-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WIHweiV/3qNl7xuDjy/PYFAXYpRGAPowSH/rXiSDN7XU1StFq71IwkT08+P9RpQx VmkJhjWzVSmhet8vWaEFqw== 0000950135-06-001680.txt : 20060317 0000950135-06-001680.hdr.sgml : 20060317 20060317150010 ACCESSION NUMBER: 0000950135-06-001680 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20060131 FILED AS OF DATE: 20060317 DATE AS OF CHANGE: 20060317 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VERMONT PURE HOLDINGS LTD/DE CENTRAL INDEX KEY: 0001123316 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-GROCERIES & RELATED PRODUCTS [5140] IRS NUMBER: 030366218 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-31797 FILM NUMBER: 06695533 BUSINESS ADDRESS: STREET 1: 44 KRUPP DRIVE STREET 2: PO BOX 536 CITY: WILLISTON STATE: VT ZIP: 05495 BUSINESS PHONE: 8028601126 MAIL ADDRESS: STREET 1: 44 KRUPP DRIVE STREET 2: PO BOX 536 CITY: WILLISTON STATE: VT ZIP: 05495 FORMER COMPANY: FORMER CONFORMED NAME: VP MERGER PARENT INC DATE OF NAME CHANGE: 20000905 10-Q 1 b59905vpe10vq.txt VERMONT PURE HOLDING, LTD UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended January 31, 2006 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.)
1050 Buckingham St., Watertown, CT 06795 (Address of principal executive offices) (Zip Code)
(860) 945-0661 (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 by check mark whether the registrant is a shell company (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.
Shares outstanding at Class March 6, 2006 ----- --------------------- Common Stock, $.001 Par Value 21,655,645
VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY Table of Contents
Page Number ----------- Part I - Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets as of January 31, 2006 and October 31, 2005 (unaudited) 3 Condensed Consolidated Statements of Operations for the Three Months ended January 31, 2006 and 2005 (unaudited) 4 Condensed Consolidated Statements of Cash Flows for the Three Months ended January 31, 2006 and 2005 (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 12-16 Item 3. Quantitative and Qualitative Disclosures About Market Risk 17-18 Item 4. Controls and Procedures 19 Part II - Other Information Item 1a. Risk Factors 20 Item 6. Exhibits 20 Signature 21
2 VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS
January 31, October 31, 2006 2005 ------------ ------------ (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,695,851 $ 1,895,810 Accounts receivable - net 6,852,945 7,249,801 Inventories 1,137,283 1,133,315 Current portion of deferred tax asset 796,662 796,662 Other current assets 604,559 1,699,370 Unrealized gain on derivatives 137,005 168,582 ------------ ------------ TOTAL CURRENT ASSETS 11,224,305 12,943,540 ------------ ------------ PROPERTY AND EQUIPMENT - net of accumulated depreciation 10,520,465 10,890,376 ------------ ------------ OTHER ASSETS: Goodwill 74,755,851 74,755,851 Other intangible assets - net of accumulated amortization 3,438,926 3,569,818 Deferred tax asset 654,729 654,729 Other assets 660,151 75,000 ------------ ------------ TOTAL OTHER ASSETS 79,509,657 79,055,398 ------------ ------------ TOTAL ASSETS $101,254,427 $102,889,314 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long term debt $ 3,329,250 $ 3,266,750 Accounts payable 1,643,884 2,582,105 Accrued expenses 2,973,749 2,990,129 Current portion of customer deposits 718,540 732,835 ------------ ------------ TOTAL CURRENT LIABILITIES 8,665,423 9,571,819 ------------ ------------ Long term debt, less current portion 37,162,500 37,975,000 Customer deposits 2,885,750 2,933,732 ------------ ------------ TOTAL LIABILITIES 48,713,673 50,480,551 ------------ ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock - $.001 par value, 50,000,000 authorized shares 21,727,196 issued and 21,655,646 outstanding shares as of January 31, 2006 and 21,744,817 issued and 21,673,267 outstanding as of October 31, 2005 21,727 21,744 Additional paid in capital 58,172,097 58,207,645 Treasury stock, at cost, 71,550 shares as of January 31, 2006 and October 31, 2005 (264,735) (264,735) Unearned compensation (134,250) Accumulated deficit (5,525,340) (5,590,223) Accumulated other comprehensive income 137,005 168,582 ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 52,540,754 52,408,763 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $101,254,427 $102,889,314 ============ ============
See notes to the condensed consolidated financial statements. 3 VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended January 31, ------------------------- 2006 2005 ----------- ----------- (Unaudited) NET SALES $14,613,714 $13,963,760 COST OF GOODS SOLD 6,399,236 5,931,876 ----------- ----------- GROSS PROFIT 8,214,478 8,031,884 ----------- ----------- OPERATING EXPENSES: Selling, general and administrative expenses 6,801,614 6,776,854 Advertising expenses 269,627 255,839 Amortization 208,807 195,282 Gain on disposal of property and equipment (1,781) (17,894) ----------- ----------- TOTAL OPERATING EXPENSES 7,278,267 7,210,081 ----------- ----------- INCOME FROM OPERATIONS 936,211 821,803 ----------- ----------- OTHER INCOME (EXPENSE): Interest expense (816,196) (810,758) ----------- ----------- TOTAL OTHER EXPENSE (816,196) (810,758) ----------- ----------- INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE 120,015 11,045 INCOME TAX EXPENSE (55,132) (4,532) ----------- ----------- NET INCOME $ 64,883 $ 6,513 =========== =========== NET LOSS PER SHARE - BASIC $ -- $ -- =========== =========== NET LOSS PER SHARE - DILUTED $ -- $ -- =========== =========== WEIGHTED AVERAGE SHARES USED IN COMPUTATION - BASIC 21,619,250 21,611,933 =========== =========== WEIGHTED AVERAGE SHARES USED IN COMPUTATION - DILUTED 21,619,324 21,618,359 =========== ===========
See notes to the condensed consolidated financial statements. 4 VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended January 31, ------------------------------ 2006 2005 ---------- ----------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 64,883 $ 6,513 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,033,362 1,244,541 Provision for bad debts 130,606 184,523 Amortization 208,807 195,282 Non cash interest expense 25,970 -- Gain on disposal of property and equipment (1,781) (17,894) Non cash compensation 10,512 -- Changes in assets and liabilities: Accounts receivable 266,250 124,171 Inventories (3,968) (8,681) Other current assets 405,776 153,482 Accounts payable (938,221) (983,679) Accrued expenses (16,380) (67,161) Customer deposits (62,277) (43,991) ---------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 1,123,539 787,106 ---------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment (672,453) (802,886) Proceeds from sale of property and equipment 10,783 40,962 ---------- ----------- NET CASH USED IN INVESTING ACTIVITIES (661,670) (761,924) ---------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from line of credit borrowings 247,333 4,034,495 Payments on line of credit (247,333) (3,768,774) Principal payments of debt (750,000) (875,001) Proceeds from sale of common stock 88,172 78,610 ---------- ----------- NET CASH USED IN FINANCING ACTIVITIES (661,828) (530,670) ---------- ----------- NET DECREASE IN CASH AND CASH EQUIVALENTS (199,959) (505,488) CASH AND CASH EQUIVALENTS - beginning of period 1,895,810 783,445 ---------- ----------- CASH AND CASH EQUIVALENTS - end of period $1,695,851 $ 277,957 ========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for interest $ 802,616 $ 820,790 ========== =========== Cash (refunds received) payments for income taxes $ (99,344) $ 128,447 ========== ===========
See the notes to the condensed consolidated financial statements. 5 VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION 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, 2005. 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 included in the Company's Annual Report on Form 10-K for the year ended October 31, 2005. 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. Certain amounts have been reclassified in the 2005 condensed consolidated financial statements to conform to the 2006 presentation. 2. STOCK BASED COMPENSATION Effective November 1, 2005, the Company adopted the provisions of SFAS No. 123, "Share-Based Payments (revised 2004)," (SFAS No. 123R). SFAS No. 123R requires companies to measure 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 will be 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). SFAS No. 123R also requires companies to measure the cost of employee services received in exchange for Employee Stock Purchase Plan ("ESPP") awards and the Company is required to expense the grant date fair value of the Company's ESPP awards. The Company did not grant any equity based compensation in the first fiscal quarter of 2006. There were stock options for 10,000 shares issued to directors in 2005 that vested in the first 6 fiscal quarter of 2006. The grant-date fair value of these share options was estimated using the Black-Scholes option-pricing model with the following assumptions: an expected life averaging 5 years; an average volatility of 36%; no dividend yield; and a risk-free interest rate averaging 3%. Based on this information and the vesting schedule of the options the Company recognized $1,136 before taxes as compensation, or $614 after taxes, under SFAS No. 123R for the first fiscal quarter of 2006. Prior to the adoption of SFAS No. 123R, the Company followed the accounting treatment prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" when accounting for stock-based compensation granted to employees and directors. Accordingly, no compensation expense was recognized for its stock option awards because the exercise price of the Company's stock options equaled or exceeded the market price of the underlying stock on the date of the grant. The Company has elected not to restate prior interim periods in the year of adoption under SFAS No. 123R. Had compensation cost for the Company's stock option awards and the stock purchase plan been determined based on the fair value at the grant dates for the awards under those plans, consistent with the provisions of SFAS No. 123R, the Company's net income and net income per share for the first fiscal quarter ended January 31, 2005 would have been impacted as follows:
Three Months Ended January 31, 2005 ------------- Net Income - As Reported $ 6,513 Effect of compensation expense determined under fair value method valuation for all awards, net of income tax 42,296 -------- Pro Forma Net Loss $(35,783) ======== Basic Net Loss Per Share: As Reported $ .00 ======== Pro Forma $ .00 ======== Diluted Net Loss Per Share: As Reported $ .00 ======== Pro Forma $ .00 ========
The fair value of each stock option was estimated on the date of the grant using the Black-Scholes option-pricing using the assumptions detailed above. Employee Stock Purchase Plan On June 15, 1999 the Company's stockholders approved the Vermont Pure Holdings, Ltd. 1999 Employee Stock Purchase Plan. On January 1, 2001, employees commenced participation in the plan. The total number of shares of common stock issued under this plan 7 during the three months ended January 31, 2006 was 52,379 for proceeds of $79,695. The total number of shares of common stock issued under this plan during the three months ended January 31, 2005 was 51,666 for proceeds of $78,610. Restricted Shares 75,000 shares on the Company's common stock that were granted on a restricted basis, and recorded as equity, in 2005 under the 2004 Stock Incentive Plan were forfeited in the first fiscal quarter of 2006. As a result, no compensation was recorded and the equity was reversed during the quarter. 3. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Company uses interest rate swaps to fix certain long term interest rates. The swap rates are based on the floating 30-day LIBOR rate and are structured such that if the loan rate for the period exceeds the fixed rate of the swap, then the bank pays the Company to lower the effective interest rate. Conversely, if the loan rate is lower than the fixed rate, the Company pays the bank additional interest. On May 3, 2005, the Company entered into an interest rate hedge ("swap") agreement in conjunction with its new senior financing (the "May 2005 Swap"). The new credit agreement requires that the Company fix the interest rate on its term debt for the life of the loan. The May 2005 Swap fixes the interest rate at 4.66%, plus the applicable margin, 2.50% at January 31, 2006 and 2.25% thereafter, and amortizes concurrently with the loan principal to fix the interest rate with respect to 75% of the outstanding principal. In addition to the May 2005 Swap, the Company has another swap (the "Original Swap") which is in the notional amount of $10 million and a fixed rate of 1.74%, plus the applicable margin. When the Original Swap matures in June 2006 the balance of the May 2005 Swap will increase to hedge 75% of the term loan on an amortizing basis. As of January 31, 2006, the total notional amount committed to swap agreements was $19.3 million. As of January 31, 2005, the Company had only the Original Swap for a total notional amount of $10 million. 8 Based on the floating rate for periods ended January 31, 2006 and 2005, the Company paid $53,000 less and $14,000 less in interest, respectively, than it would have without the swaps. These swaps are considered hedges under SFAS Nos. 133 and 137. Since the instruments are intended to hedge against variable cash flows, they are considered a cash flow hedge. As a result, the changes in the fair values of the derivatives are recognized as comprehensive income or loss until the hedged item is recognized in earnings. 4. COMPREHENSIVE (LOSS) INCOME The following table summarizes comprehensive income for the respective periods:
Three Months Ended January 31, ------------------ 2006 2005 -------- ------- Net Income $ 64,883 $ 6,513 Other Comprehensive (Loss) Income: Unrealized (loss) gain on derivatives designated as cash flow hedges - net of tax (31,577) 34,360 -------- ------- Comprehensive Income $ 33,306 $40,873 ======== =======
5. INVENTORIES Inventories consisted of the following at:
January 31, October 31, 2006 2005 ----------- ----------- Finished Goods $ 990,630 $ 994,240 Raw Materials 146,653 139,075 ---------- ---------- Total Inventories $1,137,283 $1,133,315 ========== ==========
6. 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: 9
Three Months Ended January 31, ------------------------- 2006 2005 ----------- ----------- Net Income $ 64,883 $ 6,513 Denominator: Basic Weighted Average Shares Outstanding 21,619,250 21,611,933 Dilutive effect of Stock Options 74 6,426 ----------- ----------- Diluted Weighted Average Shares Outstanding 21,619,324 21,618,359 Basic Income Per Share $ .00 $ .00 =========== =========== Diluted Income Per Share $ .00 $ .00 =========== ===========
There were 817,187 and 2,648,490 options outstanding as of January 31, 2006 and 2005, respectively. For the three month periods ended January 31, 2006 and 2005, there were 10,000 and 65,000 options used to calculate the effect of dilution, respectively. There were 807,187 and 2,583,490 options not included in the dilution calculation because the options' exercise price exceeded the market price of the underlying common shares. 7. DEBT As of January 31, 2006 the Company had $600,000 outstanding on its acquisition line of credit and there was no outstanding loan balance but $1,391,000 of letters credit were outstanding on its revolving line of credit. Also as of January 31, 2006, there was $6,900,000 and $4,609,000 available on the acquisition and revolving lines of credit, respectively. The Company's Loan and Security agreement requires that it be in compliance with certain financial covenants at the end of each fiscal quarter. The covenants include senior fixed charge coverage of greater than 1.25 to 1, total fixed charge coverage of greater than 1 to 1, and senior debt to EBITDA of greater than 2.75 to 1. As of January 31, 2006, the Company was in compliance with all of the financial covenants of its senior credit facility. 8. GOODWILL AND OTHER INTANGIBLE ASSETS Major components of intangible assets at January 31, 2006 and October 31, 2005 consisted of: 10
January 31, 2006 October 31, 2005 ----------------------------- ----------------------------- Gross Carrying Accumulated Gross Carrying Accumulated Amount Amortization Amount Amortization -------------- ------------ -------------- ------------ Amortizable Intangible Assets: Customer Lists and Covenants Not to Compete $4,655,238 $1,735,429 $4,655,238 $1,527,060 Other Intangibles 711,083 191,966 633,168 191,528 ---------- ---------- ---------- ---------- Total $5,366,321 $1,927,395 $5,288,406 $1,718,588 ========== ========== ========== ==========
Amortization expense for the periods ending January 31, 2006 and January 31, 2005 was $208,807 and $195,282 respectively. The changes in the carrying amount of goodwill for the fiscal periods ending January 31, 2006 and October 31, 2005 are as follows:
January 31, 2006 October 31, 2005 ---------------- ---------------- Beginning Balance $74,755,851 $74,772,591 Goodwill acquired during the period 36,390 Goodwill disposed of during the period (53,130) ----------- ----------- Balance as of the end of the period $74,755,851 $74,755,851 =========== ===========
9. SUBSEQUENT EVENT On March 1, 2006 the Company extended the term of the $500,000 note receivable due to us on that date. The note was a portion of the proceeds related to the sale of the assets of the Company's retail segments on March 1, 2004. The note receivable is now due on March 1, 2007. The remaining terms of the note remain substantially unchanged. 11 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, 2005 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 Results of Operations for the Three Months Ended January 31, 2006 (First Quarter) Compared to the Three Months Ended January 31, 2005 Sales Sales for the three months ended January 31, 2006 were $14,614,000 compared to $13,964,000 for the corresponding period in 2005, an increase of $650,000 or 5%. The increase was primarily the result of the growth of existing product lines that more than offset a decline in equipment rental revenue in fiscal year 2005. Excluding acquisitions, sales were up 3% for the three months ended January 31, 2006 compared to the corresponding period in 2005. The comparative breakdown of sales of the product lines for the respective three month periods ended January 31, 2006 and 2005 is as follows:
Product Line 2006 2005 Difference % Diff. ------------ ------- ------- ---------- ------- (in thousands) Water $ 6,514 $ 6,440 $ 74 1% Coffee and Other Products 5,829 5,169 660 13% Equipment Rental 2,271 2,355 (84) (4%) ------- ------- ---- --- Total $14,614 $13,964 $650 5% ======= ======= ==== ===
12 Water - Sales of water and related products increased as a result of a 4% increase in volume net of a 3% decrease in price. Acquisition activity had no material impact on sales growth for water products. Coffee and Other Products - Sales of coffee and other products increased 3% from sales volume obtained in acquisitions. Net of acquisitions, sales increased 10%. This increase in sales was attributable to increased volume of all products in this category but primarily to the growth of single serve coffee, which grew 37%, to $1,565,000 in the first quarter of fiscal year 2006 compared to $1,142,000 in the same period in fiscal year 2005. In addition, "other product" sales include fuel adjustments charged to customers to offset increased fuel costs. The fees, which totaled $207,000 for the first quarter of fiscal year 2006, were not charged in the first quarter of fiscal year 2005 and accounted for 4% of the total 13% increase for the category. Equipment Rental - Equipment rental revenue decreased in the first quarter compared to the same period in fiscal year 2005 primarily as a result of a decline in average cooler rental pricing which decreased 3%. Also, cooler placements declined approximately 1%. The decrease in price and placements is directly attributable to continuing competition from other rental and retail outlets. Acquisition activity had no impact on equipment rental. Gross Profit/Cost of Goods Sold - For the three months ended January 31, 2006, gross profit increased $182,000, or 2%, to $8,214,000 from $8,032,000 for the comparable period in 2005. The increase in gross profit was primarily due to higher sales. As a percentage of sales, gross profit decreased to 56% of sales during the quarter from 58% for the comparable period in fiscal year 2005. The decrease in gross profit, as a percentage of sales, was attributable to a change in product sales mix as the sales increase is skewed to lower margin products. Most notably, the profit margin on single serve coffee is less than water and traditional coffee products. Operating Expenses and Income from Operations Total operating expenses increased to $7,278,000 in the first quarter of fiscal year 2006 from $7,210,000 in the comparable period in fiscal year 2005, an increase of $68,000, or 1%. Selling, general and administrative (SG&A) expenses of $6,802,000 in the first quarter of fiscal year 2006 remained essentially unchanged compared to $6,777,000 in the same period of fiscal 2005. Of total SG&A expenses, route distribution costs increased $26,000, or 1%. The increase is attributable to route labor costs which increased $94,000, or 5% corresponding with sales, as well as fuel and repair costs. The increase in these costs was partially offset by a decrease in other route costs, primarily lease and insurance costs. Selling costs increased $54,000, or 8%, as a result of increased sales staffing and compensation. Administration costs decreased $55,000, or 2%, primarily as a result of a decrease in outside professional fees. Advertising expenses were $270,000 in the first quarter of fiscal year 2006 compared to $256,000 in the first quarter of fiscal year 2005, an increase of $14,000, or 5%. The increase in advertising costs is related to an increase in yellow page advertising. 13 Amortization increased to $209,000 in the first quarter of fiscal year 2006 from $195,000 in the first quarter of fiscal year 2005. This increase is attributable to intangible assets that were acquired as part of several acquisitions in fiscal year 2004 and 2005. Income from operations for the three months ended January 31, 2006 was $936,000 compared to $822,000 in the same period in 2005, an increase of $114,000, or 14%. The increase was a result of higher sales and gross margin and only slightly higher operating costs. Interest, Taxes, and Other Expenses - Income from Continuing Operations Interest expense was $816,000 for the three months ended January 31, 2005 compared to $811,000 in the three months ended January 31, 2005, an increase of $5,000. Higher interest costs were primarily a result of higher market interest rates and fixing an additional amount of senior debt at a rate higher than short term rates. Income from continuing operations before income taxes was $120,000 for the three months ended January 31, 2006 compared to income from continuing operations before income taxes of $11,000 in the corresponding period in fiscal year 2005, an improvement of $109,000. The tax expense for the first quarter of fiscal year 2006 was $55,000 and was based on the expected effective tax rate of 46% for the entire fiscal year 2006. We recorded a tax expense of $5,000 related to income from operations in the first quarter of fiscal year 2005 based on an effective tax rate of 41%. The effective tax rates were calculated by estimating the federal tax liability, combined with the pertinent taxes in the states in which we operate and non-deductible permanent items, for the full fiscal year. Net Income Net income of $65,000 for the three months ended January 31, 2006 increased from net income of $7,000 in the corresponding period in fiscal year 2005. The increase is attributable to higher sales, improved gross margin, and stable operating and interest expenses in the first quarter of fiscal year 2006 as compared to the same period in fiscal year 2005. Trends While sales have continued to grow, net of acquisitions, from year to year, the increase has generally been generated by our non-core products. As we have discussed in the past, industry dynamics have created a more competitive environment for our core products in most markets in recent years. We expect water sales to continue to grow and rental revenue to continue to slowly decrease or remain flat from year to year. The decrease in rental revenue will be offset from the sale of coolers and coffee machines. We expect single serve coffee continue to increase at a rate comparable to the last 12 months. However, the growth of coffee sales and sale of equipment are not as profitable as our traditional product lines - five gallon water and cooler rental. We expect to increase net income in 2006 but the extent of the increase is largely dependent the on coffee and ancillary products and new product offerings to leverage our distribution system. Operating costs continue to be threatened by outside conditions such as fuel, insurance, and administrative expenses related to regulatory requirements. The SEC has extended the period to comply with Section 404 of the Sarbanes-Oxley Act for non-accelerated filers. We absorbed some of 14 this compliance cost in fiscal year 2005 and expect that most of the remainder of the anticipated cost to comply will be incurred in fiscal year 2007. In addition, the potential of growth through acquisitions remains viable. We have ample opportunities to acquire businesses through small acquisitions and will take advantage of these opportunities based on price, potential synergies, and access to capital. Liquidity and Capital Resources As of January 31, 2006 we had working capital of $2,559,000 compared to $3,372,000 as of October 31, 2005, a decrease of $813,000. The decrease in working capital is reflective of seasonal decreases in cash and accounts receivable of $200,000 and $397,000 respectively, and a reduction in prepaid expenses of $507,000 primarily related to insurance costs. The reduction in these current assets more than offset a seasonal decrease in accounts payable of $938,000. In addition, working capital decreased as a result of the reclassification of a $500,000 note receivable from current to long term based on an extension of the terms. On March 1, 2006 the Company extended the term of the $500,000 note receivable due to us on that date. The note was a portion of the proceeds related to the sale of the assets of the Company's retail segments on March 1, 2004. The note receivable is now due on March 1, 2007. The remaining terms of the note remain substantially unchanged. We routinely use cash for capital expenditures and repayment of debt. In the first quarter of fiscal year 2006 we spent $672,000 on capital expenditures including coolers, brewers, bottles and racks related to home and office distribution as well as bottling equipment and leasehold improvements. In the first quarter of fiscal year 2006 we paid $750,000 to pay down our term debt with Bank of America. As of January 31, 2006 we had $600,000 outstanding on our acquisition line of credit and there was no outstanding loan balance but $1,391,000 of letters credit outstanding on our revolving line of credit. Also as of January 31, 2006, there was $6,900,000 and $4,609,000 available on the acquisition and revolving lines of credit, respectively. Our Loan and Security agreement requires that we be in compliance with certain financial covenants at the end of each fiscal quarter. The covenant requirements include senior fixed charge coverage of greater than 1.25 to 1, total fixed charge coverage of greater than 1 to 1, and senior debt to EBITDA of greater than 2.75 to 1. As of January 31, 2006 we are in compliance with all of the financial covenants of our senior credit facility. 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 January 31, 2005: 15
PAYMENT DUE BY PERIOD ------------------------------------------------------------------ CONTRACTUAL OBLIGATIONS TOTAL 2006 2007-2008 2009-2010 AFTER 2010 - ----------------------- ----------- ---------- ----------- ----------- ----------- Debt (1) $40,492,000 $2,518,000 $ 7,374,000 $ 8,680,000 $21,920,000 Interest on Debt (1) 18,669,000 3,472,000 6,259,000 5,098,000 3,840,000 Operating Leases 9,229,000 1,928,000 4,425,000 2,676,000 200,000 Coffee Purchase Commitments 1,374,000 1,124,000 250,000 -- -- ----------- ---------- ----------- ----------- ----------- Total $69,764,000 $9,042,000 $18,308,000 $16,454,000 $25,960,000 =========== ========== =========== =========== ===========
(1) Interest based on 75% of outstanding senior debt at the hedged interest rate discussed above, 25% of outstanding senior debt at a variable rate of 6.82%, and subordinated debt at a rate of 12%. As of the date of this report, we have no other material contractual obligations or commitments. 16 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS Market risks relating to our operations result primarily from changes in interest rates and commodity prices. INTEREST RATE RISKS We use interest rate "swap" agreements to curtail interest rate risk. At January 31, 2006, we had approximately $7,000,000 of long-term debt subject to variable interest rates. Under the credit agreement with Bank of America, we pay interest at a rate of LIBOR plus a margin of 2.50%, or 7.07% at January 31, 2006. A hypothetical 100 basis point increase in the LIBOR rate would result in an additional $70,000 of interest expense on an annualized basis. Conversely, a decrease would result in a proportionate interest cost savings. As of January 31, 2006, we have fixed the interest rate on $10 million of debt at 4.24% with a swap agreement until June 2006 (the "Original Swap"). On May 3, 2005, we entered into a second swap in conjunction with our senior financing (the "May 2005 Swap"). Our credit agreement requires that we fix the interest rate on 75% of our term debt for the life of the loan. The May 2005 Swap fixes the interest rate at 4.66%, plus the applicable margin, 2.50% at January 31, 2006, and amortizes concurrently with the loan principal to fix the interest rate with respect to 75% of the outstanding principal, including the Original Swap. When the Original Swap matures in June 2006 the balance of the May 2005 swap will increase to fix the interest rate on 75% of the term loan on an amortizing basis. As of January 31, 2006, the total notional amount committed to swap agreements was $19.3 million. As of January 31, 2006, these were rates favorable to the market. We will continue to evaluate swap rates as the market dictates. They serve to stabilize our cash flow and expense 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. To date we have fixed rates as required by our credit agreement with the bank. 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 is dictated by commodity prices. We enter into contracts to mitigate market fluctuation of these costs by fixing the price with our suppliers for certain periods. Currently, we have fixed the price of our anticipated supply through May 2006 at "green" prices ranging from $.95 to $1.15 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, on an annual basis. In this case, competitors that had fixed pricing might have a competitive advantage. 17 Diesel Fuel We operate vehicles to deliver product to customers. The cost of fuel to operate these vehicles fluctuates over time. Over the last year, fuel prices increased 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 on an annual basis. In aggregate, we have spent approximately an additional $83,000 on fuel as a result of higher prices in the first quarter of fiscal year 2006 compared to the comparable period of 2005. We have offset some of this cost by adjusting our price to our customers on a monthly basis while fuel prices are higher. 18 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)) as January 31, 2006. 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 Securities Exchange Act of 1934, as amended, 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. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING During the three months ended January 31, 2006, 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. 19 PART II - Other Information ITEM 1A. RISK FACTORS There have been no material changes in our Risk Factors since they were disclosed in Form 10-K for the period ending October 31, 2005. ITEM 6. 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
20 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, 2006 VERMONT PURE HOLDINGS, LTD. By: /s/ Bruce S. MacDonald ------------------------------------ Bruce S. MacDonald Vice President, Chief Financial Officer (Principal Accounting Officer and Principal Financial Officer) 21 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.
22 EX-31.1 2 b59905vpexv31w1.txt EX- 31.1 SECTION 302 OF CERTIFICATION CEO EXHIBIT 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Peter K. Baker, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Vermont Pure Holdings, Ltd.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 17, 2006 /s/ Peter K. Baker - ------------------------------------- Peter K. Baker Chief Executive Officer EX-31.2 3 b59905vpexv31w2.txt EX-31.2 SECTION 302 OF CERTIFICATION CFO EXHIBIT 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Bruce S. MacDonald, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Vermont Pure Holdings, Ltd.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 17, 2006 /s/ Bruce S. MacDonald - ------------------------------------- Bruce S. MacDonald Chief Financial Officer EX-32.1 4 b59905vpexv32w1.txt EX-32.1 SECTION 906 OF CERTIFICATION CEO EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. Section 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Vermont Pure Holdings, Ltd. (the "Company") for the quarter ended January 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned Chief Executive Officer of the Company, certifies, to the best knowledge and belief of the signatory, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Peter K. Baker - ------------------------------------- Peter K. Baker Chief Executive Officer DATE: MARCH 17, 2006 EX-32.2 5 b59905vpexv32w2.txt EX-32.2 SECTION 906 OF CERTIFICATION CFO EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. Section 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Vermont Pure Holdings, Ltd. (the "Company") for the quarter ended January 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned Chief Financial Officer of the Company, certifies, to the best knowledge and belief of the signatory, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Bruce S. MacDonald - ------------------------------------- Bruce S. MacDonald Chief Financial Officer DATE: MARCH 17, 2006 -----END PRIVACY-ENHANCED MESSAGE-----