus was included was April 1, 1998 and the SEC File number
assigned to that Registration Statements is 333-43061. All of the
Exchange notes covered by the Registration Statement have been issued
and the offering thereunder has been terminated.
Sparkling Spring did not engage an underwriter or other third
party in connection with the issuance and distribution of the Exchange
Notes and as a result did not incur directly any underwriting
discounts or commissions, finders fees or other similar expenses.
However, Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer and sold by such broker-dealers
to purchasers or to or through other broker-dealers who received
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such Exchange Notes were or
could have been deemed to be "underwriters" within the meaning of the
Securities Act and any profit on any such resale of Exchange Notes and
any commissions or concessions received by any such person were or
could have been deemed to be underwriting compensation under the
Securities Act.
In connection with the issuance of the Exchange Notes, Sparkling
Spring incurred accounting, legal, printing and related expenses,
which taken together were not material. No payments were made to any
directors or officers of Sparkling Spring or their associates or to
any persons owning 10% or more of any class of equity securities of
Sparkling Spring or to any other affiliates of Sparkling Spring. None
of the expenses represents material changes in the information set
forth in the Prospectus.
PART IV
ITEM 17. FINANCIAL STATEMENTS (INTENTIONALLY OMITTED)
ITEM 18. FINANCIAL STATEMENTS
The financial statements required by Item 18 are listed in the
Index to Consolidated Financial Statements appearing on Page F-1.
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
a) Financial Statements
See Index to Financial Statements on page F-1 hereof.
b) Exhibits
Exhibit No.
2.(ii) Senior Credit Agreement, dated May 26, 1998 among
Sparkling Spring Water Group Limited and the Guarantors
named therein, as borrowers, and The Toronto-Dominion Bank,
Toronto Dominion (Texas), Inc. and The Toronto-Dominion
Bank, London Branch, as lenders.
SIGNATURES
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, on this 16th day of June, 1998.
SPARKLING SPRING WATER GROUP LIMITED
By: /s/ Kent Dillon Schickli
-----------------------------------
Kent Dillon Schickli
Chief Financial Officer
SIGNATURES
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, on this 16th day of June, 1998.
SPARKLING SPRING WATER LIMITED
By: /s/ Kent Dillon Schickli
-----------------------------------
Kent Dillon Schickli
Chief Financial Officer
SIGNATURES
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, on this 16th day of June, 1998.
SPRING WATER, INC.
By: /s/ Kent Dillon Schickli
-----------------------------------
Kent Dillon Schickli
Chief Financial Officer
SIGNATURES
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, on this 16th day of June, 1998.
CULLYSPRING WATER CO., INC.
By: /s/ Kent Dillon Schickli
-----------------------------------
Kent Dillon Schickli
Chief Financial Officer
SIGNATURES
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, on this 16th day of June, 1998.
MOUNTAIN FRESH ACQUISITION CORP.
By: /s/ Kent Dillon Schickli
-----------------------------------
Kent Dillon Schickli
Chief Financial Officer
SIGNATURES
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, on this 16th day of June, 1998.
CRYSTAL SPRINGS ACQUISITION, INC.
By: /s/ Kent Dillon Schickli
-----------------------------------
Kent Dillon Schickli
Chief Financial Officer
SIGNATURES
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, on this 16th day of June, 1998.
WATER JUG ENTERPRISES LIMITED
By: /s/ Kent Dillon Schickli
-----------------------------------
Kent Dillon Schickli
Chief Financial Officer
SIGNATURES
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, on this 16th day of June, 1998.
WITHEY'S WATER SOFTENING &
PURIFICATION LTD.
By: /s/ Kent Dillon Schickli
-----------------------------------
Kent Dillon Schickli
Chief Financial Officer
SIGNATURES
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, on this 16th day of June, 1998.
AQUA CARE WATER SOFTENING &
PURIFICATION, INC.
By: /s/ Kent Dillon Schickli
-----------------------------------
Kent Dillon Schickli
Chief Financial Officer
SIGNATURES
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, on this 16th day of June, 1998.
HIGH VALLEY WATER LIMITED
By: /s/ Kent Dillon Schickli
-----------------------------------
Kent Dillon Schickli
Chief Financial Officer
SIGNATURES
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, on this 16th day of June, 1998.
3003969 NOVA SCOTIA LIMITED
By: /s/ Kent Dillon Schickli
-----------------------------------
Kent Dillon Schickli
Chief Financial Officer
SIGNATURES
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, on this 16th day of June, 1998.
CANADIAN SPRINGS WATER COMPANY LIMITED
By: /s/ Kent Dillon Schickli
-----------------------------------
Kent Dillon Schickli
Chief Financial Officer
SIGNATURES
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, on this 16th day of June, 1998.
SPARKLING SPRING WATER (UK) LIMITED
By: /s/ Kent Dillon Schickli
-----------------------------------
Kent Dillon Schickli
Chief Financial Officer
SIGNATURES
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, on this 16th day of June, 1998.
AQUAPORTE (UK) LIMITED
By: /s/ Kent Dillon Schickli
-----------------------------------
Kent Dillon Schickli
Chief Financial Officer
SIGNATURES
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, on this 16th day of June, 1998.
MARLBOROUGH EMPLOYMENT LIMITED
By: /s/ Kent Dillon Schickli
-----------------------------------
Kent Dillon Schickli
Chief Financial Officer
SIGNATURES
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, on this 16th day of June, 1998.
WATER AT WORK LIMITED
By: /s/ Kent Dillon Schickli
-----------------------------------
Kent Dillon Schickli
Chief Financial Officer
SIGNATURES
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, on this 16th day of June, 1998.
NATURAL WATER LIMITED
By: /s/ Kent Dillon Schickli
-----------------------------------
Kent Dillon Schickli
Chief Financial Officer
SIGNATURES
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, on this 16th day of June, 1998.
CRYSTAL SPRINGS OF SEATTLE, INC.
By: /s/ Kent Dillon Schickli
-----------------------------------
Kent Dillon Schickli
Chief Financial Officer
SIGNATURES
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, on this 16th day of June, 1998.
CRYSTAL SPRINGS DRINKING WATER, INC.
By: /s/ Kent Dillon Schickli
-----------------------------------
Kent Dillon Schickli
Chief Financial Officer
SIGNATURES
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, on this 16th day of June, 1998.
COASTAL MOUNTAIN WATER CORP.
By: /s/ Kent Dillon Schickli
-----------------------------------
Kent Dillon Schickli
Chief Financial Officer
SPARKLING SPRING WATER GROUP LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report F-2
Consolidated Balance Sheets as at December 31, 1997 F-3
and 1996
Consolidated Statements of Operations for the years F-4
ended December 31, 1997, 1996 and 1995
Consolidated Statements of Shareholders Equity F-5
(Deficit) for the years ended December 31, 1997,
1996 and 1995
Consolidated Statements of Cash Flows for the years F-6
ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements F-7
AUDITORS' REPORT
To the Shareholders of
Sparkling Spring Water Group Limited
We have audited the consolidated balance sheets of Sparkling
Spring Water Group Limited as at December 31, 1997 and 1996 and
the consolidated statements of operations, shareholders' equity
(deficit) and cash flows for each of the years in the three year
period ended December 31, 1997. These financial statements are
the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform an audit to obtain reasonable assurance whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation.
In our opinion, these consolidated financial statements
present fairly, in all material respects, the financial position
of the Company as at December 31, 1997 and 1996 and the results
of its operations and the changes in its financial position for
each of the years in the three year period ended December 31,
1997 in accordance with accounting principles generally accepted
in the United States.
Halifax, Canada Ernst & Young
April 1, 1998 Chartered Accountants
SPARKLING SPRING WATER GROUP LIMITED
CONSOLIDATED BALANCE SHEETS
As at December 31
1996 1997
ASSETS [note 12]
Current
Cash and cash equivalents $ 2,230,735 $ 27,507,257
Accounts receivable (net of
allowance for doubtful
accounts of $387,247;
1996-$210,058 [note 5]) 4,799,080 8,267,315
Inventories [note 6] 866,061 1,751,562
Prepaid expenses 1,352,989 1,536,755
Current portion of deferred taxes 95,681 --
Total current assets 9,344,546 39,062,889
Deferred taxes 440,856 1,379,736
Fixed assets [note 7] 15,823,231 23,307,315
Goodwill and deferred charges
[note 8] 18,800,535 43,248,972
Total assets $44,409,168 $106,998,912
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
Current
Accounts payable and accrued $ 4,303,850 $ 6,645,552
liabilities
Income tax payable 76,890 1,042,567
Unearned revenue 161,790 75,488
Customer deposits 2,620,495 3,396,466
Debt due within one year [note 9] 1,581,036 1,189,868
Total current liabilities 8,744,061 12,349,941
Obligations under capital leases 1,926,325 2,485,204
[note 10]
Loans payable [note 11] 26,966,493 1,123,617
Subordinated notes payable [note 12] -- 100,000,000
Total long-term liabilities 28,892,818 103,608,821
Shareholders' equity (deficit)
[Notes 2 and 13]
Capital Stock
Authorized
11,383,328 Class D Voting Common
Shares, without nominal or
par value
10,000,000 Class E Non-Voting
Common Shares, without nominal or
par value
10,000,000 Special Preferred
Shares, par value Cdn $1.00,
issuable in series
Issued and outstanding:
Common shares 1,383,328
(1996-1,720,746; 1995-1,216,308) 8,295,170 6,269,204
Less: Subscriptions receivable (230,003) (230,003)
8,065,167 6,039,201
Cumulative translation adjustment (362,935) (770,729)
Deficit (929,943) (14,228,322)
Total shareholders' equity 6,772,289 (8,959,850)
(deficit)
Total liabilities and $44,409,168 $106,998,912
shareholders' equity
(deficit)
Commitments [notes 10 and 16]
See accompanying notes
SPARKLING SPRING WATER GROUP LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31
1995 1996 1997
Revenue:
Water $ 9,640,919 $16,809,749 $25,506,684
Rental 4,135,650 7,347,386 10,346,344
Other 1,572,545 3,169,214 6,220,856
Total revenue 15,349,114 27,326,349 42,073,884
Cost of sales:
Water 2,118,880 3,400,298 4,080,686
Other 743,867 1,275,321 3,059,061
Total cost of sales 2,862,747 4,675,619 7,139,747
Gross profit 12,486,367 22,650,730 34,934,137
Expenses:
Selling, delivery and
administrative [note 18] 9,040,529 15,756,452 23,721,678
Depreciation and amortization 1,464,668 3,841,614 5,691,609
Operating profit 1,981,170 3,052,664 5,520,850
Interest expense 1,294,371 2,481,005 5,017,631
Redemption of common stock -- -- 4,588,502
options [note 13]
(Loss) income before the 686,799 571,659 (4,085,283)
following
Provision for income taxes 299,107 398,325 439,377
[note 17]
Net (loss) income before
non-controlling interest
and extraordinary item 387,692 173,334 (4,524,660)
Non-controlling interest 22,996 (6,894) --
[note 4]
Net (loss) income before 410,688 166,440 (4,524,660)
extraordinary item
Extraordinary item [note 14] (391,626) (473,436) (833,706)
Net (loss) income $ 19,062 $ (306,996) $(5,358,366)
Basic (loss) earnings per share
before extraordinary item $ 0.338 $ 0.113 $ (2.685)
Diluted (loss) earnings per share
before extraordinary item $ 0.291 $ 0.095 $ (2.685)
Basic (loss) earnings per share $ 0.016 $ (0.209) $ (3.180)
Diluted (loss) earnings per $ 0.014 $ (0.209) $ (3.180)
share
See accompanying notes
SPARKLING SPRING WATER GROUP LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
For the years ended December 31, 1997, 1996 and 1995
Common Share Cumulative
Common Stock Purchase Warrants Translation Amended
Shares Amount Warrants Amount Adjustment Deficit
Balance December 31, 1994 1,216,308 $1,628,793 165,767 $1,135,149 $ 209,624 $ (642,009)
as restated [note 3]
Net income 19,062
Foreign currency translation (21,575) 1,581 (123,760)
Balance December 31, 1995 1,216,308 1,607,218 165,767 1,136,730 85,864 (622,947)
Net loss (306,996)
Redemption of common
share purchase warrants
[note 13] (345,878) (165,767) (1,136,730)
Shares issued for cash 504,438 7,077,716
Subscriptions receivable (230,003)
Foreign currency translation (43,886) (448,799)
Balance December 31, 1996 1,720,746 8,065,167 -- -- (362,935) (929,943)
Net Loss (5,358,366)
Redemption of common shares (344,918) (1,717,691) (7,940,013)
Shares issued for cash 7,500 32,445
Foreign currency translation (340,720) (407,794)
Balance December 31, 1997 1,383,328 $6,039,201 -- $ -- $ (770,729) $(14,228,322)
See accompanying notes
SPARKLING SPRING WATER GROUP LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
1995 1996 1997
OPERATING ACTIVITIES
Net (loss) income $ 19,062 $ (306,996) $(5,358,366)
Items not requiring cash
Depreciation and
amortization 1,464,668 3,841,614 5,691,609
Deferred taxes 85,673 (293,390) (843,199)
Non-controlling interest (22,996) 6,894 --
Amortization of deferred 460,951 -- 54,789
financing costs
Amortization of subordinated
notes payable discount 130,824 -- --
2,138,182 3,248,122 (455,167)
Net change in non-cash working
capital balances [note 15] (647,671) (32,178) (349,135)
Cash (used in) provided by
operating activities 1,490,511 3,215,944 (804,302)
INVESTING ACTIVITIES
Purchase of fixed assets (2,741,204) (7,272,814) (6,769,301)
Sale of fixed assets, net 453,927 536,627 730,898
Acquisitions [note 4] (1,932,057) (17,432,167) (27,860,306)
Cash used in investing
activities (4,219,334) (24,168,354) (33,898,709)
FINANCING ACTIVITIES
Increase in long-term debt 4,456,924 20,893,151 30,593,657
Repayment of long-term debt (868,466) (1,239,400) (57,053,075)
Issuance of common shares -- 6,847,713 32,445
Redemption of common shares -- -- (9,657,704)
Issuance of subordinated notes
payable -- -- 100,000,000
Redemption of common share warrants -- (1,482,608) --
Redemption of subordinated notes
payable -- (2,159,777) --
Increase in deferred charges (36,980) (190,462) (3,909,827)
Cash provided by financing
activities 3,551,478 22,668,617 60,005,496
Effect of foreign currency
translation on cash (29,606) (345,770) (25,963)
Increase in cash and
cash equivalents during the year 793,049 1,370,437 25,276,522
Cash and cash equivalents,
beginning of year 67,249 860,298 2,230,735
Cash and cash equivalents, end
of year $ 860,298 $ 2,230,735 $27,507,257
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid $ 1,138,106 $ 2,553,882 $ 3,597,458
Income taxes paid $ -- $ 32,046 $ 227,191
See accompanying notes
SPARKLING SPRING WATER GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
1. Description of Business
Sparkling Spring Water Group Limited ("Sparkling Spring")
is incorporated under the laws of the Province of Nova
Scotia, Canada and provides containered water to home and
office markets in British Columbia and the Maritime
provinces of Canada, England, Scotland and the Pacific
Northwestern United States.
2. Significant Accounting Policies
These financial statements have been prepared on a
historic cost basis by management in accordance with accounting
principles generally accepted in the United States ("US GAAP"),
the more significant of which are as follows:
Basis of Presentation
As a result of significant foreign acquisitions and
growth in the Company's operations, the shareholders of
Sparkling Spring and Sparkling Spring Water Limited ("SSWL")
approved a reorganization on November 19, 1997 whereby the former
shareholders of SSWL exchanged their shares of SSWL for
shares of Sparkling Spring. This reorganization facilitated
effective income tax planning regarding corporate distributions
as described below and further facilitated credit risk
management. In order to minimize tax on corporate
distributions Sparkling Spring was created to acquire the
shares of SSWL and to acquire new debt as described in
note 12. It is anticipated that Sparkling Spring will not
be involved in carrying on any actual business operations
and that in the future the Company's various operations will
be isolated in separate corporate vehicles to achieve
certain creditor protection for the holders of the new
debt. As a part of this reorganization, certain shareholders
of SSWL, including certain principal shareholders, directors
and executive officers of the Company, reduced, at their
discretion, their interest in Sparkling Spring by exchanging
their shares of common stock and options to acquire shares
of common stock of SSWL for a combination of shares of
common stock and options to acquire shares of common stock
of Sparkling Spring plus cash. The exchange was completed
as a method of providing cash to the previous shareholders
of SSWL. The shareholders of SSWL exchanged, on an
aggregate basis, 1,728,246 shares of common stock and
442,993 options to acquire shares of common stock of SSWL
for 1,383,328 shares of common stock and 252,197 options
to acquire shares of common stock of Sparkling Spring
plus $14,169,784 in cash. Those shareholders reducing their
interest in Sparkling Spring received cash of $28 per share
for each share by which their holdings of shares of common
stock were reduced. Those shareholders surrendering options
to acquire shares of common stock received $28, less the
option's exercise price, for each option surrendered. The
amount of $28 per share was the Company's estimate of the
fair value of its shares at the time of the reorganization
as negotiated by all shareholders. Subsequent to the
reorganization, Sparkling Spring owns 100% of the issued
and outstanding shares of SSWL.
As part of the reorganization certain key managers
of the Company have subscribed for an aggregate of 9,360
shares of Common Stock of Sparkling Spring. The shares will
be recorded at their estimated fair value, as determined
by an agreed upon formula, and reflected as temporary
equity in the Company's financial statements upon issuance.
These managers have granted an option to Sparkling Spring
enabling Sparkling Spring to repurchase these shares of
Common Stock at any time at their estimated fair market
value determined in accordance with the same agreed upon
formula price. Sparkling Spring is obligated to repurchase
these shares at the option of the key managers for the
same formula price during a one month period each year,
subject to any financial covenants and financing requirements
affecting the Company. If shares are purchased by the Company,
the excess or deficiency of the cost to redeem the shares
over the carrying value of the shares will be charged
or credited to retained earnings.
Control of the Company did not change with the
reorganization. Accordingly, the reorganization has been
accounted for using the reorganization under common control
method of accounting whereby the consolidated financial
statements reflect the consolidated historical carrying value
of the assets, liabilities and shareholders' equity, and
the consolidated historical operating results of SSWL for each
of the periods presented. Sparkling Spring was incorporated
on October 22, 1997 and, accordingly, had no assets, liabilities
or shareholders' equity or historical operating results prior
to this date.
Basis of Consolidation
These consolidated financial statements include the
accounts of Sparkling Spring and its wholly-owned
subsidiaries, principally SSWL, Sparkling Spring Water U.K.
Limited ("SSWUK"), Canadian Springs Water Company Ltd.
("Canadian Springs"), Water Jug Enterprises Limited ("Water
Jug"), and the subsidiaries referred to in note 4
(collectively referred to as the "Company").
Reporting Currency
The Company uses the United States dollar as its
reporting currency and the Canadian dollar as its functional
currency. Assets and liabilities are translated into United
States dollars at the exchange rates in effect at the balance
sheet date. The revenues and expenses have been translated
into United States dollars at average exchange rates
prevailing during the year. The gains and losses on
translation are included in a separate component of
shareholders' equity titled "cumulative translation adjustment".
Foreign currency denominated assets and liabilities
of Canadian operations are translated into Canadian dollars
at exchange rates prevailing at the balance sheet date for
monetary items and at exchange rates prevailing at the
transaction date for non-monetary items. Gains or losses
on translation are recognized in the statement of operations.
Balance sheet accounts denominated in foreign currencies
and translated at year-end exchange rates have been translated
to U.S. dollars at the following rates:
1995 1996 1997
Canadian Dollars $0.733 $0.730 $0.700
U.K. Pounds Sterling $1.552 $1.705 $1.642
Cash Equivalents
The Company considers all highly-liquid investments with a
maturity of three months or less when purchased to be cash
equivalents.
Inventories
Inventories are valued at the lower of cost, determined on a
first-in, first-out basis, and net realizable value.
Fixed Assets
Fixed assets are recorded at cost less related government
grants and investment tax credits. Depreciation is provided on
the declining balance basis at the following annual rates:
Well and buildings 5%
Machinery, equipment and coolers 10-20%
Motor vehicles 30%
Roadways 8%
Returnable bottles 20%
Leasehold improvements are amortized on a straight-line
basis over the term of the related lease.
Acquisitions, Goodwill
On the acquisition of businesses, the excess of the purchase
price over the fair value of the underlying net identifiable
assets acquired is recognized as goodwill. Goodwill is amortized
on a straight-line basis over 40 years. The method used to
assess if there has been a permanent impairment in the value of
goodwill is based on projected and discounted cash flows.
Deferred Financing Costs
Deferred financing costs represent professional fees and
other related costs incurred in relation to long-term financing
agreements. These costs are amortized on a straight-line basis
over the term of the related financing and charged to interest
expense.
Unearned Revenue
Unearned revenue represents the prepayment of bottled water
charges. These amounts are recognized as revenue in the period
the product is provided.
Advertising
Advertising expenditures are expensed as incurred.
Financial Instruments
The Company's primary financial instruments consist of cash
and cash equivalents, accounts receivable, accounts payable,
customer deposits and long-term debt. The difference between the
carrying values and the fair market values of the primary
financial instruments are not material due to the short-term
maturities and, or the credit terms of those instruments.
The Company has at any one time a significant number of
commitments to extend credit. The accounts receivable are owed
from a large number of customers on normal credit terms and
therefore there is minimal customer concentration and credit
risk.
Cross Currency Swaps
The Company enters into cross currency swaps to hedge net
assets and expected future cash flows of operations denominated
in currencies other than the US dollar. To the extent cross
currency swaps hedge net assets in currencies other than the US
dollar, unrealized gains or losses arising from changes in
forward foreign exchange rates are recorded as an adjustment to
the cumulative translation adjustment account with a
corresponding entry to other assets or liabilities, as
appropriate.
To the extent cross currency swaps are entered into to hedge
future expected cash flows of subsidiaries operating outside of
the US, unrealized gains or losses resulting from changes in
forward foreign exchange rates are recognized in income and
offset with a corresponding entry to assets or liabilities, as
appropriate. The initial premium or discount associated with
cross currency swaps of this nature is recorded as an other asset
or liability, as appropriate, and amortized to income over the
life of the swap.
Earnings Per Share
Basic and diluted earnings per share is calculated using the
weighted average number of common shares outstanding during the
period adjusted for the effect of the exercise of all outstanding
options and warrants in accordance with SFAS 128 applied
retroactively. The weighted average shares calculated under this
method for basic and diluted earnings per share are 1,685,131
(1996 - 1,468,527, 1995 - 1,216,308) and 1,685,131 (1996 -
1,758,022, 1995 - 1,410,728), respectively.
Leases
Leases are classified as capital or operating leases.
Assets are recorded as capital leases when the substantial
benefits and risks of ownership have been transferred to the
Company. Obligations recorded under capital leases are reduced
by lease payments, net of imputed interest.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting
period. Actual results could differ from these estimates.
Income Taxes
Income taxes are accounted for in accordance with SFAS 109,
"Accounting for Income Taxes". Under SFAS 109, an assets and
liability approach is required including a valuation allowance.
Such approach results in the recognition of deferred tax assets
and liabilities for the expected future tax consequences of
temporary differences between the book carrying amounts and the
tax basis of assets and liabilities.
The Company and its subsidiaries file separate federal,
state, and foreign income tax returns and, accordingly, provide
for such income taxes on a separate company basis.
3. Change in Accounting Policy
As a result of increased business activity in the United
States, the Company retroactively changed its reporting policy
from Canadian dollars and Canadian generally accepted accounting
principles to United States dollars and United States generally
accepted accounting principles, effective January 1, 1997.
In order to comply with accounting principles generally
accepted in the United States the following accounting policies
have also been changed:
Export Development Costs
Costs to develop export markets were previously deferred and
amortized over five years. The Company has changed its
accounting policy to expense these items in the period in which
the expenditures were incurred.
Foreign Currency
The Company previously deferred and amortized unrealized
foreign exchange gains and losses on long-term monetary items
over the remaining term of the item. These gains and losses are
now charged to income during the period of the unrealized gain or
loss.
Income Taxes
The Company now follows SFAS 109 for accounting for income
taxes which requires an assets and liabilities approach, subject
to a valuation allowance for deferred tax assets. The Company
previously followed the deferral method.
The effect of the changes to these accounting policies had
the following impact on net assets, net income after
extraordinary items and cumulative translation adjustment:
1995 1996
Goodwill and deferred charges $ (76,442) $ (217,280)
Deferred taxes, asset 243,147 147,530
Net assets (decrease) increase $ 166,705 $ (69,750)
Operating expenses $ 42,952 $ (406,361)
Depreciation and amortization 24,410 61,186
Provision for income taxes (299,107) (529,301)
Extraordinary item (391,626) (473,436)
Unusual items 596,541 1,111,049
Net income decrease $ (26,830) $ (236,863)
Cumulative translation adjustment $ 4,755 $ 408
increase
Unusual items include previously deferred financing costs of
$907,674 and $596,541 in the years 1996 and 1995 respectively,
which were expensed as a result of repayment of the then existing
financing facility and have been reclassified as extraordinary
items (net of applicable income taxes) as a result of the change
in accounting policy from Canadian generally accepted accounting
principles to United States generally accepted accounting
principles. Unusual items in 1996 also includes $203,375 related
to an employee buyout package.
The retroactive application of the changes in accounting
policies described above also had the effect of reducing the
deficit at January 1, 1995 from $830,789 to $642,009.
4. Acquisitions
1997
During the year the Company completed the following
acquisitions:
<CAPTION
Acquisition Interest Acquisition
Company Location Date Acquired Cost
(000'S)
D&D and Company, Inc. Portland, Oregon January, 1997 100% $ 3,972
High Valley Water Limited Kelowna, January, 1997 100% 2,329
British Columbia
Withey's Water Softening and Prince George,
Purification Limited British Columbia January, 1997 100% 1,568
Marlborough Employment Glasgow, Scotland February, 1997 100% 6,878
Limited
Soja Enterprises, Inc. Portland, Oregon June, 1997 100% 252
Crystal Spring Bottled Water Portland, Oregon June, 1997 100% 4,403
Co., Inc.
Cullyspring Water Co., Inc. Seattle, Washington October, 1997 100% 7,039
Crystal Springs Drinking Seattle, Washington December, 1997 100% 1,419
Water Inc.
$27,860
The following summarizes the transactions (in thousands):
Net working capital $ 196
Fixed assets 6,919
Assumption of debt obligations (1,160)
Goodwill 21,905
Total cash consideration $27,860
The acquisitions have been accounted for under the purchase
method of accounting and accordingly the results of operations
since the dates of acquisition have been included in the
consolidated statement of operations.
1996
On January 18, 1996, the Company acquired 100% of the shares
of Canadian Springs and on May 19, 1996 the Company acquired 100%
of the shares of Water Jug, companies located in British
Columbia, Canada. The acquisitions have been accounted for under
the purchase method of accounting and accordingly the results of
operations since the dates of acquisition have been included in
the consolidated statement of operations.
The following summarizes the transactions (in thousands):
Canadian Springs Water Jug
Net working capital $ 319 $ (57)
Fixed assets 2,996 341
Assumption of debt obligations (694) (155)
Goodwill 12,993 972
Total cash consideration $15,614 $1,101
During 1996, the Company also acquired the non-controlling
interest in SSWUK from the minority shareholder for cash
consideration of $717,135, including goodwill of $391,024.
1995
On April 26, 1995, SSWUK acquired 100% of the shares of
Aquaporte (UK) Limited ("Aquaporte"), a company registered in
England and Wales. The acquisition has been accounted for under
the purchase method of accounting and accordingly the results of
operations since the date of acquisition have been included in
the consolidated statement of operations.
The following summarizes the transaction (in thousands):
Net working capital $ (441)
Fixed assets 663
Goodwill 1,710
Total cash consideration $1,932
The following unaudited pro forma information presents a
summary of consolidated results of operations as if the
acquisitions of D&D and Company, Inc., High Valley Water Limited,
Withey's Water Softening and Purification Limited, Marlborough
Employment Limited, Soja Enterprises Inc., Crystal Spring Bottled
Water Co., Inc., Cullyspring Water Co., Inc. and Crystal Springs
Drinking Water Inc. had occurred at January 1, 1997 and January
1, 1996 and as if the acquisitions of Canadian Springs, Water Jug
and the non-controlling interest in SSWUK had occurred at
January 1, 1996.
For the Year Ended December 31,
1996 1997
Total revenue $45,973,741 $48,749,884
Net (loss) income 819,236 (4,439,478)
Extraordinary item (473,436) (833,706)
Basic (loss) earnings per 0.558 (2.635)
share
5. Allowance for Doubtful Accounts
Balance January 1, 1995 $316,115
Additions 175,924
Write-offs (20,215)
Balance December 31, 1995 471,824
Additions 116,444
Write-offs (378,210)
Balance December 31, 1996 210,058
Additions 267,684
Write-offs (90,495)
Balance December 31, 1997 $387,247
6. Inventories
1996 1997
Packaging materials $480,537 $ 973,583
Goods for resale 215,306 502,608
Cooler parts 77,897 151,208
Other 92,321 124,163
$866,061 $1,751,562
7. Fixed Assets
1996 1997
Accumulated Accumulated
Cost Depreciation Cost Depreciation
Land and well $ 489,670 $ 42,349 $ 312,120 $ 4,292
Buildings and roadways 745,695 142,193 792,444 198,274
Coolers 10,931,290 4,631,002 15,967,041 7,813,592
Machinery and equipment 4,395,170 1,598,854 10,947,082 4,548,844
Equipment and computer
hardware under capital 1,525,163 836,621 1,447,572 830,435
lease
Motor vehicles 911,010 705,555 1,658,382 1,057,127
Motor vehicles under 2,906,758 746,227 4,633,516 1,887,790
capital lease
Leasehold improvements 646,211 220,794 1,285,553 458,309
Returnable bottles 2,852,141 656,282 4,636,423 1,574,155
25,403,108 $9,579,877 41,680,133 $18,372,818
Accumulated depreciation 9,579,877 18,372,818
Net book value $15,823,231 $23,307,315
8. Goodwill and Deferred Charges
1996 1997
Accumulated Accumulated
Cost Depreciation Cost Depreciation
Goodwill $19,588,100 $945,502 $40,727,367 $1,487,449
Deferred financing costs 116,201 41,693 3,911,380 54,789
Other 83,429 -- 161,273 8,810
19,787,730 $987,195 44,800,020 $1,551,048
Accumulated amortization 987,195 1,551,048
Net book value $18,800,535 $43,248,972
9. Debt Due Within One Year
1996 1997
Current portion of obligations
under capital leases [note 10] $1,104,315 $ 967,467
Current portion of loans payable [note 11] 476,721 222,401
$1,581,036 $1,189,868
10. Obligations Under Capital Leases
The obligations under capital leases are recorded net of the
related imputed interest calculated at an average rate of 10%.
Total minimum annual lease commitments are as follows:
1998 $1,364,998
1999 1,092,905
2000 854,888
2001 630,774
2002 395,408
Thereafter in aggregate 335,934
4,674,907
Less imputed interest 1,222,236
3,452,671
Less current portion 967,467
$2,485,204
11. Loans Payable
1996 1997
Term loans ($17,747,328 Cdn. and (pound)8,204,760) $26,866,624 $ --
bearing interest at prime plus 1 1/4%.
Term loans bearing interest at 11 3/8% repayable in 112,812 96,018
monthly installments of principal and interest of
$2,868 maturing in varying amounts to 2001.
Unsecured loan ((pound)273,400) bearing interest at 7%, 463,778 --
interest and principal repayable upon maturity
on June 8, 1997.
Term loan bearing interest at 9%, repayable in five -- 1,250,000
equal installments of principal and interest of
$321,000, maturing 2002.
27,443,214 1,346,018
Less portion due within one year 476,721 222,401
$26,966,493 $1,123,617
On January 28, 1997, the Company replaced its $27 million
term loans with a revolving credit facility of $51.1 million
available in multiple currencies at Libor plus 2.75% and, or
prime rate plus 1.25%. In addition to refinancing the term
loans, funds were used to finance acquisitions. The total
amounts outstanding under the credit facility and other
borrowings totaling $54.7 million as at November 19, 1997 were
repaid as a result of the issuance of $100 million of Senior
Subordinated Notes Payable described in note 12.
The following repayment schedule represents the required
annual principal repayments of long-term debt.
1998 $222,401
1999 242,832
2000 265,152
2001 285,645
2002 305,840
Thereafter in aggregate 24,148
12. Subordinated Notes Payable
1996 1997
Senior subordinated notes payable maturing
November 2007, bearing interest at 11.5%,
interest payable semi-annually, principal
due at maturity $-- $100,000,000
On November 19, 1997, the Company completed a $100,000,000
private placement of 11 1/2% Senior Subordinated Notes due 2007
(the "Private Notes"). The Company used a portion of the net
proceeds of this offering to repay $54.7 million of its existing
credit facility and to pay $14.2 million to certain Company
shareholders (see note 2).
The Company offered to each holder of Private Notes
equivalent exchange notes (the "Exchange Notes"). The Exchange
Notes are identical in form and terms to the Private Notes,
except that upon the effectiveness of a registration statement
filed with the United States Securities and Exchange Commission
covering the Exchange Notes, the holders of Exchange Notes may
offer the notes for sale to the general public [see note 21 (c)].
Each of the Company's subsidiary guarantors has fully and
unconditionally guaranteed, on a senior subordinated basis,
jointly and severally, to each holder of the notes and the
trustee under the indenture pursuant to which the notes were
issued, the full and prompt performance of the Company's
obligations under the indenture and the notes, including the
payment of principal and interest on the notes. The guarantees
are subordinated to guarantor senior indebtedness (as defined in
the indenture). As of December 31, 1997, the subsidiary
guarantors had approximately $4.8 million of guarantor senior
indebtedness outstanding.
The obligations of each subsidiary guarantor will be limited
to the maximum amount which, after giving effect to all other
contingent and fixed liabilities of such subsidiary guarantor and
after giving effect to any collections from or payments made by
or on behalf of any other subsidiary guarantor in respect of the
obligations of such other subsidiary guarantor under its
guarantee or pursuant to its contribution obligations under the
indenture pursuant to which the notes are to be issued, will
result in the obligations of such subsidiary guarantor under its
guarantee not constituting a fraudulent conveyance or fraudulent
transfer under federal, state or other applicable law. In
addition, the obligations of each subsidiary guarantor organized
outside the United States will be limited to the maximum amount
permitted under applicable Canadian, English, Scottish or other
foreign law.
Separate audited financial statements of the guarantor
subsidiaries have not been provided as Sparkling Spring has no
subsidiaries which are nonguarantor subsidiaries and does not
believe that this information would be meaningful to investors.
Sparkling Spring is a holding company and has no operations or
assets independent of its investment in its subsidiaries. All of
Sparkling Spring's subsidiaries are wholly-owned. There are no
restrictions as to the payment of dividends or loans by Sparkling
Spring's subsidiaries to Sparkling Spring or as to the granting
of any upstream guarantees not constituting a fraudulent
conveyance or fraudulent transfer under applicable law.
The Company has entered into two cross currency interest
rate swaps to more closely match the interest requirements of the
above notes with the cash flows earned by the Company's Canadian
and UK subsidiaries. Under the terms of the first swap, maturing
November 15, 2002, the Company will receive 11.5%, payable
semiannually, on a $28 million US dollar notional amount in
return for paying 10.83%, payable semiannually, on a $39.872
million Canadian notional amount. The terms of the agreement
also call for the Company to receive $28 million US in exchange
for $39.872 million Canadian on November 15, 2002.
Under the terms of the second swap, maturing November 15,
2003, the Company will receive 11.5%, payable semiannually, on a
$30 million US dollar notional amount in return for paying
12.61%, payable semiannually, on a 17.857 million Great Britain
pounds notional amount. The terms of the agreement also call for
the Company to receive $30 million US in exchange for 17.857
million Great Britain pounds on November 15, 2003.
Both of the above noted swaps have been transacted with a US
bank with a counter party credit rating of "A" (Standard &
Poors). At December 31, 1997 the aggregate fair value of the two
swaps was $423,359 US dollars in favor of the Company of which
$114,556 has been recorded as a reduction in interest expense
with the remaining balance of $308,803 recorded as a decrease in
the cumulative translation adjustment.
13. Capital Stock
During 1994, the Company issued 165,767 common share
purchase warrants to the holders of subordinated notes payable.
The warrants were exercisable at $0.01 per share upon repayment
of the notes or in the event of default of interest payments
required on these notes. The warrants were assigned a value of
$1,135,149 representing the estimated fair value of the warrants
at the date of issuance. During 1996 the subordinated notes were
redeemed together with the related common share purchase warrants
for cash consideration of $4.7 million representing a $1,253,552
excess over the book value of the debt and warrants. The present
value of interest payments foregone by the noteholders of
$907,674 was expensed in 1996 as described in note 14. The
remaining excess of $345,878 was allocated to the warrants and
has been reflected as a reduction of paid in capital.
As described in note 2, the Company completed a
reorganization in 1997 whereby the shareholders of SSWL
exchanged, on an aggregate basis, 1,728,246 shares of common
stock and 442,993 options to acquire shares of common stock of
SSWL for 1,383,328 shares of common stock and 252,197 options to
acquire shares of common stock of Sparkling Spring plus
$14,169,784 in cash. A total of $4,512,080 has been expensed in
these financial statements representing cash used to repurchase
options to acquire shares of common stock. The remaining cash
paid to shareholders of $9,657,704 has been charged to share
capital and retained earnings based on the number of shares of
SSWL redeemed using the average carrying value per share. A
further $76,422 has been expensed in these financial statements
related to the repurchase of stock options from a former
employee.
The Company maintains a stock option plan for management and
directors where options to acquire Class E common shares are
issued with strike prices approximating the estimated value of
the shares at the date of issuance.
The Company accounts for stock options in accordance with
APB Opinion No. 25 and accordingly, no compensation costs have
been recognized. Had the Company determined compensation cost
based on the fair value at the grant date for its stock options
under SFAS No. 123, the Company's net income and net income per
share would have been reduced to the pro forma amounts as
follows:
1995 1996 1997
$ $ $
Net (loss) income, as reported 19,062 (306,996) (5,358,366)
Net (loss), pro forma (95,014) (415,332) (5,358,366)
Net (loss) income per share, as 0.016 (0.209) (3.180)
reported
Net (loss) per share, pro forma (0.078) (0.283) (3.180)
There were no stock options granted during 1997. The per
share weighted average fair value of stock options granted in
1996 and 1995 was $4.77 and $1.15 respectively at the date of
grant, using the minimum value approach as permitted by SFAS 123
for non-public companies, and an assumed risk free interest rate
of 5%.
The following summarizes the status of the option plan. To
the extent that options are exercisable in Canadian dollars,
exercise prices have been translated at the exchange rate as of
December 31, 1997:
Number of Range of Average
Options Exercise Price Exercise Price
Outstanding at December 31, 1994 301,298 $1.27 - 4.326 $3.33
Granted 64,595 $3.85 - 4.326 $4.30
Outstanding at December 31, 1995 365,893 $1.27 - 4.326 $3.53
Granted 53,500 $10.27 - 20.00 $18.53
Cancelled (20,000) $4.326 $4.326
Outstanding at December 31, 1996 399,393 $1.27 - 20.00 $5.50
Exercised (7,500) $4.326 $4.326
Repurchased (190,796) $1.27 - 20.00 $4.351
Outstanding at December 31, 1997 201,097 $1.27 - 20.00 $6.61
Exercisable at December 31, 1997 168,263 $1.27 - 20.00 $4.59
Information with respect to options outstanding and
exercisable at December 31, 1997 is as follows:
Options outstanding
Remaining
Number Contractual
Exercise Price Outstanding Life
$1.27 55,111 3.8 years
$3.85 5,000 3.8 years
$4.326 95,736 3.8 years
$10.27 5,000 5.0 years
$14.00 5,000 5.6 years
$20.00 35,250 3.8 years
201,097
Options Exercisable
$1.27 55,111 3.8 years
$3.85 5,000 3.8 years
$4.326 93,236 3.8 years
$10.27 1,250 5.0 years
$14.00 1,000 5.6 years
$20.00 12,666 3.8 years
168,263
At December 31, 1995 and 1996 the number of options
exercisable were 138,084 and 235,390, respectively, and the
weighted average exercise prices were $3.38 and $3.58
respectively.
Warrants for 51,100 shares have been granted and are
outstanding. The warrants are exercisable for total cash
consideration of $1.
14. Extraordinary Item
The Company restructured and replaced its long-term
financing agreements in each of the last three years. Costs
incurred related to new loan financing arrangements have been
deferred in accordance with the Company's accounting policy for
deferred financing costs. Costs, in the amount of $833,706 (1996-
$473,436; 1995-$391,626) related to debt that was restructured
have been expensed in the year, net of applicable income tax
recoveries of $398,724 (1996-$434,238; 1995-$204,915).
15. Statement of Cash Flow
1995 1996 1997
(Increase) decrease in
Accounts receivable $ (875,321) $(1,672,299) $(3,468,235)
Inventories (173,756) (313,116) (885,501)
Prepaid expenses (198,454) (759,560) (183,766)
(1,247,531) (2,744,975) (4,537,502)
Increase (decrease) in
Accounts payable and accrued 317,510 1,867,327 2,341,702
liabilities
Unearned revenue 316,146 (223,376) (86,302)
Customer deposits 380,735 742,951 775,971
Income taxes payable -- 76,890 965,677
1,014,391 2,463,792 3,997,048
Net change in non-cash working
capital balances (233,140) (281,183) (540,454)
Less net working capital acquired
on acquisitions [note 4] (441,446) 262,344 195,908
Effect of translation 26,915 (13,339) (4,589)
$ (647,671) $ (32,178) $ (349,135)
Net working capital acquired on acquisitions has been
excluded from cash flows from operations as it has been included
in investing activities in acquisitions.
16. Lease Commitments
The Company is committed under operating leases extending
for various periods to 2008. Future minimum lease payments are
as follows:
1998 $1,436,760
1999 1,281,658
2000 1,070,543
2001 860,170
2002 817,844
Thereafter in aggregate 3,205,197
$8,672,172
Lease costs of $1,291,043(1996 - $896,000; 1995 - $695,000)
have been expensed during the year.
17. Income Taxes
A reconciliation of the provision for income taxes based on
the combined federal and provincial income tax rates of 45% is as
follows:
1995 1996 1997
Provision for (recovery of) income taxes $319,408 $254,144 $(1,832,754)
at statutory rates
Non deductible amortization -- 132,910 302,059
Redemption of common stock options -- -- 2,030,436
Difference in foreign tax rates (5,640) 14,414 (62,980)
Other (14,661) (3,143) 2,616
$299,107 $398,325 $ 439,377
The provision for income
taxes includes:
1995 1996 1997
Current income taxes--Canada $ -- $ 90,000 $ 804,385
--Foreign -- -- 315,877
-- 90,000 1,120,262
Deferred income taxes-Canada 269,107 357,325 (550,968)
--Foreign 30,000 (49,000) (129,917)
299,107 308,325 (680,885)
$299,107 $398,325 $ 439,377
The deferred tax asset is comprised of the following timing
differences:
1995 1996 1997
Excess accounting expenses over tax $106,792 $561,774 $ 345,168
Non capital loss carryforwards 169,341 185,657 1,214,849
Excess of tax over book depreciation (42,743) (204,149) (177,533)
Other differences 9,757 (6,745) (2,748)
$243,147 $536,537 $1,379,736
The Company has non capital losses available for carryforward
that expire as follows:
2004 $1,451,040
2012 1,140,072
No expiry 563,224
18. Selling, Delivery and Administrative
(a) Related Party Transactions
During the year the Company paid approximately $1,029,779
(1996-$529,400; 1995-$386,000) to CF Capital Corporation (CFCC),
a company affiliated by common significant shareholdings, for
management and related services.
The Company also paid CFCC $518,700 (1996-$239,600; 1995-
$135,000) for investment banking advisory services rendered in
connection with acquisitions completed during the year which were
capitalized as part of the related acquisition costs.
The Company has entered into a Management Agreement with
CFCC and two of CFCC's shareholders who are also shareholders of
the Company. Under the terms of the Agreement, CFCC manages the
operations of the Company and negotiates contracts, financial
agreements and other arrangements. The Management Agreement
provides that CFCC shall receive a base fee which is adjusted
yearly based on annual Company revenues. An annual bonus,
calculated as a percentage of the base fee, is due to CFCC in the
event the Company achieves certain targeted levels of per share
earnings before depreciation, amortization and income taxes.
CFCC also receives fees for investment banking advisory service
rendered to the Company in connection with successful
acquisitions.
All shareholders of the Company are party to a Shareholder
Agreement which provides, among other things, for preemptive
rights in favor of the shareholders under certain circumstances
if Sparkling Spring issues additional securities and for certain
registration rights. The Shareholder Agreement also provides
restrictions on the transfer of the Company's capital stock, for
rights of first refusal and for rights of certain shareholders to
require all other shareholders to join with them in their sale of
the Company's capital stock.
In connection with the purchase of shares of common stock of
the Company, promissory notes totaling $230,003 have been received
from certain officers of the Company. The promissory notes bore
interest at a rate of 7% and were scheduled to mature on January
31, 1998 with principal and interest due on that date. The
promissory notes were cancelled by the Company and replaced with
promissory notes which bear interest at a rate of 6% and mature
on January 31, 1999 with principal and interest due on that date.
The common shares purchased by the officers are pledged as
security for the promissory notes.
(b) Advertising and Promotional Expenses
Selling, delivery and administration expenses include
advertising and promotional expenses of $1,238,000 (1996-
$1,206,000; 1995-$656,000).
19. Summary of Business Segments
1995 1996 1997
Revenue
Canada $ 5,061,581 $15,363,998 $19,416,108
United Kingdom 10,287,533 11,962,351 17,658,190
United States -- -- 4,999,586
$15,349,114 $27,326,349 $42,073,884
Net income (loss) before income
taxes, non-controlling interest
and extraordinary item
Canada $622,549 $ 726,937 $(4,391,401)
United Kingdom 64,250 (155,278) 451,400
United States -- -- (145,282)
$686,799 $ 571,659 $(4,085,283)
Identifiable assets
Canada $ 5,664,794 $27,177,107 $ 31,345,420
United Kingdom 12,856,161 17,232,061 25,866,401
United States -- -- 49,787,091
$18,520,955 $44,409,168 $106,998,912
20. Comparative Figures
Certain of the comparative figures have been reclassified to
conform with the presentation adopted in the current year.
21. Subsequent Events
(a) On February 24, 1998, the Company purchased all of the
outstanding capital stock of Coastal Mountain Water Corp. for
$4,241,000. Coastal Mountain Water Corp. is based in Vancouver,
British Columbia and focuses on the direct delivery of eighteen
litre containers of water to residential and commercial customers
and the rental of water coolers.
(b) In January, 1998 the Company issued 9,360 shares to key
managers of the Company for aggregate proceeds of $262,080 (note
2).
(c) The Registration Statement filed by the Company covering the
Exchange Notes (note 12) was declared effective by the United
States Securities and Exchange Commission on April 1, 1998.
(d) In March 1998, the Company received a loan commitment for
purposes of financing future capital investments, working capital
and general corporate purposes. The loan commitment provides for
borrowing availability of initially $40.0 million and matures in
2007. The documentation for the loan is expected to be finalized
and the loan closed by early May. The Company's payment
obligations under the credit agreement will have pledged as
collateral a first priority security interest granted in favor of
the lenders over substantially all of the assets of the Company.
The Company's obligations under the credit agreement will rank
senior to the payment of the Exchange Notes.
EXHIBIT INDEX
Exhibit Sequential
Number Description Page Number
- - ------- ----------- -----------
2.(ii) Senior Credit Agreement, dated May 26, 1998 among 87
Sparkling Spring Water Group Limited and the Guarantors
named therein, as borrowers, and The Toronto-Dominion
Bank, Toronto Dominion (Texas), Inc. and The Toronto-
Dominion Bank, London Branch, as lenders.