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, 2000 Commission File No. 1-11254 VERMONT PURE HOLDINGS, LTD. (Exact name of registrant as specified in its charter) Delaware 06-1325376 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Route 66; PO Box C; Randolph, VT 05060 (Address of principal executive offices) (Zip Code) (802)728-3600 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --------------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding at Class September 8, 2000 ----- ------------------- Common Stock, $.001 Par Value 10,294,758 VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES INDEX Part I - Financial Information Page Number Item 1. Financial Statements Consolidated Balance Sheets as of July 31, 2000 (unaudited) and October 30, 1999 3 Consolidated Statements of Operations (unaudited) for the Nine Months and Three Months ended July 31, 2000 and July 31, 1999 4 Consolidated Statements of Cash Flows (unaudited) for the Nine Months ended July 31, 2000 and July 31, 1999 5 Notes to Consolidated Financial Statements (unaudited) 6 - 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation 9 - 12 Item 3. Quantitive and Qualitative Disclosures about Market Risk 13 Part II - Other Information 14 - 18 Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K Signature 19 2 VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS July 31 October 30, 2000 1999 ------------ ----------- (unaudited) ASSETS -------- CURRENT ASSETS: Cash ($975,000 of the 2000 balance is restricted) $ 1,281,980 $ 367,018 Investments - Money Market Fund (restricted building 1,735,029 - Accounts receivable 4,607,922 3,525,238 Notes Receivable - 975,000 Inventory 2,002,471 2,711,709 Current portion of deferred tax asset 601,922 601,922 Other current assets 1,293,036 781,968 ---------- ----------- TOTAL CURRENT ASSETS 11,522,360 8,962,855 ---------- ----------- PROPERTY AND EQUIPMENT - net of accumulated depreciation 14,632,296 11,122,258 ---------- ----------- OTHER ASSETS: Intangible assets - net of accumulated amortization 10,935,643 10,443,207 Deferred tax asset 3,182,914 3,182,914 Other assets 130,156 122,996 ---------- ----------- TOTAL OTHER ASSETS 14,248,712 13,749,117 ---------- ----------- TOTAL ASSETS $ 40,403,368 $ 33,834,230 ========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts payable $ 3,403,055 $ 3,443,208 Current portion of customer deposits 45,616 45,033 Accrued expenses 1,125,390 851,371 Current portion of long term debt 1,491,537 1,414,930 Current portion of obligations under capital leases 159,056 180,589 ---------- ----------- TOTAL CURRENT LIABILITIES 6,224,653 5,935,131 Long term debt 5,492,221 1,663,893 Long term obligations under capital leases 316,345 379,583 Line of credit 14,249,000 11,689,792 Long term portion of customer deposits 866,720 684,334 ---------- ----------- TOTAL LIABILITIES 27,148,939 20,352,733 ---------- ----------- STOCKHOLDERS' EQUITY: Preferred stock - $.001 par value, 500,000 authorized shares, none issued and outstanding shares at July 31, 2000 Common stock - $.001 par value, 50,000,000 authorized shares, 10,344,758 issued and outstanding shares at July 31, 2000 and 10,339,758 at October 30, 1999 10,345 10,340 Paid in capital 23,208,969 23,197,724 Accumulated deficit (9,796,136) (9,557,817) Treasury stock, at cost, 50,000 shares (168,750) (168,750) ---------- ----------- TOTAL STOCKHOLDERS' EQUITY 13,254,429 13,481,497 ---------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 40,403,368 $ 33,834,230 ========== =========== See notes to consolidated financial statements. 3

VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Three months ended ~~Six~~Nine ~~months~~Months ~~ended~~Ended July 31, July 31, July 31, July 31, ------------- -------------~~-------~~ ------------ -------------~~---------~~ ~~April 30, May 1, April 30, May 1,~~ 2000 1999 2000 1999 -------------- ------------- ------------- --------------- (unaudited) (unaudited) (unaudited) (unaudited) SALES $ 810,~~224~~158,~~666~~368 $ 79,~~799~~432,~~473~~119 $ 1424,~~648~~806,~~435~~803 $ 1323,~~680~~112,~~319~~438 COST OF GOODS SOLD 34,~~255~~675,~~754~~045 23,~~952~~682,~~859~~347 510,~~544~~219,~~124~~169 48,~~983~~666,~~873~~220 -------------- ------------- ------------- --------------- GROSS PROFIT 45,~~968~~483,~~912~~323 45,~~846~~749,~~614~~772 914,~~104~~587,~~311~~633 814,~~696,~~446,218 -------------- ------------- ------------- --------------- OPERATING EXPENSES: Selling, general and administrative expenses 34,~~805~~062,~~661~~463 3,~~136~~511,~~067~~264 711,~~350~~412,~~293~~755 59,~~853~~364,~~057~~321 Advertising expenses ~~621~~851,~~567~~867 ~~859~~818,~~310~~407 1,~~131~~982,~~028~~896 12,~~547~~366,~~851~~258 Amortization ~~174~~185,~~702~~073 ~~151~~146,~~812~~773 ~~341~~526,~~336~~409 ~~303~~450,~~426~~199 -------------- ------------- ------------- --------------- TOTAL OPERATING EXPENSES 45,~~601~~099,~~930~~403 4,~~147~~476,~~189~~444 813,~~822~~922,~~657~~060 712,~~704~~180,~~334~~778 -------------- ------------- ------------- --------------- INCOME FROM OPERATIONS ~~366~~383,~~982~~920 ~~699~~1,~~425~~273,328 ~~281~~665,~~654~~574 ~~992~~2,~~112~~265,440 -------------- ------------- ------------- --------------- OTHER INCOME (EXPENSE): Interest (~~455~~442,~~562~~505) (~~259~~272,~~759~~436) (~~734~~1,~~274~~176,779) (~~481~~753,~~316~~752) Miscellaneous - 012,110 272,~~886~~887 -12,110 -------------- ------------- ------------- --------------- TOTAL OTHER ~~INCOME (~~EXPENSE) (~~455~~442,~~562~~505) (~~259~~260,~~759~~326) (~~461~~903,~~388~~892) (~~481~~741,~~316~~642) -------------- ------------- ------------- --------------- NET INCOME (LOSS) $ (8858,~~580~~585) $ ~~439~~1,~~666~~013,002 $ (~~179~~238,~~734~~319) $ ~~510~~1,~~796~~523,798 -------------- ------------- ------------- --------------- ~~=============== ============== ============== ================~~ NET INCOME (LOSS) PER SHARE - BASIC $ (0.01) $ 0.0410 $ (0.02) $ 0.0515 =============== ============== ============== ================ NET INCOME (LOSS) PER SHARE - DILUTED $ (0.01) $ 0.0409 $ (0.02) $ 0.0514 =============== ============== ============== ================ Weighted Average Shares Used in Computation - Basic 10,~~289~~290,~~758~~591 10,~~257~~259,~~091~~758 10,~~289~~290,~~758~~036 10,~~254~~255,~~996~~917 =============== =============== ============== ================ Weighted Average Shares Used in Computation - Basic/Diluted 10,~~744~~290,~~750~~591 10,~~766~~758,~~484~~862 10,~~606~~290,~~218~~036 10,~~875~~816,~~518~~068 =============== =============== ============== ================

See notes to consolidated financial statements. 4

~~Six~~VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended ---------------------------------- ~~April~~July 3031, ~~May~~July 131, 2000 1999 --------------- -------------- (unaudited) (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income/(loss) ~~income~~ $ (~~179~~238,~~734~~319) $ ~~510~~1,~~796~~523,798 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation ~~909~~1,~~700~~381,523 ~~666~~1,~~778~~021,115 Amortization ~~341~~526,~~336~~409 ~~303~~450,~~426~~199 (Gain) on settlement of note receivable (295,000) - (Gain) loss on disposal of property and equipment (8467,~~512~~637) ~~6,883~~- Changes in assets and liabilities (net of effect of acquisitions): (Increase) Decrease in accounts receivable (~~549~~1,~~285~~082,684) (~~723~~1,~~441~~469,336) (Increase) Decrease in inventory ~~(90~~709,~~902)~~238 60319,~~794~~330 (Increase) in other current assets (3511,~~026,377~~068) (296,~~949~~577) (Increase) Decrease in other assets (~~871~~1,~~011~~026,005) ~~146~~144,~~270~~255 (Decrease) in accounts payable (~~613~~40,~~365~~153) (~~309~~638,~~215~~892) Increase in customer deposits ~~103~~182,~~119~~969 46298,~~966~~498 (Decrease) Increase in accrued expenses ~~933~~274,~~409~~019 ~~(189~~326,~~590)~~027 --------------- -------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (3186,~~422,622~~707) ~~222~~1,~~717~~678,416 --------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment (32,~~556~~261,~~032~~856) (1,~~117~~839,~~160~~615) Purchase of property, plant and equipment from Bond Financing (2,390,395) - Purchase of Money Market Investment from Bond Financing (4,125,424) - Reduction of Money Market Investment Account 2,390,395 - Proceeds from sale of fixed assets 92,310 - Collection of note receivable 1,270,000 - Cash used for acquistions (~~219~~263,~~283~~983) (~~294~~339,665) --------------- -------------- NET CASH ~~PROVIDED (~~USED IN) INVESTING ACTIVITIES (25,~~413~~288,~~005~~952) (12,~~411~~179,~~825~~280) --------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds ~~from~~of line of credit 32,~~060~~559,208 21,~~201~~966,~~000~~642 Proceeds from debt 4,~~254~~295,~~422~~881 -479,895 Principal payment of debt (~~283~~475,~~259~~718) (~~558~~635,939) Sale of common stock -11,250 1237,720 --------------- -------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 76,~~031~~390,~~371~~622 1,~~654~~848,~~781~~318 --------------- -------------- NET INCREASE IN CASH 914,962 1,~~195~~347,~~744~~454 ~~465,673~~------------- ------------- CASH - Beginning of period 367,018 161,271 --------------- -------------- CASH - End of period $ 1,~~562~~281,~~762~~980 $ ~~626~~1,~~944~~508,725 =============== =============== Cash paid for interest $ ~~509~~1,~~274~~046,747 $ ~~481~~753,~~316~~752 =============== =============== NON-CASH FINANCING AND INVESTING ACTIVITIES: Equipment acquired under capital leases $ ~~102~~145,~~202~~844 $ ~~102~~131,913 =============== ==============~~= see notes to consolidated financial statements~~

See notes to consolidated financial statements. 5 VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION The accompanying unaudited 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 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 applied consistently with the Form 10-K for the year ended October 30, 1999. Certain information and footnote disclosures normally included in financial statements presented in accordance with generally accepted accounting principles have been condensed or omitted. The accompanying consolidated financial statements should be read in conjunction with the financial statements and notes thereto incorporated by reference from the Company's Form 10-K and Annual Report for the year ended October 30, 1999. 2. FISCAL YEAR/QUARTER END Since 1994, the Company has used the "4-4-5" method to determine its fiscal months, quarters and years. Effective April 30, 2000, it began to use the regular calendar to determine the financial cut-off times for these periods. The reason for this change is to accommodate a future significant acquisition and to be more compatible with software used in the operation of the business. 3. INVESTMENT - MONEY MARKET A money market account has been set up for undisbursed funds relating to the Vermont Economic Development Authority Bond issuance (see note 4). The funds have been invested in First Union's Evergreen Money Market account and administered by First Union, the Bond trustee. These funds are restricted for the expenditures related to the purchase of building and equipment. 6 4. LONG TERM DEBT The Company amended and restated its five-year revolving credit agreement with First Union National Bank and KeyBank National Association on January 28, 2000. The facility was increased to $25 million from $15 million under the terms and conditions of the agreement. The Company and First Union modified the credit agreement to waive non-compliance by the Company with a single financial covenant as of July 31, 2000. The interest rate on funds borrowed under the agreement is LIBOR plus 2.5%. Pursuant to the proposed merger agreement as discussed in Note 8 the Company executed a commitment letter with another institution which, if consumated will replace the existing agreement with First Union National Bank and KeyBank National Association. As of the end of the quarter, the Company had fixed the rate of interest on $7,500,000 of its outstanding debt at 8.43%. In conjunction with the facility, the Company entered into a Letter of Credit with First Union for $4,300,000 to secure bonds issued for the same amount by the Vermont Economic Development Authority. The Company pays a 2% annual fee of the Letter of Credit amount. As of July 31, 2000, exclusive of the Letter of Credit, the Company had borrowed $13,999,000 pursuant to this agreement and $2,390,000 had been disbursed from the bond proceeds. The Bonds were issued as two series designated as Variable Rate Demand/Fixed Rate Revenue Bonds (Vermont Pure Springs, Inc. Project) 1999 Series A 20 year bonds and Variable Rate Demand/Fixed Rate Revenue Bonds (Vermont Pure Springs, Inc. Project) 1999 Series A-T (Taxable) 10 year bonds. The Series A Bonds were issued for $3,195,000 and mature on January 1, 2020 and the Series A-T Bonds were issued for $1,105,000 and mature on January 1 2011. The "Floating Rate" is a variable rate of interest equal to the minimum rate of interest necessary, in the sole judgment of the Remarketing Agent (First Union Securities, Inc.), to sell the Bonds on any Business Day at a price equal to the principal amount thereof, exclusive of accrued interest, if any, thereon. Interest is determined on a weekly basis and is payable on the first of every month. 5. LEGAL PROCEEDINGS a) In connection with litigation with its largest spring water source, Pristine Mountain Springs, the Company reached a settlement on December 1, 1999. As part of the settlement, the owner of the spring and its affiliate paid $1,270,000 to the Company and acknowledged the Company's rights under the amended water supply contract and right of first refusal to purchase the spring site. In order to obtain the rights to the supply contract, the Company had previously issued a $975,000 non-interest bearing convertible debenture to the original creditor of the owner of the spring and its affiliate. Settlement of the transaction resulted in miscellaneous income being recorded for the period. Cash Settlement $ 1,270,000 Less: Debt Assumed 975,000 Less: Legal Fees 22,113 -------------- Total Miscellaneous Income $ 272,887 ============ b) On July 27, 2000 the Company filed a lawsuit in Vermont Federal Court against Descartes Systems/Endgame Solutions for non-performance of the professional services agreement between the two companies. In the suit Vermont Pure alleges that the vendor did not adequately perform the services rendered in connection with approximately $500,000 of unpaid billings. To date, Descartes Systems/Endgame Solutions has not responded to the complaint. 7 6. INTEREST RATE HEDGE On May 2, 2000, the Company signed a three-year "swap" agreement with the KeyBank National Association to fix the interest rate on $5,000,000 of the Company's debt. The agreement fixes the variable LIBOR rate portion of the debt at 7.13%. As of July 31, 2000 the Company's total interest rate spread was 2.5% over LIBOR. Consequently, the agreement currently fixes the portion of the debt at 9.63%. 7. COMMITMENTS In March 1999, Vermont Pure Holdings, Ltd. entered into distribution agreements with several Snapple distributors in order to replace a major customer. Effective March 1, 2000, the Company modified its distribution agreements with three of these distributors. Consequently, Vermont Pure is the exclusive spring water brand carried by Mr. Natural, Inc., Millrose Distributors and Snapple of Long Island, Inc. The distribution area served by these businesses is the greater metropolitan New York City area. 8. PROPOSED MERGER On May 5, 2000 Vermont Pure Holdings, Ltd. entered into an Agreement and Plan of Merger and Contribution with Crystal Rock Spring Water Company. Crystal Rock is a privately held company. The agreement provides for the formation of a new publicly held holding company, also to be known as Vermont Pure Holdings, Ltd., that will own the two businesses. Existing shareholders of Vermont Pure will receive stock of the new holding company on a 1-for-1 basis. The consideration to be paid is approximately $64.9 million, consisting of not less than $9.5 million in cash, stock of Vermont Pure valued at $31.1 million for purposes of the transaction, 12% subordinated notes due 2007 of Vermont Pure in the original principal amount of $22.6 million, and the assumption by Vermont Pure of $1.7 million in debt. The stock price of Vermont Pure for purposes of the merger will be determined prior to the closing but according to the agreement, can range from $2.80 per share to $3.15 per share. As a result, the number of shares that will be issued will be from approximately 11.1 million to approximately 9.9 million shares, depending on the price. The transaction requires the approval of the stockholders of Vermont Pure and is subject to bank financing. In conjunction with the merger agreement, the Company executed a commitment letter with Webster Bank of Waterbury, Connecticut that provides for up to $36 million in financing for the cash portion of the purchase price, consolidation of the existing debt of both companies (including $1.7 million of Crystal Rock indebtedness), and post-merger working capital. In connection with the merger, the Company will hold a shareholders meeting on October 5, 2000 for shareholders of record on August 30. If the shareholders approve the merger, it is expected to be closed concurrently with the bank financing shortly thereafter. 8 PART I - Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the financial statements and notes thereto as filed in the Company's Form 10-K for the year ended October 30, 1999. Forward-Looking Statements When used in the Form 10-Q and in future filings by the Company with the Securities and Exchange Commission, the words or phrases "will likely result" and "the Company expects," "will continue," "is anticipated," "estimated," "project," or "outlook" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The Company wishes to 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 bottling capacity constraints in the face of significant growth, dependence on outside distributors, and reliance on commodity price fluctuations as they influence raw material pricing. The Company has 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 Sales - Sales for the first nine months of fiscal year 2000 were $24,807,000, an increase of $1,695,000 or 8% over the sales of $23,112,000 for the corresponding period last year. Sales for the third quarter of fiscal year 2000 were $10,158,000, an increase of $726,000 or 8% over sales of $9,432,000 for the corresponding period last year. In total, 14,034,000 gallons of water were sold at an average price $1.34 per gallon compared to 12,721,000 gallons at an average price of $1.46 for the corresponding period a year ago. Net of acquisitions, sales increased 5% for the nine-month period compared to the corresponding period a year ago. Sales for retail-size products decreased $1,139,000 or 11%, for the nine months of fiscal year 2000 compared to the corresponding period a year ago. Sales increased $23,000 or 1%, for the third quarter of fiscal 2000 compared to the corresponding period a year ago. In the category, 6,486,000 gallons were sold at an average price of $1.69 per gallon compared to 6,416,229 gallons at 1.87 per gallon for the comparable period a year ago. For the first three quarters of the year, the Vermont Pure brand sales were down 32% while Hidden Spring and Private Label brands were up 47% and 10% respectively. The decline in the Vermont Pure brand reflects the major changes in the Company's distribution system for that brand while the channels for the other categories remained largely unchanged. The decrease in sales can be attributable to lower selling prices to secure competitive distribution channels to replace a major distributor relationship in April of 1999. In addition, an unseasonably cool, rainy summer negatively impacted overall beverage sales in the Northeastern United States. Decreases in average selling prices were partially offset by lower promotional spending as described in further detail below. 9 Sales for the home and office category increased $2,947,290 or 27%, for the first nine months of fiscal year 2000 compared to the corresponding period of the prior year. Net of acquisitions, sales increased 20% for the nine-month period compared to the corresponding period a year ago. Sales increased $874,397 or 21%, for the third quarter of fiscal year 2000 compared to the corresponding period of the prior year. In gallonage, sales increased for the comparable nine-month periods from 6,304,000 gallons to 7,548,000 from 1999 to 2000 while the average price per gallon remained the same at $1.05. The respective sales increases in this category for the first nine months and third quarter of 2000 were attributable to market growth and expansion and acquisitions. The Company has continued its acquisition strategy during the period. Acquisitions made in the last twelve months have been relatively small in sales volume but geographically important. Cost of Goods Sold - For the first nine months of fiscal 2000, Cost of Goods Sold was $10,219,000 compared to $8,666,000 for the same period in fiscal year 1999. Resulting gross profits were $14,588,000, or 59% of sales, and $14,446,000, or 63% of sales, for the two respective periods. For the third quarter of 2000, Cost of Goods Sold was $4,675,000 compared to $3,682,000 for the same period in fiscal 1999 resulting in gross profits of $5,483,000, or 54% of sales, and $5,750,000 or 61% of sales. The increase in gross profit for nine-month period was due to the increase in sales. The increase in sales can be attributed solely to the delivery of home and office products, which in general, is the Company's highest margin line. The decrease in gross profit for the third quarter can be attributed to lower then expected sales from the retail sized products. The decrease in gross profit as a percentage of sales is a result of lower average sales prices combined with higher raw material pricing of the retail-size product. Raw material pricing, particularly for the Company's retail-size line of products, has fluctuated since mid-1999 as a result of commodity pricing. Over this period, the Company has been successful at mitigating these increases by modifying its packaging and increasing production efficiencies but average cost per case has still increased about 3%. However, the stability of these costs cannot be guaranteed. Significant price fluctuations in the future could result in corresponding positive or negative effects on cost of goods sold and gross profit. Operating Expenses - For the first nine months of fiscal year 2000 compared to the corresponding period in fiscal year 1999, total operating expenses were $13,922,000 and $12,181,000, an increase of $1,741,000 or 15%. For the third quarter, operating expenses were $5,099,000 in 2000 compared to $4,476,000 in 1999, an increase of $623,000, or 14%. Selling, general and administrative expenses increased by $2,048,000 or 22%, for the first nine months of fiscal 2000 and $551,000 or 16% for the third quarter of fiscal 2000 compared to the corresponding periods a year ago. The increase in these costs was primarily due to the addition of the operating costs to grow the home and office delivery business and build inventory for the retail-size products to supply customer demand throughout the peak summer sales season. Specifically, non-recurring operating costs related to the home and office category growth are: o Costs associated with integrating PET sales into the home and office distribution network in the geographic areas that were previously covered by outside distributors. 10 o In anticipation of the Crystal Rock transaction, the consolidation of sales and distribution systems resulting from acquisitions have been delayed. This includes the cost of warehouses, route operations, and personnel. As a consequence, the benefits of cost reduction from consolidation have not yet been achieved. o Increased administration of implementing a new software system. Costs to build inventory are outside warehouse rent and handling fees, freight to the outside location, and the freight cost inefficiencies of double handling product between the bottling plant and the customer. Advertising and promotional expense decreased $383,000, or 17%, and increased $33,000, or 4%, during the nine-month and third quarter periods of 2000, respectively, compared to the corresponding periods last year. The Company's advertising and promotion is predominantly associated with the sales of the retail-size packages. As mentioned above, the pricing environment for these products has changed such that the Company's distributors seek price discounts instead of advertising and promotion support. During the nine months and third quarter of 2000 the Company's aggregate per case expense decreased $.26 and $.03 per case for the comparable periods in the prior year. Nevertheless, due to the competitive nature of the industry, the Company anticipates that it will continue to spend significant amounts in the future for advertising and promotion as it continues to develop brand recognition and increase market penetration but can give no assurances that increases in spending will result in higher sales. For the first nine months and third quarter of fiscal year 2000, amortization increased $76,000 and $38,000 respectively, from the same periods a year ago as a result of increased goodwill from new acquisitions. Income From Operations - Profit from operations for the first nine months of fiscal 2000 was $666,000 as compared to $2,265,000 for the corresponding period last year, a decrease of $1,599,000. Income from operations for the third quarter of fiscal 2000 was $384,000 compared to $1,273,000 for the corresponding period last year, a decrease of $889,000. The decrease is attributable to lower sales in the retail-size category combined with an increase in raw material costs and logistics costs of storing product. The Company plans to continue to create brand awareness and to find alternate distribution channels for its retail-size product and expand its less seasonal home and office distribution business. Other Income/Expense - Net interest expense increased $423,000 or 57% and $170,000 or 63% for the first nine months and third quarter of fiscal year 2000, respectively, compared to the corresponding periods in fiscal year 1999. The increase in interest expense was a result of increased borrowing to fund operations as a result of lower operating profits, to build inventory, to add additional plant and equipment, to finance acquisitions, and higher interest rates. Miscellaneous income reflects the cash settlement in the Pristine Mountain Springs litigation, less the related assumed debt and the related legal costs. For more information, see Note 5 to the enclosed financial statements. Net Income/Loss- The Company's net loss for the first nine months of fiscal year 2000 was $238,000 compared to a net profit of $1,524,000 for the corresponding period last year. The net loss for the third quarter of fiscal 2000 was $59,000 compared to a net profit of $1,013,000 for the same quarter in 1999. The net loss for the quarter and the year to date are attributable to lower operating results combined with higher interest costs. 11 Liquidity and Capital Resources The net decrease in cash for the nine months ended July 31, 2000 was largely to fund operating losses and payment of debt. A significant amount of cash has been expended for capital improvements. $4,652,000 has been used primarily for expansion of the building that houses the Company's main bottling facility, new production equipment, and hardware and software to support the home and office delivery system. As of July 31, 2000, the Company had working capital of $5,298,000 compared to $3,028,000 on October 30, 1999. The increase in working capital of $2,270,000 reflects, primarily, an increase in cash of $2,710,000 for specified restricted uses. Of this total, $1,735,000 is being held as proceeds from the bonds issued for new building and equipment and $975,000 is being held as collateral for a mandatory convertible debenture scheduled for conversion by September, 2001. As of July 31, 2000, the Company had disbursed $2,390,000 of the total $4,300,000 in bond proceeds and borrowed $14,249,000 under its credit agreement with First Union and Key Banks compared to $844,000 of the line at the beginning of the fiscal year. As of October 30, 1999, $11,690,000 was outstanding under the First Union agreement. Proceeds from the increased debt were used for new building and equipment, acquisitions, seasonal inventory build, and working capital. The maximum amount available to borrow under the First Union facility is $25,000,000 subject to certain conditions and covenants. The facility is secured by all of the assets of the Company and expires January 2004. The Company and First Union modified the credit agreement to waive non-compliance by the Company with a single financial covenant as of July 31, 2000. The Company has increased its debt significantly in the current year. The purpose has largely been to put infrastructure in place to accommodate its future growth - building, equipment, and computer hardware and software systems. The Company has also been transforming its distribution channels and, in the process, required more working capital to fund operations. While past trends and future expectations warrant these investments and efforts no assurance can be given that future growth will occur. In this case, the Company may be restricted to its access to working capital by covenants and conditions in the agreement with its primary lender and no assurance can be given that other financing will be available. On May 5, 2000, Vermont Pure Holdings, Ltd. entered into an Agreement and Plan of Merger and Contribution with Crystal Rock Spring Water Company of Watertown, Connecticut. More details are provided in footnote 8 to the financial statements included herewith. In conjunction with the potential merger the Company signed a letter of intent with Webster Bank of Waterbury, Connecticut. The commitment provides for up to $36 million of financing for the cash portion of the purchase price, to consolidate the existing debt of both companies, and post-merger working capital. 12 PART I - Item 3 QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risks relating to the Company's operations result primarily from changes in interest rates and commodity prices related to packaging materials. Interest Rate Risks - On July 31, 2000, the Company had $14,500,000 outstanding on its credit facility with First Union and Key Banks at LIBOR plus 2.5%. As of July 31, 2000, LIBOR was 6.63%. The Company pays a stepped fixed interest rate, subject to changes in the LIBOR spread pursuant to the agreement, on $7,500,000 of the facility. This interest rate was 8.63% on August 2, 2000. On May 2, 2000 the Company entered into an agreement to fix $5,000,000 of debt at 9.63%, subject to changes in the LIBOR spread, for three years. In addition, it had committed to repay $4,300,000 of bonds issued by the Vermont Economic Development Authority at variable rates for taxable and non-taxable issues. Bond interest rates are variable based on weekly rates established for the taxable and non-taxable issues which on August 2, 2000 were 6.7% and 4.3%, respectively. The Company pays an annual letter of credit fee of 2% to secure the bonds. The company also has miscellaneous loans totaling at variable interest rates. Consequently, after considering the Company's fixed rate instruments, a hypothetical 100 basis point increase in market rates would result in approximately $70,000 of interest expense on an annualized basis. Commodity Price Risks - Although the Company has yearly contracts with its vendors that set the purchase price of its PET bottles used to bottle its retail-size product, the vendors are entitled to pass on increases in the market price of the resin used as the raw material for the bottles. These prices are related to supply and demand market factors for PET and, to a lesser extent the price of petroleum, from which PET is derived. A hypothetical resin price increase of $.05 per pound would result in an approximate price increase per bottle of $.005. During the 2000 fiscal year pricing has increased. To a lesser extent the Company is similarly dependant on resin for caps and paper for corrugated boxes and labels. The potential impact is not material compared to bottles. The Company is planning to mitigate the effect of these commodity risks by working with suppliers to reduce the amount of material that it uses to package its products while maintaining and improving quality 13 PART II - Other Information Item 1 - Legal Proceedings In March of 1999, the Company contracted with Descartes Systems Group, Inc. ("Descartes"), an Ontario corporation, to provide professional services related to the design, installation, maintenance, operation and training for computer hardware and software. The computer hardware and software was marketed to the Company as a product that would provide computerized management of the Company's direct distribution through its delivery network, and associated billing and accounting. On July 27, 2000, the Company filed a lawsuit against Descartes and an affiliate of Descartes entitled Vermont Pure Holdings, Ltd. v. Descartes Systems Group, Inc. and Endgame Systems, Inc. f/k/a DSD Solutions, Inc., in the United States District Court for the District of Vermont. The action is docketed as Civil Action No. 2:00-CV-269. The Company has sought monetary damages against Descartes and Endgame in an amount exceeding $100,000 for the Company's losses associated with failures of the systems and services provided by the defendants. In addition, the Company has sought a Declaratory Judgment invalidating the defendant's demand for payments in the amount of $411,841.10. As of the date of this disclosure, the defendants have not yet answered the Company's lawsuit. The Company intends to vigorously prosecute the lawsuit. The Company has made alternative arrangements for performing the functions that were associated with the services of the defendants. Item 2 - Changes in Securities (a) None (b) None (c) None Item 3 - Defaults upon Senior Securities None Item 4 - Submission of Matters to a Vote of Security Holders ------ On May 2, 2000 the Company held its annual shareholders meeting a 1:30 p.m. at the Radisson Hotel, in Burlington, Vermont. There was one matter of business requiring shareholder vote, election of directors. A total of 8,548,438 votes were cast and the following directors were elected to one year terms with the corresponding vote tally: 14 "For" "Withheld" Frank G. McDougall 8,501,998 46,440 Timothy G. Fallon 8,501,998 46,440 Robert C. Getchell 8,501,998 46,440 David R. Preston 8,501,998 46,440 Norman E. Rickard 8,501,998 46,440 Beat Schlagenhauf 8,501,998 46,440 Richard S. Worth 8,501,998 46,440 Phillip Davidowitz 8,501,998 46,440 Item 5 - Other Information None Item 6 - Exhibits and Reports on Form 8-K (a) Exhibit Number Description 2.1 Agreement and Plan of Merger and Contribution dated as of May 5, 2000 among the Registrant, VP Merger Parent, Inc., VP Acquisition Corp., Crystal Rock Spring Water Company and its stockholders. Exhibits to the merger agreement, appear as Exhibits to the form S-4 Registration Statement, filed by VP Merger Parent, Inc., file number 333-45226, on September 6, 2000. 3.1 Amended and Restated Certificate of Incorporation of Registrant dated January 12, 1994. (Incorporated by reference from exhibit 3.3 of Form 10-KSB for fiscal year ended October 30, 1993- File No. 1-11254.) 3.2 Amendment of Certificate of Incorporation of Registrant dated June 15, 1999. 3.3 By-Laws of Registrant. (Incorporated by reference from Exhibit 3.4 of Registration Statement 33-46382) 3.4 Amendment to By-Laws of Registrant Adopted March 26, 1997. (Incorporated by reference from exhibit 3.3 of Form 10-KSB for fiscal year ended October 25, 1997-File No. 1-11254) 10.1* Employment Agreement between the Registrant and Timothy G. Fallon dated as of November 1, 996. (Incorporated by reference from exhibit 10.1 of form10-KSB for fiscal year ended October 25, 1997-File No. 1-11254.) 15 10.2* Amendment to the November 1, 1996 Employment Agreement between the Registrant and Timothy G. Fallon dated November 1, 1999. 10.3* Employment Agreement between the Registrant and Bruce S. MacDonald dated as of November 1, 1997. (Incorporated from Exhibit 10.2 of form 10-KSB for fiscal year ended October 25,1999-File No. 1-11254) 10.4* Stock Option Agreement between Registrant and Mr . Fallon. (Incorporated by reference from Exhibit 10.7 of form 10-K for fiscal year ended October 28, 1994, File No. 1-11254.) 10.5 1993 Performance Equity Plan. (Incorporated by reference from Exhibit 10.9 of Registration Statement 33-72940.) 10.6 Stock Purchase Agreement between the Registrant and Carolyn Howard relating to the acquisition of A.M. Fridays, Inc. dated July 16, 1997. (Incorporated by reference from Exhibit 10.1 of the report on Form 8-K dated September 11, 1997.) 10.7 Stock Purchase Agreement between the Registrant and David Eger dated August 27, 1997 relating to Excelsior Spring Water Co.("Excelsior"). (Incorporated by reference from exhibit 10.1 of the report on from 8-K dated September 1, 1997.) 10.8 Promissory Note from the Registrant to Mr. Eger in the principal amount of $503,000. (Incorporated by reference form Exhibit 10.2 of the report on Form 8-K dated September 11, 1997.) 10.9 Form of Note Purchase Agreement between the Registrant and certain note holders of Excelsior dated August 27,1997. (Incorporated by reference from Exhibit 10.4 of the Report on form 8-K dated September 11, 1997.) 10.10 Form of Stock Purchase Agreement between Registrant and certain Stockholders of Excelsior dated August 27, 1997. (Incorporated by reference from Exhibit 10.4 of the Report on Form 8-K dated September 11, 1997.) 10.11 Schedule of Stock and Note Purchase Agreement information dated August 27, 1997 regarding the Excelsior purchase. (Incorporated by reference from Exhibit 10.7 of the Report on Form 8-K dated September 1, 1997.) 16 10.12 Consulting Agreement between the Registrant and Corporate Investors Network, Inc. dated December 1, 1996. (Incorporated by reference from Exhibit 10.1 of the report on Form 10-QSB for the quarter ended January 25, 1997.) 10.13 1998 Incentive and Non-Statutory Stock Option Plan (Incorporated by reference to Appendix A of the Registrant's 1998 Proxy Statement) 10.14 Asset Purchase Agreement between the Registrant and Vermont Coffee Time, Inc. relating to the purchase certain assets and Liabilities dated December 19, 1997. (Incorporated by reference from Exhibit 10.1 of the report on Form 10-QSB for the quarter ended January 24, 1998.) 10.15 Promissory Note from the Registrant to Vermont Coffee Time, Inc. dated January 5, 1998. (Incorporated by reference from Exhibit 10.3 of the Report of Form 10-QSB for the quarter ended January 24, 1998.) 10.16 Security Agreement between the Registrant and Vermont Coffee Time, Inc. dated January 5, 1998. (Incorporated by reference from Exhibit 10.3 of the report of Form 10-QSB for the quarter ended January 24, 1998.) 10.17 Consulting Agreement between Amy Berger and the Registrant dated January 5, 1998. (Incorporated by the reference form Exhibit 10.4 of the report on form 10-QSB for the quarter ended January 24, 1998.) 10.18 Non Compete Agreement of Fred Beauchamp and Jim Creed between the Registrant and Sagamon Springs, Inc. dated January 6 1998. (Incorporated by the reference form Exhibit 10.5 of the report on form 10-QSB for the quarter ended April 25, 1998.) 10.19 1999 Employee Stock Purchase Plan (Incorporated by reference to the Exhibit A of the Registrant's 1999 Proxy Statement) 10.20 Stock Purchase Agreement between Registrant, Paul Hayes and Michael Hayes date July 27, 1999 relating to Adirondack Coffee Service, Inc. (Incorporated by reference from Exhibit 10.23 of form 10-K for fiscal year ended October 30, 1999, File No.1-11254). 10.21 Promissory Note dated July 27,1999 from the registrant to the Hayes in the Principal amount of $303,734. (Incorporated by reference from Exhibit 10.24 of form 10-K for fiscal year ended October 30, 1999, File No.1-11254). 10.22 Loan Purchase Agreement to spring source dated September 30,1999 between the Registrant and Marcon Capital Corporation. (Incorporated by reference from Exhibit 10.26 of form 10-K for fiscal year ended October 30, 1999, File No.1-11254). 17 10.23 Convertible Debenture Agreement dated September 30,1999 between the Registrant and Marcon Capital Corporation in the amount of $975,000. (Incorporated by reference from Exhibit 10.27 of form 10-K for fiscal year ended October 30, 1999, File No.1-11254). 10.24 Amended and Restated Security Agreement between Registrant and First Union Bank dated January 28, 2000. (Incorporated by reference from Exhibit 10.27 of the report on form 10Q fourth quarter ended January 29, 2000). 10.25 Loan Agreement between Registrant and Vermont Economic Development Authority dated December 1, 1999. (Incorporated by reference from Exhibit 10.28 of the report on form 10Q fourth quarter ended January 29, 2000). 10.26 Trust Indenture Between Registrant and Vermont Economic Development authority and First Union National Bank, as trustee, dated December1, 1999. (Incorporated by reference from Exhibit 10.29 of the report on form 10Q fourth quarter ended January 29, 2000). 10.27 Settlement Agreement between Registrant and Pristine Mountain Springs, Amsource LLC, Barton Lord and Ronald Colton dated December 1, 1999. (Incorporated by reference from Exhibit 10.31 of the report on form 10Q fourth quarter ended January 29, 2000). 10.28 Amended and Restated Spring Water License and Supply Agreement between Registrant and Mountain Springs, Amsource LLC, Barton Lord and Ronald Colton dated December 5, 1999. (Incorporated by reference from Exhibit 10.31 of the report on form 10Q fourth quarter ended January 29, 2000). 27.1 Financial Data Schedule (b) No reports on Form 8-K were filed for the quarter ended July 31, 2000. * Relates to Compensation 18 SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: September 14, 2000 Randolph, Vermont VERMONT PURE HOLDINGS, LTD. By:/s/ Bruce S. MacDonald Bruce S. MacDonald Vice President, Chief Financial Officer (Principal Accounting Officer and Principal Financial Officer) 19

TERM DEFINITION Affiliate Section 1.3.1. Affiliated Group Section 3.10.1. Agreement Preamble Benefit Plans Section 3.11.1. Certificate of Merger Section 2.1. Closing Section 2.6. Closing Date Section 2.6. Code Recitals Company Preamble Company Common Stock Section 2.5.1. Contribution Recitals Certificate of Merger Section 2.1. DGCL Recitals Effective Date Section 2.1. Effective Time Section 2.1. Employee List Section 3.12.2. Encumbrances Section 3.15.1. Environmental Claim Section 1.3.2. Environmental Laws Section 1.3.3. ERISA Section 1.3.4. ERISA Affiliate Section 1.3.5. Exchange Act Section 1.3.6. Exchange Ratio Section 2.5.2. Exclusivity Period Section 7.6. Financial Advisor Section 3.27. Financial Statements Section 3.6. GAAP Section 3.6. Governmental Entity Section 3.5.2. Holdings Preamble Holdings Public Filings Section 3.26. 2 Holdings Stock Section 2.4.1. Insurance Contracts Section 3.19. Interim Balance Sheet Section 3.6. Interim Balance Sheet Date Section 3.6. Interim Financial Statements Section 3.6. Liabilities Section 3.7.2. Material Adverse Effect Section 1.3.7. Materials of Environmental Concern Section 1.3.8. Merger Recitals Merger Sub Preamble Parent Preamble Parent Share Amount Section 2.5.2. Parent Stock Section 2.4.1. Permits Section 3.8. Permitted Encumbrances Section 1.3.9. Person Section 1.3.10. Proprietary Rights Section 3.17.1. Real Property Section 3.16.1. Real Property Leases Section 1.3.11. Registration Statement Section 7.1. SEC Section 1.3.12. Securities Act Section 1.3.13. Share Price Section 2.5.2. Share Price Calculation Section 2.5.2. Stockholder Approval Section 7.1. Stockholders Preamble Subordinated Notes Section 2.5.2. Subsidiary Section 1.3.14. Surviving Corporation Section 2.1. Tax Section 3.10.1. Tax Returns Section 3.10.1. Treasury Regulation Section 3.10.1. Year 2000 Compliant Section 3.17.3.

Filing Compare · PLATINUM ACQUISITION CORP