UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
[X]
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended October 31,
2009.
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[ ]
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the transition period from
___________ to ___________.
Commission
File Number 000-31797
VERMONT
PURE HOLDINGS, LTD.
(Exact
name of registrant as specified in its charter)
Delaware
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03-0366218
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State
or other jurisdiction of incorporation or
organization
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I.R.S.
Employer Identification Number
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1050 Buckingham St.,
Watertown, CT 06795
(Address
of principal executive offices and zip code)
Registrant's
telephone number, including area code:
(860)
945-0661
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class
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Name
of exchange on which registered
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Common
Stock, par value $.001 per share
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NYSE
Amex
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Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.
Yes [_] No [X]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes [_] No [X]
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
Yes
[ ] No [ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer [
] Accelerated
filer [ ]
Non-accelerated
filer [
] Smaller
Reporting Company [X]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes
[ ] No [X]
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant, computed by reference to the last sale price
per share of common stock on April 30, 2009, the last business day of the
registrant’s most recently completed second fiscal quarter, as reported on the
NYSE Amex, was $7,337,832.
The
number of shares outstanding of the registrant's Common Stock, $.001 par value
per share, was
21,472,439
on
January 4, 2010.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant’s definitive proxy statement, to be filed not later than 120
days after the registrant’s fiscal year ended October 31, 2009, and delivered in
connection with the registrant’s annual meeting of stockholders, are
incorporated by reference into Part III of this Form 10-K.
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Table
of Contents
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Page
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Part I
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Item 1.
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Business
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3
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Item
1A.
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Risk
Factors
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9
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Item
1B.
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Unresolved
Staff Comments
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15
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Item 2.
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Properties
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15
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Item 3.
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Legal
Proceedings
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16
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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17
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Part II
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Item 5.
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Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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18
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Item 7.
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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19
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Item 8.
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Financial
Statements and Supplementary Data
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27
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Item 9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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27
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Item 9A(T).
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Controls
and Procedures
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27
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Item
9B.
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Other
Information
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28
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Part III
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Item 10.
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Directors,
Executive Officers and Corporate Governance
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29
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Item 11.
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Executive
Compensation
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29
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Item 12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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29
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Item 13.
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Certain
Relationships and Related Transactions, and Director
Independence
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30
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Item 14.
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Principal
Accountant Fees and Services
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30
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Part IV
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Item 15.
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Exhibits
and Financial Statement Schedules
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31
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Signatures
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33
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Note: Items 6 and 7A are not required for smaller
reporting companies and therefore are not furnished.
***************
In this
Annual Report on Form 10-K, “Vermont Pure,” the “Company,” “we,” “us” and “our”
refer to Vermont Pure Holdings, Ltd. and its subsidiary, taken as a whole,
unless the context otherwise requires.
***************
This
Annual Report on Form 10-K contains references to trade names, label design,
trademarks and registered marks of Vermont Pure Holdings, Ltd. and its
subsidiary and other companies, as indicated. Unless otherwise
provided in this Annual Report on Form 10-K, trademarks identified by (R) are
registered trademarks or trademarks, respectively, of Vermont Pure Holdings,
Ltd. or its subsidiary. All other trademarks are the properties of
their respective owners.
***************
Except
for historical facts, the statements in this Annual Report on Form 10-K are
forward-looking statements. Forward-looking statements are merely our
current predictions of future events. These statements are inherently
uncertain, and actual events could differ materially from our
predictions. Important factors that could cause actual events to vary
from our predictions include those discussed in this Annual Report on Form 10-K
under the heading “Risk Factors.” We assume no obligation to update
our forward-looking statements to reflect new information or
developments. We urge readers to review carefully the risk factors
described in this Annual Report on Form 10-K and in the other documents that we
file with the Securities and Exchange Commission. You can read these
documents at www.sec.gov.
PART
I
ITEM
1. BUSINESS.
Introduction
and Company Background
Vermont
Pure Holdings, Ltd., incorporated in Delaware in 1990, is engaged in the
production, marketing and distribution of bottled water and the distribution of
coffee, ancillary products, and other office refreshment products. We operate
primarily as a distribution business to homes and offices, using our own trucks
for distribution throughout New England, New York, and New Jersey.
Our
distribution sales and services evolved from our initial business, sales of
bottled water and cooler rentals. We bottle our water and also have
it bottled for us. All of our water products are still, non-sparkling waters as
opposed to sparkling waters. In addition to water and related
services our other significant offerings have grown to include distribution of
coffee and ancillary products, and other refreshment products including soft
drinks and snacks. To a lesser extent, we distribute these products
through third party distributors and directly through vending
machines.
Bottled
water is a mainstream beverage and the centerpiece of many consumers’ healthy
living lifestyles. In addition, we believe that the development and
continued growth of the bottled water industry reflects growing public awareness
of the potential contamination and unreliability of municipal water
supplies. Conversely, bottled water has been the recent focus of
publicity regarding concerns about the environmental and health effects of using
polycarbonate plastic bottles (these are described in more detail in Item 1A,
Risk Factors).
Coffee, a
product that is counter seasonal to water, is the second leading product in the
distribution channel, accounting for 24% of our total sales in fiscal year 2009.
We sell different brands and sizes of coffee products. Recently, we have
re-introduced our Cool Beans® brand coffee in an effort to increase
profitability and create brand equity in the coffee category. Because
coffee is a commodity, coffee sales are affected by volatility in the world
commodity markets. An interruption in supply or a dramatic increase
in pricing could have an adverse effect on our business.
The
increase in coffee sales in recent years has been driven by the market growth of
single-serve coffee products. This development has
revolutionized the marketplace and, while we expect the growth of these products
to continue, innovation and changes in distribution will play a significant role
in the profitability of the products.
Water
Sources, Treatment, and Bottling Operations
Water
from local municipalities is the primary raw source for the Crystal Rock®
brand. The raw water is purified through a number of processes
beginning with filtration. Utilizing carbon and ion exchange
filtration systems, we remove chlorine and other volatile compounds and
dissolved solids. After the filtration process, impurities are removed by
reverse osmosis and/or distillation. We ozonate our purified water
(by injecting ozone into the water as an agent to prohibit the formation of
bacteria) prior to storage. Prior to bottling, we add pharmaceutical
grade minerals to the water, including calcium and potassium, for taste. The
water is again ozonated and bottled in a fully enclosed clean room with a high
efficiency particulate air, or HEPA, filtering system designed to prevent any
airborne contaminants from entering the bottling area, in order to create a
sanitary filling environment.
If for
any reason the municipal sources for Crystal Rock® water were curtailed or
eliminated, we could, though probably at greater expense, purchase water from
other sources and have it shipped to our manufacturing facilities.
In
conjunction with our acquisition of their Home and Office distribution assets,
we entered into a contract with Mayer Brothers of Buffalo, New York to bottle
our Crystal Rock® brand in that market.
The
primary source of our natural spring water (primarily sold under the Vermont
Pure® brand) is a spring owned by a third party in Stockbridge, Vermont that is
subject to a 50- year water supply contract. We also obtain water,
under similar agreements with third parties, from springs in Bennington and
Tinmouth, Vermont. These three springs are approved by the State of
Vermont as sources for natural spring water. The contractual terms
for these springs provide spring water in excess of our current needs and within
the apparent capacity of the springs, and accordingly we believe that we can
readily meet our bulk water supply needs for the foreseeable
future.
Percolation
through the earth's surface is nature's best filter of water. We
believe that the exceptionally long percolation period of natural spring water
assures a high level of purity. Moreover, the long percolation period
permits the water to become mineralized and pH balanced.
We
believe that the age and extended percolation period of our natural spring water
provides the natural spring water with certain distinct attributes: a purer
water, noteworthy mineral characteristics (including the fact that the water is
sodium free and has a naturally balanced pH), and a light, refreshing
taste.
An
interruption or contamination of any of our spring sites would materially affect
our business. We believe that we could find adequate supplies of bulk spring
water from other sources, but that we might suffer inventory shortages or
inefficiencies, such as increased purchase or transportation costs, in obtaining
such supplies.
We are
highly dependent on the integrity of the sources and processes by which we
derive our products. Natural occurrences beyond our control, such as
drought, earthquake or other geological changes, a change in the chemical or
mineral content or purity of the water, or environmental pollution may affect
the amount and quality of the water emanating from the springs or municipal
sources that we use. There is a possibility that characteristics of
the product could be changed either inadvertently or by tampering before
consumption. Even if such an event were not attributable to us, the
product’s reputation could be irreparably harmed. Consequently, we
would experience economic hardship. Occurrence of any of these events
could have an adverse impact on our business. We are also dependent on the
continued functioning of our bottling processes. An interruption may
result in an inability to meet market demand and/or negatively impact the cost
to bottle the products.
We have
no material contractual commitments to the owners of our outside sources and
bottling facilities other than for the products and services we
receive.
We use
outside trucking companies to transport bulk spring water from the source site
to our bottling facilities.
Products
We sell
our major brands in three and five gallon bottles to homes and offices
throughout New England, New York, and New Jersey. In general, Crystal Rock® is
distributed in southern New England and upstate and western New York, while
Vermont Pure® is primarily distributed throughout northern New England and
upstate New York and secondarily in southern New England. We rent and sell water
coolers to customers to dispense bottled water. Our coolers are available in
various consumer preferences such as cold, or hot and cold, dispensing units. In
addition, we sell and rent units to commercial accounts that filter water from
the existing source on site. We also rent and sell coffee brewing
equipment and distribute a variety of coffee, tea and other hot beverage
products and related supplies, as well as other consumable products used around
the office. We offer vending services in some
locations. We own the Cool Beans® brand of coffee which we distribute
throughout our market area. In addition to Cool Beans®, we sell other
brands of coffee, most notably, Baronet and Green Mountain Coffee
Roasters.
Our
extensive distribution system and large customer lists afford us the
opportunity to introduce new products that may benefit our current customers or
appeal to new customers. From time to time we may capitalize on
these opportunities by expanding our product lines or replacing existing
products with new ones. In response to the increasingly competitive
sales environment, we will consider distributing new products that we
believe may enhance our sales and profitability.
Marketing
and Sales of Branded Products
Our water
products are marketed and distributed in three and five gallon bottles as
“premium” bottled water. We seek brand differentiation by offering a
choice of high quality spring and purified water along with a wide range of
coffee and office refreshment products, and value-added service. Home
and Office sales are generated and serviced using our own facilities, employees
and vehicles.
We
support this sales effort through Yellow Pages and internet advertising, as well
as selected radio, television and billboard advertising campaigns. We
also sponsor local area sporting events, participate in trade shows, and
endeavor to be highly visible in community and charitable events through
donations.
We market
our Home and Office delivery service throughout most of New England and New York
and parts of New Jersey. Telemarketers and outside/cold-call sales
personnel are used to market our Home and Office delivery.
Advertising
and Promotion
We
advertise our products primarily through Yellow Pages and internet advertising
and, from time
to time
on radio, television, and billboards. Radio and billboard has
primarily been used in the southern New England market on a selected
basis. We have also actively promoted our products through
sponsorship of various local organizations and sporting events to endeavor to be
highly visible in the communities that we serve. In recent years, we
have sponsored professional minor league baseball and various charitable and
cultural organizations, such as Special Olympics and the Multiple Sclerosis
Society donating both products and money.
Sales
and Distribution
We sell
and deliver products directly to our customers using our own employees and route
delivery trucks. We make deliveries to customers on a regularly
scheduled basis. We bottle our water at our facilities in Watertown,
Connecticut, White River Junction, Vermont, and Halfmoon, New York and have
water bottled for us in Buffalo and Clayton, New York. We maintain
numerous distribution locations throughout our market area. From
these locations we also distribute dispensing equipment, a variety of coffee,
tea and other refreshment products, and related supplies. We ship
between our production and distribution sites using both our own and contracted
carriers.
Supplies
We
currently source all of our raw materials from outside vendors. As one of the
largest Home and Office distributors in the country, we are able to capitalize
on volume to continue to reduce costs.
We rely
on trucking to receive raw materials and transport and deliver our finished
products. Consequently, the price of fuel significantly impacts the
cost of our products. We purchase our own fuel for our Home and
Office delivery and use third parties for transportation of raw materials and
finished goods between our warehouses. While volume purchases can
help control erratic fuel pricing, market conditions ultimately determine the
price. In 2008, we experienced substantial increases in fuel prices as a result
of market influences. However, we were able to establish a fuel adjustment
charge for our customers that covered the incremental rising cost of fuel.
In 2009, prices substantially decreased, but again our aggregate fuel adjustment
charge revenue, although it declined, offset the incremental fuel cost over what
we considered our “base” level for fuel cost. However, the risk remains
that we may not be able to use fuel price adjustments to cover the cost of fuel
increases in a volatile market for petroleum products, which could adversely
affect our profitability.
No
assurance can be given that we will be able to obtain the supplies we require on
a timely basis or that we will be able to obtain them at prices that allow us to
maintain the profit margins we have had in the past. We believe that
we will be able to either renegotiate contracts with these suppliers when they
expire or, alternatively, if we are unable to renegotiate contracts with our key
suppliers, we believe that we could replace them. Any raw material
disruption or price increase may result in an adverse impact on our financial
condition and prospects. For instance, we could incur higher costs in
renegotiating contracts with existing suppliers or replacing those suppliers, or
we could experience temporary dislocations in our ability to deliver products to
our customers, either of which could have a material adverse effect on our
results of operations.
Seasonality
Our
business is seasonal. The period from June to September, when we have our
highest water sales, represents the peak period for sales and revenues due
to increased consumption of cold beverages during the summer months in our core
Northeastern United States market. Conversely, coffee, which represented 24% of
our sales in 2009, has a peak sales period from November to March.
Competition
We
believe that bottled water historically has been a regional business in the
United States. The market includes several large regional brands
owned by multi-national companies that operate throughout contiguous states. We
also compete with smaller, locally-owned bottlers that operate in specific
cities or market areas within single states.
With our
Crystal Rock® and Vermont Pure® brands, we compete on the basis of pricing,
customer service, quality of our products, attractive packaging, and brand
recognition. We consider our trademarks, trade names and brand
identities to be very important to our competitive position and defend our
brands vigorously. In addition, we offer PET plastic as an
alternative bottle and have converted customers with health concerns about
polycarbonate plastic to this container.
We feel
that installation of filtration units in the home or commercial setting poses a
competitive threat to our business. To address this, we have
continued to develop our plumbed-in filtration business by completing a small
acquisition in this line of business in 2009 and actively offering it as an
alternative product.
In the
past five years, cheaper water coolers from offshore sources have become more
prevalent, making customer purchasing a more viable alternative to
leasing. Traditionally, the rental of water coolers for offices and
homes has been a very profitable business for us. As coolers have
become cheaper and more readily available at retail outlets, our cooler rental
revenue has declined. Although this rental revenue is very profitable
for us, it may continue to decline or become less profitable in the future as a
result of this relatively new form of competition.
As
discussed above, coffee is another significant component of our overall
sales. The growth of this product line has been driven by single
serve packages. Increased competition has developed for these
products, not only from other food and beverage distributors, but office
products distributors as well. In addition, retail and internet availability has
increased as well. Machines to brew these packages are different from
traditional machines and packages ideally need to be brewed in machines that
accommodate the specific package. The popularity of a certain machine
dictates what products are successful in the
marketplace. Consequently, our success, both from a sales and
profitability perspective, may be affected by our access to distribution rights
for certain products and machines and our decisions concerning which equipment
to invest in.
We
believe that it has become increasingly important to our competitive advantage
to decrease the impact of our business on the environment. We
traditionally use five gallon containers that are placed on coolers and are
reused many times. In recent years, we have taken additional steps to
“green” our business including:
·
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Completed
an extensive solar electricity generation installation in our Watertown
facility to supply a significant amount of the energy for that
facility.
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·
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Upgraded
the lighting in most of our facilities to high efficiency
lighting.
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·
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Instituted
no-idling and other driving policies in all of our
locations.
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·
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Upgraded
many of our older vehicles to new, more energy efficient
vehicles.
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Trademarks
We own
the trade names of the principal water brands that we sell, Vermont Pure Natural
Spring Water® and Crystal Rock®. We also own the Cool Beans® coffee
brand and own or have rights to other trade names that currently are not a
significant part of our business. Our trademarks as well as
label designs are, in general, registered with the United States Patent and
Trademark Office.
Government
Regulation
The
Federal Food and Drug Administration (FDA) regulates bottled water as a
“food.” Accordingly, our bottled water must meet FDA requirements of
safety for human consumption, of processing and distribution under sanitary
conditions and of production in accordance with the FDA “good manufacturing
practices.” To assure the safety of bottled water, the FDA has
established quality standards that address the substances that may be present in
water which may be harmful to human health as well as substances that affect the
smell, color and taste of water. These quality standards also require
public notification whenever the microbiological, physical, chemical or
radiological quality of bottled water falls below standard. The
labels affixed to bottles and other packaging of the water are subject to FDA
restrictions on health and nutritional claims for foods under the Fair Packaging
and Labeling Act. In addition, all drinking water must meet
Environmental Protection Agency standards established under the Safe Drinking
Water Act for mineral and chemical concentration and drinking water quality and
treatment that are enforced by the FDA.
We are
subject to the food labeling regulations required by the Nutritional Labeling
and Education Act of 1990. We believe we are in compliance with these
regulations.
We are
subject to periodic, unannounced inspections by the FDA. Upon
inspection, we must be in compliance with all aspects of the quality standards
and good manufacturing practices for bottled water, the Fair Packaging and
Labeling Act, and all other applicable regulations that are incorporated in the
FDA quality standards. We believe that we meet the current
regulations of the FDA, including the classification as spring
water. All of our plants and distribution locations are registered
with the FDA under the 2002 "Public Health Security and Bioterrorism
Preparedness and Response Act of 2002". Most recently, the FDA put into
effect the Bottled Water Microbial Rule to monitor water sources for E. coli
bacteria. We have been in compliance with the testing requirements
for this rule prior to and since its inception in December 2009.
We also
must meet state regulations in a variety of areas to comply with purity, safety,
and labeling standards. From time to time, our facilities and sources
are inspected by various state departments and authorities.
Our
product labels are subject to state regulation (in addition to the federal
requirements) in each state where the water products are sold. These
regulations set standards for the information that must be provided and the
basis on which any therapeutic claims for water may be made.
The
bottled water industry has a comprehensive program of
self-regulation. We are a member of the International Bottled Water
Association, or IBWA. As a member, our facilities are inspected
annually by an independent laboratory, the National Sanitation Foundation, or
NSF. By means of unannounced NSF inspections, IBWA members are
evaluated on their compliance with the FDA regulations and the association's
performance requirements, which in certain respects are more stringent than
those of the federal and various state regulations.
In recent
years, there has been an increasing amount of proposed legislative and executive
action in state and local governments that would ban the use of bottled water in
municipal buildings, enact local taxes on bottled water, and limit the sale by
municipalities of water supplies to private companies for
resale. Such regulation could adversely affect our business and
financial results. For additional information, see “Risk Factors”
below.
The laws
that regulate our activities and properties are subject to change. As
a result, there can be no assurance that additional or more stringent
requirements will not be imposed on our operations in the future. Although we
believe that our water supply, products and bottling facilities are in
substantial compliance with all applicable governmental regulations, failure to
comply with such laws and regulations could have a material adverse effect on
our business.
Employees
As of
January 15, 2010, we had 326 full-time employees and 16 part-time
employees. None of the employees belong to a labor
union. We believe that our relations with our employees are
good.
A
dditional Available
Information
Our
principal website is www.vermontpure.com. We make our annual,
quarterly and current reports, and amendments to those reports, available free
of charge on www.vermontpure.com, as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the Securities and
Exchange Commission (SEC). Reports of beneficial ownership of our
common stock, and changes in that ownership, by directors and officers on Forms
3, 4 and 5 are likewise available free of charge on our website.
The
information on our website is not incorporated by reference in this Annual
Report on Form 10-K or in any other report, schedule, notice or
registration statement filed with or submitted to the SEC.
The SEC
maintains an Internet site that contains reports, proxy and information
statements, and other information regarding issuers that file electronically at
www.sec.gov. You may also read and copy the materials we file with
the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Room 1580,
Washington, D.C. 20549. You may obtain information on the operation
of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
ITEM
1A. RISK FACTORS.
We
operate in a competitive business environment that is influenced by conditions
that are both controllable and beyond our control. These conditions
include, but are not limited to, the regional economy, monetary policy, and the
political and regulatory environment. The following summarizes
important risks and uncertainties that may materially affect our business in the
future.
Over
a period of years, we have borrowed substantial amounts of money to finance
acquisitions. If we are unable to meet our debt service obligations
to our senior and subordinated lenders, we would be in default under those
obligations, and that could hurt our business or even result in foreclosure,
reorganization or bankruptcy.
The
underlying loans are secured by substantially all of our assets. If
we do not repay our indebtedness in a timely fashion, our secured creditors
could declare a default and foreclose upon our assets, which would likely result
in harmful disruption to our business, the sale of assets for less than their
fully realizable value, and possible bankruptcy. We must generate
enough cash flow to service this indebtedness until maturity.
Fluctuations
in interest rates could significantly increase our expenses. We will
have significant interest expense for the foreseeable future, which in turn may
increase or decrease due to interest rate fluctuations. To partially
mitigate this risk, we have established fixed interest rates on 75% of our
outstanding senior term debt.
As a
result of our large amount of debt, we may be perceived by banks and other
lenders to be highly leveraged and close to our borrowing
ceiling. Until we repay some of our debt, our ability to access
additional capital may be limited. In turn, that may limit our
ability to finance transactions and to grow our business. In
addition, our senior credit agreement limits our ability to incur incremental
debt without our lender’s permission.
Our
senior credit agreement contains numerous covenants and restrictions that affect
how we conduct our business.
The
Baker family currently owns a majority of our voting stock and controls the
company. Such control affects our corporate governance, and could
also have the effect of delaying or preventing a change of control of the
company.
The Baker
family group, consisting of four current directors Henry Baker (Chairman
Emeritus), Peter Baker (CEO), John Baker (Executive Vice President) and Ross
Rapaport (Chairman), as trustee, together own a majority of our common
stock. Accordingly, these stockholders, acting together, can exert a
controlling influence over the outcome of matters requiring stockholder
approval, such as the election of directors, amendments to our certificate of
incorporation, mergers and various other matters. The concentration
of ownership could also have the effect of delaying or preventing a change of
control of the company.
As
permitted under the corporate governance rules of the NYSE Amex, we have, at the
direction of the Baker family group, elected “controlled company” status under
those rules. A controlled company is exempted from these NYSE Amex
corporate governance rules: (1) the requirement that a listed company
have a majority of independent directors, (2) the requirement that nominations
to the company’s board of directors be either selected or recommended by a
nominating committee consisting solely of independent directors, and (3) the
requirement that officers’ compensation be either determined or recommended by a
compensation committee consisting solely of independent directors. We
do not currently utilize exemption (3) as we have a compensation committee
consisting solely of three independent directors.
Our
success depends on the continued services of key personnel.
Our
continued success will depend in large part upon the expertise of our senior
management. Peter Baker, our Chief Executive Officer and President,
John Baker, our Executive Vice President, and Bruce MacDonald, our Chief
Financial Officer, Treasurer and Secretary, have entered into employment
agreements with Vermont Pure Holdings, Ltd. These “at will”
employment agreements do not prevent these employees from
resigning. The departure or loss of any of these executives
individually could have an adverse effect on our business and
operations.
The
personal interests of our directors and officers create a conflict.
As
mentioned above, the Baker family group owns a majority of our common
stock. In addition, in connection with the acquisition of Crystal
Rock Spring Water Company in 2000, we issued members of the Baker family group
12% subordinated promissory notes secured by all of our assets. The
current balance on these notes is approximately $13,500,000. We also
lease important facilities in Watertown and Stamford, Connecticut from Baker
family interests. These interests of the Baker family create various
conflicts of interest. Transactions between the Company and related
parties are subject to review and approval by the Audit Committee, which
consists entirely of independent directors.
We
face competition from companies with far greater resources than we have.
In addition, methods of competition in the distribution of home and office
refreshment products continue to change and evolve. If we are unable to
meet these changes, our business could be harmed.
We
operate in highly competitive markets. The principal methods of
competition in the markets in which we compete are distribution capabilities,
brand recognition, quality, reputation, and price. We have a
significant number of competitors, some of which have far greater resources than
us. Among our principal competitors are Nestlé Waters North America,
large regional brands owned by private groups, and local competitors in the
markets that we serve. Price reductions and the introduction of new
products by our competitors can adversely affect our revenues, gross margins,
and profits.
In
addition, the industry has been affected by the increasing availability of water
coolers in discount retail outlets. This has negatively impacted our
rental revenue stream in recent years as more customers choose to purchase
coolers rather than rent them. The reduction of rental revenue has
been somewhat offset by the increase in coolers that we sell but not to the
extent that rentals have declined. We do not expect retail sales to replace
rentals completely because we believe that the purchase option does not provide
the quality and service that many customers want. However, third
party retail cooler sales may continue to negatively impact our rental revenues
in the future.
The
bottled water industry is regulated at both the state and federal
level. If we are unable to continue to comply with applicable
regulations and standards in any jurisdiction, we might not be able to sell our
products in that jurisdiction, and our business could be seriously
harmed.
The FDA
regulates bottled water as a food. Our bottled water must meet FDA requirements
of safety for human consumption, labeling, processing and distribution under
sanitary conditions and production in accordance with FDA “good manufacturing
practices.” In addition, all drinking water must meet Environmental
Protection Agency standards established under the Safe Drinking Water Act for
mineral and chemical concentration and drinking water quality and treatment,
which are enforced by the FDA. We also must meet state regulations in
a variety of areas. These regulations set standards for approved water sources
and the information that must be provided and the basis on which any therapeutic
claims for water may be made. We have received approval for our
drinking water in Connecticut, Massachusetts, New Hampshire, New Jersey, New
York, Rhode Island and Vermont. However, we can give no assurance
that we will receive such approvals in the future.
Legislative
and executive action in state and local governments banning the use of municipal
funds for purchasing bottled water, enacting local taxes on bottled water or
water extraction, and restricting water withdrawal and usage rights from public
and private sources could adversely affect our business and financial
results.
Recent
initiatives have taken place in several major cities regarding bottled water,
principally the smaller sizes sold in stores to retail
consumers. Regulations have been proposed in some localities that
would ban the use of public funds to purchase bottled water and enact local
taxes on bottled water or water extraction, and restrict the withdrawal of water
from public and private sources. These actions are purportedly
designed to discourage the use of bottled water due in large part to concerns
about the environmental effects of producing and discarding large numbers of
plastic bottles. In developing these stories, local and national
media have reported on the growth of the bottled water industry and on the pros
and cons of consuming bottled water as it relates to solid waste disposal and
energy consumption in manufacturing as well as conserving the supply of water
available to the public.
We
believe that the adverse publicity associated with these reports is generally
aimed at the retail, small bottle segment of the industry that is now a minimal
part of our business, and that our customers can readily distinguish our
products from the retail bottles that are currently the basis for concern in
some areas. Our customers typically buy their water in reusable five
gallon containers that are placed on coolers and are reused many times and only
approximately 4% of our total sales is from water sold in single serve
packages. In addition, we continue to take steps to “green” our
business by means of solar electricity generation, high efficiency lighting,
no-idling and other driving policies, and the use of biodiesel.
While we
believe that to date we have not directly experienced any adverse effects from
these concerns, and that our products are sufficiently different from those
under scrutiny, there is no assurance that adverse publicity about any element
of the bottled water industry will not affect consumer behavior by discouraging
buyers from buying bottled water products generally. In that case,
our sales and other financial results could be adversely affected.
In
2009, Connecticut passed legislation setting a schedule to eventually prohibit
use of bisphenol A, in the packaging of food and beverage
products. Other jurisdictions which we operate in are considering
such legislation. Bisphenol A is contained in the three- and five- gallon
polycarbonate plastic bottles that we use to bottle our
water. Any significant change in perception by our customers or
immediate government regulation of polycarbonate plastic in food and beverage
products could adversely affect our operations and financial
results.
We feel
that scientific evidence suggests that polycarbonate plastic has been, and will
continue to be, a safe packing material for all consumers. National and
international organizations responsible for consumer safety, including the Food
and Drug Administration, have continued to recognize the safety of this
packaging. Nonetheless, media reports have prompted concern in our
marketplace among customers and potential customers.
To date,
this situation has not adversely affected our business. However, it is possible
that developments surrounding this issue could lead to adverse effects on our
business. Such developments could include:
·
|
Increased
publicity that changes perception regarding packaging that uses bisphenol
A, so that significant numbers of consumers stop purchasing products that
are packaged in polycarbonate plastic before we could identify and react
to the change.
|
·
|
The
emergence of new scientific evidence that proves polycarbonate plastic is
unsafe, or interpretations of existing evidence by regulatory agencies
that lead to prohibitions on the use of polycarbonate plastic as packaging
for consumable products faster than we could adapt to the
change.
|
·
|
Inability
of sellers of consumable products to find an adequate supply of
alternative packaging if polycarbonate plastic becomes an undesirable
package.
|
If such
events, or any of them, were to occur, our sales and operating results could be
materially adversely affected.
We have
begun offering PET plastic as an alternative bottle and have converted customers
with a concern about polycarbonate plastic to this
container. However, at this point, no assurance can be given that
this is an adequate solution if materially adverse developments such as those
noted above should occur.
We
depend upon maintaining the integrity of our water resources and manufacturing
process. If our water sources or bottling processes were contaminated for any
reason, our business would be seriously harmed.
Our
ability to retain customers and the goodwill associated with our brands is
dependent upon our ability to maintain the integrity of our water resources and
to guard against defects in, or tampering with, our manufacturing
process. The loss of integrity in our water resources or
manufacturing process could lead to product recalls and/or customer illnesses
that could significantly reduce our goodwill, market share and
revenues. Because we rely upon natural spring sites for sourcing some
of our water supply, acts of God, such as earthquakes, could alter the geologic
formation of the spring sites, constricting water flow.
In
addition, we do not own any of our water sources. Although we feel
the long term rights to our spring and municipal sources are well secured, any
dispute over these rights that resulted in prolonged disruption in supply could
cause an increase in cost of our product or shortages that would not allow us to
meet the market demand for our product.
Fluctuations
in the cost of essential raw materials and commodities, including fuel costs,
for the manufacture and delivery of our products could significantly impact our
business.
We rely
upon the raw material of polycarbonate, a commodity that is subject to
fluctuations in price and supply, for manufacturing our
bottles. Bottle manufacturers also use petroleum-based
products. Increases in the cost of petroleum will likely have an
impact on our bottle costs.
Our
transportation costs increase as the price of fuel rises. Because
trucks are used extensively in the delivery of our products, the rising cost of
fuel has impacted and can be expected to continue to impact the profitability of
our operations unless we are able to pass along those costs to our
customers. Further, limitations on the supply or availability of fuel
could inhibit our ability to get raw materials and distribute our products,
which in turn could have an adverse affect on our business. In 2008,
we experienced substantial increases in fuel prices as a result of market
influences. However, we were able to establish a fuel adjustment charge
for our customers that covered the incremental rising cost of fuel. In
2009, prices substantially decreased, but again our aggregate fuel adjustment
charge revenue, although it declined, offset the incremental fuel cost over what
we considered our “base” level for fuel cost. However, the risk remains
that we may not be able to use fuel price adjustments to cover the cost of fuel
increases in a volatile market for petroleum products, which could adversely
affect our profitability.
A
significant portion of our sales, 24% in fiscal year 2009, is derived from
coffee. The supply and price of coffee may be limited by climate, by
international political and economic conditions, and by access to
transportation, combined with consumer demand. An increase in the
wholesale price of coffee could result in a reduction in our
profitability. If our ability to purchase coffee were impaired by a
market shortage, our sales might decrease, which would also result in a
reduction of profitability.
We
have a limited amount of bottling capacity. Significant interruptions
of our bottling facilities could adversely affect our business.
We own
three bottling facilities, and also contract with third parties, to bottle our
water. If any of these facilities were incapacitated for an extended
period of time, we would likely have to relocate production to an alternative
facility. The relocation and additional transportation could increase
the cost of our products or result in product shortages that would reduce
sales. Higher costs and lower sales would reduce
profitability.
We
rely upon a single software vendor that supplies the software for our route
accounting system.
Our route
accounting system is essential to our overall administrative function and
success. An extended interruption in servicing the system could
result in the inability to access information. Limited or no access
to this information would likely inhibit the distribution of our products and
the availability of management information, and could even affect our compliance
with public reporting requirements. Our supplier is Innovations in
Software, or IIS, which has a limited number of staff that has proprietary
information pertaining to the operation of the software. Changes in
personnel or ownership in the firm might result in disruption of
service. Such changes would be addressed by retaining a new vendor to
service the existing software or purchasing a new system. But, any of these
consequences could have a material adverse impact on our operations and
financial condition.
Our
customer base is located in New England, New York and New Jersey. If
there were to be a material decline in the economy in these regions, our
business would likely be adversely affected.
Essentially
all of our sales are derived from New England, New York and New
Jersey. A significant negative change in the economy of any of these
regions, changes in consumer spending in these regions, or the entry of new
competitors into these regional markets, among other factors, could result in a
decrease in our sales and, as a result, reduced profitability.
Our
business is seasonal, which may cause fluctuations in our stock
price.
Historically,
the period from June to September represents the peak period for sales and
revenues due to increased consumption of beverages during the summer months in
our core Northeastern United States markets. Warmer weather in our
geographic markets tends to increase water sales, and cooler weather tends to
decrease water sales. To the extent that our quarterly results are
affected by these patterns, our stock price may fluctuate to reflect
them.
Acquisitions
may disrupt our operations or adversely affect our results
We
regularly evaluate opportunities to acquire other businesses. The
expenses we incur evaluating and pursuing acquisitions could have a material
adverse effect on our results of operations. If we acquire a
business, we may be unable to manage it profitably or successfully integrate its
operations with our own. Moreover, we may be unable to realize the
financial, operational, and other benefits we anticipate from these
acquisitions. Competition for future acquisition opportunities in our
markets could increase the price we pay for businesses we acquire and could
reduce the number of potential acquisition targets. Further,
acquisitions may involve a number of special financial and business risks, such
as:
·
|
charges
related to any potential acquisition from which we may
withdraw;
|
·
|
diversion
of our management’s time, attention, and
resources;
|
·
|
decreased
utilization during the integration
process;
|
·
|
loss
of key acquired personnel;
|
·
|
increased
costs to improve or coordinate managerial, operational, financial, and
administrative systems including compliance with the Sarbanes-Oxley Act of
2002;
|
·
|
dilutive
issuances of equity securities, including convertible debt
securities;
|
·
|
the
assumption of legal liabilities;
|
·
|
amortization
of acquired intangible assets;
|
·
|
potential
write-offs related to the impairment of
goodwill;
|
·
|
difficulties
in integrating diverse corporate cultures;
and
|
·
|
additional
conflicts of interests.
|
We
are required to be in full compliance with Section 404 of the Sarbanes-Oxley Act
as of our fiscal year ending October 31, 2010. Under current
regulations, the financial cost of compliance with Section 404 is
significant. Failure to achieve and maintain effective internal
control in accordance with Section 404 could have a material adverse effect on
our business and our stock price.
In 2010,
we will be in the process of implementing the final requirements of Section 404
of the Sarbanes-Oxley Act of 2002, which requires management to assess the
effectiveness of our internal controls over financial reporting, include an
assertion in our annual report as to the effectiveness of its controls, and
include a report on the effectiveness by our independent
auditors. The cost to comply with this law will affect our net income
adversely. In addition, management’s effort and cost are no assurance
that our independent auditors will attest to the effectiveness of our internal
controls in its report as required by the law. If that is the case,
the resulting report from our auditors may have a negative impact on our stock
price. As of January 14, 2010, the U.S. House of Representatives had
passed legislation, the “Wall Street Reform and Consumer Protection Act of
2009,” that would permanently exempt small public companies like us
from the requirement that our auditor attest to the effectiveness of our
internal controls. However, there is no assurance that the Senate
will pass the same bill or that it will become law.
ITEM
1B.
|
UNRESOLVED
STAFF COMMENTS.
|
As part
of our Home and Office delivery operations, we have entered into or assumed
various lease agreements for properties used as distribution points and office
space. The following table summarizes these arrangements and includes
our bottling facilities:
Location
|
|
Lease expiration
|
|
Sq. Ft.
|
|
|
Annual Rent
|
|
Williston,
VT
|
|
June
2014
|
|
|
10,720
|
|
|
$
|
81,686
|
|
Southborough,
MA
|
|
December
2013
|
|
|
15,271
|
|
|
$
|
114,533
|
|
Bow,
NH
|
|
May
2012
|
|
|
12,800
|
|
|
$
|
57,000
|
|
Rochester,
NY
|
|
January
2012
|
|
|
15,000
|
|
|
$
|
60,000
|
|
Buffalo,
NY
|
|
September
2010
|
|
|
10,000
|
|
|
$
|
62,500
|
|
Syracuse,
NY
|
|
December
2010
|
|
|
10,000
|
|
|
$
|
38,333
|
|
Halfmoon,
NY
|
|
October
2011
|
|
|
22,500
|
|
|
$
|
148,500
|
|
Plattsburgh,
NY
|
|
May
2010
|
|
|
5,000
|
|
|
$
|
24,000
|
|
Watertown,
CT
|
|
October
2016
|
|
|
67,000
|
|
|
$
|
414,000
|
|
Stamford,
CT
|
|
October
2010
|
|
|
22,000
|
|
|
$
|
248,400
|
|
White
River Junction, VT
|
|
May
2014
|
|
|
15,357
|
|
|
$
|
77,706
|
|
Watertown,
CT
|
|
May
2013
|
|
|
15,000
|
|
|
$
|
55,715
|
|
Groton,
CT
|
|
June
2014
|
|
|
7,500
|
|
|
$
|
56,375
|
|
Canton,
MA
|
|
January
2015
|
|
|
23,966
|
|
|
$
|
143,796
|
|
All
locations are used primarily for warehousing and distribution and have limited
office space for location managers and support staff. The exception
is the Watertown, Connecticut location, which has a substantial amount of office
space for sales, accounting, information systems, customer service, and general
administrative staff.
In 2000,
we entered into 10-year lease agreements to lease the buildings that are
utilized for operations in Watertown and Stamford,
Connecticut. Subsequently, on August 29, 2007, we finalized an
amendment to our existing lease for the Watertown facility. The lease
was scheduled to expire in October, 2010. Annual rent payments for
the remainder of the original lease were scheduled to be $414,000
annually.
The
amended lease extends the term of the lease six years, to 2016, with an option
to extend it an additional five years. Annual lease payments over the
extended term of the lease are as follows:
Years
1-2 $452,250
Years
3-4 $461,295
Years
5-6 $470,521
The rent
during the extended option term is to be negotiated by the parties or, in the
event there is no agreement, by appraisers selected by
them. Otherwise the lease remained substantially
unchanged.
The
principal reason for seeking to amend the lease was our decision to construct
solar panels on the roof of the facility, in order to generate a portion of our
electricity needs more cheaply than we currently pay to purchase that
electricity. We determined that the economic payback period of the
solar panels would exceed the remaining term of the lease unless we sought and
obtained an amendment extending the term of the lease.
After
finalizing the lease amendment, we entered into agreements for the construction
of the solar panels as well as grant agreements from the State of Connecticut to
subsidize the project in part. We believe that certain federal and
state tax credits will also help to reduce the effective cost of the
project.
The
landlord for the buildings in Stamford and Watertown, Connecticut is a trust
with which Henry, John, and Peter Baker, and Ross Rapaport are
affiliated. We believe that the rent charged under these leases is
not more than fair market rental value.
We expect
that these facilities will meet our needs for the next several
years.
ITEM
3.
|
LEGAL
PROCEEDINGS.
|
On May 1,
2006, the Company filed a lawsuit in the Superior Court Department, County of
Suffolk, Massachusetts, alleging malpractice and other wrongful acts against
three law firms that had been representing the Company in litigation involving
Nestlé Waters North America, Inc.: Hagens Berman Sobol Shapiro LLP, Ivey &
Ragsdale, and Cozen O’Connor. The case is Vermont Pure Holdings, Ltd. vs. Cozen
O'Connor et al., Massachusetts Superior Court CA No. 06-1814.
Until May
2, 2006, when the Company terminated their engagement, the three defendant law
firms represented the Company in litigation in federal district court in
Massachusetts known as Vermont Pure Holdings, Ltd. vs. Nestlé Waters North
America, Inc. (the Nestlé litigation). The Company filed the Nestlé litigation
in early August 2003.
The
Company’s lawsuit alleges that the three defendant law firms wrongfully
interfered with, and/or negligently failed to take steps to obtain, a proposed
June 2003 settlement with Nestlé. The complaint includes counts involving
negligence, breach of contract, breach of the implied covenant of good faith and
fair dealing, breach of fiduciary duty, tortious interference with economic
relations, civil conspiracy, and other counts, and seeks declaratory relief and
compensatory and punitive damages.
In July
2006, certain of the defendants filed a counterclaim against the Company seeking
recovery of their fees and expenses in the Nestlé litigation. In August 2007,
certain of the defendants filed a counterclaim against the Company that includes
an abuse of process count in which it is alleged that our claims against them
are frivolous and were not advanced in good faith, as well as a quantum meruit
count in which these defendants allege that their services were terminated
wrongfully and in bad faith and seek approximately $2.2 million in
damages.
Discovery
of fact witnesses and expert witnesses has been completed. In September 2008,
the defendants in the lawsuit filed summary judgment motions seeking dismissal
of the Company’s claims in their entirety, which the Company opposed. The
Superior Court Judge denied these motions in a ruling dated December 26,
2008.
On July
31, 2009, the Company reached a settlement with all defendants in the action
other than Cozen O’Connor and a former partner in that firm, pursuant to which
mutual releases have been executed. The Company received a one-time payment of
$3 million which has been reflected in fiscal year 2009 as miscellaneous
income.
An
evidentiary hearing took place between October 1 and October 7, 2009, and
certain matters relating to that hearing are currently under advisement with the
Court. The Court has set a tentative trial date of March 4, 2010. Management
intends to pursue the Company’s remaining claims, and to the extent of the
counterclaims asserted against the Company, to defend the Company
vigorously.
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS.
|
No matter
was submitted to a vote of security holders during the quarter ended October 31,
2009.
PART
II
ITEM
5.
|
MARKET
FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES.
|
Our
Common Stock is traded on the NYSE Amex under the symbol VPS. The
table below indicates the range of the high and low daily closing prices per
share of Common Stock as reported by the exchange.
Fiscal Year Ended
October 31, 2009
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
First
Quarter
|
|
$
|
1.13
|
|
|
$
|
.60
|
|
Second
Quarter
|
|
$
|
.75
|
|
|
$
|
.34
|
|
Third
Quarter
|
|
$
|
1.41
|
|
|
$
|
.54
|
|
Fourth
Quarter
|
|
$
|
.83
|
|
|
$
|
.59
|
|
Fiscal Year Ended
October 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
1.72
|
|
|
$
|
1.38
|
|
Second
Quarter
|
|
$
|
1.60
|
|
|
$
|
1.36
|
|
Third
Quarter
|
|
$
|
1.41
|
|
|
$
|
1.27
|
|
Fourth
Quarter
|
|
$
|
1.41
|
|
|
$
|
.94
|
|
The last
reported sale price of our Common Stock on the NYSE Amex on January 15, 2010 was
$.54 per share.
As of
that date, we had 408 record owners and believe that there were approximately
2,000 beneficial holders of our Common Stock.
No
dividends have been declared or paid to date on our Common Stock. Our
senior credit agreement prohibits us from paying dividends without the prior
consent of the lender. It is unlikely that we will pay dividends in
the foreseeable future.
Issuer
Purchases of Equity Securities
The
following table summarizes the stock repurchases, by month, that were made
during the fourth quarter of the fiscal year ended October 31,
2009.
Period
|
|
Total
Number of Shares
Purchased
|
|
|
Average
Price
Paid per Share
|
|
|
Total
Number of Shares Purchased as Part of Publicly Announced
Program (1)
|
|
|
Maximum
Number of Shares that May Yet be Purchased Under the
Program
(1)
|
|
August
1-31
|
|
|
0
|
|
|
$
|
-
|
|
|
|
0
|
|
|
|
168,702
|
|
September
1-30
|
|
|
76,700
|
|
|
$
|
.71
|
|
|
|
76,700
|
|
|
|
92,002
|
|
October
1-31
|
|
|
0
|
|
|
$
|
-
|
|
|
|
0
|
|
|
|
92,002
|
|
Total
|
|
|
76,700
|
|
|
$
|
.71
|
|
|
|
76,700
|
|
|
|
|
|
(1)
|
On
July 16, 2008 we announced a program to repurchase up to 250,000 shares of
our common stock. There is no expiration date for the plan to
repurchase additional shares and the share limit may not be
reached.
|
ITEM
7.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
|
The
following Management's Discussion and Analysis (MD&A) is intended to help
the reader understand our company. The MD&A should be read in
conjunction with our consolidated financial statements and the accompanying
notes. This overview provides our perspective on the individual sections of the
MD&A, as well as a few helpful hints for reading these pages. The
MD&A includes the following sections:
§
|
Business
Overview
—
a brief
description of fiscal year 2009.
|
§
|
Results of Operations
—
an analysis of our consolidated results of operations for the two years
presented in our consolidated financial
statements.
|
§
|
Liquidity and Capital
Resources
— an analysis of cash flows, sources and uses of cash,
and contractual obligations and a discussion of factors affecting our
future cash flow.
|
§
|
Critical Accounting
Policies
— a discussion of accounting policies that require
critical judgments and estimates. Our significant accounting policies,
including the critical accounting policies discussed in this section, are
summarized in the notes to the accompanying consolidated financial
statements.
|
Business
Overview
We were
profitable in fiscal year 2009. This was an improvement over the
substantial loss that we experienced in fiscal year 2008. However, in our fiscal
year ended October 31, 2008, we experienced goodwill impairment (a non-cash
charge) in the amount of $22,359,000, which materially reduced our income from
continuing operations and net income. At October 31, 2008, the
valuation by which we measure goodwill impairment was significantly affected by
the lower value of our stock price which, among other things, was affected by
general market conditions. Impairment of goodwill does not affect the
Company’s liquidity or indicate its profitability prospects in the
future. Nevertheless, it was a substantial component of our loss from
operations of $15,862,000 and net loss of $19,836,000. But for the
impairment of goodwill, all of those line items would have shown income, not
losses.
Fiscal
2009 results were favorably impacted by a one-time legal settlement of
$3,000,000. Without consideration of this and the goodwill impairment charge in
2008, the financial performance of our business for fiscal year 2009 declined
when compared to fiscal year 2008. The decline was primarily a result of
decreased sales and increased cost of sales and the resultant decrease in gross
profit and was not offset by lower operating and interest costs. The
decrease in sales was primarily a result of poor general economic conditions in
our marketplace and a reduction of fuel adjustment charges which were offset by
lower fuel costs. Product margins decreased, as a percentage of
sales, as a result of the product mix skewing more toward single serve coffee
and increased competition.
We made a
mid-year acquisition that approximately doubles the size of our sales in the
Boston market. Throughout the second half of fiscal 2009 we
integrated our new and existing businesses in the market. This created a larger
market presence for our Vermont Pure® spring water brand, coffee, and other
products.
The
generally slower business due to the overall softening of the economy was
evident in each of our fiscal quarters. The recessionary economic
environment has affected the sales of our more profitable products, water and
cooler rentals, the most. Our single serve coffee business grew this
fiscal year over last year but these products are less profitable than our
traditional products. In order to offset the decrease in
profitability, we have taken action to reduce our labor, product, selling and
administrative costs. We will continue to explore new and existing
distribution channels and new products in an effort to identify sales
opportunities.
Results
of Operations
Fiscal
Year Ended October 31, 2009 Compared to Fiscal Year Ended October 31,
2008
Sales
Sales for
fiscal year 2009 were $66,126,000 compared to $69,237,000 for 2008, a decrease
of $3,111,000 or 4%. Sales attributable to acquisitions in fiscal
year 2009 were $2,209,000. Net of the acquisitions, sales decreased
8%.
The
comparative breakdown of sales is as follows:
Product Line
|
|
2009
(in
000’s $)
|
|
|
2008
(in
000’s $)
|
|
|
Difference
(in
000’s $)
|
|
|
% Diff.
|
|
Water
|
|
$
|
27,870
|
|
|
$
|
29,250
|
|
|
$
|
(1,380
|
)
|
|
|
(5
|
%)
|
Coffee
and Related
|
|
|
21,490
|
|
|
|
21,197
|
|
|
|
293
|
|
|
|
1
|
%
|
Equipment
Rental
|
|
|
8,903
|
|
|
|
8,909
|
|
|
|
(6
|
)
|
|
|
-
|
|
Other
|
|
|
7,863
|
|
|
|
9,881
|
|
|
|
(2,018
|
)
|
|
|
(20
|
%)
|
Total
|
|
$
|
66,126
|
|
|
$
|
69,237
|
|
|
$
|
3,111
|
|
|
|
(4
|
%)
|
Water
– The aggregate
decrease in water sales was a result of a 1% decrease in price and a 4% decrease
in volume. The increase in price was attributable to general
increases in list prices. We believe the decrease in the amount of water sold
was attributable to the weaker economy.
Volume was
favorably impacted by acquisitions completed during the year. Sales increased 5%
as a result of these acquisitions. So, net of acquisitions, total
water sales decreased 9% in fiscal year 2009.
Coffee and Related
Products
– The small increase in sales was primarily due to the growth of
single serve coffee, which grew 14% to $10,452,000 in fiscal year 2009 compared
to $9,184,000 in fiscal year 2008. Otherwise, traditional coffee
products and related products decreased 8% in fiscal year 2009 compared to the
year earlier. Acquisitions accounted for less than 1% of the growth
in this category.
Equipment Rental
–
Equipment rental revenue decreased slightly in fiscal year 2009 compared to the
prior year primarily as a result of a 1% decrease in the placements, including
placements acquired during the year, of equipment that was almost offset by a
similar increase in average rental price. Acquisitions increased
equipment rental 4% in fiscal year 2009 compared to 2008.
Other
– The
substantial decrease in other revenue is reflective of fees that are charged as
a result of higher energy costs for delivery and freight, raw materials, and
bottling operations. These charges decreased to $1,448,000 in fiscal
year 2009 from $3,207,000 in 2008 after experiencing an increase the prior year
when energy costs peaked. Sales of other products such as
single-serve drinks, cups, and vending items, in aggregate, decreased 1% in 2009
compared to last year. We believe the decrease in the amount of these
products was attributable to the weaker economy.
Gross Profit/Cost of Goods
Sold
Gross
profit decreased $3,605,000, or 9% in fiscal year 2009 compared to 2008, from
$38,910,000 to $35,305,000. As a percentage of sales, gross profit decreased to
53% of sales from 56% for the respective period. The decrease in
gross profit was attributable to lower sales and a change in product sales
mix. Lower overall sales reduced the absolute dollar amount of gross
profit. This included lower fuel adjustment charges, which are mostly offset by
lower fuel costs in selling, general, and administrative expenses, and therefore
adversely affecting gross profit. Increased costs that we were not able to pass
onto customers and a change in the product mix of sales, influenced primarily by
higher volume growth of single serve coffee, resulted in a lower gross profit
margin, as a percentage of sales.
Cost of
goods sold includes all costs to bottle water, costs of purchasing and receiving
products for resale, including freight, as well as costs associated with product
quality, warehousing and handling costs, internal transfers, and the repair and
service of rental equipment, but does not include the costs of distributing our
product to our customers. We include distribution costs in selling,
general, and administrative expense, and the amount is reported
below. Other companies may include distribution costs in their cost
of goods sold, in which case, on a comparative basis, such other companies may
have a lower gross margin as a result.
Income (Loss) from
Operations/Operating Expenses
The
income from operations was $4,385,000 in 2009 compared to a loss from operations
of $15,862,000 in 2008, an improvement of $20,247,000. The most
significant component of this increase was goodwill impairment of $22,359,000 in
2008, which did not recur in 2009. There was no such impairment in
2009. Total operating expenses decreased to $30,920,000 for the year,
from $54,773,000 the prior year, a decrease of $23,853,000. Once
again, the most significant contributor to the higher operating expenses in 2008
was the impairment charge of $22,359,000 which did not occur in
2009. Net of impairment, operating expenses decreased. The
decrease was a result of lower commission based compensation expenses due to
lower sales as well as decreased professional fees.
Selling,
general and administrative (SG&A) expenses were $28,599,000 in fiscal year
2009 and $30,132,000 in 2008, a decrease of $1,533,000, or 5%. Of
total SG&A expenses:
·
|
Route
sales costs decreased 5%, or $737,000, to $13,490,000 in fiscal year 2009
from $14,227,000 in fiscal year 2008, primarily related to lower labor
costs on commission-based sales due to decreased sales and lower fuel
costs. Included as a component of route sales costs are total
direct distribution related costs which decreased $741,000, or 5%, to
$12,785,000 in fiscal year 2009 from $13,526,000 in fiscal year 2008
primarily as a result of lower fuel
costs;
|
·
|
Selling
costs increased 2%, or $69,000, to $2,894,000 in fiscal year 2009 from
$2,825,000 in fiscal year 2009
as a
result of computer software implementation costs
and;
|
·
|
Administrative
costs decreased 7%, or $865,000, to $12,215,000 in fiscal year 2009 from
$13,080,000 in fiscal year 2008, as a result of lower labor costs,
professional fees related to compliance and litigation, and non recurrence
of a provision for bad debts of $532,043 on notes receivable in
2008.
|
Advertising
expenses decreased to $1,138,000 in fiscal year 2009 from $1,530,000 in 2008, a
decrease of $392,000, or 26%. The decrease in advertising costs is primarily
related to a decrease in Yellow Page advertising due to a reduction of exposure
in that medium in favor of increased internet advertising which cost less during
the year.
Amortization
increased to $1,113,000 in fiscal year 2009 from $888,000 in
2008. The increase of $225,000 in amortization is attributable to
intangible assets that were acquired as part of acquisitions in fiscal year
2009.
We had a
loss from the sale of miscellaneous assets in fiscal year 2009 of $70,000
compared to a gain on the sale of assets of $136,000 in fiscal year 2008. The
sales were of miscellaneous assets no longer used in the course of
business.
We
conducted an assessment of goodwill as of October 31, 2009 and 2008, using
essentially the same step one valuation process for both years. We
concluded that goodwill was not impaired as of October 31, 2009 since the
assessment concluded that the Company’s fair value exceeded the Company’s equity
at the valuation date. In fiscal year 2008, we incurred an impairment
loss of $22,359,000. The impairment loss was a non-cash charge and
was a result of the assessment of our goodwill as of October 31,
2008. Goodwill had been recorded for acquisitions from 1996 through
2008. Our 2008 assessment concluded that goodwill on our books was
impaired when we determined the Company’s fair value was less than the Company’s
equity as of the valuation date. In determining the amount of the
impairment, we followed a two step approach. In step one, and in determining the
fair value of the Company (the reporting unit), we used a weighted average of
three different market approaches as shown below:
|
|
Percentages for Weighted
Average
|
|
|
|
2009
|
|
|
2008
|
|
Quoted
stock price
|
|
|
30
|
%
|
|
|
30
|
%
|
Value
comparisons to publicly traded companies (see note1)
|
|
|
10
|
%
|
|
|
20
|
%
|
Discounted
net cash flow
|
|
|
60
|
%
|
|
|
50
|
%
|
We
believe that this approach provided a reasonable estimation of the value of the
Company and took into consideration our thin trading volume (which reflects, in
part, the fact that the Company is a “controlled company” under the governance
rules of the NYSE Amex), market comparable valuations, and expected results of
operations. We compared the resulting estimated fair value to the equity value
of the Company as of October 31, 2008 and determined that there was an
impairment of goodwill. In step two, we then allocated the estimated fair value
to all of the assets and liabilities of the Company (including unrecognized
intangible assets) as if the Company had been acquired in a business combination
and the estimated fair value was the price paid. We then recognized impairment
in the amount by which the carrying value of goodwill exceeded the implied value
of goodwill as determined in this allocation.
1 These
were the companies used in the year marked:
Company Name
|
Exchange
|
Symbol
|
2009
|
2008
|
Coca-Cola
Bottling Co., Consolidated
|
NYSE
|
COKE
|
X
|
X
|
Farmer
Bros. Co.
|
NASDAQ
|
FARM
|
X
|
X
|
Green
Mountain Coffee Roasters, Inc.
|
NASDAQ
|
GMCR
|
X
|
X
|
Hansen
Natural, Corp.
|
NASDAQ
|
HANS
|
X
|
X
|
Coca-Cola
Enterprises, Inc.
|
NYSE
|
CCE
|
X
|
X
|
National
Beverage Corp.
|
NASDAQ
|
FIZZ
|
X
|
X
|
PepsiAmericas,
Inc.
|
NYSE
|
PAS
|
|
X
|
Pepsi
Bottling Group, Inc.
|
NYSE
|
PBG
|
|
X
|
We
believe that the impairment was primarily the result of a decline in the quoted
market prices of our stock at October 31, 2008 below our book carrying value,
and was not due to any changes in our core business. There was no event or
change in circumstance that would more likely than not reduce the fair value of
our underlying net assets below their carrying amount prior to the annual
impairment test.
Other Income and Expense,
Income Taxes, and (Loss) Income from Operations
Interest
expense was $2,619,000 for fiscal year 2009 compared to $3,005,000 for fiscal
year 2008, a decrease of $386,000. The decrease is attributable to
lower outstanding debt, on average, and lower variable interest
rates.
Income
before income taxes in fiscal year 2009 was $4,766,000, compared to a loss
before income taxes in fiscal year 2008 of $18,867,000, an improvement of
$23,633,000. As noted above, the most significant items in
reconciling the improvement are the $3,000,000 legal settlement received in 2009
and goodwill impairment of $22,359,000 in 2008.
Aside from those two
items, operating results declined as a result of lower sales and gross profit
that was not completely offset by lower operating and interest
expenses. The tax expense for fiscal year 2009 was $1,746,000
compared to $969,000 for fiscal year 2008 and resulted in an effective tax rate
of 37% in 2009 and (5%) in 2008. The increase in the effective tax rate from
2008 to 2009 was a result of a lower effective tax rate in 2008 due to tax
credits for the installation of solar electricity generating equipment during
fiscal year 2008.
The negative
tax rate in 2008 is attributable to the exclusion of the impairment loss from
the determination of taxable income. In addition to the effective tax rate being
impacted by the affect of expected tax credits for the installation of solar
electricity generating equipment during fiscal year 2008 it was also affected by
a bad debt allowance set up for the write off of the notes receivable of
$532,043 referenced above. Our total effective tax rate is a
combination of federal and state rates for the states in which we
operate.
Net Income
(Loss)
The net
income in fiscal year 2009 was $3,020,000 compared to a net loss of
$(19,836,000) in 2008, an improvement of $22,856,000. As noted above,
the most significant items when considering the improvement are the $3,000,000
legal settlement received in 2009 and goodwill impairment of $22,359,000 in
2008. Net income (loss) was completely attributable to continuing
operations.
Based on
the weighted average number of shares of Common Stock outstanding of 21,526,000
(basic and diluted), income per share in fiscal year 2009 was $.14 per
share. This was an increase of $1.06 per share from fiscal year 2008,
when the weighted average number of shares of Common Stock outstanding was
21,564,000 (basic and diluted) and we had net loss of $(.92) per
share.
The fair
value of our swaps decreased $194,000 during fiscal year 2009 compared to a
decrease of $422,000 in 2008. This resulted in unrealized losses of $119,000 and
$263,000, net of taxes, respectively, for the fiscal years ended October 31,
2009 and 2008. The decrease during the year has been recognized as an
adjustment to net income (loss) to arrive at comprehensive income (loss) as
defined by the applicable accounting standards. Further, the
cumulative adjustment over the life of the instrument has been recorded as a
current liability and reflected as accumulated other comprehensive loss, net of
deferred taxes in the equity section on our consolidated balance
sheet.
Liquidity
and Capital Resources
As of
October 31, 2009, we had working capital of $4,088,000 compared to $3,103,000 as
of October 31, 2008, an increase of $985,000. The increase in working
capital was primarily attributable to the increase in net income in fiscal year
2009, which benefited from the legal settlement noted above. Net cash provided
by operating activities increased $2,740,000 to $9,261,000 in 2009 from
$6,521,000 in 2008. In addition to the increase in net income, the increase was
attributable to a significant tax refund for 2008 received in 2009.
We use
cash provided by operations to repay debt and fund capital
expenditures. In fiscal year 2009, we used $3,722,000 for scheduled
repayments of our term debt. In addition, we used $500,000 to pay down a portion
of a subordinated note. We also used $2,276,000 for capital
expenditures. Capital expenditures were substantially higher for the same period
last year because of $722,000 expended on our solar electricity generation
project. We spent less for coolers, brewers, and racks related to
home and office distribution in 2009 compared to 2008 as a result of lower
demand for rental units. We expect to increase our spending for bottles in the
next year as we convert our polycarbonate bottles to PET plastic. We
also expect to spend up to $1,500,000 next year on the conversion.
During
fiscal year 2009, we borrowed $2,500,000 to complete an acquisition and $800,000
to fund capital expenditures and pay down subordinated debt from our acquisition
line of credit. As of October 31, 2009, we had outstanding balances of
$13,542,000 on our term loan, $4,300,000 on our $10,000,000 acquisition line of
credit, and no balance on our $6,000,000 revolving line of credit with Bank of
America. In addition, there was an outstanding letter of credit for
$1,583,000 issued against our revolving line of credit. As of October
31, 2009, there was $5,700,000 and $4,417,000 available on the acquisition and
revolving lines of credit, respectively. As of October 31, 2009, we had
$13,500,000 of debt subordinated to our senior credit facility.
As of
October 31, 2009, we had an interest rate swap agreement with Bank of America in
effect. The intent of the instrument is to fix the interest rate on
75% of the outstanding balance on the Term Loan as required by the credit
facility. The swap fixes the interest rate for the swapped amount at
6.62% (4.87% plus the applicable margin of 1.75%). As of October 31, 2009, we
had approximately $7,700,000 million of debt subject to variable interest
rates. Under the credit facility with Bank of America, interest is
paid at a rate of LIBOR plus a margin of 1.75% on term debt and 1.50% on the
line of credit resulting in variable interest rates of 2.00% and 1.75%,
respectively, at that date.
Our
lines of credit mature on April 5, 2010. On that date, any balance on the
acquisition line converts to a term loan with equal annual installments payable
over the next five years. Any balance on the revolving line will be
due and payable on April 5, 2010. We are currently negotiating to
renew these facilities. If we are unable to negotiate acceptable
renewal terms, and no alternative funding is available, we may experience a
material adverse financial impact.
2.
Our
credit facility requires that we be in compliance with certain financial
covenants at the end of each fiscal quarter. The covenants include
senior debt service coverage as defined of greater than 1.25 to 1, total debt
service coverage as defined of greater than 1 to 1, and senior debt to EBITDA as
defined of no greater than 2.5 to 1. As of October 31, 2009, we were
in compliance with all of the financial covenants of our credit facility and we
expect to be in compliance in the foreseeable future.
We used
$86,848 of cash to purchase shares of our common stock on the open market during
fiscal year 2009.
The net
deferred tax liability at October 31, 2009 represents temporary timing
differences, primarily attributable to depreciation and amortization, between
book and tax calculations.
We have used all of our
federal net operating loss carryforwards and will have to fund our tax
liabilities with cash in the current fiscal year and in the future.
In
addition to our senior and subordinated debt commitments, we have significant
future cash commitments, primarily in the form of operating leases that are not
reported on the balance sheet. These operating leases are described
in Note 17 to our Audited Consolidated Financial Statements.
The
following table sets forth our contractual commitments as of October 31,
2009:
|
|
Payment due by Period
|
|
Contractual Obligations
|
|
Total
|
|
|
2010
|
|
|
|
2011-2012
|
|
|
|
2013-2014
|
|
|
After 2014
|
|
Debt
|
|
$
|
31,342,000
|
|
|
$
|
3,680,000
|
|
|
$
|
21,720,000
|
|
|
$
|
5,942,000
|
|
|
$
|
-
|
|
Interest
on Debt (1)
|
|
|
6,504,000
|
|
|
|
2,305,000
|
|
|
|
4,048,000
|
|
|
|
151,000
|
|
|
|
-
|
|
Operating
Leases
|
|
|
11,798,000
|
|
|
|
3,358,000
|
|
|
|
4,721,000
|
|
|
|
2,727,000
|
|
|
|
992,000
|
|
Total
|
|
$
|
49,644,000
|
|
|
$
|
9,343,000
|
|
|
$
|
30,489,000
|
|
|
$
|
8,820,000
|
|
|
$
|
992,000
|
|
(1) Interest
based on 75% of outstanding senior debt at the hedged interest rate discussed
above, 25% of outstanding senior debt at a variable rate of 2.00%, and
subordinated debt at a rate of 12%.
As of the
date of this Annual Report on Form 10-K, we have no other material contractual
obligations or commitments.
Inflation
has had no material impact on our performance.
3.
Factors Affecting Future
Cash Flow
Generating
cash from operating activities and access to credit is integral to the success
of our business. We continue to generate cash from operating
activities to service scheduled debt repayment and fund capital
expenditures. In addition, we have borrowed from our acquisition line
of credit for capital expenditures and acquisitions. We also lease a
significant amount of our vehicles. Our current revolving and
acquisition lines of credit mature in April 2010.
Recent
adverse economic conditions nationally have negatively impacted many businesses
revenue and profitability and severely restricted credit
availability. We experienced the effect of this environment
throughout fiscal year 2009. We do not feel this has materially jeopardized our
cash flow or our credit standing but we expect that it will continue into
2010. Like most businesses, we are taking steps to preserve cash flow
but no assurance can be given that the future economic environment will not
adversely affect our cash flow and results of operations or that we will have
adequate access to credit.
4.
Factors Affecting Quarterly
Performance
Our
business and financial trends vary from quarter to quarter based on, but not
limited to, seasonal demands for our products, climate, and economic and
geographic trends. Consequently, results for any particular fiscal
quarter are not necessarily indicative, through extrapolation, or otherwise, of
results for a longer period.
Critical
Accounting Policies
Our
financial statements are prepared in accordance with generally accepted
accounting principles. Preparation of the statements in accordance
with these principles requires that we make estimates, using available data and
our judgment for such things as valuing assets, accruing liabilities, and
estimating expenses. We believe that the estimates, assumptions and
judgments involved in the accounting policies described below have the greatest
potential impact on our financial statements, so we consider these to be our
critical accounting policies and estimates. Because of the uncertainty inherent
in these matters, actual results could differ from the estimates we use in
applying the critical accounting policies. We base our ongoing estimates on
historical experience and other various assumptions that we believe to be
reasonable under the circumstances.
Accounts
Receivable – Allowance for Doubtful Accounts
We
routinely review our accounts receivable, by customer account aging, to
determine if the amounts due are collectible based on information we receive
from the customer, past history, and economic conditions. In doing
so, we adjust our allowance accordingly to reflect the cumulative amount that we
feel is uncollectible. This estimate may vary from the proceeds that
we actually collect. If the estimate is too low, we may incur higher
bad debt expenses in the future resulting in lower net income. If the
estimate is too high, we may experience lower bad debt expense in the future
resulting in higher net income.
Fixed Assets –
Depreciation
We
maintain buildings, machinery and equipment, and furniture and fixtures to
operate our business. We estimate the life of individual assets to allocate the
cost over the expected life. The basis for such estimates is use,
technology, required maintenance, and obsolescence. We
periodically review these estimates and adjust them if
necessary. Nonetheless, if we overestimate the life of an asset or
assets, at a point in the future, we would have to incur higher depreciation
costs and consequently, lower net income. If we underestimate the
life of an asset or assets, we would absorb too much depreciation in the early
years resulting in higher net income in the later years when the asset is still
in service.
Goodwill
– Intangible Asset Impairment
We have
acquired a significant number of companies. The excess of the
purchase price over the fair value of the assets and liabilities acquired has
been recorded as goodwill. If goodwill is not impaired, it would
remain as an asset on our balance sheet at the value assigned in the
acquisitions. If it is impaired, we would be required to write down
the asset to an amount that accurately reflects its estimated
value. We completed a valuation of the Company performed as of
October 31, 2009, and goodwill was not impaired as of that date. As
of October 31, 2008, using a similar valuation process, comparing the fair value
to the carrying value of the Company, we determined that goodwill was impaired
at that time. As a result of this process, the Company recorded an
impairment loss on goodwill of $22,359,000 in 2008. In determining
these valuations we relied, in part, on our projections of future cash
flows. If these projections change in the future, there may be a
material impact on the valuation of the Company, which may result in an
additional impairment of goodwill.
Income
Taxes
We
recognize deferred tax assets and liabilities based on temporary differences
between the financial statement carrying amount of assets and liabilities and
their corresponding tax basis. The valuation of these deferred tax
assets and liabilities is based on estimates that are dependent on rate and time
assumptions. If these estimates do not prove to be correct in the
future, we may have over or understated income tax expense and, as a result,
earnings.
Financial
Accounting Standards Board (“FASB”) guidance clarifies the criteria that an
individual tax position must satisfy for some or all of the benefits of that
position to be recognized in a company’s financial statements. The guidance
prescribes a recognition threshold of more-likely-than-not, and a measurement
attribute for all tax positions taken or expected to be taken on a tax return in
order for those tax positions to be recognized in the financial statements. The
Company adopted these provisions at the beginning of fiscal year
2008.
Stock Based
Compensation
When a
situation arises, we recognize the cost of employee services received in
exchange for an award under our stock option plans based on the fair value of
the award. The cost of equity is determined using interest rate,
volatility, and expected life assumptions. We estimate a risk free rate of
return based on current (at the time of option issuance) U. S. Treasury bonds
and calculate the volatility of its stock price over the past twelve months from
the option issuance date. The fluctuations in the volatility
assumption used in the calculation over the years reported is a direct result of
the increases and decreases in the stock price over that time. All
other factors being equal, a 10% increase in the volatility percentage results
in approximately a 12% increase in the fair value of the options, net of
tax.
Off-Balance Sheet
Arrangements
We lease
various facilities and equipment under cancelable and non-cancelable short and
long term operating leases, which are described in Note 16 to our Audited
Consolidated Financial Statements contained in this Annual Report on Form
10-K.
ITEM
8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.
Our
Consolidated Financial Statements and their footnotes are set forth on pages F-1
through F-27.
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
|
None.
ITEM
9A(T).
CONTROLS
AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
Our Chief
Executive Officer and our Chief Financial Officer, and other members of our
senior management team, have evaluated the effectiveness of our disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)). Based on such evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures, as
of the end of the period covered by this report, were adequate and effective to
provide reasonable assurance that information required to be disclosed by us,
including our consolidated subsidiary, in reports that we file or submit under
the Exchange Act, is recorded, processed, summarized and reported, within the
time periods specified in the SEC’s rules and forms.
The
effectiveness of a system of disclosure controls and procedures is subject to
various inherent limitations, including cost limitations, judgments used in
decision making, assumptions about the likelihood of future events, the
soundness of internal controls, and fraud. Due to such inherent limitations,
there can be no assurance that any system of disclosure controls and procedures
will be successful in preventing all errors or fraud, or in making all material
information known in a timely manner to the appropriate levels of
management.
Internal
Control Over Financial Reporting
a)
Management's Annual Report on Internal Control Over Financial
Reporting
The
management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting for the Company. Internal
control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f)
promulgated under the Securities Exchange Act of 1934 as a process designed by,
or under the supervision of, the Company's principal executive and principal
financial officers and effected by the Company's board of directors, management
and other personnel, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:
•
pertain to the maintenance
of records that in reasonable detail accurately and fairly reflect the
transactions and dispositions of the assets of the Company;
•
provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company are being made
only in accordance with authorizations of management and directors of the
Company; and
•
provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of the Company's assets that could have a material effect on
the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
The
Company's management assessed the effectiveness of the Company's internal
control over financial reporting as of October 31, 2009. In making this
assessment, the Company's management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework.
Based on
our assessment, management concluded that, as of October 31, 2009, the Company's
internal control over financial reporting is effective based on those
criteria.
This
Annual Report on Form 10-K does not include an attestation report of the
Company’s registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to
attestation by the Company’s registered public accounting firm pursuant to rules
of the Securities and Exchange Commission that permit the Company to provide
only management’s report in this Annual Report on Form 10-K.
b)
Changes in Internal Control Over Financial Reporting
No change
in our internal control over financial reporting occurred during the fiscal
quarter ended October 31, 2009 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
ITEM
9B. OTHER INFORMATION.
None.
PART
III
ITEM
10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.
|
The
information required by this Item is incorporated by reference to the sections
captioned “Directors”, “Our Executive Officers”, “Section 16(a) Beneficial
Ownership Reporting Compliance” and “Corporate Governance” in our 2010 proxy
statement to be filed with the SEC within 120 days after the end of our fiscal
year ended October 31, 2009.
ITEM
11.
|
EXECUTIVE
COMPENSATION.
|
The
information required by this Item is incorporated by reference to the sections
captioned “Compensation of Executive Officers” and “Compensation of Non-Employee
Directors” in our 2010 proxy statement to be filed with the SEC within 120 days
after the end of our fiscal year ended October 31, 2009.
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
|
Securities
Authorized for Issuance Under Equity Compensation Plans.
The
following table sets forth certain information as of October 31, 2009 about
shares of our Common Stock that may be issued upon the exercise of options and
other rights under our existing equity compensation plans and arrangements,
divided between plans approved by our stockholders and plans or arrangements
that were not required to be and were not submitted to our stockholders for
approval.
Equity
Compensation Plan Information
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
Plan
Category
|
|
Number
of Securities to be issued upon exercise of outstanding options, warrants
and rights
|
|
|
Weighted-average
exercise price of outstanding options, warrants and rights
|
|
|
Number
of Securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a)).
|
|
Equity
compensation plans approved by security holders
|
|
|
574,500
|
|
|
$
|
2.91
|
|
|
|
1,649,500
|
|
Equity
compensation plans not approved by security holders
|
|
|
-0-
|
|
|
|
-
|
|
|
|
-0-
|
|
Total
|
|
|
574,500
|
|
|
$
|
2.91
|
|
|
|
1,649,500
|
|
Additional
information required by this Item is incorporated by reference to the section
captioned “Security Ownership of Certain Beneficial Owners and Management” in
our 2010 proxy statement to be filed with the SEC within 120 days after the end
of our fiscal year ended October 31, 2009.
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
|
The
information required by this Item is incorporated by reference to the section
captioned “Corporate Governance” in our 2010 proxy statement to be filed with
the SEC within 120 days after the end of our fiscal year ended October 31,
2009.
ITEM
14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES.
The
information required by this Item is incorporated by reference to the sections
captioned “Independent Registered Public Accounting Firm Fees” and “Pre-Approval
Policies and Procedures” in our 2010 proxy statement to be filed with the SEC
within 120 days after the end of our fiscal year ended October 31,
2009.
PART
IV
ITEM 15.
|
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES.
|
a)
|
The
following documents are filed as part of this
report:
|
(1)
Financial Statements
Reports
of Independent Registered Public Accounting Firms
|
F-1
|
|
|
Consolidated
Balance Sheets as of October 31, 2009 and 2008
|
F-2
|
|
|
Consolidated
Statements of Operations for the years ended October 31, 2009 and
2008
|
F-3
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity and Comprehensive Income
(Loss) for the years ended October 31, 2009 and 2008
|
F-4
|
|
|
Consolidated
Statements of Cash Flows for the years ended October 31, 2009 and
2008
|
F-5
|
|
|
Notes
to the Consolidated Financial Statements
|
F-6
- F-26
|
(2)
Schedules
None
(3) Exhibits
:
|
|
Filed
with this Form 10-K
|
Incorporated
by Reference
|
|
|
|
3.1
|
Certificate
of Incorporation
|
|
S-4
|
September
6, 2000
|
Exhibit
B to Appendix A
|
|
3.2
|
Certificate
of Amendment to Certificate of Incorporation
|
|
8-K
|
October
19, 2000
|
4.2
|
|
3.3
|
By-laws
|
|
10-Q
|
September
14, 2001
|
3.3
|
|
4.1
|
Registration
Rights Agreement with Peter K. Baker, Henry E. Baker, John B. Baker and
Ross Rapaport
|
|
8-K
|
October
19, 2000
|
4.6
|
|
10.1*
|
1998
Incentive and Non-Statutory Stock Option Plan, as amended
|
|
14A
|
March
10, 2003
|
A
|
|
10.2*
|
1999
Employee Stock Purchase Plan
|
|
14A
|
March
15, 1999
|
A
|
|
10.3*
|
2004
Stock Incentive Plan
|
|
14A
|
March
9, 2004
|
B
|
|
10.4*
|
Instrument
of Amendment dated September 22, 2005 amending the 1999 Employee Stock
Purchase Plan
|
|
8-K
|
September
28, 2005
|
10.1
|
|
10.5*
|
Employment
Agreement dated May 2, 2007 with Peter K. Baker
|
|
8-K
|
May
2, 2007
|
10.1
|
|
10.6*
|
Employment
Agreement dated May 2, 2007 with Bruce S. MacDonald
|
|
8-K
|
May
2, 2007
|
10.3
|
|
10.7*
|
Employment
Agreement dated May 2, 2007 with John B. Baker
|
|
8-K
|
May
2, 2007
|
10.2
|
|
10.8
|
Lease
of Grounds in Stamford, Connecticut from Henry E. Baker
|
|
S-4
|
September
6, 2000
|
10.24
|
|
10.9
|
Lease
of Buildings and Grounds in Watertown, Connecticut from the Baker’s
Grandchildren Trust
|
|
S-4
|
September
6, 2000
|
10.22
|
|
10.10
|
Lease
of Building in Stamford, Connecticut from Henry E. Baker
|
|
S-4
|
September
6, 2000
|
10.23
|
|
10.11
|
First
Amendment to the Lease of Buildings and Grounds in Watertown, Connecticut
from the Baker’s Grandchildren Trust
|
|
10-Q
|
September
14, 2007
|
10.4
|
|
10.12
|
Credit
Agreement dated April 5, 2005 with Bank of America and Webster
Bank
|
|
10-Q
|
July
8, 2005
|
10.1
|
|
10.13
|
Form
of Term Note dated April 5, 2005 issued to Bank of America and Webster
Bank
|
|
10-Q
|
July
8, 2005
|
10.2
|
|
10.14
|
Form
of Subordination and Pledge Agreement dated April 5, 2005 between Henry E.
Baker, Joan Baker, John B. Baker, Peter K. Baker and Bank of
America
|
|
10-Q
|
July
8, 2005
|
10.3
|
|
10.15
|
Form
of Second Amended and Restated Promissory Note dated April 5, 2005 issued
to Henry E. Baker, Joan Baker, John B. Baker and Peter K.
Baker
|
|
10-Q
|
July
8, 2005
|
10.4
|
|
10.16
|
Form
of Acquisition Note dated April 5, 2005 issued to Bank of America and
Webster Bank
|
|
10-Q
|
July
8, 2005
|
10.5
|
|
10.17
|
Form
of Revolving Credit Note dated April 5, 2005 issued to Bank of America and
Webster Bank
|
|
10-Q
|
July
8, 2005
|
10.6
|
|
10.18
|
First
Amendment to the Credit Agreement dated April 5, 2005 with Bank of
America
|
|
10-Q
|
September
14, 2007
|
10.1
|
|
10.19
|
Second Amendment
to the Credit Agreement dated April 5, 2005 with Bank of
America
|
|
10-Q
|
September
14, 2007
|
10.2
|
|
10.20
|
Third Amendment
to the Credit Agreement dated April 5, 2005 with Bank of
America
|
|
10-Q
|
September
14, 2007
|
10.3
|
|
10.21
|
Form
of Indemnification Agreement dated November 2, 2005 with each of Henry E.
Baker, John B. Baker, Peter K. Baker, Phillip Davidowitz,David Jurasek,
Bruce S. MacDonald and Ross S. Rapaport
|
|
10-K
|
January
30, 2006
|
10.21
|
|
10.22
|
Form
of Indemnification Agreement dated November 2, 2005 with each of John M.
Lapides and Martin A. Dytrych
|
|
10-K
|
January
30, 2006
|
10.22
|
|
10.23
|
Installation
Agreement with American Capital Energy, Inc. dated August 29,
2007
|
|
10-K
|
January
29, 2008
|
10.29
|
|
10.24
|
Financial
Assistance Agreement with Connecticut Innovations dated August 20,
2007
|
|
10-K
|
January
29, 2008
|
10.30
|
|
10.25
|
Fourth
Amendment to the Credit Agreement dated April 5, 2005 with Bank of
America
|
|
10-Q
|
September
15, 2008
|
10.1
|
|
10.26*
|
Amendment
No. 1 to Employment Agreement with Peter K. Baker dated September 10,
2009.
|
|
10-Q
|
September
14, 2009
|
10.1
|
|
10.27*
|
Amendment
No. 1 to Employment Agreement with John B. Baker dated September 10,
2009.
|
|
10-Q
|
September
14, 2009
|
10.2
|
|
10.28
|
Settlement
Agreement and General Release dated as of July 31, 2009 by and between
Vermont Pure Holdings, Ltd. and Ivey & Ragsdale, et al.
|
|
10-Q
|
September
14, 2009
|
10.3
|
|
10.29
|
Settlement
Agreement and General Release dated as of July 31, 2009 by and between
Vermont Pure Holdings, et al. and Hagens Berman Sobol Shapiro et
al.
|
|
10-Q
|
September
14, 2009
|
10.4
|
|
21.1
|
Subsidiary
|
X
|
|
|
|
|
23.1
|
Consent
of Wolf & Company, P.C.
|
X
|
|
|
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
X
|
|
|
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
X
|
|
|
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
X
|
|
|
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
X
|
|
|
|
|
* Management contract or compensatory
plan.
SIGNATURES
Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, Vermont Pure Holdings, Ltd.
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
VERMONT
PURE HOLDINGS, LTD.
|
|
|
|
|
|
Dated:
January 25, 2010
|
By:
|
/s/ Peter
K. Baker
|
|
|
|
Peter
K. Baker, Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Name
|
|
Title
|
|
Date
|
/s/ Ross S. Rapaport
Ross
S. Rapaport
|
|
Chairman
of the Board of Directors
|
|
January
25, 2010
|
/s/ Henry E. Baker
Henry
E. Baker
|
|
Director,
Chairman Emeritus
|
|
January
25, 2010
|
/s/ John B. Baker
John
B. Baker
|
|
Executive
Vice President and Director
|
|
January
25, 2010
|
/s/ Peter K. Baker
Peter
K. Baker
|
|
Chief
Executive Officer and Director
|
|
January
25, 2010
|
/s/ Phillip Davidowitz
Phillip
Davidowitz
|
|
Director
|
|
January
25, 2010
|
/s/ Martin A. Dytrych
Martin
A. Dytrych
|
|
Director
|
|
January
25, 2010
|
/s/ John M. Lapides
John
M. Lapides
|
|
Director
|
|
January
25, 2010
|
|
|
|
|
|
/s/ Bruce S. MacDonald
Bruce
S. MacDonald
|
|
Chief
Financial Officer, Chief Accounting Officer and Secretary
|
|
January
25, 2010
|
EXHIBITS
TO VERMONT PURE HOLDINGS, LTD.
ANNUAL
REPORT ON FORM 10-K
FOR
THE FISCAL YEAR ENDED OCTOBER 31, 2009
Exhibits
Filed Herewith
Exhibit
|
|
|
Number
|
|
Description
|
21.1
|
|
Subsidiary
|
23.1
|
|
Consent
of Wolf & Company, P.C.
|
31.1
|
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
31.2
|
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
32.1
|
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
32.2
|
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
PAGE
|
Report of the
Independent Registered Public Accounting Firms
|
F-1
|
|
|
Financial
Statements:
|
|
|
|
Consolidated
Balance Sheets
October
31, 2009 and 2008
|
F-2
|
|
|
Consolidated
Statements of Operations
Fiscal
Years Ended October 31, 2009 and 2007
|
F-3
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity and
Comprehensive
Income (Loss) Fiscal Years Ended October
31,
2009 and 2008
|
F-4
|
|
|
Consolidated
Statements of Cash Flows,
Fiscal
Years Ended October 31, 2009 and 2007
|
F-5
|
|
|
Notes to the
Consolidated Financial Statements
|
F-6 -
F-26
|
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have
audited the accompanying consolidated balance sheets of Vermont Pure Holdings,
Ltd. and subsidiary as of October 31, 2009 and 2008, and the related
consolidated statements of operations, changes in stockholders’ equity and
comprehensive income (loss), and cash flows for each of the two years in the
period ended October 31, 2009. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about 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. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Vermont Pure Holdings, Ltd.
and subsidiary as of October 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the two years in the period ended
October 31, 2009, in conformity with U.S. generally accepted accounting
principles.
/s/ Wolf
& Company, P.C.
Boston,
Massachusetts
January
25, 2010
VERMONT
PURE HOLDINGS, LTD. AND SUBSIDIARY
|
|
|
|
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
October
31,
|
|
|
October
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
3,095,307
|
|
|
$
|
1,181,737
|
|
Accounts
receivable, trade - net of reserve of $435,790 and
|
|
|
7,426,530
|
|
|
|
7,842,819
|
|
$414,301
for 2009 and 2008, respectively
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
2,171,812
|
|
|
|
1,669,949
|
|
Current
portion of deferred tax asset
|
|
|
751,082
|
|
|
|
744,087
|
|
Other
current assets
|
|
|
721,468
|
|
|
|
1,612,605
|
|
|
|
|
|
|
|
|
|
|
TOTAL
CURRENT ASSETS
|
|
|
14,166,199
|
|
|
|
13,051,197
|
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT - net
|
|
|
9,857,414
|
|
|
|
10,563,388
|
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
32,123,294
|
|
|
|
32,080,669
|
|
Other
intangible assets - net
|
|
|
4,035,194
|
|
|
|
2,084,542
|
|
Other
assets
|
|
|
112,333
|
|
|
|
152,333
|
|
|
|
|
|
|
|
|
|
|
TOTAL
OTHER ASSETS
|
|
|
36,270,821
|
|
|
|
34,317,544
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
60,294,434
|
|
|
$
|
57,932,129
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Current
portion of long term debt
|
|
$
|
3,680,000
|
|
|
$
|
3,315,079
|
|
Accounts
payable
|
|
|
2,427,157
|
|
|
|
2,542,711
|
|
Accrued
expenses
|
|
|
2,548,764
|
|
|
|
2,859,277
|
|
Current
portion of customer deposits
|
|
|
696,779
|
|
|
|
699,921
|
|
Unrealized
loss on derivatives
|
|
|
725,473
|
|
|
|
531,673
|
|
|
|
|
|
|
|
|
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
10,078,173
|
|
|
|
9,948,661
|
|
|
|
|
|
|
|
|
|
|
Long
term debt, less current portion
|
|
|
27,661,667
|
|
|
|
28,561,928
|
|
Deferred
tax liability
|
|
|
3,666,779
|
|
|
|
3,403,696
|
|
Customer
deposits
|
|
|
2,660,585
|
|
|
|
2,666,870
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
44,067,204
|
|
|
|
44,581,155
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY:
|
|
|
|
|
|
|
|
|
Common
stock - $.001 par value, 50,000,000 authorized shares,
|
|
|
|
|
|
|
|
|
21,951,987
issued and 21,472,439 outstanding shares as of
|
|
|
|
|
|
|
|
|
October
31, 2009 and 21,862,739 issued and 21,489,489
|
|
|
|
|
|
|
|
|
outstanding
as of October 31, 2008
|
|
|
21,952
|
|
|
|
21,863
|
|
Additional
paid in capital
|
|
|
58,457,807
|
|
|
|
58,395,551
|
|
Treasury
stock, at cost, 479,548 shares as of October 31, 2009
|
|
|
|
|
|
|
|
|
and
373,250 shares as of October 31, 2008
|
|
|
(804,149
|
)
|
|
|
(717,301
|
)
|
Accumulated
deficit
|
|
|
(40,999,634
|
)
|
|
|
(44,019,502
|
)
|
Accumulated
other comprehensive loss
|
|
|
(448,746
|
)
|
|
|
(329,637
|
)
|
TOTAL
STOCKHOLDERS' EQUITY
|
|
|
16,227,230
|
|
|
|
13,350,974
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
60,294,434
|
|
|
$
|
57,932,129
|
|
|
|
|
|
|
|
|
|
|
See
the accompanying notes to the consolidated financial
statements.
|
VERMONT PURE HOLDINGS, LTD. AND
SUBSIDIARY
|
|
|
|
CONSOLIDATED STATEMENTS OF
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year Ended October 31
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
NET
SALES
|
|
$
|
66,125,827
|
|
|
$
|
69,237,456
|
|
|
|
|
|
|
|
|
|
|
COST
OF GOODS SOLD
|
|
|
30,820,655
|
|
|
|
30,327,137
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
35,305,172
|
|
|
|
38,910,319
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
28,599,190
|
|
|
|
30,131,964
|
|
Advertising
expenses
|
|
|
1,137,878
|
|
|
|
1,530,000
|
|
Amortization
|
|
|
1,113,396
|
|
|
|
887,813
|
|
Loss
(gain) on disposal of property and equipment
|
|
|
69,882
|
|
|
|
(136,204
|
)
|
Impairment
loss - goodwill
|
|
|
-
|
|
|
|
22,359,091
|
|
|
|
|
|
|
|
|
|
|
TOTAL
OPERATING EXPENSES
|
|
|
30,920,346
|
|
|
|
54,772,664
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) FROM OPERATIONS
|
|
|
4,384,826
|
|
|
|
(15,862,345
|
)
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
Interest
|
|
|
(2,618,847
|
)
|
|
|
(3,004,626
|
)
|
Miscellaneous
income
|
|
|
3,000,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
TOTAL
OTHER INCOME (EXPENSE), NET
|
|
|
381,153
|
|
|
|
(3,004,626
|
)
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) BEFORE INCOME TAXES
|
|
|
4,765,979
|
|
|
|
(18,866,971
|
)
|
|
|
|
|
|
|
|
|
|
INCOME
TAX EXPENSE
|
|
|
1,746,111
|
|
|
|
968,554
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
$
|
3,019,868
|
|
|
$
|
(19,835,525
|
)
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS) PER SHARE - BASIC:
|
|
$
|
0.14
|
|
|
$
|
(0.92
|
)
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS) PER SHARE - DILUTED:
|
|
$
|
0.14
|
|
|
$
|
(0.92
|
)
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES USED IN COMPUTATION - BASIC
|
|
|
21,525,932
|
|
|
|
21,564,384
|
|
WEIGHTED
AVERAGE SHARES USED IN COMPUTATION - DILUTED
|
|
|
21,525,932
|
|
|
|
21,564,384
|
|
|
|
|
|
|
|
|
|
|
See
the accompanying notes to the consolidated financial
statements.
|
VERMONT PURE HOLDINGS, LTD. AND
SUBSIDIARY
|
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
|
AND COMPREHENSIVE INCOME
(LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Treasury
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Stock
|
|
|
Paid
in
|
|
|
Treasury
|
|
|
Stock
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
Comprehensive
|
|
|
|
Issued
|
|
|
Par
Value
|
|
|
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
Deficit
|
|
|
Loss
|
|
|
Total
|
|
|
Income
(Loss)
|
|
Balance,
October 31, 2007
|
|
|
21,800,555
|
|
|
$
|
21,800
|
|
|
$
|
58,307,395
|
|
|
|
194,250
|
|
|
$
|
(474,441
|
)
|
|
$
|
(24,183,977
|
)
|
|
$
|
(67,136
|
)
|
|
$
|
33,603,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued under employee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock
purchase plan
|
|
|
62,184
|
|
|
|
63
|
|
|
|
88,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
repurchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
179,000
|
|
|
|
(242,860
|
)
|
|
|
|
|
|
|
|
|
|
|
(242,860
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,835,525
|
)
|
|
|
|
|
|
|
(19,835,525
|
)
|
|
$
|
(19,835,525
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on derivatives, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(262,501
|
)
|
|
|
(262,501
|
)
|
|
|
(262,501
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
October 31, 2008
|
|
|
21,862,739
|
|
|
|
21,863
|
|
|
|
58,395,551
|
|
|
|
373,250
|
|
|
|
(717,301
|
)
|
|
|
(44,019,502
|
)
|
|
|
(329,637
|
)
|
|
|
13,350,974
|
|
|
$
|
(20,098,026
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued under employee
stock purchase plan
|
|
|
89,248
|
|
|
|
89
|
|
|
|
62,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
repurchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106,298
|
|
|
|
(86,848
|
)
|
|
|
|
|
|
|
|
|
|
|
(86,848
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,019,868
|
|
|
|
|
|
|
|
3,019,868
|
|
|
$
|
3,019,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on derivatives, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(119,109
|
)
|
|
|
(119,109
|
)
|
|
|
(119,109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
October 31, 2009
|
|
|
21,951,987
|
|
|
$
|
21,952
|
|
|
$
|
58,457,807
|
|
|
|
479,548
|
|
|
$
|
(804,149
|
)
|
|
$
|
(40,999,634
|
)
|
|
$
|
(448,746
|
)
|
|
$
|
16,227,230
|
|
|
$
|
2,900,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
the accompanying notes to the consolidated financial
statements.
|
VERMONT PURE HOLDINGS, LTD. AND
SUBSIDIARY
|
|
CONSOLIDATED STATEMENTS OF CASH
FLOWS
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year Ended October 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
3,019,868
|
|
|
$
|
(19,835,525
|
)
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
3,853,864
|
|
|
|
4,063,178
|
|
Provision
for bad debts
|
|
|
394,825
|
|
|
|
345,812
|
|
Provision
for bad debts on notes receivable
|
|
|
30,893
|
|
|
|
532,043
|
|
Amortization
|
|
|
1,113,396
|
|
|
|
887,813
|
|
Impairment
loss - goodwill
|
|
|
-
|
|
|
|
22,359,091
|
|
Non
cash interest expense
|
|
|
78,242
|
|
|
|
110,450
|
|
Deferred
tax expense
|
|
|
330,779
|
|
|
|
195,408
|
|
Loss
(gain) on disposal of property and equipment
|
|
|
69,882
|
|
|
|
(136,204
|
)
|
|
|
|
|
|
|
|
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
397,932
|
|
|
|
(665,800
|
)
|
Inventories
|
|
|
(495,379
|
)
|
|
|
41,417
|
|
Other
current assets
|
|
|
891,137
|
|
|
|
(929,392
|
)
|
Other
assets
|
|
|
9,107
|
|
|
|
11,763
|
|
Accounts
payable
|
|
|
(115,554
|
)
|
|
|
441,312
|
|
Accrued
expenses
|
|
|
(310,513
|
)
|
|
|
(595,210
|
)
|
Customer
deposits
|
|
|
(153,777
|
)
|
|
|
(305,049
|
)
|
NET
CASH PROVIDED BY OPERATING ACTIVITIES
|
|
|
9,114,702
|
|
|
|
6,521,107
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment - net of debt
|
|
|
(2,306,192
|
)
|
|
|
(3,560,014
|
)
|
Proceeds
from sale of property and equipment
|
|
|
136,876
|
|
|
|
253,725
|
|
Cash
used for acquisitions
|
|
|
(1,694,236
|
)
|
|
|
(429,608
|
)
|
Cash
used for purchase of trademark
|
|
|
-
|
|
|
|
(40,000
|
)
|
NET
CASH USED IN INVESTING ACTIVITIES
|
|
|
(3,863,552
|
)
|
|
|
(3,775,897
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Principal
payments on debt
|
|
|
(3,313,077
|
)
|
|
|
(3,282,217
|
)
|
Purchase
of treasury stock
|
|
|
(86,848
|
)
|
|
|
(242,860
|
)
|
Proceeds
from issuance of common stock
|
|
|
62,345
|
|
|
|
88,219
|
|
NET
CASH USED IN FINANCING ACTIVITIES
|
|
|
(3,337,580
|
)
|
|
|
(3,436,858
|
)
|
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH
|
|
|
1,913,570
|
|
|
|
(691,648
|
)
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS - beginning of year
|
|
|
1,181,737
|
|
|
|
1,873,385
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS - end of year
|
|
$
|
3,095,307
|
|
|
$
|
1,181,737
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION,
|
|
|
|
|
|
|
|
|
EXCLUDING
NON-CASH FINANCING AND INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
2,575,652
|
|
|
$
|
2,922,374
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for taxes
|
|
$
|
483,553
|
|
|
$
|
2,354,300
|
|
|
|
|
|
|
|
|
|
|
NON-CASH
FINANCING AND INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable issued in acquisitions
|
|
$
|
2,500,000
|
|
|
$
|
36,000
|
|
Equipment
purchased by acquisition line
|
|
$
|
300,000
|
|
|
$
|
421,527
|
|
|
|
|
|
|
|
|
|
|
See
the accompanying notes to the consolidated financial
statements.
|
VERMONT
PURE HOLDINGS, LTD. AND SUBSIDIARY
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
1.
|
BUSINESS OF THE
COMPANY AND BASIS OF
PRESENTATION
|
Vermont
Pure Holdings, Ltd. and Subsidiary (collectively, the “Company”) is engaged in
the production, marketing and distribution of bottled water and distribution of
coffee, ancillary products, and other office refreshment products. The Company
operates exclusively as a home and office delivery business, using its own
trucks to distribute throughout New England, New York, and New
Jersey.
The
consolidated financial statements of the Company include the accounts of Vermont
Pure Holdings, Ltd. and its wholly-owned subsidiary, Crystal Rock,
LLC. All inter-company transactions and balances have been eliminated
in consolidation.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
2.
|
SIGNIFICANT ACCOUNTING
POLICIES
|
Cash Equivalents
–
The Company considers all highly liquid temporary cash investments with an
original maturity of three months or less to be cash equivalents.
Accounts Receivable
-
Accounts receivable are carried at original invoice amount less an estimate made
for doubtful accounts. Management establishes the allowance for doubtful
accounts by regularly evaluating past due balances, collection history as well
as general economic and credit conditions. Individual accounts receivable are
written off when deemed uncollectible, with any future recoveries recorded as
income when received.
Inventories
–
Inventories primarily consist of products that are purchased for resale and are
stated at the lower of cost or market on a first in, first out
basis.
Property and
Equipment
– Property and equipment are stated at cost net of accumulated
depreciation. Depreciation is calculated on the straight-line method over the
estimated useful lives of the assets, which range from three to ten years for
machinery and equipment, and from seven to thirty years for buildings and
improvements, and three to seven years for other fixed assets. Leasehold
improvements are depreciated over the shorter of the estimated useful life of
the leasehold improvement or the term of the lease.
Goodwill and Other
Intangibles
– Intangible assets with lives restricted by contractual,
legal, or other means are amortized over their useful lives. The Company defines
an asset’s useful life as the period over which the asset is expected to
contribute to the future cash flows of the entity. Goodwill and other
intangible assets not subject to amortization are tested for impairment annually
or more frequently if events or changes in circumstances indicate that the asset
might be impaired. The amount of impairment for goodwill and other
intangible assets is measured as the excess of their carrying values over their
implied fair values. The Company conducted assessments of the
carrying value of its goodwill using an independent third party valuation as of
October 31, 2009 and determined that goodwill was not impaired. A
similar valuation was conducted and concluded that goodwill was impaired as of
October 31, 2008. Other than goodwill, intangible assets consist primarily of
customer lists and covenants not to compete, with estimated lives ranging from 3
to 10 years.
Impairment for Long-Lived
and Intangible Assets
– The Company reviews long-lived assets and certain
identifiable intangible assets for impairment whenever circumstances and
situations change such that there is an indication that the carrying amounts may
not be recovered. Recoverability is assessed based on estimated
undiscounted future cash flows. As of October 31, 2009 and 2008, the
Company believes that there has been no impairment of its long-lived and
intangible assets, other than goodwill as described above.
Stock-Based
Compensation
– The Company has several stock-based compensation plans
under which incentive and non-qualified stock options and restricted shares may
be granted, and an Employee Stock Purchase Plan (ESPP). The Company
measures the cost of employee services received in exchange for an award of
equity instruments based on the grant date fair value of the award. That cost is
recognized over the period during which an employee is required to provide
services in exchange for the award, the requisite service period (usually the
vesting period). The Company provides an estimate of forfeitures at initial
grant date. This policy had no material impact on the Company’s 2009 and 2008
results of operations since no options were issued or vested during those
years.
Net Income (Loss) Per Share
– Net income (loss) per share is based on the weighted average number of
common shares outstanding during each period. Potential common shares are
included in the computation of diluted per share amounts outstanding during each
period that income is reported. In periods in which the Company
reports a loss, potential common shares are not included in the diluted earnings
per share calculation since the inclusion of those shares in the calculation
would be anti-dilutive. The Company considers outstanding “in-the-money” stock
options, if any, as potential common stock in its calculation of diluted
earnings per share and uses the treasury stock method to calculate the
applicable number of shares.
Advertising Expenses
– The Company expenses advertising costs at the commencement of an advertising
campaign.
Customer Deposits
–
Customers receiving home or office delivery of water pay the Company a deposit
for the water bottle that is refunded when the bottle is returned. Based on
historical experience, the Company uses an estimate of the deposits it expects
to refund over the next twelve months to determine the current portion of the
liability, and classifies the remainder of the deposit obligation as a long term
liability.
Income Taxes
– When
calculating its tax expense and the value of tax related assets and liabilities
the Company considers the tax impact of future events when determining the value
of assets and liabilities in its financial statements and tax
returns. Accordingly, a deferred tax asset or liability is calculated
and reported based upon the tax effect of the differences between the financial
statement and tax basis of assets and liabilities as measured by the enacted
rates that will be in effect when these differences reverse. A
valuation allowance is recorded if realization of the deferred tax assets is not
likely.
Beginning
at the start of fiscal year 2008, the Company adopted new accounting guidance on
the accounting for uncertainty in income taxes. The Company uses a
more-likely-than-not measurement attribute for all tax positions taken or
expected to be taken on a tax return in order for those tax positions to be
recognized in the financial statements.
Derivative Financial
Instruments
- The Company records all derivatives on the balance sheet at
fair value. The Company utilizes interest rate swap agreements to hedge variable
rate interest payments on its long-term debt. The interest rate swaps
are recognized on the balance sheet at their fair value as stated by the bank
and are designated as cash flow hedges. Accordingly, the resulting changes in
fair value of the Company’s interest rate swaps are recorded as a component of
other comprehensive income (loss). The Company assesses, both at a
hedge’s inception and on an ongoing basis, whether the derivatives that are used
in hedging transactions are highly effective in offsetting changes in cash flows
of the related hedged items. Gains and losses that are related to the
ineffective portion of a hedge or terminated hedge are recorded in
earnings.
Fair Value of Financial
Instruments
– The carrying amounts reported in the consolidated balance
sheet for cash equivalents, trade receivables, and accounts payable approximate
fair value based on the short-term maturity of these instruments. The
carrying value of senior debt approximates its fair value since it provides for
variable market interest rates. The Company uses a swap agreement to hedge the
interest rates on its long term debt. The swap agreement is carried
at its estimated settlement value based on information from the financial
institution. Subordinated debt is carried at its approximate market
value based on periodic comparisons to similar instruments in the market
place.
Fair Value
Hierarchy
The
Company groups its financial assets and liabilities, generally measured at fair
value, in three levels based on the markets in which the assets and liabilities
are traded and the reliability of the assumptions used to determine the fair
value.
Level 1 –
Valuation is based on quoted prices in active markets for identical assets or
liabilities. Level 1 assets and liabilities generally include debt and equity
securities that are traded in an active exchange market. Valuations are
obtained from readily available pricing sources for market transactions
involving identical assets or liabilities.
Level 2 –
Valuation is based on observable inputs other than level 1 prices, such as
quoted prices for similar assets or liabilities; quoted prices in markets that
are not active; or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets or
liabilities.
Level 3 –
Valuation is based on unobservable inputs that are supported by little or no
market activity and that are significant to the fair value of the assets or
liabilities. Level 3 assets and liabilities include financial instruments
whose value is determined using pricing models, discounted cash flow
methodologies, or similar techniques, as well as instruments for which the
determination of fair value requires significant management judgment, or
estimation.
The level
of fair value hierarchy in which the fair value measurement falls is determined
by the lowest level input that is significant to the fair value
measurement.
Revenue Recognition
–
Revenue is recognized when products are delivered to customers. A certain amount
of the Company’s revenue is derived from leasing water coolers and coffee
brewers. These leases are generally for the first 12 months of
service and are accounted for as operating leases. To open an account
that includes the rental of equipment, a customer is required to sign a contract
that recognizes the receipt of the equipment, outlines the Company’s ownership
rights, the customer’s responsibilities concerning the equipment, and the rental
charge for twelve months. In general, the customer does not renew the
agreement after twelve months, and the rental continues on a month to month
basis until the customer returns the equipment in good condition. The
Company recognizes the income ratably over the life of the lease. After the
initial lease term expires, rental revenue is recognized monthly as
billed.
Shipping and Handling Costs
– The Company distributes its home and office products directly to its
customers on its own trucks. The delivery costs related to the
Company’s route system, which are reported under selling, general, and
administrative expenses, were approximately $12,785,000 and $13,526,000 for
fiscal years 2009 and 2008, respectively.
3.
|
RECENT
ACCOUNTING PRONOUNCEMENTS
|
In December 2007, the FASB
issued guidance that establishes principles and requirements for how the
acquirer in a business combination recognizes and measures identifiable assets
acquired, liabilities assumed, and non-controlling interests in the
acquiree. This guidance further addresses how goodwill acquired or a
gain from a bargain purchase is to be recognized and measured and determines
what disclosures are needed to enable users of the financial statements to
evaluate the effects of the business combination. This guidance is
effective prospectively for business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period beginning on
or after December 15, 2008 which is fiscal 2010 for the
Company.
In March
of 2008, the FASB issued guidance that changes the disclosure requirements for
derivative instruments and hedging activities. Entities are required
to provide enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash
flows. This guidance is effective for fiscal years and interim
periods beginning after November 15, 2008. The Company is currently
assessing the impact, if any, this pronouncement will have on its reporting and
when, if necessary, to implement enhanced reporting.
In April
2009, the FASB issued a statement that provides guidance on how to determine the
fair value of assets and liabilities in an environment where the volume and
level of activity for the asset or liability have significantly decreased and
re-emphasizes that the objective of a fair value measurement remains an exit
price. The statement is effective for periods ending after June 15, 2009,
with earlier adoption permitted. Accordingly, the Company
adopted this statement as of August 1, 2009 and this adoption did not have a
material impact on the consolidated financial statements.
In April
2009, the FASB issued a statement that requires companies to disclose the fair
value of financial instruments within interim financial statements, adding to
the current requirement to provide those disclosures annually. The statement is
effective for periods ending after June 15, 2009, with earlier adoption
permitted. Accordingly, the Company adopted this statement as of July
31, 2009.
In May
2009, the FASB issued an accounting pronouncement establishing general standards
of accounting for and disclosure of subsequent events, which are events
occurring after the balance sheet date but before the date the financial
statements are issued or available to be issued. In particular, the
pronouncement requires entities to recognize in the financial statements the
effect of all subsequent events that provide additional evidence of conditions
that existed at the balance sheet date, including the estimates inherent in the
financial preparation process. Entities may not recognize the impact
of subsequent events that provide evidence about conditions that did not exist
at the balance sheet date but arose after that date. This
pronouncement also requires entities to disclose the date through which
subsequent events have been evaluated. This pronouncement was
effective for interim and annual reporting periods ending after June 15,
2009. The Company adopted the provisions of this pronouncement for
the interim period ended July 31, 2009, as required, and adoption did not have a
material impact on the Company’s consolidated financial statements taken as a
whole.
In June
2009, the FASB issued two related accounting pronouncements changing the
accounting principles and disclosures requirements related to securitizations
and special-purpose entities. Specifically, these pronouncements
eliminate the concept of a “qualifying special-purpose entity”, change the
requirements for derecognizing financial assets and change how a company
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be
consolidated. These pronouncements also expand existing disclosure
requirements to include more information about transfers of financial assets,
including securitization transactions, and where companies have continuing
exposure to the risks related to transferred financial assets. These
pronouncements will be effective as of the beginning of each reporting entity’s
first annual reporting period that begins after November 15, 2009, for interim
periods within that first annual reporting period and for interim and annual
reporting periods thereafter. Earlier application is
prohibited. The recognition and measurement provisions regarding
transfers of financial assets shall be applied to transfers that occur on or
after the effective date. The Company will adopt these new
pronouncements on November 1, 2010, as required. Management has not
yet determined the impact adoption may have on the Company’s consolidated
financial statements.
In
June 2009, the FASB approved the
FASB Accounting Standards
Codification
(
Codification
) as the single
source of authoritative nongovernmental U.S. Generally Accepted Accounting
Principles (
U.S.
GAAP
). The Codification does not change current U.S. GAAP but
is intended to simplify user access to all authoritative U.S. GAAP by providing
all the authoritative literature related to a particular topic in one
place. All existing accounting standard documents will be superseded
and all other accounting literature not included in the Codification will be
considered non-authoritative. The Codification is effective for
interim and annual periods ending after September 15, 2009. The
Codification was effective for the Company during its interim period ending
September 30, 2009 and it did not have an impact on its financial condition
or results of operations.
In August
2009, the FASB issued guidance for measuring the fair value of a liability in
circumstances in which a quoted price in an active market for the identical
liability is not available. In such instances, a reporting entity is
required to measure fair value utilizing a valuation technique that uses
(i) the quoted price of the identical liability when traded as an asset,
(ii) quoted prices for similar liabilities or similar liabilities when
traded as assets, or (iii) another valuation technique that is consistent
with the existing principles for measuring fair value, such as an income
approach or market approach. The new guidance also clarifies that when
estimating the fair value of a liability, a reporting entity is not required to
include a separate input or adjustment to other inputs relating to the existence
of a restriction that prevents the transfer of the liability. The guidance is
effective November 1, 2009. The Company is currently reviewing the impact, if
any, that this new accounting standard will have on their consolidated financial
statements.
4.
|
MERGERS AND
ACQUISITIONS
|
During
fiscal years 2009 and 2008, Vermont Pure Holdings, Ltd. made four acquisitions
in each year. The purchase price paid for the acquisitions for the
respective years is as follows:
|
|
2009
|
|
|
2008
|
|
Cash
(including acquisition costs)
|
|
$
|
1,694,236
|
|
|
$
|
429,608
|
|
Issuance
of debt
|
|
|
2,500,000
|
|
|
|
36,000
|
|
Other
|
|
|
1,965
|
|
|
|
-
|
|
|
|
$
|
4,196,201
|
|
|
$
|
465,608
|
|
The
allocation of purchase price related to these acquisitions for the respective
years is as follows:
|
|
2009
|
|
|
2008
|
|
Accounts
Receivable, net
|
|
$
|
378,433
|
|
|
$
|
-
|
|
Equipment
|
|
|
748,456
|
|
|
|
65,528
|
|
Identifiable
Intangible Assets
|
|
|
3,164,552
|
|
|
|
389,317
|
|
Goodwill
|
|
|
42,626
|
|
|
|
15,763
|
|
Inventory
|
|
|
6,484
|
|
|
|
-
|
|
Customer
deposits
|
|
|
(144,350
|
)
|
|
|
(5,000
|
)
|
Purchase
Price
|
|
$
|
4,196,201
|
|
|
$
|
465,608
|
|
The
following table summarizes the pro forma consolidated condensed results of
operations (unaudited) of the Company for the fiscal years ended October 31,
2009 and 2008 as though all the acquisitions had been consummated at the
beginning of fiscal year 2008:
|
|
2009
|
|
|
2008
|
|
Net
Sales
|
|
$
|
67,514,475
|
|
|
$
|
72,854,493
|
|
Net
Income (Loss)
|
|
$
|
3,060,777
|
|
|
$
|
(19,725,199
|
)
|
Net
Income (Loss) Per Share-Diluted
|
|
$
|
.14
|
|
|
$
|
(.91
|
)
|
Weighted
Average Common Shares
Outstanding-Diluted
|
|
|
21,525,932
|
|
|
|
21,564,384
|
|
The
operating results of the acquired entities have been included in the
accompanying statements of operations since their respective dates of
acquisition.
The
carrying cost of the equipment rented to customers, which is included in
property and equipment in the consolidated balance sheets, is calculated as
follows:
|
|
2009
|
|
|
2008
|
|
Original
Cost
|
|
$
|
2,815,877
|
|
|
$
|
3,125,883
|
|
Accumulated
Depreciation
|
|
|
2,007,121
|
|
|
|
2,130,685
|
|
Carrying
Cost
|
|
$
|
808,756
|
|
|
$
|
995,198
|
|
We expect
to have revenue of $661,000 from the rental of such equipment over the next
twelve months.
The
activity in the allowance for doubtful accounts for the years ended October 31,
2009, and 2008 is as follows:
|
|
2009
|
|
|
2008
|
|
Balance,
beginning of year
|
|
$
|
414,301
|
|
|
$
|
354,825
|
|
Provision
|
|
|
489,434
|
|
|
|
345,812
|
|
Write-offs
|
|
|
(467,945
|
)
|
|
|
(286,336
|
)
|
Balance,
end of year
|
|
$
|
435,790
|
|
|
$
|
414,301
|
|
Inventories
at October 31 consisted of:
|
|
2009
|
|
|
2008
|
|
Finished
Goods
|
|
$
|
2,015,395
|
|
|
$
|
1,557,914
|
|
Raw
Materials
|
|
|
156,417
|
|
|
|
112,035
|
|
Total
Inventories
|
|
$
|
2,171,812
|
|
|
$
|
1,669,949
|
|
Finished
goods inventory consists of products that the Company sells such as, but not
limited to, coffee, cups, soft drinks, and snack foods. Raw material
inventory consists primarily of bottle caps.
8.
|
PROPERTY AND
EQUIPMENT, NET
|
Property
and equipment at October 31 consisted of:
|
Useful
Life
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
Leasehold
improvements
|
Shorter
of useful life of
asset
or lease term
|
|
$
|
1,637,482
|
|
|
$
|
1,812,689
|
|
Machinery
and equipment
|
3 -
10 yrs.
|
|
|
20,477,139
|
|
|
|
20,467,805
|
|
Bottles,
racks and vehicles
|
3 -
7 yrs.
|
|
|
4,693,090
|
|
|
|
6,125,618
|
|
Furniture,
fixtures and office equipment
|
3 -
7 yrs.
|
|
|
2,324,425
|
|
|
|
2,235,166
|
|
Construction
in progress
|
|
|
|
164,771
|
|
|
|
136,005
|
|
Property
and equipment before accumulated depreciation
|
|
|
29,296,907
|
|
|
|
30,777,283
|
|
Less
accumulated depreciation
|
|
|
|
19,439,493
|
|
|
|
20,213,895
|
|
Property
and equipment, net of accumulated depreciation
|
|
$
|
9,857,414
|
|
|
$
|
10,563,388
|
|
During
2008, the Company completed an extensive solar electricity generation
installation in its Watertown facility to supply a significant amount of the
energy for that facility. The expenditures of the solar project are
net of $1,311,000 received from a grant for the project through October 31,
2009. The total cost of the project was $2,092,000.
Depreciation
expense for the fiscal years ended October 31, 2009 and 2008 was $3,853,864, and
$4,063,178, respectively.
9.
|
GOODWILL AND OTHER
INTANGIBLE ASSETS
|
Components
of other intangible assets at October 31 consisted of:
|
|
2009
|
|
|
2008
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
Amortized
Intangible Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
Lists and Covenants Not to
Compete
|
|
$
|
8,969,270
|
|
|
$
|
5,223,343
|
|
|
$
|
5,866,981
|
|
|
$
|
4,113,807
|
|
Other
Identifiable Intangibles
|
|
|
490,013
|
|
|
|
200,746
|
|
|
|
528,254
|
|
|
|
196,886
|
|
Total
|
|
$
|
9,459,283
|
|
|
$
|
5,424,089
|
|
|
$
|
6,395,235
|
|
|
$
|
4,310,693
|
|
|
Amortization
expense for amortizable intangible assets for fiscal years 2009 and 2008,
was $1,113,396, and $887,813,
respectively.
|
|
Estimated
amortization expense for the next five years is as
follows:
|
Fiscal Year
Ending
|
|
Amount
|
|
October 31,
2010
|
|
$
|
1,065,000
|
|
October 31,
2011
|
|
|
926,000
|
|
October 31,
2012
|
|
|
779,000
|
|
October 31,
2013
|
|
|
702,000
|
|
October 31,
2014
|
|
|
296,000
|
|
The
average remaining term of identifiable intangible assets with balances remaining
to be amortized is 33 months.
An
assessment of the carrying value of goodwill was conducted as of October 31,
2009, and 2008. In 2009 it was determined that goodwill was not
impaired. In 2008, based on the analysis, it was determined at that
time that goodwill was impaired. In the second phase of the
assessment process it was determined that goodwill on the Company’s books was
overvalued by $22,359,091 on the assessment date, resulting in a non-cash
impairment loss of that amount for 2008. The changes in the carrying
amount of goodwill for the fiscal years ended October 31, 2009 and 2008 are as
follows:
|
|
2009
|
|
|
2008
|
|
Beginning
balance
|
|
$
|
32,080,669
|
|
|
$
|
54,423,997
|
|
Goodwill
acquired during the year
|
|
|
42,625
|
|
|
|
15,763
|
|
Goodwill
disposed of during the year
|
|
|
-
|
|
|
|
-
|
|
Impairment
loss
|
|
|
-
|
|
|
|
(22,359,091
|
)
|
Balance
as of October 31
|
|
$
|
32,123,294
|
|
|
$
|
32,080,669
|
|
The
assessment of the carrying value of goodwill is a two step process. In step one,
the fair value of the Company is determined, using a weighted average of three
different market approaches – quoted stock price, value comparisons to publicly
traded companies believed to have comparable reporting units, and discounted net
cash flow. This approach provided a reasonable estimation of the
value of the Company and took into consideration the Company’s thinly traded
stock and concentrated holdings, market comparable valuations, and expected
results of operations. The Company compared the resulting estimated fair value
to its equity value as of October 31, 2009 and 2008 and determined no impairment
of goodwill at October 31, 2009 and that there was an impairment of goodwill at
October 31, 2008. Based on that finding for 2008, the assessment proceeded to
step two, where the estimated fair value of the Company’s assets and liabilities
(including unrecognized intangible assets) were allocated as if it had been
acquired in a business combination and the estimated fair value was the price
paid. An impairment was recognized as of October 31, 2008 in the amount by which
the carrying value of goodwill exceeded the implied value of goodwill as
determined in this allocation. The Company is a single reporting unit
as it does not have separate management of product lines and shares its sales,
purchasing and distribution resources among the lines.
Impairment
recorded in 2008 was primarily the result of a decline in the quoted market
prices of the Company’s stock at year-end below its book carrying value, and was
not due to any changes in the core business. There was no event or change in
circumstance that would more likely than not reduce the fair value of our
underlying net assets below their carrying amount prior to the annual impairment
test.
At
October 31 the balance of other assets is itemized as follows:
|
|
2009
|
|
|
2008
|
|
Note
receivable, unsecured, due August 8, 2011, interest 0% per annum
(net
of an allowance for bad debt of $87,936 in 2009 and $57,043 for
2008)
|
|
$
|
73,333
|
|
|
$
|
113,333
|
|
Ownership
interests
|
|
|
39,000
|
|
|
|
39,000
|
|
Total
|
|
$
|
112,333
|
|
|
$
|
152,333
|
|
|
In
fiscal year 2008, the Company recorded a provision for bad debt expense on
an unsecured, subordinated note receivable from Trident
LLC. The note, which was due in full in 2011 and had a
principal balance of $475,000, represented the remaining portion of the
sales price that was receivable from the sale of our retail operations in
March, 2004. The note was considered fully impaired primarily
based on advice from Trident that it had closed its principal facility and
generally ceased its operations due to cash flow problems. The provision
for bad debt expense is reflected in selling, general and administrative
expenses for the year ended October 31, 2008. The Trident note
and related provision were both written off in fiscal year
2009.
|
Accrued
expenses as of October 31 are as follows:
|
|
2009
|
|
|
2008
|
|
Payroll
and Vacation
|
|
$
|
1,002,147
|
|
|
$
|
1,575,787
|
|
Interest
|
|
|
457,123
|
|
|
|
491,875
|
|
Health
Insurance
|
|
|
392,293
|
|
|
|
403,325
|
|
Accounting
and Legal
|
|
|
159,000
|
|
|
|
160,500
|
|
Termination
Benefit
|
|
|
221,000
|
|
|
|
-
|
|
Miscellaneous
|
|
|
317,201
|
|
|
|
227,790
|
|
Total
|
|
$
|
2,548,764
|
|
|
$
|
2,859,277
|
|
Termination
Benefit
On
February 6, 2009 the Company entered into a Severance and Release Agreement with
an employee that has worked for the Company 59 years. Under the
agreement the Company is obligated to pay the employee, or his estate, $68,000 a
year for the next 4 years. On the date of the agreement, the Company
recognized the full expense related to this special termination
benefit.
Senior
Debt
The
Company has a senior credit facility with Bank of America that provides a Term
Loan, a Revolving Credit Loan of $6 million for working capital and letters of
credit, and up to $10 million in an Acquisition Loan to be used for acquisitions
and capital expenditures. The Term Loan may also provide funds for
future principal payment of the Company’s subordinated debt if certain financial
covenants are met after the first two years of the loan.
On July
5, 2007 the Company and the Bank amended the facility. The amendment
extended the working capital and acquisition lines of credit by changing the
Acquisition Loan termination date and Revolving Credit Loan maturity date to
April 5, 2010 from April 5, 2008 and extended the Term Loan maturity date to
January 5, 2014. In conjunction with the extension of the maturity
date, the monthly amortization amount on the Term Loan was fixed at $270,833 for
the duration of the loan. Prior to the amendment, the Term Loan
maturity date was May 5, 2012 and the remaining amortization was scheduled to be
monthly amounts, increasing from year to year, ranging from $312,500 to
$395,833. In addition, the amendment increased the Acquisition Loan
availability to $10,000,000 and made up to $3,000,000 available from the
Revolving Credit Loan for repurchase of Company stock or for repayment of
subordinated debt and $2,200,000 available from the Acquisition Loan for
installation of solar panels for electricity generation at the Company’s leased
property in Watertown, Connecticut. The amendment has provisions for
amortization of the additional borrowed amounts over the remaining life of the
loans starting approximately two years after disbursement. It also
altered some of the financial covenant calculations to provide for the
additional borrowing.
Interest
on the loans is based on the 30-day LIBOR plus an applicable margin based on the
Company’s financial performance. The applicable margin may vary from
125 to 225 basis points for the Acquisition and Revolving Credit Loans and 150
to 250 basis points for the Term Loan based on the level of senior debt to
earnings before interest, taxes, depreciation, and amortization
(EBITDA). The applicable margins as of October 31, 2009 were 1.75%
for the Term Loan and 1.5% for the Acquisition and Revolving Credit Loans,
resulting in total variable interest rates of 2.00% and 1.75%,
respectively. The facility is secured by substantially all of the
Company’s assets. As of October 31, 2009, there was $13,542,000
outstanding on the Term Loan, and $4,300,000 outstanding on the Acquisition
Loan. There were no borrowings outstanding on the Revolving Credit
Loan but there was an outstanding letter of credit of $1,563,000 issued against
the Revolving Credit Loans availability as of the end of the fiscal
year.
The
facility with Bank of America requires that the Company be in compliance with
certain financial covenants at the end of each fiscal quarter. The
covenants include senior debt service coverage as defined of greater than 1.25
to 1, total debt service coverage as defined of greater than 1 to 1, and senior
debt to EBITDA as defined of no greater than 2.50 to 1. As of October
31, 2009 and 2008, the Company was in compliance with all of the financial
covenants of the facility.
On April
5, 2010 any balance on the Acquisition Loan converts to a term loan with equal
annual installments payable over the next five years. Any balance on
the Revolving Loan will be due and payable on April 5, 2010. We are
currently negotiating to renew these facilities. If we are unable to
negotiate acceptable renewal terms, and no alternative funding is available, the
Company’s business and its results of operations may be materially
affected.
Subordinated
Debt
As part
of the acquisition agreement in 2000 with the former shareholders of Crystal
Rock Spring Water Company, the Company issued subordinated notes in the amount
of $22,600,000. The notes have an effective date of October 5, 2000,
were for an original term of seven years (subsequently extended to 2012 as part
of the senior credit facility refinancing described above) and bear interest at
12% per year. Scheduled repayments are made quarterly and are
interest only for the life of the note unless specified financial targets are
met. In April 2004, the Company repaid $5,000,000 of the outstanding
principal. In April, 2005, the Company repaid an additional
$3,600,000 of this principal.
On May 7,
2009, with the mutual consent of the three subordinated debt holders, the
Company paid $500,000 to John B. Baker as a payment of principal on his note. As
of October 31, 2009, the Company had $13,500,000 of subordinated debt
outstanding bearing an interest rate of 12%.
The notes
are secured by all of the assets of the Company but specifically subordinated,
with a separate agreement between the debt holders, to the senior credit
facility described above.
|
Annual
maturities of debt as of October 31, 2009 are summarized as
follows:
|
|
|
Term
|
|
|
Credit
Lines
|
|
|
Subordinated
|
|
|
Total
|
|
Fiscal
year ending October 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
$
|
3,250,000
|
|
|
$
|
430,000
|
|
|
$
|
-
|
|
|
$
|
3,680,000
|
|
2011
|
|
|
3,250,000
|
|
|
|
860,000
|
|
|
|
-
|
|
|
|
4,110,000
|
|
2012
|
|
|
3,250,000
|
|
|
|
860,000
|
|
|
|
13,500,000
|
|
|
|
17,610,000
|
|
2013
|
|
|
3,250,000
|
|
|
|
860,000
|
|
|
|
-
|
|
|
|
4,110,000
|
|
2014
and after
|
|
|
542,000
|
|
|
|
1,290,000
|
|
|
|
-
|
|
|
|
1,832,000
|
|
Total
Debt
|
|
$
|
13,542,000
|
|
|
$
|
4,300,000
|
|
|
$
|
13,500,000
|
|
|
$
|
31,342,000
|
|
13
.
|
INTEREST
RATE SWAP AGREEMENTS
|
The
Company uses interest rate swaps to effectively convert variable rate debt to a
fixed rate. The swap rates are based on the floating 30-day LIBOR rate and are
structured such that if the loan rate for the period exceeds the swap rate, then
the bank pays the Company to lower the effective interest
rate. Conversely, if the loan rate is lower than the swap rate, the
Company pays the bank additional interest.
On
October 5, 2007, the Company entered into an interest rate hedge swap agreement
in conjunction with an amendment to its facility with Bank of
America. The intent of the instrument is to fix the interest rate on
75% of the outstanding balance on the Term Loan with Bank of America as required
by the facility. The swap fixes the interest rate for the swapped
amount at 6.62% (4.87% plus the applicable margin, 1.75%).
As of
October 31, 2009, the total notional amount committed to the swap agreement was
$10.2 million. On that date, the variable rate on the remaining 25%
of the term debt was 1.99%.
Based on
the floating rate for respective years ended October 31, 2009 and 2008, the
Company paid $477,542 more and $208,000 more in interest, respectively, than it
would have without the interest rate swap agreements.
These
swaps are considered cash flow hedges because they are intended to hedge, and
are effective as a hedge, against variable cash flows. As a result,
the unrealized loss on derivative in connection with the interest rate swap
agreement, recorded as a current liability, was $725,473 and $531,673 at October
31, 2009 and 2008. The changes in the fair values of the derivatives,
net of tax, are recognized as comprehensive income or loss until the hedged item
is recognized in earnings.
14.
|
FAIR VALUES OF ASSETS
AND LIABILITIES
|
|
The
Company’s assets and liabilities measured at fair value are as
follows:
|
|
|
October
31, 2009
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on derivatives
|
|
$
|
-
|
|
|
$
|
725,473
|
|
|
$
|
-
|
|
15.
|
STOCK BASED
COMPENSATION
|
Stock Option and Incentive
Plans
In April
1998, the Company’s shareholders approved the 1998 Incentive and Non Statutory
Stock Option Plan (the “1998 Plan”). In April 2003, the Company’s
shareholders approved an increase in the authorized number of shares to be
issued under the 1998 Plan from 1,500,000 to 2,000,000. This plan
provides for issuance of up to 2,000,000 options to purchase the Company’s
common stock under the administration of the compensation committee of the Board
of Directors. The intent of this plan is to issue options to
officers, employees, directors, and other individuals providing services to the
Company. Of the total amount of shares authorized under this plan,
425,500 option shares are outstanding and 1,574,500 option shares are available
for grant at October 31, 2009.
In April
2004, the Company’s shareholders approved the 2004 Stock Incentive Plan (the
“2004 Plan”). This plan provides for issuances of awards of up to
250,000 restricted or unrestricted shares, or incentive or non-statutory stock
options, of the Company’s common stock. Of the total amount of shares authorized
under this plan, 149,000 option shares are outstanding, 26,000 restricted shares
have been granted, and 75,000 shares are available for grant at October 31,
2009.
All
incentive and non-qualified stock option grants had an exercise price equal to
the market value of the underlying common stock on the date of grant. The
following table summarizes the activity related to stock options and outstanding
stock option balances during the last two fiscal years:
|
|
Outstanding
Options
(Shares)
|
|
|
Weighted
Average
Exercise
Price
|
|
Balance
at October 31, 2007
|
|
|
659,500
|
|
|
$
|
3.01
|
|
Expired
|
|
|
(66,800
|
)
|
|
|
3.84
|
|
Balance
at October 31, 2008
|
|
|
592,700
|
|
|
|
2.91
|
|
Expired
|
|
|
(18,200
|
)
|
|
|
3.13
|
|
Balance
at October 31, 2009
|
|
|
574,500
|
|
|
|
2.91
|
|
In 2009
and 2008, the 18,200 and 66,800 respective options that expired related to the
1998 Plan.
The total
shares available for grant under all plans are 1,649,500 at October 31,
2009.
The
following table summarizes information pertaining to outstanding stock options,
all of which are exercisable, as of October 31, 2009:
Exercise
Price
Range
|
|
|
Outstanding
Options
(Shares)
|
|
|
Weighted
Average Remaining
Contractual
Life
|
|
|
Weighted
Average
Exercise Price
|
|
|
Intrinsic
Value
|
|
$
|
1.80
- $2.60
|
|
|
|
234,500
|
|
|
|
5.24
|
|
|
$
|
2.32
|
|
|
$
|
-
|
|
$
|
2.81
- $3.38
|
|
|
|
295,000
|
|
|
|
1.13
|
|
|
|
3.22
|
|
|
|
-
|
|
$
|
3.50
- $4.25
|
|
|
|
40,000
|
|
|
|
2.27
|
|
|
|
3.80
|
|
|
|
-
|
|
$
|
4.28
- $4.98
|
|
|
|
5,000
|
|
|
|
2.17
|
|
|
|
4.98
|
|
|
|
-
|
|
|
|
|
|
|
574,500
|
|
|
|
2.89
|
|
|
$
|
2.91
|
|
|
$
|
-
|
|
All of
the outstanding options as of October 31, 2009 and 2008 were
vested.
Outstanding
options were granted with lives of 10 years and provide for vesting over a term
of 0-5 years.
Employee Stock Purchase Plan
(ESPP)
The
Company maintains an ESPP, under which, as originally approved, 500,000 shares
of common stock were reserved for issuance. On March 29, 2007 the Company’s
stockholders approved an increase in the number of shares available under the
plan from 500,000 to 650,000 shares. The ESPP enables eligible
employees to subscribe, through payroll deductions, to purchase shares of the
Company's common stock at a purchase price equal to 95% of the fair market value
on the last day of the payroll payment period. At October 31, 2009,
641,747 shares have issued since the inception of the plan including 89,248
shares issued for proceeds of $62,345 in fiscal year 2009. In fiscal
year 2008 62,184 shares for proceeds of $88,219 were issued from the
plan. The plan reached its limit of shares in the option period
ending December 31, 2009. There are no plans to increase the limit or create a
similar plan.
The
Company has a defined contribution plan which meets the requirements of Section
401(k) of the Internal Revenue Code. All employees of the Company who are at
least twenty-one years of age are eligible to participate in the plan. The plan
allows employees to defer a portion of their salary on a pre-tax basis and the
Company contributes 25% of amounts contributed by employees up to 6% of their
salary. Company contributions to the plan amounted to $97,000, and $145,000, for
the fiscal years ended October 31, 2009 and 2008, respectively.
17.
|
COMMITMENTS AND
CONTINGENCIES
|
Operating
Leases
The
Company’s operating leases consist of trucks, office equipment and rental
property.
Future
minimum rental payments, including related party leases described below, over
the terms of various lease contracts are approximately as follows:
Fiscal
Year Ending October 31,
|
2010
|
|
$
|
3,358,000
|
|
2011
|
|
|
2,629,000
|
|
2012
|
|
|
2,092,000
|
|
2013
|
|
|
1,810,000
|
|
2014
|
|
|
917,000
|
|
Thereafter
|
|
|
992,000
|
|
Total
|
|
$
|
11,798,000
|
|
Rent
expense was $3,665,000 and $3,586,000 for the fiscal years ended October 31,
2009 and 2008, respectively.
18.
|
RELATED PARTY
TRANSACTIONS
|
Directors and
Officers
The Baker
family group, consisting of four current directors Henry Baker (Chairman
Emeritus), Peter Baker (CEO), John Baker (Executive Vice President) and Ross
Rapaport (Chairman), as trustee, together own a majority of our common
stock. In addition, in connection with the acquisition of Crystal
Rock Spring Water Company in 2000, we issued members of the Baker family group
12% subordinated promissory notes secured by all of our assets. The
current balance on these notes is $13,500,000.
Henry
Baker, had an employment contract with the Company through July 1, 2008. His
contract entitled him to annual compensation of $47,000 as well as a leased
Company vehicle. Since then he has been employed by the Company as an at-will
employee at the discretion of management. Mr. Baker’s sons, John Baker and Peter
Baker, have employment contracts with the Company through December 31,
2010. They are also directors. The two contracts entitle the
respective shareholders to annual compensation of $320,000 each and other
bonuses and perquisites.
The
Company leases a 67,000 square foot facility in Watertown, Connecticut and a
22,000 square foot facility in Stamford, Connecticut from a Baker family
trust. The lease in Stamford expires in October 2010. On
August 29, 2007 the Company finalized an amendment to our existing lease in
Watertown which extended that lease to October 2016.
Future
minimum rental payments under these leases are as follows:
Fiscal
year ending October 31,
|
|
Stamford
|
|
|
Watertown
|
|
|
Total
|
|
2010
|
|
$
|
248,400
|
|
|
$
|
414,000
|
|
|
$
|
662,400
|
|
2011
|
|
|
-
|
|
|
|
452,250
|
|
|
|
452,250
|
|
2012
|
|
|
-
|
|
|
|
452,250
|
|
|
|
452,250
|
|
2013
|
|
|
-
|
|
|
|
461,295
|
|
|
|
461,295
|
|
2014
|
|
|
-
|
|
|
|
461,295
|
|
|
|
461,295
|
|
2015
|
|
|
-
|
|
|
|
470,521
|
|
|
|
470,521
|
|
2016
|
|
|
-
|
|
|
|
470,521
|
|
|
|
470,521
|
|
Totals
|
|
$
|
248,400
|
|
|
$
|
3,182,132
|
|
|
$
|
3,430,532
|
|
The
Company’s Chairman of the Board, Ross S. Rapaport, who also acts as Trustee in
various Baker family trusts is employed by Pepe & Hazard LLP a business law
firm that the Company uses from time to time. During fiscal 2009 and
2008 the Company paid approximately $69,000 and $63,000, respectively, for
services provided by Pepe & Hazard LLP.
As of
October 31, 2009, the Company had accrued $120,000 to pay Mr. Rapaport for work
in 2009 that consumed more time than would routinely be required by his duties
as chair of the Board. Payment of this amount occurred after October
31, 2009 and was approved by the Company’s compensation committee.
Investment in
Voyageur
The
Company had an equity position in a software company named Voyageur Software,
Inc. (Voyageur) formerly Computer Design Systems, Inc. One of the Company’s
directors was a member of the board of directors of Voyageur. The
Company’s equity investment in Voyageur represented approximately 24% of the
outstanding shares of the company. In 2004, the Company determined
that its investment in Voyageur was impaired and wrote off the carrying value of
its investment. On February 29, 2008, Voyageur sold substantially all
of its assets to another software company and the proceeds were insufficient to
provide a return to Voyageurs shareholders. As a result of the sale,
Voyageur ceased its operations. Software development and maintenance previously
provided by Voyageur to the Company may now be provided by the buyer, an
unrelated party.
During
fiscal year 2008 the Company paid $45,011 for service, software, and hardware
from Voyageur. There were no payments to Voyageur in fiscal year
2009.
The
following is the composition of income tax expense:
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
1,217,515
|
|
|
$
|
412,009
|
|
State
|
|
|
197,818
|
|
|
|
361,137
|
|
Total
current
|
|
|
1,415,333
|
|
|
|
773,146
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
295,844
|
|
|
|
183,582
|
|
State
|
|
|
34,934
|
|
|
|
11,826
|
|
Total
deferred
|
|
|
330,778
|
|
|
|
195,408
|
|
Total
income tax expense
|
|
$
|
1,746,111
|
|
|
$
|
968,554
|
|
Deferred
tax assets (liabilities) at October 31, 2009 and October 31, 2008, are as
follows:
|
|
October 31,
|
|
|
|
2009
|
|
|
2008
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$
|
165,600
|
|
|
$
|
157,434
|
|
Accrued
compensation
|
|
|
229,506
|
|
|
|
296,118
|
|
Accrued
liabilities and reserves
|
|
|
79,249
|
|
|
|
88,499
|
|
Interest
rate swap
|
|
|
276,727
|
|
|
|
202,036
|
|
Capital
loss carry forward
|
|
|
81,959
|
|
|
|
83,057
|
|
Valuation
allowance
|
|
|
(81,959
|
)
|
|
|
(83,057
|
)
|
Total
deferred tax assets
|
|
|
751,082
|
|
|
|
744,087
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(1,639,881
|
)
|
|
|
(1,576,065
|
)
|
Amortization
|
|
|
(2,026,898
|
)
|
|
|
(1,827,631
|
)
|
Total
deferred tax liabilities
|
|
|
(3,666,779
|
)
|
|
|
(3,403,696
|
)
|
|
|
|
|
|
|
|
|
|
Net
deferred tax liability
|
|
$
|
(2,915,697
|
)
|
|
$
|
(2,659,609
|
)
|
During
2009 and 2008, the Company established a valuation allowance of $81,959 and
$83,057, respectively, related to the capital loss carry forward deferred tax
asset.
Income
tax expense differs from the amount computed by applying the statutory tax rate
to net (loss) income before income tax expense as follows:
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
Income
tax expense (benefit) computed at the statutory rate
|
|
$
|
1,620,434
|
|
|
$
|
(6,414,770
|
)
|
Goodwill
impairment
|
|
|
-
|
|
|
|
7,602,091
|
|
Energy
Credit
|
|
|
-
|
|
|
|
(508,260
|
)
|
Other
differences
|
|
|
(27,939
|
)
|
|
|
43,337
|
|
State
income taxes
|
|
|
153,616
|
|
|
|
246,156
|
|
Income
tax expense
|
|
$
|
1,746,111
|
|
|
$
|
968,554
|
|
The
Company did not recognize an increase to tax liability for uncertain tax
positions. The Company files income tax returns in the U.S. federal
jurisdiction and various state and local jurisdictions. Generally, the Company
is no longer subject to U.S. federal, state and local tax examinations by tax
authorities for years before October 31, 2005.
A
reconciliation of the beginning and ending amount of unrecognized tax benefits
including interest and penalties is as follows:
Balance at
November 1, 2007
|
|
$
|
119,000
|
|
Increases
related to current year tax positions
|
|
|
-
|
|
Increases
related to the prior year tax positions
|
|
|
17,000
|
|
Decreases
related to prior year tax positions
|
|
|
-
|
|
Settlements
|
|
|
-
|
|
Expiration
of Statutes
|
|
|
-
|
|
Balance
at October 31, 2008
|
|
$
|
136,000
|
|
Increases
related to current year tax positions
|
|
|
-
|
|
Increases
related to the prior year tax positions
|
|
|
34,000
|
|
Decreases
related to prior year tax positions
|
|
|
-
|
|
Settlements
|
|
|
-
|
|
Expiration
of Statutes
|
|
|
118,000
|
|
Balance
at October 31, 2009
|
|
$
|
52,000
|
|
The
Company recognizes interest and penalties related to the unrecognized tax
benefits in tax expense. During the year ended October 31, 2009
the Company reduced interest and penalties by $27,000. In the year ended October
31, 2008, it recognized $17,000 of interest and penalties. The Company had
approximately $35,000 and $62,000 of interest and penalties accrued at October
31, 2009 and 2008, respectively.
20.
|
NET INCOME (LOSS) PER
SHARE
|
The
following calculation provides the reconciliation of the denominators used in
the calculation of basic and fully diluted earnings per share:
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
Net
Income (Loss)
|
|
$
|
3,019,868
|
|
|
$
|
(19,835,525
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic
Weighted Average Shares Outstanding
|
|
|
21,525,932
|
|
|
|
21,564,384
|
|
Effect
of Stock Options
|
|
-
|
|
|
-
|
|
Diluted
Weighted Average Shares Outstanding
|
|
|
21,525,932
|
|
|
|
21,564,384
|
|
|
|
|
|
|
|
|
|
|
Basic
Net Income (Loss) Per Share
|
|
$
|
.14
|
|
|
$
|
(.92
|
)
|
|
|
|
|
|
|
|
|
|
Diluted
Net Income (Loss) Per Share
|
|
$
|
.14
|
|
|
$
|
(.92
|
)
|
There
were 574,500 and 592,700 options outstanding for the years ended October 31,
2009 and 2008, respectively, that were not included in the dilution calculation
because the options’ exercise price exceeded the market price of the underlying
common shares.
21.
|
CONCENTRATION OF
CREDIT RISK
|
The
Company maintains its cash accounts at various financial
institutions. The balances at times may exceed federally insured
limits. At October 31, 2009, the Company had cash in deposits
exceeding the insured limit by approximately $3,472,000. Effective
October 3, 2008, the Emergency Economic Stabilization Act temporarily raised the
basic limit on federal deposit insurance coverage from $100,000 to $250,000 per
depositor. The legislation provides that the basic deposit insurance limit will
return to $100,000 after December 31, 2013. In addition, the
Company’s deposits are maintained in various financial institutions that are
participating in the Federal Deposit Insurance Corporation’s Temporary Liquidity
Guarantee Program. This program provides a full guarantee for all
noninterest-bearing transaction accounts maintained at the various financial
institutions through December 31, 2009. Accordingly, all of the
Company’s cash accounts are fully guaranteed at October 31, 2009.
On May 1,
2006, the Company filed a lawsuit in the Superior Court Department, County of
Suffolk, Massachusetts, alleging malpractice and other wrongful acts against
three law firms that had been representing the Company in litigation involving
Nestlé Waters North America, Inc.: Hagens Berman Sobol Shapiro LLP, Ivey &
Ragsdale, and Cozen O’Connor. The case is Vermont Pure Holdings, Ltd. vs. Cozen
O'Connor et al., Massachusetts Superior Court CA No. 06-1814.
Until May
2, 2006, when the Company terminated their engagement, the three defendant law
firms represented the Company in litigation in federal district court in
Massachusetts known as Vermont Pure Holdings, Ltd. vs. Nestlé Waters North
America, Inc. (the Nestlé litigation). The Company filed the Nestlé litigation
in early August 2003.
The
Company’s lawsuit alleges that the three defendant law firms wrongfully
interfered with, and/or negligently failed to take steps to obtain, a proposed
June 2003 settlement with Nestlé. The complaint includes counts involving
negligence, breach of contract, breach of the implied covenant of good faith and
fair dealing, breach of fiduciary duty, tortious interference with economic
relations, civil conspiracy, and other counts, and seeks declaratory relief and
compensatory and punitive damages.
In July
2006, certain of the defendants filed a counterclaim against the Company seeking
recovery of their fees and expenses in the Nestlé litigation. In August 2007,
certain of the defendants filed a counterclaim against the Company that includes
an abuse of process count in which it is alleged that our claims against them
are frivolous and were not advanced in good faith, as well as a quantum meruit
count in which these defendants allege that their services were terminated
wrongfully and in bad faith and seek approximately $2.2 million in
damages.
Discovery
of fact witnesses and expert witnesses has been completed. In September 2008,
the defendants in the lawsuit filed summary judgment motions seeking dismissal
of the Company’s claims in their entirety, which the Company opposed. The
Superior Court Judge denied these motions in a ruling dated December 26,
2008.
On July
31, 2009, the Company reached a settlement with all defendants in the action
other than Cozen O’Connor and a former partner in that firm, pursuant to which
mutual releases have been executed. The Company received a one-time payment of
$3 million which has been reflected in fiscal year 2009 as miscellaneous
income.
An
evidentiary hearing took place between October 1 and October 7, 2009, and
certain matters relating to that hearing are currently under advisement with the
Court. The Court has set a tentative trial date of March 4, 2010. Management
intends to pursue the Company’s remaining claims, and to the extent of the
counterclaims asserted against the Company, to defend the Company
vigorously.
23.
|
REPURCHASE
OF COMMON STOCK
|
|
In
January 2006, the Company’s Board of Directors approved the purchase of up
to 250,000 of the Company’s common shares at the discretion of
management. In May 2008, the Company’s Board of Directors
approved the purchase of up to an additional 250,000 of the Company’s
common shares at the discretion of management. In fiscal years 2009 and
2008, the Company purchased an additional 106,298 and 179,000 shares,
respectively, for an aggregate purchase price of $86,848 and $242,860,
respectively. Since the inception of the purchases, 407,998 shares, for a
total of $539,455, have been purchased. The Company expects to continue to
purchase stock in the open market but total purchases may not ultimately
reach the limit established. The Company has used internally
generated cash to fund these
purchases.
|
Management
has evaluated subsequent events through January 25, 2010, which is the date the
financial statements were issued. There were no subsequent events
that require adjustment to or disclosure in the consolidated financial
statements.
F -
26
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