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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 July 31, 2007
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
(Address of principal executive offices)
  06795
(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 þ       No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See Rule 12b-2 of the Exchange Act for the definitions of “large accelerated filer” and “accelerated filer”.
Large Accelerated Filer o      Accelerated Filer o       Non-Accelerated Filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o      No þ
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   September 5, 2007
Common Stock, $.001 Par Value   21,620,605
 
 

 


 

VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY
Table of Contents
         
    Page Number  
Part I — Financial Information
       
 
Item 1. Financial Statements
       
 
    3  
 
    4  
 
    5  
 
    6-12  
 
    13-20  
 
    20-21  
 
    21-22  
 
       
 
    23  
 
    23  
 
    23-24  
 
    24  
 
    24  
 
    24  
 
    24-25  
 
    26  
  EX-10.1 First Amendment to the Credit Agreement dated April 5, 2005
  EX-10.2 Second Amendment to the Credit Agreement dated April 5, 2005
  EX-10.3 Third Amendment to the Credit Agreement dated April 5, 2005
  EX-10.4 First Amendment to the Lease of Buildings and Grounds in Watertown, Connecticut
  EX-31.1 Certification of Chief Executive Officer pursuant to Section 302
  EX-31.2 Certification of Chief Financial Officer pursuant to Section 302
  EX-32.1 Certification of Chief Executive Officer pursuant to Section 906
  EX-32.2 Certification of Chief Financial Officer pursuant to Section 906

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VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
                 
    July 31,     October 31,  
    2007     2006  
    (unaudited)     (unaudited)  
ASSETS
CURRENT ASSETS:
               
Cash and cash equivalents
  $ 245,762     $ 2,120,111  
Accounts receivable — net
    7,626,788       7,212,054  
Inventories
    1,570,253       1,192,286  
Current portion of deferred tax asset
    683,509       683,509  
Other current assets
    1,352,863       884,031  
Unrealized gain on derivatives
    77,837       134,737  
 
           
 
               
TOTAL CURRENT ASSETS
    11,557,012       12,226,728  
 
           
 
               
PROPERTY AND EQUIPMENT — net of accumulated depreciation
    10,857,666       10,718,834  
 
           
 
               
OTHER ASSETS:
               
Goodwill
    54,427,890       54,421,662  
Other intangible assets — net of accumulated amortization
    2,825,300       3,197,575  
Other assets
    260,513       770,212  
 
           
 
               
TOTAL OTHER ASSETS
    57,513,703       58,389,449  
 
           
 
               
TOTAL ASSETS
  $ 79,928,381     $ 81,335,011  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
               
CURRENT LIABILITIES:
               
Line of credit
  $ 47,273     $  
Current portion of long term debt
    3,308,978       3,583,564  
Accounts payable
    2,109,733       2,005,283  
Accrued expenses
    2,989,614       3,414,036  
Current portion of customer deposits
    750,458       706,401  
 
           
TOTAL CURRENT LIABILITIES
    9,206,056       9,709,284  
 
               
Long term debt, less current portion
    31,604,167       33,875,000  
Deferred tax liability
    3,233,228       3,233,228  
Customer deposits
    2,918,857       2,828,208  
 
           
 
               
TOTAL LIABILITIES
    46,962,308       49,645,720  
 
           
 
               
COMMITMENTS AND CONTINGENCIES
               
 
               
STOCKHOLDERS’ EQUITY:
               
Common stock — $.001 par value, 50,000,000 authorized shares 21,800,555 issued and 21,635,705 outstanding shares as of July 31, 2007 and 21,747,572 issued and 21,608,922 outstanding as of October 31, 2006
    21,801       21,747  
Additional paid in capital
    58,307,395       58,220,887  
Treasury stock, at cost, 164,850 shares as of July 31, 2007 and 138,650 shares as of October 31, 2006
    (420,285 )     (369,662 )
Accumulated deficit
    (24,980,901 )     (26,260,341 )
Accumulated other comprehensive income, net of tax
    38,063       76,660  
 
           
TOTAL STOCKHOLDERS’ EQUITY
    32,966,073       31,689,291  
 
           
 
               
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 79,928,381     $ 81,335,011  
 
           
See notes to the condensed consolidated financial statements.

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VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                                 
    Three months ended July 31,     Nine months ended July 31,  
    2007     2006     2007     2006  
    (unaudited)     (unaudited)  
NET SALES
  $ 17,107,306     $ 16,520,746     $ 48,086,185     $ 46,374,976  
 
                               
COST OF GOODS SOLD
    7,168,897       6,666,507       20,910,196       19,541,550  
 
                       
 
                               
GROSS PROFIT
    9,938,409       9,854,239       27,175,989       26,833,426  
 
                       
 
                               
OPERATING EXPENSES:
                               
Selling, general and administrative expenses
    7,241,166       7,239,648       20,761,522       20,739,928  
Advertising expenses
    713,476       365,354       1,231,396       855,485  
Amortization
    213,513       223,021       630,904       649,808  
(Gain) loss on disposal of property and equipment
    1,085       (55,991 )     (14,267 )     (67,696 )
 
                       
 
                               
TOTAL OPERATING EXPENSES
    8,169,240       7,772,032       22,609,555       22,177,525  
 
                       
 
                               
INCOME FROM OPERATIONS
    1,769,169       2,082,207       4,566,434       4,655,901  
 
                       
 
                               
OTHER EXPENSE:
                               
Interest
    (818,088 )     (841,949 )     (2,442,883 )     (2,417,187 )
Miscellaneous
          750,000             750,000  
 
                       
 
                               
TOTAL OTHER EXPENSE
    (818,088 )     (91,949 )     (2,442,883 )     (1,667,187 )
 
                       
 
                               
INCOME BEFORE INCOME TAXES
    951,081       1,990,258       2,123,552       2,988,714  
 
                               
INCOME TAX EXPENSE
    (374,284 )     (738,418 )     (844,112 )     (1,197,180 )
 
                       
 
                               
NET INCOME
  $ 576,797     $ 1,251,840     $ 1,279,440     $ 1,791,534  
 
                       
 
                               
NET INCOME PER SHARE — BASIC:
  $ 0.03     $ 0.06     $ 0.06     $ 0.08  
     
 
                               
NET INCOME PER SHARE — DILUTED:
  $ 0.03     $ 0.06     $ 0.06     $ 0.08  
     
 
                               
WEIGHTED AVERAGE SHARES USED IN COMPUTATION — BASIC
    21,625,571       21,645,384       21,626,220       21,633,440  
 
                       
WEIGHTED AVERAGE SHARES USED IN COMPUTATION — DILUTED
    21,626,050       21,645,384       21,626,220       21,633,440  
 
                       
See notes to the condensed consolidated financial statements.

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VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                 
    Nine months ended July 31,  
    2007     2006  
    (unaudited)  
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net income
  $ 1,279,440     $ 1,791,534  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
    3,049,752       2,956,150  
Bad debt provision
    240,381       205,355  
Amortization
    630,904       649,808  
Non cash interest expense
    77,911       77,911  
Gain on disposal of property and equipment
    (14,267 )     (67,696 )
Non cash compensation
          14,064  
Changes in assets and liabilities:
               
Accounts receivable
    (655,115 )     (694,691 )
Inventories
    (377,967 )     (168,018 )
Other current assets
    37,714       (199,676 )
Other assets
    3,153        
Accounts payable
    104,450       (651,797 )
Customer deposits
    134,707       40,088  
Accrued expenses
    (406,119 )     852,346  
 
           
NET CASH PROVIDED BY OPERATING ACTIVITIES
    4,104,944       4,805,378  
 
           
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchase of property and equipment
    (3,202,249 )     (2,685,531 )
Proceeds from sale of property and equipment
    68,092       154,582  
Cash used for acquisitions
    (290,540 )     (363,682 )
 
           
NET CASH USED IN INVESTING ACTIVITIES
    (3,424,697 )     (2,894,631 )
 
           
 
               
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from line of credit
    2,610,970       772,973  
Payments on line of credit
    (2,563,697 )     (772,973 )
Proceeds from long term debt
    13,678        
Principal payments on long term debt
    (2,651,486 )     (2,454,250 )
Purchase of treasury stock
    (50,623 )     (71,260 )
Sale of common stock
    86,562       133,431  
 
           
NET CASH USED IN FINANCING ACTIVITIES
    (2,554,596 )     (2,392,079 )
 
           
 
               
NET DECREASE IN CASH AND CASH EQUIVALENTS
    (1,874,349 )     (481,332 )
 
               
CASH AND CASH EQUIVALENTS — Beginning of period
    2,120,111       1,895,810  
 
               
 
           
CASH AND CASH EQUIVALENTS — End of period
  $ 245,762     $ 1,414,478  
 
           
 
               
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION, EXCLUDING NON-CASH FINANCING AND INVESTING ACTIVITIES
               
Cash paid for interest
  $ 2,401,476     $ 2,386,344  
 
           
 
               
Cash paid for income taxes
  $ 708,305     $ 78,758  
 
           
 
               
NON-CASH FINANCING AND INVESTING ACTIVITIES:
               
Notes payable issued in acquisitions
  $ 104,300     $  
 
           
See notes to the condensed consolidated financial statements.

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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, 2006.
 
    Certain information and footnote disclosures normally included in audited consolidated financial statements presented in accordance with GAAP have been condensed or omitted. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended October 31, 2006. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.
 
    The financial statements herewith reflect the consolidated operations and financial condition of Vermont Pure Holdings Ltd. and its wholly owned subsidiary Crystal Rock, LLC.
 
2.   RECENT PRONOUNCEMENTS
 
    In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB Statement No. 115” (SFAS No. 159). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is expected to expand the use of fair value measurement, which is consistent with the FASB’s long-term measurement objectives for accounting for financial instruments. The fair value option established will permit all entities to choose to measure eligible items at fair value at specified election dates. An entity shall record unrealized gains and losses on items for which the fair value option has been elected through net income in the statement of operations at each subsequent reporting date. This statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007, which is fiscal year 2009 for the Company. The Company is currently

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    reviewing the impact, if any, that this new accounting standard will have on their financial statements.
3.   COMPENSATION PLANS
 
    Effective November 1, 2005, the Company adopted the provisions of SFAS No. 123R, “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). Under SFAS No. 123R the Company provides an estimate of forfeitures at the initial date of grant.
 
    The Company has several stock-based compensation plans under which incentive and non-qualified stock options and restricted shares are granted. In November 1993, the Company adopted the 1993 Performance Equity Plan (the “1993 Plan”). The 1993 Plan authorized the granting of awards for up to 1,000,000 shares of common stock to key employees, officers, directors and consultants until November 2003. Grants could take the form of stock options (both qualified and non-qualified), restricted stock awards, deferred stock awards, stock appreciation rights and other stock based awards. The plan prohibits issuances of options after November 2003.
 
    In April 1998, the Company’s shareholders approved the 1998 Incentive and Non-Statutory Stock Option Plan. In April 2003, the Company’s shareholders approved an increase in the authorized number of shares to be issued under its 1998 Incentive and Non-Statutory Stock Option Plan from 1,500,000 to 2,000,000. This plan provides for issuances of options to purchase the Company’s common stock under the administration of the compensation committee of the Board of Directors. The intent of the plan is to reward options to officers, employees, directors, and other individuals providing services to the Company.
 
    In April 2004, the Company’s shareholders approved the 2004 Stock Incentive Plan (the “2004 Plan”). The plan provides for issuances of awards of up to 250,000 restricted or unrestricted shares of the Company’s common stock, or incentive or non-statutory stock options to purchase such common stock. Of the total amount of shares authorized under this plan, 149,000 option shares are outstanding, 26,000 restricted shares have been granted, and 75,000 shares are available for grant at July 31, 2007.
 
    The options issued under the plans generally vest in periods up to five years based on the continuous service of the recipient and have 10 year contractual terms. Share awards generally vest over one year. Option and share awards provide for accelerated vesting if there is a change in control of the Company (as defined in the plan).
 
    There was no activity related to stock options and outstanding stock option balances or other equity based compensation during the nine months ended July 31, 2007. The Company did not grant any equity based compensation during the nine months ended July 31, 2006.

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The following table summarizes information pertaining to outstanding stock options, all of which are exercisable, as of July 31, 2007:
                                         
                    Weighted              
                    Average     Weighted     Intrinsic  
Exercise         Outstanding     Remaining     Average     Value  
Price         Options     Contractual     Exercise     as of  
Range         (Shares)     Life     Price     July 31, 2007  
 
$ 1.80 - $2.60    
 
    299,500       5.9     $ 2.36     $  
$ 2.81 - $3.38    
 
    350,000       3.1       3.25        
$ 3.50 - $4.25    
 
    70,000       3.0       3.99        
$ 4.28 - $4.98    
 
    5,000       4.4       4.98        
     
 
                           
       
 
    724,500             $ 2.96     $  
       
 
                           
Since all outstanding stock options were fully vested as of July 31, 2007 there was no unrecognized share based compensation related to unvested options as of that date. There were 32,687 shares with a weighted average exercise price of $2.81 that expired during the three and nine month periods ended July 31, 2007. The Company recognized $1,136 as compensation related to vested options during the nine months ended July 31, 2006. All incentive and non-qualified stock option grants had an exercise price equal to the market value of the underlying common stock on the date of grant.
Employee Stock Purchase Plan
On June 15, 1999 the Company’s stockholders approved the Vermont Pure Holdings, Ltd. 1999 Employee Stock Purchase Plan (“ESPP”). On January 1, 2001, employees commenced participation in the plan. The total number of shares of common stock issued under this plan during the nine months ended July 31, 2007 was 52,983 for proceeds of $86,562.
The total number of shares of common stock issued under this plan during the nine months ended July 31, 2006 was 97,047 for proceeds of $150,743.
On March 29, 2007 the Company’s stockholders approved an increase in the number of shares available under the plan from 500,000 to 650,000 shares. Effective January 1, 2006, ESPP shares are granted at 95% of the fair market value at the last day of the offering period. Prior to that, ESPP shares were granted at 85% of the fair market value at the lower of the first or last day of the offering period.
Restricted Shares
75,000 shares of the Company’s common stock that were granted on a restricted basis, and recorded as equity, in fiscal year 2005 under the 2004 Plan were forfeited in the first fiscal quarter of 2006. As a result, no compensation was recorded and the equity was reversed as a deferred compensation adjustment during the quarter.

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4.   INTEREST RATE SWAP AGREEMENTS
 
    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 July 5, 2007 the Company entered into an interest rate hedge agreement (the “July 2007 Swap”) in conjunction with an amendment to its Credit Agreement with Bank of America (see footnote 8). The swap was structured to fix the interest rate on 75% of the Term Loan, as amended on the same date, taking into account the hedge entered into on May 3, 2005 (the “May 2005 Swap”) when the Credit Agreement was originally executed. The Credit Agreement requires that the Company fix the interest rate on not less than 75% of its term debt for the life of the loan. The July 2007 swap fixes the interest rate at 7.73% (5.98%, plus the applicable margin, 1.75%) for the term facility at July 31, 2007
 
    The May 2005 Swap fixed the interest rate at 6.41% (4.66%, plus the applicable margin, 1.75%) for the term facility at July 31, 2007, and amortizes concurrently with the loan principal to fix the interest rate with respect to 75% of the outstanding principal prior to the July 5, 2007 amendment. In addition to the July 2007 and May 2005 Swaps, the Company had another swap (the “Original Swap”), in the notional amount of $10 million and a fixed rate of 1.74%, plus the applicable margin, that matured in June 2006. When the Original Swap matured in June 2006 the balance of the May 2005 Swap increased to hedge 75% of the term loan, prior to the July 5 2007 amendment, on an amortizing basis. As of July 31, 2007, the total notional amount committed to swap agreements was $15.6 million. On that date, the variable rate on the remaining 25% of the term debt was 7.07%. Based on the floating rate for respective nine month period ended July 31, 2007 and 2006, the Company paid $83,000 and $173,000 less in interest, respectively, than it would have without the swaps.
 
    These swaps are considered cash flow hedges under SFAS No. 133 because they are intended to hedge, and are effective as a hedge, against variable cash flows. As a result, the changes in the fair values of the derivatives, net of tax, are recognized as comprehensive income or loss until the hedged item is recognized in earnings.
 
5.   COMPREHENSIVE INCOME
 
    The following table summarizes comprehensive income for the respective periods:

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    Three Months Ended July 31,     Nine Months Ended July 31,  
    2007     2006     2007     2006  
Net income
  $ 576,797     $ 1,251,840     $ 1,279,440     $ 1,791,534  
Other comprehensive income (loss):
                               
Unrealized gain (loss) on derivatives designated as cash flow hedges — net of tax
    (8,640 )     (16,114 )     (38,597 )     26,114  
 
                       
Comprehensive income
  $ 568,157     $ 1,235,726     $ 1,240,843     $ 1,817,648  
 
                       
6.   INVENTORIES
 
    Inventories consisted of the following at:
                 
    July 31,     October 31,  
    2007     2006  
Finished Goods
  $ 1,382,773     $ 1,057,580  
Raw Materials
    187,480       134,706  
 
           
Total Inventories
  $ 1,570,253     $ 1,192,286  
 
           
7.   INCOME PER SHARE AND WEIGHTED AVERAGE SHARES
 
    The Company considers outstanding in-the-money stock options as potential common stock in its calculation of diluted earnings per share, unless the effect would be anti-dilutive, and uses the treasury stock method to calculate the applicable number of shares. The following calculation provides the reconciliation of the denominators used in the calculation of basic and fully diluted earnings per share:
                                 
    Three Months Ended     Nine Months Ended  
    July 31,     July 31,  
    2007     2006     2007     2006  
Net Income
  $ 576,797     $ 1,251,840     $ 1,279,440     $ 1,791,534  
Denominator:
                               
Basic Weighted Average Shares Outstanding
    21,625,571       21,645,384       21,626,220       21,633,440  
Dilutive effect of Stock Options
    479                    
 
                       
Diluted Weighted Average Shares Outstanding
    21,626,050       21,645,384       21,626,220       21,633,440  
 
                       
Basic Income Per Share
  $ .03     $ .06     $ .06     $ .08  
 
                       
Diluted Income Per Share
  $ .03     $ .06     $ .06     $ .08  
 
                       
    There were 724,500 and 757,187 options outstanding as of July 31, 2007 and 2006, respectively. For the nine month period ended July 31, 2007 there were no options used to calculate the effect of dilution because all of the outstanding options’ exercise prices

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    exceeded the market price of the underlying common shares. For the three months ended July 31, 2007, there were 20,000 options used to calculate the effect of dilution and 704,500 options not included in the dilution calculation because the options’ exercise prices exceeded the market price of the underlying common shares. For the three month and nine month periods ended July 31, 2006, there were no options used to calculate dilution because all of the options’ exercise price exceeded the market price of the underlying common shares.
 
8.   DEBT
 
    On July 5, 2007 the Company amended its credit agreement with Bank of America dated April 5, 2005. The amendment changed the Acquisition Loan Termination Date and Revolving Credit Loan Maturity Date to April 5, 2010 from April 5, 2008 and extended the Term Loan Maturity Date to January 5, 2014. In conjunction with the extension of the maturity date, the monthly amortization amount on the Term Loan was fixed at $270,833 for the duration of the loan. Prior to the amendment, the Term Loan Maturity Date was May 5, 2012 and the remaining amortization was scheduled to be monthly amounts, increasing from year to year, ranging from $312,500 to $395,833. In addition, the amendment makes up to $3,000,000 available from the Revolving Credit Loan for repurchase of Company stock or for repayment of subordinated debt and $2,200,000 available from the acquisition loan for installation of solar panels for electricity generation at the Company’s facility in Watertown, CT. The amendment has provisions for amortization of the additional borrowed amounts over the remaining life of the loans starting approximately two years after disbursement. It also alters some of the financial covenant calculations to provide for the additional borrowing.
 
    As of July 31, 2007 the Company had an outstanding balance of $47,000 on its revolving line of credit with Bank of America. There was no balance on the acquisition line of credit and $1,385,000 outstanding in letters of credit on the revolving line of credit. As of July 31, 2007, there was $7,500,000 and $2,992,000 available on the acquisition and revolving lines of credit, respectively.
 
    As of July 31, 2007, the Company had approximately $5.3 million of debt subject to variable interest rates. Under the senior credit agreement with Bank of America, interest is paid at a rate of LIBOR plus a margin of 1.75% on term debt and 1.50% on the line of credit resulting in variable interest rates of 7.07% and 6.82%, respectively at July 31, 2007. In addition, as of July 31, 2007 the Company had $20,854,000 of senior term debt outstanding under the credit agreement.
 
    The Company’s Loan and Security agreement requires the Company to be in compliance with certain financial covenants at the end of each fiscal quarter. The covenants include senior debt service coverage as defined of greater than 1.25 to 1, total debt service coverage as defined of greater than 1 to 1, and senior debt to EBITDA of greater than 2.50 to 1.
 
    Due to higher than usual unfinanced capital expenditures in the fourth quarter of fiscal 2006 and higher cash taxes in 2007, as of July 31, 2007, the Company was not in compliance with two of the financial covenants of its senior credit facility, senior debt service coverage (which

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    was 1.18) and total debt service coverage (which was 0.88). Bank of America waived compliance with these covenants, and we expect to be in compliance with them in the future.
 
    As of July 31, 2007, the Company had $14,000,000 of subordinated debt outstanding bearing an interest rate of 12%.
9.   GOODWILL AND OTHER INTANGIBLE ASSETS
 
    Major components of intangible assets at July 31, 2007 and October 31, 2006 consisted of:
                                 
    July 31, 2007     October 31, 2006  
    Gross Carrying     Accumulated     Gross Carrying     Accumulated  
    Amount     Amortization     Amount     Amortization  
Amortizable Intangible
                               
Assets:
                               
Customer Lists and Covenants Not to Compete
  $ 5,477,663     $ 3,013,035     $ 5,141,123     $ 2,383,443  
Other Intangibles
    555,261       194,589       633,172       193,277  
 
                       
Total
  $ 6,032,924     $ 3,207,624     $ 5,774,295     $ 2,576,720  
 
                       
    Amortization expense for the three month periods ending July 31, 2007 and 2006 was $213,513 and $223,021, respectively. Amortization expense for the nine month periods ending July 31, 2007 and 2006 was $630,904 and $649,808, respectively.
 
    The changes in the carrying amount of goodwill for the nine month period ending July 31, 2007 are as follows:
         
Balance as of October 31, 2006
  $ 54,421,662  
Goodwill acquired during the year
    11,479  
Goodwill disposed of during the year
    (5,251 )
 
     
Balance as of July 31, 2007
  $ 54,427,890  
 
     

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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, 2006 as well as the condensed consolidated financial statements and notes contained herein.
Forward-Looking Statements
When used in the Form 10-Q and in our future filings with the Securities and Exchange Commission, the words or phrases “will likely result,” “we expect,” “will continue,” “is anticipated,” “estimated,” “project,” “outlook,” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. We caution readers not to place undue reliance on any such forward-looking statements, each of which speaks only as of the date made. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. Among these risks are water supply and reliance on commodity price fluctuations. We have no obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements.
Results of Operations
Overview and Trends
Net income in the third quarter and first nine months was lower than the third quarter and first nine months of 2006. The decrease, which was expected, reflects the non-recurrence of a legal settlement received in the third quarter of 2006 and increased advertising costs in the third quarter of 2007.
Our core products, water and equipment rentals continue to grow modestly from quarter to quarter, with other sales declining somewhat. We anticipate that increased advertising will create more brand awareness and market demand in some of our larger markets of the long term to increase the growth of our core products. We expect single serve coffee products to continue to have the highest sales growth but at a lower rate than in the past. The lower growth rate is a consequence of a maturing product lifecycle for single serve coffee products in our market area.
We are out of compliance with two of our bank covenants at the end of the third quarter. Bank of America waived these covenants for the quarter and we expect lower unfinanced capital expenditures and modified loan amortization to bring us back into compliance by the end of fiscal year 2007. We expect to pay down more than $3 million a year in debt in the coming years.
In the longer term, operating costs continue to be adversely affected 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.

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We absorbed some of 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 2008.
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.
Results of Operations for the Three Months Ended July 31, 2007 (Third Quarter) Compared to the Three Months Ended July 31, 2006
Sales
Sales for the three months ended July 31, 2007 were $17,107,000 compared to $16,521,000 for the corresponding period in 2006, an increase of $586,000, or 4%. The increase was primarily the result of water and coffee and related sales. Net of acquisitions completed subsequent to the third quarter of fiscal year 2006, sales increased $471,000, or 3%, from a year ago.
The comparative breakdown of sales of the product lines for the respective three month periods ended July 31, 2007 and 2006 is as follows:
                                 
Product Line   2007     2006     Difference     % Diff.  
(000’s $)                                
Water
  $ 8,096     $ 7,808     $ 288       4 %
Coffee and Related
    4,608       4,190       418       10 %
Equipment Rental
    2,296       2,227       69       3 %
Other
    2,107       2,296       (189 )     (8 %)
 
                       
Total
  $ 17,107     $ 16,521     $ 586       4 %
Water — The increase in sales related to acquisitions was $83,000, or 1% of sales. Net of acquisitions, volume decreased 1% and average selling price increased 4%.
Coffee and Related Products — The increase was attributable to increased volume of all products in this category but primarily to the growth of single serve coffee, which grew 25%, to $1,870,000 in the third quarter of 2007 compared to $1,493,000 in the same period in fiscal year 2006. Acquisitions had no significant effect on the sales increase in coffee from year to year.
Equipment Rental — The increase in equipment rental revenue was due to an increase in equipment placements which rose 3% during the third quarter of 2007 compared the same period of 2006. Average selling prices did not change substantially in the third quarter of 2007 compared to the same period in the prior year. Acquisition revenue did not have a material affect on rental revenue.
Other — The decrease in other revenue was primarily attributable to higher miscellaneous price adjustments, coupons and discounts, and deposit adjustments, despite a 12% increase in sales of other products such as soft drinks, single serve water, cups, and vending items.

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Gross Profit/Cost of Goods Sold — For the three months ended July 31, 2007, gross profit increased $84,000, or 1%, to $9,938,000 from $9,854,000 for the comparable period in 2006. As a percentage of sales, gross profit decreased to 58% in the third quarter of 2007 from 60% in 2006. The decrease in gross profit, in dollars and as a percentage of sales, was attributable to the decrease in other sales.
Operating Expenses and Income from Operations
Total operating expenses increased to $8,169,000 in the third quarter of 2007 from $7,772,000 in the comparable period in 2006, an increase of $397,000, or 5%.
Selling, general and administrative (SG&A) expenses of $7,242,000 in the third quarter of 2007 were substantially the same as $7,241,000 in the comparable period in 2006. Of total SG&A expenses, route distribution costs increased $155,000, or 5%; selling costs decreased $49,000, or 6%; and administration costs decreased $105,000, or 3%. The increase in route expenses was primarily related to higher labor related costs attributable to sales volume increases of coffee and related products. Selling costs decreased as a result of reduced staffing. The decrease in administrative costs was attributable to lower legal expenses.
Advertising expenses were $713,000 in the third quarter of 2007 compared to $365,000 in the third quarter of 2006, an increase of $348,000, or 95%. The increase in advertising costs is related to an advertising campaign in southern New England comprised of radio, billboards, and distribution of samples to increase brand awareness.
Amortization was $214,000 in the third quarter of 2007, a $9,000, or 4%, decrease from $223,000 in the comparable quarter in 2006. Amortization is attributable to intangible assets that were acquired as part of acquisitions in recent years.
Income from operations for the three months ended July 31, 2007 was $1,769,000 compared to $2,082,000 in the comparable period in 2006, a decrease of $313,000, or 15%. The decrease was a result of higher operating costs primarily related to an increase in advertising.
Interest, Taxes, and Other Expenses
Interest expense was $818,000 for the three months ended July 31, 2007 compared to $842,000 in the three months ended July 31, 2006, a decrease of $24,000, or 3%. Lower interest costs were primarily a result of lower outstanding debt despite slightly higher interest rates.
In the third quarter of 2006 we recorded $750,000 as other income related to the settlement of a legal case. There was no other income in the third quarter of 2007.
The tax expense for the third quarter of fiscal year 2007 was $374,000 and was based on the expected effective tax rate of 40%. We recorded a tax expense of $738,000 related to income from operations in the third quarter of fiscal year 2006 based on an effective tax rate of 37%. The lower effective tax rate in the third quarter of 2006 was a result of reassessing our state tax rate midway through the fiscal year and determining that it had decreased. Income before income taxes was $951,000 for the three months ended July 31, 2007 compared to income before income taxes of $1,990,000 in the corresponding period in 2006, a decrease of $1,039,000. The decrease was attributable to the legal settlement recorded in 2006 and higher advertising costs in 2007.

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Net Income
Net income of $577,000 for the three months ended July 31, 2007 decreased from net income of $1,252,000 in the corresponding period in 2006, a decrease of $675,000, or 54%. The decrease primarily reflects higher advertising costs in 2007 compared to the same period in fiscal year 2006 as well the legal settlement made in the third quarter of 2006.
Results of Operations for the Nine Months Ended July 31, 2007 Compared to the Nine Months Ended July 31, 2006
Sales
Sales for the first nine months of 2007 were $48,086,000 compared to $46,375,000 for the first nine months of 2006, an increase of $1,711,000 or 4%. Net of acquisitions, sales increased, $1,335,000, or 3%, over the first nine months in the prior year.
The comparative breakdown of sales of the product lines for the first nine months of 2007 and 2006 is as follows:
                                 
Product Line   2007     2006     Difference     % Diff.  
(in 000’s $)                                
Water
  $ 21,866     $ 21,306     $ 560       3 %
Coffee and Related
    14,405       12,920       1,485       11 %
Equipment Rental
    6,858       6,740       118       2 %
Other
    4,957       5,409       (452 )     (8 %)
 
                       
Total
  $ 48,086     $ 46,375     $ 1,711       4 %
Water — Water sales increased primarily as a result of higher average selling prices and acquisitions. Average selling price increased 3%. Net of acquisitions, total water sales increased 2%. Before considering the increase from acquisitions volume decreased 1%
Coffee and Related Products — The 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 25%, to $5,793,000 in the first half of fiscal year 2007 compared to $4,639,000 in the same period in fiscal year 2006. Coffee sales were not materially influenced by acquisitions in the first nine months of 2007.
Equipment Rental — Equipment rental increased as a result of water cooler placements and rental of single serve coffee equipment. Average price decreased 1% and placements increased 3%. Equipment rental has been substantially unaffected by acquisitions in the first nine months of fiscal year 2007.
Other — Other revenue decreased as a result of a change of approximately $201,000 in the estimate of container deposit liability brought about by the loss of a customer as well as higher miscellaneous discounts. Otherwise, sales of other products such as soft drinks, single serve water, cups, and vending items increased 7%.

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Gross Profit/Cost of Goods Sold
Gross profit increased $343,000, or 1%, to $27,176,000 for the first nine months of 2007 from $26,833,000 for the first nine months of 2006. The increase in gross profit was attributable to higher sales. As a percentage of sales, gross profit decreased 1% from the first nine months of 2006 compared to the same period in 2007. The decrease in gross profit, as a percentage of sales, was attributable to a change in product sales mix as well as a higher container return charge in the second quarter. Product mix was influenced by higher volume growth of single serve coffee which has a lower profit margin than water and traditional coffee products.
Cost of goods sold includes all costs to bottle water, costs of purchasing and receiving products for resale, including freight, as well as costs associated with product quality, warehousing and handling costs, internal transfers, and the repair and service of rental equipment, but does not include the costs of distributing our product to our customers. We include distribution costs in selling, general, and administrative expense, and the amount is reported below. The reader should be aware that other companies may include distribution costs in their cost of goods sold, in which case, on a comparative basis, such other companies may have a lower gross margin as a result.
Income from Operations/Operating Expenses
Total operating expenses in the first nine months of 2007 were $22,610,000 compared to $22,178,000 for the comparable period in fiscal 2006, an increase of $432,000.
Selling, general and administrative (SG&A) expenses were $20,762,000 and $20,740,000 for the first nine months of 2007 and 2006, respectively, an increase of $22,000. Of total SG&A expenses, route distribution costs increased $162,000, primarily because of higher labor related costs attributable to sales volume increases. Selling costs decreased $286,000, or 13% as a result of decreased sales staffing. Administration costs increased $145,000, or 2%, as a result of higher legal, accounting, and computer-related expenses. Included in SG&A expenses for the first nine months of the respective fiscal years, total direct distribution related costs increased to $10,165,000 in fiscal year 2007 from $10,003,000 in fiscal year 2006.
Advertising expenses were $1,231,000 in the first nine months of 2007 compared to $855,000 in the first nine months of 2006, a increase of $376,000, or 44%. The increase in advertising costs is related to higher print advertising, advertising production and an advertising campaign in southern New England comprised of radio, billboards, and distribution of samples to increase brand awareness.
Amortization decreased to $631,000 in the first nine months of 2007 from $650,000 in the first nine months of 2006, a decrease of $19,000, or 3%. The decrease is attributable lower amortization of non-compete agreements and customer lists from recent small acquisitions than in the previous year.
Income from operations for the first nine months of 2007 was $4,566,000 compared to $4,656,000 in the first nine months of 2006, a decrease of $90,000 or 2%. The decrease was a result of higher operating costs primarily attributable to advertising.

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Interest, Taxes, and Other Expenses
Interest expense was $2,443,000 for the first nine months of 2007 compared to $2,417,000 in the first nine months of 2006, a decrease of $26,000, or 1%. 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 that more than offset lower outstanding debt.
In 2006, we recorded $750,000 as other income related to the settlement of a legal case. There was no other income in the third quarter of 2007.
Income tax expense of $844,000 for the first nine months of 2007 is a decrease of $353,000 from tax expense of $1,197,000 for the same period a year ago. The tax expense was determined by using an annual effective tax rate of 40% for fiscal year 2007 and 41% for fiscal year 2005, which represents the estimated federal and state income tax expense for the respective years. 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. The decrease in the effective tax rate from the first nine months of 2006 to the first nine months of 2007 was primarily a result of a shift in earnings in states with lower effective rates and the effect of domestic production activity deduction.
Net Income
Net income of $1,279,000 for the nine months of 2007 represented a decrease of $513,000 from net income of $1,792,000 in the first nine months of 2006. The decrease in net income in the first nine months of 2007 as compared to the first nine months of 2006 is attributable to the legal settlement that occurred in 2006.
Liquidity and Capital Resources
On July 5, 2007 we amended our credit agreement with Bank of America dated April 5, 2005. The amendment changed the Acquisition Loan Termination Date and Revolving Credit Loan Maturity Date to April 5, 2010 from April 5, 2008 and extended the Term Loan Maturity Date to January 5, 2014. In conjunction with the extension of the maturity date, the monthly amortization amount on the Term Loan was fixed at $270,833 for the duration of the loan. Prior to the amendment, the Term Loan Maturity Date was May 5, 2012 and the remaining amortization was scheduled to be monthly amounts, increasing from year to year, ranging from $312,500 to $395,833. In addition, the amendment makes up to $3,000,000 available from the Revolving Credit Loan for repurchase of our stock or for repayment of subordinated date and $2,200,000 available from the acquisition loan for installation of solar panels for electric generation at the Company’s facility in Watertown, CT. The amendment has provisions for amortization of the additional borrowed amounts over the remaining life of the loans starting approximately two years after disbursement. It also alters some of the financial covenant calculations to provide for the additional borrowing.
As of July 31, 2007 we had an outstanding balance of $47,000 on the revolving line of credit with Bank of America. There was no balance on the acquisition line of credit and $1,385,000 outstanding in letters of credit on the revolving line of credit. As of July 31, 2007, there was $7,500,000 and $2,992,000 available on the acquisition and revolving lines of credit, respectively.

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On July 5, 2007 we entered into an interest rate hedge agreement (the “July 2007 Swap”) in conjunction with the amendment to our Credit Agreement with Bank of America. The swap was structured to fix the interest rate on 75% of the Term Loan, as amended on the same date, taking into account the hedge entered into on May 3, 2005 (the “May 2005 Swap”) when the Credit Agreement was executed. The Credit Agreement requires that we fix the interest rate on not less than 75% of our term debt for the life of the loan. The July 2007 swap fixes the interest rate at 7.73% (5.98%, plus the applicable margin, 1.75%) for the term facility at July 31, 2007. The May 2005 Swap fixes the interest rate at 6.41% (4.66%, plus the applicable margin, 1.75%) for the term facility at July 31, 2007.
As of July 31, 2007, we had approximately $5.3 million of debt subject to variable interest rates. Under the senior credit agreement with Bank of America, interest is paid at a rate of LIBOR plus a margin of 1.75% on term debt and 1.50% on the line of credit resulting in variable interest rates of 7.07% and 6.82%, respectively at July 31, 2007. In addition, as of July 31, 2007 we had $20,854,000 of senior term debt outstanding under the credit agreement.
Our credit facility requires that we be in compliance with certain financial covenants at the end of each fiscal quarter. The covenants include senior debt service coverage as defined of greater than 1.25 to 1, total debt service coverage as defined of greater than 1 to 1, and senior debt to EBITDA as defined of no greater than 2.5 to 1. As of July 31, 2007, our senior debt service and total debt service covenants were 1.18 to 1 and .88 to 1, respectively. As a result we were out of compliance with those covenants. We were in compliance with the senior debt to EBITDA covenant. Bank of America waived the noncompliance.
We were out of compliance with the two covenants because of higher than usual unfinanced capital spending in the fourth quarter of 2006 and higher cash taxes in 2007. We expect that with lower unfinanced capital expenditures in the future, as well as the stable principal repayment schedule afforded by the amendment to our credit agreement, we will be in compliance with these covenants in the future.
As of July 31, 2007, we had working capital of $2,351,000 compared to $2,517,000 as of October 31, 2006, a decrease of $166,000. The decrease in working capital was primarily attributable to the use of cash during the period for capital expenditures, acquisitions and term debt reduction. Working capital was reduced by the current portion of long term debt being increased based on the term debt amortization schedule and working capital increased as a result of a reclassification of a $500,000 note receivable to current assets. In addition, cash was used to increase inventory and reduce accrued expenses, net of an increase in accounts payable. As a result, net cash provided by operating activities decreased $700,000 to $4,105,000 from $4,805,000.
As mentioned above, we use cash provided by operations to repay debt and fund capital expenditures. In the first nine months of fiscal year 2007, we used $2,521,000 for scheduled repayments of our term debt under our bank facility and $131,000 for repayment to sellers for financed acquisitions. In addition we used $3,202,000 for capital expenditures and $291,000 for acquisitions made in the first half of 2007. Capital expenditures included routine expenditure for coolers, brewers, bottles and racks related to home and office distribution as well as bottling

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equipment.
The net deferred tax liability at July 31, 2007 represents temporary timing differences, primarily attributable to depreciation and amortization, between book and tax calculations. We have used substantially all of our federal net operating loss carryforwards and will have to fund our tax liabilities with cash in the current fiscal year and in the future.
In addition to our senior and subordinated debt commitments, we have significant future cash commitments, primarily in the form of operating leases that are not reported on the balance sheet. The following table sets forth our contractual commitments in future fiscal years:
                                         
    Payment due by fiscal year  
            Remainder                    
Contractual Obligations   Total     of 2007     2008-2009     2010-2011     After 2011  
Debt
  $ 34,960,000     $ 860,000     $ 6,558,000     $ 6,500,000     $ 21,042,000  
Interest on Debt (1)
    16,652,000       756,000       5,573,000       4,713,000       5,610,000  
Operating Leases
    10,798,000       718,000       4,906,000       2,739,000       2,435,000  
 
                             
Total
  $ 62,410,000     $ 2,334,000     $ 17,037,000     $ 13,952,000     $ 29,087,000  
 
                             
 
(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 7.07%, and subordinated debt at a rate of 12%.
We have no other material contractual obligations or commitments.
Inflation has had no material impact on our performance.
Item 3. Quantitative and Qualitative Disclosures about Market Risks
Market risks relating to our operations result primarily from changes in interest rates and commodity prices.
Interest Rate Risks
At July 31, 2007, we had approximately $5,213,000 of long-term debt on our term facility and $47,000 on our revolving line of credit 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 1.75%, or 7.07% on the term debt and LIBOR plus 1.5%, or 6.82%, on the revolving line of credit. A hypothetical 100 basis point increase in the LIBOR rate would result in an additional $52,000 of interest expense on an annualized basis. Conversely, a decrease would result in a proportionate interest cost savings.
Our credit agreement requires that we fix the interest rate on 75% of our term debt for the life of the loan. We have accomplished this with a swap agreement that fixes the interest rate at 4.66%, plus the applicable margin, 1.75% and another that fixes the interest rate at 5.98%, plus the applicable margin, 1.75% at July 31, 2007. The two swaps combine to amortize concurrently with the loan principal to fix the interest rate with respect to 75% of the outstanding principal. As of July 31, 2007, the total notional amount committed to swap agreements was $15,640,000.

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As of July 31, 2007, the rates under our swap agreements, when aggregated, were 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 are dictated by commodity prices. As of July 31, 2007, we purchased coffee at fixed price contracts with our vendors. We enter into contracts to mitigate market fluctuation of these costs by fixing the price for certain periods. As of July 31, 2007, we had fixed the price of our anticipated supply through December 2007 at a “green” price of $1.06 - $1.17 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 $120,000 annually. 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. In recent years, prices have fluctuated significantly and remain relatively high. We have offset some of this cost by adjusting our price to our customers on a monthly basis while fuel prices are higher. 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, our fuel costs were not significantly different in the first half of 2007 when compared to the same period in 2006.
Item 4. Controls and Procedures
Our Chief Executive Officer and our Chief Financial Officer, and other members of our senior management team have evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures, as of the end of the period covered by this report, were adequate and effective to provide reasonable assurance that information required to be disclosed by us, including our consolidated subsidiary, in reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the 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.

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Changes in Internal Control over Financial Reporting
During the six months ended July 31, 2007, 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.

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PART II — Other Information
Item 1. Legal Proceedings
There have been no material developments in our legal proceedings since they were disclosed in Form 10-K for the period ending October 31, 2006.
Item 1A. Risk Factors
Recent initiatives have taken place in several major cities regarding bottled water, principally the smaller sizes sold in stores to retail consumers. Regulations have been proposed in some localities that would ban the use of bottled water in municipal buildings, enact local taxes on bottled water, and limit the sale by municipalities of water supplies to private companies for resale. These actions are purportedly designed to discourage the use of bottled water due in large part to concerns about the environmental effects of producing and discarding large numbers of plastic bottles. In developing these stories, local and national media have reported on the growth of the bottled water industry and on the pros and cons of consuming bottling water as it relates to solid waste disposal and energy consumption in manufacturing.
We believe that the adverse publicity associated with these reports is generally aimed at the retail, small bottle segment of the industry that is now a minimal part of our business, and that our customers can readily distinguish our products from the retail bottles that are currently the basis for concern in some areas. Our home and office water customers typically buy their water in reusable five-gallon containers that are placed on coolers and are reused many times. In addition, we continue to take steps to “green” our business by means of as solar electricity generation, high efficiency lighting, no-idling and other driving policies, and the use of biodiesel.
While we believe that to date we have not directly experienced any adverse effects from these concerns, and that our products are sufficiently different from those under scrutiny, there is no assurance that adverse publicity about any element of the bottled water industry will not affect consumer behavior by discouraging buyers from buying bottled water products generally. In that case, our sales and other financial results could be adversely affected.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) The following table summarizes the stock repurchases, by month, that were made during the period.

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                    Total Number of     Maximum  
                    Shares     Number of  
                    Purchased as     Shares that May  
    Total Number of             Part of a Publicly     Yet be Purchased  
    Shares     Average Price     Announced     Under the  
    Purchased     Paid per Share     Program (1)     Program (1)  
May 1-31
    14,200     $ 1.91       14,200       165,400  
June 1-3
    5,900     $ 1.92       5,900       159,500  
July 1-31
    2,800     $ 1.90       2,800       156,700  
 
                         
Total
    22,900     $ 1.90       22,900          
 
(1)   On June 16, 2006 we announced a program to repurchase up to 250,000 shares of our common stock at the discretion of management. There is no expiration date for the program and the share limit may not be reached.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
On September 5, 2007 we filed Form 8-K describing the amendment to our lease of the facility at 1050 Buckingham St. In the disclosure, we reported the annual rent payments for Years 4-5 of the extended term of the lease totaled $475,521. Recently, it has come to our attention that the total annual rent for Years 4-5 of the extended term of the lease is $470,521. Although the error is immaterial to our operations and financial results, we are herby correcting it.
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)

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Table of Contents

     
Exhibit    
Number   Description
 
10.1
  First Amendment to the Credit Agreement dated April 5, 2005 with Bank of America and Bank of America
 
   
10.2
  Second Amendment to the Credit Agreement dated April 5, 2005 with Bank of America and Bank of America
 
   
10.3
  Third Amendment to the Credit Agreement dated April 5, 2005 with Bank of America and Bank of America
 
   
10.4
  First Amendment to the Lease of Buildings and Grounds in Watertown, Connecticut from the Baker’s Grandchildren Trust
 
   
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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Table of Contents

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: September 14, 2007
         
  VERMONT PURE HOLDINGS, LTD.
 
 
  By:   /s/ Bruce S. MacDonald    
         Bruce S. MacDonald   
         Vice President, Chief Financial Officer
     (Principal Accounting Officer and
     Principal Financial Officer) 
 

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Table of Contents

         
Exhibits Filed Herewith
     
Exhibit    
Number   Description
 
   
10.1
  First Amendment to the Credit Agreement dated April 5, 2005 with Bank of America and Bank of America
 
   
10.2
  Second Amendment to the Credit Agreement dated April 5, 2005 with Bank of America and Bank of America
 
   
10.3
  Third Amendment to the Credit Agreement dated April 5, 2005 with Bank of America and Bank of America
 
   
10.4
  First Amendment to the Lease of Buildings and Grounds in Watertown, Connecticut from the Baker’s Grandchildren Trust
 
   
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.

27

 

Exhibit 10.1
FIRST AMENDMENT AGREEMENT
      FIRST AMENDMENT AGREEMENT (this “Agreement”), dated as of September 1, 2005, by and among (1) Vermont Pure Holdings, Ltd. (“Holdings”), (2) Crystal Rock LLC (“Crystal Rock”, and together with Holdings, collectively, the “Borrowers”), (3) Bank of America, N.A. (“Bank of America”) and the other lending institutions party to that certain Credit Agreement (defined below) as lenders (together with Bank of America, collectively, the “Lenders”), and (4) Bank of America, as administrative agent (the “Administrative Agent”) for itself and the other Lenders with respect to a certain Credit Agreement, dated as of April 5, 2005, by and among the Borrowers, the Lenders and the Administrative Agent (as amended, the “Credit Agreement”).
WITNESSETH:
      WHEREAS, the Borrowers have requested that the Lenders amend certain terms and conditions of the Credit Agreement on the terms and conditions set forth herein; and
      WHEREAS, the parties hereto have agreed to amend certain provisions of the Credit Agreement.
      NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
      §1. Definitions . Capitalized terms used herein without definition that are defined in the Credit Agreement (after giving effect to the amendments thereof set forth herein) shall have the same meanings herein as therein.
      §2. Ratification of Existing Agreements . All of the Borrowers’ obligations and liabilities to the Lenders as evidenced by or otherwise arising under the Credit Agreement, the Notes and the other Loan Documents, are, by the Borrowers’ execution of this Agreement, ratified and confirmed in all respects. In addition, by the Borrowers’ execution of this Agreement, each Borrower represents and warrants that it does not have any counterclaim, right of set-off or defense of any kind with respect to such obligations and liabilities.
      §3. Representations and Warranties . Each Borrower hereby represents and warrants to the Lenders that all of the representations and warranties made by the Borrowers in the Credit Agreement, the Notes and the other Loan Documents are true in all material respects on the date hereof as if made on and as of the date hereof, except to the extent that such representations and warranties relate expressly to an earlier date.
      §4. Conditions Precedent . The effectiveness of the amendments contemplated hereby shall be subject to the satisfaction on or before the date hereof of each of the following conditions precedent:
     (a) Representations and Warranties . All of the representations and warranties made by the Borrowers herein, whether directly or incorporated by reference, shall be true and correct on the date hereof except as provided in §3 hereof.

 


 

     (b) Performance; No Event of Default . Each Borrower shall have performed and complied in all respects with all terms and conditions herein required to be performed or complied with by it prior to or at the time hereof, and there shall exist no Default or Event of Default.
     (c) Corporate or Limited Liability Company Action . All requisite corporate or limited liability company, as applicable, action necessary for the valid execution, delivery and performance by each Borrower of this Agreement and all other instruments and documents delivered by each Borrower in connection therewith shall have been duly and effectively taken.
     (d) Delivery . The parties hereto shall have executed this Agreement and delivered this Agreement to the Administrative Agent.
      §5. Amendments to the Credit Agreement .
     (a) The definition of “Swing Line Sublimit” in Section 1.1 of the Credit Agreement is hereby amended and restated in its entirety to read as follows:
     “ Swing Line Sublimit . An amount equal to the lesser of (a) $2,000,000 and (b) the Total Revolving Credit Commitment. The Swing Line Sublimit is part of, and not in addition to, the Total Revolving Credit Commitment.”
     (b) Section 2.2 of the Credit Agreement is hereby amended and restated in its entirety to read as follows:
      “2.2. Revolving Credit Commitment Fee . The Borrowers agree to pay to the Administrative Agent for the accounts of the Lenders in accordance with their respective Commitment Percentages a commitment fee (the “ Revolving Credit Commitment Fee ”) calculated at the rate of one-quarter of one percent (0.25%) per annum on the average daily amount during each calendar quarter or portion thereof from the date hereof to the Revolving Credit Loan Maturity Date by which the Total Revolving Credit Commitment minus the sum of the Maximum Drawing Amount and all Unpaid Reimbursement Obligations exceeds the outstanding amount of Revolving Credit Loans (excluding the outstanding amount of Revolving Credit Loans made under §2.6.2) during such calendar quarter. The Revolving Credit Commitment Fee shall be payable quarterly in arrears on the first day of each calendar quarter for the immediately preceding calendar quarter commencing on the first such date following the date hereof, with a final payment on the Revolving Credit Loan Maturity Date or any earlier date on which the Commitments in respect of Revolving Credit Loans shall terminate.”
      §6. Miscellaneous Provisions .
          (a) Except as otherwise expressly provided by this Agreement, all of the respective terms, conditions and provisions of the Credit Agreement, the Notes and the other Loan Documents shall remain the same. The Credit Agreement, as amended hereby, the Notes

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and the other Loan Documents shall continue in full force and effect, and this Agreement and the Credit Agreement shall be read and construed as one instrument.
          (b) This Agreement is intended to take effect under, and shall be construed according to and governed by, the laws of the State of New York.
          (c) This Agreement may be executed in any number of counterparts, but all such counterparts shall together constitute but one instrument. In making proof of this Agreement it shall not be necessary to produce or account for more than one counterpart signed by each party hereto by and against which enforcement hereof is sought. A facsimile of an executed counterpart shall have the same effect as the original executed counterpart.
[Remainder of page intentionally blank; Signature Pages follow)

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      IN WITNESS WHEREOF, each of the parties hereto have caused this Agreement to be executed in its name and behalf by its duly authorized officer as of the date first written above.
         
  VERMONT PURE HOLDINGS, LTD.
 
 
  By:   /s/ Timothy G. Fallon    
    Name:   Timothy G. Fallon    
    Title:   Chief Executive Officer   
 
         
  CRYSTAL ROCK LLC
 
 
  By:   /s/ Timothy G. Fallon    
    Name:   Timothy G. Fallon   
    Title:   Manager   
 
[Signature Page to First Amendment Agreement]

 


 

         
  BANK OF AMERICA, N.A., as a Lender
 
 
  By:   /s/ Matthew S. Latham    
    Name:   Matthew S. Latham    
    Title:   Senior Vice President   
 
         
  BANK OF AMERICA, N.A., as Administrative Agent
 
 
  By:   /s/ Matthew S. Latham    
    Name:   Matthew S. Latham    
    Title:   Senior Vice President   
 
[Signature Page to First Amendment Agreement]

 


 

         
  WEBSTER BANK, NATIONAL ASSOCIATION
 
 
  By:   /s/ Richard A. O’Brien    
    Richard A. O’Brien    
    Senior Vice President   
 
[Signature Page to First Amendment Agreement]

 

 

Exhibit 10.2
SECOND AMENDMENT AGREEMENT
      SECOND AMENDMENT AGREEMENT (this “ Agreement ”), dated as of March 23, 2006, by and among (1) Vermont Pure Holdings, Ltd. (“ Holdings ”), (2) Crystal Rock LLC (“ Crystal Rock ”, and together with Holdings, collectively, the “ Borrowers ”), (3) Bank of America, N.A. (“ Bank of America ”) and the other lending institutions party to that certain Credit Agreement (defined below) as lenders (together with Bank of America, collectively, the “ Lenders ”), and (4) Bank of America, as administrative agent (the “ Administrative Agent ”) for itself and the other Lenders with respect to a certain Credit Agreement, dated as of April 5, 2005, by and among the Borrowers, the Lenders and the Administrative Agent, as amended by the First Amendment Agreement, dated as of September 1, 2005 (as amended, the “ Credit Agreement ”).
WITNESSETH:
      WHEREAS , the Borrowers have requested that the Lenders amend certain terms and conditions of the Credit Agreement on the terms and conditions set forth herein; and
      WHEREAS , the parties hereto have agreed to amend certain provisions of the Credit Agreement.
      NOW, THEREFORE , for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
      §1. Definitions . Capitalized terms used herein without definition that are defined in the Credit Agreement (after giving effect to the amendments thereof set forth herein) shall have the same meanings herein as therein.
      §2. Ratification of Existing Agreements . All of the Borrowers’ obligations and liabilities to the Lenders as evidenced by or otherwise arising under the Credit Agreement, the Notes and the other Loan Documents, are, by the Borrowers’ execution of this Agreement, ratified and confirmed in all respects. In addition, by the Borrowers’ execution of this Agreement, each Borrower represents and warrants that it does not have any counterclaim, right of set-off or defense of any kind with respect to such obligations and liabilities.
      §3. Representations and Warranties . Each Borrower hereby represents and warrants to the Lenders that all of the representations and warranties made by the Borrowers in the Credit Agreement, the Notes and the other Loan Documents are true in all material respects on the date hereof as if made on and as of the date hereof, except to the extent that such representations and warranties relate expressly to an earlier date.

 


 

      §4. Conditions Precedent . The effectiveness of the amendments contemplated hereby shall be subject to the satisfaction on or before the date hereof of each of the following conditions precedent:
     (a) Representations and Warranties . All of the representations and warranties made by the Borrowers herein, whether directly or incorporated by reference, shall be true and correct on the date hereof except as provided in §3 hereof.
     (b) Performance; No Event of Default . Each Borrower shall have performed and complied in all respects with all terms and conditions herein required to be performed or complied with by it prior to or at the time hereof, and there shall exist no Default or Event of Default.
     (c) Corporate or Limited Liability Company Action . All requisite corporate or limited liability company, as applicable, action necessary for the valid execution, delivery and performance by each Borrower of this Agreement and all other instruments and documents delivered by each Borrower in connection therewith shall have been duly and effectively taken.
     (d) Delivery . The parties hereto shall have executed this Agreement and delivered this Agreement to the Administrative Agent.
      §5. Amendments to the Credit Agreement .
     (a) Section 11.4 of the Credit Agreement is hereby amended and restated in its entirety to read as follows:
     “ 11.4. Restricted Payments . Neither Borrower will make any Restricted Payments other than, in the case of Holdings, the repurchase of its common stock in the open market or through privately negotiated transactions in an aggregate amount not to exceed 250,000 shares of such common stock and for aggregate consideration not to exceed $500,000, so long as, at the time of any such repurchase, no Default or Event of Default has occurred and is continuing or would result therefrom.”
     (b) Section 18.6(a) of the Credit Agreement is hereby amended and restated in its entirety to read as follows:
     “(a) if to the Borrowers, at 45 Krupp Drive, Williston, Vermont 05495, Attention: Bruce MacDonald or at such other address for notice as the Borrowers shall last have furnished in writing to the Person giving the notice, with a copy to, Foley Hoag LLP, 155 Seaport Blvd., Boston Massachusetts, 02210, Attention: Dean Hanley;”
Each other reference to Cozen O’Connor as Company counsel in any Loan Document is hereby replaced with a corresponding reference to Foley Hoag LLP, as provided above.

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      §6. Miscellaneous Provisions .
          (a) Upon the amendments herein becoming effective, the Administrative Agent hereby consents to the election of Peter K. Baker as President and Chief Executive Officer of Holdings and as a Manager of Crystal Rock in replacement of Timothy G. Fallon in such capacities and acknowledges and agrees that the conditions set forth with respect to such replacement in Section 15.1(r) of the Credit Agreement have been met and that no Default or Event of Default exists thereunder solely by reason of such replacement.
          (b) The Administrative Agent and the Lenders hereby consent to the termination by Holdings of that certain Lease of Water Rights, dated November 6, 1997, relating to a water spring in Tinmouth, Vermont (the “ Tinmouth Lease ”) and acknowledge and agree that the Collateral Assignment of Lease of Water Rights, dated April 5, 2005, from Holdings to the Administrative Agent with respect to the Tinmouth Lease shall be terminated and of no further force or effect upon the termination of Tinmouth Lease. Holdings will provide the Administrative Agent with all documentation reasonably requested by the Administrative Agent with respect to the termination of the Tinmouth Lease.
          (c) Except as otherwise expressly provided by this Agreement, all of the respective terms, conditions and provisions of the Credit Agreement, the Notes and the other Loan Documents shall remain the same. The Credit Agreement, as amended hereby, the Notes and the other Loan Documents shall continue in full force and effect, and this Agreement and the Credit Agreement shall be read and construed as one instrument.
          (d) This Agreement is intended to take effect under, and shall be construed according to and governed by, the laws of the State of New York.
          (e) This Agreement may be executed in any number of counterparts, but all such counterparts shall together constitute but one instrument. In making proof of this Agreement it shall not be necessary to produce or account for more than one counterpart signed by each party hereto by and against which enforcement hereof is sought. A facsimile of an executed counterpart shall have the same effect as the original executed counterpart.
[Remainder of page intentionally blank; Signature Pages follow]

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      IN WITNESS WHEREOF, each of the parties hereto have caused this Agreement to be executed in its name and behalf by its duly authorized officer as of the date first written above.
         
  VERMONT PURE HOLDINGS, LTD.
 
 
  By:   /s/ Peter K. Baker  
    Name:   Peter K. Baker  
    Title:   CEO  
 
  CRYSTAL ROCK LLC
 
 
  By:   /s/ Peter K. Baker  
    Name:   Peter K. Baker  
    Title:   Manager  
 
[Signature Page to Second Amendment Agreement]

 


 

         
  BANK OF AMERICA, N.A. , as a Lender
 
 
  By:   /s/ Matthew S. Latham  
    Name:   Matthew S. Latham   
    Title:   Senior Vice President   
 
  BANK OF AMERICA, N.A. , as Administrative Agent
 
 
  By:   /s/ Michael R. Langmeyer  
    Name:   Michael R. Langmeyer   
    Title:   Assistant Vice President   
 
[Signature Page to Second Amendment Agreement]

 


 

         
  WEBSTER BANK, NATIONAL ASSOCIATION
 
 
  By:   /s/ Richard A. O’Brien  
    Richard A. O’Brien   
    Senior Vice President   
 
[Signature Page to Second Amendment Agreement]

 

 

Exhibit 10.3
THIRD AMENDMENT AGREEMENT
      THIRD AMENDMENT AGREEMENT (this “ Agreement ”), dated as of July 5, 2007, by and among Vermont Pure Holdings, Ltd. (“ Holdings ”), Crystal Rock LLC (“ Crystal Rock ”, and together with Holdings, collectively, the “ Borrowers ”), Bank of America, N.A. (“ Bank of America ”) and the other lending institutions party to that certain Credit Agreement (as defined below) as lenders (together with Bank of America, collectively, the “ Lenders ”), and Bank of America, as administrative agent (the “ Administrative Agent ”) for itself and the other Lenders with respect to a certain Credit Agreement, dated as of April 5, 2005, by and among the Borrowers, the Lenders and the Administrative Agent, as amended by the First Amendment Agreement, dated as of September 1, 2005 and the Second Amendment Agreement dated as of March 23, 2006 (as amended, the “ Credit Agreement ”).
WITNESSETH:
      WHEREAS , the Borrowers have requested that the Lenders agree to amend certain terms and conditions of the Credit Agreement on the terms and conditions set forth herein; and
      WHEREAS , the parties hereto have agreed to amend the Credit Agreement as set forth herein.
      NOW, THEREFORE , for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
      §1. Definitions . Capitalized terms that are used herein and are not defined herein have the meanings given to such terms in the Credit Agreement (after giving effect to the amendments thereof set forth herein).
      §2. Ratification of Existing Agreements . All of the Borrowers’ obligations and liabilities to the Lenders as evidenced by or otherwise arising under the Credit Agreement, the Notes and the other Loan Documents, are, by the Borrowers’ execution of this Agreement, ratified and confirmed in all respects. In addition, by the Borrowers’ execution of this Agreement, each Borrower represents and warrants that it does not have any defense, counterclaim, or right of set-off or recoupment of any kind with respect to such obligations and liabilities.
      §3. Representations and Warranties . Each Borrower hereby represents and warrants to the Lenders that all of the representations and warranties made by the Borrowers in the Credit Agreement, the Notes and the other Loan Documents are true in all material respects on the date hereof as if made on and as of the date hereof, except to the extent that such representations and warranties relate expressly to an earlier date.
      §4. Conditions Precedent . The effectiveness of the amendments contemplated hereby shall be subject to the satisfaction on or before the date hereof of each of the following conditions precedent:

 


 

     (a) Representations and Warranties . All of the representations and warranties made by the Borrowers herein, whether directly or incorporated by reference, shall be true and correct on the date hereof except to the extent that such representations and warranties relate expressly to an earlier date.
     (b) Performance; No Event of Default . Each Borrower shall have performed and complied in all respects with all terms and conditions herein required to be performed or complied with by it prior to or at the time hereof, and there shall exist no Default or Event of Default.
     (c) Corporate or Limited Liability Company Action . All requisite corporate or limited liability company, as applicable, action necessary for the valid execution, delivery and performance by each Borrower of this Agreement and all other instruments and documents delivered by each Borrower in connection therewith shall have been duly and effectively taken.
     (d) Delivery . The parties hereto shall have executed this Agreement and delivered this Agreement to the Administrative Agent, and the Borrowers shall have executed and delivered to the Administrative Agent replacement Acquisition Loan Notes payable to each Lender in the principal amount of each Lender’s Commitment in respect of the Acquisition Loans, as amended hereby,.
     (e) Payment of Amendment Fee . The Borrowers shall have paid to the Administrative Agent, for the account of the Lenders, the Amendment Fee.
     (f) Payment of Fees and Expenses . The Borrowers shall have paid to the Administrative Agent in immediately available funds all fees and expenses, including reasonable legal fees, incurred by the Administrative Agent in connection with this Agreement, the Credit Agreement or the other Loan Documents on or prior to the date hereof.
      §5. Amendments to the Credit Agreement .
     (a) The following definitions in Section 1.1 of the Credit Agreement are hereby amended and restated in their entirety to read as follows:
      Acquisition Loan Termination Date . April 5, 2010.
      Consolidated Operating Cash Flow . For any period, an amount equal to (a) Consolidated EBITDA of Holdings and its Subsidiaries for such period (excluding the Consolidated EBITDA of any Subsidiary (or with respect to an asset acquisition, the acquired assets) for the period prior to the acquisition of such Subsidiary (or assets) by Holdings or any of its Subsidiaries), less (b) the sum of (i) cash payments for all income taxes paid during such period, plus (ii) to the extent not already deducted in the determination of Consolidated EBITDA of Holdings and its Subsidiaries, Capital Expenditures made during such period (excluding Capital Expenditures made with the proceeds of Indebtedness (other than the Loans) during such period), provided that, for the purpose of determining

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Consolidated Operating Cash Flow (as a component of Consolidated Adjusted Operating Cash Flow) for the covenants set forth in Sections 12.1 and 12.2, the Capital Expenditures referred to in this definition (i.e. the Capital Expenditures deducted from Consolidated EBITDA pursuant to this clause (ii)) shall not include the Solar Project Capital Expenditures, plus (iii) the aggregate amount of Distributions made by Holdings during such period.
      Revolving Credit Loan Maturity Date . April 5, 2010.
      Term Loan Maturity Date . January 5, 2014.
     (b) The following definition is added to Section 1.1 of the Credit Agreement in its appropriate alphabetical order:
      Solar Project Capital Expenditures . Capital Expenditures which are made for the purpose of outfitting the Watertown facility of Borrowers with solar panels for electric generation, provided that not more than a gross amount (i.e. calculated before taking into account any tax credits, grants and other reductions in the net cost to Borrowers of such Capital Expenditures) of $2,220,000 of Capital Expenditures will be Solar Project Capital Expenditures for the purposes of this Agreement even if the actual gross amount of such Capital Expenditures is greater than such amount.
     (c) The third sentence of Section 4.8.1 of the Credit Agreement is hereby amended and restated in its entirety to read as follows:
As used herein, a “Tranche Ending Date” means any of the following dates: April 5, 2009, April 5, 2010, and any other date designated by the Borrowers in a Payment Schedule Election Notice; provided that if on April 5, 2009, the amount of Acquisition Advances outstanding is less than $2,000,000, then such Tranche Ending Date shall be extended to the earlier of (x) the first date thereafter that the aggregate amount of Acquisition Advances outstanding is at least $2,000,000 and (y) April 5, 2010.
     (d) Section 5.3.1 of the Credit Agreement is hereby amended and restated in its entirety to read as follows:
      5.3.1 Schedule of Installment Payments of Principal of Term Loan . The Borrowers jointly and severally promise to pay to the Administrative Agent for the account of the Lenders the principal amount of the Term Loan in one hundred five (105) consecutive monthly payments in an amount equal to the amount set forth in the table below opposite the period containing the date of such payment, such payments to be due and payable on the fifth day of each month ending within any period set forth below in the table in the amount set forth opposite such period in the table below, commencing on May 5, 2005, with a final payment on the Term Loan Maturity Date in an amount equal to the unpaid balance of the Term Loan.

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  Period     Amount of Payment  
           
 
May 5, 2005 through and including May 4, 2006
    $ 250,000.00    
           
 
May 5, 2006 through and including January 4, 2014
    $ 270,833.33    
           
 
Term Loan Maturity Date
    Remaining Balance of Term Loan  
     (e) The second sentence of Section 9.17.1 of the Credit Agreement is hereby amended and restated in its entirety to read as follows:
The proceeds of the Acquisition Loans shall be used solely (i) to finance Permitted Acquisitions, (ii) to finance the purchase, redemption, defeasance, retirement or other acquisition of any shares of any class of Capital Stock of Holdings, and (iii) to make payments on Subordinated Debt that are permitted by the Subordination Documents; no proceeds of the Term Loan shall be used for any of the purposes set forth in clauses (i), (ii) and (iii) of this sentence.
     (f) Section 11.4 of the Credit Agreement is hereby amended and restated in its entirety to read as follows:
11.4. Restricted Payments . Neither Borrower will make any Restricted Payments other than, in the case of Holdings, the repurchase of its common stock in the open market or through privately negotiated transactions in an aggregate amount not to exceed 1,500,000 shares of such common stock and for aggregate consideration not to exceed $3,000,000, so long as, at the time of any such repurchase, no Default or Event of Default has occurred and is continuing or would result therefrom.
     (g) Schedule 1 to the Credit Agreement is hereby amended and restated in its entirety to read as set forth on Schedule 1 to this Agreement.
      §6. Amendment Fee. The Borrowers agree to pay to the Administrative Agent on the date hereof a fee (the “ Amendment Fee ”) in the amount of $25,000, which fee shall be for the accounts of the Lenders in accordance with their respective Commitment Percentages.
      §7. Expenses, Etc. The Borrowers agree to pay to the Administrative Agent upon demand an amount equal to any and all out-of-pocket costs or expenses (including reasonable legal fees and disbursements) incurred or sustained by the Administrative Agent in connection with the preparation of this Agreement and related matters.
      §8. Miscellaneous Provisions .
          (a) Except as otherwise expressly provided by this Agreement, all of the respective terms, conditions and provisions of the Credit Agreement, the Notes and the other

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Loan Documents shall remain the same. The Credit Agreement, as amended hereby, the Notes and the other Loan Documents shall continue in full force and effect, and this Agreement and the Credit Agreement shall be read and construed as one instrument.
          (b) This Agreement is intended to take effect under, and shall be construed according to and governed by, the laws of the State of New York.
          (c) This Agreement may be executed in any number of counterparts, but all such counterparts shall together constitute but one instrument. In making proof of this Agreement it shall not be necessary to produce or account for more than one counterpart signed by each party hereto by and against which enforcement hereof is sought. A facsimile of an executed counterpart shall have the same effect as the original executed counterpart.
[Remainder of page intentionally blank; Signature Pages follow]

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      IN WITNESS WHEREOF, each of the parties hereto have caused this Agreement to be executed in its name and behalf by its duly authorized officer as of the date first written above.
         
  VERMONT PURE HOLDINGS, LTD.
 
 
  By:   /s/ Peter K. Baker  
    Name:   Peter K. Baker   
    Title:   Chief Executive Officer   
 
  CRYSTAL ROCK LLC
 
 
  By:   /s/ Peter K. Baker  
    Name:   Peter K. Baker   
    Title:   Manager   
 
  BANK OF AMERICA, N.A. , as a Lender
 
 
  By:   /s/ Christopher T Phelon  
    Name:   Christopher T Phelon  
    Title:   Senior Vice President  
 
  BANK OF AMERICA, N.A. ,
as Administrative Agent
 
 
  By:   /s/ Kalens Herold  
    Name:   Kalens Herold  
    Title:   Assistant Vice President  
 
  WEBSTER BANK, NATIONAL ASSOCIATION
 
 
  By:   /s/ Carol Carver  
    Name:   Carol Carver  
    Title:   Vice President  


 

         
SCHEDULE 1
                                             
                             
                                      Commitment  
        Revolving                         Percentage  
        Credit               Acquisition     (for Revolving  
        Loan     Term Loan     Loan     Credit Loans, Term  
  Name and Address     Commitment     Commitment     Commitment     Loans and  
  of Lender     Amount     Amount     Amount     Acquisition Loans)  
                             
 
 
                                         
                             
 
Bank of America, N.A. 777 Main Street Hartford, CT 06115
    $ 3,900,000.00       $ 18,200,000.00       $ 6,500,000         65.00 %  
                             
 
Webster Bank, National Association 145 Bank Street Waterbury, CT 06702
    $ 2,100,000.00       $ 9,800,000.00       $ 3,500,000         35.00 %  
                             

 

Exhibit 10.4
SECOND AMENDMENT
TO LEASE OF 1050 BUCKINGHAM STREET, WATERTOWN, CT BETWEEN HENRY
E. BAKER FOR THE BAKER GRANDCHILDREN TRUST U/T/A DATED MAY 5, 2000
AND CRYSTAL ROCK SPRING WATER COMPANY DATED
MAY 5, 2000
     WHEREAS, the Parties executed a lease for the subject premises on May 5, 2000; and
     WHEREAS, Crystal Rock Spring Water Company has been merged into Crystal Rock LLC, a Delaware limited liability company, which is a wholly owned subsidiary of Vermont Pure Holdings, Ltd. A Delaware corporation; and
     WHREAS, Vermont Pure Holdings, Ltd. has and is again fully assuming this lease obligation of Crystal Rock Spring Water Company; and
     WHEREAS, the parties executed a First Amendment to said Lease on October 2, 2000; and
     WHEREAS, the Parties wish to amend said lease a second time as follows:
     NOW, THEREFORE, for $1.00 and other valuable consideration, the Parties agree to modify said lease as follows:
  1.   The parties acknowledge that the ten year term of the lease expires on October 5, 2010 and that the Rent currently is FOUR HUNDRED FOURTEEN THOUSAND and 00/100 DOLLARS ($414,000.00) per annum, payable in equal monthly installments, in advance, of THIRTY FOUR THOUSAND FIVE HUNDRED and 00/100 DOLLARS ($34,500) per month.
 
  2.   The parties agree to replace Article XXIX, OPTIONS TO RENEW, of the lease, with the following:
Article XXIX — Extension of Lease and Option to Renew :
               A. Provided Tenant is not then in default beyond any applicable grace period, this lease is extended and renewed for an additional term of six (6) years (the “First Renewal Term”) from the tenth anniversary of the Rent Commencement Date (months 121-144). Rent shall be FOUR HUNDRED FIFTY TWO THOUSAND TWO HUNDRED FIFTY and 00/100 DOLLARS ($452,250.00) per annum, payable in equal monthly installments of THIRTY SEVEN THOUSAND SIX HUNDRED EIGHTY SEVEN and 50/100 DOLLARS ($37,687.50).

 


 

               B. For months 145-168, rent shall be FOUR HUNDRED SIXTY ONE THOUSAND TWO HUNDRED NINETY FIVE and 00/100 DOLLARS ($461,295.00), payable in equal monthly installments, in advance, of THIRTY EIGHT THOUSAND FOUR HUNDRED FORTY ONE and 25/100 DOLLARS ($38,441.25).
               C. For months 169-192, rent shall be FOUR HUNDRED SEVENTY THOUSAND FIVE HUNDRED TWENTY ONE and 20/100 DOLLARS ($470,521.20), payable in equal monthly installments, in advance, of THIRTY NINE THOUSAND TWO HUNDRED TEN and 10/100 DOLLARS ($39,210.10).
               D. Provided Tenant is not then in default beyond any applicable grace period, Tenant shall have an option of renewing this Lease for an additional term of five (5) years (the “Second Renewal Term”) from the sixteenth anniversary of the Rent Commencement Date by sending to Landlord written notice postmarked on or before the first day of the seventh month of the fifteenth Lease Year that it is extending the Term of this Lease. Rent for said term shall be negotiated by the parties. In the event the parties fail to reach an agreement regarding rent for the second renewal term, each party shall select a qualified appraiser who shall render an opinion as to the fair rental property for the second renewal term. The rent shall be the average of the two, less 10% for said term.
  3.   All other terms and conditions of the Lease shall not be modified by this Amendment and are hereby ratified.

 


 

     IN WITNESS WHEREOF, the parties have hereunto set their hands and seals the                        day of September, 2007.
                 
Signed, Sealed and Delivered in the
presence of
      BAKER GRANDCHILDRENS’ TRUST
u/t/a dated May 5, 2000 LANDLORD
   
 
               
/s/ Cheryl Gustafson
      By   /s/ Henry E. Baker    
 
         
 
HENRY E. BAKER, Trustee
   
/s/ Mary DelGrasso
               
 
               
 
               
        VERMONT PURE HOLDINGS, LTD.
Successor to Crystal Rock Spring Water Company, TENANT
   
 
               
/s/ Debbie H. Kritz
      By   /s/ Martin Dytrich    
 
         
 
MARTIN DYTRICH, its Director
   
/s/ Beatrice B. Moore           Chair, Audit Committee    
            Chair, Independent Directors    

 


 

                 
STATE OF CONNECTICUT
    )          
 
    )     ss.:    
COUNTY OF
    )          
     Personally appeared BAKER GRANDCHILDRENS’ TRUST u/t/a dated May 5, 2000, acting by HENRY E. BAKER, Trustee, hereunto duly authorized, signer and sealer of the foregoing instrument, and acknowledged the same to be his free act and deed and the free act and deed of said Trust, before me.
         
     
     /s/ David Jurasek  
    Notary Public/   
    Commissioner of the Superior Court   
 
                 
STATE OF CONNECTICUT
    )          
 
    )     ss.:    
COUNTY OF
    )          
     Personally appeared VERMONT PURE HOLDINGS, LTD. Successor to CRYSTAL ROCK SPRING WATER COMPANY by MARTIN DYTRICH its Director, hereunto duly authorized, signer and sealer of the foregoing instrument, and acknowledged the same to be his free act and deed, before me.
         
     
     /s/ Debbie H. Kritz  
    Notary Public/   
    Commissioner of the Superior Court   
 

 

 

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: September 14, 2007
   
 
   
/s/ Peter K. Baker
 
   
Peter K. Baker
   
Chief Executive Officer
   

 

 

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: September 14, 2007
     
/s/ Bruce S. MacDonald
 
   
Bruce S. MacDonald
   
Chief Financial Officer
   

 

 

Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. §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 July 31, 2007, 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. §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: September 14, 2007

 

 

Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. §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 July 31, 2007, 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. §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: September 14, 2007