10-Q 1 b50871vpe10vq.txt VERMONT PURE HOLDINGS, LTD. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended April 30, 2004 Commission File No. 000-31797 VERMONT PURE HOLDINGS, LTD. (Exact name of registrant as specified in its charter) Delaware 03-0366218 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 67 Holly Court, Williston VT 05495 (Address of principal executive offices) (Zip Code) (802) 860-1126 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding at Class June 10, 2004 ----- -------------- Common Stock, $.001 Par Value 21,499,399 VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES INDEX
Page Number Part I - Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets as of April 30, 2004 (unaudited) and October 31, 2003 (unaudited) 3 Condensed Consolidated Statements of Operations for the Three and Six Months ended April 30, 2004 and 2003 (unaudited) 4 Condensed Consolidated Statements of Cash Flows for the Six Months ended April 30, 2004 and 2003 (unaudited) 5 Notes to Condensed Consolidated Financial Statements (unaudited) 6-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12-19 Item 3. Quantitative and Qualitative Disclosures About Market Risk 20-21 Item 4. Controls and Procedures 21 Part II - Other Information 22-27 Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K Signatures and Exhibit Index 28-29
2 VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
April 30, October 31, 2004 2003 ------------- ------------- (unaudited) (unaudited) ASSETS ------ CURRENT ASSETS: Cash and cash equivalents $ 97,838 $ 1,170,321 Accounts receivable - net 6,410,710 6,198,942 Inventories 1,147,198 1,018,970 Current portion of deferred tax asset 1,093,000 1,093,000 Other current assets 2,570,332 1,761,617 Unrealized gain on derivatives 86,404 -- Dicontinued Operations -- 3,876,654 ------------- ------------- TOTAL CURRENT ASSETS 11,405,482 15,119,504 ------------- ------------- PROPERTY AND EQUIPMENT - net of accumulated depreciation 12,505,525 13,482,857 Discontinued Operations -- 7,142,676 ------------- ------------- TOTAL PROPERTY AND EQUIPMENT 12,505,525 20,625,533 ------------- ------------- OTHER ASSETS: Goodwill 73,352,134 72,899,355 Other intangible assets - net of accumulated amortization 1,421,771 1,247,994 Deferred tax asset 1,171,259 1,156,000 Other assets 645,323 285,678 ------------- ------------- TOTAL OTHER ASSETS 76,590,487 75,589,027 ------------- ------------- TOTAL ASSETS $ 100,501,494 $ 111,334,064 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Current portion of long term debt $ 5,836,832 $ 3,148,274 Accounts payable 2,300,616 2,318,720 Accrued expenses 2,408,275 2,329,163 Current portion of customer deposits 178,429 169,504 Unrealized loss on derivatives -- 35,504 Discontinued Operations -- 2,056,938 ------------- ------------- TOTAL CURRENT LIABILITIES 10,724,152 10,058,103 Long term debt, less current portion 36,325,034 48,273,782 Customer deposits 2,795,381 2,655,560 ------------- ------------- TOTAL LIABILITIES 49,844,567 60,987,445 ------------- ------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock - $.001 par value, 500,000 authorized shares, none issued and outstanding -- Common stock - $.001 par value, 50,000,000 authorized shares, 21,479,400 issued and 21,407,850 outstanding shares as of April 30, 2004 and 21,430,987 issued and 21,359,437 outstanding as of October 31, 2003 21,474 21,431 Additional paid in capital 57,696,920 57,535,069 Treasury stock, at cost, 71,550 shares (264,735) (264,735) Accumulated deficit (6,883,136) (6,909,642) Accumulated other comprehensive income (loss) 86,404 (35,504) ------------- ------------- TOTAL STOCKHOLDERS' EQUITY 50,656,927 50,346,619 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 100,501,494 $ 111,334,064 ============= =============
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended April 30, Six months ended April 30, ---------------------------- ---------------------------- 2004 2003 2004 2003 ------------ ----------- ------------ ------------ (unaudited) (unaudited) NET SALES $ 13,182,212 $ 11,923,148 $ 25,179,780 $ 23,440,984 COST OF GOODS SOLD 5,959,610 4,844,344 11,319,548 9,668,470 ------------ ------------ ------------ ------------ GROSS PROFIT 7,222,602 7,078,804 13,860,232 13,772,514 ------------ ------------ ------------ ------------ OPERATING EXPENSES: Selling, general and administrative expenses 5,793,650 5,215,768 11,492,516 10,485,294 Advertising expenses 261,200 182,903 475,383 376,931 Amortization 89,510 38,229 162,964 71,448 Other compensation -- -- 18,951 38,997 ------------ ------------ ------------ ------------ TOTAL OPERATING EXPENSES 6,144,360 5,436,900 12,149,814 10,972,670 ------------ ------------ ------------ ------------ INCOME FROM OPERATIONS 1,078,242 1,641,904 1,710,418 2,799,844 ------------ ------------ ------------ ------------ OTHER EXPENSE: Interest (916,085) (991,900) (1,930,299) (2,079,074) Miscellaneous (2,261) (4,394) (8,397) 13,416 ------------ ------------ ------------ ------------ TOTAL OTHER EXPENSE (918,346) (996,294) (1,938,696) (2,065,658) ------------ ------------ ------------ ------------ INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 159,896 645,610 (228,278) 734,186 INCOME TAX BENEFIT (EXPENSE) 26,696 (259,342) 95,876 (294,923) ------------ ------------ ------------ ------------ INCOME (LOSS) FROM CONTINUING OPERATIONS 186,592 386,268 (132,402) 439,263 DISCONTINUED OPERATIONS: (Loss) Income from discontinued operations (187,321) 168,945 (79,868) 259,084 Gain on disposal of segments of business 352,535 -- 352,535 -- Income tax expense from discontinued operations (68,628) (67,865) (113,759) (104,074) ------------ ------------ ------------ ------------ INCOME FROM DISCONTINUED OPERATIONS 96,586 101,080 158,908 155,010 ------------ ------------ ------------ ------------ NET INCOME $ 283,178 $ 487,348 $ 26,506 $ 594,273 ============ ============ ============ ============ NET INCOME (LOSS) PER SHARE - BASIC: Continuing Operations $ 0.01 0.02 $ (0.01) 0.02 Discontinued Operations 0.00 0.00 0.01 0.01 ------------ ------------ ------------ ------------ NET INCOME $ 0.01 $ 0.02 $ 0.00 $ 0.03 NET INCOME (LOSS) PER SHARE - DILUTED: Continuing Operations $ 0.01 0.02 $ (0.01) 0.02 Discontinued Operations 0.00 0.00 0.01 0.01 ------------ ------------ ------------ ------------ NET INCOME $ 0.01 $ 0.02 $ 0.00 $ 0.03 ============ ============ ============ ============ WEIGHTED AVERAGE SHARES USED IN COMPUTATION - BASIC 21,475,233 21,271,536 21,460,346 21,265,602 ============ ============ ============ ============ WEIGHTED AVERAGE SHARES USED IN COMPUTATION - DILUTED 21,693,432 21,678,293 21,684,154 21,845,098 ============ ============ ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended April 30, --------------------------- 2004 2003 ------------ ----------- (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 26,506 $ 594,273 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 2,667,004 2,487,819 Amortization 162,963 78,348 Change in deferred tax asset (15,035) 348,000 Loss (Gain) on disposal of property and equipment 26,667 12,011 Loss (Gain) on the sale of business segments (352,535) Non cash compensation 18,921 38,997 Changes in assets and liabilities (net of effect of acquisitions and sale of business segments): Accounts receivable 571,168 (1,362,142) Inventories (671,924) 116,596 Other current assets (796,069) (367,898) Other assets (251,593) (49,967) Accounts payable 85,341 868,786 Accrued expenses (904,265) (87,107) Customer deposits 148,746 140,555 ------------ ------------ NET CASH PROVIDED BY CONTINUING OPERATIONS 715,895 2,818,271 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment (1,838,002) (1,890,171) Proceeds from sale of property and equipment 170,554 78,637 Cash used for acquisitions - net of cash acquired (627,653) (180,325) Proceeds from sale of business segments - net of transaction costs 9,425,618 -- ------------ ------------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 7,130,517 (1,991,859) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from line of credit borrowings 2,533,533 1,543,348 Principal payments of debt (11,563,724) (1,846,479) Proceeds from issuance of common stock 111,294 89,729 ------------ ------------ NET CASH USED IN FINANCING ACTIVITIES (8,918,897) (213,402) ------------ ------------ NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,072,485) 613,010 CASH AND CASH EQUIVALENTS - beginning of period 1,170,321 652,204 ------------ ------------ CASH AND CASH EQUIVALENTS - end of period $ 97,836 $ 1,265,214 ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for interest $ 1,999,206 $ 2,173,846 ============ ============ Cash paid for taxes $ 169,639 $ 157,531 ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION AND DISCONTINUED OPERATIONS 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, 2003. Certain information and footnote disclosures normally included in audited consolidated financial statements presented in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto incorporated by reference in the Company's Annual Report on Form 10-K for the year ended October 31, 2003. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. On March 2, 2004 the Company completed the sale of the two retail segments of its business. See Note 9 for more information. 2. STOCK BASED COMPENSATION The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Pro-forma information regarding net (loss) income and net (loss) income per share is presented below as if the Company had accounted for its employee stock options under the fair value method using SFAS No. 123, net of tax is as follows: 6
Three Months Ended Six Months Ended April 30, April 30, 2004 2003 2004 --------- --------- -------- ----------- Net Income -As Reported $ 283,178 $ 487,348 $ 26,506 $ 594,273 Deduct: Effect of compensation expense determined using fair value, net of income tax 50,651 93,875 102,872 139,891 --------- --------- -------- ----------- Pro Forma Net Income (Loss) $ 232,527 $ 393,473 (76,366) $ 454,382 ========= ========= ======== =========== Basic Net Income Per Share: As Reported $ .01 $ .03 $ .00 $ .03 ========= ========= ======== =========== Pro Forma $ .01 $ .03 $ .00 $ .02 ========= ========= ======= =========== Diluted Net (Loss) Income Per Share: As Reported $ .01 $ .03 $ .00 $ .03 ========= ========= ======== =========== Pro Forma $ .01 $ .02 $ .00 $ .02 ========= ========= ======== ===========
There were no options granted for the three month period ended April 30, 2004 and there were 65,000 options granted in each of the six month periods ended April 30, 2004 and 2003. The weighted average fair value of the options granted for the respective six month periods, using the Black-Scholes option pricing model, was $1.27 and $1.70, respectively. In the three month period ending April 30, 2004, there were 5,000 options exercised at an exercise price of $2.50 per share. Assumptions used for estimating the fair value of the option on the date of grant under the Black-Scholes option pricing model are as follows for the three and six month periods ended April 30:
2004 2003 ---- ---- Expected Dividend Yield 0% 0% Expected Life 5 Years 5 Years Risk free Interest Rate 3.0% 5.7% Volatility 39% 36%
3. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES On July 24, 2001, the Company entered into a swap agreement with Webster Bank to fix an additional $4,000,000 of our long term debt at 7.25% interest for three years. On June 11, 2003, we entered into an interest rate swap agreement with Webster Bank for $10 million. The agreement fixes the interest rate for that portion of our senior debt for three years at 3.74%. The swaps are fixed at these rates based on the current applicable margin of 2.25% under our loan and security agreement with Webster Bank. Under the agreement, the applicable margin can range, based on our financial performance, from 1.5% to 2.5%. The 7 swap rates are based on the floating 30-day LIBOR rate and are structured such that if the loan rate for the period exceeds the fixed rate of the swap then the bank pays the Company to lower the effective interest rate and if the rate is lower than the fixed rate, the Company pays the bank additional interest. Based on the floating rate for the three and six months ended April 30, 2004, the Company paid $249,000 more in interest than it would have without the swaps. The Company accounts for changes in the fair value of the swap agreements by reporting the change in fair value as an unrealized gain or loss for the purposes of calculating comprehensive income (see Note 5). 4. SEGMENTS The Company has traditionally prepared detailed information to evaluate its operations on a segment basis. It accounted for the business in three separate segments, "Retail", "Retail-Gallons" and "Home and Office". Since the Company completed the sale of its two retail segments in March 2004, its remaining operations are entirely in the Home and Office segment. As a result of the sale, the results of operations for the retail segments are classified as discontinued operations in the periods reported. Consequently, the Company will not report segment information in this report or in the future unless required. 5. COMPREHENSIVE INCOME The following table summarizes comprehensive income for the respective three and six month periods:
Three Months Ended Six Months Ended April 30, April 30, 2004 2003 2004 2003 ---- ---- ---- ---- Net Income $283,178 $487,348 $ 26,506 $594,273 Other Comprehensive Income: Change in unrealized gain on derivatives designated as cash flow hedges - net of tax 83,440 146,628 121,908 242,940 -------- -------- -------- -------- Comprehensive Income $366,618 $633,976 $148,414 $837,213 ======== ======== ======== ========
6. STOCKHOLDERS' EQUITY Stock Issued to Directors The Company issued 5,430 and 9,285 of its common shares to Directors in lieu of cash for board fees in the first six months of fiscal years 2004 and 2003, respectively. Expense of $19,000 and $39,000 for the respective periods was based on the market price on the date of issuance. There was no such compensation in the second quarter of either year. 8 Employee Stock Purchase Plan The Company maintains an employee stock purchase program. The total number of common shares issued under this plan during the six months ended April 30, 2004 and 2003 were 37,983 for proceeds of $98,794 and 26,325 for proceeds of $89,729, respectively. For the three months ended April 30, 2004 and 2003, there were no shares issued under the plan. 7. INVENTORIES Inventories consisted of the following at:
April 30, October 31, 2004 2003 ---- ---- Raw Materials $ 147,422 $1,131,588 Finished Goods 999,776 1,833,866 ---------- ---------- Total Inventories $1,147,198 $2,965,454 ========== ==========
8. OPERATING LEASES The Company's operating leases consist of trucks, office equipment and rental property. Future minimum rental payments over the terms of various lease contracts are approximately as follows: For the fiscal year ending October 31,: 2004 $ 1,184,000 2005 2,082,000 2006 1,772,000 2007 1,572,000 2008 1,334,000 Thereafter 1,877,000 ------------ Total $ 9,821,000 ------------
9. SALE OF BUSINESS SEGMENTS On March 2, 2004 the Company completed the sale of substantially all of the assets related to its Retail and Retail - Gallons segments. These segments have been accounted for as discontinued operations. The sale resulted in a gain, reported in discontinued operations, of $352,535. The gain was calculated by deducting the net carrying value of the assets and liabilities and transaction costs from the net proceeds as follows: 9 Selling Price $ 10,567,998 Accounts Receivable (1,147,229) Inventory (2,490,181) Property, Plant, and Equipment (7,093,641) Accounts Payable 1,739,347 Transaction Costs (1,223,759) ------------ Gain before Income Taxes $ 352,535 ------------
In addition to cash proceeds of $10,067,998, the Company received a $500,000 5% subordinated note from the buyer as consideration for the sale. Interest is payable by the seller on a quarterly basis and the total principal is due on the second anniversary of the sale. Substantially all of the proceeds of the sale were used to reduce debt. $5,000,000 was used to pay down the Company's senior term debt with Webster Bank and $5,000,000 was used to pay down its subordinated debt. Revenues, expenses, and costs have been excluded from the respective captions in the related financial statements and reported as (loss) income from discontinued operations, net of income taxes, for all periods presented. For the three months ended April 30, 2004 and 2003, revenue from discontinued operations were $1,537,000 and $6,144,000, respectively. The loss before income taxes was $187,000 for the second quarter in 2004 and income before taxes was $169,000 for the second quarter in 2003. For the six months ended April 30, 2004 and 2003, net sales from discontinued operations were $6,434,000 and $9,703,000, respectively. The loss before income taxes was $80,000 for the first half of 2004 and income before taxes was $260,000 fro the first half of 2003. The respective losses and income do not include any allocation of corporate costs that were previously allocated to the discontinued operations. Those costs are expected to continue in the future and will be allocated only to the remaining line of business. 10. DEBT During the six months ended April 30, 2004, the Company borrowed $2.3 million from its operating line of credit with Webster Bank. In addition, it had letters of credit totaling $1 million and a balance of $1.6 million on its acquisition line of credit. Amendment to Senior Debt Agreement In conjunction with the sale of the segments of business, the Company amended its agreement with its senior lender to facilitate payment of debt with the proceeds of the sale. The amendment allows for prepayment of $5,000,000 of senior debt and $5,000,000 of subordinated debt related to the sale and omits availability of $5,000,000 of credit previously earmarked for subordinated debt repayment. Other significant changes included increasing the applicable margin by 25 basis points and changing the financial covenants to reduce the limit of the senior debt to EBITDA ratio limit to 2.75 from 3.00 and splitting the debt service ratio to senior and global ratios with respective limits of 1.5 and 1.1. The Company's Loan and Security agreement requires that it be in compliance with certain 10 financial covenants at the end of each fiscal quarter. The Company was in compliance with all of the financial covenants in the agreement as of April 30, 2004. 11. EARNINGS PER SHARE AND WEIGHTED AVERAGE SHARES The Company considers outstanding in-the-money stock options as potential common stock in its calculation of diluted earnings per share and uses the treasury stock method to calculate the applicable number of shares. The following calculation provides the reconciliation of the denominators used in the calculation of basic and fully diluted earnings per share:
Three Months Ended April 30, Six Months Ended April 30, 2004 2003 2003 ---- ---- ---- Net Income $ 283,178 487,348 $ 26,506 $ 594,293 ----------- ----------- ----------- ----------- Denominator: Basic Weighted Average Shares Outstanding 21,475,233 21,271,536 21,460,346 21,265,602 Dilutive effect of Stock Options 218,199 1,095,634 223,808 579,496 ----------- ----------- ----------- ----------- Diluted Weighted Average Shares Outstanding 21,693,432 21,678,293 21,684,154 21,845,098 Basic Earnings Per Share $ .01 $ .02 $ .00 $ .03 =========== =========== =========== =========== Diluted Earnings Per Share $ .01 $ .02 $ .00 $ .03 =========== =========== =========== ===========
There were 2,512,990 options outstanding as of April 30, 2004. For the three month period ended April 30, 2004, in addition to the options used to calculate the effect of dilution, there were 1,249,200 additional options outstanding. For the three and six month periods ended April 30, 2003 and 2004, there were 240,000 additional options not used in the dilution calculation. These options were not included in the dilution calculation because the options' exercise price exceeded the market price of the underlying common shares. 12. Litigation Settlement In January 2003, the Company settled a suit alleging that a vendor did not adequately perform the services rendered in connection with approximately $500,000 of unpaid billings. In settling the suit, the Company agreed to pay $50,000 to the vendor in full settlement of the litigation. In conjunction with the settlement, the parties released each other from any further liability in the case. A gain of $150,000 was recognized in the first quarter of 2003 since the Company had set up a reserve for settlement of the suit that exceeded the final amount paid. The gain has been included as a reduction of selling, general and administrative expenses. 11 PART I - Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the financial statements and notes thereto as filed in our Annual Report on Form 10-K for the year ended October 31, 2003 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 Business Overview Throughout our history, we have marketed our bottled water through two major channels - retail distribution and delivery to home and offices. On March 2, 2004 we completed the sale of the assets and certain liabilities of the retail distribution portion of our business. Specifically, we sold the assets of Vermont Pure Springs, Inc. that we used in the processing, bottling, marketing, production, distribution and sale of spring water to retail channels of distribution in PET packages of 1 gallon or smaller. This included our retail consumer business under our own brands, as well as the private label business that we packed for others. The sale included the springs, the manufacturing facility, accounts receivable, the inventory and the related machinery and equipment located in Randolph Center, Vermont. The goal of this transaction was to enable us to concentrate on our higher margin, and more profitable, Home & Office business, which distributes the Crystal Rock(R) brand of water, as well as our Vermont Pure(R) water, coffee and other products. It is the culmination of a strategy that we began pursuing in 1996, when we originally diversified into the Home & Office segment. Over time, the retail PET business has become unprofitable to us as margins have been reduced by intense competition in this segment of the market. The reader should note that, after the sale, our business is made up of the Home & Office delivery 12 segment only. In the financial statements contained herein, operations of the retail segments have been reported as discontinued operations, net of taxes, for all periods presented. In reporting the results of the discontinued operations, operating expenses differ from those made in past segment reporting detail for two reasons. First, past segment information for the retail segments include a portion of our corporate overhead and interest expense that we allocated to these two segments that is being absorbed by the Home & Office segment after the sale. At the same time, with the proceeds from this sale, we have paid down a significant amount of our corporate debt, which, other things being equal, should reduce the amount of remaining interest expense that must be carried by the Home & Office segment. For the Three Months Ended April 30, 2004 (Second Quarter) Sales Sales from continuing operations for the first three months of 2004 were $13,182,000 compared to $11,923,000 for the first three months of 2003, an increase of $1,259,000 or 11%. The increase was primarily the result of acquisitions. Net of acquisitions, sales were up 3%, due to increased sales of coffee related products which offset a small decline in the base business of water related products. The comparative breakdown of sales of the product lines for the second quarter of 2004 and 2003 is as follows:
Product Line 2004 2003 Difference % Diff. ------------ ---- ---- ---------- ------- (in 000's $) (in 000's $) (in 000's $) Water $ 6,281 $ 5,886 $ 395 7% Coffee and Other Products 4,685 3,914 771 20% Equipment Rental 2,216 2,123 93 4% ------- ------- ------ Total $13,182 $11,923 $1,259 11%
Water - Net of acquisitions, water sales decreased 2%. Average sales price per bottle remained flat for the quarter compared to last year as a result of competitive pressure while volume increased. In addition, sales decreased 3% because of the loss of a distributor. Coffee and Other Products - The acquisition of a large office coffee distributor during the second half of fiscal year 2003 accounted for a significant part of the increase in sales for the second quarter of 2004 compared to the second quarter of 2003. Net of acquisitions, the category increased 9%. Sales of Keurig single-serve coffee packages are responsible for most of this growth. However, the margin on single serve distribution is approximately half of traditional coffee products. Equipment Rental - Net of acquisitions, equipment rental income was down 1%. Water cooler rental was down as a result of the lower market demand referred to above and competition from retail outlets selling similar units. Average price was down 1%. Brewer rentals increased slightly as a result of demand for single serve units. 13 Gross Profit/Cost of Goods Sold Gross profit increased $144,000, or 2%, to $7,223,000 for the second quarter of 2004 from $7,079,000 for the second quarter of 2003. The increase in gross profit was attributable to higher sales. As a percentage of sales, gross profit decreased to 55% of sales from 59% for the respective periods. The decrease in gross profit, as a percentage of sales, was attributable to lower average selling prices, higher costs, and higher percentage of sales of lower margin non-water related products. Lower sales prices were primarily for our higher margin water-related products. In addition, increased cost of sales lowered margins. The increase in cost of sales is attributable to higher costs of production as a result of higher costs of materials for bottles and labor, and higher service costs as a result of lower sales volume per customer. Income from Operations/Operating Expenses Total operating expenses increased to $6,144,000 in the second quarter of 2004 from $5,437,000 in the second quarter of 2003, an increase of $707,000, or 13%. Selling, general and administrative (SG&A) expenses were $5,794,000 and $5,216,000 for the first quarters of 2004 and 2003, respectively, an increase of $578,000, or 11%. Of total SG&A expenses, route distribution costs, primarily labor, fuel, vehicle, and insurance costs, increased 23%. Selling costs decreased 2% and administration costs increased 4%. Advertising expenses were $261,000 in the second quarter of 2004 compared to $183,000 in the second quarter of 2003, an increase of $78,000, or 43%. The increase in advertising costs is related to increased yellow page advertising. Amortization increased to $90,000 in the second quarter of 2004 from $38,000 in the second quarter of 2003 as a result of intangible assets that were acquired as part of several acquisitions in fiscal year 2003 and 2004. Income from operations for the second quarter of 2004 was $1,078,000 compared to $1,642,000 in the second quarter of 2003, a decrease of $564,000, or 34%. The decrease was a result of a lower selling prices, a higher sales mix of lower margin products, higher production and service costs, and higher operating costs. Interest, Taxes, and Other Expenses - Income from Continuing Operations Net interest expense was $916,000 for the second quarter of 2004 compared to $992,000 in the second quarter of 2003, a decrease of $73,000. Lower interest costs were primarily a result of lower amounts of senior and subordinated debt compared to a year ago. Income from continuing operations before income tax expense was $160,000 for the second quarter of 2004 compared to income from continuing operations before taxes of $646,000 in the second quarter of 2003. The net tax benefit of $27,000 for the second quarter of 2004 compares to tax expense of $259,000 for the same period a year ago. The effective tax benefit is a result of an adjustment of the estimated annual effective rate. The rate for the year is estimated to be 42% for the year compared to a rate of 40% that was accrued in the second quarter of 2003. 14 Income from continuing operations of $187,000 for the second quarter of 2004 was $99,000 less than the second quarter of 2003. Discontinued Operations We have reported the results related to the sale of the retail segments as discontinued operations as three separate captions. First, the loss from operations for these segments for the three months ended April 30, 2004 has been reported as a loss from discontinued operations of $187,000. The corresponding tax benefit of $78,000 was calculated at 42%, the estimated annual rate for 2004. Income from discontinued operations for the second quarter of 2003 was $169,000. Second, we had a gain as a result of the sale of the assets. The gain on the transaction was $353,000 and was determined by deducting the net value of the assets and liabilities sold as well as the direct costs incurred in the transaction from the sale price. Finally, the net tax expense of $69,000 for the discontinued operations and transaction was calculated using an effective tax rate of 42% for second quarter of 2004 while the tax expense of $68,000 was calculated using an effective tax rate of 40% for the second quarter of 2003. The total income from discontinued operations was $97,000 in second quarter of 2004 compared to $101,000 is the second quarter of 2003, a decrease of $4,000. Net Income Net income of $283,000 for the second quarter of 2004 was a result of income from operations and gain from the sale of the retail business which more than offset the loss from discontinued operations. This represented a decrease in net income of $204,000 from net income in the second quarter of 2003. Based on the weighted average number of shares of common stock outstanding of 21,475,233 and 21,693,432 for the three months April 30, 2004, the net income per share was $.01 per share - basic and diluted, respectively, in the second quarter of 2004. This compares to net income of $.02 per share- basic and diluted, in the second quarter of 2003. For the Six Months Ended April 30, 2004 Sales Sales from continuing operations for the first six months of 2004 were $25,180,000 compared to $23,441,000 for the first six months of 2003, an increase of $1,739,000 or 7%. The increase was the result of acquisitions. Net of acquisitions, sales were substantially the same as the corresponding period in the prior year. The comparative breakdown of sales of the product lines for the first six months of 2004 and 2003 is as follows: 15
Product Line 2004 2003 Difference % Diff. ------------ ---- ---- ---------- ------- (in 000's $) (in 000's $) (in 000's $) Water $11,787 $11,334 $ 453 4% Coffee and Other Products 8,985 7,837 1,148 15% Equipment Rental 4,408 4,270 138 3% ------- ------- ------ Total $25,180 $23,441 $1,739 7%
Water - Net of acquisitions, water sales decreased 4%. Average sales price per bottle decreased 1% as a result of competitive pressure while volume increased as a result of acquisitions. In addition, sales decreased 3% because of the loss of a distributor. Coffee and Other Products - The acquisition of a large office coffee distributor during the second half of fiscal year 2003 accounted for 5% of the increase in sales for the first six months of 2004 compared to the comparable period in 2003. Net of acquisitions, the category increased 10%. Sales of Keurig single-serve coffee packages are responsible for most of this growth. However, the margin on single serve distribution is lower than traditional coffee products. Equipment Rental - Net of acquisitions, equipment rental income was down 2%. Water cooler rental was down as a result of the lower market demand referred to above and competition from retail outlets selling similar units. Average price was down 1%. Brewer rentals increased slightly as a result of demand for single serve units. Gross Profit/Cost of Goods Sold Gross profit increased $88,000, or 1%, to $13,860,000 for the first six months of 2004 from $13,773,000 for the first six months of 2003. The increase in gross profit was attributable to higher sales. As a percentage of sales, gross profit decreased to 55% of sales from 59% for the respective periods. The decrease in gross profit, as a percentage of sales, was attributable to lower average selling prices, higher costs, and higher percentage of sales of non-water related products. Lower sales prices were primarily for our higher margin water-related products. In addition, increased cost of sales lowered margins. The increase in cost of sales is attributable to higher costs of production as a result of higher costs of materials for bottles and labor, and higher service costs as a result of lower sales volume per customer. Income from Operations/Operating Expenses Total operating expenses increased to $12,150,000 in the first six months of 2004 from $10,973,000 in the first six months of 2003, an increase of $1,177,000, or 11%. Selling, general and administrative (SG&A) expenses were $11,493,000 and $10,485,000 for the first six months of 2004 and 2003, respectively, an increase of $1,008,000, or 10%. Of total SG&A expenses, route distribution costs, primarily labor, fuel, vehicle, and insurance costs, increased 18%. Selling costs decreased 4% and administration costs increased 1%. Advertising expenses were $475,000 in the first six months of 2004 compared to $377,000 in the first six months of 2003, an increase of $98,000, or 26%. The increase in advertising costs is related to increased yellow page advertising. 16 Amortization increased to $163,000 in the first six months of 2004 from $71,000 in the first six months of 2003 as a result of intangible assets that were acquired as part of several acquisitions in fiscal years 2003 and 2004. Other compensation in the first six months of 2004 totaled $19,000 compared to $39,000 in the first six months of 2003. This expense relates to compensation paid to directors in company stock in lieu of cash for board fees. Income from operations for the first six months of 2004 was $1,710,000 compared to $2,800,000 in the first six months of 2003, a decrease of $1,090,000, or 39%. The decrease was a result of lower selling prices, a higher sales mix of lower margin products, higher production and service costs, and higher operating costs. Interest, Taxes, and Other Expenses - (Loss) Income from Continuing Operations Net interest expense was $1,930,000 for the first six months of 2004 compared to $2,079,000 in the first six months of 2003, a decrease of $149,000. Lower interest costs were primarily a result of lower amounts of senior and subordinated debt compared to a year ago. The loss from continuing operations before income tax expense was $228,000 for the first six months of 2004 compared to income from continuing operations before taxes of $734,000 in the first six months of 2003, a decrease of $962,000. The net tax benefit of $96,000 for the first six months of 2004 compares to tax expense of $295,000 for the same period a year ago. The tax benefit for the first six months of 2004 is based on an estimated rate of 42% for the year compared to a rate of 40% for the first six months of 2003. The loss from continuing operations of $132,000 for the first six months of 2004 was $571,000 less income from operations of $439,000 for the first six months of 2003. Discontinued Operations The loss from operations for discontinued segments for the six months ended April 30, 2004 was $80,000. The corresponding tax expense of loss from discontinued operations combined with the gain on the sale of $114,000 was calculated at 42%, the estimated effective annual rate for 2004. Income from discontinued operations for the second quarter of 2003 was $259,000. Tax expense, calculated at an effective rate of 40%, was $104,000. Total income from discontinued operations was $158,000 in the first half of 2004 compared to $155,000 in 2003. Net Income Net income of $27,000 for the six months of 2004 was attributable to a loss from continuing operations and loss from discontinued operations that were not completely offset by the gain on the sale of a portion of the retail business. This represented a decrease in net income of $567,000 from net income in the first six months of 2003. Based on the weighted average number of shares of common stock outstanding of 21,460,000 for the first six months ended April 30, 2004, the net income per share was $.00 per share - basic and 17 diluted in the first six months of 2004. This compares to net income of $.03 per share- basic and diluted, in the first six months of 2003. Trends During the last 18 to 24 months the stagnant economic environment in our core markets has continued to have a negative effect on sales in the Home & Office segment. Net of acquisitions, these conditions have resulted in lower volume through loss of customers, reduced business with continuing customers, and increased competition causing lower average selling prices. In addition, the products that reflect increased sales are lower margin products. Though we have seen some abatement to these trends in the last couple of months, a reversing trend has not developed. The prospect of increases in other costs such as fuel and insurance remains uncertain. We believe that variable external factors such as economic conditions and commodity pricing will not change current trends in the near term but we are positioning our business for the long term. We expect to be profitable for the year and continue to generate positive cash flow. This will allow us to proceed with our strategic direction - increasing market share by building density in our core markets though internal growth and acquisitions. By continuing to build density our intent is to become more efficient and position our business so that cyclical improvements in economic conditions will be more likely to produce growth and improve our profitability. Liquidity and Capital Resources As of April 30, 2004 we had working capital of $681,000 compared to $5,062,000 on October 31, 2003, a decrease of $4,381,000. The decrease in working capital was primarily a result the Company's line of credit $3,903,000 being due March 5, 2005 - becoming current debt during the quarter. In addition the Company used cash for capital expenditures and repayment of debt in the first six months of 2004. Capital expenditures consisted of bottling equipment, and coolers, brewers, bottles and racks related to home and office distribution. During the quarter, we paid $648,000 for regularly scheduled debt repayments on our senior credit facility. As noted above, we sold the assets of our Retail and Retail - Gallons segments in March, 2004. The sale produced cash proceeds of $10,068,000. The proceeds were used reduce our debt. $5,000,000 was used to pay down the senior term debt with Webster Bank and $5,000,000 was used to pay down our subordinated debt. Also, in conjunction with the sale we paid down $280,000 of senior and subordinated debt to other lenders. In addition, we received a promissory note from the buyer for $500,000. We borrowed $2,303,000 on our working capital line of credit during the quarter and we had borrowed $1,600,000 on our acquisition line of credit as of April 30, 2004. In addition, there is $1,050,000 committed for letters of credit on our working capital line of credit. On November 3, 2003 a swap agreement for $10,000,000 matured and on April 2, 2004 a swap agreement for $4,000,000 matured. To date, we have $14,000,000 of fixed rate debt in outstanding swap agreements. For a schedule and further explanation of our fixed debt instruments, see Item 3. 18 As our swap agreements mature, lower fixed or market interest rates may lower our debt service and provide more cash in future periods. We expect that cash on hand and the cash generated from future operations combined with the operating line of credit with Webster Bank will provide sufficient cash flow for routine operations and growth in the foreseeable future. The operating and acquisition lines of credit will mature in March 2005 at which time the acquisition line of credit will convert to a term note. We believe that we will be able to extend the facility in conjunction with the existing senior financing arrangement, which runs until 2008. However, no assurance can be given that adequate financing at reasonable interest rates will be secured if more cash is needed other than that generated from operations. We are in compliance with the financial covenants of our financing agreements as of April 30, 2004. In addition to our senior and subordinated debt commitments, we have significant future cash commitments, primarily in the form of operating leases that are not reported on the balance sheet. The following table sets forth our contractual commitments as of April 30, 2004:
Coffee Purchase Fiscal Year Debt Operating Leases Commitments Total ----------- ----------- ---------------- --------------- ------ 2004 $ 1,778,000 $ 1,184,000 $ 460,000 $ 3,422,000 2005 6,095,000 2,082,000 230,000 8,407,000 2006 3,975,000 1,772,000 5,747,000 2007 4,165,000 1,572,000 5,737,000 2008 26,149,000 1,334,000 27,483,000 Thereafter 0 1,877,000 1,877,000 =========== =========== ============ Total $42,162,000 $ 9,821,000 $ 690,000 $ 52,673,000
The debt obligation in fiscal year 2005 includes payoff of the operating line of credit balance as of April 30, 2004 which matures in March 2005. As of the date of this report, we have no other material contractual obligations or commitments. 19 PART I - Item 3 QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risks relating to our operations result primarily from changes in interest rates and commodity prices. INTEREST RATE RISKS At April 30, 2004, we had approximately $10,600,000 of long term debt subject to variable interest rates. Under the loan and security agreement with Webster Bank, we currently pay interest at a rate of LIBOR plus a margin of 2.25%. A hypothetical 100 basis point increase in the LIBOR rate would result in an additional $106,000 of interest expense on an annualized basis. Conversely, a decrease would result in a proportionate interest cost savings. We use interest rate "swap" agreements to curtail interest rate risk. The following table summarizes our current agreements:
Notional Amount Fixed Interest Rate Maturity Date $ 4,000,000 7.50% July 24, 2004 $ 10,000,000 3.99% June 11, 2006
In aggregate, we have fixed the interest rate on this $14,000,000 of debt at 5% until July 2004. Currently, we believe that this is above market rates but we expect our cumulative interest rates to be at or below market after July. We will continue to evaluate swap rates as agreements mature. They serve to stabilize our cash flow and expenses but ultimately may cost more or less in interest than if we had carried all of our debt at a variable rate over the swap term. Our strategy is to keep the fixed and variable portions of our senior debt approximately equal to offset and minimize the respective risk of rising and falling interest rates. Future low rates may compel us to fix a higher portion to further stabilize cash flow and expenses as we monitor short and long term rates and debt balances. COMMODITY PRICE RISKS Coffee The cost of our coffee purchases are dictated by commodity prices. We enter into contracts to mitigate market fluctuation of these costs by fixing the price for certain periods. Currently we have fixed the price of our anticipated supply through December 2004 at "green" prices ranging from $.61-$.74 per pound. We are not insulated from price fluctuations beyond that date. At our existing sales levels, an increase in pricing of $.10 per pound would increase our total cost for coffee $75,000. In this case, competitors that had fixed pricing might have a competitive advantage. Diesel Fuel We own and operate vehicles to deliver product to customers. The cost of fuel to operate these vehicles fluctuates over time. During the most recent quarter, fuel prices have increased 20 significantly. We estimate that a $0.10 increase per gallon in fuel cost would result in an increase to operating costs of approximately $60,000. PART I - Item 4. CONTROLS AND PROCEDURES Our Chief Executive Officer, our Chief Financial Officer, and other members of our senior management team have evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). 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 the Company, including our consolidated subsidiaries, 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. 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. 21 PART II - Other Information Item 1 - Legal Proceedings None. Item 2 - Changes in Securities (a) None. (b) None. (c) None. Item 3 - Defaults upon Senior Securities None. Item 4 - Submission of Matters to a Vote of Security Holders On April 13, 2004, we held our annual stockholders meeting at 11:00 a.m. at the offices of Foley Hoag LLP, 155 Seaport Boulevard, 13th Floor, Boston, Massachusetts 02210. There were two matters of business requiring a stockholder vote, election of directors and a proposal to approve and adopt our 2004 Stock Incentive Plan. A total of 18,245,999 votes were cast and the following directors were elected to one year terms with the corresponding vote tally:
Withhold For Authority --- --------- Timothy G. Fallon 18,050,771 195,228 Henry E. Baker 18,031,641 214,358 Peter K. Baker 18,031,641 214,358 Phillip Davidowitz 18,169,402 76,597 Robert C. Getchell 18,169,402 76,597 Carol R. Lintz 18,169,402 76,597 David R. Preston 18,169,402 76,597 Ross Rapaport 18,032,916 213,083 Norman E. Rickard 18,169,402 76,597 Beat Schlagenhauf 18,032,916 213,083
A total of 12,461,071 votes were cast and it was decided to approve the 2004 Stock Incentive Plan as proposed in Annex B of our definitive proxy statement dated March 9, 2004. The plan covers 250,000 shares of our common stock and provides for the grant of incentive and non-statutory stock options and awards of restricted and unrestricted 22 stock. The vote tally was as follows: Number of Votes For: 11,880,679 Number of Votes Against: 559,180 Number of Votes Abstaining: 21,212 Number of "Non-Votes": 5,784,928
Item 5 - Other Information None. Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits
Exhibit Number Description ------ ----------- 3.1 Certificate of Incorporation of the Company. (Incorporated by reference to Exhibit B to Appendix A to the Proxy Statement included in the S-4 Registration Statement filed by Vermont Pure Holdings, Ltd., f/k/a VP Merger Parent, Inc., File No. 333-45226, on September 6, 2000 (the "S-4 Registration Statement").) 3.2 Certificate of Amendment of Certificate of Incorporation of the Company filed October 5, 2000. (Incorporated by reference to Exhibit 4.2 of the Report on Form 8-K filed by the Company on October 19, 2000 (the "Merger 8-K").) 3.3 By-laws of the Company. (Incorporated by reference from Exhibit 3.3 to Form 10-Q for the Quarter ended July 31, 2001.) 4.1 Registration Rights Agreement among the Company, Peter K. Baker, Henry E. Baker, John B. Baker and Ross Rapaport. (Incorporated by reference to Exhibit 4.6 of the Merger 8-K.) 10.1* 1993 Performance Equity Plan. (Incorporated by reference from Exhibit 10.9 of Registration Statement 33-72940.) 10.2* 1998 Incentive and Non-Statutory Stock Option Plan, as amended. (Incorporated by reference to Appendix A to the Definitive Proxy Statement dated March 10, 2003.)
23 10.3* 1999 Employee Stock Purchase Plan. (Incorporated by reference to Exhibit A of the 1999 Definitive Proxy Statement.) 10.4* Employment Agreement between the Company and Timothy G. Fallon. (Incorporated by reference to Exhibit 10.13 of the S-4 Registration Statement.) 10.5* Employment Agreement between the Company and Bruce S. MacDonald. (Incorporated by reference to Exhibit 10.14 of the S-4 Registration Statement.) 10.6* Employment Agreement between the Company and Peter K. Baker. (Incorporated by reference to Exhibit 10.15 of the S-4 Registration Statement.) 10.7* Employment Agreement between the Company and John B. Baker. (Incorporated by reference to Exhibit 10.16 of the S-4 Registration Statement.) 10.8* Employment Agreement between the Company and Henry E. Baker. (Incorporated by reference to Exhibit 10.17 of the S-4 Registration Statement.) 10.9 Lease of Buildings and Grounds in Watertown, Connecticut from the Baker's Grandchildren Trust. (Incorporated by reference to Exhibit 10.22 of the S-4 Registration Statement.) 10.10 Lease of Grounds in Stamford, Connecticut from Henry E. Baker. (Incorporated by reference to Exhibit 10.24 of the S-4 Registration Statement.) 10.11 Lease of Building in Stamford, Connecticut from Henry E. Baker. (Incorporated by reference to Exhibit 10.23 of the S-4 Registration Statement.) 10.12 Loan and Security Agreement between the Company and Webster Bank, M &T Bank, Banknorth Group, and Rabobank dated March 5, 2003. (Incorporated by reference to Exhibit 10.12 of Form 10-Q for the quarter ended January 31, 2003.) 10.13 Form of Term Note from the Company to Webster Bank and participants dated March 5, 2003. (Incorporated by reference to Exhibit 10.12 of Form 10-Q for the quarter ended January 31, 2003.)
24 10.14 Amended and Restated Subordinated Promissory Note from the Company to Henry E. Baker dated March 5, 2003. (Incorporated by reference to Exhibit 10.12 of Form 10-Q for the quarter ended January 31, 2003.) 10.15 Amended and Restated Subordinated Promissory Note from the Company to Joan Baker dated March 5, 2003. (Incorporated by reference to Exhibit 10.12 of Form 10-Q for the quarter ended January 31, 2003.) 10.16 Amended and Restated Subordinated Promissory Note from the Company to John B. Baker dated March 5, 2003. (Incorporated by reference to Exhibit 10.12 of Form 10-Q for the quarter ended January 31, 2003.) 10.17 Amended and Restated Subordinated Promissory Note from the Company to Peter K. Baker dated March 5, 2003. (Incorporated by reference to Exhibit 10.12 of Form 10-Q for the quarter ended January 31, 2003.) 10.18 Amended and Restated Subordinated Promissory Note from the Company to Ross S. Rapaport, Trustee, dated March 5, 2003. (Incorporated by reference to Exhibit 10.12 of Form 10-Q for the quarter ended January 31, 2003.) 10.19 Subordination and Pledge Agreement from Henry E. Baker to Webster Bank dated March 5, 2003. (Incorporated by reference to Exhibit 10.12 of Form 10-Q for the quarter ended January 31, 2003.) 10.20 Subordination and Pledge Agreement from Joan Baker to Webster Bank dated March 5, 2003. (Incorporated by reference to Exhibit 10.12 of Form 10-Q for the quarter ended January 31, 2003.) 10.21 Subordination and Pledge Agreement from John B. Baker to Webster Bank dated November 1, 2001. (Incorporated by reference to Exhibit 10.12 of Form 10-Q for the quarter ended January 31, 2003.) 10.22 Subordination and Pledge Agreement from Peter K. Baker to Webster Bank dated March 5, 2003. (Incorporated by reference to Exhibit 10.12 of Form 10-Q for the quarter ended January 31, 2003.) 10.23 Subordination and Pledge Agreement from Ross S. Rapaport, Trustee, to Webster Bank dated March 5, 2003. (Incorporated by reference to Exhibit 10.12 of Form 10-Q for the quarter ended January 31, 2003.) 10.24 Form of Acquisition/Capital Line of Credit Note from the Company to Webster Bank and participants dated March 5, 2003. (Incorporated by reference to Exhibit 10.12 of Form 10-Q for the quarter ended January 31, 2003.)
25 10.25 Form of Revolving Line of Credit Note from the Company to Webster Bank and participants dated March 5, 2003. (Incorporated by reference to Exhibit 10.12 of Form 10-Q for the quarter ended January 31, 2003.) 10.26** Form of Indemnification Agreements, dated November 1, 2002, between the Company and the following Directors and Officers: Henry E. Baker John B. Baker Peter K. Baker Phillip Davidowitz Timothy G. Fallon Robert C. Getchell David Jurasek Carol R. Lintz Bruce S. MacDonald David R. Preston Ross S. Rapaport Norman E. Rickard Beat Schlagenhauf (Incorporated by reference to Exhibit 10.27 of Form 10-K for the year ended October 31, 2002.) 10.27 Purchase and Sale Agreement among Vermont Pure Springs, Inc., Vermont Pure Holdings, Ltd. and Micropack Corporation dated as of March 1, 2004. (Incorporated by reference to Exhibit 10.27 of Form 10-Q for the quarter ended January 31, 2004.) 10.28 Trademark License Agreement between Vermont Pure Holdings Ltd. and MicroPack Corporation dated March 1, 2004. (Incorporated by reference to Exhibit 10.28 of Form 10-Q for the quarter ended January 31, 2004.) 10.29 Supply and Sublicense Agreement between Vermont Pure Holdings Ltd. and MicroPack Corporation dated March 1, 2004. (Incorporated by reference to Exhibit 10.29 of Form 10-Q for the quarter ended January 31, 2004.) 10.30* 2004 Stock Incentive Plan. (Incorporated by reference to Annex B to the Definitive Proxy Statement dated March 9, 2004.)
26 10.31 Amendment #2 to Loan and Security Agreement between the Company and Webster Bank, M &T Bank, Banknorth Group, and Rabobank dated March 5, 2003. 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.
* Relates to compensation ** The form contains all material information concerning the agreement and the only differences are the name and the contact information of the director or officer who is party to the agreement. (b) Reports on Form 8-K A Report on Form 8-K was filed on March 16, 2004 in conjunction with the press release announcing our financial results for the quarter ended January 31, 2004. 27 SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: June 14, 2004 Williston, Vermont VERMONT PURE HOLDINGS, LTD. By: /s/ Bruce S. MacDonald ---------------------- Bruce S. MacDonald Vice President, Chief Financial Officer (Principal Accounting Officer and Principal Financial Officer) 28 Vermont Pure Holdings, Ltd. Quarterly Report on Form 10-Q for the Quarter Ended April 30, 2004 Exhibits Filed Herewith
Exhibit Number Description ------ ----------- 10.31 Amendment #2 to Loan and Security Agreement between the Company and Webster Bank, M &T Bank, Banknorth Group, and Rabobank dated March 5, 2003. 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.
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