VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Form 10-Q instructions and in the opinion of management contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the condensed consolidated financial position, results of operations, and cash flows for the periods presented. The results have been determined on the basis of generally accepted accounting principles and practices of the United States of America (“GAAP”), applied consistently with the Annual Report on Form 10-K of Vermont Pure Holdings, Ltd. (the “Company”) for the year ended October 31, 2009.
Certain information and footnote disclosures normally included in audited consolidated financial statements presented in accordance with GAAP have been condensed or omitted. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended October 31, 2009. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.
The financial statements herewith reflect the consolidated operations and financial condition of Vermont Pure Holdings Ltd. and its wholly owned subsidiary Crystal Rock, LLC.
2.
GOODWILL AND OTHER INTANGIBLE ASSETS
Major components of intangible assets at January 31, 2010 and October 31, 2009 consisted of:
|
|
|
January 31, 2010
|
|
|
October 31, 2009
|
|
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Amortizable Intangible Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer Lists and Covenants Not to Compete
|
|
$
|
8,969,270
|
|
|
$
|
5,496,170
|
|
|
$
|
8,969,270
|
|
|
$
|
5,223,343
|
|
|
Other Identifiable Intangibles
|
|
|
471,031
|
|
|
|
201,851
|
|
|
|
490,013
|
|
|
|
200,746
|
|
|
Total
|
|
$
|
9,440,301
|
|
|
$
|
5,698,021
|
|
|
$
|
9,459,283
|
|
|
$
|
5,424,089
|
|
|
|
Amortization expense for the three month periods ending January 31, 2010 and 2009 was $273,932 and $200,413, respectively.
|
There were no changes in the carrying amount of goodwill for the three month period ending January 31, 2010.
3.
DEBT
As of January 31, 2010 the Company had outstanding balances of $12,729,000 on its term loan and $4,300,000 on its $10,000,000 acquisition line of credit with Bank of America. In addition, there was an outstanding letter of credit for $1,583,000 issued against the $6,000,000 revolving line of credit’s availability. As of January 31, 2010 there was $5,700,000 and $4,417,000 available on the acquisition and revolving lines of credit, respectively.
As of January 31, 2010, the Company had approximately $7,500,000 of debt subject to variable interest rates. Under the senior credit agreement 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 acquisition line of credit resulting in variable interest rates of 1.98% and 1.73%, respectively at January 31, 2010.
The Company’s credit facility requires the Company to 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 of greater than 2.50 to 1. As of January 31, 2010, the Company was in compliance with these covenants.
As of January 31, 2010, the Company had $13,500,000 of subordinated debt outstanding bearing an interest rate of 12%.
On April 5, 2010 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.
4.
INVENTORIES
Inventories consisted of the following at:
|
|
|
January 31,
2010
|
|
|
October 31,
2009
|
|
|
Finished Goods
|
|
$
|
1,981,242
|
|
|
$
|
2,015,395
|
|
|
Raw Materials
|
|
|
148,733
|
|
|
|
156,417
|
|
|
Total Inventories
|
|
$
|
2,129,975
|
|
|
$
|
2,171,812
|
|
5.
ON-BALANCE SHEET DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES
Derivative Financial Instruments
The Company has a stand-alone derivative financial instrument in the form of an interest rate swap agreement, which derives its value from underlying interest rates. This transaction involves both credit and market risk. The notional amount is an amount on which calculations, payments, and the value of the derivative are based. The notional amount does not represent direct credit exposures. Direct credit exposure is limited to the net difference between the calculated amount to be received and paid, if any. Such difference, which represents the fair value of the derivative instrument, is reflected on the Company’s balance sheet as an unrealized gain or loss on derivatives.
The Company is exposed to credit-related losses in the event of nonperformance by the counterparties to these agreements. The Company controls the credit risk of its financial contracts through credit approvals, limits and monitoring procedures, and currently has no reason to believe that any counterparties will fail to fulfill their obligations.
Risk Management Policies - Hedging Instruments
The primary focus of the Company’s asset/liability management program is to monitor the sensitivity of the Company’s interest rate swap and its related value and the resulting assets and liabilities and net income or loss under varying interest rate scenarios and to take steps to control its risks. On a quarterly basis, the Company simulates the net portfolio value and net income expected to be earned over a twelve-month period following the date of simulation. The simulation is based on a projection of market interest rates at varying levels and estimates the impact of such market rates on the levels of interest-earning assets and interest-bearing liabilities during the simulation or measurement period. Based upon the outcome of the simulation analysis, the Company considers the use of derivatives as a means of reducing the volatility of the net portfolio value and projected net income within certain ranges of projected changes in interest rates. The Company evaluates the effectiveness of entering into any derivative instrument agreement by measuring the cost of such an agreement in relation to the changes in net portfolio value and net income volatility within an assumed range of interest rates.
The Company uses long-term variable rate debt as a source of funds for use in the Company’s general business purposes. These debt obligations expose the Company to variability in interest payments due to changes in interest rates. If interest rates increase, interest expense increases. Conversely, if interest rates decrease, interest expense decreases. Management believes it is prudent to limit the variability of a portion of its interest payments and, therefore, generally hedges a portion of its variable-rate interest obligations. To meet this objective, management enters into interest rate swap agreements whereby the Company receives variable interest rate payments and makes fixed interest rate payments on a portion of its debt.
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%) and matures in January 2014.
As of January 31, 2010, the total notional amount committed to the swap agreement was $9,500,000. On that date, the variable rate on the remaining 25% of the term debt was 1.98%. This agreement provided for the Company to receive payments at a variable rate determined by a specified index (30-day LIBOR) in exchange for making payments at a fixed rate.
At January 31, 2010 and 2009, the unrealized loss relating to interest rate swaps was recorded in current liabilities. For the effective portion of the hedge, changes in the fair value of interest rate swaps designated as hedging instruments to mitigate the variability of cash flows associated with long-term debt are reported in other comprehensive income or loss net of tax effects. Any ineffective portion of the hedge is recognized in earnings. The cash flow hedge is 100% effective for the quarters ending January 31, 2010 and 2009. These amounts subsequently are reclassified into interest expense as a yield adjustment in the same period in which the related interest on the long-term debt affects earnings. There was no other comprehensive income or loss reclassified into interest expense during the quarters ended January 31, 2010 and 2009.
As a result of the interest rate swap, the Company incurred and paid $115,000 of additional interest expense in the quarter ended January 31, 2010. Additionally in the quarter ended January 31, 2010 the fair value of the swap changed from an unrealized loss on derivative liability at the beginning of the period of $725,473 to $674,481, resulting in an increase in other comprehensive income before taxes of $50,992. The net unrealized gain after taxes for the period, which is recorded in stockholders’ equity as an adjustment to other comprehensive income, was $30,014.
6.
FAIR VALUES OF ASSETS AND LIABILITIES
|
|
The Company’s assets and liabilities measured at fair value under the levels of the fair value hierarchy are as follows:
|
|
|
|
January 31, 2010
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on derivatives
|
|
$
|
-
|
|
|
$
|
674,481
|
|
|
$
|
-
|
|
7.
COMPREHENSIVE INCOME (LOSS)
The following table summarizes comprehensive income (loss) for the respective periods:
|
|
|
Three Months Ended January 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Net income
|
|
$
|
177,551
|
|
|
$
|
94,525
|
|
|
Other comprehensive income (loss):
Unrealized gain (loss) on derivatives designated as cash flow hedges – net of tax
|
|
|
30,014
|
|
|
|
(227,958
|
)
|
|
Comprehensive income (loss)
|
|
$
|
207,565
|
|
|
$
|
(133,433
|
)
|
8.
INCOME PER SHARE AND WEIGHTED AVERAGE SHARES
The Company considers outstanding in-the-money stock options as potential common stock in its calculation of diluted earnings per share, unless the effect would be anti-dilutive, and uses the treasury stock method to calculate the applicable number of shares. The following calculation provides the reconciliation of the denominators used in the calculation of basic and fully diluted earnings per share:
|
|
|
Three Months Ended
January 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Net Income
|
|
$
|
177,525
|
|
|
$
|
94,525
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Basic Weighted Average Shares Outstanding
|
|
|
21,475,127
|
|
|
|
21,502,483
|
|
|
Dilutive effect of Stock Options
|
|
|
-
|
|
|
|
-
|
|
|
Diluted Weighted Average Shares Outstanding
|
|
|
21,475,127
|
|
|
|
21,502,483
|
|
|
Basic Income Per Share
|
|
$
|
.01
|
|
|
$
|
.00
|
|
|
Diluted Income Per Share
|
|
$
|
.01
|
|
|
$
|
.00
|
|
There were 569,500 and 587,700 options outstanding as of January 31, 2010 and 2009, respectively. For the three month period ended January 31, 2010 and 2009 there were no options used to calculate the effect of dilution because all of the outstanding options’ exercise prices exceeded the market price of the underlying common shares.
9.
COMPENSATION PLANS
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 the initial date of grant.
The Company has several stock-based compensation plans under which incentive and non-qualified stock options and restricted shares are granted. In April 1998, the Company’s stockholders approved the 1998 Incentive and Non-Statutory Stock Option Plan. In April 2003, the Company’s stockholders approved an increase in the authorized number of shares to be issued under its 1998 Incentive and Non-Statutory Stock Option Plan from 1,500,000 to 2,000,000. This plan provides for issuances of options to purchase the Company’s common stock under the administration of the compensation committee of the Board of Directors. The intent of the plan is to reward options to officers, employees, directors, and other individuals providing services to the Company.
In April 2004, the Company’s stockholders approved the 2004 Stock Incentive Plan. The plan provides for issuances of awards of up to 250,000 restricted or unrestricted shares of the Company’s common stock, or incentive or non-statutory stock options to purchase such 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 January 31, 2010.
The options issued under the plans generally vest in periods up to five years based on the continuous service of the recipient and have 10 year contractual terms. Share awards generally vest over one year. Option and share awards provide for accelerated vesting if there is a change in control of the Company (as defined in the plans).
There was an option for 5,000 shares of stock that expired in the first three months in each of fiscal years 2010 and 2009. Other than the expirations, there was no activity related to stock options and outstanding stock option balances or other equity based compensation during the three month periods ended January 31, 2010 and 2009. The Company did not grant any equity based compensation during the three months ended January 31, 2010 and 2009.
The following table summarizes information pertaining to outstanding stock options, all of which are exercisable, as of January 31, 2010:
|
Exercise
Price
Range
|
|
|
Outstanding
Options
(Shares)
|
|
|
Weighted Average Remaining
Contractual
Life
|
|
|
Weighted
Average
Exercise Price
|
|
|
Intrinsic
Value
as of
January 31, 2010
|
|
|
$
|
1.80 - $2.60
|
|
|
|
234,500
|
|
|
|
5.0
|
|
|
$
|
2.32
|
|
|
$
|
-
|
|
|
$
|
2.81 - $3.38
|
|
|
|
290,000
|
|
|
|
.9
|
|
|
|
3.23
|
|
|
|
-
|
|
|
$
|
3.50 - $4.25
|
|
|
|
40,000
|
|
|
|
2.0
|
|
|
|
3.80
|
|
|
|
-
|
|
|
$
|
4.28 - $4.98
|
|
|
|
5,000
|
|
|
|
1.9
|
|
|
|
4.98
|
|
|
|
-
|
|
|
|
|
|
|
|
569,500
|
|
|
|
2.7
|
|
|
$
|
2.91
|
|
|
$
|
-
|
|
Outstanding options were granted with lives of 10 years and provide for vesting over a term of 0-5 years. Since all outstanding stock options were fully vested as of January 31, 2010 there was no unrecognized share based compensation related to unvested options as of that date. 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.
Employee Stock Purchase Plan
On June 15, 1999, the Company’s stockholders approved the Vermont Pure Holdings, Ltd. 1999 Employee Stock Purchase Plan (“ESPP”). On January 1, 2001, employees commenced participation in the plan. The total number of shares of common stock issued under this plan during the three months ended January 31, 2010 and 2009 was 8,242 and 57,739 for proceeds of $4,648 and $38,397, respectively.
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. Effective January 1, 2006, ESPP shares are granted at 95% of the fair market value at the last day of the offering period. Prior to that, ESPP shares were granted at 85% of the fair market value at the lower of the first or last day of the offering period. 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.
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 4 years starting at the date of the agreement. On the date of the agreement, the Company recognized the full expense related to this special termination benefit.
10.
RECENT PRONOUNCEMENTS
The Financial Accounting Standards Board released an update to guidance for fair value measurements and disclosures. This update requires new disclosures for significant transfers in and out of Level 1 and Level 2 fair value measurements and separate presentation of certain information in the reconciliation for fair value measurements using significant unobservable inputs. In addition, the updated guidance clarifies the requirements of existing disclosures. The update is effective for interim and annual reporting periods beginning after December 15, 2009, which is the second quarter of fiscal 2010 for the Company. The Company does not expect this update to have a material impact on its consolidated financial statements
11.
SUBSEQUENT EVENT
Debt Restructuring
The Company is in the process of negotiating an amendment to its existing credit facility with Bank of America to renew its revolving line of credit and re-finance the balance on its term loan and acquisition line of credit. The Company expects to finalize the proposed amendment to the facility to by April 5, 2010, when its current lines of credit expire, but no assurance can be given that this will be the case. The Company expects that this proposed amendment will provide adequate access to capital to fund future operations but if it is unable to amend its facility to extend its lines of credit, and no alternative funding is available, its business and its results of operations may be materially affected. It is also expected that the terms of the maturity of the Company’s subordinated debt will change to be consistent with the proposed senior debt restructuring.
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto as filed in our Annual Report on Form 10-K for the year ended October 31, 2009 as well as the condensed consolidated financial statements and notes contained herein.
Forward-Looking Statements
When used in the Form 10-Q and in our future filings with the Securities and Exchange Commission, the words or phrases “will likely result,” “we expect,” “will continue,” “is anticipated,” “estimated,” “project,” “outlook,” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. We caution readers not to place undue reliance on any such forward-looking statements, each of which speaks only as of the date made. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. Among these risks are water supply and reliance on commodity price fluctuations. We have no obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements.
Results of Operations
Overview and Trends
Our sales were higher and our business was more profitable in the first quarter of fiscal year 2010 than in the same period a year ago. The increase in sales and profit was largely due to acquisitions completed in fiscal year 2009. Although, technically, the national economy is not in a recession, we believe that the economy is still soft in the markets in which we operate. As a result, although we are hopeful that we can sustain the first quarter growth over the remainder of the fiscal year, there is no assurance we can do so. Accordingly, we continue to explore ways to leverage our distribution channels and operate our business efficiently.
Despite uncertainty in the regional economy, our business remains healthy. We have conserved cash while reducing debt. We also have reduced capital spending while upgrading the quality of our bottles. We continue to have borrowing capacity available on our lines of credit. Although our lines of credit expire on April 5, 2010 we are negotiating with Bank of America to renew the lines by the expiration date in a restructured arrangement that includes our senior term debt.
Results of Operations for the Three Months Ended January 31, 2010 (First Quarter) Compared to the Three Months Ended January 31, 2009
Sales
Sales for the three months ended January 31, 2010 were $16,185,000 compared to $15,552,000 for the corresponding period in 2009, an increase of $633,000 or 4%. The increase was primarily the result of sales from acquisitions that were consummated after the first quarter in fiscal year 2009. Sales related to those acquisitions totaled $718,000 in the first quarter of fiscal year 2010. Without including sales from acquisitions, total sales decreased by 1% in the first quarter of 2010 compared to the same period in 2009.
The comparative breakdown of sales of the product lines for the respective three-month periods ended January 31, 2010 and 2009 is as follows:
|
Product Line
|
|
2010
|
|
|
2009
|
|
|
Difference
|
|
|
% Diff.
|
|
|
(000's $)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water
|
|
$
|
6,620
|
|
|
$
|
6,217
|
|
|
$
|
403
|
|
|
|
6
|
%
|
|
Coffee and Related
|
|
|
5,595
|
|
|
|
5,499
|
|
|
|
96
|
|
|
|
2
|
%
|
|
Equipment Rental
|
|
|
2,243
|
|
|
|
2,142
|
|
|
|
101
|
|
|
|
5
|
%
|
|
Other
|
|
|
1,727
|
|
|
|
1,694
|
|
|
|
33
|
|
|
|
2
|
%
|
|
Total
|
|
$
|
16,185
|
|
|
$
|
15,552
|
|
|
$
|
633
|
|
|
|
4
|
%
|
Water
– Sales of water increased compared to the same period in the prior year because volume in the first quarter of 2010 increased 4% and the average selling price increased 2% from the first quarter of 2009. The increase in sales is related to acquisitions. Acquisitions accounted for $427,000 of sales, or 6%, in fiscal year 2010. Net of acquisitions, sales for the category decreased slightly.
Coffee and Related Products
– The increase in sales in the first quarter of 2010 compared to the comparable period in 2009 was attributable to the growth of single serve coffee, which grew 10%, to $2,850,000 in the first quarter of 2010 compared to $2,594,000 in the same period in fiscal year 2008. Other products in this category, traditional coffee and ancillary refreshment products declined 6% in the first quarter compared to the same quarter a year ago. The decrease in traditional coffee products is a result of lower demand in our market because of the appeal of single serve products. Acquisitions had no significant affect on this category.
Equipment Rental
– Equipment rental revenue increased in the first quarter of 2010 compared to the comparable period in 2009 as a result of an increase in both average rental prices and placements of equipment. Sales were 1% higher in the first quarter of 2010 due to increased equipment placements and 4% higher as a result of an increase in prices as compared to the first quarter of 2009. Sales increased $127,000, or 6%, as a result of acquisitions. Net of acquisitions, sales decreased slightly for the category.
Other
– The increase in other revenue is attributable to higher sales of other products, including single serve beverages, cups, and vending, in the first quarter of 2010 compared to the same period a year ago. Sales in this category increased $61,000 as a result of acquisitions. Net of acquisitions, sales decreased 2%.
Gross Profit/Cost of Goods Sold
– For the three months ended January 31, 2010, gross profit was $8,517,000 compared to $8,120,000 for the comparable period in 2009. As a percentage of sales, gross profit increased to 53% in the first quarter of 2010 from 52% in the first quarter of 2009. The increase in gross profit of $397,000, or 5%, was primarily due to higher sales, primarily as a result of acquisitions. The improvement in gross profit percentage was due to the change in product sales mix including an increase in higher margin water 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. The reader should be aware that other companies may include distribution costs in their cost of goods sold, in which case, on a comparative basis, such other companies may have a lower gross margin as a result.
Operating Expenses and Income from Operations
Total operating expenses increased to $7,601,000 in the first quarter of 2010 from $7,287,000 in the comparable period in 2009, an increase of $314,000, or 4%.
Selling, general and administrative (SG&A) expenses of $6,920,000 in the first quarter of 2010 increased $110,000, or 2%, from $6,810,000 in the comparable period in 2009. Of total SG&A expenses, route distribution costs increased $80,000, or 1%, as a result of higher fuel and sales-related compensation costs; selling costs increased $49,000, or 1% as a result of higher sales-related compensation costs; and administration costs decreased $19,000 as a result of lower labor costs.
Advertising expenses were $357,000 in the first quarter of 2010 compared to $283,000 in the first quarter of 2009, an increase of $74,000, or 26%. The increase in advertising costs is primarily related to an increase in agency costs and internet advertising.
Amortization increased to $274,000 in the first quarter of 2010 from $200,000 in the comparable quarter in 2009. Amortization is attributable to intangible assets that were acquired as part of acquisitions in recent years.
Income from operations for the three months ended January 31, 2010 was $916,000 compared to $833,000 in the comparable period in 2009, an increase of $83,000, or 10%. The increase was a result of higher sales and product margins which were partially offset by increased operating expenses.
Interest, Taxes, and Other Expenses
Interest expense was $615,000 for the three months ended January 31, 2010 compared to $683,000 in the three months ended January 31, 2009, a decrease of $68,000. The decrease is attributable to lower outstanding debt and lower interest rates during the first quarter of 2010 compared to the first quarter of 2009.
Income before income taxes was $301,000 for the three months ended January 31, 2010 compared to income before income taxes of $150,000 in the corresponding period in 2009, an increase of $151,000. The tax expense for the first quarter of fiscal year 2010 was $123,000 and was based on the expected effective tax rate of 41%. We recorded a tax expense of $56,000 related to income from operations in the first quarter of fiscal year 2009 based on an effective tax rate of 37%. The lower effective tax rate in 2009 was primarily a result of a reduction of our tax reserves in 2009 and estimated increases in non-deductible items in 2010 as compared to 2009.
Net Income
Net income increased to $178,000 for the three months ended January 31, 2010 from $95,000 in the corresponding period in 2009. The increase is attributable to higher sales and product margins, and proportionately similar operating expenses for the first quarter of 2010 as compared to the same period in fiscal year 2009.
Liquidity and Capital Resources
As of January 31, 2010, we had working capital of $4,047,000 compared to $4,088,000 as of October 31, 2009, a decrease of $41,000. The relatively stable working capital balance was reflective of the consistent working capital sources and uses in the first quarter of 2010. Net cash provided by operating activities increased $262,000 to $520,000 in 2010 from $258,000 in 2009. The increase was primarily attributable to higher net income and lower cash usage for inventory.
In the first three months of fiscal year 2010, we used $812,000 for scheduled repayments of our senior term debt. In addition, we used $649,000 for capital expenditures. Cash expenditures for capital additions were $458,000 higher than for the same period last year because of higher outlays for water bottles and coolers. In addition, we borrowed $300,000 from our line of credit in the first quarter of 2009 to pay for capital expenditures.
As of January 31, 2010 we had outstanding balances of $12,729,000 on our term loan and $4,300,000 on our $10,000,000 acquisition line of credit with Bank of America. In addition, there was no balance outstanding but an outstanding letter of credit for $1,583,000 issued against our $6,000,000 revolving line of credit. As of January 31, 2010 there was $5,700,000 and $4,417,000 available on the acquisition and revolving lines of credit, respectively.
We are in the process of negotiating an amendment to our existing credit facility with Bank of America to renew our revolving line of credit and re-finance the balance on our term loan and acquisition line of credit. We expect to finalize the proposed amendment to the facility to by April 5, 2010, when our current lines of credit expire, but no assurance can be given that this will be the case. Further, we expect that this proposed amendment will provide adequate access to capital to fund future operations but if we are unable to amend our facility to extend our lines of credit, and no alternative funding is available, our business and results of operations may be materially affected. It is also expected that the terms of the maturity of our subordinated debt will change to be consistent with the proposed senior debt restructuring.
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 January 31, 2010, we were in compliance with all of the financial covenants of our credit facility.
As of January 31, 2010, 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, 1.75%). The amendment to our bank facility referenced above will require that we will have a minimum of 75% of the term loan at a fixed interest rate at any point in time. This will result in an increase in our interest rate swap(s) if the amendment closes.
The net deferred tax liability at January 31, 2010 represents future tax consequences of temporary differences, primarily attributable to depreciation and amortization, that will result in future taxable income.
In addition to our senior and subordinated debt commitments, we have significant future cash commitments, primarily in the form of operating leases that are not reported on the balance sheet. The following table sets forth our contractual commitments in future fiscal years:
|
|
|
Payment due by fiscal year
|
|
|
Contractual Obligations (1)
|
|
Total
|
|
|
Remainder
of 2010
|
|
|
|
2011-2012
|
|
|
|
2013-2014
|
|
|
After 2015
|
|
|
Debt
|
|
$
|
30,529,000
|
|
|
$
|
2,867,000
|
|
|
$
|
21,720,000
|
|
|
$
|
5,512,000
|
|
|
$
|
430,000
|
|
|
Interest on Debt (2)
|
|
|
7,618,000
|
|
|
|
1,740,000
|
|
|
|
4,088,000
|
|
|
|
1,787,000
|
|
|
|
3,000
|
|
|
Operating Leases
|
|
|
11,098,000
|
|
|
|
2,509,000
|
|
|
|
4,787,000
|
|
|
|
2,821,000
|
|
|
|
981,000
|
|
|
Total
|
|
$
|
49,245,000
|
|
|
$
|
7,116,000
|
|
|
$
|
30,595,000
|
|
|
$
|
10,120,000
|
|
|
$
|
1,414,000
|
|
(1) Customer deposits have been excluded from the table. Deposit balances vary from period to period with water sales but future increases and decreases in the balances are not accurately predictable. Deposits are excluded because, net of periodic additions and reductions, it is probable that a customer deposit balance will always be outstanding as long as the business operates.
(2) 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 1.98%, and subordinated debt at a rate of 12%.
We have no other material contractual obligations or commitments.
Inflation has had no material impact on our performance.
Item 3.
Quantitative and Qualitative Disclosures about Market Risks.
Pursuant to Regulation S-K, Item 305(e), smaller reporting companies are not required to provide this information.
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Item 4(T).
|
Controls and Procedures.
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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 Commission’s rules and forms. Our Chief Executive Officer and Chief Financial Officer also concluded that our disclosure controls and procedures were effective to insure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, or other persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures are designed to provide reasonable assurance that the controls and procedures will meet their objectives.
The effectiveness of a system of disclosure controls and procedures is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of internal controls, and fraud. Due to such inherent limitations, there can be no assurance that any system of disclosure controls and procedures will be successful in preventing all errors or fraud, or in making all material information known in a timely manner to the appropriate levels of management.
Changes in Internal Control over Financial Reporting.
During the three months ended January 31, 2010, there were no changes in our internal control over financial reporting that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1.
Legal Proceedings.
With respect to the Company’s lawsuit filed in May 2006 in Massachusetts Superior Court against its former legal counsel (Vermont Pure Holdings, Ltd. vs. Cozen O’Connor et al., CA No. 06-1814), as more fully described in Part I, Item 3 of our Annual Report on Form 10-K for the Year Ended October 31, 2009, the following developments occurred subsequent to the evidentiary hearing that took place between October 1 and October 7, 2009.
On February 8, 2010, the Court made certain rulings in favor of the Company based on the evidence submitted at the hearing, and denied a further motion by the remaining defendants to dismiss the case. The Court has set a tentative trial date of May 26, 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 1A.
Risk Factors.
There was no change in the three months ended January 31, 2010 from the Risk Factors reported in our Annual Report on Form 10-K for the year ended October 31, 2009.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3.
Defaults Upon Senior Securities.
None.
Item 4.
Other Information.
None.
Item 5.
Exhibits.
|
Exhibit
Number
|
Description
|
|
3.1
|
Certificate of Incorporation (Incorporated by reference to Exhibit B to Appendix A to our registration statement on Form S-4, File No. 333-45226, filed with the SEC on September 6, 2000)
|
|
3.2
|
Certificate of Amendment of Certificate of Incorporation (Incorporated by reference to Exhibit 4.2 of our current report on Form 8-K, filed with the SEC on October 19, 2000)
|
|
3.3
|
By-laws, as amended (Incorporated by reference to Exhibit 3.3 to our quarterly report on Form 10-Q, filed with the SEC on September 14, 2001)
|
|
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
|
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
Dated: March 17, 2010
|
VERMONT PURE HOLDINGS, LTD.
|
|
|
|
|
|
|
|
|
By:
|
/s/ Bruce S. MacDonald
|
|
|
|
|
Bruce S. MacDonald
|
|
|
|
|
Vice President, Chief Financial Officer
(Principal Accounting Officer and Principal Financial Officer)
|
|
|
|
|
|
|
Exhibits Filed Herewith
|
Exhibit
Number
|
Description
|
|
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
|
19